Legislature(2019 - 2020)ADAMS ROOM 519
03/07/2019 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Alaska Economic Outlook | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
HOUSE FINANCE COMMITTEE
March 7, 2019
1:37 p.m.
1:37:06 PM
CALL TO ORDER
Co-Chair Foster called the House Finance Committee meeting
to order at 1:37 p.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Tammie Wilson, Co-Chair
Representative Jennifer Johnston, Vice-Chair
Representative Dan Ortiz, Vice-Chair
Representative Ben Carpenter
Representative Andy Josephson
Representative Gary Knopp
Representative Bart LeBon
Representative Kelly Merrick (via teleconference)
Representative Colleen Sullivan-Leonard
Representative Cathy Tilton
MEMBERS ABSENT
None
ALSO PRESENT
Mouhcine Guettabi, Associate Professor of Economics,
Institute of Social and Economic Research; Representative
Sarah Hannan.
PRESENT VIA TELECONFERENCE
Representative Kelly Merrick
SUMMARY
PRESENTATION: ALASKA ECONOMIC OUTLOOK
1:37:51 PM
Co-Chair Foster reviewed the meeting agenda. He recognized
Representative Sarah Hannan in the audience.
^PRESENTATION: ALASKA ECONOMIC OUTLOOK
1:38:12 PM
MOUHCINE GUETTABI, ASSOCIATE PROFESSOR OF ECONOMICS,
INSTITUTE OF SOCIAL AND ECONOMIC RESEARCH, shared that he
had a Ph.D. in economics with a specialization in regional
economics from Oklahoma State University and had worked for
Institute of Social and Economic Research (ISER) since
2012. His primary role was conducting economic forecasts
and impact analyses and understanding the dynamics of the
Alaska economy. Additionally, he studied healthcare markets
and costs. He relayed he would address a 2016 analysis by
ISER that looked at the economic impacts of a few fiscal
options to potentially close the budget [gap]. He also
intended to apply the estimates to the governor's proposed
budget.
Mr. Guettabi addressed a PowerPoint presentation titled
"Budget Options: What are the short term effects," dated
March 7, 2019 (copy on file). He provided a presentation
outline on slide 2. The presentation would address what had
been done in the original analysis; potential short-term
impacts and caveats; the potential simulative effects that
would stem from higher dividends; and on a macro level,
whether the oil induced recession was over and what the
state could potentially expect if the current changes were
implemented in terms of when the recession would actually
end. He would give context by providing numbers from
Alaska's most severe recession, which occurred in the
1980s.
1:40:17 PM
Mr. Guettabi turned to slide 3 and addressed the report he
had previously referenced titled "The Short-run Economic
Impacts of Alaska's Fiscal Options." The report was
authored by Gunnar Knapp, Matthew Berman, and himself. He
emphasized that the report focused on the short-term
impacts and underscored that the analysis did not give any
window into the long-term ramifications of the proposed
changes (whether regarding quality of life, quality of
services, the extent of the outmigration, or the potential
attractiveness of the business environment). The discussion
would focus on the ramifications from, for example,
removing $100 million in government spending from the
economy. He would follow the reduction through the economy
to determine the total affect.
Mr. Guettabi was not simply interested in the number of
jobs would potentially be reduced if six people were laid
off, but in how removing $100 million from K-12 would
impact vendors working with K-12 and how it influenced
spending by teachers, administrators, janitors, and people
potentially who worked for the vendors. Total employment
affect pertained to the combination the direct effects (the
layoff or number of jobs lost as a result of the direct
cut), indirect effects (the losses to vendors or suppliers,
and induced effects (losses or gains in the case of the
dividend as a result of household spending). He elaborated
that people spent more or less money as a result of the
proposed changes and the goal was to follow the dollars
throughout to determine the employment effects.
1:42:30 PM
Co-Chair Wilson asked for the distinction between short-
term and long-term for the current discussion purposes.
Mr. Guettabi replied that short-term was about 1 to 1.5
years. He explained it encompassed a timeframe before
significant outmigration occurred, before wages started
changing, and before firms started making adjustments.
Vice-Chair Ortiz asked if there was a definition of short-
run.
Mr. Guettabi replied that short-run was essentially the
time period before behavioral adjustments kicked in.
1:43:40 PM
Mr. Guettabi moved to slide 4 and addressed conclusions
from the original March 30, 2016 ISER study. He
acknowledged that obviously the world had changed a bit
since that time. The report had concluded that any option
that potentially took money out of the pocket of Alaskans,
whether through a tax, a reduction in government, or a
reduction in the Permanent Fund Dividend (PFD), would have
short-term negative consequences. There were various
options available to balance the budget including a tax,
reduction in PFD, or a cut in government, but all would
result in taking money from different people or factions of
the economy and would all have some version of a negative
short-term effect. The exception was the use of savings
(second bullet), which also had a tradeoff because it
potentially put pressure on the Permanent Fund and
jeopardized long-term returns. He explained there were
variations in the negative short-term effects depending on
who money was taken away from. He used an income tax and
sales tax as an example and detailed that a portion of the
tax would be borne by nonresidents. Whereas, reducing the
PFD took money from Alaskans - low income Alaskans tended
to spend a significant portion of their money. He
summarized that all of the options would hurt, but the
amount of hurt varied.
Mr. Guettabi continued that the deficit had been $3
billion, and a significant portion had been solved with the
percent of market value (POMV) [draw from the Permanent
Fund Earnings Reserve Account (ERA)] and shifting away from
oil revenues as the largest source of revenues to a more
stable funding stream.
