Why Washington should intervene in Puerto Rico economic crisis

Every morning I open the papers hoping to read that the administration has decided to throw a lifeline to Puerto Rico’s sinking economy.  By the time I finish my cup of Yaucono coffee I am disappointed.  Puerto Rico has reached a breaking point and the federal government that took possession of the territory in 1898 has a moral and practical obligation to intervene.

Puerto Rico’s economic troubles have been well documented.  The economy has been in a recession since 2006 and unemployment stands at 15.4 percent.  The population is shrinking as more Puerto Ricans move to the mainland, mostly to Florida, in search of employment.   For Puerto Ricans who experienced the expansive optimism of the prosperous ‘60s and ‘70s, the economic outlook is heartbreaking. 

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For decades the Puerto Rican government has been spending beyond its means and borrowing to make up the difference.  Puerto Rico is $70 billion in debt, much of which is held in U.S. municipal bond funds.  Wall Street has been speculating about a default for months.  

The Puerto Rican government has reduced the deficit by cutting spending, overhauling pensions plans and raising taxes but it is too little too late.   Moodys, Standard and Poor’s, and Fitch recently downgraded the Island’s debt to junk status. To refinance its debt the Puerto Rican government is planning to issue $2.9 billion in bonds rumored to have prohibitive, some would say predatory, rates.

Yet even if the best minds and intentions were brought to bear on these problems, the territory cannot implement a winning strategy without Washington’s involvement  because its economy is hamstrung by Federal laws.  For instance, Federal maritime law raises shipping costs disproportionately for Puerto Rican businesses.  Corporate incentives and taxes aimed at U.S. companies operating in Puerto Rico are vulnerable to Congressional whim.  Free trade agreements have eroded the competitive advantage of Puerto Rican businesses by opening up U.S. markets, and Puerto Rico itself, to foreign competitors.

The administration has been clear that there will be no bailout for Puerto Rico. The Puerto Rican government has not asked for one, at least publicly, which is understandable since it has to placate investors and  political opponents.  

Congress is hostile to spending initiatives which is why Detroit received such little assistance.  But unlike Detroit, Puerto Rico cannot file for Chapter 9 bankruptcy because it not a municipality. Its only option is default.

Given the legal and fiscal limitations that come with being a U.S. possession, it is unfair for the Federal government to expect Puerto Rico to stay the course on its own.   Puerto Rico cannot borrow its way to prosperity when its economy is being strangled by debt that can only be paid at increasingly high rates.

In the short term, the federal government can increase Puerto Rico’s liquidity by purchasing the government of Puerto Rico’s new debt or by issuing bond guarantees as it did for the Jordanian government last year.   This is critical because the recent downgrade is forcing Puerto Rico to borrow at unsustainably high rates which will delay its economic recovery.

Increased liquidity, however, would only offer temporary relief.  The spiral of debt cannot be undone without an economic turnaround.  In the long term, the Federal government should eliminate or modify federal laws and policies that hinder economic growth in Puerto Rico.   When Puerto Rico was first industrialized in the 1950’s, federal tax incentives were used to convince U.S. companies to relocate their operations.  Over the years, the strategy achieved massive economic and social growth but did not build sufficient productive capacity in Puerto Rico.   When the incentives were completely phased out in 2006 many U.S. companies left, taking their jobs with them.

Instead of self-reliant, Puerto Ricans became more dependent on federal assistance. Today federal transfer payments make up 40 percent of income in Puerto Rico. This is an untenable economic arrangement that must be changed.

The federal government cannot continue to ignore its Puerto Rican problem. When the United States seized Puerto Rico from Spain over 100 years ago, it forged a colonial relationship that conflicts with American values of equality and self-determination. This relationship cannot be righted unless Puerto Rico becomes a state or the United States severs ties.

Congress is unlikely to contemplate a status change without a supermajority of Puerto Rican voters or an economic turnaround.  Therefore, until a status change occurs, the United States, as holder of the territory, has a moral obligation to the people of Puerto Rico who have been American citizens since 1917 and who fight Americans wars for which they cannot vote. They must be empowered to reach their maximum economic potential within the constraints of the territory and consistent with American values.

Should the Puerto Rican economy implode the aftereffects will be felt on the mainland. Crime and narcotrafficking will increase and Puerto Rico could become a node of instability in the Caribbean.  In short, failing to take action will be expensive, politically dangerous, socially disruptive, and just plain un-American.

Sierra-Zorita is project director at the Media Diversity Initiatives/National Hispanic Foundation for the Arts.