The Disease That Alaska Might Have

Our story starts in 1969 on a United Airlines DC-8. Destined for a New York bank, its cargo of $180 million in checks were made out to Alaska from major oil companies for the right to look for North Slope crude. That $180 million generated $41,000 a day in interest and it was only one fifth of the initial total.

Where are we going? To a Dutch disease that Alaska caught from oil.

The Oil Windfall

Only three years after the trans-Alaska pipeline began to generate massive amounts of state revenue, Alaska eliminated its income tax and started sending a yearly check that sometimes topped $2000 to most residents. Unlike states with no income tax, Alaska also has no statewide sales tax.

But…no problem. Alaska had her oil revenue.

Oil-related production, property and corporate taxes have provided 90 percent of the state’s discretionary spending and more than half of the state’s budget. Also financed with oil money, Alaska established a Permanent Fund that holds a $53 billion dollar investment portfolio and a Reserve Fund with $7 billion. The Permanent Fund provides some state revenue and the dividend checks that go to households. The Reserve Fund is the “rainy day” account.

Composed of stocks and bonds and real estate, the Permanent Fund has Apple at the top of its equities holdings:

From: The Atlantic

For decades it all worked so ideally that Alaskans became fiercely protective of their reserve funds, their yearly checks and the taxes they did not pay. All are potential revenue sources that they do not want to touch. And yet now with the price of oil plunging, they have a budget gap that is close to $4 billion.

This is the history of the Permanent Fund they want to preserve:

In 1999, Alaskans said they wanted no Permanent Fund money to go to the state’s coffers.

Our Bottom Line: Dutch Disease

Alaska’s dependence on the oil industry is a reminder of what a commodity boom can do to an economy. Essentially that commodity takes over. It eliminates other industries, boosts government revenue and elevates the income of a select few. When the boom turns to bust, there are no replacement industries to fill the void, government money dries up and the source of consumer spending contracts. It happened in the Netherlands during the 1960s and ’70s (hence the name Dutch Disease).

An economic physician might say that Alaska is suffering from a different strain of the same disease.