The Puerto Rico Debt Crisis, Explained

[Bacchus4.0]

http://www.huffingtonpost.com/robert-rosenkranz/the-puerto-rico-debt-cris_b_7880796.html

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Moreover the economic stagnation, or contraction, is not merely a result of an economic cycle but of major long term problems that make the island uncompetitive. The government of Puerto Rico has created many of these problems with its own misguided policies, but the Federal government has made a bad situation worse. "The single most telling statistic... is that only 40 percent of the population -- versus 63 percent on the U.S. mainland -- is employed or looking for work." Krueger attributes this to a Federal minimum wage which is far higher than unskilled labor earns in competing Caribbean islands, aggravated by local regulations on overtime, paid vacations, and dismissals which are more costly and onerous than on the U.S. mainland.

An overly generous welfare system undermines the incentive to take jobs at all: "One estimate shows that a household of three that is eligible for food stamps, AFDC, Medicaid, and utility subsidies could receive $1743 a month." That amount is actually higher than the median family income on the island.

Energy costs, another key economic input, are also exceedingly high, several times mainland prices. The government's electric utility, PREPA, is inefficient, overstaffed, and technologically antiquated. The Federal government's Jones Act makes things worse by requiring that all oil imports be conducted with U.S. vessels and crews. Indeed, that Act applies to all shipments to and from U.S. ports and drives transport costs generally to uncompetitive levels. Local regulation of rates and licensing for ground transportation adds to the problem.

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Is there a way out? The report suggests there is, but it must be both comprehensive and ambitious. The Federal Government, the bondholders, and the government of Puerto Rico must all make difficult decisions. The solution must begin with a revival of growth. The key is supply side reforms. The Commonwealth can fix local labor regulations, and eliminate obstacles to doing business. It can bring energy costs down by opening competition for electric generation to new and more efficient suppliers. The Federal Government needs to make welfare payments consistent with local market conditions, suspend the Federal minimum wage, and exempt Puerto Rico from the Jones Act.

A major fiscal adjustment is required. Revenue measures should be as growth friendly as possible, and might include VAT/Sales tax and property tax overhauls. Expense measures should include right sizing of education services (PR has more teachers per student than the wealthiest counties on the mainland), a means test for tuition at the University of PR, and elimination of Medicaid benefits in excess of Federal standards. After several years, supply side reforms ought to result in 2.5 percent growth, which will drive increased revenue collections.

[gladium et scutum]

1. IMO we

should allow Puerto Rico to become an independent nation.

[FBaggins]

2. "Allow" them to become independent?

They have no interest in that. The last vote for independence received something like 5% support.

[gladium et scutum]

3. That is not the point.

We need to divest ourselves of the "Empire". Whether they have an "interest" in that does not matter. We have no business in trying to govern their affairs. Those people must not remain as helots to the United States. They are entitled to stand on their own.

[Bacchus4.0]

4. Give them independence frankly would be the option.

Essentially say at some future date that PR will be independent. PR will not vote for independence and the US Congress will not grant them statehood.

[Marksman_91]

5. Am I to understand you imply that the will of the Puerto Rican people should be ignored?

They continue to vote to not become independent, so I think that they should stay the way as they are if that's how the majority wants it.

[Bacchus4.0]

6. it is complicated though. The party that favors an "association" with the US claims

That the current relationship is not territorial and defines the relationship as how they would like it to be, not what it is. For example, federal laws dont apply to the island and they can undertake their own foreign policy even though neither is the reality. They make up about half the electorate and want no referendum that is only independence vs statehood without their wish list option of free association. Almost noone wants the territorial status option that is the current reality.