‘Honey, We Shrunk the Middle Class’
Starring Puerto Rico’s Legislative Assembly
The Economy Goes Back to the 80s
Did you love the 1980s? Well…if the answer is yes, go to your closet and dig up your LA Gear hi-tops and jogging suit and start getting in shape because that is where our economy is headed. But, if you think those years were not that hot…well, deal with it because Puerto Rico has returned to the 1980s and not even the much-maligned federal fiscal-control board will be able to send us forward to the 21st century.
For the better part, if not for all of the past decade (2006-2016), Puerto Rico has suffered the effects of the hardest and longest depression in its history.
During the past 10 years, any economic advances Puerto Rico may have previously had were reversed or cancelled by a less-than-zero growth rate of its gross national product (GNP), insufficient revenues, increasing public debt, new and higher taxes, increasing unemployment rate and the final phasing out of Section 936 of the U.S. Internal Revenue Code, thus fiscally setting back the island not 10 or 20, but 30 years.
“No one has received a more severe blow from this recession than the island’s middle class, which up to the turn of the century, used to be very strong,” said Eddy Sánchez, a planner working for the government on health-related issues.
He defined the middle class as those households earning between $40,000 and $100,000 a year.
Economists have classified the middle class (individuals and /or households) in three different groups; medium-low, average and upper. The lowest income bracket for each group being: $30,000 a year for the medium-low class; $50,000 a year for the average middle class; and $80,000 a year for the upper-middle class.
Puerto Rico’s middle class, which was formed with the island’s industrialization initiative under Operation Bootstrap, derived its income from the manufacturing and services industries, but mainly from the former.
“The manufacturing industry has never paid minimum wages. By 2006, the salary of any production-line employee could have been some $40,000 a year, or even more, depending on how much overtime he or she could manage to clock-in…. And we’re not talking about highly specialized production workers. These were the average line workers. And guess what…that is what an entry-level lawyer made at [the law firm of] McConnell Valdés, or at any other major law firm for that matter,” Sánchez said to Caribbean Business.
In more specific terms, back in 2006, a person working anywhere in the manufacturing industry averaged a weekly salary of $611.38, or about $31,791 a year. Going fast-forward to 2014, the same person working in the manufacturing industry was averaging $740.92 a week, for a difference of $129.54. This translates to roughly $38,527 a year. Such a salary rise in the manufacturing business was not very significant, but from the worker’s perspective “a rise, nonetheless,” Sánchez noted.
But while there was an increase in the average weekly salary in the manufacturing industry, it would be wrong to assume the industry was not hit very hard by the recession. If we use the table for average weekly salaries (by industry) prepared by the P.R. Labor Department and look at the total average salaries paid by the manufacturing industry for 2006 ($3.5 billion) and 2014 ($2.8 billion), there is a difference of $700 million.
How could manufacturers have paid less if individual workers are getting more money each week? Simple, they paid more or less the same salaries to fewer workers, thus the average salary was higher. From 1997 to 2012, an estimated 80,000 jobs were lost in manufacturing in Puerto Rico, according to the 2012 Economic Census of the U.S. Census Bureau.
Interestingly, the total weekly salaries paid for all industries in Puerto Rico for 2006 and 2014 was almost the same, $24.56 billion. There was a difference of a little less than half a million dollars ($438,843) in paid salaries registered in 2014.
Labor-force participation rate abysmally low
Fewer people employed means they have less money to spend, which in turn means increasing inventories, decreasing imports and decreasing revenues, both for local businesses and the commonwealth government.
As of June 2015 (the end of fiscal 2015), the employment rate in Puerto Rico was 34.7%, referring to the island’s labor-force participation rate. This means that fewer than 35 people, out of every 100 capable of working, were employed. When compared to 2006, when the rate was 42.1%, there is a difference of 7.4%. This means there were fewer people working in Puerto Rico nine years later.
At the same time, the island’s unemployment rate has been quite high, hovering at more than 16% around its peak; in December 2015, the unemployment rate was pegged at 12.2%.
The earlier part of this decade also coincided with the final phasing out of Section 936 of the U.S. Internal Revenue Code, which in turn became the preamble to the massive layoffs of government workers during the administration of former Gov. Luis Fortuño.
If the GNP numbers for 2006 ($7.35 billion) are compared with those of 2014 ($6.39 billion)—the closest year to 2016 for which there are statistics available—the difference is almost $1 billion. The last time Puerto Rico had a similar GNP was 1999. So, after that eight-year period of economic stagnation in Puerto Rico, the island’s situation was similar to that of 15 years earlier. The local economy not only came to a grinding halt, but it also hit reverse and the value of all services and finished goods produced on the island was the same as that of 1999.
The Puerto Rico Planning Board, the government agency in charge of estimating GNP and other economic indicators, has estimated the GNP for 2015 will be significantly lower than that of 2014. With a negative growth outlook for Puerto Rico’s GNP, the island’s economy keeps getting deeper and deeper into a 20th century scenario, the now-dreaded 1980s, from which not even the resourceful duo of Doc Brown and Marty McFly could send us back to the future.
“Right now, the [island’s] economy is almost at the same level as it was in the mid-1990s. It is entirely possibly that it could reach 1980s levels by 2020,” Sánchez said.
