The Alaska Permanent Fund was established in 1976 as an investment that would allow for the continuation of funding of Alaska’s essential services once the Alaskan oil resources had been exhausted. While a portion of the income from the Fund comes from oil revenue (about 11% of total oil revenue to the state), most of the growth in the fund has come from re-investment and additional money put in by the legislature during the “rich” years of the inevitable boom and bust cycles experienced by Alaska. Based on its purpose, to fund the Alaska government once oil tax revenues have dried up, many people in Alaska (myself included) believe paying an annual dividend to residents is inconsistent with the Fund’s goal. In a 2010 study by the University of Alaska Institute of Social and Economic Research, Scott Goldsmith writes that if all Permanent Fund earnings had been reinvested it “would have resulted in the Fund today being about twice its $34 billion balance. The annual earnings from a fund of this size would be sufficient to pay a large share of the cost of government on a sustainable basis.” So rather than maximizing future value, the State has chosen to take profits from oil companies and redistribute them to residents. This is hardly consistent with conservative fiscal policy.

Critics believe that a portion of the income should be redistributed annually to the residents of Alaska because they fear the Alaskan legislature lacks the political will and discipline not to touch the Fund to finance current government programs. By redistributing dividends to residents, each individual gets to determine how to best spend the money while at the same time stimulating the Alaskan economy. While this is an interesting theory (and I generally support allowing individuals to spend money rather than governments), it is inconsistent with the intent of the fund. Plus, any concerns about the state government dipping into the Fund to pay for current needs can be eliminated by requiring residents to vote any time the legislature wishes to use the money. Currently the legislature can use the money whenever they want so the redistribution doesn’t reduce that risk anyway.

Instead of exclusively funding essential government services in the future, Alaska has created a giant entitlement program. And, like all entitlement programs, it becomes difficult and unpopular to discontinue. Many residents count on the Permanent Fund Dividend as part of their annual income. There’s no need to save money each month for a down payment on a new car because you can just use your dividend. State charities would also be impacted by the dividend’s elimination. In 2009 the State of Alaska developed the Pick. Click. Give program that allows residents to donate all or a portion of their dividend to local charities. In 2013, Alaskans pledged more than $2.4 million in dividends to local charities with a food bank, a program to feed the homeless, local public radio, a domestic violence group, and a dog and puppy rescue program as the largest recipients. With the influx of cash, these organizations have become dependent on the dividend donations. The competitive nature of getting donations has caused several non-profit organizations to start running ad campaigns for Fund donations adding administrative costs that eat away a portion of their increased donations. Instead of lobbying government, they are lobbying residents.

Another problem with the dividend is that for those individuals who do not wish to collect a dividend out of principle or because they don’t feel they meet one of the complicated eligibility requirements, application for and approval to participate in the Permanent Fund Dividend has become evidence of Alaska residency. If you have your primary residence in Alaska, an Alaska Driver’s License, vote here, have your bank accounts here, and get your mail here, but do a significant amount of work outside Alaska, if you don’t apply for and receive a dividend, you may find yourself in tax conundrum. By not collecting a dividend, other states have used this as evidence that an individual is not an Alaskan resident and is subject to state personal income taxes in the state they do some of their business in.

While getting rid of the Permanent Fund Dividend might be unpopular, it is the right thing to do for the long-term fiscal stability of Alaska. This is especially true now, as Alaska has reduced taxes on oil companies in an effort to reinvigorate the oil industry here. If we are going to be an example of a fiscally conservative state, saving for the future is responsible, but blatant redistribution policies are not.

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Alaska Oil Redistribution Image courtesy of Victor Habbik

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The red line indicates profits and the blue line total workers’ compensation and is for the beginning of the financial crisis through sometime in late 2012. Yes, it does indicate that there is currently a gap between profits and workers’ compensation, but the question Krugman should be asking is: “Why?”. Of course to do so would require looking at the issue from the perspective of business owners (the microeconomic perspective), which is not something Krugman has ever been very good at. So what are some microeconomic reasons this gap exists?

1) High unemployment means labor is a buyer’s market. This is basic supply and demand. With unemployment rates high, companies do not have to compete for high quality labor, keeping labor rates relatively steady. As the unemployment rate begins to fall, the gap will decrease significantly. While this is a macro- rather than a microeconomic reason, it is still an important consideration for businesses.

2) Wage rates move closer to the long-run profit average than profit at a point-in-time. Even pulling 8 extreme data points from the above graph indicates the average index is approximately 127 making the compensation index at the last data point of approximately 109 much closer to average profits than the graph at that point-in-time indicates. You will also notice that employees were not asked to take the same 20 percent decrease in compensation that profits took in 2009. Steady compensation is a good thing. Wage increases also generally lag profit increases, as companies need to feel comfortable with long-term costs and economic factors before raising compensation.

3) Inflation concerns. Companies are holding onto cash for several reasons. One reason is concern that monetary policies conducted by the Fed during the recession will ultimately lead to inflation once the economy begins to heat up. This will mean higher labor costs and other factors of production that will require cash.

4) Other employee cost uncertainty. Companies look at employee compensation from the perspective of wages and benefits. Since Krugman describes the blue line as “total workers’ compensation” I will assume it includes benefits as well. The uncertainty of rising healthcare costs associated with full implementation of the Affordable Healthcare Act as well as unemployment insurance, social security, and Medicare/Medicaid taxes provide disincentives to increase base wages as overall employee costs are anticipated to rise in the coming years.

From both a macro and microeconomic perspective there is nothing surprising, or particularly alarming about the profit/compensation pattern presented in Krugman’s article.

