Alaska is Not Just Oil
Alaska’s budget is experiencing unprecedented stress due to the decline of oil prices. The difficulty stems from a significant reliance on oil revenues to pay for the State’s expenditures. This might become a source of worries for our population, since the health of the budget often gets conflated with the health of the private economy. While there is no doubt that both the oil industry and the government sector are important drivers, the state possesses other important sources of income to fuel growth. In fact, data show that only 5.58 percent of the population is directly employed in the natural resources sector.
In Alaska, the basic sectors—industries that sell goods and services primarily to markets outside Alaska, and thus bring money into the economy—are: forestry, fishing and hunting activities, mining, transportation and warehousing, and government and government enterprises. The federal government is considered basic because federal spending in Alaska is paid for from outside Alaska. Support sectors and industries are those that sell goods and services primarily to markets inside Alaska, and thus recirculate money in the economy.
From an employment perspective, health care and social assistance is the largest sector with retail being a close second. Government employment ac- counts for 23 percent of Alaska
employment and 31 percent of total wage and salary income. It is important to note that Alaska’s boroughs are very heterogeneous and many of their economies are dependent on government activity. These regional differences are going to need to be taken into account when making budgetary cuts to deal with the shortfall.
The Alaska economy did not experience the recession that most of the lower 48 states underwent. In fact, we only had one year of negative growth in 2009; however, we have witnessed much slower year over year growth since 2011. This decline in growth is due to both the recovery of the rest of the country coupled with lower oil prices.
The current slowdown has remained fairly contained in oil and gas, construction, and government employment. The severity and length of this decline will be determined by the multiplier effect of these losses—felt directly by those who do not receive this money, and indirectly by the businesses where they would have spent it—coupled with the Legislature’s decisions. Budget cuts have the potential to exacerbate the strain on economic activity, but may be inevitable in the short run.
The downward pressure from oil decline and government tightening do not seem to be temporary. The response by households and businesses to the uncertainty is difficult to predict, but we expect the economy to lose as much as 2 percent of its jobs in 2016.
Nevertheless, Alaska’s current economy is very different from the one that experienced the severe 1985 recession. First, we have experienced slow and steady growth for the last quarter century and the economy is no longer subject to significant volatility in either employment or population. Second, we have about 50 percent more jobs than we did then. Third, alternative sources of income in the form of Permanent Fund Dividends (PFDs) and retirement earnings have increased substantially and support a considerable number of jobs. These differences make it clear that we should not draw inferences about Alaska’s future by relying on previous recessionary episodes.