Vice-Chair Ortiz asked if there was a difference in the
impact on the economy between taking money from individuals
through a tax and injecting funds to individuals.
1:46:42 PM
Mr. Guettabi asked for clarification on the question. He
wondered if Vice-Chair Ortiz was asking whether the
negative effect of a tax increase equal in size to the
positive [of injecting funds to individuals].
Vice-Chair Ortiz stated the positive effect.
Mr. Guettabi answered that he was treating them in a
symmetric fashion related to the short-term (the period of
time before there were behavioral responses).
Mr. Guettabi turned to slide 6 [there was no slide 5 in the
presentation] and addressed the tools used to develop the
ISER study. The study followed money through the economy
and used a standard input/output model that captured the
linkages across Alaska's economic sectors. He clarified
that it was an actual model of Alaska's economy that
captured how much given sectors varied against one another,
how much households spend, and what kind of things they
spent money on. The model helped understand how shocks to
any sector or household income reverberate through the
economy. For example, in the private economy, the method
was typically used to understand the economic impact of a
large construction project. He used a current construction
"renaissance" in Fairbanks as an example and explained the
tools were used to understand the economic ramifications of
such an injection. He furthered that the model considered
how much money was taken from different households or the
amount of reductions or increases to government that were
being captured. The study followed the ripple effects in
the economy and considered the immediate, indirect, and
induced effects.
1:48:41 PM
Mr. Guettabi moved to slide 7 and addressed how the effects
were estimated. He shared that he was often asked why the
employment effects of cutting government spending were
larger than those resulting from cutting the dividend. He
explained that a cut in government spending had a direct
reduction of a job and the spending associated with the
job. In the income case (sales or income taxes),
individuals experienced income shock and therefore they
spent less money. There were jobs that were lost, but the
initial income shock resulted in the ripple effects or
spending reductions.
1:50:01 PM
Mr. Guettabi turned to slide 8 and addressed important
limitations. He explained that the analysis had used what
ISER termed as generic cuts rather than following a
specific proposal. He referenced the second bullet point
and reiterated his earlier statements that the analysis
focused on the short-term and did not account for potential
outmigration, prices, or wage rates. He elaborated that
those items occurred in the medium to long-term. He
highlighted that understanding the long-term ramifications
was arguably much more important than understanding the
short-term effects; however, the ability to forecast long-
term ramifications was limited.
Vice-Chair Johnston asked if generic cuts used the mean
average of the whole employee pool.
Mr. Guettabi replied that ISER used several ways. The first
related to layoff of government workers and used the
average pay of government workers. Another case removed
government services, which was an amalgamation of a few
different functions. A third option cut the pay of
government workers. He concluded that it was not a specific
K-12 or University; it was a combination of the items.
Vice-Chair Johnston asked for verification that all three
went into the generic cuts.
Mr. Guettabi replied that they were modeled separately. The
rule of thumb was that every $100 million in cuts resulted
in a loss of about 1,000 jobs.
1:52:26 PM
Mr. Guettabi stated that the devil was in the details and
many things were unknown including the actual size of the
cuts, how the cuts would be absorbed, how communities would
respond to the loss in local government revenues, and how
the University would respond. The questions were important,
and it was not yet known whether changes would be in
layoffs, pay, or any of the above. There was a great deal
of uncertainty about how much, if, or what type of cuts
would actually take place.
Mr. Guettabi advanced to a chart showing estimated job
losses per $100 million of deficit reduction across various
options. The first four options were classified as
government related and the remainder were income related
including the dividend and several modeled taxes. The
darker green bars associated with each option represented a
low estimate and the lighter green represented a high
estimate. One of the reasons the employment losses from
cuts to government were large was due to the loss of the
job and the income associated with the job. It was
important to note that across the income options, the
amount of revenue raised fell on nonresidents in some cases
(e.g. taxes), which resulted in fewer short-term economic
impacts.
Representative Josephson relayed that the previous day the
committee had heard an economist [from the Office of
Management and Budget (OMB)] talk about that individuals
would make adjustments in their lives and seek other
employment. He highlighted a proposed cut of 18 staff
within the Division of Agriculture under the Department of
Natural Resources. He presumed the individuals would be
unemployed for at least a day and some of the individuals
would hopefully get other jobs. He asked if the ISER study
factored those things into account or whether those items
fell into the long-term category.
Mr. Guettabi responded that the study looked at
ramifications from making cuts. He could not forecast how
long someone would be unemployed. He noted that the
backdrop was that Alaska had been in a recession for 39
months.
Vice-Chair Johnston noticed that slide 9 specified a 3
percent and 4 percent sales tax as options. She how ISER
defined the flat rate income tax option on the slide.
Mr. Guettabi replied that the study had used a broad
definition for income tax and had taken the same share of
income across household groups.
1:56:13 PM
Mr. Guettabi moved to a chart on slide 10 showing estimated
income losses per $100 million of deficit reduction. He
highlighted that PFD cuts resulted in the largest income
losses because they fell on residents only - almost all
other options fell on nonresidents to a certain extent. He
detailed that in the modeling exercise, the high case
assumed that households, depending on income bracket, saved
some of their income, paid federal taxes, and spent the
remainder in the economy. Whereas, the low case included
some adjustments to account for how much of the spending
actually occurred in Alaska.
Mr. Guettabi addressed income losses from government
reductions and underscored that $1 of compensation included
retirement and health insurance; therefore, removing the $1
did not mean that it did not hurt the individual, but the
share of the $1 spent was lower because it included some
non-wage/non-spendable items.
