Director Ralph Townsend in his office

Dear friends and colleagues,

We are adding a new feature called “Hot Topics,” to the ISER website to help our audience find research relevant to current policy issues more easily.  The first entries summarize and connect readers with recent ISER work in two areas: the impact of state budget changes on the Alaska economy and how the PFD affects Alaska’s economy and its social institutions.

An important part of ISER’s mission is to conduct research that will improve understanding of important policy options facing Alaska.  Researchers who want to better understand complex social systems break the big questions into pieces that can be analyzed with available data and tools. Our publications database is open to all, but help locating relevant research may be useful to some readers.

To make our work accessible to wide audiences we often create summaries of our work and post those on our website along with the full article. We also post copies of PowerPoint presentations for government and civic groups. Now we are adding “Hot Topics,”  where you can find a collection of  relevant ISER summaries, articles, and presentations on current policy issues. Watch for new “Hot Topics” throughout the year.

State Budget

What research has ISER done on the impact of state budget changes?

You have probably seen press reports that cite ISER analysis of how changes in the state budget will affect the economy.   These estimates are based upon work that was completed in 2016 by Gunnar Knapp, Mouhcine Guettabi, and Matthew Berman, “Short-Run Economic Impacts of Alaska Fiscal Options.

The 2016 report looks at several different kinds of spending cuts and taxes. Those results can be roughly summarized by two approximations:

First, every $100 million in spending cuts can be expected to cause total short-term job losses of about 1000 jobs.

Second, every $100 million increase in taxes or $100 million cut to the PFD can be expected to cause total short-run job losses of about 700.

It is important to remember that these numbers are simply looking at the total impact on the state economy. There are obviously big differences in who is impacted by sales taxes, income taxes, and PFD cuts or by different program cuts.

In the Research Summary, “How Much Might Closing the State Budget Gap Cost Alaska Families?” ISER’s Matthew Berman and Random Reamey estimate how several revenue-raising measures – three kinds of taxes and a cut in the Permanent Fund dividends – would affect households with and without children. They did not, however, estimate the effects of spending cuts on families.

A spending cut causes more job losses than a cut in the PFD.  When the state cuts spending by $100 million, some combination of government employees lose their jobs and/or government suppliers lose revenues.  Those employees and suppliers then have $100 million less to spend. This decreased spending of $100 million is similar to the decreased spending when Alaskans see $100 million in PFD cuts.  So, the effects are similar after the “first round” of job losses. The estimates indicate that, on average, 300 jobs are lost because of this “extra round.”

In March, Mouhcine Guettabi spoke with Alaska State House and Senate Finance Committees concerning the FY19-20 budget proposal. In his presentation, he provided estimates based on the 2016 report and an analysis of the budget proposal by Legislative Finance. Dr. Guettabi estimated that combined effect of the budget reductions would be just under 17,000 fewer jobs and that the effect of the PFD increases would be just under 10,000 additional jobs.  The net impact was therefore about 7000 fewer jobs.

Most importantly, I would emphasize that these are the immediate, short-run effects of the changes.  These short-run changes are important, especially as the Alaska economy is just starting to recover from a recession.  But the long-run issues are even more important as Alaskans determine how much government spending is needed to continue our recovery and support Alaska’s aspirations for the future.

We don’t know how much the state should spend: that answer depends on what things Alaskans want to keep, and what they’ll pay for them. But we throw some light on the debate. Mouhcine Guettabi, Trang Tran, and Linda Leask look at how Alaska’s state spending compares with spending in other states, especially oil-producing states, how spending changes over time, and discuss Alaska’s unique spending programs and higher living costs that add to the price of government in the 2018 paper, How Does Alaska Spending Compare.”

Alaska Permanent Fund

What does ISER research tell us about the PFD?

Since 2015, when oil prices declined, Alaska state government has faced new budget realities and new questions concerning the size of the Permanent Fund Dividend (PFD).  We at ISER frequently hear the question “What do we know about the PFD and how it affects our economy?” 

Decreases in the PFD will reduce incomes and economic activity.  But estimating a magnitude for those changes can be challenging. Many things are changing in the economy, and sorting out cause-and-effect can be difficult.  

Some basic statistics on the PFD are helpful.  For the past 5 years, an average of 630,000 Alaskans have received the PFD.  Each $1000 therefore represents about $630 million in additional income. Mean per capita income for Alaska in 2017 was slightly over $34,000.  Each $1000 change in the PFD therefore represents about 3% of total personal income. Obviously, the PFD is a much larger share of income for someone earning $15,000 than for someone earning $150,000.

In 2016, Gunnar Knapp, Mouhcine Guettabi, and Matt Berman developed estimates of the short- to medium-term impacts on the Alaska economy of various changes in spending, taxes, and the PFD.  They estimated that each $100 million reduction in the PFD distributions causes the economy to contract by 558 to 892 jobs.  Because of multiplier effects, each $100 million reduction in PFD distributions lowers total income by $130 to $149 million.

In a 2018 journal article in World Development, Matthew Berman estimated that the PFD reduced the average poverty rate during 2011-2015 in Alaska by 2.3 percentage points, from 11.4% to 9.3%.  This represents 15,000 to 25,000 (depending upon year) fewer Alaskans below the poverty line.  Findings are summarized in, “How PFDs Reduce Poverty in Alaska.” The effect is especially significant for Alaska Natives, where the PFD reduced poverty rates from 22.3% to 16.3% on average in 2011-2015.  Interestingly, Dr. Berman found that official income data from the American Community Service, conducted by the US Census, significantly under reports PFD income because of technical issues in how the data is collected.  

Brett Watson, Mouhcine Guettabi, and Matthew Reimer recently examined some social effects of the PFD, specifically on crime.  In an article that will appear soon in the Review of Economics and Statistics, they use data from Anchorage to estimate how crime patterns change immediately following the distribution of the PFD.  In the four weeks following the PFD distribution, they find a 10% increase in substance abuse incidents, an 8% decline in property crimes, and no change in violent crime.  On an annual basis, these estimated changes in criminal activity are small and estimated costs are a small portion of the total payment.

And this month, in an article available on Social Science Research Network, Andrew Bibler, Mouhcine Guettabi, and Matt Reimer analyzed how a $1,000 increase in the PFD affects the labor market. An increase affects women in the labor market differently than men, with women working fewer hours and men having increased employment in the three months after the PFD is distributed. The differing response, however, nearly balance each other out with a small decline in the hours worked on an annual basis. During the first three months after the dividend is delivered there is a 0.7% contraction of hours worked. The  decline lessens to 0.2% on an annual basis, a relatively small number.

I hope that you find these useful.  And look for future postings on important current policy issues under “Hot Topics.”

Ralph Townsend's signature

Ralph Townsend

ISER Director