We Interrupt This Referendum, Part 2 By S. Artesian

5 July 2015 — The Wolf Report: Nonconfidential analysis for the anti-investor

1. Tearing away, just for the moment, from Thunderdome on the Aegean–“Break a deal; face the wheel”– there’s the island commonwealth, Puerto Rico, part of the United States when that’s convenient and lucrative for the Federal government; and not part of the United States when it’s not convenient.  Like now.  When it has $72 billion in debt that the commonwealth acknowledges cannot be serviced.  Then…then Puerto Rico is a special case.  It reports statistical information to the US Department of Commerce and the Federal Reserve, but it gets its own country page on the World Bank website; and it gets its own statistical database.

Puerto Rico’s economy gets a critical, and helpful look from the Federal Reserve.   It  gets another critical, but helpful, always helpful,  report, authored by Anne Krueger (formerly of the IMF, and currently married to Freddy),  Ranjit Teja, and Andrew Wolfe (no relation). These reports tell us what went wrong and what to do about it.  That’s what makes them so helpful.

Anyone can point out after all, that labor force participation rate for the population in Puerto Rico aged 24-54 is at about 43 percent vs. 63 percent for the mainland USA.  Anyone can point out that GDP growth since the end of the official recession in 2009, has been less than 1/4 of that on the mainland.  Anyone can point out that manufacturing, seizing the incentives of Federal tax breaks that ended some years ago, began to close shops in the recession of 2001.  Anyone, even I, can tell you that the annual percentage change in fixed capital formation has slowed dramatically; turned negative in 2000; that the gross amounts have trended downwards over the last 10 years.

But it takes an economist to tell you the reason for these indicators of distress is that Puerto Rico’s minimum wage is the same as the mainland’s. 

2.  Puerto Rico isn’t Greece.  Puerto Rico is not a sovereign country, cooking its books to join a monetary union.  Puerto Rico is not subject to balance of trade difficulties.  Puerto Rico isn’t Greece, but capitalism is capitalism, and when capital attacks its “fixed” accumulated component, devaluing the means of production, closing shop, it necessarily must also attack its living component– which happens to be the lives of those working and not working; the lives of the working poor and the unemployed poor whether in Europe, or Asia, or the Americas.

The Krueger report and NY Fed’s report find that the fact that the minimum wage in Puerto Rico amounts to an obstacle to economic expansion, to labor market efficiency, investment, because unlike the mainland United States where the minimum wage is only equivalent of 28 percent of per capita income, the minimum wage amounts to 77 percent of the per capita income.  The minimum wage is just too close to the average wage, so, according to the economists, there is insufficient advantage to employing workers at the minimum wage.  You see, Puerto Rico is poor– it has difficulty becoming “competitive,” “expanding the economy,” and most importantly servicing the debt– because it isn’t poor enough.  That’s what economics amounts to: the ideology of poverty.

The solution?  Any economist can tell you the obvious solution.  Lower the minimum wage, of course.  Get an exemption from the federal minimum wage for Puerto Rico.  Sure thing, if only Puerto Rico were its own country, then this problem could be solved and with haste.

3.  What else?  Puerto Rico has established sponsored public sector corporations and authorities, empowered to issue bonds for raising revenue to invest in power generation, like the Puerto Rico Electric Power Authority, transport, like the Puerto Rico Highway and Transportation Authority, Puerto Rico Aqueduct and Sewer Authority.

Now as part of its program to make the island attractive to investors, the commonwealth reduced, and has maintained the reduction, of corporate and personal income taxes.  Taxes on corporate profits can be in the 0-4 percent per year bracket for as long as 15 years, and the benefit is renewable upon the expiration of the 15 year allotment. 

In order to undertake the upkeep and upgrade of infrastructure essential to the production and circulation of capital, power and transportation, these authorities have to issue bonds, and the bonds have to be collateralized by a portion of the revenues generated by the fees charged to the corporate users of the power and transportation infrastructure.   Reduce the fees, either “actively” or “structurally” be intentional action, or “passively” “organically” by a decline in economic activity and guess what?  The revenue stream is inadequate to service the debt and sustain the infrastructure.

The solution?  Of course, restrain the public sector corporations and allow “private competition” to access the networks built by these authorities so that the private competition can charge lower user fees.   This is nothing but the latest iteration of the “Washington Consensus” that tells us all things are better with private enterprise.  That’s the ideology.  The practicality of course is that privatization leads to decay of networks (Railtrack, anyone?).  The practicality is that in periods of economic downturn and distress, private enterprise engages in asset stripping, asset liquidation.  Anyone other than an economist can tell you that.

4.  So before we return to Greece, where the population has decided to foot one more business class ticket to Brussels for Tsipras and co., let’s just be clear what’s going on here:  there is no such thing as economics.  There is capitalism and its ideologues.  There is the class struggle, however horribly muted, disorganized, seemingly feeble, against capital’s reproduction of its slasher self.

Oh…and Alexis?  That ticket is one way, no returns.

July 5, 2015

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