Puerto Rico needs some help and the US is obligated to provide it
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There are several conjectures over the causation of Puerto Rico’s unsustainable indebtedness. One hypothesis is that a “bloating” government inflated the government payroll, increasing the need to borrow.

Even when there is no academic study showing that the payroll is payable or not, the proportion of government employees to the overall population aged 16 and older was lower in 2001 than in 1988, when there were no debt problems. In fact, the ratio of government workers to the population, ages 16-64, in 2013 was 10.3 percent in the U.S. and 11.2 percent in Puerto Rico, reducing the validity of this claim.

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Another hypothesis is that reckless and corrupt administrations caused this debt crisis. I acknowledge that fiscal mismanagement has exacerbated this crisis, but there are studies showing that the (low) quality of administrators was similar from 1975-2000, and there is no evidence that the corruption of the 2000s was worse than the corruption in the 1970s or 1980s, when there was no debt crisis.

 

Someone can argue about a cumulative effect of the fiscal mismanagement, but debt (measured in the correct way, either adjusted for inflation or as a share of gross domestic product) actually decreased from 1977 to 1987.

Another thesis is that, in the long term, this debt crisis was caused when the Puerto Rican economy clashed after U.S. authorities removed the industrial incentives provided to Puerto Rico under section 936 of the federal tax code without any substitutable economic strategy. This deindustrialization reduced government revenues, increasing Puerto Rico's dependency on external funding.

The proportion of manufacturing employment decreased during the 1990s. In 1995, manufacturing represented 42 percent of the island's GDP, creating more than 30 percent of the local bank deposits and generating 17 percent of the total direct employment (that is, without accounting for the large indirect employment resulting from local firms providing services to these factories and from consumption of these high-wage workers).

It is far from a coincidence that when the transition period of the section 936 ended in 2006, Puerto Rico entered the largest economic depression in more than 100 years. I verified the relationship between this deindustrialization and indebtedness with advanced statistical methods in a recent paper.

Thus, the U.S. has a large responsibility regarding Puerto Rico’s crisis, and each branch of the U.S. government could help, but they prefer to remain indifferent. On the one hand, the Treasury could endorse new Puerto Rican bonds in order to refinance its debt with lower a interest rate (commonly known as the “Brady Plan”). It could also enhance tax credits for the U.S. companies paying taxes in Puerto Rico.

On the other hand, Congress could include Puerto Rico in the Guam-Northern Mariana Islands Visa Waiver Program to bring more tourists from Asia (20 percent of world tourists will be Chinese by 2023); remove the navigation acts that force Puerto Ricans to exclusively contract expensive U.S. vessels; implement new industrial policies; or provide parity in the distribution of Medicare and Medicaid funds.

The Federal Reserve could implement many programs described by Professor Arturo Estrella in a recent study, but it would appear that the interests of the few (bondholders and transportation companies, among others) are more important than the well-being of 3.5 million U.S. citizens in a forgotten colony.

The bad news for U.S. policymakers is that if the economy of Puerto Rico does not recover from its depression — one that will be exacerbated with the austerity measures implemented by the Financial Oversight and Management Board — American investments in Puerto Rican bonds will not be safe: Bonds are paid with tax revenues and tax revenues increase with economic growth.

Thus, a fixed government budget is perfectly compatible with a destroyed economy. Another bit of bad news is that more people will migrate from Puerto Rico to the U.S., reducing Puerto Rican tax revenues even further while increasing uncertainty for U.S. bondholders.

In addition, more people will migrate, searching for medical services in the U.S., which would increase federal expenditures in the mainland; expenditures that could be lower for the federal government if they provide parity in Medicaid and Medicare to the island.

Now that a humanitarian crisis is really landing in Puerto Rico, let's assign responsibilities and demand reparations.

 

José G. Caraballo, Ph.D., is a professor in the Department of Business Administration at the University of Puerto Rico at Cayey. He is also the director of the Census Information Center at UPR. 


 

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