The Only State Where Everyone Gets Free Money
This year, Alaska will give each of its residents over $2,000 in cash, no questions asked. Advocates of a basic income want to expand its model around the world.
The Trans-Alaska Pipeline in 1997. Image: Roger W / Flickr
Every year, the state of Alaska hands each of its citizens hundreds to thousands of dollars, no strings attached. The only requirement for receiving the cash is that a person has a) held residence in Alaska for more than one year and is b) alive.
To citizens in the state, the Permanent Fund Dividend is a deeply beloved if sometimes controversial policy. To those outside it, it's often regarded as a curiosity. The annual payout makes headlines when it happens—Alaska's giving people free money!—and has, typically, been forgotten just as quickly.
Recent years, however, have seen a groundswell of attention to the underlying concept. Interest in basic income ideas continue to percolate worldwide. As grim studies portend incoming job shortages, as inequality festers, and as automation threatens to throw economies into turmoil, the notion that a state could give a regular, guaranteed income—a minimum salary distributed to every citizen, regardless of age, employment, or social standing—has been sounding better and better. And Alaska's been doing it for years. A miniature version of it, anyway.
"The Alaska dividend is pretty much the closest thing the world has to a universal basic income anywhere," Scott Santens, who is perhaps the web's most active basic income advocate, told me. Not only that, he says, but a basic income could help citizens fight the impacts of climate change. President Obama's recent trip to Alaska was focused on highlighting the calamity that human-induced warming is bringing to the region; perhaps we should be paying attention as well to a policy, found only here, that may help keep society stable and more equal in the face of a warmer, job-scarce future.
"Oil is not the most important thing about what's been happening in Alaska since 1982"
Alaska's Permanent Fund was established in 1976, in the midst of a black gold rush; the massive Trans-Alaska pipeline was in the process of being built, and the state had reaped $900 million in revenue from the sale of drilling leases in Prudhoe Bay, the largest oil field in North America, in a matter of years. In a matter of a few more, it'd spent it. Alaskans soon recognized that their enormous oil reserves were nonetheless limited, so, with a kind of longterm forward-thinking rarely seen in politics today, they voted to add an amendment to the state constitution to establish a fund that would protect a portion of all incoming oil wealth for future generations.
"There was a general recognition that the mineral royalties the state was creating weren't going to go on forever," Valerie Mertz, the CEO of the Alaska Permanent Fund, told me. "The idea was to take this nonrenewable resource and turn it into a sustainable resource for the state. A way to lock some money away from a time when the state's doing well, to save it for a rainy day, if you will."
The amendment stipulates that "at least 25 percent of all mineral lease rentals, royalties, royalty sales proceeds, federal mineral revenue-sharing payments and bonuses received by the state be placed in a permanent fund, the principal of which may only be used for income-producing investments." The Alaska Permanent Fund, a state-owned corporation, was created to manage and invest that revenue.
The governor at the time was Jay Hammond, a rugged, barrel-chested New York transplant and army vet. As the mayor of Bristol Bay, the story goes, Hammond saw the unfairness inherent in a foreign company coming in and profiting off of natural resources that belonged to everybody. He enacted a three percent tax on fish caught in the area, which was distributed directly to everybody else.
Once in the state's highest office, according to The New York Times, "Mr. Hammond, a Republican, persuaded voters to approve the establishment of a permanent fund to handle the state's petroleum royalties." (His original plan, which was passed but ruled unconstitutional, was known as "Alaska, Inc," and was designed to bequeath shares in the fund to every Alaskan once a year.) In 1980, Hammond pushed another amendment to the state constitution, creating the Permanent Fund dividend (PFD) that would pay out a portion of the Fund to everyone. The first payment, of $1,000 to each citizen, was made in 1982.
"Oil is not the most important thing about what's been happening in Alaska since 1982," Santens says. "The most important thing is that instead of resources being freely given away, rent is instead being earned on shared resources and every resident is receiving an equal share of the fruits of that rent."
The Fund kept growing, built on a steady influx of oil revenues and sound investment. Alaska's economy has continued to be dominated by resource extraction, but the Fund diversified its holdings, decoupling itself from oil.
"Our current portfolio includes global bond, stock and real estate investments, private equity, infrastructure, multi-asset funds and hedge funds," Laura Achee, a spokeswoman for the Fund told me. That includes investments in everything from Danish wind power to the New York Times to Brazilian banks. In 1998, the earnings from the Fund surpassed the state's oil revenues.
