Economic Forecasting in a Remote Northern Region: Lessons from Alaska

Abstract

The driving force behind the economic transformation of Alaska has been petroleum development. Exploitation of this resource has created an extraordinary surplus of which a large portion has been retained within the region and used for growth and development. The importance of this surplus--oil company profits, federal taxes, and state-local taxes--can be seen in a comparison of the components of value added in Alaska with the US as a whole. (Value added is a measure of the value of all the goods and services produced for final demand in an economy and is similar to Gross Product.) For the US as a whole employee compensation (wages paid and benefits to workers) is the largest component of value added and its share has remained almost constant over time at about 57%. In contrast, in Alaska employee compensation, originally 68% of value added, had fallen to 37% of value added by the late 1980s. The other components of value added, payments to other factors and profits, increased from 32% to 63% of the total. Most of this increase reflects the value of oil production above its cost. It is this surplus, more than any other factor which has challenged economists attempting to forecast the direction of the economy. But some of the more traditional aspects of the economy have also made it difficult to forecast. Presented at First Alaska-Japan Regional Forum on the North Pacific, Niigata, Japan"