One more time: The Mackie plan

The new economy

Posted: Friday, February 04, 2000

I first heard about the Mackie plan two weeks ago when the alarm on my clock radio woke me up at 6:30 am. At first I thought I must be dreaming: A $25,000 dividend just couldn't be real, but it was. I've now had some time to think about it and, while I'm still not sure whether I favor it, the plan may make a certain amount of sense. Maybe.

For people who have been asleep or off fishing for the past two weeks, the Mackie plan proposes to distribute half of the permanent fund as a one-time payment of $25,000 and eliminate future dividend payments completely. The remainder of the Permanent Fund would then be available to fund state government. To prevent a massive population inflow of people, the plan wisely stipulates that only residents as of Jan. 1, 2000 would qualify for the $25,000 dividend.

There are several issues that need to be addressed. Perhaps most important is the size of the mega-dividend itself. This isn't as simple as it may sound. My understanding is that Sen. Mackie chose a $25,000 payment because it would add up to about half of the existing fund and was equal to about 12 years of the estimated $2,000 per year payout.

This is correct only if the interest rate remains close to zero for 12 years. It won't. At an interest rate of just 7 percent, the present value of a $2,000 payment for 12 years is only about $16,000. To put it another way, at the same 7 percent interest rate, the proposed $25,000 payment is equivalent to 12 annual payments of about $3,000. Given this choice, the rational decision is clear: Take the $25,000 and give up the annual payments.

Like all public policies, the Mackie plan would have indirect effects, both good and bad. The good would be that the one-time $25,000 payment could eliminate about 80 percent of the ``deadbeat dad'' problem because almost $100 million in permanent fund dividend payments would be tapped to pay past child support payments.

Likewise, perhaps 90 percent of the outstanding student loans would be paid off by garnishing the $25,000 dividends.

Finally, and perhaps most importantly to many Alaskans, the need for an income or state sales tax would be eliminated or delayed indefinitely if the permanent fund were used to fund state government.

Among the potential negative effects would be the political fallout Alaska would receive when word of the program spread beyond our state. I can imagine federal funding sources drying up when Congress found out that every Alaskan was suddenly $25,000 richer.

It is also possible that some people would spend their $25,000 unwisely and, because they would no longer be receiving an annual dividend, require additional state assistance in the future. This is possible, of course, but whether the state should be in the business of telling people how to spend their money is a separate issue entirely.

Can the plan possibly pass? My first thought was that there was no way that it couldn't pass if it made it out of the Legislature and Alaskans were allowed to vote on it. Who could say no to a quick $25,000 even if it meant no dividend in the future - especially when there is the ever-present fear (whether justified or not) that the Legislature will somehow manage to fritter away the permanent fund sometime in the future?

Then I read of the two surveys showing that 60 percent of Alaskans were opposed to the Mackie plan. Perhaps I was wrong, but I don't think so. On certain kinds of issues, people answer surveys one way but vote another. I suspect that this is one of those issues. I think people will vote for the money regardless of what they say in hypothetical surveys.

All of this must be qualified because many Alaskans consider the permanent fund as an entitlement and do not analyze it logicical financial analysis. These people may prefer to receive an annual dividend even if the value of that dividend is less than the value of a one time pay out. Me? I plan to take the Concorde to Paris and have lunch at Maxim's. That would pretty much exhaust my $25,000 but, hey, easy come, easy go.

Bill Brown teaches economics at the University of Alaska Southeast. He can be reached at william.brown@uas.alaska.edu.



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