Oversight for Puerto Rico’s Debt

Great rum and beaches aside, Puerto Rico faces a mountain of problems. It is $72 billion in debt and owes a $422 million payment due May 1, amidst a long deteriorating economy. The island has already defaulted on $2 billion in payments and is so strapped for cash that hospitals are rationing medicine.

Puerto Rico’s economy has limped along for decades. Economists Alida and Richard Freeman found that when Puerto Rico’s minimum wage was raised to U.S. levels in the 1970’s, employment on the island decreased by eight to ten percent.

About twenty years later, two economic crutches were removed. The U.S. shut down military bases on the island and revoked corporate tax exemptions. Over the past ten years, Puerto Rico’s population has declined by 273,000 and its labor force participation rate has shrunk to just over 40 percent. Since 2008, the economy has contracted every year except for one.

Puerto Rico’s economic woes have several sources. Its generous welfare benefits, which are adjusted for U.S. wages, discourage work. A report by economist Ann Krueger found that a household of three eligible for food stamps, Medicaid, and utilities subsidies could receive $1,743 a month. This compares favorably to the $1,159 earnings of a minimum wage earner. 

The disparity exists because welfare benefits are measured according to mainland wages, which are higher. Other laws, such as a mandatory 15 days of paid vacation, deter people from hiring.

Bad governance has added fuel to the fire. For example, Puerto Rico has 40 percent fewer students than a decade ago, yet a ten percent increase in teachers. A quarter of the workforce consists of government workers.

Federal laws such as the 1920 Jones Act, which requires that goods shipped from Puerto Rico to the U.S. be carried on U.S.-flagged ships, hamper opportunities for economic improvement. As of 2013, 17 ships belonging to four companies connected the island’s 3.5 million residents with the U.S. mainland. This increases the cost of living for residents while also limiting economic growth.

In an attempt to address some of these challenges, Congress has introduced the Puerto Rico Oversight, Management, and Economic Stability Act, which would create a presidentially appointed oversight board that could reject any budgets or regulations that would detract from Puerto Rico’s economic growth.

Five members on this board would be needed to approve a Chapter 11-style debt restructuring. This is similar to the control board that brought order to Washington D.C. finances in the 1990s. In addition to helping Puerto Rico fix its debt problems, the bill would reduce the minimum wage.

This is a good start, although it does not touch the Jones Act and does not go far enough in removing the barriers to economic growth. Aside from its flaws, it gets right that the U.S. should avoid any taxpayer bailouts, and should instead create some fiscal discipline through a review board. There is no replacement for real reform.