The outlook for 2010

In 2009, according to The Economist magazine, world output shrank by more than 1 per cent, the first time since 1945 that it has declined on a year-over-year basis.  At the same time, years of excessive lending and irrational asset pricing finally caught up with the world’s financial system.  Governments across the world responded to the dual economic and financial crises with massive public spending programs, historic liquidity increases, and unprecedented interventions by central banks.  These policy initiatives appear to have worked and by the end of the year all the world’s big economies had stopped shrinking.

That is good news, but hold the celebration: the consensus forecasts of global growth for 2010 are a sluggish 1 to 2 per cent for most advanced economies.  Thus, after a year of economic collapse, multiple bank bailouts, stimulus spending, and large-scale monetary easing, it appears that 2010 will be a year of reassessment, sorting through the wreckage, burying the dead, and regrouping the walking wounded.

A weak, jobless recovery appears to be the best case scenario for many countries.  In the United States, for example, the consensus forecast is for growth to be around 2.5 per cent in 2010, with the unemployment rate stubbornly hovering around 9 or 10 per cent.  There are good reasons for these diminished expectations.  Most of the growth in the U.S. during 2010 will be driven by the restocking of depleted inventories and stimulus spending.  This should keep the U.S. economy going for a couple of quarters, but neither of these factors, however, can sustain growth past 2010 without a self-sustaining cycle of private spending and income.

Unfortunately, it is highly unlikely that private consumption spending will grow vigorously in 2010 because American household balance sheets are weighed down by debt.  Household wealth is down some $12 trillion relative to 2006, a decrease of 19 per cent due mostly to the collapse in house and stock prices.  This means that people in the U.S. are more likely to spend less, save more, and pay down debt.  Indeed, some analysts expect consumer spending to grow more slowly than income for the first time in twenty-odd years.  Weak consumer demand means that business firms will not be hiring in large numbers in 2010.  Relatively high unemployment will hold back wage gains.  Low wage growth, in turn, further depresses consumer demand and the cycle reinforces itself.

Weakness in the financial sector is the other factor limiting growth in the U.S.  Credit flows to businesses are “glacial” in the words of a recent Financial Times editorial.  In the U.S. bank loans to business and consumers are actually falling, as are loans packaged into asset-back securities, this despite unprecedented measures—such as public guarantees of bank debt, equity infusions, and the outright purchase of assets—introduced to address the financial crisis.  This reluctance to lend is due in part to a shortage of willing borrowers; in part to the weigh of toxic assets still festering in banks’ balance sheets; in part to rising delinquency and foreclosure rates among non-subprime borrowers, as well as falling commercial property values; and in part due to the expectation that new stringent capital requirements are on the way.  All these factors encourage bankers to lend less and hoard their capital.

In addition, at some point during 2010 we are likely to see pressure mounting for the U.S. to reduce its massive budget deficit, currently in excess of 10 per cent of GDP, and for the Federal Reserve to begin reducing its bloated balance sheet, currently well over twice its pre-crisis size.  The failure to implement a credible budget plan or any uncertainty generated by the withdrawal of monetary support could adversely impact investors’ assessments of sovereign risk and push up sharply bond yields in the U.S.

If the outlook for the U.S. is somewhat unclear, in Puerto Rico it is pretty much cloudy.  We can expect economic activity to be stagnant or declining during the first half of 2010 as the government finishes the implementation of its fiscal austerity program.  Unemployment should also keep rising during this period.   According to the Economist Intelligence Unit, Puerto Rico should be the  third slowest (out of 180 countries tracked by the EIU) growing economy in 2010.

Growth could turn positive towards the second half of the year, if the government winds down its budget-cutting measures by June, and if it is effective in spending the remainder of the ARRA funds allocated to Puerto Rico.  However, there are several downside risks to this scenario. 

• First, any significant increases in oil prices or in short-term interest rates could stifle the recovery. 
• Second, financial institutions in Puerto Rico are under great strain.  Three of the eight publicly traded local banks are operating under cease and desist orders issued by the FDIC.  According to some analysts this means the FDIC could be active in Puerto Rico next year.  Any intervention by the FDIC in Puerto Rico could further depress consumer confidence. 
• Third, some labor leaders are calling for a general strike early next year to protest government layoffs, the implementation of public-private partnerships, and efforts to turn back the clock on labor legislation.  It is impossible at this time to determine whether this effort will be successful but uncertainty associated with widespread labor and social unrest could adversely affect investment and economic activity.

In sum, in 2010 we can expect a weak, jobless recovery for the U.S. and a sluggish, anemic economy in Puerto Rico.  In both places uncertainty will weigh on the economy and 2010 will be a year of hard work, difficult decisions, and little, if any, improvement in economic conditions.

