Structural Analysis of the Alaska Economy: What are the Drivers?

Abstract

Because of public ownership of much of the natural resource base, state government has a unique role to play in Alaska fostering economic development. A clear understanding of the structure of the economy is a necessary prerequisite for formulating a successful development strategy. This paper describes and quantifies the 14 BASIC sectors (Economic Drivers) upon which all economic activity in the state depends. Without them, the Alaska economy would not exist. Each of these 14 BASIC sectors draws money into the state, which directly generates revenues for businesses, wages and jobs for Alaskans, and other income. As Alaska businesses and households spend this new money within the state, additional revenues, wages, and jobs are created in other businesses (NON-BASIC sectors) through a process known as the economic multiplier. The size and growth of the economy depends largely upon these BASIC sectors because, without the money they bring into the state, the NON-BASIC sectors would not exist.1 We begin this paper with an estimate of the contribution of each of the 14 BASIC sectors to total employment and resident income. We do this using a simple model to calculate how much new money each driver brings into the economy and then estimating how that new money works its way through the economy generating business revenue, wages, jobs, and other sources of income.2 The results of the analysis are summarized in Table I.1. in which total employment (resident and non resident) and personal income of Alaskan households averaged over the period 2004-2007 are parceled out among the 14 BASIC drivers—aggregated into 5 major categories. We find that the various activities of the federal government, both national defense and non-defense spending, account for the largest share of total economic activity. This economic activity is not only the personal income directly flowing to households as payrolls and transfer payments and federal government jobs. It also includes a measure of personal income and jobs generated throughout the economy as the federal dollars circulate through the NON-BASIC sectors in industries like retail trade, business and personal services, transportation, and construction. The total of $9.93 billion in personal income and 131 thousand jobs can be interpreted as the loss to the state if Alaska were to receive no federal dollars over the period 2004- 2007. Petroleum was the largest private economic driver, contributing $7.44 billion to Alaska personal income and 117.6 thousand jobs. The contribution of petroleum comes from production-related activities, current petroleum revenues, and spending from the accumulated savings from revenues collected in prior years and deposited in the Alaska permanent fund and the constitutional budget reserve. The other three driver categories—traditional natural resources, new resources, and personal assets--together accounted for personal income of $7.61 billion and employment of 121.9 thousand. Traditional natural resources are those private sectors that were most important to the economy at the time of statehood. New resources are activities that have developed more recently. The category of personal assets represents the purchasing power of households that is independent of current employment such as retirement income.