Puerto Rico’s financial well being has been in a downward spiral since about 2006. It is the forgotten land that the United States has ignored as its budget problems evolved to where it is now so indebted to the tune of over $70 billion. The government of Puerto Rico can no longer pay its bills. And most Americans are completely unaware of this situation.
The subject of Puerto Rico’s debt crisis has been rarely mentioned by any of the presidential candidates during the 2016 presidential election season nor has this tragedy been adequately covered by the media. But it is an important issue that needs to both, address improving the daily lives of Puerto Ricans who are American citizens, as well as restructuring their debts to satisfy creditors.
Cliff Notes on Puerto Rico’s Financial Crisis
In the 4/17/16 Harvard Economics Review report, the author Justin Lee details Puerto Rico’s financial perils with the following description:
“To put that into perspective, their debt to GDP ratio is nearly 100% and the state pension fund is $30 billion in the red. The poverty rate is 45%, more than three times the average in the fifty states. While many Americans may not see Puerto Rico as a part of the union, its 3.5 million residents are United States citizens and are free to migrate to any state. Two-thirds of United States pension and retirement funds also hold Puerto Rican municipal bonds and a default could cause billions of dollars to vanish.”
(Since 2012, an additional 100,000 Puerto Ricans have moved to Florida, mostly in the Orlando area. Over the past decade 440,000 have relocated to the U.S mainland.)
As a U.S. territory, it does not have the benefit of accessing the bankruptcy courts to restructure their municipal debt as Detroit did. There was a local law that could have provided similar relief but it was struck down by the courts in 2015. Currently, the U.S. Supreme Court has reviewed an appeal on this case, but it ruled against Puerto Rico. Because Puerto Rico is not a sovereign country like Greece, it cannot apply for assistance via the International Monetary Fund.
Yes, the U.S congress could have created legislation to allow for this bankruptcy restructuring option but Wall Street special interest groups stepped in to block this possibility. It seems that they have been selling Puerto Rico municipal government bonds to their investors, a lucrative business because this U.S. territory was barred from defaulting on this obligation due to no access to U.S. bankruptcy laws. The financiers kept selling the municipal bonds even though many were aware that with Puerto Rico’s increasing debt load, the officials would find themselves not being able to pay back the investors while also maintaining a reasonable level of essential services like health care services and schools.
Beyond Wall Street’s greed in overselling bonds, the following information from the book, “War Against All Puerto Ricans,” authored by Nelson Antonio Denis, explains how over many years, the U.S. government has contributed to the island’s financial hard times:
“The island is a captive market of the US: the fourth largest market in the world for US products. 85 percent of everything purchased and consumed in Puerto Rico, comes from the US. ”
“All of these products are wildly overpriced, thanks to the “price protection” of the 1917 Jones Act, aka the Law of Cabotage. The author has commented the following on his blog: “Lawmakers should allow non-American ships to carry goods between the island and the mainland, which is prohibited by the Jones Act to protect the domestic shipping industry. That will lower shipping costs to Puerto Rico, including those for oil and natural gas, an important consideration for an island economy.”
“For the past few years, consumer spending on the island has hovered at $35 billion per year.”
“Thanks to the Jones Act, the prices paid by Puerto Rican consumers are roughly 20% higher than on the mainland. ”
“20% of $35 billion (the annual consumer spending) is $7 billion. This is the amount of excess prices on goods paid every year, by Puerto Rican consumers.
“85% (the percentage of goods that come from the US) of $7 billion is $5.95 billion. ”
“So Puerto Ricans pay roughly $5.95 billion in annual excess profits to US corporations, thanks to the Jones Act. That amount exceeds the $4.6 billion in federal benefits that the US “gives” to Puerto Rico.”
“There’s more…due to the reduction in Medicare Advantage funds as of 2016, the US will reduce its “giving” to Puerto Rico by $500 million. So as of 2016, Puerto Ricans will receive only $4.1 billion back from the US government, but pay $5.95 billion in excess profits to US corporations. ”
The debt crisis has caused Puerto Rico’s economy to contract over several years which has resulted in unemployment skyrocketing to double digits; businesses closing and home prices plummeting. There are regular power outages because of lack of maintenance; and there has been a tax increase of 11.5%.
There are realistic, doable steps that can be taken to lighten the burdensome weight of this debt on the peoples of Puerto Rico beyond the 2016 PROMESA Bill passed by the U.S. congress which created a Financial Control Board. This bill, spearheaded by Paul Ryan has come a little too late. Its austerity measures designed to better restructure and manage Puerto Rico’s huge debt is being imposed when the island is experiencing a recession.