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Brookings cuatro años después

A casi cuatro años de haber participado de los trabajos del Informe CNE/Brookings sobre la economía de Puerto Rico, el Dr. Barry Bosworth, Senior Fellow del Instituto Brookings, encuentra que la situación económica de Puerto Rico se ha deteriorado marcadamente.  En parte, este deterioro se debe al impacto de la profunda crisis económica y financiera a nivel global.  Sin embargo, es evidente que el modelo de desarrollo de Puerto Rico mostraba señales de debilidad desde por lo menos el año 2006, mucho antes de que comenzara la crisis a nivel mundial.  Por lo tanto, las causas de la crisis económica en Puerto Rico incluyen también un componente local, que es intrínsico a Puerto Rico.

Los problemas básicos de la economía de Puerto Rico identificados en el 2006 siguen presentes: las distorsiones económicas que son el legado de la implementación de la Sección 936; un nivel bajo de inversión; el estancamiento de la productividad laboral; una tasa de empleo sorpresivamente baja; y la explosión del déficit fiscal.

En términos específicos, el Dr. Bosworth encuentra que la tasa de empleo y el déficit fiscal han empeorado significativamente desde su última visita a la isla.  Por el lado de los empleos, es sorprendente que la tasa de empleo en la isla sea tan baja.  De acuerdo con las cifras mas recientes, la tasa de empleo en Puerto Rico era menos de 40% de la de la población con 16 años o mas estaba empleada.  Esta tasa de empleo es solamente 2/3 partes de la tasa de empleo en los Estados Unidos.  Si Puerto Rico lograra cerrar esa brecha el ingreso per capita en la isla aumentaría un 50%, aun manteniendo el diferencial en salarios que existe entre Estados Unidos y Puerto Rico.

El problema principal en cuanto empleo es que la tasa de participación laboral—la porción de la población adulta que se encuentra económicamente activa—es muy baja, de hecho es una de las tasas mas bajas, sino la mas baja, en el mundo.  Este fenómeno es producto de fallas en el mercado laboral de Puerto Rico, tanto por el lado de la oferta como por el lado de la demanda.

Por el lado de la oferta, encontramos que la aplicación en Puerto Rico de los programas de beneficencia social genera fuertes desincentivos al trabajo en el sector formal de la economía.

Por el lado de la demanda, encontramos primero que el sector privado en Puerto Rico está subdesarrollado: solamente 30% de los puertorriqueños trabajan en el sector privado, en comparación con un 60% en los Estados Unidos.  Además, la aplicación a la isla del salario mínimo federal puede ser que este limitando la creación de empleos para aquellas personas con menos destrezas.  Esto se debe a que el salario promedio en Puerto Rico es la mitad del salario promedio en los Estados Unidos.  Por lo tanto, la aplicación de salario mínimo de $7.25 por hora en Puerto Rico es equivalente a tener un salario mínimo de casi $15 por hora.

En términos del déficit, es evidente que el gobierno Puerto Rico tiene una larga historia de deficiencias financieras pero en años recientes la magnitud de estos deficits ha ido aumentando.  El problema radica principalmente en que los recaudos gubernamentales se han desplomado como porcentaje del producto nacional bruto de la isla, y aunque los gastos del gobierno también se han reducido de 30% del PNB a 25%, los recaudos han caído aun más, de 30% del PNB a 22%.

Esta caída en los recaudos se debe principalmente a dos factores: (1) el empleo en Puerto Rico esta decreciendo y por lo tanto hay menos personas y compañías pagando impuestos; y (2) la erosión de la base contributiva que es producto de las múltiples exenciones, créditos, y deducciones que han sido legisladas a través de los años.

El Dr. Bosworth señala además que los recaudos del gobierno de Puerto Rico dependen excesivamente de impuestos sobre las corporaciones, a diferencia de jurisdicciones en el resto de mundo que dependen mayormente de impuestos sobre el consumo y sobre la propiedad.

Por ejemplo, de acuerdo con la data del Departamento de Hacienda para el año fiscal 2009 las corporaciones con operaciones en Puerto Rico pagaron $1,364 millones en contribuciones sobre ingresos y $1,081 millones por concepto de retención sobre el pago de regalías a no-residentes.  En total, por lo tanto, las corporaciones pagaron $2,445 millones en impuestos de un total de recaudos netos de $7,760 millones, lo que es equivalente a un 31.5%.

El aumento en el déficit gubernamental ha provocado un aumento vertiginoso en la deuda pública de Puerto Rico, la cual ha aumentado de 58% del PNB en el 2000 a un 95% del PNB en el 2009.  Esta tasa de crecimiento del endeudamiento publico, según el Dr. Bosworth, simplemente no es sostenible a largo plazo.

Mas preocupante aun es que una buena porción de la deuda emitida recientemente por el gobierno de Puerto Rico se ha destinado a pagar deudas con suplidores y otros gastos operacionales en vez de usarse para financiar la inversión en bienes públicos a largo plazo.  Las emisiones de bonos realizadas recientemente por la Corporación del Fondo de Interés Apremiante (COFINA) son un buen ejemplo.

