It is hard to put much faith in Bermuda’s 2012 budget when it follows the same strategy as last year: maintain the status quo, increase debt and hope a US recovery leads to a Bermuda recovery.  The problem with this approach is that it shows that our government firmly believes that Bermuda’s recession was caused by the global downturn and is not related to our own policy decisions.  This is concerning as it stands in contrast to their original beliefs that Bermuda wouldn’t be impacted by the US recession.  Further, we’re ignoring the evidence that departing non-Bermudian workers have taken a great deal of spending out of the economy.  Bermuda won’t see any form of recovery until we attract back high disposable income non-Bermudians and make them once again feel welcome as we’ve left ourselves with no alternatives.

It is wholly concerning that our government is still trying to rely on their predictions related to the US economy as the foundation of our strategy for overcoming our recession.  Their predictions haven’t exactly panned out terribly well and it ignores the possibility that our recession isn’t simply caused by the global one.

Let’s look back to March 13th 2008 where then Attorney General Senator Kim Wilson stated:

“In the United States, the national economy is probably already in — or about to slide into — a recession. While opinions and expectations vary widely, a large majority of respected forecasters now expect at least two quarters of declining real GDP (gross domestic product).

“In Bermuda’s case, the outlook is cautiously optimistic. Given the prevailing uncertainty in the global outlook, the Ministry of Finance anticipates that Bermuda’s GDP will likely settle in the range of 2.5 percent to three precent. The effect of a short term US recession won’t be adverse to Bermuda.“

Later in the piece, Senator Walton Brown is attributed as pointing out that while the US had a small recession in the early 1990s Bermuda was not impacted because of international businesses and construction projects.

Our government missed recognizing the severity of the US and global recession.  Certainly there were many who did but it raises concerns when they continue to rely on forecasts of the US economy as the bellweather for Bermuda’s.  Further, it was originally assumed Bermuda wouldn’t be impacted. The thought was that due to international business and construction (driven by growth in international business) that we would be shielded from the effects of a small recession.  The recession was bigger than expected but why did this have an impact on Bermuda’s economy?  What changed?

While the global recession was much larger than expected, the evidence that should concern many is that despite the US showing signs of recovery, Bermuda is showing no signs.  Bermuda, due to it’s insurance focused international business industry should have been more shielded from the recession and yet it wasn’t.  Bermuda has suffered far worse than most originally assumed it would.  Why?

The problem we face is that people assume cause and effect.  There’s a global recession so that must mean a local one.  The key is understanding what the underlying drivers are of the local recession.  Why are we in a downturn.  It isn’t simply because the world is in one.  It’s because we were in a boom period that busted.  It’s because we created a wealth of policy to drive away guest workers.  As a result, our overall population has declined and with it has gone the ancillary spending.  This has caused a cascading decline where Bermudians lose their jobs and also spend less.  We need to reverse this trend.

There is clear evidence that the number of non-Bermudian workers has declined significantly since 2008.  With them has gone local spending and growth.  Regardless of the cause or catalyst, this is the foundation of our recession and it needs to be clearly understood.  This is why it is difficult to put much faith in Bermuda’s 2012 budget and why it’s so concerning.  If we follow the same strategies of maintaining the status quo, increasing debt and hoping a US recovery leads to a Bermuda recovery we won’t have addressed the root cause of our economic problems and we’ll be no closer to recovery.

With their support of the personal duty hike retailers are stubbornly creating the exact opposite environment they desire.  All they're doing is increasing the competitiveness of local import firms, not decreasing it.  Today, it's a huge hassle to buy online, a path only chosen by those dedicated to lower prices or greater selection.  Tomorrow, it could be so easy that the consumer may well be able to buy online without even knowing how, with all the hassle taken out of the equation.  The day that happens, retail as we know it will be near dead and all the duty hikes will have done is accellerate our pace towards achieving it.  

It's harrowing to watch as so few see the implications that the hike on personal imports likely will do more damage than good, much like the hike at the airport did.  The intent is well meaning, but the implications of the change may not be well understood.  It is suspected that we'll see a few things result from this action.  

• People will take to boycotting local retailers and buying online out of spite due to the Chamber of Commerce's support for the hike on personal imports.
• The duty hike will kill demand for some importers causing more job losses that will not be offset by hires by local retailers.
• The government will overestimate duty revenues
• The duty hike will encourage more entrepreneurs into the import business who will make it even easier to import items on demand.  

Before I plead my case I think it's important to recognize that I'm not against an across the board hike in duty rates.  I've long advocated on this blog a hike in duty rates across the board in order to discourage the rampant addition to consumption this island suffers from.  Even today, with our rapidly rising debts duty hikes could be a good thing to help combat the problem.  However, what I don't support are protectionist policies to keep local retail afloat, not because they aren't well intentioned but usually because when you mess with the market you create unexpected side effects that you didn't originally intend for.