Holly A. Bell is a business and economics professor in the University of Alaska system and an experienced author, analyst, manager, and blogger who lives in the Mat-Su Valley of Alaska. You can visit her website at www.professorhollybell.com or follow her on Twitter at @HollyBell8

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CFOs are taking it slow as uncertainty is still present

Slow and Unsteady (via CFO.com)

The Economy | February 07, 2013 | CFO Magazine The U.S. CFO Optimism Index dropped yet again in the latest Duke University/CFO Magazine Global Business Outlook Survey, to 51 out of 100. Down from 52 last fall and 59 at the beginning of 2012, optimism levels among senior finance executives dipped late…

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http://www.moneynews.com/MKTNews/james-rickards-currency-wars/2013/01/25/id/473012?promo_code=12318-1&utm_source=taboola

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Where do big deficits come from? James M. Buchanan had an idea. (via The Christian Science Monitor)

Why do politicians act as they do? Specifically, why do they do things that don’t seem to be in their constituents’ long-term interest, such as creating big deficits by authorizing lots of government spending without enough tax revenue to back it up? James M. Buchanan devoted his life to trying…

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Deficits image courtesy of Stuart Miles

Nicolae Naumof posts a very good introduction to the foundational concept of relativity in behavioral economics. Through two examples he describes how we use mental references, environmental factors, and comparisons to make what are sometimes less than purely rational decisions.

From Naumof:

“The pond effect shows us that people don’t evaluate size of the carp as being 50cm per se, but rather as being a big or a small fish compared with its environment and fellow fish.”

Image courtesy of Idea go

By Holly A. Bell

While I am skeptical of the current fiscal cliff deal’s ability to resolve the uncertainty that has been plaguing our economy, there might be one advantage to pushing sequestration out two months: Spending cuts and the debt ceiling might be a better match for negotiation purposes. By ending the tax debate, we know what income is going to be. We also know what current spending is and what it is projected to be.

The debt ceiling indirectly creates a spending cap. Discussing spending cuts while at the same time determining what the debt ceiling will be provides a great deal of incentive for both sides to come up with a solution. In many ways the debate about increasing taxes versus decreasing spending was actually and psychologically very divisive, which made a solution very difficult. However, the debt ceiling and spending cuts debate is more synthesized, which is psychologically and practically important. This is an and debate rather than a versus debate.

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spending cuts image courtesy of nokhoog_buchachon

By Holly A. Bell

Fiscal conservatives shouldn’t be too alarmed that we are about to fall off the “Fiscal Cliff“. Like drug addicts who have to hit bottom before they are willing to help themselves, our elected Representatives need to find themselves in the garbage and rat infested gutter at the bottom of the cliff before recovery can begin.

So what are the advantages of going off the Fiscal Cliff? First, it is now much more likely that a deal can be reached. It is psychologically easier for Republicans to support tax cuts and Democrats to support spending increases, both of which will have to happen to climb back up the hill.

Second, the much hyped “worst-case scenario” is upon us, yet the planet hasn’t fallen off its axis. Falling off the Fiscal Cliff actually ends some uncertainty that can cause stagnation in business decisions. Businesses and markets will now begin to adjust based on this new information, even though we might not like how they do it.

And finally, as many people will lose their unemployment benefits, they might be forced back to work in part-time and low wage jobs. While this is not a good thing at an individual level, the government is ultimately concerned with macroeconomics. We might see the unemployment level drop while wage rates continue to trend downward. By hitting a wage rate “bottom” and devaluing our currency through Fed actions, our products become more attractive as exports. This, of course, assumes the rest of the world has money to buy them.

Have a great 2013 everyone and I’ll see you on the climb back up the hill.

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Fiscal cliff image courtesy of Sura Nualpradid

As 2012 draws to a close, I have a few random thoughts I need to get off my chest before the end of the year:

On gender neutral toys:

If we truly want toys and other items to be gender neutral, why do we continue to insist on labeling colors as gender specific? Why can’t a boy play with a pink toy? Men have been wearing pink shirts and ties for years and I’ve never known a girl who refused to play with or wear something blue. Something icky or ugly perhaps, but never blue.

On preventing tragedy:

Humans have been trying to manage risk and control tragedy since we began throwing virgins into volcanoes, yet tragedy still exists. In spite of all our efforts to mitigate risks for our children, and ourselves it will never go away. We have to understand there is a difference between risk and uncertainty. Risk can be calculated and partially mitigated, but uncertainty cannot. The actions of nature and people are often uncertain.

On social media:

I like social media, I really do. But it seems like trying to discuss issues on Twitter has devolved—to put it academically—into a study of the density of the use of four letter words to convey ignorance of cause and effect. In addition to the types of four letter words I won’t repeat here, it includes words like work, evil, poor, guns, fair, owes, debt, and, of course, rich.

Related to other types of four letter words, civil discourse on the issues often seems rare, while shouting in all caps and name calling is not. Resorting to colorful metaphors does not strengthen your argument, make me to go away, or convince me that your point of view is better reasoned; therefore, superior to mine. I am also not likely to even consider your opinion, even if it has merit, if you add #moron to the end of your post. If you can’t find a polite way to make your point, please remain silent.

On the Fiscal Cliff, U. S. debt, gun control, Congress, the economy, and unemployment:

I’ve tried to make polite arguments about how to deal with these problems, but no one is listening. I have decided for the rest of 2012 to take my own advice and remain silent. Good luck.

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2012 image courtesy of sdmania