En junio de 2009 COFINA emitió deuda en exceso de $5,000 millones, cuyo pago esta garantizado por la asignación a COFINA de 2.75%, de un total de 5.5% del impuesto sobre las ventas y el uso que corresponde al gobierno central, por los próximos 40 años.  El dinero producto de la emisión se puede usar, entre otras cosas, para el pago de ciertas deudas del Secretario de Hacienda con el BGF, para el pago de deudas a ciertos suplidores del gobierno, y para sufragar gastos operacionales del gobierno central.  Esto significa que nuestros nietos estarán pagando el IVU en el 2030 para cumplir con el servicio de la deuda pagadero a estos bonistas sin recibir ellos ningún beneficio a cambio.

El sector financiero de Puerto Rico ha desmejorado significativamente desde el 2005.  La crisis financiera comienza antes en Puerto Rico debido a prácticas contables cuestionables.  Más recientemente vemos, como resultado de una burbuja especulativa en el mercado de vivienda local debido a un exceso de oferta, que la morosidad de los préstamos de construcción se ha disparado.  Esta situación, en combinación con la crisis financiera en los Estados Unidos, ha llevado a una contracción del crédito local de todo tipo a corto plazo.

Según datos de la Oficina del Comisionado de Instituciones Financieras los activos de los bancos comerciales en Puerto Rico han disminuido de $101,478,871,000 a diciembre de 2005 a $92,839,089,000 en septiembre del 2009, una reducción en exceso de $8,000 millones, equivalente a un 14% del PNB de Puerto Rico a junio de 2009.  Además, analistas financieros de Keefe, Bruyette, and Woods y de Raymond James, han reseñado que tres bancos locales están operando bajo ordenes de cese y desista del FDIC y que la probabilidad es alta de que el FDIC intervenga una o mas de estas instituciones en el 2010.  En suma, todos estos factores apuntan a que Puerto Rico podría enfrentar una crisis financiera en el 2010 lo que significaría un obstáculo severo para la recuperación económica en Puerto Rico.

Finalmente, el Dr. Bosworth enfatiza que a corto plazo no hay mucho que podamos hacer, pues muchas de las acciones necesarias toman tiempo para llevarse a cabo.   Sin embargo, estamos a tiempo para tomar medidas correctivas a mediano y largo plazo, si se comienza a trabajar ahora.  Se necesitan profundos cambios estructurales en nuestra economía para reestablecer el crecimiento en Puerto Rico. Lo más importante para Puerto Rico es la creación de empleos y ese debe el objetivo principal de toda política publica.  Para lograr esto es necesario hacer de Puerto Rico un lugar atractivo para hacer negocios, implementar una reforma contributiva a fondo, y reformar todo el entramado regulatorio de la isla.

La presentacion del Dr. Bosworth se encuentra aqui.

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Where are the new jobs?

On May 28^th, 2008 then governor Aníbal Acevedo Vilá signed Puerto Rico’s new tax incentives law, which we described as the time as another attempt in the long line of mostly futile efforts undertaken since 1976 to resuscitate Puerto Rico’s flawed economic development model based on tax breaks.  Yet, expectations were high for the new law, as advocates claimed that 15,000 new manufacturing jobs would be created by December 2009 as a result of its implementation.

According to the Labor Department’s household survey, manufacturing employment in Puerto Rico in May 2008 was 125,000, while in October 2009 it was 104,000—a decline of 21,000 jobs, or 16.8 per cent.  If we look at the Labor Department’s establishment survey, which uses a different methodology, the picture is slightly better.  According to this other survey, manufacturing employment in May 2008 was 102,000, while in September 2009 it was 91,400—a decline of 10,600 jobs, which is equivalent to 10.39 per cent.  In both instances, however, manufacturing employment in Puerto Rico has experienced a double-digit percentage decline since the enactment of the new tax incentives law.  Which begs the question: Where are the new jobs?

Now, it could be argued that the recessionary environment has effectively sterilized the job-creating effects of the new law.  However, the recession was a known fact at the time, indeed the local economy was well into the second year of a recession and the U.S. economy was extremely weak, if not already in a recessionary state.  Yet, it was claimed at the time that thousands of new jobs would be created as a result of the new law.  Obviously, this has not happened.  Where are the new jobs?

That issue, in turn, raises the question of how to measure the effectiveness of tax incentives.  The law requires the Secretary of Economic Development to file annual reports stating, among other things, the total amount of investment in machinery and equipment and the number of jobs and payroll generated by exempt businesses.  The Secretary of the Treasury is also required to file an annual report stating the amount of taxes paid by exempt businesses during the past year and a forecast of such payments for the next three years.  To our knowledge, these reports have not been prepared, and if they do exist, then they have not been made public.  Which should not be surprising, the Puerto Rican government has a long history of both ignoring the law and withholding information from the public.

