Tuesday, March 31, 2015

[DONDEQUIERA] The Magical Mystical Unemployment Rate: Inside Puerto Rico's mysterious drop in unemployment

[Roll up! Roll up for the magical mystery unemployment rate! Step right this way!]

The February unemployment figures came out for Puerto Rico and there was a surprising drop in the numbers; they dropped from 12.4 to 11.6%.  This was possible through a 9K+ net increase in employment.  And while the jump might seem dubious, unemployment has actually been dropping since October of last year.

Roll up, roll up for the mystery unemployment rate 
Roll up, roll up for the mystery unemployment rate 
Roll up (We've got everything you need), roll up for the
unemployment rate 
Roll up (Satisfaction guaranteed), roll up for the
unemployment rate

These days, I'm not even sure if unemployment rate is what Puerto Rico economists should focus on.  As I have suggested in the past, the labor force participation rate, is, for me, the most worrisome.

If we look, once again, at the U.S. Bureau of Labor Statistics, Economy At A Glance (Puerto Rico), we see a long steady drop in the labor force.  Starting in 2006, the decreases in the Puerto Rican labor force has dropped down to levels not seen since, 1989.

In total, there has been a drop of about 290 thousand participants in the Puerto Rico labor force since 2006.  Curiously, there has also been a drop of about 272 thousand people employed, during the same time period.  Finally, there has been a total population drop of 257 thousand, roughly the same amount, again, during the same period.

What's the narrative?

A reasonable explanation of these trends could be, as jobs were lost in Puerto Rico, a large majority of the unemployed decided to leave the island. So as the number of total jobs dropped, unemployment skyrocketed, but eventually leveled off, as more and more unemployed went off the grid.  They didn't migrate away, they broke with the Pack, and begin using informal economies to support their well being.

Enter the ever illusive, Puerto Rico informal economy.  The raison d'etat of 8 years worth of complete incompetence in all things IVU or IVA.  As was recently expressed, managing a micro-economy is hard, and few, if any, of our governmental leaders (and their administrations) have been in control of said micro-economy.

The magical mystery unemployment rate is coming to take you away 
Coming to take you away 
The magical mystery unemployment rate is dying to take you away 
Dying to take you away, take you today

Labor force participation rate, total (% of total population ages 15+) (modeled ILO estimate)

Getting back to the labor force rate, here is a graph from the World Bank.  Labor force participation rate is the proportion of the population ages 15 and older that is economically active: all people who supply labor for the production of goods and services during a specified period.  In Puerto Rico, this critical rate went from 48.9% (2005) to 42.6% (2013).  That means that only 4 out of every 10 people in Puerto Rico are working "inside" the traditional BLS type of "employment" model.  Prior to this drop the labor force rate had been climbing since 1990, where the rate was 44.7%.

And Here is The Kicker

So if all of the major economic indicators show declines in the past 8 years, how has the Puerto Rico gross domestic product(GDP) and GDP per capita been able to sustain their continued growth?  How is retail purchasing in Puerto Rico rising?  How?

[Dying to take you away, take you today]

Publicado por Blogger en DONDEQUIERA el 3/31/2015 12:06:00 p. m.

Thursday, March 26, 2015

[DONDEQUIERA] Mall of San Juan - Praise the Lord

Sure, I know how curious people can be, but, if you ask me, Puerto Rico has a new house of worship.  Move over Plaza Las Americas, there is a new temple in which to praise the all mighty.  The new "Our Lady of Holy Capitalism," is open for business.  Let us stand back and adore thee.

As thousands demonstrated yesterday, the new Mall of San Juan opened to unprecedented numbers of shoppers and gawkers.  From all accounts, it looks like the new shopping mecca is an instant success, as predicted.  

Publicado por Blogger en DONDEQUIERA el 3/26/2015 06:24:00 p. m.

Wednesday, March 18, 2015

[DONDEQUIERA] Puerto Rico's Debt Crisis: An allegory of stupidity and greed

Puerto Rico Bonds: Perfect for Everyone!
Have you ever purchased a home or a car?  In these transactions there are three key principals:  the buyer, the salesperson, and the seller.  During such transactions, there is an agreement between the seller and the salesperson, that for each sale, the salesperson receives a commission for said sale.  While agreements vary, usually the commission is based on a percentage of the final sale price.

I think that's fairly well understood by most people, but let's up the ante.  What if  we are talking about municipal bonds?  As a thought experiment, let's say the principal actors in this "hypothetical" situation are Oppenheimer Funds Investment Management (buyer), UBS Investment Banking (the salesperson), and the Autoridad de Energía Eléctrica (the seller).  In this "hypothetical" transaction, the Autoridad contracts UBS to help them sell $3.5 billion in municipal bonds.  Now for simplicity purposes, let's imagine that Oppenheimer Funds purchases all $3.5 billion of the bonds.

