Monday, October 30, 2017

Notes from the Alaska Fiscal Cliff: A conversation about the role of economic analysis in Alaska fiscal policy

Often, all too often it seems, conversations on social media about fiscal policy descend into personal attacks.  While one we had the other day about the role of economic analysis in the development of Alaska fiscal policy bordered at times on going down that path, for the most part it stayed on point.

This particular conversation was notable because it was largely with Daniel McDonald, who, in his day job, serves as Press Secretary to the Alaska (largely Republican) Senate Majority.  The Senate Majority has passed legislation the last two years that would permanently cut the Permanent Fund Dividend (PFD) in half, and this past session voted to reduce (i.e., tax) statutory income from the PFD otherwise due Alaskans at a 50% rate rather than cut government spending further.

Throughout the debate over taxing the PFD some of the strongest arguments against doing so have been the results of some economic analyses done last year by the University of Alaska-Anchorage's Institute of Social and Economic Research ("ISER"), at least in our view the state's best economic think tank.

In various studies ISER economists have concluded that cutting the PFD:

  • “Has the largest adverse impact on the economy [of all the new revenue options] per dollar of revenues raised,” https://goo.gl/ZxR1Hw at A-15;
  • “[W]ill likely increase the number of Alaskans below the poverty line by 12–15,000 (2% of Alaskans),”https://goo.gl/iuTjv2 at 14.
Other parts of the studies have been cited often during the state's fiscal policy debates for other findings related to the impact that cuts in government spending would have on jobs.

But when it comes to the PFD, those advocating reductions have responded to the studies largely with radio silence, at least publicly going out of their way to ignore the analysis and conclusions.

We have often wondered why that is. While McDonald made clear that he was speaking for himself and on his own time in the discussion, his reaction offers at least some insight into how at least some in Juneau are justifying that approach behind the scenes.

The irony is that the same arguments he makes below also undercut the portions of the ISER studies that some others, including some members of the Senate Majority, have used to justify maintaining current government spending levels.

But consistency among those seeking to impose a targeted income tax on PFD income generally has been rare in any event.  The discussion with McDonald, for example, started as a branch off of a claim by a former staffer to the House Republican Minority Leader that members of the House Republican Minority consistently had voted earlier this year against "income taxes," overlooking the fact that at least ten of the members did that very thing by voting for substantial reductions (i.e., taxes) on income derived from the PFD when a proposal to do so came over from the Senate.

For those interested in context, the overall discussion of which the following is a branch starts here, https://goo.gl/sqRw5j.

Hans Rodvik Okay let me be very specific here. All House Republican members of the House Republican caucus who were present that day voted against the income tax bill introduced by the Governor. The PFD is a completely separate vote and issue. The 3 Rs who voted for the income tax are not part of the House Republican caucus

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October 27 at 7:11pm
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Brad Keithley Hans .. The PFD is a separate issue only to those in the Top 20% that want to wish it so. To those who focus on economic reality, it's precisely the same. Indeed, it's worse. That form of taxation has the largest adverse impact on the overall economy (both jobs and income) of any of the so-called new revenue options, and is "by far" the worst for Alaska families. https://goo.gl/BVQ94d

In an effort to trivialize the PFD cuts of the last two years and normalize continued cuts going…
BGKEITHLEY.BLOGSPOT.COM

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October 28 at 8:49amEdited
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Donn Liston You are exactly correct, Mr. Keithley!

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Brad Keithley Daniel ... It would appear you are misreading ITEP. $92,000 is the average income for the second 20%. The Top 20% range starts at $115,000. https://goo.gl/N1sUUb

Alaska is facing a significant budget gap…
ITEP.ORG

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October 28 at 8:35am
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Daniel McDonald It’s not as difficult as you’d think it would be to join the dreaded top 20% of earners in Alaska. A married couple, each individually earning $58k per year, would qualify. The average elementary school teacher is currently making about $70k.

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ReplyOctober 28 at 8:40amEdited
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Daniel McDonald Basically, if you’re married, and both you and your spouse earn a typical wage in Alaska, then you’re in the top 20%.

