Yes, Puerto Rico's Debt Needs To Be Forgiven

Scene of desolation in Puerto Rico after Hurricane Maria.

In the wake of Hurricane Maria's devastation of Puerto Rico the issue of bringing the island territory of the U.S. back to economic viability has come to the fore.  Let's recall one of the issues even before the monster storm (barely 2 mph less than category 5) was Puerto Rico's  debt.  But in the wake of  Maria, which could cost the island up to $95 billion, more than double its current debt, there are few good options available. The most likely of which is that, under the existing law, all debt holders, including PREPA (electric utility) bondholders, will be those left largely footing the bill.

Even econ maven Steve Rattner, who initially inveighed against debt forgiveness,  stated flatly in a CNN interview a week ago that investors will have no choice but to "take a haircut".  There is simply no way it can ever be in a position to repay the debt especially after the hurricane's ravages. Rattner of Willett Advisors, originally told Bloomberg TV  that Congressional action might be needed to wipe out the debt.

But this isn't true. (A realization that may have subsequently caused Rattner to change his tune)

Under the PROMESSA act, according to UN sovereign debt consultant Eric LeCompte, the potential for Puerto Rico's debt to be significantly forgiven is a real possibility that will not take an act of Congress. Under the law, the bankruptcy judicial authority has significant latitude to consider the U.S. territory’s ability to pay the debt. The territory also has $50 billion in unfunded pension liabilities.

LeCompte pointed out that the super bankruptcy process includes a key provision that pins debt payments to the economic ability of a sovereign region to pay. The provisions of the PROMESA act are more sweeping in this regard than credit leniency afforded to states or other sovereign governments, he said.  Adding - in one online interview with an investor site (ValueWalk):  "When PROMESA legislation was written, it was very specific to Puerto Rico.  It would be very difficult for other territories to have the same latitude under the law.”

LeCompte also noted that money earmarked to pay bondholders is currently being diverted to hurricane relief.  This in itself makes it incomprehensible why Congress would recently pass - as part of general emergency relief-  a $4.9 b  package for the island territory but via a LOAN with interest attached. WTF?!  With bondholder debt diverted to hurricane relief why on Earth would you add more debt as a component of relief?  It's idiotic, but also passing sadistic.

Basically, what the Repukes in Congress have done is to essentially charge Puerto Rico "a leasing fee for the life raft as they drown", in the words of one commentator. How about, instead of treating the people of Puerto Rico like second class citizens, we treat them like the  hurricane victims of Houston? Give them hurricane relief with NO strings, i.e. no interest-bearing loans attached. This so they can get a head start on rebuilding and get on with their lives.

But the zeitgeist appears to be one of calculated cruelty combined with economic stupidity, such as exemplified in a recent WSJ piece ('Forgiving Debt Would Hurt Puerto Rico') by John Tamny. According to Tamny,  Puerto Rico's debt troubles "were the direct result of policies that hurt growth so forgiving its debt would only free Puerto Rico's politicians from having to address the policies that were suffocating its policies to begin with".

What is Tamny's solution? It is "to allow the government to feel the pain of its debt"  then this would "leave politicians no choice but to adopt pro growth policies".  And what pray tell does this mean? Well "a reduction in income taxes for the highest earners".  So, in the analogy of a foot race, Tamny would have the island cut its legs another foot shorter. 

He clearly is still hostage to the supply side nonsense, which almost brought Barbados to ruin in 1991 thanks to its adoption of Reagan's bunkum in 1986.

The fact is that any drop in revenue from whatever source will not help Puerto Rico, given any island state is already behind the financial 'eight ball' by virtue of its geographical situation - being an ISLAND.  Islands (such as Barbados and Puerto Rico) have to have all resources come in from outside - ship or plane - which naturally increases the cost of living. No surprise then that Puerto Rico's cost of living is some 13 percent higher than any location in the U.S.  Barbados cost of living is even higher than Puerto Rico's - as we relearn each time we visit and go the grocery mart.

Puerto Ricans also can’t claim the Earned Income Tax Credit or Child Tax Credit, which serves to both cushion the blow of living in poverty while enticing people into paid work. Those would be useful in a place where the labor force has fallen by about 20 percent over the last decade.

The territory’s economic struggles -  like those of Barbados -  led it to borrow heavily by issuing bonds in an attempt to keep its budget balanced. But it hasn’t been able to climb out of the hole, and in 2015 its governor announced that it couldn’t keep paying its creditors. Because Puerto Rico isn’t a state, it has been denied the ability to go through municipal bankruptcy. Congress instead set up a Financial Oversight Management Board to come up with a plan. So far, the plan calls for austerity measures that include $25.7 billion in spending cuts. The plan even acknowledges that his will lead to another “lost decade” of economic growth for the island (which could easily end up being worse than their projections).