So the burning question for this "hypothetical" sale, is: "How much did UBS earn in this transaction?"  Now, I'm not an economist or even a financial advisor, but math tells us that even a small percentage of $3.5 billion is still a shit load of money.

The Moral of This Story

Trying to unravel in the ins and outs of our debt crisis is a mess, so, as my first Spanish teacher used to tell me: "Don't make a trouble for you're head."

After all of my investigation into this debt crisis, all I can conclude is that the commission on $70 billion is an even larger shit load of money.  Over the last twenty years, our sales of municipal debt has exploded.

There are probably very sophisticated economic theories involved in why this has happened, but if we use a hybrid of philosophical razors, I think the moral becomes clear.

First, let's use Hanlon's razor (which I mentioned recently).  Hanlon's Razor states: "Never attribute to malice that which is adequately explained by stupidity."  I don't think current and past Puerto Rico administrations intended to do anything evil in selling so many bonds.  I think they sold so many bonds because they could.

And finally, let's use Ockham's razor.  Okham's razor states that among competing hypotheses that predict equally well, the one with the fewest assumptions should be selected.  All things being equal, the motivation for selling so many municipal bonds is greed.

Let's face it, it's pretty common within our commonwealth to exchange lucrative government deals for favors.  Whether these deals are in exchange for prior financial support during a politician's campaign or simply the action of a politician showering contracts on friends and families, one thing is painfully clear:

The sales of Puerto Rico municipal bonds over the last twenty years have generated a lot of profits in the form of takedowns, management fees, and underwriting expenses.   Because in the end, isn't it always about the benjamins?

Publicado por Blogger en DONDEQUIERA el 3/18/2015 09:35:00 a. m.

Tuesday, March 10, 2015

[DONDEQUIERA] IVA Propaganda - Departamento de Hacienda

I found some nice pro-IVA artwork on the Departamento de Hacienda website.  Here are my favorites:

Income Tax Versus IVA

Everyplace is using IVA

Less taxes, um hum, sure...

No more income tax withholding

Again, income tax and IVU is less than IVA - refunds

My absolute favorite!
Besides the consultants (KPMG), the clear cut winner with the IVA so far, are the advertising agencies and the ad sellers (mostly El Nuevo Dia, or should I say GFR Media?)

Publicado por Blogger en DONDEQUIERA el 3/10/2015 03:25:00 p. m.

Monday, March 9, 2015

[DONDEQUIERA] Risk Assessment for 2015 Puerto Rico Tax Reform

Ooooo doggie, did I strike gold. I found me a glory hole!

I was poking around on the Transformacionpr Web Site and found the risk assessment for the new Puerto Rico Tax Reform (PDF), prepared by KPMG.  As an introduction to this new glory hole information, I offer you the top five threats to a successful implementation of the VAT (IVA) in Puerto Rico
  • 1) Current Economic Instability - Yeah, this is pretty high risk, it's what we call a doozy.
  • 2) Ad Hoc Legislative Changes - Already happening! So I'd also pretty high risk, like 100% likely.
  • 3) Continued Culture of Tax Evasion - Funny how easy it was to find pertinent information about IVA evasion in other countries.  Don't hear so much about that part of "other places use it too!" See the tale of the Scorpion and the IVA.
  • 4) Inconsistent Enforcement Efforts - In a kleptocracy like ours, this is a given.  This is almost certainly to go hand in hand with the the culture addressed above.
  • 5) Population Loss - In the end, the true measure of the new tax reform is will it rescue the economy?  Will it prevent the mass exodus of Puerto Ricans looking for greener pastures in a much evolved United States.  Almost exclusively, when this happened before, many went to New York.  Now much more of the US is ready to receive the flood of Puerto Rican refugees.  Prediction: highly probable.
I didn't want to get to heavy into this, but if you study the risk document, it is rich with context and strategy.  Let's get this party started!

Publicado por Blogger en DONDEQUIERA el 3/09/2015 10:28:00 a. m.

Thursday, March 5, 2015

[DONDEQUIERA] The Elusive Puerto Rican informal Economy

Funny thing happened to me while I was trolling the economic data for Puerto Rico yesterday.  Surprise, surprise, I found yet another paradox.  According the Puerto Rico Government Development Bank (GDB), Puerto Rico's Economic Activity Index and Retail Sales are growing.   How is this possible?  With lower population and lower employment rates, shouldn't the economic activity be shrinking?  How can there be more money in the economy when there are less people working?

Ask yourself, how could there be more money in an economy, when there is less income?  The only logical conclusion is that there is another source of income.  Now ask yourself, what other sources of income are there that aren't from employment?  Now you might respond, clearly you are overlooking self-employment. Unfortunately, the labor data available for the GDB doesn't support this theory.  On the contrary, self-employment is at it's lowest since 2008.  So if it's not self-employment, then what could be the source of this money?