Ms. Elaine Murray, director of the Irish Linen Shop recently penned a letter to the editor arguing in favor of the hike on personal import duties.  The gist of her arguement, if I can do it justice, is that online shopping and discretionary spending is killing local retail.

The truth is that our global and local recession necessitates the increase in this tax and frankly, it is time to protect the local bricks and mortar retailers from any more closures which will certainly translate to higher unemployment. This is not a mandatory tax. It is a tax on your discretionary spending overseas. It is fair and it’s your choice. Keeping Bermuda dollars in Bermuda will keep Bermudians working.

The problems that I find with Ms. Murrays arguements are that she depends on three assumptions, that our local recession is largely caused by the global one (a belief not shared by this blog), that online business is responsible for the decline in retail and that brick and mortar businesses should be given special concessions over other businesses.

The belief that the local recession was caused by the global one is one which has frequently rebuted by this blog.  At it's most basic, when you crunch the numbers on the declines in the population of non-Bermudian workers, they add up to significant declines in local spending and tax revenues.  As has been argued since before many people believed the island would even enter a recession, it is out local policy which has been the primary factor behind our recession and the decline in guest workers, not global elements.  This needs to be firmly understood and rectified before we have any chance at digging ourselves out of this recession.

Next we can move on to the the assumption that online business is killing retail.  The first problem with this assumption is that we simply don't have the numbers to support the arguement for online purchases killing local retail.  It's meerly a guess.  The statistics department produces no reports on online and mail order purchases, only resident purchases abroad brought in via the airport and resident imports overall.  This poses a considerable problem as it indicates we're choosing policies based upon assumptions and not facts.  Considering the recent focus on "reality" based decision making, this seems like a glaring flaw, regardless of the outcome.

As suggested above, the decline in non-Bermudian workers is the prime culprit for declines in retail sales and online purchases are simply a correlation to local retail declines, not a primary causation.  It is very important to understand the difference.  This blog made a pretty solid attempt to approximate the impact of the decline in non-Bermudian population on the local economy and it makes for a compelling arguement.  Again, if we can regrow our non-Bermudian population, we can increase local spending and in effect, save retail.  Attacking online shopping is likely to not have anywhere the impact that retailers or government are hoping for.

Finally, let's challenge the notion that we should be saving local retail and putting it ahead of other businesses.  This is another fundamentally flawed arguement, one where people believe it is better to use protectionist policies to prop up an industry rather than strive for efficiency.  This often leads to disaster.  

One of the big questions that arises is why are retail jobs more special than other industries?  In our history we built ships, grew onions, farmed our own food and farmed flowers among other things. These industries are all gone now.  Where would we be today had we imposed taxes to protect jobs for these industries in spite of progress?  Would we still likely to be prosperous building ships or growing onions?

If we're protecting jobs for retailers, why stop there?  Why aren't we taxing all imported food at 25% to protect local farmers and fishermen?  Why aren't we taxing the internet and cell phones because of the impact it has on local telephone companies and media companies? Indeed, jobs are being lost there too.  Why are we not looking at every industry losing jobs and coming up with means of taxation to save them?  Likely because it wouldn't make much sense to do so.  Landlines are as much a thing of the past as shipbuilding.  While it is wholly unfortunate to watch as jobs decline in servicing and maintaining them, it would be entirely self destructive to attempt to protect those jobs by taxing progress.

We're not taxing these things is because we'd damage progress to do so and eventually get left behind and thats the reason why we shouldn't bail out retailers today.  The challenges for brick and mortar businesses simply aren't limited to Bermuda.  Retailers the world over are having to rethink their models and adapt to provide better service.  This isn't the first time it's occured, with retailers having faced the onslaught of catalogues and tv shopping.  The successful ones survived and adapted, the unsuccessful, rightfully failed.

The greatest problem with the proposed duty hike is that it will likely lead to an even worse situation for retailers rather than a better one.  It is harrowing to watch and realise that they simply don't see it. Duty hikes will take make importing models even more competitive.  People who today suffer through the hassle of ordering something online, coordinating payment, shipping, forwarding, and duty by themselves do so only because it is easier to do all that than buy locally.  It is only the very committed who will trudge through this path to save a few dollars or attain that nearly unattainable item.  

Tomorrow will be very different.  The duty hike creates opportunity.  All those who buy online today won't be disinclined to do so, but they'll likely search for alternatives.  They'll turn to enterprising import firms who will import on their behalf to take advantage of cheaper duty rates.  Those firms are being positioned to take advantage of the duty hikes to make ordering online and importing not only possible, but far easier than it is today.  

Here's my impromtu budget wishlist to get our economy back on track.  

