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State spending rekindles an old debate

Posted: November 20, 2013 - 12:03am

The following editorial first ran in the Anchorage Daily News on Nov. 16, 2013:

State spending. We can’t sustain it as is, so what do we do about it?

In Alaska, when you say maximum sustainable yield, you think about salmon. On Nov. 11, however, four men at the Anchorage Chamber of Commerce luncheon debated maximum sustainable yield for state spending.

The question was: Is maximum sustainable yield the best means of managing state spending?

Maximum sustainable yield allows the state to spend from its general fund a set percentage of its “nest egg,” basically the sum of its savings, including the Permanent Fund, and the value of its oil and gas. For 2014, that sum would be $5.5 billion. Over time it would increase to cover inflation and population growth but would keep the state from draining savings and preclude the need for taxes.

Economist Scott Goldsmith and oil and gas consultant Brad Keithley argued for the proposition.

Andrew Halcro, chamber president and former House member, and economist Jonathan King argued against it. Basically, they said maximum sustainable yield is good math that ignores both politics and economics.

That’s because to meet the sustainable mark, state spending would have to be cut by about $1.5 billion from its current level — a massive jolt to Alaska’s economy, said Halcro and King. They point out that public spending and the private sector are bound together here — when the state spends big, especially on capital projects, private business prospers.

The elegant math of sustainable yield won’t appeal to contractors, carpenters or computer specialists who see dwindling opportunities.

Halcro and King argued that both political reality and economic consequences demand the more difficult work of gradually stepping down spending and working through the needs, demands and desires of Alaskans.

Keithley and Goldsmith responded that the state could easily take the cut in stride. Keithley said the spending levels would only need to return to those of three years ago, while Goldsmith argued that the recent reduction in state capital spending has slashed fat, not meat, and hasn’t seemed to hurt anyone. Halcro and King countered that’s because many projects are still to come on line, and that the effects of cuts will be felt later.

Who’s right?

Both arguments have flaws — or at least sufficient unknowns to keep debate alive.

When Keithley mentions only dialing back spending to three-year-old levels, it sounds modest and doable. But it also evokes a line from an old Beatles song: “Your voice is soothing but the words aren’t clear.” What exactly will be the effect of such a cut? How it will it affect Alaskans where they live? That’s the political and economic question that must be answered.

Keithley in particular said Alaska must get its fiscal house in order to keep attracting resource development investment, arguing that unsustainable spending will have Alaska going to the oil industry for more — a belief, he says, that will curtail investment here even if the oil tax cuts of Senate Bill 21 stand.

But should the state’s budget be based primarily on what resource developers want? Or do we consider their claims in the context of a larger vision of where we want Alaska to go, what levels of educational opportunity, public safety and resource management we want? Math and the accounting exercise aren’t ends in themselves but tools to serve that larger purpose — if we have one.

For their part, Halcro and King ran smack up against the very politics and economics they used to argue against maximum sustainable yield. Keithley and Goldsmith asked them the obvious question — if sustainable yield isn’t the best answer, what is?

Their response was an echo of debates gone by: a broad-based state sales tax, some use of Permanent Fund earnings, gradual cuts. That’s when they lost the room. If you’ve lived in Alaska more than 10 minutes, you know we keep a death grip on our dividends. And tax proposals go to the plate with two strikes and a broken arm.

Keithley and Goldsmith won the post-debate vote at the Chamber but this debate is far from settled. Both sides argue that Alaska would be far better off with a long-range fiscal plan, both for the present and for our children and theirs. That’s the truth. The plan doesn’t have to be writ in stone, just in good faith.

Two last thoughts:

No resolution of this debate will happen soon because 2014 is an election year. Besides, the day of reckoning when we run out of savings is now 2023, according to Goldsmith’s analysis. We didn’t act when we were a lot closer to the edge a decade ago. We’re not going to act now.

Sooner than later would be wise, however. The wolf hasn’t been at the door for years. But he’s still out there.

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