Mr. Geuttabi moved to slide 11 and addressed effects of
government cuts. He detailed that the employment graph
[slide 9] included four government options. He intended to
address three of the options and removed capital spending
from the equation. He explained that when averaging
government layoffs, pay cuts, and broad-based state cuts,
every $100 million deficit reduction resulted in
approximately 1,080 jobs lost in the short run.
1:58:50 PM
Co-Chair Wilson asked if he was meaning government would
lose 1,000 jobs or the entire sector would lose the jobs.
She reasoned that although the state was not providing
services with the $100 million, it did not necessarily cut
the money from the economy because there may or may not be
a tradeoff pertaining to the whether the private sector saw
a need for whatever the government had taken out. She was
trying to determine how to justify discontinuing a service.
She wondered if it meant the state had to determine whether
the private sector would pick a service up if it was cut
from government. She wondered if that level of detail was
needed to fully understand the impact of the proposed
budget reduction.
Mr. Guettabi replied it was a good question about how the
private sector would respond to the cuts. Currently, the
discussion was about removing a certain amount of money
from the economy. He considered whether they should be
thinking about the cuts as absolute reductions or whether
private sector would step up and cover some of the losses.
Additionally, he considered whether there was even an
understanding of the potential reaction to the losses from
the private sector. He did not know how quickly the private
sector would potentially replace the spending. He had been
asked earlier in the day what signals would potentially
lead to the belief that reductions were not real and there
was someone else waiting in the wings to cover them. He did
not know where the potential recovery of some of the losses
would come from.
Co-Chair Wilson reasoned that Mr. Guettabi was speaking to
the $100 million in real numbers. She provided a
hypothetical scenario where a department was cut by 50
employees, but only 30 of the positions had been funded.
She thought they would have to know how much of the
reductions represented real dollars and what portion
existed but was never funded.
Mr. Guettabi agreed. He reiterated his earlier statement
that the devil was in the details and the details in Co-
Chair Wilson's example were the details that mattered. He
elaborated that knowing how the cut was implemented,
whether it included layoffs and/or pay cuts, how it was
done, and how much a person earned were all immensely
important. The ISER analysis only helped provide an
understanding of the potential aggregate effects.
2:02:03 PM
Mr. Guettabi moved to slide 12 and addressed the goal of
the presentation. He stated that most of the conversation
had focused on the state reductions, whereas, he thought
about the economy as a whole. He was trying to understand
the economic ramifications from all of the proposed
changes, including how much money would be injected into
the economy as a result of the higher PFD or removed from
the economy as a result of the cuts. He clarified that cuts
encompassed loss in federal dollars, local government
revenues, and operating spending. He explained that
injections meant injections as a result of using the
statutory formula instead of the capped PFDs (the first
payback of the PFDS). He stated that he would be making
assumptions that committee members may agree or disagree
with. There was uncertainty about how communities would
respond and how people would spend or save PFDs.
Mr. Guettabi moved to a bar chart on slide 13 showing
reductions in spending. He noted that the data used the
numbers presented by the Legislative Finance Division (LFD)
on February 26 to show how much the state was using in
reserves and whether or not the reduction was $1.6 billion.
He elaborated that there seemed to be a fairly unambiguous
reduction of $650 million in operating budget reductions
(shown in blue); $420 million in local government revenues
through the oil and gas property tax and $28 million
reduction in fish tax for a total of $448 million (shown in
red); and a loss of $500 million in federal matching
dollars (shown in green). He stated that the slide showed
the amount of money that would get pulled out of the
economy in the short-run.
2:04:45 PM
Representative Josephson remarked that the $500 million in
foregone federal revenue currently resided in Washington
D.C., not Alaska. There was no penalty directly applied to
Alaska residents' income stream. He thought it was
especially damaging money to forego because it acted much
like the ERA POMV that buttressed the economy. He explained
the funds did not reflect a subtraction from something else
the state would have done.
Mr. Guettabi thought of federal dollars as basic dollars
stimulating the economy including jobs. He was not
necessarily making a judgement on the value of the dollars.
His point was that there would be fewer dollars because of
the loss in federal match as a result of the cuts to
Medicaid. He agreed that federal dollars did not negatively
affect Alaskans; the money came from the outside and a loss
in federal funds would mean losing a source that did not
necessarily influence Alaskans in any way.
Vice-Chair Johnston looked at the local government
reductions that were shifted to the state [shown in red on
slide 13]. She noted that the money would not necessarily
leave the economy or the job market; it would fill a hole
in the budget. She asked if ISER called the shift a job
loss or more of a fund transfer.
Mr. Guettabi answered that in absolute terms someone was
losing the $448 million. He did not know how communities
would respond - whether they would raise taxes, spend less,
use savings, default on bonds, or other. In absolute terms,
the state would be getting the money, but someone would be
losing it. Arguably if the money was left in communities
would have had an additional $448 million in bank accounts
and the economy.
Co-Chair Wilson stated that the $500 million was only if
the federal dollars actually existed. She stated many times
federal receipts were funds the state hoped to receive. She
continued that perhaps the state had been matching the
funds for a long time, but the federal dollars had never
actually come, and the state ended up spending the matching
portion. She stated the fiscal impact depended on whether
the federal funds were real dollars.
2:08:38 PM
Mr. Guettabi replied that it was his understanding that the
federal funds [on slide 13] reflected real funds the state
had been receiving. He detailed that most of the funds were
associated with Medicaid dollars.
Representative Carpenter asked for verification that
because the $448 million was coming from local government
reductions, someone was losing the money.
Mr. Guettabi replied in the affirmative. He stated that
someone was losing the money.
Representative Carpenter asked who was losing the money
with the loss of $500 million in federal dollars.