According to Occam's Razor, the only answer to this riddle is the elusive Puerto Rican informal economy.  Estimated at $17 billion dollars, or 27% if gross domestic product  [of Puerto Rico], the black market is the primary target for both the IVU and the IVA.

When the debate surrounding the IVU caught my attention back in 2006-07, I started watching the growth of a local pulgero, a flea market.  I watched as the IVU became the law of the land, the size of the pulgero grew rapidly.  However, as the years went by and the informal economy continued growing, my local pulgero maxxed out.  Recently, the number of stalls, constructed out of wagons (steel enclosed trailers typically used for goods transport), has roughly stayed the same.  I share my heuristic, to call into question, the origin of the informal economy.

I love the way, the Puerto Rico informal economy has become an accepted fact.  I love it for the irony it represents, for not only does this represent the cash-based economy where goods and services are exchanged outside of law, it also includes drugs and guns trafficking.

It boggles the mind that so many "law-abiding" citizens are complicit with major crime and the syndicates they represent.  Since it is, by definition, off the books, there is no way to estimate the breakdown of the estimated $17 billion.  I wonder though, how much of this economy is drawn from drugs, guns, and prostitution?

Of course, within a kleptocracy like ours, an informal economy is the most nefarious type of corruption.   It slowly leaches into our daily lives, increasingly corrupting more and more of our society.

Much heralded, is the community that protects the gang that helps them to survive, providing "jobs" and income for the community where none existed.  But I wonder....how many of the participants in Puerto Rico's informal economy would openly support murderers, thieves, and extortionists?  Especially, if you factor in that Puerto Rico's population is approximately 95% Christian?

Sadly, I'm left with only the illogic from Star Tek's classic "I Mudd" episode.  "You say that Jesus and The Bible are your strength, but openly allow murder, stealing, and bearing false witness.  But if God was your copilot, you wouldn't take what isn't yours."

Publicado por Blogger en DONDEQUIERA el 3/05/2015 10:36:00 a. m.

Wednesday, March 4, 2015

[DONDEQUIERA] The Fable of the Scorpion and the Puerto Rico IVA

Recently the ex-governor of Puerto Rico, Anibal Acevedo Vila made an interesting announcement on his blog, entitled "Refrescando la Memoria."  In his discourse, he suggests that the IVU, which he signed into law in 2006, is one of the reasons that the Puerto Rico economy has not emerged from it's decade old depression.

Yes, let's refresh our memories and see what emerges, but first, I'm reminded of an Aesop Fable, that might help us with our memories:
A scorpion and a frog meet on the bank of a stream and the scorpion asks the frog to carry him across on its back. The frog asks, "How do I know you won't sting me?" The scorpion says, "Because if I do, I will die too." 
The frog is satisfied, and they set out, but in midstream, the scorpion stings the frog. The frog feels the onset of  paralysis and starts to sink, knowing they both will drown, but has just enough time to gasp "Why?" 
Replies the scorpion: "Its my nature..."
The Moral

As some of you political monsters out there might remember, during his political campaign against ex-govenor Pedro Rossello, Acevedo Vila was likened to a scorpion. So let's keep that in mind as I unwind the tatters of history and reveal the moral.

But didn't Acedo Vila, himself, sign the bill into law? Yes, but he remembers thinks a little differently: "Aunque tenía dudas muy fuertes sobre la imposición de un impuesto al consumo, acepté la propuesta del PNP. (While I had strong doubts about the IVU, I agreed to the PNP proposal.)"   So let's deconstruct that statement, because it's a doozy.  So the PDP governor, accepted the IVU proposal from the opposition party, the PNP.  Yeah, that happens here, like, never.

Maybe the blog post is a secret cry for help, because the governor is surely suffering some type of memory robbing affliction. Maybe it's the early stages of senility, because Acevedo Vila must not remember having had the power to veto while governor. Anyway, I digress.

The Informal Economy

When the IVU was implemented it was heralded as the way to increase tax collections from the informal economy (the black market) and those pesky tax evaders.  But like a horrible punch line to a sadistic joke, long story short, it didn't.  As the landscape changed, so did the behavior of the evaders, as well as the merchants and consumers of the black market.

Unlike our fable, in this version, Acevedo Vila isn't the scorpion, he's the frog. And the willing participants of the black market and those wily tax evaders are the scorpion.  For you see, as ugly as it sounds, if there is one thing tax evaders excel at, it is bending the rule of law to their favor.

What's My Point?

If one of the motivations for the new tax law is to capture taxes from the informal economy and tax evaders, then the VAT (IVA) is doomed already.  For just as certain as the sun rises in the east and sets in the west, the moment the VAT becomes law, people will find a way to beat the new system. It is just our nature, we can't help ourselves, even if we tried.  Therefore, all of the tax revenue projections are based on a flawed assumption.

Publicado por Blogger en DONDEQUIERA el 3/04/2015 07:55:00 a. m.