Living with Risk Daily Briefing – May 20

Published on May 20, 2020 / Leer en español

Center for a New Economy

Edited by
Sergio M. Marxuach


Five things you should know today

1) PREPA invoices increase during the COVID-19 lockdown

Analysis by Malu Blázquez, Executive Director, ReImagina Puerto Rico

Residential customers in Puerto Rico probably saw an increase in their April 2020 invoice from the Puerto Rico Electric Power Authority (PREPA) when compared to the previous month’s invoice. Many ask how is that possible when petroleum barrel prices decreased by 100% in March, but the rate for the April 2020 PREPA invoice was $0.2162/kWh, not yet reflecting any decrease in petroleum prices.

However, lower rates are expected in the June 2020 invoice. That is because, on April 22, the Puerto Rico Energy Bureau (PREB) ordered PREPA to submit a monthly reconciliation of estimated and actual costs for fuel and purchased power (instead of submitting it at the end of the billing trimester in May, as is common). If the difference between estimated and actual costs is greater than $20 million, then PREPA has to adjust its rates as required by PREB regulations. On May 15, PREPA submitted to the PREB a Motion to Submit Reconciliations for March and April 2020, demonstrating that the reconciliation amount, in fact, exceeded $20 million and it recalculated the rate per kWh for the remaining billing cycles of the quarter. PREPA proposes a rate reduction of approximately $0.04 per kWh for PREB’s review and final determination, to be applied to the June 2020 invoice.

While most commercial customers probably received a reduced PREPA invoice due to operational shutdowns or decreased operations due to the pandemic, residential customers will most likely experience an increase because most families have been sheltered at home for the last couple of months, which has led to increased use of air conditioners and other electronic equipment. For example, my April 2020 invoice reflected a 61.9% increase in consumption and 112.7% increase in total cost.  Even if my April invoice had been calculated using a reduced rate of $0.18/kWh, it would still have been higher than the March invoice due to the increase in consumption. So while we are expecting our electricity invoices to decrease due to lower petroleum prices, we will probably not see lower PREPA invoices in the near future, as shelter-in-place measures have not been completely lifted and we are now entering the summer months when consumers typically increase their consumption.

2) The failure of hollowed-out government

For decades now we have been hearing about how government needed to become more “efficient.” The result has been an underinvestment in state capacity to deliver important services when needed, for example, when a pandemic strikes. According to an analysis by Mariana Mazzucato and Giulio Quaggiotto published in Project Syndicate, for “the last half-century, the prevailing political message in many countries has been that governments cannot – and therefore should not – actually govern. Politicians, business leaders, and pundits have long relied on a management creed that focuses obsessively on static measures of efficiency to justify spending cuts, privatization, and outsourcing.”

This decades-long trend has left the United States and the United Kingdom, for example, struggling to respond to the COVID-19 pandemic, as “outsourcing has proven not to be a reliable way to ensure emergency access to medical equipment.” While smaller and often poorer countries, such as Vietnam, Pakistan, and New Zealand have been better able to respond to the challenges of the pandemic.

In Pakistan, for example, “citizens were able to apply for emergency cash transfers (made available to an impressive 12 million households) directly from their mobile phones,” whereas in Puerto Rico the island’s Labor Department has been unable to process 80,000 applications for special unemployment benefits. For context, keep in mind that GDP per capita in Pakistan is approximately $1,400, while in Puerto Rico it is around $32,000.

In the final analysis, according to the authors, “it is no coincidence that countries with mission-driven governments have fared better in the COVID-19 crisis than have countries beholden to the cult of efficiency. Effective governance, it turns out, cannot be conjured up at will, because it requires investment in state capacity.”

3) Trump administration chooses Virginia company to manufacture generic drugs needed to treat COVID-19

The Biomedical Advanced Research and Development Authority, a division of the U.S. Department of Health and Human Services, has awarded a four-year, $354 million contract to Virginia-based Phlow Corp. to manufacture raw pharmaceutical ingredients and generic medicines used for the treatment of COVID-19 patients. According to the New York Times, the contract, “meshes President Trump’s “America First” economic promises with concerns that coronavirus treatments be manufactured in the United States.”

Peter Navarro, a trade advisor to the president, said the project “will not only help bring our essential medicines home but actually do so in a way that is cost competitive with the sweatshops and pollution havens of the world.”