Mr. Guettabi replied that the federal funds were used for
payments to hospitals, physicians, and people in the
healthcare industry. He explained a reduction in $500
million would result in layoffs in the healthcare industry.
Representative Carpenter understood where the local
government reductions came from. Alternatively, he wondered
who was losing the $500 million coming into the state's
economy. He asked where the federal money came from. He
asked if it was a free source of money.
Mr. Guettabi answered that the money came from the federal
government. He explained that if the state lost the federal
funds, there would be $500 million less flowing into the
state's economy.
Representative Carpenter pointed out that someone was
paying for the $500 million to come into the state's
economy.
Mr. Guettabi replied it was the federal government.
Representative Carpenter asked about the impact of $500
million coming into the state's economy from the federal
government. He reasoned that someone was paying the taxes.
He stated the money was not free.
Mr. Guettabi replied that if Representative Carpenter was
suggesting that the money was being taken out of some other
program in federal dollars, he agreed that money was
scarce, and the money would have potentially been allocated
to something else or the size of government would get
reduced.
Representative Carpenter stated that the larger issue was
receipt of $500 million in federal funds with no impact to
the economic base or community on a state or federal level.
He stated it was shown as a large chunk of guaranteed money
that could be lived with. He stressed there was a cost
associated, but they were not considering where it was
coming from.
Co-Chair Foster thought Representative Carpenter was saying
the federal money was coming from taxpayers and was asking
about that impact.
2:12:24 PM
Co-Chair Wilson thought Representative Carpenter was asking
the impact if taxpayers were not paying extra tax for the
$500 million to come in. She assumed it would mean the
federal tax liability would be less because the federal
government did not need it, which she would find
refreshing. She thought the question was that if a taxpayer
was not having to pay in for the $500 million whether it
would change the economy.
Mr. Guettabi answered that Representative Carpenter and Co-
Chair Wilson were correct that he was not looking at the
potential savings to individuals if foregoing the $500
million would mean taxpayers would pay less federal tax. He
was not taking that into account.
Vice-Chair Johnston stated it was necessary to realize the
state brought in more federal dollars than it paid out to
the federal government. She did not believe residents paid
close to $500 million in income taxes.
Representative Knopp expounded on the question by
Representative Carpenter. He asked if it was fair to say
there would be no economic impact locally if the federal
government did not change their tax laws and remained
status quo. He reasoned "if we were going to pay it
regardless if we got it back, there would be no economic
benefit," unless the federal tax structure rates changed.
He thought a change in the federal tax structure would be
needed to make the scenario beneficial.
Mr. Guettabi stated his understanding of the question. He
thought Representative Knopp was saying that if getting the
$500 million meant an increase in tax liability by
Alaskans, there would be no gain by receiving the $500
million.
2:14:44 PM
Representative Knopp clarified his point that there would
be an impact to Alaska's economy if it did not receive the
$500 million in federal funds. He reasoned that if the
state did not receive the funds and the federal tax rate
did not change, there would be no economic benefit by not
receiving the federal funds. He was responding to an
earlier statement that there was no free money. He
explained that the state could give the funding back to the
federal government, but [without a federal tax structure
change] Alaskan taxpayers would still be sending money to
the federal government anyway. He emphasized there was no
economic benefit to not taking the money.
Mr. Guettabi did not disagree.
Representative Josephson highlighted that if the state did
not have the $500 million, people would get sick, go to the
hospital, and insurance premiums would rise. He explained
that people would receive care when it was an emergency
rather than preventative and someone would pay for the
care.
Mr. Guettabi stated that if the loss in federal dollars
potentially resulted physicians or clinicians laying off
people or seeing fewer Medicaid patients or other patients,
which somehow resulted in people using emergency rooms,
overall costs would increase. He reported that the use of
emergency rooms had been found to increase overall costs.
He continued that if the reductions potentially changed
behavior and resulted in overuse of emergency rooms, it was
not a good thing in any environment where the state was
already paying a $3,000 healthcare premium over the
national average.
2:17:15 PM
Mr. Guettabi moved to slide 14 specifying that the ISER
report excluded school debt reimbursement and debt service,
capital budget reserves, and use of reserves. He referenced
the LFD presentation that had shown $70 million in school
debt reimbursement and debt service; the items had not been
factored into the presentation due to large uncertainties
around how the issue would be handled. He noted that the FY
20 capital budget was about $188 million lower than the FY
19 budget. Additionally, the LFD presentation had shown the
state was using about $352 million in reserves. The
presentation did not factor in the use of savings because
it did not take money from anyone; therefore, it did not
have short-term negative effects.
Mr. Guettabi turned to a bar chart on slide 16 [there was
no slide 15] and considered the employment impacts. He
intended to use employment numbers he had presented earlier
in the presentation by applying them to the reductions. He
used the estimate of 1,086 jobs lost per loss of $100
million. The blue bar used a $650 million reduction in
agency operation spending and multiplied the figure by the
1,086 jobs lost per $100 million. He noted the chart
treated the local government revenues as actual losses [red
bar]. He considered that perhaps certain communities had
savings and maybe they would not spend all of that money so
the reductions would not be true reductions. He explained
that the figures likely showed an upper bound of the
potential effects if the funds were treated as genuinely
coming out of the economy. He continued that if communities
had the capacity to potentially raise taxes, the losses
would not be as large - the job losses would be closer to
3,000 instead of 4,865. He noted that the capacity to raise
taxes varied between communities.