Reintroduce growth

• Eliminate term limits
• Relax work permit requirements for skilled jobs traditionally unfilled by Bermudians
• Eliminate red tape and delays in work permit approval process
• Cut payroll tax

Cut costs

• Introduce 12 or more unpaid holidays (one friday a month) for the civil service over the next year which would save nearly $15 million in labor costs but allow people to keep their jobs.
• Privatisation of some government services, eg public transport.  Increase support for mini buses to handle the kinds of routes regular buses cannot service.
• Eliminate GP cars and credit cards
• Eliminate non-essential spending, especially external spending and trips
• Reduce the size of cabinet
• Halt further development of low cost housing
• Change trash collection to a rotating 3 days every 2 weeks rather than 2 days every week.

Increase revenues

• Duty simplification/harmonization to a flat rate for everything but food for all types of imports, not just personal (ala the Fair Tax Cut proposal).  This would have the added benefit of reducing duty related accounting.  

“Home buyers saddled with debt as repossessions continue”.  Sigh… this was all sadly predictable years ago.

What happens if you combine a weakening global economy with off-shoring of local jobs and a rapidly softening local housing market?

A weakening global economy means global spending is getting tighter.  While Bermuda is typically quite shielded by such events is there a guarantee that Bermuda will feel no side effects?  Further, will the off-shoring of local jobs mean a decrease in overall employment levels, subsequently decreasing local spending?  Spending that keeps many supplementary industries afloat?  Finally, what happens if the housing market continues to soften and a large number of mortgage holders (especially those with interest only loans) wake up to realize that the value of their home has dropped and they now are in a state of negative equity if they try to sell?

It is very frustrating to watch as retailers come out blaming online purchases for the decline in retail sales when it is quite likely it could largely be attributed to the decline in the number of non-Bermudian workers.

Let’s follow up on a few charts we threw together back in September when the last employment brief was released.  At the time we used the 2000 census numbers as well as the annual employment briefs to approximate the impact of non-Bermudian job losses on housing demand and the impact of non-Bermudian expenditures on the local economy.

Let’s convert the approximate impact of non-Bermudian population growth on weekly expenditure chart to a bar chart (it was previously an area chart) to better appreciate the impact.

In in 2009, we saw more than $400,000 less spent than in 2010 and more than $800,000 less spent in the economy in 2010 than 2009 each week.  To put this in context, that means that each week we saw nearly $1.3 million less spent in the local economy each week in 2010 vs. 2008.  That’s nearly $68 million less spent in the economy in 2010 vs 2008, and $45 million less spent in 2010 than 2009.

Still not obvious?  let’s look at the year over year total approximation of non-Bermudian expenditure. 

Still not clear enough?  Ok, let’s break it down further, here’s the approximate impact of the year over year loss of non-Bermudian expenditure in 2009, 2010

$3 million less sent on food in 2009 over 2008, $6 million in 2010 over 2009.  The list goes on, clothing, housing, household goods, transportation, education.  This isn’t even 2011 numbers included.  Many millions less spent in the economy each year.

Still think online purchases are the biggest factor and that a duty increase on personal imports will make much of a difference?

Government claimed that the airport duty hike to 35% was to protect retailers.  The above chart pulled from the retail sales index reports demonstrates that this is an unfounded argument.  If overseas purchases were the cause for retail sales declines then why are they down year over year just like retail?

Frustratingly, we simply don’t make decisions based upon the statistics.  Retailers are busy trying to convince government to hike duty for personal imports to 35% as well, and yet where is the evidence to showcase that online purchases are indeed the problem?  Presently, we only collect statistics on overseas purchases at the airport and yet we should be collecting statistics on personal imports (by collating duty submissions made by the various importing firms) in order to make an informed conclusion.

If you ask me, the biggest problem facing local retail isn’t competition from purchases on the internet, it’s from the decline of people with high disposable incomes.  Retailers should be making that message well heard so more people understand the value our guest workers (aka. long term tourists) bring rather than expecting handouts.

It is with sadness and regret that I learned of the unfortunate passing of cousin Sean at such a young age.  It is never easy losing someone of strong character and is only made worse when they’re family and dedicated to doing what they can to make the island a better place for the rest of us.  Thank you cousin for your dedication to setting a great example, I’m sorry to see you leave us so early and hope that you’ve moved on to a better place.

For those wondering, typically I don’t post anything regarding the passing of family and friends though given cousin Sean’s interest in public service I thought a few words were warranted.

The Bermuda Chamber of Commerce’s Retail Division has come out suggesting a standardized 25% duty rate for personal imports.  This move won’t be well received by many and could spell a death knell for the buy Bermuda campaign.  Standardizing duty rates to a flat rate across the board is one thing, raising rates for everyone while giving special concessions to retailers is another.  The Chamber risks creating a grassroots Boycott Bermuda campaign to fight their failure to find more reasonable solutions.  They should be developing better service and working on alternatives rather than begging for concessions and penalizing all others.