Furthermore, as we stated in 2008, the law’s disclosure and reporting requirements should be fine-tuned in two key dimensions.  First, several reports during the past thirty years, such as the Tobin Report in 1975 and James Dietz’s seminal Economic History of Puerto Rico (Princeton University Press, 1986), have highlighted that Puerto Rico’s dependence on tax exemptions to attract foreign investment has generated an ever growing gap between the island’s Gross Domestic Product (“GDP”), which measures the value of all production generated within Puerto Rico, and the island’s Gross National Product (“GNP”), which measures the value of production that can be attributed to locally-owned factors of production.

The existence of this gap is important because it indicates there is a mismatch between Puerto Rico’s real productive capacity and the amount of “value added” that is measured and reflected in official statistics.  An analysis carried out by Barry Bosworth and Susan Collins for the CNE/Brookings report published in 2006, reveals that over the 1987-2001 period the ratio of capital income to employee compensation in the chemical industry (which includes pharmaceuticals) averaged 10.5 in Puerto Rico and 2.1 in the United States.

According to the authors “differences in relative factor returns of this magnitude cannot be credibly attributed to differences in the underlying production processes.”  Bosworth and Collins estimate that manufacturing output and economy-wide GDP in 2004 were in fact overstated by 45 per cent and 17 per cent, respectively, and conclude that “much of what is recorded as production in Puerto Rico is a simple paper transaction in which income is transferred to Puerto Rico and then taken back out as dividend payments to mainland corporations.”

If the new incentives law is successful in generating real economic activity by locally-owned firms and not merely paper profits by multinational companies, then we should see an increase in Puerto Rico’s GNP growth rate relative to the growth rate its GDP and the gap between both indicators should narrow and eventually close.  Therefore, we recommend that the reports to be filed by the Secretary of Economic Development include an analysis of the GDP/GNP gap and their respective growth rates during each of the previous three fiscal years.

Second, tax incentive programs in Puerto Rico have never been subject to a strict cost-benefit analysis.  This is important because the crucial issue with respect to growth incentives is whether an additional dollar spent in promoting one activity would be more beneficial than a dollar spent elsewhere.  Thus, the question for those who believe a particular activity should be promoted—for example, the pharmaceutical industry—is why they believe the social returns to such an activity will be higher than elsewhere in the economy.

Therefore, we recommend that the reports to be filed by the Secretary of the Treasury include the following information: (1) an analysis of the cost of each of the incentives included in the law in terms of forgone public revenues (tax expenditures); (2) the cost per job created in terms of forgone public revenues and a comparison of this cost with the average wage paid to workers in exempt businesses; and (3) an estimate of the aggregate economic activity generated by the tax incentives and a comparison of these benefits with the cost of the incentives in terms of forgone public revenues.

Proponents of the new law claimed at the time that it was the “best incentives law in the world”.  Yet, so far it seems “that dog don’t hunt”, as Bill Clinton would say.

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One swallow a summer does not make

So said Aristotle, warning his students against making bold predictions based on scant evidence.  It is in this light that we should interpret the most recent change in the Government Development Bank’s Economic Activity Index, which showed a slight increase in its absolute value from 134.27 in August to 135.32 in September, which is equivalent to a month over month increase of 0.78%.

At first glance, this negligible increase in economic activity, as measured by the index, could be interpreted as a sign that “we are seeing the light at the end of tunnel.”  There are, however, several reasons to be cautious.  First, all indices have a measurement error, which, to be fair, can be attributed to the general fallibility of human beings.  In this case, we do not know what this index’s margin of error is.  If it is smaller than 0.78%, then the recently reported increase could be interpreted as significant, if it is equal to or larger than 0.78%, then the month over month change could be just a statistical glitch, the proverbial one swallow of the title.

Second, there could be an endogeneity problem with the index, as the independent variables—payroll employment, gasoline consumption, electricity consumption, and cement sales—may not be completely exogenous with respect to GNP, which is the dependent variable in this case.  There are statistical fixes to this problem, but since the methodology for calculating the index has not been disclosed it is impossible to determine if it has been corrected for endogenous relationships, if any, that may exist between one or more of the independent variables and dependent variable.

Third, even if we assume the index accurately measures economic activity in Puerto Rico, its recent performance does not bode well for the island.  The PowerPoint presentation prepared and released by the GDB includes the linear regression equation that describes the mathematical relationship between the index and Puerto Rico’s GNP at constant 2008 prices.  That equation is y=432.25x – 4,124.27, where x is the value of the index, and y is GNP.  If we calculate the index’s average value for fiscal year 2008-09 and plug it into the regression equation the GNP forecast for that fiscal year is $56.019 billion, which is 7.84% less than the GNP for fiscal year 2008 of $60.787 billion.

If we take the analysis one step further and calculate the average index value for the first three months of fiscal year 2009-10 and do the same calculation, we find that the implied GNP for the current fiscal year declines further to $54.127 billion, a decrease of 3.38% with respect to the previous fiscal year.  Again, with only three index data points for the current fiscal year it may be premature to use the index to forecast GNP.  Yet, we note that the contraction of 3.38% implied by the regression analysis is consistent with a recent estimate done by the Economist Intelligence Unit that foresees Puerto Rico GNP contracting by 3% during the current fiscal year.

