Web Note No. 14

In fiscal year 2014, Alaska’s state government can afford to spend about $5.5 billion. That’s an estimate of the level of Unrestricted General Fund spending the state can sustain over the long run, based on the current petroleum nest egg of about$149 billion—a combination of state financial assets (the Permanent Fund and cash reserves) and the value of petroleum still in the ground. The size of that nest egg fluctuates, depending on the state’s forecast of petroleum revenues, earnings on investments, and other factors. This Web Note presents the latest in a series of estimates of the maximum amount the state can spend and still stay on a sustainable budget path.Northrim Bank

Web Note No. 8

The Alaska economy is growing as high commodity prices (for oil and gold in particular) drive the private sector and oil revenue surpluses fuel the state budget. But as oil production continues to decline; the prospect for commercialization of North Slope gas in the near term fades; access to petroleum resources on federal lands remains stalled; and non-petroleum resource development moves forward only slowly, many Alaskans are concerned with what path the Alaska economy will take in the next decades. We could go in four possible directions. Here we offer a short description of each scenario— general enough to let each person fill in the blanks. Our objective is not to predict but rather to stimulate thought and discussion about what Alaskans can and should do to move the economy along the preferred path. Here’s a summary of the four potential paths. A more detailed description follows.Northrim Ban

Oil Pumps Alaska's Economy to Twice the Size - But What's Ahead?

Oil money has driven most of the growth and paid for state government operations in Alaska for 40 years. We’ve all gotten used to that money, so it’s easy to underestimate how much of the state’s prosperity is built on oil. Think about this: without oil, the economy today would be only half the size. But now times are changing. The North Slope is producing just a third the oil it once did—and there’s a danger Alaskans will assume the state can keep going the way it is, without future oil development. Not true.Northrim Bank

High Oil Prices Give Alaskans a Second Chance: How Will We Use this Opportunity?

Think about this: 10 years ago, it looked as if Alaska was on the brink of a tough transition to a post-Prudhoe Bay economy. Oil production was half of what it had once been, the state’s oil revenues were about $2 billion, financial reserves were falling, and employment in the oil industry was down. The price of Alaska oil, adjusted to today’s buying power, was$27 a barrel—and that was high by historical standards. Things have changed dramatically since then: a combination of much higher oil prices—about $115 a barrel as this paper is being written—and revisions in the way the state calculates production taxes have caused state oil revenues to skyrocket, even though oil production is down 40% since 2002. We now find ourselves in a second huge oil-revenue boom, comparable to the one in the early 1980s (Figure 1 ).Northrim Ban

Web Note No. 4a

Replacing Alaska’s public infrastructure would cost nearly $59 billion, in today’s dollars. That includes, as the table shows, the costs of replacing public buildings as well as transportation and utility systems.1 This is an update of an estimate ISER made in 2007—which at that time was the first comprehensive estimate of the cost to replace Alaska’s public infrastructure.2 That 2007 estimate was considerably less—about$39.5 billion—but we emphasized at the time that it was preliminary. It did not take into account that costs to replace infrastructure in remote areas are higher, and it undercounted and undervalued certain types of infrastructure, including power and telephone systems. This revised estimate is based on an analysis of cost differences across the state, additional data on existing infrastructure, and additional consultation with engineers, architects, and cost estimators

The Alaska Permanent Fund Dividend: A Case Study in Implementation of a Basic Income Guarantee

Presented at 13th Basic Income Earth Network Congress University of Sao Paulo Sao Paulo, BrazilThe Alaska Permanent Fund Dividend program has attracted considerable interest because it is a unique example of a BASIC INCOME GUARANTEE. In this paper, I describe the structure of the dividend program, its economic effects, some of its unintended consequences; and I close with a number of observations about how the dividend might be structured differently. My objective is to give the reader insights into the factors to consider in implementing a BASIC INCOME GUARANTEE in other places. However, before beginning it is important to present a short description of Alaska because the structure of any BASIC INCOME program and its impacts are contingent upon the particular institutional, economic, political, and social environment in which it is located. Alaska is the largest of the 50 United States measured by land area—but among the smallest measured by population. Its 700 thousand residents comprise only about twotenths of one percent of the total U.S. population. As a state within the United States, its border is open to the rest of the nation for the free movement of goods and services, people, capital, and information. Furthermore, it is subject to the laws, regulations, and policies established by the federal government. As I will discuss below, these connections create some challenges for the dividend program because the state cannot totally control its own economic and political environment.Northrim Ban

Managing Extractive Resource Wealth for Sustainability: Lessons from Alaska Seen Through the Lens of Maximum Sustainable Yield

