Juneau, Alaska

(907) 699-6788 ed.king@kingecon.com

Flattening the Recession Curve

You’ve probably heard the phrase “flatten the curve” quite a bit over the last month. It’s been popular when talking about the current pandemic. Economists use a similar model, except that we want money to pass from person to person as fast as possible.

The tie between epidemiology and economics is important to consider. As we reduce the strain on the healthcare system, it shifts the burden onto the economy. For example, shutting down restaurants prevents the spread of a virus from customer to customer. But, it also reduces the spread of money from customer to cashier. Without sales, businesses can’t pay their workers or vendors.

As the spread of the virus is contained, the flow of dollars is constrained. Consequently, flattening the curve of the pandemic accelerates and intensifies the destruction of the economy. As we address the former issue, it is irresponsible to ignore the latter.

Economic Damage

As I wrote before, there are a lot of implications that stem from closing down an economic system. And, they’ve gotten worse since that was written. The more aggressively we fight the spread of the virus, the more damage we do to the financial health of our state.

Just two weeks of closing down businesses results in employees missing an entire pay period. Anyone living paycheck to paycheck will never catch-up. Businesses that were just barely getting by will not reopen when things get back to normal.

If you push the shutdown longer, people can’t pay rent or mortgages. Evictions, foreclosures, and bankruptcies rise. Business, personal, and home loan defaults increases – perhaps even upending the banking system. Homelessness rises and home prices fall.

Flattening the Recession Curve

This is why you have to be careful that one disaster doesn’t create another. If you burn the city to vanquish your enemy, you rule over ashes. So, how can we extinguish the flames consuming the economy?

That is a difficult question. First, any action must balance speed against scrutiny. If something doesn’t happen within the next few weeks, it will be too late for it to be effective. So, an effort needs to move forward before it is perfect. By next legislative session, any efforts will have to focus on helping the economy out of a recession rather than trying to minimize how deep it gets.

At the same time, the legislature must balance their efforts to manage the current crisis against the long-term implications of their actions. Anything that costs money will reduce future revenues. That implies that distributing money today will result in taking money tomorrow. So, legislators must be careful not to simply shift the damage further – protecting the current economy by greatly injuring future generations.

Impacts to Our Long-Term Financial Health

That last point is critical. With the stock market crashing and the oil market imploding, Alaska’s two primary revenue sources are gravely injured. And not just for the current fiscal year.

While the stock market will eventually recover, getting to the point that investment earnings can pay all of our bills just got a lot harder. And, with a smaller fund balance, both earnings and POMV projections decline. A $10 billion loss in fund value translates to $700 million of lost earnings each year.

The impact on the POMV will take longer to realize – due to the averaging the law requires. There’s no impact until FY22. Then, the allowable draw will be $100 million less than planned. By FY26, the transfer to the general fund will be over $500 million lower than any projection made before the market crashed.

The damage done to the oil market is going to hurt too. First, the state is going to get about $500 million less in tax and royalty payments in each year that prices stay low. Then, with less cash flowing into oil company coffers, there is less cash that can flow out through capital projects. The result will be fewer barrels of future production.

We’ve already heard companies cutting back on planned expenditures. Best case scenario, oil prices will recover in a year or two and the deferred projects will pick up where they left off. However, that still means that the lower prices will hurt beyond the current budget. The ramifications will ripple through the long-term revenue picture.

Together, this means that our objective just changed. Rather than trying to manage a few years of reduced revenues while we wait for new oil to help restore balance, our long-term financial health just went from bad to worse.

The ability to avoid taxes with fiscal restraint has disappeared. Given this new reality, it’s understandable that some decision-makers hesitate to make the long-term situation worse to alleviate the near-term crisis.

What Can We Do?

There are basically three options at this point. First, we can do nothing. The damage will be done, then the economy will begin to recover. Of course, this argument would be the equivalent of saying let the virus spread. People will get sick, but most will recover. For the same reasons that such an argument doesn’t work for a pandemic, it is not a responsible approach to the economic destruction we are observing.

Second, we could pump money into the economy the same way we distribute dividends. Just appropriate a billion, or two, to the department to revenue and tell them to send a check to everyone that received a PFD last October. This approach is fast and undiscriminating. It is also expensive and inefficient.