Buying power diminished
After the loss of thousands of well-paid jobs that the manufacturing sector used to provide and the ripple effect this has had on other areas of the economy, such as construction and autos, the consequences came quickly. With the loss of income and the establishment of a sales & use tax in 2006, many middle-class individuals and families saw their buying power significantly diminished. The whole situation coincided with the crisis in the banking industry (subprime mortgages), the federal bailout to banks and the global recession. Families not only saw their incomes drop and in many cases disappear, but they also saw how their savings, in the form of property values (for most Puerto Ricans their homes are their biggest and only asset) were reduced by 30%, or even more. Many saw their equity vanish and were stuck paying mortgages for homes that had been significantly devalued.
As a result, many middle-class households made budget cuts in such areas as entertainment, summer and Christmas vacations, dining out, going to the movies and even family outings on weekends. Many families were also forced to send their children to public instead of private schools. But in many cases, these budget cuts have not been enough, as thousands of families have also lost their homes.
Another area of the economy that has suffered a severe blow is car sales. Statistics show there is more than one car per household in Puerto Rico, but with less money to spend, families had to sell their extra vehicles, forfeit on their loans and leases, delay buying new vehicles or purchase used cars.
The United Group of Automotive Importers (GUIA by its Spanish acronym) reports that the number of new cars sold in Puerto Rico dropped from 117,838 in 2006 to 81,353 in 2015. That is a loss of more than 30% in a decade.
Ricardo García, president of GUIA, told Caribbean Business that the island’s shrinking population, increasing sales of used cars and uncertainty over its economic and fiscal woes have had a negative effect on new-car sales, which will likely continue to have a negative impact on sales this year.
García estimated only 77,000 new cars will be sold this year in Puerto Rico. This will put 2016 on par with 2009, the year with the lowest sales on record (76,477).
When there is nothing else left to cut
The number of foreclosed mortgages on residential units reached 4,453 in 2015, with a consolidated book value of $648.3 million, according to the Financial Institutions Commissioner’s Office (OCIF by its Spanish acronym). In short, the number of foreclosures had almost doubled from 2008 (2,357 residential units), the earliest date for which OCIF offered data.
Thus far, Alejandro García Padilla, who took over from Fortuño with a promise to reactivate the island’s economy, has not been able to jumpstart it despite following his predecessor’s initiative of turning Puerto Rico into a tax haven for millionaire investors willing to take up residence on the island and an investment incentive program, among other initiatives.
As happened some 70 years ago, the need for jobs has prompted several hundred thousand people to move north to the mainland U.S., searching for a means of livelihood for their families. Those leaving the island included untrained and lower-educated workers as well as college-educated professionals.
According to the U.S. Census Bureau, Puerto Rico’s population has diminished from 3.8 million in 2004 to 3.5 million in 2015, or a 9.2% drop in the past 11 years. New population estimates will be reported by the Census Bureau later this year, but practically no demographer expects a change in the population’s tendency to decrease.
U.S. institutions and companies have always come to the island to recruit new professionals, particularly teachers, nurses, engineers and law enforcement officers, to attend to their increasingly diversified communities. Because they are already trained and licensed, require little additional training and many are bilingual, these professionals usually receive entry-level salaries far superior to those they would get on the island.
This fact seems to have given way to a new trend that appears to be gaining momentum: professionals in Puerto Rico changing careers to get good jobs in the U.S.
“This is what’s happening now. I recently learned about an experienced demographer looking to complete a degree in nursing in one of those for-profit colleges that resembles a diploma production line, to get a job as a nurse somewhere in the U.S.,” Sánchez recalled.
According to the planner, a nurse could have an entry salary of $40,000 a year in the U.S., whereas “it will take a demographer some time before reaching that bracket here in Puerto Rico, if he or she is lucky enough to get a job.”
Rafael (last name withheld), a recent law school graduate, had landed a job with one of the island’s biggest and most prestigious law firms. Before becoming a lawyer, he was a schoolteacher, hoping law school would help him provide better living conditions for his family. But less than a year after he started working at the law firm, Rafael resigned his position and was in the process of moving to Florida.
“I had to do it. You can’t just sit down and wait for things to turn your way. When you have kids, you have to act…. Anyway, I’ll be better off as a teacher in Florida than as a lawyer here,” Rafael said.
Can we get back to the future?
The Economic Analysis Division of the Government Development Bank (GDB) estimates there will be a modest increment of 0.5% in employment for July 2016 and an additional 1.5% by December, for a 2% total estimated increase.
Meanwhile, the GDB’s Economic Activity Index (EAI) for 2007 was at 154.7 points, but by 2015, this had dropped to 127.4, representing a drop of 27.3 points during an eight-year period. The last time the EAI had reached a similar mark was during the mid-1990s.
According to the GDB, the EAI “summarizes the behavior of four major monthly economic indicators,” those indicators being: total nonfarm payroll employment, cement sales, gasoline consumption and electric-power consumption. As of April 2012, the electric-power-consumption variable was replaced by the electric-power-generation variable as the fourth indicator. Before that, the government had “reset” the EAI in 1980 to make that year the index’s new “base year.”
The 1980 mark for the year is 100, which figuratively speaking is equal to zero. This means, since resetting the EAI’s base year, that the Puerto Rico economy had grown 154.7 points by 2007, but by 2015, had lost about half, or 50%, of the registered growth since 1980.
While some have questioned the government’s optimistic estimations and assumptions, recent economic indicators show a downward curve that is still pushing the island’s economy back into last-century levels.