Mr. Guettabi addressed the bar showing projected employment
losses resulting from the loss of federal dollars (shown in
green). He reported that for every $100 million lost in
federal funds there was a loss of about $1,000 jobs. The
slide showed the potential jobs removed from the economy in
the short-run if ISER's 2016 estimates were applied to the
money that would no longer be circulating in the economy.
Mr. Guettabi turned to a table on slide 17 showing a
breakdown of employment losses from reductions. The
reductions included $650 million from the operating budget,
$448 million from local governments, and $500 million in
federal dollars. He pointed out there was a question about
how localities would absorb the losses - he did not believe
anyone had a good sense about what portion of the losses
would be covered by reductions, tax increases, or the use
of savings.
2:21:08 PM
Representative Sullivan-Leonard looked at the state
operating budget reductions showing a total job loss of
7,059 [slide 16]. She asked if the figure could be broken
down to show which area of the state would have the largest
loss.
Mr. Guettabi explained he had not done a regional analysis
because the budget had been out for several weeks and he
was trying to apply previous research to calculate some of
the figures. He confirmed that if ISER had more information
about how the cuts would potentially be implemented, he
would have the ability to do a regional assessment that
would potentially be more informative.
Mr. Guettabi looked at slide 18 and addressed how much each
borough would have to raise taxes in order to replace state
aid. For example, the North Slope Borough would lose $372
million and would need to generate a tax of $35,972 per
person in order to replace lost revenues. The numbers in
red showed the tax necessary to replace lost revenues. He
clarified that the slide did not claim the method would be
used by the borough. The data used the potential losses in
oil and gas property taxes and divided them by the
population.
Representative Knopp observed that the slide used the
entire population for the Kenai Borough including children.
He noted that the number was significantly more than the
number of taxpayers.
Mr. Guettabi replied in the affirmative. He advanced to
slide 20 [there was no slide 19] and addressed the short-
term economic effects of higher PFDs using ISER's 2016
analysis. Under the proposed budget, Alaska residents would
receive $2,932 (if the statutory formula was used) instead
of the $1,800 that they would have received if the
dividends were capped. Alaskans would receive an additional
$1,061 to pay back for previous capped dividends. He
explained that it would mean each person would receive an
increase of about $2,193, which translated into an
additional $1.348 billion in the economy if 615,000 people
received the PFD.
Vice-Chair Ortiz asked if the number included an average
federal income tax of 20 percent.
Mr. Guettabi replied that the data only included the
overall amount of money of money being sent to people
before removing taxes. The data showed how much more money
people would have in their bank accounts if the checks were
sent out. He noted that the figure was in addition to what
the PFD would have been.
2:25:21 PM
Mr. Guettabi advanced to a bar chart on slide 21 and looked
at additional dollars in people's bank accounts due to
higher PFDs. The additional dollars resulting from using
the statutory formula would be about $696 million and the
additional dollars due to the payback dividend would be
about $652 million, which totaled $1.34 billion. He noted
the increases were marginal, meaning above and beyond what
the dividend potentially would have been.
Mr. Guettabi moved to a bar chart on slide 22 and
considered the short-term impacts of the higher PFD. He
reported that the original ISER analysis found that for
every $100 million increase in the PFD, the average number
of added jobs was 725 in the short-term. The chart showed
the added money to the average increases per $100 million.
He explained that the chart factored in the increases from
using the statutory formula and from the payback
[dividend]. The result was 9,700 jobs in the short-term as
a result of the larger injection.
Mr. Guettabi briefly referenced a table on slide 23 that
provided a breakdown of the calculation used on slide 22.
Co-Chair Wilson referenced the PFD data used and asked if
there was historical data available as well. She thought it
would depend on the money that remained in Alaska versus
money that was spent online or put in savings accounts.
Mr. Guettabi replied that the analysis treated the PFD as
an income injection. The analysis projected the number of
jobs that would get created if residents received the
additional money (including assumptions about savings and
taxes). There was a separate paper that included the
exercise Co-Chair Wilson was asking about - it looked at
how employment in the months following the [PFD]
distribution change as a result in the variation of the
size of the PFD from 1990 to present. The analysis used
real employment fluctuations in response to changes in the
size of the PFD.
Mr. Guettabi advanced to a bar chart on slide 24 showing
employment changes from declines in state spending, loss of
local government revenues, federal revenues, and employment
gains from higher PFDs. He explained that the economy would
have 7,000 fewer jobs if the proposed changes were put
together. The number included the 9,700 jobs added through
PFD gains, and $16,000 jobs lost as a result of the losses
from spending reductions. He clarified that the number was
not solid, there were uncertainties surrounding how people
spent their PFDs (i.e. if they spent the PFD and how much
they spent). He noted there was uncertainty about what type
of reductions were actually taken from the changes in
operating budget, local government, and federal funds.
2:29:19 PM
Representative Knopp noted that the previous day Ed King,
Chief Economist, OMB had presented a chart showing the
effects of an injection into the economy and the growth of
jobs. He noted a specific timeframe had not been included.
He shared that Mr. King had reported that how fast and deep
the waves were depended on the rate the money left the
market. He wondered whether numerous short-term injections
(that lasted a quarter or six months at the rate the money
left the market) caused significant damage to the economy.
He detailed that injections resulted in a spike in the
economy annually. He asked if the injections were harmful
to the economy and caused uncertainties.
