Session 1 don rissmiller

Puerto Rico: The Island’s Economics Don Rissmiller

January 15, 2014

Strategas Research Partners 212-­‐906-­‐0134 drissmiller@strategasrp.com

Puerto Rico Economy: Overview • Roughly three Hmes the size of Rhode Island.

• Climate: tropical marine; liNle seasonal temperature variaHon. Periodic droughts; hurricanes.

• PopulaHon: 3,645,648 (July 2013 est) • PopulaHon growth rate: -­‐0.47% (2013 est.)

Source: CIA World Factbook

Puerto Rico Economy: • American CiHzenship/Defense.

• Commonwealth status.

• Tax treatment versus other jurisdicHons.

Puerto Rico Economy: • Lack of independence.

• Lack of control of own currency & monetary policy.

• Size creates vulnerability to money flows.

• “Be careful what you wish for.”

2006 Law Change: Tax Changes • Change in tax treatment removes corporate incenHves.

• Companies begin to relocate.

• Puerto Rico economy stagnates since 2006.

• BUT .. Debt tax advantages remain.

Labor Force ParHcipaHon Falls

51

PR Labor Force ParHcipaHon (%)

49

47

45

43

41

39

37 2004 -­‐ Jul 2005 -­‐ Jul 2006 -­‐ Jul 2007 -­‐ Jul 2008 -­‐ Jul 2009 -­‐ Jul 2010 -­‐ Jul 2011 -­‐ Jul 2012 -­‐ Jul 2013 -­‐ Jul

Why Is Labor Force ParHcipaHon Key? • Labor Force ParHcipaHon Rate can be more reliable than either the numerator or denominator.

• Puerto Rico: 41% • U.S.A: 63%

Why Is Labor Force ParHcipaHon Key? • Increased labor force parHcipaHon gives a broader group to contribute to paying off exisHng (government) debt.

• Lack of labor force parHcipaHon leaves more people dependent on alternate programs.

– Dependency raHos become an issue.

• Movements tend to be slow and secular: demographics, etc. mean slow reacHons.

– Hard to reverse quickly.

Timely Data Suggest Puerto Rico Economy Remains Weak

Govt Development Bank Economic AcHvity Index

Headlines Suggest Vulnerability to a Shock • Puerto Ricans Flock North Away From BaNered Economy. Exodus in Past Decade Was the Largest Since the 1950s. WSJ, 1/6/14 • Plagued By Violence, Bad Economy, Puerto Rico Rings In 2014 With Bang; 13 Murders In 5 Days. Fox News, 1/8/14

This has happened despite easy Fed policy (which PR “imports”).

Federal Funds [effective] Rate % p.a.

6

6

5

5

4

4

3

3

2

2

1

1

0

0 03 04 05 06 07 Source: Federal Reserve Board

08

09

10

11

12

13

Lack of Monetary Policy Control • “PrinHng money” Hed to another central bank, with different objecHves.

• Not necessarily a bad thing, eg, some U.S. states are weaker than others.

– But fiscal policy should make up the difference.

• QuesHons: do the areas trade a lot, and can individuals & capital move freely?

Why Debt/Income MaNers • In the long run, debt/income should go sideways, otherwise interest costs can consume the enHre budget.

• For countries, debt/GDP is open used.

• A measure of vulnerability.

Debt/Income Must Go Sideways as a DefiniHon of Fiscal Sustainability

Not “Too Big to Fail?”

• Other state & local governments have either filed for bankruptcy (eg, Detroit) or seen their situaHon improve.

• There is no longer an “emergency” climate.

• PR Revenue collecHons for the first 6 months of fiscal 2014 were $80 million above budgeted esHmates (Bloomberg, 1/9)

Conclusion • Some natural advantages for the island economy.

• Structural issues with labor force parHcipaHon • The Fed is easy, but perhaps not enough.

• Crisis acHons are fading as other areas improve.

• Can the debt burden be smoothed?