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Brad Keithley Daniel ... OK, now that we have corrected for that we can move on to the substance. What that tells you is that the households covering 80% of Alaska income are below that level. 

That should be a significant concern in developing fiscal policy, espec
ially with respect to those parts of the economy driven by consumer spending. As ISER makes clear, "Lower-income Alaskans typically spend a higher share of their income than higher-income Alaskans do, so more regressive measures will have a larger adverse effect on expenditures." That is why cutting the PFD has the "largest adverse impact on the economy" of all the so-called new revenue options.


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October 28 at 8:57amEdited
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Daniel McDonald Short-term consumer spending shouldn’t be the highest priority for a state’s tax policy. Other taxes, like an income tax, have a detrimental effect on saving and investing, things you need if you want economic life in this state. And taxes on earned wages also have the additional problem of acting as a disincentive to work.

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ReplyOctober 28 at 8:58am
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Brad Keithley Hmmm .. most of our large-scale investment comes from out of state sources in the oil industry. So, while I agree that taxes on oil and corporate taxes could significantly affect investment levels, I am highly skeptical of the argument that individual income taxes would have the same effect. Further to that point, it would be interesting to see a study that identifies how much of the savings and investment done by Alaskans actually stays in Alaska. I have some reason to think its relatively small, which would further detract from an already weakened argument.

And most studies I have looked at show that the 'taxes serve as a disincentive to work' argument is significantly, to the point of being hugely overblown at low tax levels. It had some validity in the days of 90% marginal tax rates (which is why they were changed), but have a very low, approaching trivial effect at low tax rates (such as a 2.5% flat tax, where 97.5% of the next dollar stays in the pocket of the earner).

We have a study on the short term effects. We don't on the long term effects. If we did it might help the analysis; but grounding policy on speculation about what it might show is pretty darned foolish, especially when we do have a concrete study that shows significant adverse effects in the short term.


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October 28 at 9:20amEdited
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Daniel McDonald All things being equal, income taxes are a disincentive to work. That’s a simple logical principle accepted in the field of economics. You may be correct in your observation that it doesn’t amount to much at low rates, but it stands nonetheless.

The e
conomy is extremely complex, which is why your faith in economic studies is misguided. Economic studies take what we think we know about economic history and try to use that information as a guide for the future. Of course, we might be wrong about the past (economists still vigorously disagree about events 100 years ago) and it’s impossible to account for all the variables that affect economic measurements. In other words, there’s nothing “concrete” about economic studies.


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October 28 at 9:46amEdited
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Donn Liston The commercial fishing fleet, fair weather tourism, and most mineral mining are all based Outside. Some are saying our best shot for sustainability is agriculture, but many who say that are high on pot...

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Daniel McDonald Policy makers have more in their decision making toolbox than economic studies, however. They have philosophy and common sense. It doesn’t intuitively make sense — in terms of fairness and common sense — to many wage earning Alaskans to first go for someone’s hard-earned cash before you reduce the annual dividend payout when times are tough.

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Brad Keithley Daniel ... Ahh yes, the classic 'we are comfortable flying blind based on highly generalized concepts that may or may not apply to Alaska, even if we are in the middle of a recession and the analysis we do have shows that we are making it worse" defense. I have heard it from some of your members before and have been similarly unimpressed.

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Daniel McDonald I would imagine your straw men are unimpressive.

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Brad Keithley Daniel .. Hmmm, I have heard it directly from your Majority Leader's mouth while sitting in his office being lectured. Is he ... made of straw??

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October 28 at 10:08amEdited
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Daniel McDonald You didn’t hear what you just put in quotation marks.

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October 28 at 10:38am
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Daniel McDonald Yours is not the dispassionate, technocratic perspective you style it to be. You too are very much guilty of what you accuse policy makers of. That is, your analysis is colored by certain general political principles, specifically, your commitment to state-directed income equality. You believe the state ought to take from higher income earners and redistribute their resources to those at the bottom, as a matter of good policy. 