It is not clear why the contract was awarded to a brand new company, given that contract manufacturing of pharmaceuticals is an established industry in the United States. The Times speculates that Phlow’s explicitly nationalistic marketing may have given it an edge with the Trump administration. The company’s website ominously warns that the United States is “becoming dangerously dependent upon foreign suppliers for our most essential generic medicines.”

As is by now perhaps typical of the Trump administration, there is a large black cloud hovering over this transaction. We can only wish it success, though, as it will manufacture “medicines that are used for sedation to help patients requiring ventilator support, pain management and certain essential antibiotics.”

4) Would $10 trillion be enough?

As Congress and the Trump administration continue to disagree about the required amount of fiscal stimulus going forward, Derek Thompson from The Atlantic makes the case for going really big: the U.S. should spend $10 trillion over the next three or four years to avoid a depression. Thompson believes we should not see this as a “bold proposal” or a “big number” but rather “as the appropriate dosage for a once-in-a-century economic affliction.”

Of course, the amount of the spending package is not the only issue. How is the money distributed among workers and employers and how is it apportioned between old-fashioned infrastructure and “Green New Deal”-type of projects, for example, is just as important.

To be fair, Thompson has some ideas about how to spend the money. But the biggest obstacle is the amount of spending. He himself admits that $10 trillion “is a stunner, but so is the crisis. The U.S. economy is $22 trillion—or at least it was before the crisis. If the federal government spends $10 trillion over the next, say, four years, that would mean a fiscal shot of about 10 percent of total economic activity over that period. In an economy where one in five Americans are out of work and several industries have no clear path to normalcy, it’s not ludicrous to think that the appropriate fiscal medicine for an unprecedented crisis will amount to a tenth of GDP over several years.”

We agree. Halfway measures and compromises will not get us out of this economic crisis. Especially if there is a second wave of outbreaks during the fall.

5) Notre Dame University unveils plans for fall semester

With so much uncertainty generated by the COVID-19 pandemic, many colleges and universities are struggling with the decision to hold classes on campus during the next fall semester. The California State University system, for example, announced recently that it will not be opening up as usual this fall, and most classes will be held online. Notre Dame University, on the other hand, has unveiled a plan to hold classes on campus this fall.

According to the New York Times, classes there will begin on August 10, there will be no fall break, and students should be back at home by Thanksgiving if everything goes according to plan. Among the challenges for Notre Dame, “will be doing enough testing of students and staff to detect infection, and to isolate and quarantine if necessary.” In addition, everything is contingent on avoiding a second major outbreak of COVID-19 in the fall.

To the best of our knowledge, the University of Puerto Rico’s plans for next fall have not been announced yet. We wish all university administrators and faculty the best as they make some difficult decisions during the next few weeks.

Quote of the Day

In our time, political speech and writing are largely the defense of the indefensible.

—George Orwell

Note from the editor

The failure of the Puerto Rico Departments of Health and Labor in executing their respective missions reflects decades of corruption, partisan hiring, ill-advised austerity policies, and poorly thought-out outsourcing practices. These agencies have hundreds of employees and budgets of several million dollars. Yet they are hollow entities. They do not have the capacity for analysis, planning, and execution that is needed to address the challenges of the COVID-19 pandemic.

When the global COVID-19 outbreak reached Puerto Rico, the Department of Health was completely unprepared to implement a plan for testing, isolating and treating positive cases, executing contact tracing, and quarantining those who have been exposed. That is why the government had to implement a strict lockdown policy, because it did not have any other options. Presumably, there was some method to the madness and the idea was to increase the state’s capacity to respond to the pandemic during the lockdown. Yet after nine weeks of shelter at home policies, the Department is still unable to reliably produce even the most basic data about COVID-19 in Puerto Rico, much less to implement a 21st-century response to the pandemic. It has wasted nine weeks at an enormous economic cost.

This leads us to the Department of Labor, which has been unable to process 80,000 applications for special unemployment benefits or to implement other assistance programs paid for by the federal government. The Department of Labor is the poster child of state failure in Puerto Rico. People are suffering unnecessarily because of the inability of the government to provide assistance to the ill, the weak, the poor, and the unemployed at a time when they need it the most.

In sum, decades of mismanagement and the concurrent erosion of state capacity cannot simply be overcome in months. Investing in and rebuilding state capacity should be the primary strategic objective of any new administration in Puerto Rico. That is, if we still have any government left after the next elections in November.

This is the end of today’s briefing.
Stay safe and well informed!