In 2014, the net income of the fund was $6.8 billion dollars and the dividend doled out $1,884 to 640,000 citizens, despite a decline in oil revenues that year. Once the tally for the earnings of the fiscal year is made, the corporation makes a transfer to the state, which determines the size of the dividend. The calculation that figures the amount of the payout in a given year is enshrined in state law and is based on the average cash earnings of the Fund over five years—the whole formula is here—but generally, the higher the earnings of the Fund and the revenue from oil leases, the higher the payout. It's a somewhat confusing process, and even Alaskans are apt to confuse the Permanent Fund, the corporation that manages the oil wealth, and the Permanent Fund Dividend, the annual mass payout by the state.
This year, the payment to every man, woman, and child (yes, children get the payment too, though it is entrusted to their guardians) is expected to surpass $2,000. The Fund, in other words, is huge. Interestingly, Mertz credits the payouts with driving the investment success of the corporation, which now employs 42 people. "It's been very successful," she tells me, "the dividend component of the program keeps people tuned into the Fund, and that in turn motivates us to do the best we can." When it began, the Fund was worth barely more than one billion dollars.
"At the end of the fiscal year on June 30th the Fund was worth $51.2 billion," Achee says.
When Hammond died, in 2005, he was remembered as the "Father of the Alaskan Basic Income." Numerous obituaries quoted Vernon Smith, the Nobel Prize-winning economist, who had called the program Hammond helped create "a model governments all over the world would be wise to copy."
There's evidence that Smith is right.
In a 2012 study, "The Alaska Permanent Fund Dividend: A Case Study in Implementation of a Basic Income Guarantee," Scott Goldsmith, a professor of economics at the University of Alaska, examined for the first time the social impact of Alaska's guaranteed cash infusions.
He notes that the fund has contributed to the state's remarkable income equality. His study points out that in 38 states, the income of the richest 20 percent grew faster than the poorest 20 percent between the early 1980s and the early 2000. In 11 states, the growth rates were about the same. "Alaska was the only state in which the income of the bottom 20 percent grew at a faster rate (25 percent) than the income of the top 20 percent (10 percent)," the paper explains.
It's worth emphasizing that Alaska has managed to buck the trend in an era dominated by wealth accumulation. Granted, the PFD is just one factor among many, and Goldsmith notes that income distribution is relatively flat in Alaska regardless. But economists and state officials credit the fund with keeping thousands of Alaskans from falling below the poverty line.
"This has been a factor contributing to the leveling of the income distribution in Alaska since the early 1980s," he writes. "The dividend is particularly important in rural parts of the state where the economy is largely a mixture of government cash-based transfers and subsistence activities and where wage paying employment is scarce." It's of major benefit, as you'd expect, to the poorest Alaskans. As of February 2015, Alaska's per capita wage was the highest in the nation, although salaries vary wildly from county to county. 9.3 percent of Alaskans live below the poverty line and 4.3 percent live in extreme poverty.
"The PFD does moderate inequality by creating a floor at the low end of the income distribution," Goldsmith told me. Today, Alaska is still looking good; it's got the second-lowest income inequality of any state in the nation, after Utah—and it's one of the richest per capita.
Meanwhile, the PFD may have created a small "magnet effect," Goldsmith notes in his survey, drawing or keeping residents to the state. It's also a boon for the retail economy, as residents often spend the income on expensive, "durable" goods like appliances and electronics after the payment is issued; however, there doesn't seem to be profligate spending, and many Alaskans report saving at least half of the income.
"It's very safe to say there's a good percentage of Alaskans who have it built into their budgets at this point," Mertz tells me.
So a Basic Income, Then
The world still doesn't have a great longterm trial run of a large-scale basic income policy—the relatively short "mincome" program in Dauphin, Manitoba is the most-studied, and the cash grant program in Namibia is celebrated, but brief—so scholars, activists, and economists can extrapolate from the "partial basic income" in Alaska. Though it's nowhere near large enough to live off of (in the contiguous US, the poverty threshold is $11,700, in Alaska, it's $14,700), the state's dividend has become a case study that basic income advocates use to bolster the case for instituting the radical-seeming free money policy on a larger scale.
Goldsmith notes that Alaska's PFD "fits a basic income definition quite well." It is, he writes, "essentially universal, individual, non-conditional, uniform, regular, and provided in cash." It's the universal quality—everybody gets a payout, no matter what, regularly—that makes it compelling to the basic income crowd. It only falls short because "the size of the annual payment fluctuates from year to year and is small relative to measures of poverty."
