While Europe agonizes over the Greek debt crisis, the United States is saddled with one of its own. Individual investment portfolios are replete with $72 billion in bonds issued by Puerto Rico’s government and its agencies, and since August this US Commonwealth has been in default. While federal law allows municipalities to restructure their debts under Chapter 9 that option is unavailable to states or US territories.
The latest proposal designed to remedy the Puerto Rico debt calamity is a so-called “superbond” plan. The details are still sketching, but one scenario entails swapping existing bonds for new ones managed by the federal Treasury. While the Treasury would not guarantee the debt it would be responsible for managing some of Puerto Rico’s tax revenues, thus decreasing the likelihood of a default on the replacement bonds.
It is unclear, however, whether the old bonds would be exchanged for new ones of equal value. Assuming this scheme can leap over the numerous political and legal hurdles necessary for implementation there remains the question of how much of a dent this could make in $72 billion in unpayable debt. Although a noble effort this strategy amounts to affixing a very small bandage over a rather deep financial wound.
To begin with, how did Puerto Rico get into this mess? Investors bought Puerto Rico’s bonds at a time when its finances, by all appearances, were strong enough to repay its debts. Government budgets ultimately rest atop the employment base sustaining them. While tourism and agriculture employ thousands those sectors are too small to absorb all able-bodied workers. One remedy for the island’s unemployment woes has been fostering other economic sectors, such as manufacturing. Due to the federal minimum wage Puerto Rico’s payroll costs are high compared to its Caribbean neighbors. Federal health and safety regulations also add to the cost of doing business. And under the 1920 Jones Act, goods exchanged between Puerto Rico and the US mainland must be shipped via U.S.-flag carriers – among the most expensive in the world. Thus, it has not been easy to attract manufacturing plants to Puerto Rico.
In a bid to stabilize, if not bolster, Puerto Rico’s economy the federal government provided enterprises operating in Puerto Rico with industrial tax incentives. These enticements, under Section 936 of the Internal Revenue Code, the cornerstone of the island’s manufacturing base, were dismantled with devastating economic consequences. Deemed “corporate welfare” by many, the federal government instated a ten-year phase out for these 936 incentives beginning in 1996. The numbers speak for themselves. The Bureau of Labor statistics reported that in 1995, the year before Section 936 was put on the chopping block, there were 159,000 manufacturing jobs in Puerto Rico. Twenty years later there are fewer than 75,000 employees in this sector — a decrease of more than fifty percent. Fewer manufacturing jobs translates into declining tax revenue for a debt-ridden Puerto Rican government.
The decimation of Puerto Rico’s manufacturing base has yielded other economic consequences. Unable to find work hundreds of thousands of islanders, particularly the young and college educated, have migrated to the US mainland in the past decade. As US citizens there is no legal impediment to their relocation. Whereas New York City was the prime destination for the great migration of the 1940s and 50s today’s preferred terminus is Orlando, Florida. A critical section of the next generation, the very people needed to lead the island out of its economy morass, are departing. The consequences of their departure will be felt for decades to come.
Despite the gravity of this situation there’s been, so far, an eerie silence from Capitol Hill. For the time being Republican lawmakers, consumed by internecine warfare, have shown little interest in touching Puerto Rico’s debt disaster. Individual investors are paying the price as are the tens of thousands of Puerto Ricans who are packing their bags to head stateside. This migration, a rather quiet exodus when compared to its counterpart in Europe, further erodes Puerto Rico’s capacity to put its financial house in order.
The “superbond” idea, a laudable effort, is simply too meagre a remedy to fully tackle this crisis. A more realistic short-term solution is amending federal law to allow the Commonwealth of Puerto Rico to file for Chapter 9. In the long haul the island’s economy cannot recover to the point where it can repay its debts without a restoration of tax incentives that attracted industries there in the first place. Both remedies, sadly, are unlikely in Washington’s current climate. Given the current state of affairs the most likely scenario is a continued decline in Puerto Rico’s economy and Puerto Ricans displacing Cubans as the largest Latino community in the State of Florida.
Amílcar Antonio Barreto is an associate professor of political science, international affairs and public policy at Northeastern University. He is also the director of its MA Program in International Affairs.