Puerto Rico, Underwater in Debt, Is a Lesson for Us All
The territory of less than four million people racked up a debt of $72 billion.
Once upon a time, the commonwealth of Puerto Rico was a significant manufacturing hotbed and a place bondholders liked to invest because returns were tax-free. But the favorable tax laws companies took advantage of went away a decade ago, and the island has since lost both capital and population. Aside from a small decrease in West Virginia, Puerto Rico is the only U.S. territory to lose residents since 2010. Nearly 10% of its population has fled the island to seek better economic opportunity on the mainland.
The result has been this territory of less than four million people, just about the population of Connecticut, racked up a debt of $72 billion with little hope of ever repaying it. If Puerto Rico were a state, an idea that has bounced around from time to time, it would be by far America’s poorest — but it would also have the option of addressing its financial situation through Chapter 9 bankruptcy. One proposal to deal with this financial crisis would involve Congress changing the law to allow the island to pursue Chapter 9. Pursuing bankruptcy, though, would be to render the investments of thousands of bondholders nearly worthless.
House Republicans seem more set on providing for an oversight committee similar to one that guided Washington, D.C., through its financial crisis 20 years ago, an arrangement that would allow Puerto Rico to restructure its debt yet again and keep creditors at bay. It would also have the ability to approve the island’s budget, a technique often used by states when municipalities run into financial crises. Otherwise, creditors have little to do but take Puerto Rico to court when the territory misses required payments, as it will again in July.
The issue with the GOP approach, according to Salim Furth and Rachel Grezler of The Heritage Foundation, is the proposed stay on litigation from creditors. As they write, “The stay would set a dangerous precedent that future insolvent governments (say, Illinois or California) would find highly attractive. The last thing taxpayers need to give Puerto Rico — or any financially feckless government — is a get-out-of-jail-free card.”
Yet while the commonwealth’s debt is being addressed by Congress, some of the root causes of its financial crunch will remain untouched. For example, several other territories controlled by the United States, such as American Samoa, are exempt from minimum wage requirements because their local economies, employment markets, and employee skill levels are not sufficient to support such a wage — but the similar economy of Puerto Rico is not. There has also been an argument made for repealing the Jones Act, a near century-old restriction allowing only domestic-flagged ships to move goods between the mainland and the island, which drives up islanders' cost of living.
Grinding poverty is nothing new to the islands dotting the Caribbean, a sad irony given that investors have made handsome rewards by opening tropical paradises catering to the well-to-do of the industrialized world. Just a short distance from these playgrounds of the rich and famous are some of the world’s most notorious slums.
Short of staging a series of military takeovers, there’s nothing we can do about how those island nations conduct their affairs. But we can assist Puerto Rico, perhaps through the tough love of letting it learn a financial lesson. Bailing the island out without addressing the underlying problems would not only bring us back full circle in just a few decades. It would also embolden spendthrift state governments to open spending spigots knowing Uncle Sam will be their backstop.
Lesson number one: Don’t make financial promises you can’t keep. As Puerto Rico goes, so shall we follow at some future date without reforms of our own.