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Affluent Christian Investor | November 12, 2018

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Alaska Oil Slump Answer is To Attract New Businesses

(Photo by Frank Kovalchek) (CC BY) (Resized/Cropped)

(Photo by Frank Kovalchek) (CC BY) (Resized/Cropped)

The Alaskan state public deficit is a consequence of a major decline in the economy. The long term focus needs to be on the economy. If and when the economy improves it will enable the state deficit to improve. Most all of the discussion has been about the deficit gap, and implementing new taxes to fill it. That means taking from private support for citizen living standards to offset some of the decay of public… services. “Moving the money around” does not address AK’s long term economic problem: generating higher domestic and out-of-state sources of income.

There are three sources of income support for Alaskan citizens: production of domestic goods and services in-state, revenue from exports, largely crude oil, and earnings from out-of-state investment. To maintain the citizens’ standard of living the decline in crude oil revenue needs to be offset by increases in one or both of the other two.

AK took a remarkable, and essentially unprecedented action, with its adoption of the principle that AK state natural resources belonged, in part, to the citizens not the government, and created the diversified AK Permanent Fund with annual dividend payments to all Alaskans. It was politically brilliant, if unintended, because reversing that action is surely not politically feasible. In public speeches, and in articles while I was at the UUA, I argued that Alaska made just two mistakes: They did not assign all of Alaskan royalty earning on oil to the citizens’ Permanent Fund account; and the income tax should not have been repealed. The latter meant foregoing ballot box control over public spending. For the state now to tap into the dividend income from those PF earnings does not help solve the long term problem; it only offsets declining public services at the expense of reduced private standards of living.

The bottom line is that Alaska must generate more production in-state and find substitute exports for oil, or suffer a decline in living standards. Unfortunately, Alaska and its oil producing firms have not exactly been on friendly terms. The level of royalty payments for resource extraction is necessarily difficult to determine, and an adversarial negotiation issue. (It is not a tax, but a payment for resources extracted.) That hostility should not be allowed to infect the general business climate.

Alaska needs to develop a business-friendlier environment that attracts new businesses. Make it easy to start new businesses and don’t tax them; rather simply tax the new income they pay out to labor, and in dividends to shareholders. That would be a step in the direction of a long term solution. Alaskans know best what other long term solutions may be feasible.

Dr. Vernon L. Smith was awarded the Nobel Prize in Economic Sciences in 2002 for his groundbreaking work in experimental economics. Dr. Smith has joint appointments with the Argyros School of Business & Economics and the School of Law, and he is part of a team that will create and run the new Economic Science Institute at Chapman.

Dr. Smith has authored or co-authored more than 250 articles and books on capital theory, finance, natural resource economics and experimental economics. He serves or has served on the board of editors of the American Economic Review, The Cato Journal, Journal of Economic Behavior and Organization, the Journal of Risk and Uncertainty, Science, Economic Theory, Economic Design, Games and Economic Behavior, and the Journal of Economic Methodology. He is past president of the Public Choice Society, the Economic Science Association, the Western Economic Association and the Association for Private Enterprise Education. Previous faculty appointments include the University of Arizona, Purdue University, Brown University, the University of Massachusetts, and George Mason University, where he was a Professor of Economics and Law prior to joining the faculty at Chapman University. Dr. Smith has been a Ford Foundation Fellow, Fellow of the Center for Advanced Study in the Behavioral Sciences and a Sherman Fairchild Distinguished Scholar at the California Institute of Technology.

In 1991, the Cambridge University Press published Dr. Smith’s Papers in Experimental Economics, and in 2000, a second collection of more recent papers, Bargaining and Market Behavior. Cambridge published his Rationality in Economics: Constructivist and Ecological Forms in January 2008. Dr. Smith has received an honorary Doctor of Management degree from Purdue University, and is a Fellow of the Econometric Society, the American Association for the Advancement of Science, and the American Academy of Arts and Sciences.

Dr. Smith is a distinguished fellow of the American Economic Association, an Andersen Consulting Professor of the Year, and the 1995 Adam Smith Award recipient conferred by the Association for Private Enterprise Education. He was elected a member of the National Academy of Sciences in 1995, and received CalTech’s distinguished alumni award in 1996. He has served as a consultant on the privatization of electric power in Australia and New Zealand and participated in numerous private and public discussions of energy deregulation in the United States. In 1997 he served as a Blue Ribbon Panel Member, National Electric Reliability Council.

Dr. Smith completed his undergraduate degree in electrical engineering at the California Institute of Technology, his master’s degree in economics at the University of Kansas, and his Ph.D. in economics at Harvard University.


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