Puerto Rico’s Failures Belong To All

Let’s get this out out of the way: Everyone deserves a share of responsibility. No single entity can be solely responsible for amassing $72+ billion in public debt for an island of less than 4 million people in a span of 40+ years. So the farcical claims that this is due to US policy, evil corporations, colonialism, vulture hedge funds, or socialism need to have several seats.

Notwithstanding the wasted breath in playing the blame game, explaining the various causes of Puerto Rico’s crisis is key to understanding some of the short term and long term solutions.

1) Status/US Economic policy: I won’t go into the nuances of Puerto Rico’s status with the United States here. It deserves its own discussion, and I’ve already written on it previously via Latino Rebels. Nevertheless, status played a significant role. Puerto Rico is, as the Courts have said, “in, but not of, the United States.” In economic parlance, this means that Puerto Rico is sometimes treated as State, and other times as a foreign nation. Usually at the arbitrary whims of Congress and the Administrative State. This hodgepodge and unstable way of classifying the island wrecks havoc on promoting investment and economic growth.

The other, more apparent, hinderance is the Jones Act. Scott Lincicome articulates this beautifully at The Federalist. In addition to Alaska and Hawaii, the Jones Act is a protectionist relic of a law that has artificially raised the cost of energy and basic goods for Puerto Ricans, contributing to the island’s economic stagnation.

2) Puerto Rican Leadership/Policy: Whereas some of the more hardcore leftist commentators would like to stop at point 1, they’re being woefully dishonest and blind to what amounts to decades of incompetence and mismanagement by Puerto Rican Governors and Legislatures. Puerto Rico has had an autonomous and democratically elected Executive  as well as autonomous budgetary authority since 1952. They weren’t just sitting around and implementing the dictates of Congress since then.

Some like to portray the debt offerings from hedge funds as vulture-like and exploitative, and although tempting to believe it, such portrayals should be rejected. Puerto Rico isn’t/wasn’t some 18 year old Freshman in college getting suckered into signing up for a credit card because he knew nothing of credit and financing. These were/are adults who knew or should have known what they were signing up for when issuing municipal debt year over year. To portray Puerto Ricans as poor, naive children is condescending and outright insulting. They didn’t have to take on this debt, and even if they did, they squandered it. Instead of using municipal bonds for infrastructure or at least SOMETHING that could affect economic growth, they chose to spend it on generous local entitlements, expanded the number of public workers, and plugged budget shortfalls.

Speaking of public workers, even after Governor Fortuño laid off 20,000 public workers as part of his reforms, there remain 230,000 public employees. That’s 20.3% of the total civilian labor force. For comparison, NJ’s is 13.6%. That is completely unsustainable for an island that has dealt with double-digit unemployment for decades.

Additionally, instead of addressing what they can in spite of US economy policy, Puerto Rican leaders relied heavily upon high local taxes, tax gimmicks to bring large corporations to the island (while ignoring the hurdles it takes for local residents to start their own businesses), and tourism. The results are as follows:

Well, the high taxes haven’t worked because tax cheats have run rampant. There’s a huge underground economy in the island because lax tax enforcement. And hilariously, the current Administration’s solution to this problem is to increase AND add new taxes (such as taxing parents of fat kids)! Brilliant.

Regarding the corporate tax gimmicks, they ran out in 2006 so naturally the large companies that came in have all left. But instead of addressing local taxation and regulatory hurdles for small businesses, the current (and former) administration introduced new tax gimmicks that have so far produced less than successful results.

Finally, since the Great Recession tourism has tanked, so the island has lost a significant portion of its revenue within the last decade. However, the drop in tourism is a less than persuasive cause of the debt crisis, considering Puerto Rico’s public debt was already massive and out of control well before 2007.

So what are the solutions out there? What can be done?

By now, many have heard mention of Chapter 9 bankruptcy options for Puerto Rico, but there’s lot of confusion on what is precisely being discussed.

Chapter 9 of the US Bankruptcy Code is exclusively used for local and county governments filing for bankruptcy (see, e.g., Detroit). States cannot, and I repeat, CANNOT file for bankruptcy under Chapter 9 or any other provision of the bankruptcy code. The city of Sacramento can file for Chapter 9, but not the State of California.

San Juan, Puerto Rico, however, cannot file for Chapter 9 because Puerto Rico is not a State. The bill currently proposed in the House of Representatives, HR870, amends this. It is a grand total of 2 pages long, and changes literally ONE line in the bankruptcy code, allowing Puerto Rico’s MUNICIPALITIES to file for Chapter 9. It does NOT allow the Commonwealth government to file for Chapter 9, although some Puerto Rican leaders want it to.

If HR870 granted such a privilege, it should be rejected outright. Puerto Rico should be become the 51st State, and its people be afforded the same rights as their fellow US Citizens on the mainland. However, allowing the Commonwealth government to file for bankruptcy would place Puerto Rico above the States by obtaining a privilege denied to them.

There are many conservatives calling HR870 a “bailout” for Puerto Rico. But on what grounds? Was Detroit’s Chapter 9 filing a bailout? If not, then why would it be for Puerto Rico’s municipalities? Conservatives cheered for Detroit’s bankruptcy because it allowed renegotiation of public employee contracts, and forced institutional reforms to address the city’s fiscal mismanagement. If granted the ability, Puerto Rico’s municipalities and indebted institutions would achieve the same result.

“But they wouldn’t have to pay their debts!” Yes, that’s what usually happens when an individual or entity files for bankruptcy. If commentators are now in blanket opposition to any reneging of debts, then why have a bankruptcy code in the first place? Moreover, just as Puerto Rico’s leadership should be treated as adults, so should the hedge funds who purchased the bonds in the first place. They knew the risks coming in (hence the high interest rates), and that risk included a risk of loss. Puerto Rico was stupid to sell the muni bonds, sure, but the hedge funds were stupid enough to buy them in the first place.

Beyond bankruptcy, Puerto Rico needs serious, structural reforms to become viable. Property regulation, taxation, tax enforcement, the public payroll, privatization; all must be addressed. In the long term, the issue of Puerto Rico’s status must once and for all be resolved. Whether Statehood or Independence, the US (and Puerto Rico) must choose. The current purgatory regime has been choking the island, and it can’t fully recover without change.

Lastly, kill the Jones Act. Kill it with fire.