Mr. Guettabi answered that from the perspective of an
economist anything potentially adding uncertainty was bad
for households and businesses. He did not know it to be the
case that PFDs created uncertainty. There was uncertainty
about the exact PFD amount, but people could fairly easily
determine the amount if the statutory formula was used. He
shared that it was hard for him to think about injections
of money into the economy as a bad thing. He noted that the
state was in an environment where it was trying to
determine how to allocate scarce resources. He explained
that the types of jobs gained, and the types of jobs lost
were not necessarily the same thing. He detailed that job
gains resulting from the PFD were in the retail sector,
paid about $2,600, and lasted about three months compared
to government jobs that paid an average of $4,700 per
month. He thought the exercise was useful to think about
impacts on employment, but "a job is not a job, is not a
job." He did not believe the yearly fluctuation resulting
from the [PFD] injections created economic uncertainty.
2:32:17 PM
Vice-Chair Johnston asked if there was any way of looking
at the PFD as universal basic income. She wondered if it
was possible to use some of the theory behind universal
basic income to inform projections.
Mr. Guettabi responded that ISER had a research program
looking at the socioeconomic impacts of the PFD because it
had been approached by people who were thinking about
universal basic income. He explained that countries,
states, and Silicon Valley were very interested in the PFD.
The research agency had looked at the PFD's impacts on
child obesity, crime, and labor. Additionally, ISER planned
to begin a few papers looking at the impacts on healthcare
usage. He noted that the dividend was not big enough to be
basic, but it was universal. Realistically, no state could
pay more than the dividend provided in Alaska. Whatever
model was implemented would likely be the same scale as the
PFD.
Representative Josephson stated that in some respects 7,000
did not seem like that many, but it was the equivalent of
everyone in Seward and Homer including infants. He believed
Mr. Guettabi was indicating that the types of jobs [created
by a larger PFD] were inferior in terms of the quality of
life they provided.
Mr. Guettabi clarified that the long-term nature of the
jobs that would be lost was different than those that would
be created. He explained that jobs that would be created
would be temporary retail jobs and the wages would be lower
than wages of jobs that were lost.
Representative Josephson stated that much had changed since
1982 and speculated that every legislator would like to pay
a $2,100 dividend. He stated that if the amount was
affordable there would be few reasons to not pay it. He
discussed that some of the public had adjusted to a lower
dividend because of the former administration's veto of the
higher PFD in 2016 and the legislature's refusal to
override the veto, in addition to the legislature's own
actions in the last two years. He thought that the full
dividend (albeit statutorily prescribed) was a phantom
until it happened. He wondered if there was any way to
calculate the economic impact. He stated that the public
may believe there would be a larger dividend because of the
new administration, but they may also realize that politics
could get in the way. He did not believe it could be a
shock to most Alaskans to not receive a full dividend.
Mr. Guettabi that he did not have a complete answer to the
question related to expectation of the size of the PFD and
how it potentially influenced how people spent or did not
spend their dividends. He communicated that there was quite
a bit of work that tried to isolate whether or not expected
income was treated differently than an unexpected serge in
money. He did not know what Alaskans thought about the size
of the PFD and whether the expectation was real or not. He
reported there was uncertainty about the extent that the
current recession and governor's proposed budget changes
would influence how much of the dividend would make it into
the economy. He did not know if the number was more or
less, but the current environment had a non-negligible
amount of uncertainty, which impacted behavior at the
business and individual level. He clarified that the
analysis did not gauge those factors.
2:37:23 PM
Vice-Chair Ortiz understood that the 7,146 in job losses
was an estimate [slide 24]. He asked if the actual number
was equally likely to be higher or lower.
Mr. Guettabi answered there were two potential sources of
uncertainty. First, which of the factors [on slide 24]
actually happened including whether the dividend was paid
back and whether communities lost local revenues. He
continued that the number would be negative regardless of
how much uncertainty existed on both sides. He did not know
whether the number was between 5 and 10 or 3 and 15.
Directionally, it appeared that the combination of the
factors would result in negative short-term consequences.
He clarified that the amount of money the proposed changes
would take out of the economy, regardless of actions taken,
would lead to negative short-term effects.
Representative LeBon asked if ISER had ever given economic
thought to a change in the program where quarterly
distributions were made as opposed to an annual lump sum
distribution. He wondered if it would change behaviors. He
mentioned Mr. Guettabi's testimony related to the increase
in retail employment following the October PFD
distribution. He asked if people would spend the PFD money
differently.
Mr. Guettabi replied that ISER had received the question
numerous times because a number of states and countries
considering universal basic income were thinking about the
proper structure. He reported that ISER had limited insight
about how people would change their behaviors. He noted
there were other programs to learn from - there had been
changes in the schedules of [indecipherable] payments and
other types of transfers that potentially provide insight
on how people spend the money and whether or not money was
fungible (i.e. whether the injection was treated the same
way as regular wages). Currently, he did not have a
complete answer regarding how much of the money would go
into retail and savings.
Mr. Guettabi referenced a crime paper produced by ISER and
reported that in the weeks following the distribution of
the PFD, substance use crimes increased slightly, and
property crimes decreased slightly. On an annualized basis,
the numbers were very small. One of the takeaways of the
specific analysis was that spreading out the payments
throughout the year could potentially remove the slight
increase in substance use crime, while continuing to see a
small reduction in property crime. He underscored that the
data was crime specific and did not say anything broadly
about the program. He reiterated that the effects
identified by the analysis were very small.
2:41:32 PM
Representative LeBon noted that the dividend program had
changed substantially over the years. He recalled when
paper checks and long lines at the bank. He remarked that
the paper piece of the program had all but disappeared due
to automatic deposits. He thought it could be modified to a
quarterly program and speculated that most of the money
would be spent in Alaska on necessities versus on a new
snow machine.
