José B. Carrión is the chairman of the Financial Oversight and Management Board for Puerto Rico. Andrew G. Biggs is a member of that board and a resident scholar at the American Enterprise Institute.
The bipartisan 2016 legislation that created the federal Financial Oversight and Management Board for Puerto Rico, of which we are members, included an explicit sense from Congress that “any durable solution for Puerto Rico’s fiscal and economic crisis should include permanent, pro-growth fiscal reforms.”
And yet the board today projects that Puerto Rico’s economy four decades from now will be no larger than it is today. What went wrong?
For most Americans, Puerto Rico recalls only two words: bankruptcy and hurricane. Ironically, the island’s 2016 debt default and 2017’s devastating Category 4 Hurricane Maria will boost short-term economic growth in Puerto Rico. The bankruptcy legislation passed by Congress allows Puerto Rico to shed some of its overwhelming debt, while $82 billion in federal aid and private insurance payouts will produce a burst of economic activity. But after that fiscal stimulus fades, growth slows. Outmigration continues, budget deficits reappear, and future fiscal distress can’t be ruled out.
Puerto Rico is beset by many problems. By far the most important is that too few residents have jobs. Puerto Rico’s 40 percent labor force participation rate falls short not only of every mainland state and every other Caribbean island, which average in the low 60 percent range, but also of 97 percent of the more than 200 countries and territories surveyed by the World Bank. If Puerto Rico boosted labor force participation even to West Virginia’s mainland-low 54 percent, the economy would increase by nearly 11 percent, tax revenue would rise, and the 44 percent poverty rate would plummet. But if labor force participation remains low, Puerto Rico will be forever poor.
A labor force participation rate in the bottom 3 percent globally doesn’t happen by accident. It’s the result of well-intentioned but misguided public policies. And not enough is being done to change them.
Puerto Rico’s poor business environment, ranked 64th in the World Bank’s Ease of Doing Business index vs. the mainland’s sixth, stunts the growth of jobs. Moreover, employers are discouraged from hiring by high mandated benefits — 12 days of paid sick leave, another 12 days paid vacation, up to a $600 Christmas bonus and eight weeks of paid maternity leave — along with employment protections making it costly to dismiss unsatisfactory employees. Finally, Puerto Rico lacked both an earned income tax credit and a work requirement for its food stamps program, in which nearly 40 percent of residents are enrolled. When welfare beneficiaries do work, withdrawal of their benefits means they’re often little better off.
As a result, Puerto Rico has no more employees in tourist-related industries than does Nebraska, despite Puerto Rico’s one-third greater population. If Puerto Rico’s labor polices didn’t harm employment and wages, all mainland states would have them. In fact, even the most progressive mainland states lack anything like these requirements.
The board pushed hard for reforms. The most important — reductions in mandatory benefits and shifting Puerto Rico to “at will” employment similar to mainland states — were rejected by Puerto Rico’s legislature. And, unlike the Washington, D.C., control board of the late 1990s or Detroit’s emergency manager, the Puerto Rico oversight board cannot mandate legislation. The administration of Gov. Ricardo Rosselló agreed to business environment reforms and to a food stamp work requirement, but the government is implementing both slowly. Only a local earned income tax credit proposal remains, and its effects will be muted if not complemented by other reforms. Thus, the board’s economist projects no long-term economic recovery.
Puerto Rico’s refusal to liberalize its labor market speaks to a broader economic model that has failed Puerto Ricans. Government hands out jobs, business contracts and reconstruction funds, even as Puerto Ricans speak openly of patronage, politicization and insider influence. Rosselló himself is a bright young politician with reformist tendencies. But he operates in a political environment where government’s role in citizens’ lives is pervasive, and often corrosive.
Puerto Rico hasn’t lacked warning of the need to loosen government’s grip. Nobel Prize-winning economist James Tobin warned in a 1975 report that “the only durable basis for prosperity is to develop and maintain economic activities on the island that are internationally competitive.” Yet today, too little is being done to achieve that goal.
Puerto Rico may shed some debt via bankruptcy and rebuild its infrastructure using federal aid, but without a robust commitment to economic reform, the underlying weaknesses that made Puerto Rico vulnerable to bankruptcy will remain. As American citizens, Puerto Rico residents may freely move to the mainland, as hundreds of thousands did even before Hurricane Maria. There they can enjoy an economy that offers fewer mandated benefits and looser job protections, but the opportunity to find a job and build a dream.
But Puerto Ricans who wish to remain on the island of their birth deserve better. And they should not be afraid to demand it.