In sum, the GDB Economic Activity Index could be a useful tool for determining the general trend of the Puerto Rican economy, but we should careful interpreting and drawing conclusions from it.

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The Impact of ARRA Funds on Employment (Part 2)

The White House reported over the weekend that 17,597 jobs have been “created or saved” in Puerto Rico thanks to the impact of federal stimulus spending in the island.  According to this report, Puerto Rico has been awarded $1,936,135,565 in federal funds under the American Recovery and Reinvestment Act of 2009 (“ARRA”), of which $200,030,374 have been “received”, and thus presumably spent.

Now, there are several reasons to be skeptic about the accuracy of this report.  First, if only some 10% of the total funds awarded has been spent, then, it is at best an exaggeration and at worst downright misleading, to calculate a figure of jobs created/or saved based on spending the total amount awarded so far.

Second, according to an op-ed piece in the Wall Street Journal written by Edward Lazear, a former chairman of the President’s Council of Economic Advisers, the jobs data “were collected from responses by government agencies that received federal funds under the American Recovery and Reinvestment Act of 2009.  Agencies were required to report an estimate of the number of jobs created and the number of jobs retained by the project or activity.” 

Under this system, “recipients have strong incentives to inflate their reported numbers.  In a race for federal dollars, contractors may assume that the programs that show the most job creation may be favored by the government when it allocates additional stimulus funds.”  So, there exists a strong bias for overstating or over-reporting total job creation.

Third, the federal data does not report net job creation, that is, total jobs created less total jobs lost in the economy.  The federal government, according to Lazear, “wants us to believe that the new hires came from the pool of the unemployed and that they are net additions to the stock of employed workers. But the data do not speak to the number of workers who left their current jobs to fill government-sponsored jobs.”  The federal government, in other words, is only reporting the positive gross figure but not the relevant net jobs figure.  Thus, it is impossible to know with certainty the impact of the stimulus on the job market with the data reported.

Finally, the data released by the federal government is inconsistent with local data about Puerto Rico’s economy.  According to data from Puerto Rico’s Labor Department a net total of 97,000 jobs have been lost in the island between September 2008 and September 2009.  The Government Development Bank’s index of economic activity has declined by 4.8% during the same period.  Other data about the real economy, such as construction permits, home sales, and retail sales, are also down significantly during this period.  The island’s unemployment rate is 16.4% and continues to rise.  As of September 2009, the unemployed and their dependents make up about a fifth of the entire 16 and over population of Puerto Rico.  Therefore, we doubt many Puerto Ricans will find anything to cheer about those 17,597 jobs “created or saved” through the expenditure of ARRA funds.

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Bizcocho

Durante uno de mis veranos de universidad, conseguí un trabajo en Inglaterra y viví allí con una familia de Londres por esos meses. Fue interesante conocer una nueva cultura y aprender nuevas costumbres. Entre todas, una de las costumbres de la familia nunca se me ha olvidado. La señora de la casa me enseño una regla que ella tenía para sus dos hijos. La misma consistía en que a la hora del postre, uno de los hijos cortaba el bizcocho y el otro escogía el pedazo que quería. Era una manera ingeniosa de evitar peleas y de ser equitativa en la repartición de bienes, ya que el que cortaba o dividía tenía incentivo de ser justo, pues de cortar un pedazo más grande que otro, sería el otro hermano el que se beneficiaría.

En días recientes he pensado mucha en esta curiosa estrategia pues se ha desatado en Puerto Rico una discusión entre hermanos sobre la repartición del bizcocho. Ha sido interesante ver la reacción a nuestra crisis económica de diferentes perspectivas. No recuerdo haber experimentado una diferencia de opinión tan marcada como la que ha generado la recesión económica de Puerto Rico y sus efectos.

Por un lado he visto los que le achacan a los empresarios la culpa de todo. Sueñan con una utopia social que no existe y no logran ver la llegada de un nuevo momento económico. Por otro, veo una retórica vitriólica hacia las organizaciones obreras y a la izquierda del País, que siempre ha existido en buena sociedad puertorriqueña, pero sutil y veladamente. Ahora esa rabia se ventila con orgullo y atrevimiento.

Pienso que sería apropiado que practicáramos un ejercicio que aprendí de las lecturas del reconocido filósofo John Rawls. Él decía que cada persona debía imaginarse que no sabía bajo qué estación de vida nacería. Es decir, que pudiera nacer dentro de una familia solvente y apoderada o dentro de una familia pobre y humilde. Si no sabes en qué tipo de situación vas a estar, ¿cómo quisieras que fuera la sociedad? Es un ejercicio muy interesante porque te obliga a considerar una realidad distinta a la actual y a revisar tus prejuicios.