Mr. Guettabi moved to slide 25 and discussed the comparison
and estimate. He did not want the takeaway to be the 7,146
[job loss projection]; the analysis was an attempt to put
the pieces together. He highlighted that the types of jobs
created and lost were not necessarily the same. He reported
that ISER's most recent work showed that the effects were
fairly concentrated in the months after the [PFD]
distribution. He clarified he was only talking about
employment effects and was not comparing the value of
government services to the value of the PFD. He referenced
the question of uncertainty and whether or not it resulted
in people spending the money or saving it if they believed
they were going to lose their jobs. He emphasized that
understanding how communities would potentially respond to
the spending cuts was a large piece of the conversation.
Additionally, the amount of federal funding the state would
lose was also a big question. His understanding was that
$500 million was a good estimate, but it could be larger.
2:43:39 PM
Mr. Guettabi advanced to a bar chart on slide 27 [there was
no slide 26] and discussed the current recession for
context about what the numbers meant. The chart showed his
forecast prior to the release of the governor's proposed
budget and did not include any large reductions or
injections. He pointed out that in 2016 the state lost
about 1.8 percent of its jobs (actual reductions) and about
1.2 percent of its jobs in 2017. He expected that the final
numbers for 2018 would show the state had lost about 0.8
percent of its jobs. Prior to the governor's proposal, he
had expected the recession would end in 2019 and the state
would gain about 0.8 percent jobs (2,700 or 2,800 jobs) if
the economy was not shocked in any way. He highlighted the
forecasted bars [shown in red] for 2019 to 2025. He noted
his expectation that growth would be small. He explained it
would have taken four or five years to recover the 12,500
or 13,000 jobs lost between 2015 and 2018 due to the oil
induced recession.
Co-Chair Wilson stated that OMB had testified that the
private sector would pick up the slack. She asked if there
was anything to show in recent years that it would be true.
Mr. Guettabi replied that he did not know the process
through which that would happen. He interpreted it as a
vision as opposed to an analysis that showed the private
sector would increase spending due to less government
spending. He did not understand the process by which there
would be elevated levels of spending by reducing government
spending.
Co-Chair Wilson thought that if the private sector were to
cover for a decline in government spending that it would
have already started happening. She pointed out that the
chart [on slide 27] did not show that to be the case.
Mr. Guettabi agreed. He looked at the two negative blue
bars on slide 27 [for 2016 and 2017] and detailed that the
first wave of the recession was oil and gas specific, which
had resulted in job loss in professional and business
services, construction, and government. Whereas, the
current recession was almost retail specific. He elaborated
that the state was in the downstream section of the
recession where jobs were lost in the high paying sectors
and the reductions in spending were making it into retail.
While there had been positive turns in oil and gas and
construction in the past six months, the increases were
still fairly small; the increases had not been large enough
to offset losses in retail.
2:48:09 PM
Representative Josephson thought each job loss would be a
case by case analysis. For example, if Division of Motor
Vehicles was privatized (which he opposed) people would
still need driver's licenses and the private sector would
have to fill the need. Whereas, if classes shrunk and a
physics teacher was dismissed at the University of Alaska-
Fairbanks, there was not a market for private sector for
physics professors. He asked if it was fair to say that
what the private sector picked up would be entirely
dependent on the nature of the work.
Mr. Guettabi agreed. He detailed that if there were
measures implemented in order to create private versions of
public services, the jobs would be replaced. His prior
response had been about whether there was a natural process
where lost government services would be picked up by the
private sector. He stressed that the economy was very
fragile and had been in recession for 39 months. He
explained that it was not as though the state had been
growing rapidly and an immediate response or recovery could
be expected.
Mr. Guettabi turned to slide 28 and addressed the current
state of the economy. Since the start of the recession the
state had lost 1.82 percent of its jobs in 2016 and 1.25
percent in 2017. He expected to see that employment had
declined by 0.8 percent in 2018. Before the governor's
proposed cuts had been announced, he had anticipated small
positive growth of 0.8 percent (2,700 or 2,800 jobs). He
had projected growth going forward to be positive but
fairly small. He detailed that the growth would have
included a combination of oil and gas activity,
stabilization of the retail sector, and positive shocks in
Fairbanks due to construction.
2:50:56 PM
Mr. Guettabi highlighted a short summary of employment
losses from 2015 to 2018 on slide 29. He emphasized that if
7,000 jobs were lost due to the proposed changes, the
recession could potentially become Alaska's most severe
recession. He highlighted that Alaska's most severe
recession to date had taken place in the 1980s where the
state had lost about 19,000 wage and salary jobs in the
space of two years. The current recession had been longer,
but milder. He expounded that the current recession had
lasted much longer, but when looking at all metrics
including stability of the housing market, the number of
jobs, and outmigration, the economy had held up well. There
were numerous explanations for that. He had argued from the
beginning that the floor of economic activity was much
higher at present, there was spending by people over the
age of 65 that provided a cushion, and there were much
larger Native corporations. Those things provided sources
of income that allowed the economy to absorb some of the
losses. He considered the potential implications if the
projected job losses were tacked onto the job losses that
had already occurred. He questioned whether there was a
potential for the oil induced recession combined with the
spending recession to become the state's most pronounced
recession.
Representative LeBon stated that one factor that created a
collapse in Alaska's economy were very strong capital
budgets in the first half of the 1980s that had fueled a
level of economic activity that included speculative real
estate spending. He pointed out that the banking community
had not helped (he had been a banker at the time). He
reported there had been aggressive lending and speculative
real estate deals and land development loans. He recalled
that seven or eight banks had been lost during that period.
He underscored that the current recession was nothing like
the one in the 1980s.