However, economists Joseph Stiglitz and Martin Guzman have pointed out that if the territory’s economy can’t recover, it will continue to have trouble paying anything to creditors, not to mention prolonging the suffering of its residents. Conversely, if the economy is allowed to regain its health, it will have more revenues that it can use to pay people back.

Another option would be to push for the hedge funds and other firms that own Puerto Rico’s debt to write off large portions of it. Under Congress’s plan, the island can unilaterally reduce its debt with the approval of a federal judge. Doing so could have other ramifications—such as increasing borrowing costs—but it’s also worth remembering that investments are inherently risky. Rattner following his change of heart pointed this out. So the same way a stock investor needs to expect the inevitable losses, so also bond investors need to expect the inevitable "hair cuts" if they happen to invest in places, or products, utilities that go under - for whatever reason.

Let's also bear in mind that allowing Puerto Ricans to  continue to suffer will do no one any good and  - if anything - drive hundreds of thousands to abandon the island to come to the mainland U.S. And, as U.S. citizens, there isn't a god damned thing Trump or his Reich wing cronies can do to stop such a mass migration. Don't like it? Then forgive the damned debt, and offer no strings attached money for relief - to rebuild!

See also:

http://smirkingchimp.com/thread/lois-marie-gibbs/75744/hurricane-victims-don-t-have-the-complexion-for-protection


And:

http://smirkingchimp.com/thread/miles-mogulescu/75740/trump-drowns-the-forgotten-men-and-women-in-swamp-water

American Workers Still Lashed To The Productivity Treadmill - Wage Stagnation

In a WSJ piece from five days ago on declining worker productivity, we learned that "productivity growth, though volatile in the short run has slowed markedly since the information technology fueled boom of the late 1990s and early 2000s." Why is this? Why are American workers, though they are underpaid and work more hours than ever before,  still held to unrealistic productivity standards by the economic pooh bahs and gurus?

 Northwestern University's Robert Gordon has posited that the Industrial  Revolution (at the turn of the 19th century) had a vastly bigger effect on productivity, economic growth than the so-called "PC revolution" in the 20th. Think about it! The former meant transition from the impossibly laughable energy of whale oil to kerosene, coal etc., a mammoth jump in the EROEI of available energy sources. The latter transpired over a period of roughly 20 years over which the EROEI of oil actually decreased from 16:1 to roughly 10:1.  Translation: More work over more hours was needed to get the same 'bang for the productivity buck.'

Little wonder wonder that even millions of computers were not able to match the sheer change in productive output that accompanied the Industrial Revolution- and within the scope of the latter's purview we include the internal combustion engine, electricity, and indoor plumbing.  Gordon argues, and he's correct, that by the time the digital revolution got under way- say in the 80s- the big payoff in productivity began shrinking. Meanwhile, the PC-computing payoff basically has "come and gone" dissipating by 2004, when EROEI reached below 10:1.

Energy efficiency continues to decline and yet the econ genii still can't fathom why labor productivity is in decline, nor identify the things gov't can do to slow it. For the worker himself, any such claim is taken as nonsense because he is working harder than ever and merely treading water.

Less noted, but an equally important factor is how productivity is gauged. We are informed (WSJ, op. cit.) that labor productivity is tied to economic growth, i.e.  the GDP. The GDP in turn is dependent by nearly a 75% proportion on consumption. The growth "rate" however seems to be stuck at 2 percent per year and no more. Indeed, in a number of quarters since the credit meltdown we've barely seen 1-1.5% per year. In addition, we've been informed (op. cit.):

"If labor productivity grows an average of 2 % per year average living standards for our children's generation will be twice what we experience... If labor productivity grows an average of 1 % per year, the difference is dramatic. Living standards will take two generations to double."

Is this all bad? And what is the root cause?  A major clue is provided by authors William Wolman and Anne Colamosca.in their (1997) book,  The Judas Economy: The Triumph of Capital and the Betrayal of Work in which we learn that productivity in relation to GDP has increased more than 40% in the interval since 1973 even as wages-salaries have remained almost stagnant.

From this it emerges that labor productivity is ebbing because wages have stagnated so workers have not been able to earn enough to spend - to contribute to the 75 percent consumption part of the GDP equation.  The inherent problem then appears to be tying labor productivity to economic growth. TIME economic columnist Rana Foroohar reinforces this aspect by noting (p. 20, Sept. 5, 2016):

"Nobody us suggesting that productivity isn't rising because individuals aren't working hard enough. On the contrary, most economists believer the American blue and white collar workers alike are firing on all cylinders."

So what the ivory tower economists are really telling us when they bitch about "moderate productivity" or "labor productivity too low" is that it isn't being translated into economic growth. But that elicits the question, why not? The answer again, is because workers are not being paid enough to purchase most of the goods they make.  Unless it's via credit card debt, of course,

Is this poppycock? Let's delve into it further. Half of the jobs in the U.S. currently pay less than $18 per hour, according to Labor Department data. That's about $37,000 a year - assuming someone works full time. Meanwhile, forty percent of jobs pay less than $15.50 per hour according to the Economic Policy Institute. How far do such incomes go?

