Saturday, September 23, 2017

Time to Rebound From Puerto Rico’s Lost Decade



By on February 18, 2016

This edition’s Front-Page cover story marks the first installment in a series that outlines the unrelenting decline of Puerto Rico’s economy, which commenced in 2006 and has yet to subside. The death knell was actually struck in 1996 when Section 936 of the Internal Revenue Code was targeted for phase-out by the Republican majority in the U.S. Congress because the tax break had the stench of corporate welfare and failed to create jobs on par with the tax decrees that were being awarded.

Sure enough, 10 years on, Puerto Rico’s economy began a free fall prompted by a confluence of events—the end of Section 936 without a suitable replacement. Puerto Rico never got Section 933-A wage credits in the tax break’s stead, leaving the island’s job-creation engine throttled. Along with that came the flight of massive capital—more than 40% of the capital in Puerto Rico’s banks were 936 funds. Then came the vortex spun by the closing of Puerto Rico’s government tied to a budget impasse between the Executive and Legislative branches and a fracas over the implementation of a sales & use tax. The 2006 closing of the government sent shock waves through Puerto Rico’s economy and proved to be the catalyst for a severe economic contraction that continues to this day.

All told, Puerto Rico’s economy has shrunk by some 16% in the past decade, more than 290,000 jobs have been lost and 12,000 businesses have shuttered. There was a time when the spiral of decline was masked by a government that became a refuge for jobs that were being lost in the private sector, with some 325,000 reported jobs in government in 2003. The charade is over.

Fast forward to 2016. Net jobs lost in 2015 amounted to 48,000 island wide, prompting the continued outmigration of Puerto Rico’s residents—many young adults with families—to the United States. The statistics are disturbing—the net population decline in 2015 amounted to some 64,000 taxpayers packing their bags to seek work elsewhere. This is pressure that a paper-thin tax base cannot withstand.

If the outmigration continues at that pace, economists project the island’s population could be around 2.8 million in 2030, far below the 3.45 million of today. The numbers tell a devastating story. Manufacturing employment is down to 74,000 from a peak of 165,000 in 1996. Investment in construction—one of the island’s economic pillars during the 1990s—is down to $4.3 billion in 2015 from a high of $6.6 billion in 2004. Home foreclosures reached a record high of 4,000 in 2015. Aside from that Mrs. Lincoln, how did you like the play?

More than just a devastating indictment of failed policies, Caribbean Business’ Lost Decade series will chronicle socioeconomic trends over the past decade. The idea is to outline exactly where the island stands on several fronts as a precursor to a plan for economic recovery.

The truth is that there is no credible plan for job creation in Puerto Rico anywhere to be found. It is time for the government to put a premium on job creation tied to economic incentive packages that are very attractive to generate capital and investment, but it must be tied to huge net job creation. Without economic development—there is no brand of orderly debt relief that can put Puerto Rico on a path to sustainable growth.

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  • Errol

    Puerto Rico’s economy cannot ever recover on its own so long as it persists in maintaining so huge a bloated government employee payroll and such generous retirement benefits for such early retiring government employees. Supporting so many unproductive people is too heavy a burden on an economy. Those barely working government employees must be cast off into the economy where they must take jobs and actually be productive. So long as they remain employed by the government, they will never contribute to the economy. And so long as the burden of keeping them on the government payroll is so great, the private sector will not invest because it simply cannot afford to carry that burden and still be profitable. Wal-mart is a good example. If the taxes imposed on Wal-mart continue at current level, it is likely that Wal-mart may cease doing business in Puerto Rico since it essentially cannot earn more than a trivial profit even when sales are good.

    • William Rapien

      One of the problems with reducing the government payroll is that those people would then go directly onto the welfare and unemployment rolls which also causes a drain on the financial resources of the government. Reducing the payroll as part of the plan to return to fiscal viability is essential but it would be a losing battle if jobs in the private sector are not created to absorb those people.
      The Puerto Rican government should have developed their own tax incentives to retain the tech industries on the island as well as pursuing federal incentives. Even the idea of a Research and Development technology corridor on the west coast of the island would have been good 10-15 years ago. Even so, the PR government is so slow in evaluating and approving the incentives that smaller tech companies could not hold out long enough and manufacturing R&D went elsewhere.
      “Government as usual” is not a local problem but is also evident stateside. Getting academics and politicians involved in creating alternate plans also has its own set of problems since they do not always have the practical experience in the day to day economics of Research and Development or of manufacturing. The Puerto Rico Manufacturers Association was not able to convince the government that action was needed, again due to politicians not being able to understand the ramifications of their decisions. Hindsight is perfect but useless if it does not educate those who need to exhibit foresight.

      • Errol

        William, you are correct that reducing government payroll would probably result in many discharged employees would simply move from their non-productive government employment to non-productive idleness on unemployment. However, the income they would receive from welfare or unemployment is less that they generous compensation they get as government employees and the outrageously generous retirement benefits they get for life beginning at an early retirement age.

        Moreover, unless they are discharged from non-productive government employment, they will NEVER get a productive job. They will remain non-productive for life! Whereas, if they are cast out into the economy, they will eventually take a job in the private sector unless they are satisfied to be parasites for life at a very reduced income level.

        • William Rapien

          Still, dumping them into an economy where there are limited job opportunities would be to risk some of them turning to less desirable methods of making money. There is no easy solution to the problem.

          Sadly, many of those leaving for the states are finding that the job market there is not very good especially if they are language challenged. Puerto Rico needs a big paradigm shift to survive. Business as usual, especially in government, is no longer viable. And abrupt job cuts without fully understanding the sociological, political and economic ramifications will just create more anarchy.

          Unfortunately, politics in Puerto Rico remain the same. People vote by party instead of using their heads. We need to actually look at the candidates closely and elect the ones that have the experience to turn things around whether they are of a particular party or not. If only there was a way to research the candidates objectively. Honesty and integrity should be the highest qualification and not whether they can get you an inside track on a government job or contract. It is the same for American politics, by the way.

          What a novel concept… a government of the people, by the people and for the people instead of the current government of the party, by the party and for the party. Who knows what we will end up with when the dust settles.

  • The Sheriff of Cochise

    The major problem between 1996 and 2006 was that Puerto Rico’s Plan A was to seek other tax breaks such as “933-A wage credits in the tax break’s stead.” In the service I always learned that when making battle plans you have Plan A, Plan B and even Plan C. Instead of blowing millions of dollars on lobbyists which we all know just turn around and make money contributions to Congressmen, the island should have tasked the brains at the state university to come up with ideas. I’ve always wondered why Puerto Rico did not come up with the idea of using Ramey AFB as a platform for space launches. Since the dawn of the space age, I remember, there were launch tracking stations in the mountains East of Mayagüez. The island could have become NASA Central because, as we know, the shuttles were carried by jumbo jets from faraway landing sites to Cape Cañaveral. And when the money shrank for NASA they would have the perfect place for the Space X program. Just one of the things that could have come up by brainstorming. But the corrupt politicians and their lobbyists cronies didn’t want that happening and therefore you have the rapidly spiraling third-world country of today, giving billionaires all kinds tax breaks while screwing the locals with more and more higher and higher taxes and fees.

    • William Rapien

      Ramey AFB would not have been a good launch site. The daily rains due to the trade winds passing over the humid mountains of PR would have limited launch windows. Also, the launches would have been over the populated parts of the island. A better alternative for NASA would have been Roosevelt Roads.

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