There are a great many who find Bermuda retailers need to do more.  In many cases, service is poor, selection is poor and pricing is poor.  In many others, it’s the complete opposite.  Those with great service are often rewarded.  Those with horrible service, sadly still get business if it proves too much of a hassle to find alternatives.  This move by the Chamber will be seen by many as a reward for bad service and will instill resentment that leads to fewer on-island purchases out of spite.  This likely will prove to be a tremendous gaff on the part of retailers as they could well end up with the opposite results they anticipate.

In the case of this blogger, I buy Bermuda where able, but also buy online.  The things I buy online are predominantly not available on island.  As an example, I’ve got big feet, 12.5W.  I struggle to find any retailer on island who carries shoes even close to this size.  Further, I have a preference for minimalist/barefoot shoes.  I have little choice but to go online.  This duty increase if implemented will negatively penalize me for being a big guy.  I resent that and I will  blame retailers.

There have been far too many cases where ordering online becomes a necessity because because Bermuda simply doesn’t have the selection and retailers refuse to do custom orders.  Knowing that retailers are perfectly willing to shift the pain elsewhere makes it evidently clear that they’re out for themselves, not for offering better service. 

I’ll happily take my business where there’s good service and pay a premium.  I tip above and beyond the included tip the when I get good service at a restaurant.  I give a good tip to grocery baggers who happen to greet me appropriately (why do so few say a simple good afternoon anymore?).  I make certain to bring my business back to shops that go out of their way to make sure I find what I need.  If they don’t have it but tell me another shop that does or a place online that I can get it, I make sure to take my business back there again.

The problem is that some retailers are ruining it for the rest.  Rather than offering better service and finding ways to make things more manageable they simply want to punish those with big feet.  Retailers have gotten greedy and this move will likely backfire.  Buy Bermuda may be dead as retailers are making a good effort to kill it.

Bermuda reached it’s peak when insurance was still in it’s infancy.  A time when Bermuda was filled with startups flush with cash.  Today, the industry is saturated and many of the now dominant firms spend far more time worrying about cutting costs.   Bermuda needs to capitalize on it’s advantages close to home and realize that there’s a burgeoning new industry, flush with capital ready to return us to prosperity.  Bermuda can and should be taking a closer look at what’s happening in the investment industry and recognize how incredibly well placed we are to benefit.  We cut our teeth by embracing on the high risk high reward prospects of reinsuring the insurance industry and could do the same with finance.

The Volcker rule has created a new battlefield over Wall Street pay that banks fear will send their star traders and hedge fund advisers fleeing.

The roughly 300-page proposal that was released earlier this month is fuzzy at best, but it makes clear that banks cannot pay their in-house top talent any type of bonuses that could encourage proprietary trading.

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However, it is sending chills through banks who fear they may lose key talent.

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Wall Street has reason to worry. High-profile traders have already left firms like Goldman Sachs and Morgan Stanley to escape the ban on proprietary trading by banks which was mandated by the 2010 Dodd-Frank financial oversight law.

As an IB exec recently pointed out, Bermuda is tremendously well placed to capitalize on the coming flood of investment startups due to appear as a result of the Volcker Rule.  To those unfamiliar with the rule, it prohibits banks from substantially owning or investing in hedge and private equity funds.  This means many top stars of the investment world will have little choice to branch out and start up their own.   Bermuda is incredibly well placed to provide a better alternative for those funds and their associated businesses to be located.  Where else can you enjoy the freedom of relaxed yet strong regulatory framework?  Where else can you show up less than an hour for your flight and be in NY in a couple hours and London by morning?  Where else can you enjoy a near non-existent commute and actually have the freedom to actually do something with your evening? 

Embracing and supporting risk has been our core strength, one we could leverage again.  Bermuda could be an excellent place to house cash flush new startups, eager to bring in top talent, spend money locally and revive our economy back to what it once was.  We should be doing everything we can to convince star traders that Bermuda is the ideal home for their business… and their money.

Are there lessons to be learned in the Greek crisis for Bermuda, should we continue our trend towards financial insolvency?  Greek Prime Minister Papandreou’s call for a referendum on the country’s bailout package could be a brilliant political move, if he’s allowed to make it. 

The rest of the world may be appalled at the prospect of putting the decision to the people but let’s remember, the last bailout and debt forgiveness didn’t exactly work all that well, did it?  Why then is more of the same medicine likely to fair much better?  Will it ultimately be rejected by the Greek people and lead to even more rioting in the streets and mass unproductivity? 

Are there alternatives?  One potential solution then is to involve the people in the decision in order to quell discontent.  By letting the people own the decision, it becomes far harder for them to rally and protest against it for it wasn’t rammed down their throats but was made of their own accord.  The trick for Papandreou to achieve success is to carefully phrase the question for the people to answer.