We’re told that Puerto Rico is our Greece, and sometimes it seems so. The U.S. territory (its residents have been American citizens since 1917) has a heap of economic problems. Gov. Alejandro Garcia Padilla recently told the New York Times that its $72 billion debt is “not payable.” To buttress the point, he commissioned a study of the island’s economy by Anne Krueger, a highly respected economist who was a top official of the International Monetary Fund. Her report makes for grim reading.
Since 2005, Puerto Rico’s economy has shrunk by about 10 percent. Its population is also declining, from 3.8 million in 2005 to 3.5 million now. People move to the mainland where prospects are better. The poorest U.S. state (Mississippi) has a per capita income 50 percent higher than Puerto Rico’s. The economy is fundamentally uncompetitive because labor is overpriced (a point also made recently by my Washington Post colleague Charles Lane).
Here’s Krueger’s acid appraisal:
“The single most telling statistic in Puerto Rico is that only 40 percent of the adult population — versus 63 percent on the U.S. mainland — is employed or looking for work; the rest are economically idle or working in the gray economy. ... The result [is] massive underutilization of labor, foregone output, and waning competitiveness.”
Krueger cites two causes.
First, an unrealistically high minimum wage dampens hiring. In 1974, Congress decreed that Puerto Rico should adopt the U.S. minimum wage (now $7.25 an hour), despite much lower skill levels. Someone working full time at the minimum wage in Puerto Rico earns 77 percent of the island’s per capita income; in the United States, the comparable figure is 28 percent.
Second, generous safety-net benefits discourage working. Puerto Ricans qualify for welfare, food stamps, Medicaid (government health insurance for the poor) and some utility subsidies. Even with the high minimum wage, benefits can be more attractive. One estimate found that a three-person household can receive $1,743 in monthly benefits compared with $1,159 in take-home pay for a minimum-wage worker.
Of course, Puerto Rico’s distress also has other causes. The phasing out of a tax break (IRS section 936) in 2006 for drug companies and other manufacturers is often blamed. Jeffrey Farrow, who handled relations with Puerto Rico in the Clinton White House, thinks its role is exaggerated.
More important, he argues, was the rise of oil prices in the 1970s because oil was — and still is — the major fuel used in generating Puerto Rico’s electricity. High electricity rates resulted. (On the mainland, little oil is used to produce electricity). The Jones Act of 1920 compounds the disadvantage; it requires that cargo carried between Puerto Rico and U.S. ports go in American vessels — more costly than foreign ships. Finally, U.S. trade agreements have benefited foreign rivals. Puerto Rican exports enter the United States duty-free; now, so do many of its competitors’.
What Greece and Puerto Rico share is a desire for debt relief. But there are also big differences. For starters, Greece’s debt (as a share of its economy) is more than double Puerto Rico’s. As a matter of arithmetic, Puerto Rico’s case for relief is weaker. Puerto Rico’s challenge is to get economic growth up more than to get debt down. The current situation can’t last indefinitely; that is, its economy can’t continue shrinking while its debt continues expanding. Lenders won’t lend.
Puerto Rico’s debt differs from Greece’s in other ways, too. Most Greek bonds were general obligations of the government. By contrast, Puerto Rico’s bonds are a bewildering array of securities issued by different agencies with varying legal protections and funding sources. “There are 17 different bond issuers in Puerto Rico,” says Farrow. This complicates matters. It virtually eliminates the prospect of a general default — or the likelihood of across-the-board debt relief. Still, Congress should pass legislation (H.R. 870) permitting Puerto Rico to put some agencies into bankruptcy. This would give it more bargaining leverage with some creditors; creditors would still retain the protection of courts against debtors’ unjustified refusal to pay. But the legislation should also address the deeper causes of Puerto Rico’s problems: The minimum wage should be frozen; the Jones Act requirement should be repealed; some or all of the publicly owned corporations (for power, water and roads) should be privatized.
All this is contentious. It may not come to pass. Or it might trigger a debate over Puerto Rican statehood. If Puerto Rico doesn’t revitalize its economy, it risks running out of cash and flirting with chaos. But the impact will fall mainly on Puerto Rico. Greece’s fate was said to affect the future of the euro and even the European Union. There is no comparable spillover here. Puerto Rico is not our Greece.
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