The governor of Puerto Rico, Ricardo Rosselló, is set to keynote an address at The Heritage Foundation on Wednesday. In the past, policy analysts and fellows at Heritage were rather reluctant about Puerto Rico becoming a state. It seemed as though statehood were contrary to conservative policies and principles, while keeping the island as an unincorporated territory furthered what Heritage stood for.

However, the truth is just the opposite. There is nothing conservative about Puerto Rico’s political status —beginning with its legal origins. Conservatives believe that judges overstep their constitutional powers when they make laws rather than interpret them. In contrast, Puerto Rico’s territorial unincorporation is the product of judicial legislation. The distinction between incorporated and unincorporated territories is not in the Constitution. It was created out of whole cloth by the U.S. Supreme Court in 1901.

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The founders believed that economic freedom is essential to America’s growth and prosperity. That is why conservatives reject the government’s intervention in the economy. And yet, territorial unincorporation has made possible the most perverse interventions by Washington in the economy of Puerto Rico.

 

By granting "triple tax-exempt" status to bonds that Puerto Rico issues  meaning they cannot be taxed by federal, state or local government —  Congress fueled high demand for the bonds regardless of fiscal policies. This encouraged many of the Puerto Rican government's administrations to engage in aggressive deficit spending. 

Until Barron’s published a front page story in 2013, it seemed as if nothing could discourage investors from passing on the tempting yields of Puerto Rico debt. Without the distortion introduced by triple-tax exemption, the muni market would have reacted to irresponsible fiscal policies by staying away from Puerto Rican bonds, thereby encouraging the government of Puerto Rico to make the necessary policy changes.

Salim Furth, a research fellow at Heritage, once referred to Puerto Rico as “the left’s sandbox” and “the failed progressive paradise.” Harsh, but not without justification. The big government, anti-free-market policies responsible for Puerto Rico’s persistently high unemployment and low income levels can be traced to the institutions that Washington pushed on Puerto Rico during the administration of Franklin D. Roosevelt. 

In 1941, President Roosevelt appointed Rexford Guy Tugwell, a member of the New Deal’s “Brain Trust,” as Puerto Rico's governor. Tugwell put in place institutions more suited to centrally-planned economies than the U.S. free-market system. These included the Planning Board and government-owned corporations, such as the Government Development Bank, the Puerto Rico Electric Power Authority and the Puerto Rico Water Resources Authority, all of which exist today. Moreover, Tugwell implemented an economic development program that began with government-owned industries and continued with tax subsidies such as IRC Section 936.

The effects of Tugwell’s experiment have been so lasting and pervasive that former Puerto Rican Governor Luis Fortuño, a conservative Republican that reduced the government payroll and promoted growth by cutting taxes, once told The Economist that “he often felt he was ‘fighting Tugwell’s phantom.'"

Puerto Rico’s territorial unincorporation allows Washington to deprive Puerto Rico of economic freedom in other ways. Congress subjects Puerto Rico to a patchwork legal framework in which the island is treated as a State in some aspects and as a separate entity in others. Consider, for instance, the absurdity of having to file Electronic Export Information (EEI) when Puerto Rico is the only insular possession within the U.S. customs territory.

The confusion and uncertainty resulting from this and other instances of disparate treatment place barriers to commerce; dissuade investment; and further crony capitalism —all of which severely limit Puerto Rico’s growth potential.

It should surprise no one that territorial unincorporation has provided fertile ground for big government, which, in an attempt to make-up for an underperforming economy, has furthered a strong dependence on federal assistance and suffocated local entrepreneurs under a heavy tax burden.

Puerto Rico does not need more special treatment. Exempting Puerto Rico from the Merchant Marine Act of 1920, or the minimum wage provisions of the Fair Labor Standards Act, would only add to the incoherent legal framework that has hindered growth by separating Puerto Rico from the U.S. economy.

In the national common market, economic freedom requires that the same rules apply to all participants, without the government picking winners and losers through legislation and regulations. The effectiveness of the free-market solutions that Puerto Rico needs to break out of its chronic economic stagnation depends on Puerto Rico being fully integrated into the federal framework that regulates and affects commerce, industry and private investment —the same framework within which the fifty States have prospered. Only then will the island’s economy converge into the U.S. national economy. Incorporation may arguably take Puerto Rico there, but its residents would continue to be politically disenfranchised.

Evidently, Heritage has provided Governor Rosselló with a valuable opportunity to not only showcase what he has done to put Puerto Rico’s fiscal house in order, but to also initiate a conversation that may result in more conservatives understanding why statehood is the only means by which Puerto Rico can both achieve economic freedom under the American flag, as well as resolve its centenary political status problem.

José Rodríguez-Suárez (@JRSwrites) is a former deputy secretary of state of Puerto Rico. He chairs the Federal Affairs Committee of the Puerto Rico Republican Party. The views expressed in this column are solely his own.


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