The CNMI as an economic laboratory

In approximately one year, the citizens of the CNMI will see what a 10-percent wage cut on government employees will do to the economy. The CNMI will be an economic laboratory, and let’s pray the little experiment does not produce an economic Frankenstein. However, I will go on record and predict the car industry will be hit the hardest by the wage cut. I predict car sales will drop from 1,544 units for Microl, Triple J’s, Joeten Motors in 2005 to less than 600 units for the three dealers in 2006. This industry will be the hardest hit by the wage cut. These dealers will have to lay off some employees. This reduction in sales will result in 1,544 units – 600 units sold = 944 units lost sales x $17,500 per car = $16,520,000 total loss from the $1 billion economy of the CNMI. This will also result in 11 percent of this figure in reduction of tax revenues. This amount is $1.8 million. The high-end restaurants that cater to locals will also be hit hard. They will also lay off workers. The entire retail industry will lose sales as the government consumer switches his/her disposable income to low-end products. Consumption, which is personal spending, will drop, causing layoffs in the affected industries. I will make a prediction that total retail sales will drop by $20 million, caused by the consumer switch to low-end products. That will reduce government revenue by another $1 million.

Banks are already seeing a lower demand for loans by government workers. This drop in loan production will cause banks to decrease earnings. They will remit less taxes, and they will lay off employees as their revenue drops.

From the above example we can see that the wage cut for the CNMI employees will result in a negative multiplier effect. This negative multiplier will also result in fewer jobs for the private sector, and it will definitely destroy the new car industry.

Let’s looks at a scenario for the next year’s economy with this wage cut. Consumption, Investment, and Government = Gross Territorial Product. First, I must explain the table. Consumption is purchases of toys, food, cars by the general public. Business Investment is the new purchases of factories, buildings, and inventories by business. Government is the purchase of labor services and the purchase of equipment and supplies by the government. Government pays for workers. These workers then become consumers and spend 95 percent of their money on toys, food, cars, etc. The alien workers do not spend money on goods; they save and then send their money to their home country.

So, in my chart you see government spending $160 million on wages. You then see government workers spending 95 percent of their $160 million, which is $152 million. This $152 million is included in the $700 million consumption. So when you lower government wages you also lower consumption. Government workers are a primary consumer in the CNMI economy. Just look at Price Costco and restaurants on government payday; we spend money in the CNMI.

Consumption + Business Investment + Government = Gross Territorial Product
$700 million + $100 million + $200 million = $1 billion
$152 million govt employee purchases + $160 million wages + (20 percent average tax)

OK. Let’s see what happens with the 10 percent cut.

Consumption + Business Investment + Government = Gross Territorial Product
$677 million + $84 million + $195 million = $961 million
$129 million + car inventories reduced by $16 million + $144 million = Taxes reduced to $192 million

The government sector will be reduced to $192 million, lowering the savings of $16 million to $8 million. This is a very conservative estimate of the economic havoc that will be caused by the wage reduction.

I have not even factored in the lower consumption by the laidoff private sector employees of the endangered industries. I will again go out on a limb and predict that government revenues could drop to $185 million, with this tinkering with government wages.

Richard Waldo, CPA
Director of Finance
Public School System