How the Feds Helped Bankrupt Puerto Rico

TND Guest Contributor:  Nick Zaiac |

Puerto Rico is full crisis mode, as signaled by Governor Alejandro García Padilla warning that the island’s debts are “not payable.” This is partially the fault of the island’s own government. The commonwealth has piled up a debt much larger as a percentage of GDP than any other state.

All major parties are to blame for over-promising and overspending, and the Puerto Rican government deserves most of the responsibility for the situation it finds itself in. Nevertheless, it is not entirely their fault.

The US federal government has many laws that disproportionately, and often inadvertently, harm the island. Policies that have little impact on the mainland can have dire consequences in Puerto Rico, partially because it’s a territory rather than a state, and partially because of the particulars of the island’s economy. A recent report on the island by economist Anne Krueger and others contains many such instances.

One notable example is the federal minimum wage. While only about 3 percent of workers on the mainland earn the minimum, 28 percent of hourly employees on the island work for this rate. Unemployment is notoriously high in Puerto Rico,currently sitting at 12.4 percent. Is there any wonder why? While there are many other factors in play, the federal minimum wage is certainly a burden on the territory.

The Jones Act is a quintessential example of a subsidy gone awry. The complex law basically states that all goods moved between US ports by ship must be owned, manned by, flagged, and built in the United States. It’s a subsidy to domestic shipbuilders, more than anything else, as international companies sailing with cheaper, foreign-built ships are barred from a major part of the US shipping market.

Now, how does this harm Puerto Rico? Because of the increased cost of shipping to the island, imports are more expensive, and almost all of the goods flowing to the island are imported. Notably, most electricity on the island is generated by burning imported oil. Similar problems are faced in places like Hawaii and Alaska. By attempting to subsidize shipbuilding, the Jones Act has inadvertently increased the cost of living for millions of people in numerous territories and states.

The list goes on and on. Environmental regulations combined with geographical factors and a poorly maintained power grid help make electricity rates high, even by Caribbean standards. Medicaid spending plays a major role in the territory’s fiscal problems. Around 60 percent of the island’s residents pay for healthcare with Medicaid or Medicare, and these programs pay doctors lower rates on the island than on the mainland. Not surprisingly, this has caused many doctors to flee and practice their trade elsewhere in the United States.

Furthermore, Puerto Rico had long been a tax haven for pharmaceutical companies, due to a special credit in the tax code. That carve out was rightfully allowed to expire about a decade ago, but the island’s economy took a hit as companies began to pull out.

The original credit was bad policy, as it encouraged companies to locate on the island just to take advantage of it. The local economy suffered because of Washington politics. This is crony capitalism, plain and simple, and the people of Puerto Rico are caught in the middle.

Now the question is, what can the federal government do to fix the problems it has caused? No matter the outcome of the current debt situation, federal law must be changed to avoid repeating this process in a few years. The repeal of regulatory subsidies like the Jones Act would be a good start, and lowering the federal minimum wage to a rate closer to that of the Commonwealth of the Northern Mariana Islands would certainly help get more people employed.

Yet, the biggest benefits might well come from a definitive answer to the territory’s political status. Many of the problems the island faces stem from sitting in constant limbo as a US territory, having neither independence nor statehood.

The former would allow Puerto Rico full self-determination, at the cost of being a part of the United States and the benefits that come along with it. Statehood, on the other hand, would grant representation in Congress, allowing the local government to draw attention to the particular problems facing the island. Right now, others hold the fate of the people of Puerto Rico in their hands.

The weight of regulations felt by Puerto Ricans is an afterthought in Washington. The answer to the “independence question” may not matter, but the current status is a problem that Puerto Ricans must face eventually. The best we can hope for is that the decision comes sooner rather than later.

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