Third, we could try to target relief to the people most impacted. Namely, the people that aren’t receiving a paycheck or income stream because the pandemic shut down their place of work. This approach is cheaper (because less people get the money), but it is also more complicated (which means it takes longer to accomplish).

Targeted Economic Relief

For workers, the targeted relief could happen in one of two ways. The first option is to use the unemployment insurance system. Pass a temporary law that allows any worker to qualify immediately for March and April. And, increase the benefit to top off any reduction in income during those months (with a reasonable maximum). The legislature would need to appropriate funds to the Department of Labor to make those payments.

The second option (although perhaps more difficult to navigate) is to ask business owners to cut a full check to employees, even if they don’t work. Then submit an invoice to the Department of Commerce. This approach shifts the burden from the employees to the employers, and from the overwhelmed UI system to different state employees. The real advantage to this approach (if it’s feasible) is that it creates a synergy with some form of business relief.

As businesses are forced to turn customers away, their income streams dry up. For most small businesses, even a two week shutdown can inflict a fatal wound. Insurance, lease payments, utilities, and other invoices don’t stop coming just because you lock the doors.

One option to help with this problem is to make funds available to them through no-interest loans. To synergize with economic relief for workers, businesses could submit wages paid to furloughed workers to reduce the loan balance (technically, this might have to be called paid vacation time to get around some tricky labor laws).

This approach would require an economic relief appropriation to the Department of Commerce, from which the loans could be issued to anyone with a business license. A maximum loan of 20% of the expenses claimed on their last federal income tax filing would be one way to ensure the funds are spread across most businesses.

Doing this could be fast enough to let small business owners keep paying their bills and their employees through the next couple of difficult months, which would minimize the depth of the coming recession. Then, the repayments could refill the ERA as the economy recovers.

Of course, these are just ideas that would require navigating the labyrinth of state and federal laws. It would take a lot of work by people much more familiar with labor laws than me to figure out the logistics.

Recommendations

I usually try to avoid making direct recommendations on this website. The intent is to provide options and information – not advice. However, this is a unique situation.

I think it would be irresponsible for the government to stand on the sidelines right now. Thousands of people are out of work because of a government directive to close their places of business. We cannot simply watch as companies fail and people lose their homes. Especially not while we have the means to help.

However, we have to be prepared to accept the long-term implications of whatever help we provide. That will mean smaller PFDs in the future. And, it will increase the need for future taxes. So, anyone coming into the legislature next year must be prepared to address those consequences. And anyone calling for a larger PFD must accept that it comes at a price.

Doing so requires spending more money out of the ERA than we would like to use. I know that’s especially hard given that the fund has already been depleted by a crashing stock market. It’s a tough spot to be. If you eat your seed corn, your future is doomed. If you plant it all, you starve before the harvest.

However, this is an emergency. And we should not turn our backs on Alaskans that need a helping hand. That’s part of our culture. We don’t drive past someone in the ditch when its twenty below. Not even if that means you’ll be late to work.

So, I recommend eating a handful of that seed. Perhaps we can make an emergency appropriation from the ERA to the Department of Commerce or the Department of Labor to provide targeted relief to businesses and wage earners that are at risk of bankruptcy. I assume $500 million would suffice for now.

If there is not time to work out the details and get the money out the door within a month, then I recommend an immediate direct distribution to Alaskans. Combined with the federal relief that is coming, about a billion dollars should provide most individuals with enough money to replace their lost wages. It will just go to every Alaskan, regardless of actual need.

Act Now

This distribution, or the other approach, should happen as soon as possible and should be in addition to a PFD in October. With the layoffs in the oil, food service, and tourism industries, the economy is almost certainly heading into a recession. Any action we take now will reduce the second order impacts.

The very worst thing we could do is stand idlily by as things get worse, and then take away some much needed income in the Fall as well. For an average worker in the restaurant business, even a $1,600 PFD is equivalent to a month’s pay. Taking away that anticipated PFD income on top of lost wages assures the worst possible outcome.

An October payment should provide some security for people that can’t find work as the economy winds down. And, unlike in normal years, this money is more likely to act as income replacement than a windfall. Therefore, it is likely to serve as economic stimulus – more so than in other years. Plus, the more we can do to reduce the depth of the recession now, the less will be needed in the Fall.

These are difficult decisions. But, we should not turn our backs on our fellow Alaskans when they desperately need a hand. We cannot stop this recession from happening, but we can flatten the recession curve. It is the responsible thing to do.

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