Para un desarrollador sería interesante pues debe imaginarse que en vez de ser el gestor de un proyecto en un arrabal, es residente de esa comunidad y el que viene a construirle encima es otro. Si es rescatador de un terreno, debe imaginarse que es el dueño del terreno al cual invaden y que ahora permanecerá por años sin poder darle uso.

Si es patrono, debe imaginarse que es obrero buscando aumentar la dignidad de su trabajo. Y si es obrero debe imaginarse lo difícil que es tratar de crear empleos bajo un esquema reglamentario tan burocratizado.

Lo importante aquí no es decir que un lado tiene más razón que el otro. Es poder imaginar y experimentar el asunto desde la perspectiva del otro. No puedo hablar por nadie, pero si antes de entrar al mundo me dijeran: “No te puedo decir si nacerás rico o pobre. Pero necesito me digas qué tipo de sociedad quieres”, yo pediría la sociedad más justa y equitativa para todos. Porque si me toca ser rico quiero poder ser buen mayordomo de mis bienes y aumentarlos. Pero si nazco pobre, quiero estar seguro que estoy en una sociedad que protege a los más débiles y les da oportunidades iguales a todos para vivir en paz y dignidad.

Hablando de bizcochos y costumbres, en mi casa mi mamá tenía una que le funcionaba muy bien. Si peleábamos por el bizcocho, lo guardaba y no le tocaba nada a nadie.

Miguel A. Soto Class

Publicada el 28 de octubre de 2009 en El Nuevo Día

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The Impact of ARRA Funds on Employment

Yesterday the administration presented a report on the use of funds available to Puerto Rico under the American Recovery and Reinvestment Act (“ARRA”).  To date, Puerto Rico has spent $1.2 billion in ARRA funds, which have generated 1,600 jobs.  Thus, according to official statistics, 1.33 jobs have been created for every $1 million of ARRA funds spent so far.  We suspect this job multiplier is rather low and perhaps not an accurate reflection of the real impact of these expenditures on the local economy.

Although it is not clear from press reports, we assume the number of jobs created includes direct, indirect, and induced jobs.  To explain these concepts let’s assume the government has funded the construction of a new highway.  Direct employment generated by this investment refers to employment directly related to the construction of the highway, that is, to people hired directly by the construction company to work on the construction of the new highway.  As a result of this direct employment, jobs are also generated in the businesses that supply goods and services (cement manufacturers, rebar makers, asphalt producers etc.) to the construction company.  These jobs are referred to as indirect employment.  Finally, when these directly and indirectly generated incomes are spent on a variety of items in the broader economy (e.g. food, clothing, entertainment, etc.), it gives rise to induced employment effects in those other sectors of the economy.

The federal government has calculated that 10.87 direct, indirect, and induced jobs are created for every $1 million of ARRA funds spent in the mainland United States.  The lower job multiplier effect for Puerto Rico could be explained by the large amount of imported goods we consume.  In Puerto Rico approximately 80 to 85% of everything we consume is imported, while in the U.S. only about 17 to 18% of all goods and services are imported.  This means the actual impact on employment in Puerto Rico of every $1 million spent from the stimulus package will be significantly lower than in the mainland U.S. because a considerably larger amount of what we will buy with those funds comes from abroad.  In simple terms, ARRA funds spent in Puerto Rico generate relatively more demand for foreign, instead of local, labor, therefore generating activity that has only a modest impact on the local economy.

Setting aside the technicalities, the question remains of whether the expenditure of ARRA funds will provide a sufficiently strong stimulus to jumpstart the Puerto Rico economy.  The answer, up to now, appears to be no.  In Puerto Rico we have lost 67,000 jobs between January and September of the current year.  That averages out to 7,444 jobs lost every month.  Looking at it in another way, Puerto Rico needs to create an average of 7,444 new jobs per month just to keep even with average monthly job losses.  The 1,600 new jobs created through the expenditure of ARRA funds substitute only for jobs lost during 6.4 days of the current year.

In sum, as we have stated before while spending ARRA funds will do some good, these expenditures are not sufficient to pull us out of the economic quagmire we are in.   We  need to do more, much more, to jumpstart the economy in the short term and still quite a lot more in structural terms to sustain that growth over the long term.

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Las Compañías Puertorriqueñas No Tienen la Culpa de la Crisis

El lunes 12 de octubre líderes del movimiento sindical puertorriqueño anunciaron su intención de llevar a cabo una demostración masiva en Hato Rey, específicamente al frente de los establecimientos principales de dos grandes empresas puertorriqueñas.  Aunque respetamos y apoyamos el ejercicio vigoroso por parte de los trabajadores de los derechos a la libre expresión, a reunirse en asamblea pacifica, y a exigirle al gobierno la reparación de agravios, entendemos, sin embargo, que el lugar escogido para llevar a cabo dicha expresión no es necesariamente el mas lógico.