In the Denver area the average rent is currently $1,350 a month. Not including utilities that would be   over 50 percent of $2620, the monthly income after taxes, for the earlier class of worker named above.  In terms of home ownership., 6 of 10 homes in the Denver area are over $400,000. The annual income needed to qualify for a mortgage for such a home - assuming a 10 percent down payment and 4 percent interest rate - would be $94,000 a year.  This is over two and a half times more income than half the jobs in the U.S. currently pay.

It doesn't take a rocket scientist or math whiz to figure out the disposable income available to those with the lower incomes (than $37,000/ yr.) would not entice them to spend on very many things - whether goods (e.g. new HDTVs, cars) or services (dining out). Hence, to avoid overstocked warehouses companies must cut production of goods. This in turn leads to a problem with aggregate demand.

Meanwhile, we learn hourly earnings for private sector workers "increased 3 cents last month to $26.39 an hour."  This is better than more than half U.S. workers but still not sufficient to rent an apartment or get a mortgage for most homes in Denver. Not to mention, Miami, LA and San Francisco.

Aggregate demand is composed of two parts: 1) demand generated by consumers for goods and services, and 2) the demand for investment goods. When the level of aggregate demand is high, both these components are generally equally high, and the levels of production and employment are high. On the other hand, when aggregate demand is low - or even one of the components (e.g. (1)) is very  low, then levels of production  plummet.

Quick and stupid fixes will not solve the situation. Thus, Columbia Business School Dean Glenn Hubbard (the guy who conceived the Bush tax cuts) and his "solution" of "rolling back regulations" (WSJ, op. cit.) will not increase productivity. It will only make more workers ill when they drink degraded water or get exposed to harmful chemicals because regulations (read protections) have been eviscerated.

A more sober and sensible take (ibid.)  is provided by Federal Reserve Vice Chairman Stanley Fischer who observes that policies work best when areas are addressed that the private sector neglects. These include: "investment in basic research, infrastructure, schooling and public health"

Imagine how much more productivity could be improved if roads, bridges were properly maintained - existing ones with issues repaired- enhancing manufacturing to retail outlet times. Imagine also how it could be improved if workers' health was improved, causing fewer work days missed.

The only way in the meantime to increase productivity tied to economic growth is for employers to increase worker wages. They can then  achieve greater purchase power, and a higher standard of living and keep those warehouses filled with product.  This is even more critical now given the weakening of the dollar's value. As per John Tamny's WSJ article ('Trump Is Wrong - A Weak Dollar Doesn't Make Strong Economy', Aug. 9, p. A15):

"American workers are paid in dollars. Devaluing the currency erodes their ability to buy the necessities and pleasures of life, whether they're created across the street or on the other side of the world. This obvious truth has long eluded proponents of a weak currency who are prone to limiting their analysis to first stage implications".

In like manner, one could say the obvious truth of hiking worker wages to enhance productivity (as currently defined) has also eluded the proponents of low wages - who are only obsessed with controlling inflation.   But as Mr. Tamny also writes, applicable here as well:

"The reality, seemingly ignored in the discussion of economic growth is that workers produce in order to consume. The making is all about the getting."

But what if the connection is ruptured? Then so also is labor productivity ruptured from GDP and economic growth.  In this case we may have a more objective measure for productivity not based so much on worker consumption.

For now, because wages are so stagnant, workers are again tapping homes for cash (WSJ, 'Tapping Homes for Cash Is Back', Aug. 28, D1) and maxing out with credit card debt.  ("Home equity line originations rose nearly 8 % to almost  $46 billion in the 2nd quarter- the highest level since 2008".)

In addition, too many American workers now appear to have '"settled" meaning they've lowered work satisfaction levels to the bare minimum or close to it (WSJ, 'Expecting Less Jobholders Cheer Up',  Sept. 2-3, p. D1).  Thus we learn:

"A decade of bruising job cuts, minimal raises and lean staffing has led workers to lower their expectations."

Also:

"The average employee today shoulders more risk for retirement and health care than in past generations, and enjoys less job security.."

Meanwhile, Donald Trump has proposed massive corporate tax cuts, i.e. effectively for the CEOs, companies, while trying to make employees believe this will translate to a few extra nickels for them.  
More than ever, Dems need to make the case that American workers need support, and also expose Trump's idiotic tax "reform" plan for what it is - sheer exercise in fantasy.  I will have more to write about this and why his idiocy now presents a "red flag" to the bond market.

Stay tuned!

See also:

http://www.smirkingchimp.com/thread/peter-dreier/74936/this-labor-day-remember-that-martin-luther-king-s-last-campaign-was-for-workers-rights