By the way, all the economic studies used in Alaska are based on historical data taken from outside Alaska with certain speculative assumptions about human behavior plugged in. And so your criticism about generalized concepts that “may or may not apply to Alaska” is built into the models you take as gospel truth.


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October 28 at 11:15amEdited
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Daniel McDonald For example, the 2016 ISER study relied on the IMPLAN input-output modeling system. The model itself maintains certain speculative assumptions about human behavior and the multiplier effect. If those assumptions are wrong, then so are the conclusions. And those assumptions are based on data compiled largely outside of Alaska.

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Daniel McDonald Oh and, of course, there’s no way to verify the accuracy of the IMPLAN model after the fact, because its advocates can always say, “the variables changed.”

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ReplyOctober 28 at 11:22amEdited
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Brad Keithley Sigh. One of your members must have thought you hadn't gone far enough. I am glad you have the spare time on a Saturday to satisfy them. As for me, I am headed off to other things after I finish this.

For whatever it's worth to whoever is bothering t
o read down this far my analysis is colored by two things. First, a significant amount of respect for the thought process of those who came before (e.g., Governor Hammond, Former Senate Presidents Clem Tillion & Rick Halford, Nobel Economic Laureates Vernon Smith & Milton Friedman) and the solutions they put -- and which still remain -- in place. They thought deeply about the issues we are confronting today, had a great deal of foresight about how to deal with them in the Alaska context and, fortunately for us, wrote about them extensively. Their solutions are well thought out and persuasive. My posts are to explain why.

Second, a desire to AVOID government action making income disparity -- and the substantial economic consequences that flow from it, such as an overall loss in jobs and incomes -- worse (in other words, the exact opposite of your claim). Unlike the PFD cut on the one hand, and a progressive income tax on the other, my suggestion of a flat tax to raise any needed "new revenue" beyond Hammond's 50/50 plan treats all Alaskans equally and, by using the broadest possible tax base, as minimally as possible. In my view, using government power to benefit one income class over another, as the PFD cut or progressive income tax would do, just leads to greater and greater distortions in the overall economy. It also leads to pushback in other areas (e.g., oil taxes) as those adversely affected look for other ways to balance out the effect. In my view government, particularly local and regional governments, should not be involved in picking economic winners and losers. Those favoring PFD cuts to raise new revenues are as guilty of that to one extreme as those advocating a progressive income tax are to the other. My posts are to explain why that is wrong.

As for your analysis of the flaws in the ISER studies, I have a short answer. Produce something else. If the Senate R's really believe the ISER analyses are misleading, sponsor another. It's not like you haven't had the time and resources to do it. Criticizing it while not producing anything other than unanalyzed generalities in response reminds me often of the mantra of the old "Know Nothing" movement. I use the analyses because they enable us to look at these issues with some rigor. If your members believe they are inaccurate, produce something that they believe is and then we can compare and analyze the results. Until then, at least to me, data driven analysis trumps "know nothing-ism".

In the meantime, have a great day. It's a Saturday; use it.


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October 28 at 12:19pm
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Daniel McDonald These opinions are my own, which is why I don’t comment during work hours. I have a personal interest in public policy. 

On economic studies, the fact that your response to my skepticism of the efficacy of speculative economic studies is that we ought
 to produce more speculative economic studies shows that you didn’t bother to read or don’t understand my critique, which is rooted in the ‘fatal conceit’ idea developed by economist Friedrich Hayek about the distribution of knowledge and the complexity of the economy. 

You’re drawing upon speculative models dressed up as science — which they are not — and mischaracterizing anyone who finds that method inherently flawed as peddling “know nothing-ism.” It’s circular reasoning in defense of a technocratic philosophy, hermetically sealed off from any outside criticism. 

Example:

Person A: “How can we know if that method of knowing is reliable if it’s based on assumptions that may not be true, with results we can’t even verify?” 

Person B: “Well if you don’t like it then produce your own study based on assumptions that may not be true with unverifiable results!”


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October 28 at 1:16pmEdited