Primero, no es justo responsabilizar a compañías puertorriqueñas, nativas, o de capital local, por el estado actual de la economía de Puerto Rico o por la crisis fiscal.  Todos los economistas están de acuerdo en que la economía de Puerto Rico generó un crecimiento económico significativo entre 1948 y 1974.  Sin embargo, ese crecimiento no se basó en las instituciones o estructuras necesarias para sostener el desarrollo económico, un concepto más amplio, de Puerto Rico a largo plazo.  Cuando éste modelo colapsó en 1974, el gobierno, en vez de repensarlo y rediseñarlo, simplemente decidió ponerlo en respiración artificial: obteniendo una nueva exención contributiva federal (la Sección 936); aumentando el empleo gubernamental; suplicando aumentos en las transferencias federales (cupones de alimentos); y aumentando el endeudamiento público.

A finales de la primera década el siglo 21 es evidente que ese modelo económico ha colapsado para siempre.  La Sección 936 ha sido eliminada por el Congreso; es poco probable que el empleo gubernamental pueda seguir creciendo a la misma tasa; las transferencias federales dependen de la dinámica económica y política en Washington DC—y por lo tanto no pueden ser la base para el desarrollo futuro—y el endeudamiento publico ha aumentado a niveles históricamente altos y no es probable que sea una fuente significativa de financiamiento para el desarrollo a largo plazo.  Ninguna de estas fallas, sin embargo, se le pueden atribuir a las compañías puertorriqueñas.

Con respecto a las finanzas publicas, la situación fiscal actual de Puerto Rico es el resultado de malas decisiones tomadas a través de los últimos 20 o 25 años y se debe tanto a un déficit de recaudos como a un exceso de gastos.  Por un lado, debido a la proliferación de incentivos fiscales, la operación de un sistema impositivo injusto y extremadamente complicado, y a la falta de fiscalización adecuada, los recaudos de Hacienda son más bajos de lo que deberían ser.  Por otro lado, debido a programas gubernamentales que continúan en existencia más allá de su vida útil, a la falta de controles fiscales, al uso de ingresos no-recurrentes para sufragar gastos recurrentes, y al reclutamiento gubernamental basado muchas veces en conexiones políticas en vez de las necesidades reales de política pública, los gastos del gobierno son más altos de lo necesario.  Ahora bien, nada de esto es culpa de las compañías puertorriqueñas o de capital nativo.

Segundo, como hemos expresado anteriormente, el sector privado en Puerto Rico está subdesarrollado.  Existen múltiples explicaciones para esa debilidad, pero el punto importante aquí es que necesitamos más, no menos, compañías de capital local prosperando y creciendo para poder sostener nuestro crecimiento económico a largo plazo y para reducir la dependencia de Puerto Rico en el capital foráneo.

En conclusión, nos parece que si la debilidad económica actual y la crisis fiscal son el producto de malas decisiones de política publica, o el resultado de la implementación durante décadas de políticas económicas erradas, entonces lo lógico y razonable es que la furia moral de los trabajadores sea dirigida en contra de aquellos responsables por tomar esas decisiones defectuosas, es decir en contra de aquellos que han ostentado el poder político, y no en contra de compañías locales que han sido exitosas, que están comprometidas con Puerto Rico, y que emplean a miles de puertorriqueños.

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Puerto Rico’s Underdeveloped Private Sector

Professors Steven Davis and Luis Rivera Batiz, in an analysis conducted for their contribution to the book The Economy of Puerto Rico: Restoring Growth, published in 2006 by the Center for the New Economy and the Brookings Institution, found that a “truly striking feature of Puerto Rico’s economy is the underdeveloped state of its private sector”.  According to their analysis, private sector employment rates in Puerto Rico are less than half the U.S. rates in recent decades.

Furthermore, they found that these private sector employment figures overstate firsthand exposure to employment in the unfettered free enterprise segment of the formal economy because many Puerto Ricans with “private sector” jobs work in industries with a major role for government employment (like hospitals and schools), industries that owe their Puerto Rican operations to special tax subsidies (pharmaceuticals), or in industries that face multiple bureaucratic obstacles to business activity (construction).

Therefore, if we look only at the free enterprise segment of the economy, which comprises businesses that operate in the formal economy without large subsidies, special regulatory advantages or heavy-handed oversight by government bureaucracies, we find that in 2000 only 24 per cent of Puerto Rico’s adult population worked in the free enterprise sector, compared with 51 per cent in the United States.

Now, it could be reasonably argued that comparing Puerto Rico with the U.S. as a whole is unfair.  So, let’s take a look at employment in some U.S. states with population similar to Puerto Rico’s.  The table below compares Puerto Rico with seven states with populations between 3 million and 4.5 million. 

 

Puerto Rico is close to the average population of this group and is right in the middle in terms of government employment as a percentage of total population.  Where Puerto Rico is off the charts is in the category of government employment as a percentage of total employment, where the island comes in at 29.78% and the average of the peer group is 18%. 