Presented at the Western Regional Science Association Annual Meeting Kauai, HawaiiAlaska has enjoyed a generation of unprecedented economic growth and prosperity driven by crude oil production primarily from one giant field, Prudhoe Bay, on the North Slope. Through a number of financial savings accounts, including the Alaska Permanent Fund, the Statutory Budget Reserve, and the Constitutional Budget Reserve, the state has successfully converted a share of petroleum wealth into $55 billion in financial assets. It has been less successful in diversifying the economic base away from dominance by oil and gas production. Now oil production has fallen to less than 1/3 of its peak and this decline is projected to continue—reducing public revenues and private economic activity. This paper will explore whether the state of Alaska has the resources to be able to transition successfully to a Post-Prudhoe Bay economy, how that transition could take place, and what impediments might prevent a successful transition. This analysis will be of interest to other natural resource dependent economies that are trying to manage the cycles that resource extraction generate.Northrim Bank

Alaska after Prudhoe Bay: Sustainability of an Island Economy

A paper presented at the Annual Meeting of the Western Regional Science Association Monterey, CaliforniaThe typical sovereign island economy is small and remote. For example the remote island nations of Nauru, Niue, and Saint Helena have populations in the range of 10 thousand each. Of course not all island nations are small or remote and neither are small or remote economies necessarily islands. However it is useful to think about the economies of small and remote islands because they can help us to understand the economic structure and prospects of larger and less remote places. Island economies generally lack a comparative advantage in the production of goods or services for export to the rest of the world. This is due to distance from markets and suppliers as well as an absence of economies of scale and specialization, both of which drive up the cost of exporting goods and services. And although the economic theory of comparative advantage tells us that trade among countries can occur even if one has an advantage in the production of all goods and services, that theory can break down if costs in the small and remote economy are too high. The mechanism by which the island economy gains access to export markets in the presence of high costs is through downward adjustment in the wage. But in some cases the wage would need to become negative to overcome the cost disadvantages created by distance and size. In such a case the island would have a subsistence economy with neither exports to the rest of the world or imports. The most important private economic activities one observes in these economies are agriculture and fishing. Occasionally an island economy will be able to take advantage of a market niche to generate exports. Tourism is the most common, and mining has provided an export base in some other places. However these market activities will not necessarily be large enough to employ a large share of the population. Furthermore dependence on a single activity leaves these economies vulnerable or “precarious”.As a consequence many of these economies are dependent on foreign aid and remittances from emigrants. These funds allow these economies to purchase a basic level of imports that would not otherwise be possibleNorthrim Bank. University of Alaska Foundation

UA Research Summary No. 13

What drives Alaska’s economy is new money: money coming in from outside the state. How big the economy is, and how much it grows, depends on how much new money comes in. New money comes from “basic” sectors— the sectors that are the basis for all jobs and income across Alaska. They are, in effect, the gears driving the economy. Alaska has eight main basic sectors, but the number of Alaskans they employ directly is small, compared with the number of jobs they support indirectly. Figure 1 shows numbers and shares of jobs for Alaskans that the federal government, the petroleum sector, and the other basic sectors generated on average between 2004 and 2006. The numbers for any specific period aren’t as important as the percentages, which don’t change much from year to year.Northrim Bank. University of Alaska Foundation

The Alaska Permanent Fund Dividend: A Case Study in the Direct Distribution of Resource Rent

The Alaska Permanent Fund is a sovereign wealth fund of the state of Alaska established in 1976 by a vote of the people to preserve part of the revenues from current oil production for future generations. Twenty percent of direct petroleum revenues have been deposited into the fund which now has a balance of $32 billion. Over its life it has generated nominal earnings of$35 billion. The successes of the fun in saving a share of the Alaska petroleum windfall and generating income are due to several factors. The boom-bust economic history of the state has been a reminder of the need to actively manage public resources. Fund management is independent of general government finances and extremely transparent. It invests to maximize long run income. In addition, the modest share of petroleum revenues set aside in the fund has left enough available for the state to expand public spending, including the establishment of a number of programs designed to strengthen the economy in recognition of the non sustainability of the petroleum sector. Since these public programs benefit particular segments of the population, the Alaska Permanent Fund dividend program was created in 1982 to provide an annual unconditional direct cash distribution to all Alaska residents. The dividend was felt to be the most equitable way to distribute a share of the public wealth of the state to the entire population. Since the inception of the program, the dividend has been paid each year. About half of Permanent Fund earnings have been allocated to the dividend program and the rest to increasing the balance in the fund. The size of the dividend has increased as the fund has grown, but it fluctuates considerably because fund earnings change from year to year. In 2010 the dividend payment was $1,281 which augmented per capita income by 3 percent. The dividend program has become extremely popular since most Alaskans feel that individuals can benefit more from deciding themselves how to spend at least a portion of the public wealth rather than allowing the government to decide on their behalf. However a minority of the population feels the dividend fosters an attitude of consumerism and leads to underinvestment. And although the dividend has created a strong constituency defending the Alaska Permanent Fund, which many feel is the main reason for the success of the fund, there is concern that the dividend will prevent the fund from being used for its ultimate purpose which is to help support the economy after petroleum production ends. Beyond its obvious positive impact on aggregate income, employment and population, little analysis has been done of other economic, social, and political effects of the dividend program. Because the dividend is not viewed as a policy to improve social welfare, but rather as a means to share public wealth equitably, interest in these other potential effects has been limited.The Revenue Watch Institut