ISER economist warns deep budget cuts could extend recession, potentially spread to housing market

Institute of Social and Economic Research economist Mouhcine Guettabi and his colleagues have been predicting Alaska’s 39 straight months of recession would finally come to an end in 2019 with a modest addition of about 1,400 jobs.

Guettabi warned the Legislature on Thursday that the recovery is fragile and could be derailed by the cuts proposed under the governor’s budget, which he predicts would cause a total short-term loss of about 7,100 jobs between direct job cuts and indirect job gains from the supersized PFD. If those losses are mostly felt by residents, he worries it could lead to outmigration and the recession could spread to the largely untouched housing market.

“I was expecting the recession to end in 2019, now as the result of these changes I don’t know when that will happen but it will appear that the recession will go on longer because of this negative pressure on employment in the short-run,” he said. “Between ’15 and ’18, the state lost between 12,500 and 13,000 jobs. If you were to add those 7,000 jobs … you would be looking at basically 20,000 jobs lost in the span of four years and that would potentially mean that, in terms of pure jobs lost, this recession would be Alaska’s most severe recession.”

Guettabi estimated that the cuts in the budget would mean a direct loss of 16,924 jobs between cuts to the state operating budget, local government and a reduction in federal spending due to the loss of state matching funds.

His analysis assumes the Legislature approves both the full statutory dividend and the PFD repayment plan sought by Gov. Michael J. Dunleavy (neither of which seem to be politically likely) amounting to the addition of about 9,777 jobs.

Guettabi was insistent throughout the hearing that his analysis should be viewed through the lens of the short-term gains and losses, acknowledging that a long-term analysis is much more difficult—if not impossible—to predict. He noted, however, that more recent analysis shows the gains from an increased PFD are on the short-term end of short-term economic impacts.

“Our more recent analysis tells me, conclusively, that these jobs are basically jobs that last for about three months,” he said. “We find that there’s an October, November and December effect, essentially.”

The housing market

Guettabi compared the current recession to the 1980s recession and explained things are considerably different between now and then, particularly when it comes to the diversification of the economy. He noted that during the most recent recession outmigration from Alaska was not particularly significant, nor were the impacts to the housing market. That’s because job losses have largely focused on non-resident workers so far.

“A lot of people were surprised to how well the housing market held up in this previous session and I think that partially one of the reasons that happened is because some of the job losses were absorbed by non-residents and obviously the economic floor is much higher,” he said. “This time around if we were to add the 7,000 on top of what we’ve already lost that recession, if it does result in outmigration, could spread through the housing market.”

Some senators were alarmed by the news, but Sen. Natasha von Imhof, R-Anchorage, chided him for making such an “extreme statement” in front of the cameras. Echoing the administration’s attempts to cast doubt on ISER, she argued that the economy is far more complicated than he would suggest.

Sen. Peter Micciche, R-Soldotna, countered that things could be worse.

“There’s potential for it to be worse. You didn’t seem to plug in the price of uncertainty on industry investment in the state of Alaska and the jobs that could possibly be impacted from that,” he said. “Is there potential for it to be worse if the uncertainty continues?”

Guettabi said the economic analysis is that uncertainty prevents about $200 million and $600 million investment in Alaska.

“There’s uncertainty on both sides of the equation,” he said.

Micciche also noted earlier in the meeting that he felt the administration’s claims that the private sector growth would some how replace losses created by cuts to government were dubious. He noted that there’s nothing in the budget—other than the increased PFD, which produces a temporary economic boost—that falls under the traditional forms of private sector boosts like tax cuts.

“We don’t have something to give back to the private sector in the reduction of the deficit. We’re not cutting income taxes, we’re not cutting corporate taxes and the reality of it is … you’re increasing that burden on local taxes,” he said. “How does the private sector rush in to fill that void if there’s not a positive effect on the private sector.”

He agreed with Micciche’s analysis, expounding on the issue again later during the meeting.

“The question about back filling is one of vision and I don’t think necessarily of analysis,” he said. “I don’t understand … what are the elements (in this budget) that are going to encourage investment. To me, there is uncertainty right now because we don’t know the size of the cuts or where it’s going to take place. It’s hard for me to see what are the sectors that are potentially going to step up.”