Energy, health care, education

President Obama couldn’t have been clearer about his budget priorities than that. Energy. Health care. Education. Americans had been held hostage to the politics of oil, be it at the hands of Middle East sheiks or from Venezuela’s Hugo Chavez or even from homegrown oil moguls in Texas and in swanky corporate headquarters in New York. The negative impact of hydrocarbon-based energy on global warming is one more reason for change.

The other big worry for most Americans is the cost of health care. It is ironic that America is known for cutting edge medical technology but ordinary people cannot afford to access it. Expensive health care is also one of the reasons American industry has become uncompetitive. The ailing American car industry, for example, is hobbled by the escalating health care costs not only of their current employees but of retired employees as well. And according to President Obama, “let there be no doubt: Health care reform cannot wait, it must not wait, and it will not wait another year.”

Then there is education. Right now, the President lamented, America has one of the highest high school dropout rates of any industrialized nation, and half of the students who begin college never finish. “This is a prescription for economic decline,” the President warned, “because we know the countries that out-teach us today will out-compete us tomorrow.”

I can see that problem first hand. One of my daughters is a grade six teacher in a newly established Charter school in Long Beach, California. The work of educating pre-teenagers from dysfunctional families is tough and emotionally draining and I can see the toll on my daughter. Sheer commitment is keeping her on. She has been paid less than a third of her salary the past two months because California has a rather severe budget problem. And despite her possession of California teaching credentials, among the toughest to earn in the US, there is no guarantee she has a job next year… or if the Charter school will still be there.

In Los Angeles Unified, the state’s largest school district, the Los Angeles Times reports officials expect to slash about $800 million in spending for the next 18 months. Layoffs are likely.

If there is one state that will test Obama’s determination to invest in education as part of his economic stimulus plan, it is California. Money for education cannot come too soon to this state. Teachers must be warned by March 15 if they will face layoffs, but already districts have decided to send more than 12,000 pink slips to tenured and probationary teachers across the state, the most ever seen this soon before the deadline, David Sanchez, president of the California Teachers Association told the Los Angeles Times.

And of course, there is this thing about America’s banking system. President Obama explained that the effort is not about helping banks; it’s about helping people. And the objective is to get credit flowing again. Here’s how it works as the President clearly explained:

“Because when credit is available again, that young family can finally buy a new home. And then some company will hire workers to build it. And then those workers will have money to spend. And if they can get a loan, too, maybe they’ll finally buy that car or open their own business. Investors will return to the market, and American families will see their retirement secured once more. Slowly, but surely, confidence will return, and our economy will recover.”

Indeed, America’s success or failure in dealing with the recession and the problem in their financial system affects not just Americans but the rest of the world. And yes, it affects us too in our seven thousand islands of calm. Then again, I seem to be getting hints in her recent pronouncements that even Ate Glue is starting to recognize the calm is about to evaporate.

I teased Albay Governor Joey Salceda two weeks ago about recent statements of his beloved “lola”, Joey’s term of endearment for Ate Glue, on how we are escaping recession’s reach. As her economic adviser, Joey assured me, “pinagalitan ko na ang lola ko.” And according to Joey, Ate Glue denied making blue skies pronouncements on the economy. The Palace press office must be manufacturing stories they don’t understand.

Anyway, Joey said he made another extensive power point presentation to his “lola” on the state of the economy just to make sure she knows the real score even if she sometimes spins for public consumption. He said he warned her that the current world recession is likely to be broader, deeper and longer. Joey shares the view of many economists that this global recession will probably be around at least three years before a recovery can be expected.

What lies ahead? L-shaped recovery more like what Japan experienced during its lost decade of the 90s. The financial meltdown is coinciding and commingling with the cyclical recession. It is proving to be the worse since WWII. It is, Joey surmised, potentially, a depression.

Joey cited a report on a recent meeting of the Federal Open Market Committee whose minutes noted: “All participants anticipated that unemployment would remain substantially above its longer-run sustainable rate at the end of 2011, even absent further economic shocks; a few indicated that more than five to six years would be needed for the economy to converge to a longer-run path characterized by sustainable rates of output growth and unemployment and by an appropriate rate of inflation.”   

One other problem Joey pointed out in the global scene is how the markets are frustrating state policy actions. The TARP and Fed bailouts are apparently being recycled into US Treasuries or safe havens like gold (now at US$1,000/oz) leaving credit frozen. Tax rebates were saved or paid down debt, not spent. Savings rates are up, which should normally be a good thing but not during these times.

Thus, lower Fed rates and monetary injections were offset by lower velocity. Conversely, state actions (Keynesian destructive creations) are postponing, diluting or even contradicting much-needed market adjustments (Schumpeterian creative destruction). The way Joey sees it, prices must fall, capacities curtailed. Only then can a base form and a recovery commence.

Protectionism will rise as solutions hinge largely on governments, whose political survival demand accommodating parochial interests. Given the magnitude of excess and its persistence, any fiscal and monetary stimulus can only postpone or mitigate, or could even aggravate but not prevent the pain, Joey warns. 

The key vulnerability of the Philippines to a broader, deeper and longer global recession, according to Joey, is a 54-percent exposure to the global economy, possibly the most exposed on a net basis among Asean 4 (Malaysia, Thailand and Indonesia + RP). We are 17 percent directly exposed to the US but indirect adds 18 percent for 35 percent. An important vulnerability is our export sector’s 65 percent concentration to electronics.

Another worry, Joey points out, is our high dependence on sovereign credit markets accounting for 74 percent of incremental public foreign borrowing. Credit spreads on emerging sovereign bonds have widened to 630 bps partly due to lower US T-note.

Joey’s presentation contains a lot more details. For now, suffice it to say that for GDP, he sees a possible sub-two percent scenario in 2H as 2008 stimulus spillover used up in 1H; OFW remittances will decline, BPO and tourism will weaken starting 2Q. But he thinks agriculture will outperform due to sustained public investments and farm subsidies. He also thinks there will be a presidential election and he is banking on what may become a most expensive election by well-funded candidates (Roxas, Villar, Escudero, admin) to provide much needed economic stimulus by boosting demand in 1H10.

And yes, Joey expects the peso will more likely be weaker.

Now we know Ate Glue knows the real story. If only Press Secretary Cerge Remonde can be given a quick course in economics… He must be made to understand the nuances of Joey’s presentation. Otherwise, he will again embarrass himself and Ate Glue with his economic illiteracy. He glowingly exhibited that when he suggested the possibility of government abandoning oil deregulation which raises the need for government to subsidize fuel prices again… as if it is capable.

High school reunion

My wife is excited to attend the 40th reunion of her St. Theresa’s high school class of ‘69 tomorrow at Wack Wack. The thought of a high school reunion brings to mind something I picked up in the net some months ago.

Overheard at a high school reunion-

She: I have good news and bad news.

He: Give me the bad news first.

She: I’ve had a hysterecomy.

He: Oh my, sorry to hear that, and the good news?

She: The doctor found your grad ring.

Boo Chanco’s e-mail address is [email protected]