Puerto Rico is an economic basket case. It’s been in a recession for nearly a decade, its skilled labor is leaving the island in droves, and the island’s government recently told its bondholders that it is unable to fully repay them. To emphasize that point, it recently failed to meet some bond payments, putting a portion of its debt technically in arrears.
Its plight has grown severe enough that Congress feels obligated to study the morass to consider whether it should act to alleviate this crisis.The Senate Finance Committee convenes this week to study the issue, and the House Judiciary Committee met earlier this year on the topic.
The island’s government should probably not hold its breath: the odds that Congress will extend Chapter 9 bankruptcy protection to the island - the government’s most fervent desire - are slim, although I’ve argued that it may very well make sense to do so. Also off the table are anything that could be remotely construed as a bailout, so there will be no federal loans, direct grants, or loan forgiveness from the feds. The Tea Party wing of the party may not be able to get who they want as the next speaker of the house, but they can put the kibosh on anything that they perceive to be government largesse.
That does not mean that the federal government is unable to help the island, however. The current crisis resulted from the combination of a profligate government abetted by the availability of low-cost capital from the mainland (thanks to beneficial tax breaks on Puerto Rico’s debt) and a dysfunctional economy with its ills exacerbated by ill-fitting regulations imposed upon it by the federal government.
While the island has undertaken some modest reform efforts - it’s privatized some government assets, trimmed the enormous public payroll a bit, and stepped up efforts to improve tax collection - giving the Puerto Ricans a regulatory exemption from some particularly ill-fitting regulations could give the island some breathing room, enough to start growing again.
In the collectivist fantasyland most liberals cling to there is no such thing as a minimum wage so high that it destroys jobs, but anyone not blinded to reality can see that the federal minimum wage of $7.25 an hour has wreaked havoc in the island. Wages and the cost of living in Puerto Rico are well below what they are on the mainland, and as a result the $7.25 wage floor cuts a wide swath of the populace out of the formal economy. While that wage represents slightly over ¼ of the median wage in the mainland United States, it represents fully 77% of Puerto Rico’s average per capita income. It is the equivalent of a $20 minimum wage in the mainland.
That’s not the only example of federal government munificence that’s damaging the island’s economy. Anne Krueger, former chief economist for the World Bank, wrote a report earlier this year noting that the combination of food stamp, Medicaid and other welfare benefits for which a family of three would qualify are even greater than what a minimum wage would pay.
As a result of these laws, scarcely 40 percent of Puerto Rico’s adult population is in the labor market, which is less than ⅔ of the proportion on the mainland. With so few people participating in the formal labor market it will be impossible for the island to achieve any sustainable economic growth. However, it also means that the island could grow smartly if these barriers could be lessened and this cohort started looking for jobs in the formal sector of the economy. Such reforms might also give skilled workers a reason to remain on the island and not flee to the mainland to start their careers.
One thing for certain is that the governor’s recovery plan - released earlier in September to great consternation in the bond market - was precisely the wrong way to begin this discussion. It’s an openly political document created to position the governor as a champion of the people ahead of next year’s election, and its strident demands for a substantial haircut for bondholders - even those who possess General Obligation Bonds, which are protected in the constitution - may make coming up with a politically viable path forward for the island even more difficult.