Vice-Chair Johnston spoke to the differences between the
current recession and the recession in the 1980s. She
discussed that in the 1980s there had been a huge shock to
the economy in the 1980s that had gone on for close to ten
years. She elaborated that massive wealth had come into the
state that had resulted in excessive spending. She
discussed that individuals hired in the 1980s were retiring
and remaining in Alaska versus moving out of state. She
believed there was a maturing of the population.
Mr. Guettabi stated it was difficult to showcase the
increased number of multigenerational families in a model.
There was more "stickiness" of the population, which made
the state better able to absorb some of the shocks.
However, he questioned whether it changed if job losses and
the recession continued.
2:55:10 PM
Vice-Chair Johnston thought the stickiness of the
population could be fragile if the opportunity for the
generations went away (e.g. if the children or
grandchildren left the state).
Representative Knopp reported that he disagreed with the
ISER report from 2016 and thought information had been left
out. He stated that the report had focused on short-term
economic impacts to the loss of the dividend. He recalled
that everyone had said the worst thing to do to the economy
was to shorten dividend checks. He elaborated that the
report had not addressed what happened if some of the
dividend had to be used to maintain jobs or the impacts of
losing some of the jobs. He thought the report was
incomplete. He looked at slide 29 that showed additional
job losses of 7,000. He understood the losses resulted from
the loss of funds for communities. He pointed out that the
analysis did not cover how the elimination of the Alaska
Marine Highway System would impact economies and people
(trickle down effects). He asked for verification that the
analysis only touched the surface of the potential economic
disaster that could take place.
Mr. Guettabi replied that Representative Knopp was correct
that it was an incomplete assessment of the potential
consequences. He emphasized that the analysis was short-
term and did not speak to how people would react, how many
people would out-migrate, and what would happen to the
quality of life or the quality of services. He underscored
that the items were much more important than the short-
term, but the ISER study and the presentation stopped short
of getting there.
2:58:15 PM
Mr. Guettabi turned to slides 30, 32, and 33 [there was no
slide 31] and highlighted that the current economy and the
economy in the 1980s were different. He referenced the out-
migration and the severity of the 1980s recession and
emphasized that the economy was much smaller with only
about 260,000 jobs compared to the current number of around
330,000. He stressed that the diversity of the Alaska
economy was much more pronounced, but prior to the use of
POMV, it did not have a diversified revenue stream. He
reiterated that the environments were different, but he
believed considering the last severe recession was
potentially useful.
Mr. Guettabi noted that the recession in the 1980s had been
much shorter and much more severe. There had been a much
larger out-migration meaning that the recession lasted
longer and impacted the housing market. He explained that
recessions typically spread through the housing market,
which made it harder to get out of a recession. He
elaborated that when housing prices dropped it became hard
to get equity out of homes. The situation had not occurred
during the current recession - the average housing price
had held up well. There had been some out-migration, but
not on the scale of the 1980s.
Mr. Guettabi summarized the depth of the housing market
downturn in the 1980s on slide 34. There had been a
significant number of vacancies and foreclosures. There
were clearly different drivers in the two recessions, but
the 1980s recession had resulted in significant negative
consequences in the short-term and long-term. He reported
that ISER did not have a way of forecasting what was to
come, but the state had already lost close to 13,000
because of the oil induced recession and it would
potentially lose more jobs as a result of the governor's
proposed changes.
3:00:40 PM
Mr. Guettabi concluded his presentation on slide 35. He
relayed that ISER did not do policy prescription and aimed
to provide an objective assessment. He pointed out that all
of the options to close the budget gap would take money
from somebody and would result in short-term negative
consequences. He elaborated that there would be regional
and statewide effects. The analysis tried to be as broad as
possible. He reminded the committee that the state's
economy was still fragile. He shared that he had done a
report six months earlier comparing Alaska's recession to
other energy dependent states. He highlighted that every
other state had already started gaining jobs. He reported
that Alaska was already lagging behind prior to any of the
proposed budget cuts. He stressed that the job losses were
only one element of the equation; how the issue was weighed
mattered differently to different people.
Mr. Guettabi relayed there were long-term considerations
but understanding how the changes would impact the economy
in the short-term was important. There was still
considerable uncertainty about which changes would actually
take place. He stated that thinking about the long-term
implications, which he could not help with, was just as
important. He noted that economists were relatively good at
answering "what is" as opposed to "what should be." He
remarked that he was in no position to talk about what
should be.
3:03:06 PM
Vice-Chair Johnston noted that Mr. Guettabi had told Co-
Chair Wilson he may have a follow up with historical
information. She wondered if he would present the
information during the current meeting.
Mr. Guettabi replied that the document was a yet-to-be
published and he offered to share with the committee. He
explained that the document had not been made public
because it was in the editing stage. He reported that in
the three months following the PFD distribution, an
additional $1,000 in the PFD resulted in women with young
children working one hour less per week on average. There
were no effects on the number of women who work. He shared
ISER's assumption that the change had to do with people
choosing to spend a bit more time with their children.
There was no change in the number of hours men worked, but
for every additional $1,000, the share of men who work
increased by about 1.8 percent. The economy had about
330,000 people and a bit less than half were men, which
equaled about 2,800 jobs in the short-run for every $1,000
increase in the PFD. There were gendered effects, the
additional jobs were concentrated amongst men, and the
share of men who work increased.
Co-Chair Foster thanked Mr. Guettabi for his presentation.
He reviewed the schedule for the following day.
ADJOURNMENT
3:06:40 PM
The meeting was adjourned at 3:06 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| ISER Guettabi HFIN 3.7.19.pdf |
HFIN 3/7/2019 1:30:00 PM |
HFIN - ISER AK Economic Outlook |