Thoughts about the Economic Impacts of the Governor's Vetoes

By Nolan Klouda, CED Executive Director

Nolan Klouda sits in BEI’s conference room.

Nolan Klouda sits in BEI’s conference room.

As someone born in the 80’s, the Alaska I’ve known has mostly been one of steady growth. I never knew the lean times before Prudhoe Bay that my family talks about, and I’m just young enough not to remember our deepest recession and housing market collapse of that same decade. But the stable, expanding economy of the 90s and 2000s isn’t any more “normal” than the booms and busts from commodities like fur, gold, and salmon that have dominated the state’s history since we were part of Imperial Russia.

So now we find ourselves in a tepid recovery after a three-year recession that finally kiboshed the Pax Alaskana we’d all gotten used to. Since last October, we’ve been averaging about 1,300 new jobs over the same month a year prior. That’s definitely good news, but we’re still down 11,600 jobs since May 2015. At that pace, it would take almost nine years to get back to 2015 employment levels--if we can sustain it.

With this recovery in mind, Mouhcine Guettabi and I ran some analysis on the likely employment effects of Governor Dunleavy’s vetoes of more than $400 million in state spending. We used a method called input-output analysis to estimate the total job losses, including the multiplier effects. All told, we think the cuts would cause a loss of about 4,200 jobs in the state. That’s more than enough to send us back into net job loss territory, and restart the recession. 

As I told Annie Zak from the Anchorage Daily News, I’m pretty concerned about these short-term losses. More worrisome, though, are the long-term effects that are much harder to analyze. As an economic developer, the loss of workforce skill and human capital are especially alarming. Alaska businesses repeatedly cite workforce gaps among the highest barriers to growth. Cuts to the University of Alaska won’t help that, nor will elimination of programs like Head Start, which are shown to improve professional success over a lifetime. I could go on.

I’ve already been asked whether we can really offer an unbiased opinion as University employees. It’s a totally fair question, and I won’t deny that I have personal opinions on the wisdom of the cuts. But this type of analysis is, as Mouhcine put it yesterday, “vanilla”. Any economist looking at these numbers would come up with a similar result. Removing expenditures will almost always be contractionary for an economy. Nor is a larger PFD likely to truly offset these job losses. The annual checks have modest effects on employment, and those effects usually only last a few months.

So where do we go from here? This kind of analysis is better at pointing out the tradeoffs of different options than recommending a particular action. Still, it’s important for Alaskans to think about the steep price we might be paying, and what benefits we reap from these cuts as a state. Not many Alaskans around today remember the grim post-1964 joke that natural disasters are one of the state’s leading industries, since they result in construction booms. Our future direction is bigger than these budget cuts, but let’s hope for an economy bountiful enough that jokes like this don’t have a chance to become fashionable again.