So it's not quite a basic income, it's just the closest we've got to a working version. And given that a number of nations are currently hotly debating whether to launch their own versions of basic income—a referendum for an unconditional income is expected in Switzerland by 2016, and the Netherlands remains divided over a proposal of its own—antecedents of any stripe are worth a look.
Given that Alaska's three-decade experiment has yielded lower inequality, high approval ratings—the Fund is one of the most popular policies in Alaska, unsurprisingly—and untold social benefits, it's largely a positive test case. Goldsmith did locate some drawbacks—he wondered if the payouts may be helping to encourage the poor to stay put in unfavorable conditions, for one—and notes that further study is necessary to draw any proper conclusions. Regardless, Alaska boasts some of the highest well-being rankings of any state, and the smart money says the free cash can't hurt.
The benefits are formidable enough that economists have taken to analyzing the prospect of exporting Alaska's model to other states, with other resources. A 2012 paper by Gary Flomenhoft, an assistant professor at the University of Vermont, found that expanding Alaska's model to other extraction industries could generate something closer to a true basic income—even in a so-called "resource-poor" state like Vermont. By taxing even the relatively few extractive industries in that small state and banking the revenues, citizens could enjoy an annual dividend as high as $10,000, Flomenhoft found.
"Personally, I think exporting the Alaska model to other states is an exceedingly good idea," Scott Santens, the basic income advocate, says. "For one, we already know it works, it's very popular with conservatives and liberals alike, and we need to increase incomes everywhere we can of those who aren't in the top 20 percent."
"I see this as a strategy for building support for a federal basic income guarantee," he continues. "It can be accomplished in the same way we've seen states recognizing gay marriage and legalizing marijuana. State by state, people could achieve partial basic incomes through Alaska model dividends, and as that happens, and poverty and inequality both decrease just as they have in Alaska, there will be that many more people who recognize the positive effects."
One of the reasons it's popular with conservatives—besides the fact that everyone tends to appreciate free cash—is that Alaskan's don't really consider this a basic income, per se.
"Although the PFD represents the first significant institution of a basic income, it is not viewed as such by Alaskans and was not established with that purpose in mind," Scott Goldsmith told me. "Rather it is a distribution of a portion of the earnings of a publicly owned natural resource to the 'owners'—the citizens of the state. And although the dividend will probably be more than $2,000 this year, at that level it is not sufficient to qualify as a basic income."
The Fund's architect would probably agree with Goldsmith. Governor Hammond insisted in an interview with The New York Times in 1980 that "even the dividend given to every Alaskan of every age and income since 1976 had 'a conservative political purpose.' He said it put a brake on government spending by encouraging politicians to hold down expenditures so there would be more to distribute to people."
Interestingly, that's more or less the conservative case for a basic income today—institute a guaranteed salary for everyone, the thinking goes, and you can get rid of a lot of bureaucracy required to run the current safety net, and just allow the free market to work: Give people enough free cash and you can blow up Medicaid and let people see whichever doctor they choose.
Of course, Alaska offers little guidance for a reorganization that radical. What we do have is a deeply red state that nonetheless literally gives its citizenry a handout every year—and appears all the better for it.
It may not be a true basic income, but Alaska's 40-year-old statewide oil bank is working exactly as planned—the idea was to create a fund to provide for Alaskans in the future, long after the glory days of oil extraction were through, and that's exactly what it's doing. The Permanent Fund become a versatile, essential organ that's helped to preserve and distribute the wealth generated by Alaska's oil reserves, long after the state could rely solely on oil taxes. And the Permanent Fund dividend has harnessed foreign profiteering into bettering the lives of everyone in the state. Oil revenues have indeed declined drastically from their 1980s peak levels, but the fund is now bigger than ever. It's big enough that the chief controversies it faces regard how to use it—recent polling suggests that Alaskans are in favor of using some of the Permanent Fund's revenue to pay for government programs threatened by budget shortfalls, and even capping the size of the yearly dividend. But the vast majority say they want to see the universal payouts protected.
"I think it is embedded in the social structure. What we're seeing with the decline of oil prices playing out, is exactly what the creators envisioned in the beginning," Valerie Mertz says. "Money coming in from oil is not what it was. We're seeing it play out exactly as planned."
Mertz tells me she's never even heard of the concept of a basic income—she's just focused on doing her best to maximize a return on investment for Alaskans. Whatever name it goes under, it's difficult to argue that the Permanent Fund has done anything but benefit the state's citizens—the thousands of people it has spared from poverty, the additional earnings, the buffer, the extra breathing room. It's a mini-basic income, and it bodes well for the future.
"It takes a lot of discipline to do it, absolutely," Mertz says. "But the concept of the Fund is a good one."