Puerto Rico’s Illness Is Threatening To Become A National Epidemic – Pacific Research Institute

Puerto Rico’s Illness Is Threatening To Become A National Epidemic

10-years of economic stagnation has taken its toll on Puerto Rico. Unemployment is skyrocketing, infrastructure is degrading, and the exodus away from the island is accelerating. Structural reforms that will stabilize the financial crisis in the short-term, and revitalize the economy in the long-term, are necessary. Such reforms will benefit the rest of the country as well.

Perhaps most obviously, these reforms will benefit the rest of the country because many Americans have directly invested in the bonds that Puerto Rico is currently unable to repay, or their pensions have invested in these bonds on their behalf. According to an analysis by USA Today based on Morningstar data, 40 percent of “municipal bond funds still have exposure to Puerto Rico debt”.

Therefore, any defaults or write downs on Puerto Rico’s $74 billion in outstanding debt will be a zero-sum game. Puerto Rico will gain debt relief, but savers and retirees in the rest of the country will be poorer.

It is imperative to keep this perspective during Puerto Rico’s debt renegotiations to ensure that Puerto Rico’s need for immediate debt relief is appropriately balanced with the need to minimize the losses on the territory’s current debt holders.

While debt renegotiations are necessary in the short-term, only economic growth can permanently fix Puerto Rico’s fiscal crisis. Economic growth does not simply occur because politicians wish it to be so. Instead, politicians must implement the right policies that empowers individuals, small businesses, and large companies (e.g. the private sector) to invest and grow the economy.

Puerto Rico’s economic malaise is attributable, in part, to poor economic policies implemented by both Puerto Rico and the federal government. These policies increase the costs of doing business, and create obstacles to working, saving, and investing in the territory.

There has also been, particularly in the past twelve months, a failure of leadership. In the PROMESA Act passed by Congress last year, an Oversight Board was charged with addressing the Puerto Rico’s fiscal crisis, along with a major role for the Governor of Puerto Rico. Both the Board and the Governor have failed to deliver a responsible fiscal plan, and the threat of a drawn-out bankruptcy court process and unequal treatment of creditors threatens to further undermine Puerto Rico’s long-term recovery.

Unsurprisingly, the private sector is unable to create strong and sustainable economic growth under these circumstances.

The upside is that changing these policies can empower the private sector to grow Puerto Rico’s economy once again. These changes must start with tax reforms that simplifies the tax structure and encourages businesses to locate in Puerto Rico.

Comprehensive regulatory reform is also necessary. Some of the regulatory reforms, such as reducing the burdensome regulations imposed on new small business, must come from San Juan. Other regulatory reforms, such as repealing the Jones Act, must come from Washington D.C. The Jones Act requires that all goods shipped to Puerto Rico must be on American ships with American crews. This requirement artificially inflates the costs of goods in Puerto Rico, makes it more difficult for businesses to produce, and increases the cost of living on residents.

Other reforms that can improve Puerto Rico’s infrastructure must also be considered. For example, while many obstacles must be addressed, privatizing the Puerto Rico power authority, can help address the chronic power outages that plague the economy.

Meeting the economic revitalization goal can have a less obvious, but perhaps even more important, impact on the rest of the U.S.

Puerto Rico is the figurative canary in the coal mine. And, while Puerto Rico may be in worse condition, many other U.S. states and localities are plagued by the same twin problems. First, burdensome regulations and anti-growth tax policies are sapping their economic mojo. Second, underfunded public pensions and a degrading infrastructure are imposing future fiscal costs that states and localities will soon be unable to meet.

While the public finances of most states and localities (except maybe Chicago) are not yet in Puerto Rico’s situation; if left unchecked, far too many will be soon. The required debt restructurings will dwarf the costs facing Puerto Rico. Therefore, the lessons gained from Puerto Rico can help many states avoid this unwanted fate.

Lesson number one is that fiscal discipline always returns. If that discipline is forced from a bankruptcy court, there will be significantly more pain than if states proactively implement fiscal discipline in the annual budgets and address the future problems of underfunded public pensions.

Lesson number two is that greater economic growth makes it easier to address fiscal problems. Therefore, the sooner reforms to growth sapping regulations and taxes at the federal, state, and local levels are implemented, the better.

If left unchecked, far too many states and localities will soon be in Puerto Rico’s unenviable position. The Puerto Rico crisis can either accelerate these unsustainable trends, or serve as a positive case study for overcoming past fiscal and economic mismanagement.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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