Almost half of the island’s population is living in poverty. Puerto Rico is now poorer than any U.S. state. The population segment that is of working age is in the minority.
Most Puerto Ricans view the PROMESA Bill with skepticism and are convinced that it was formed to extract every ounce of profit, and deliver it to US hedge funds and bondholders. Sen. Robert Menéndez, D-N.J., the only Latino senator to vote against the Senate bill, condemned the bill during a four-hour filibuster, saying “PROMESA demands a price far too high for relief that is far too unrealistic.
One U.S. congressman insisted on a key amendment to the PROMESA bill. He demanded that Puerto Rico should be exempted from the Jones Act, in order to create true economic progress on the island.
On 9/29/16 Nelson Denis posted this story on his WAR ON PUERTO RICO blog , “U.S. Congressman wants to repeal the Jones Act in Puerto Rico:”
“On June 7, 2016, Gary Palmer (a republican congressman from Alabama) issued a press release. He insisted on a key amendment to the PROMESA bill. He demanded that Puerto Rico should be exempted from the Jones Act, in order to create true economic progress on the island.”
“The Jones Act exemption helps Puerto Rico, a U.S. territory, by reducing prices for goods transported by water. Two Puerto Rican economists found that from 1991-2010, the Jones Act cost Puerto Rican residents $16.4 billion.”
“Exempting territories from the Jones Act has been proven as a stable, successful way to improve a territory’s economic environment. Three U.S. territories have currently been exempted from the Jones Act strengthening their economies and encouraging business development. The U.S. Virgin Islands were exempted in 1992 and today shipping costs from the mainland are nearly half that of Puerto Rico.”
“If exempted, Puerto Rico’s power companies would be able to replace foreign-sourced oil with cheaper, cleaner, U.S.-sourced natural gas. Manufacturers in Puerto Rico would also no longer be at a cost disadvantage relative to Asia and other Latin American countries when shipping goods to the U.S.”
“Relief from the Jones Act would allow the cost of living in Puerto Rico to decline, allowing residents to stretch their wages further than before.”
“Palmer offered his amendment to H.R. 5278: the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), to exempt Puerto Rico from the Jones Act. But it was never even considered.”
There are other supporters of repealing the 1917 Jones Act. For example, Senator John McCain has repeatedly attempted to repeal the Jones Act. A broad ideological spectrum – including the Heritage Foundation, the Cato Institute, the New York Times and Washington Post editorial boards – also support this repeal.
The Second Solution (4/17/16 Harvard Economics Review report, by Justin Lee)
Are these fiscal austerity practices (PROMESA BILL) enough though? Keeping in mind the spectacular failure of European austerity measures, the answer seems to be no. While the current Congressional proposal at best fixes the debt issues in the short term, it has no plan to increase the amounts of capital inflow into the island. Simply cutting spending and increasing taxes does not ensure long-term stability or prevent future debt crises from taking place.
“Instead, a more sustainable solution may be the conversion of Puerto Rico into an enterprise zone. First proposed by Jack Kemp, the former U.S. Secretary for Housing and Urban Development under George H.W. Bush, the idea of an enterprise zone roughly translates to lower corporate tax rates, lower personal tax rates, and zero capital gains taxes in specific, delineated regions. The idea has been dismissed as a duplicitous conservative tactic meant to create urban tax havens, but it may be a simple solution to the island’s struggles.”
“For one, the United States has the highest business tax rates in the developed world and keeping these rates at 15% instead of 35% would encourage both capital flow and entrepreneurship. Secondly, over 440,000 Puerto Ricans have left for the mainland in the past decade, and lowering personal income tax rates would attract workers and keep families looking to maintain higher wages. Lastly, by not having any capital gains taxes, investments in Puerto Rican start ups and ventures will rise, thereby increasing GDP and overall tax.”
“The idea of an enterprise zone is also not too radical if one looks at countries like China and its relationship with Hong Kong. As a low tax, low regulation locale, Hong Kong has flourished as a business hub for decades.”
“Now, these two policies of fiscal austerity and an enterprise zone are not mutually exclusive and more likely than not government spending should be curbed. However, we should keep in mind the historical examples of Greece and Hong Kong when we consider the concept of an enterprise zone, rather than focusing on ideological divides and seeking out sinister motives. We often overlook Puerto Rico when considering domestic policy, but with the impending financial danger it poses, perhaps a radical solution is the solution we need.”