In last week’s column, we compared nominal growth in Alaska’s Gross Domestic Product (GDP) to “real” (ex-inflation) Alaska GDP growth since 2000, and then compared real GDP growth to the “growth” over the same period in real median Alaska household income.
We did that because, as we noted at the beginning of the column, some observers routinely base their assessment of the economic health of the Alaskan economy, including that of Alaskan households, on the level of growth in Alaska GDP. The implicit assumption in such assessments is that the increase in the overall economy, as measured by GDP, routinely “trickles down” to Alaska households.
In the column, we explained that much of the “growth” many perceive in Alaska GDP over the last 24 years (i.e., since 2000) is due to inflation, rather than growth in real terms. We also explained that the change in real median Alaska household income over the period has not mirrored the change in Alaska GDP. Instead, we explained that while real Alaska GDP has grown somewhat over the past 24 years, real median Alaska household income has largely flatlined.
In short, there has been no general “trickle down” from real growth in Alaska GDP to Alaska households.
In this week’s column, we discuss why that link generally does not exist to the extent some think and, using available Census Bureau data, examine the growth rates in real Alaska household income by income bracket. We dive into the latter because Census Bureau data reveal significant differences in growth rates across income brackets. Focusing solely on the median Alaska household income doesn’t tell a complete story of the economic conditions many Alaska households face.
The reason that the median Alaska household income does not generally follow Alaska GDP is straightforward. Unlike some other states, Alaska GDP is heavily concentrated in capital-intensive industries, such as oil and mining. In those industries, growth is mainly the result of additional capital investment rather than labor, and, as a consequence, much of the return goes to the sources of the capital, many of which are non-resident, including both the companies’ shareholders and the lenders making the investments.
That trend has accelerated in recent years due to reductions in the labor force in those industries. And even where the labor force, i.e., households, realizes some of the growth, the state’s significant non-resident share of the workforce further reduces the share that ends up in Alaska household income.
In other states with significant oil and mining industries, a share of the growth in GDP typically gravitates to local households through royalty payments made to local owners. Historically, Alaska households have realized similar benefits through the distribution of a portion of Alaska’s commonly owned royalty income as Permanent Fund Dividends (PFDs).
Due to significant cuts in the PFD over the last decade, however, an increasing share of that source of growth has been diverted to state government, which then distributes the income according to its own priorities. Following its path after being so diverted, not all ends up in Alaska household income. And even of the portion that does, a significant share ends up going to households other than those to which it would go if distributed as PFDs.
A good example of the latter is household income derived from the state’s share of Medicaid payments. Many assume that income ends up in the households of those who qualify for the program. But it doesn’t. Instead, the income ends up in the households of the doctors and other health care providers who actually receive the payments.
That example also helps explain another reason median income may not rise even if households share in some of the increase in GDP. That is because such increases may be directed disproportionately to households with incomes above the median, such as the doctors who receive the Medicaid payments. The incomes of higher-income households may rise further, but the median household income, which reflects the middle household with the same number of households above and below, may not.
As the following charts explain, that has been the case with Alaska.
Using data available from the Census Bureau’s American Community Survey (ACS) 5-year detailed estimates, which are available from 2010 through 2023, here is the nominal mean household income by year and income bracket for Alaska.
Even from the nominal numbers, it is clear that incomes above the median level, which closely match those of the “middle” quintile, are rising faster than those below it. As reflected in the legend, the compound annual growth rate (CAGR) over the period for the average household in the Top 20% is 2.95%, while the same number for the average household in the Lowest 20% is only 1.56%. Splitting the middle-income bracket evenly between the two, the average CAGR for those in the upper half is 2.65%, while the same number for those in the lower half is 2.00%.
The differences are even more pronounced when the numbers are calculated on a “real,” i.e., after-inflation, basis. In this chart, we have adjusted the nominal numbers reflected in the preceding chart for inflation, as measured over the period by the Bureau of Labor Statistics Consumer Price Index for All Urban Consumers: All Items in Urban Alaska (Alaska CPI). The numbers are calculated in real 2010 dollars.
As the chart shows, while real (after-inflation) incomes for those in the upper income brackets have risen over the period, those in the lower income brackets have either stagnated or declined.
As reflected in the legend, the compound annual real growth rate (CAGR) for the average household in the Top 20% is 0.55% per year, while the same figure for the average household in the Lowest 20% is negative 0.70%. Splitting the middle-income bracket evenly between the two, the average real CAGR for those in the upper half is positive 0.29%, while the same number for those in the lower half is negative 0.28%.
The following chart plots the changes on an index basis to bring the differences into even sharper focus. As the chart shows, while the real incomes for those in the upper income brackets have risen over the period, with ending numbers above 100, those in the middle and lower income brackets have ended the period either where they started (lower middle) or below 100 (middle and lowest).
Some will claim that those are simply the results of Adam Smith’s “invisible hand,” i.e., the regular operation of a free market economy, but the fact is that, over the latter half of the period (2017-23), at least in some respects, they are result of state government putting its thumb on the scale heavily in favor of upper-income households.
By using PFD cuts (the “most regressive tax ever proposed”) to help fund government over the period, rather than other, more neutral and broad-based revenue mechanisms, the state has disproportionately reduced the income of middle and lower-income Alaska households, at least in some instances, as with the Medicaid payments discussed above, by diverting the benefit instead to upper-income households. The results are similar in effect to Texas or Oklahoma levying a targeted tax just on the royalty income received by the state’s various mineral interest owners, many of whom are rural farm and ranch owners, and redirecting the benefits instead to upper-income doctors and other medical professionals.
The impact has not been minor. Over the period from 2017 to 2023, distributing the full PFD and raising government revenues by other, broad-based and neutral means, would have raised the average household incomes of those in the lowest income bracket by approximately 20% on average, of those in the lower middle 20% by approximately 7.5% on average, and of those in the middle income bracket by approximately 5% on average.
Instead of the index curves shown in the chart above, the results would have been more like this:
We have calculated the above chart by adjusting the nominal incomes reported by the Census Bureau for the years 2017 – 2024 by adding back the average annual PFD cuts made by the Legislature, by household, and restating the result in 2010 dollars. While the results may not be entirely precise, given that not all Alaska households receive the PFD and the average household size that does may vary somewhat by income bracket, the results are directionally correct. As the chart indicates, it is highly likely that, had a full, statutory PFD been distributed over the period, all Alaskan households would have realized at least some real income growth.
At least in significant part, that is because, in doing so, Alaska household incomes would have been tied more directly to changes in Alaska GDP. There would have been at least some “trickle down.”
As we explained in last week’s column, there has been a significant divergence over the past quarter-century between how “Alaska” is doing economically and how “Alaskans” are doing. By using deep PFD cuts to fund state government, the Legislature has made that divergence even worse. Even as the overall Alaska economy, as measured by GDP, has grown somewhat, many Alaska households have seen their economic circumstances deteriorate in significant part due to PFD cuts.
Rather than preserving at least some link between Alaska’s GDP and Alaska household income, the Legislature has pushed the two further apart, to the detriment of middle and lower-income Alaska households. Acting consistently with their own self-interest, but not that of many of their constituents, legislators have knowingly sacrificed the well-being of households in the middle and lower income brackets to ensure that those in the upper income brackets remain insulated – and in some instances, indeed benefit – from the impact of growing deficits.
Brad Keithley is the Managing Director of Alaskans for Sustainable Budgets, a project focused on developing and advocating for economically robust and durable state fiscal policies. You can follow the work of the project on its website, at @AK4SB on Twitter, on its Facebook page or by subscribing to its weekly podcast on Substack.