Now, the reason for this is not that Puerto Rico employs too many people in government, as we have seen Puerto Rico is close to the average in this regard, the reason is that in Puerto Rico total employment is only 1 million, whereas the average for the peer group is 1.6 million.  So, while the share of government workers appears high in Puerto Rico, this is only due to the fact that the denominator of the ratio is much smaller in Puerto Rico.

It also could be reasonably argued that the appropriate benchmark for the island is a small, open economy.  So, let’s take a look at employment in Ireland.  According to data from Ireland’s Central Statistics Office, in 2008 the total population was 4.2 million people, of which 3.5 million were 15 years and over.  Of those 3.5 million, approximately 2.2 million were in the labor force and 1.3 million were outside the labor force, for a labor force participation rate of 62.8 per cent.  Finally, of the 2.2 million people in the labor force, some 2.1 million were employed and 115,000 were unemployed.

In Puerto Rico, in 2008 the total population was approximately 3.95 million people, of which 3.06 million were 16 years and over.  Of those 3.06 million people, 1.37 million were in the labor force and 1.69 million were outside the labor force, for a labor force participation rate of 44.8 per cent.  Finally, of the 1.37 million people in the labor force, some 1.19 million were employed and 188,600 were unemployed. (Figures cited here are averages)

Right away you can notice some stark contrasts.  Ireland and Puerto Rico have similar populations and demographic structures, yet there were 910,000 more people employed in Ireland than in Puerto Rico.  In addition, the labor force participation rate, which is the percentage of the adult population that is economically active, was 18 percentage points higher in Ireland than in Puerto Rico.  Indeed, in Puerto Rico more than half (55.2%) of the adult population was officially economically inactive, while in Ireland it was a little over a third (37.2%).

So where are those additional 900,000 jobs in Ireland?  Certainly not in the government.  Total public sector employment in Ireland, including the health sector and local governments, amounts to 373,300.  If we exclude the health sector, government employment in Ireland drops to 262,300.

These figures are comparable to those for Puerto Rico, where total public sector employment amounts to 297,300, of which 218,500 jobs are in the central government (including public corporations), 63,900 jobs are in municipal governments, and 14,900 jobs are in the federal government.  If we exclude federal government workers, public sector employment in Puerto Rico decreases to 282,400.

Thus, if public employment is essentially the same in both places but there are 900,000 more jobs in Ireland than in Puerto Rico, then the Irish private sector must employ a significantly larger share of the population when compared to the private sector in Puerto Rico.  Some areas where the employment differences are significant are: agriculture, which employs 121,000 people in Ireland and only 15,000 in Puerto Rico; finance, insurance and real estate, which employs 296,300 people in Ireland and only 48,000 in Puerto Rico; and eating, drinking, and lodging, which employs 128,600 people in Ireland and a mere 73,000 in Puerto Rico.

No matter how you slice it, the plain truth is that Puerto Rico’s private sector is underdeveloped.  There are multiple explanations for this weakness, among them a complex regulatory environment, the lack of an entrepreneurial culture, and a burdensome tax system.  However, that is only part of the problem.  In Puerto Rico, we also see a significant amount of parasitic, rent-seeking behavior by private firms that pretend to live off government contracts, tax breaks, regulatory favors, and other assorted forms of corporate welfare.  These businessmen appear to spend more time lobbying government for special treatment than running their companies.  Any serious policy effort to generate economic growth in Puerto Rico must address all these issues head on.

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200,000 new jobs are good but…

They are not sufficient to keep up with population growth.   According to data from the Puerto Rico Planning Board, Puerto Rico’s civilian population 16 years and older increased from 2,788,000 in July 1999 to 3,068,000 in July 2009, a net increase of 280,000 persons, equivalent to an average of 28,000 persons per year.  

The administration’s announced intention to create 200,000 net new jobs over the next eight years, equivalent to an average net increase of 25,000 jobs per year,  is commendable but insufficient to keep up with population growth and clearly inadequate to make a significant dent in Puerto Rico’s unemployment rate. 

A more aggressive goal would be to seek to raise Puerto Rico’s labor force participation rate to parity with that of the mainland United States.  According to Barry Bosworth, co-editor of the 2006 CNE/Brookings report on the economy of Puerto Rico, that goal could be achieved in 15 years if total employment increased in Puerto Rico at a yearly rate of  3%.   The table below sets forth the employment goals for the next eight years under those premises.

As set forth in the table above, if employment in Puerto Rico grew at an annual rate of 3% a year over the next eight years, a total of 295,048 net new jobs would be created, equivalent to an annual average of 36,881 net new jobs. 

Admittedly, the goal is ambitious but Puerto Rico’s previous experience, especially between 1950 and 1975, suggests it is feasible.  However, to reach that objective requires a dynamic, growing economy, with significant new investment; and for that happen we need deep structural reforms to Puerto Rico’s economic model.  There is simply no other way around it.

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