In 1898 the United States snatched the island of Puerto Rico, along with some other choice real estate away from a withering Spanish empire. Strategically the island was important as a gateway into the Caribbean and Latin America, which we affectionately dubbed our “backyard”. Puerto Rico, along with Cuba, was also capable of producing tons of sugar – a commodity that the mainland United States demanded and couldn’t grow enough to keep up.
Since the end of the Spanish-American War, Puerto Rico has had a bizarre relationship with the United States. She’s a territory of the United States. Puerto Ricans are US Citizens, but within Puerto Rico they do not have political representation in Washington. The tax laws are different, they serve in the US military and the administration of the Island works a little differently than a US State. Culturally there’s a big gap between “middle America” and Puerto Rico but we recognize the Puerto Rican contribution to cities like New York and Chicago as well as South Florida. Oh yeah, everyone loves J-Lo and the slew of MLB players from there.
Based on the upstart imperial mindset of the United States at the time and the tangible gains adding an island like Puerto Rico could add to our portfolio, the arrangement made sense. Today the arrangement is maybe a little more complicated. I’ve heard from more than one Puerto Rican mouth that they believe that the corporations in the United States benefit from Puerto Rico by being able to tap into cheaper labor sources…and Puerto Rico benefits by being able to send their riff-raff up north to find menial jobs in the mainland USA.
The island is something of a cash cow for American corporations and investors, or at least it was. In addition to discounted prices on labor, profits made in Puerto Rico were tax-free up until recently. This included interest on bank deposits. Due to maritime restrictions placed by the federal government, foreign ships could not unload goods in Puerto Rican ports and continue on to the US – only American ships can carry cargo between two points in the US (the Jones Act). Due to Puerto Rico being a relatively small market, it doesn’t pay for foreign cargo vessels to make a special trip to the island. This shipping SNAFU makes everything more expensive on the ground and makes American goods more competitive.
Investment and trade with the mainland helped Puerto Rico become the most advanced economy in Latin America, with a per capita GDP slightly higher than Uruguay and Chile and ranking higher on the HDI than any other Latin American nation. Although at the top of the pack south of the border, Puerto Rico is notably poorer than Mississippi, the poorest state in the Union.
Puerto Rico also benefited from profits on their government issued bonds being tax free at the federal, state and local level. Due to the tax benefits and promises of high returns on top of that, many American bond funds eagerly gobbled up Puerto Rico’s debt. The high demand for Puerto Rican debt gave the Puerto Rican authorities the incentive to, well, issue more of it. Today Puerto Rico is $72 billion in debt.
$72 billion is pretty hefty sum. Puerto Rico has a population of about 3.5 million and a GDP around $100 billion. That makes the math simple enough, Puerto Rico has a debt to GDP ratio of around 72%. To put it into perspective, my native state of Iowa has a similar population, a GDP of about $176 billion and a debt of $21.5 billion. If Puerto Rico were a state, her GDP and per capita income would be well below that of Mississippi, our perennial economic basement dweller. Puerto Rico’s debt figure of $72 billion is similar to the state of Virginia’s $74 billion – with a population over twice as large and a GDP over four times as large.
Maybe Puerto Rico can grow out of this debt? No, that doesn’t look promising. Section 936 of the US Tax Code, the one that allowed US corporations to take profits tax-free in Puerto Rico expired, taking away one of the big incentives for businesses to operate in Puerto Rico. Local employment laws are by some accounts restrictive. Energy, the oft-overlooked driving factor of economic growth is considerably more expensive down there, making the cost of everything go up. The workforce of Puerto Rico is getting older and stagnating. Brain drain and “drain” in general to the mainland is still an issue. There just aren’t any promising signs of a big Puerto Rican recovery. A significant portion of the population relies on government transfers (social security, welfare, medicaid, food stamps, etc.) and as it looks now, it’ll probably stay that way.
It’s important to note that the public corporations like the Puerto Rican Power Authority and the Government Development Bank owe about $25 billion in total. This debt is basically on the backs of the Puerto Rican people as well, just on a different accounting ledger. Cutbacks in infrastructure will exasperate the problem and keep Puerto Rico from developing a competitive environment.
The Puerto Rican government has been raising already high local taxes (there’s no federal taxes so there’s more blood from the turnip to squeeze) and cutting back benefits at a time when people need the money the most. It’s causing a lot of resentment towards the government, as they’re the ones who squandered the money away and racked up the debt. One difference between Puerto Rico and Greece is that in Greece there’s a widely-enough held sentiment that the Greek people benefited from racking up the debt through lucrative government jobs and exorbitant pensions, whereas no one is saying that about Puerto Rico. It really does seem like a case of politicians simply pissing away borrowed money for so many years.
I’m not sure exactly how this will play out, but I think it will cause some little tremors in the US stock market and probably capture some mainstream attention once everyone has settled down about the Confederate flag or whatever the hot button issue is today. I don’t think there’s a lot of resentment towards the US federal government in the sense that they’ll be pointing the fingers at us for causing their problems, but I think more than anything it’ll be the other way around – Mainland Americans will be looking down their noses as Puerto Rico. Maybe Donald Trump will suggest booting them out of the …… uh…..little thing we have going on and a segment of the population will agree. More level-headed people will give Puerto Rico the Ward Clever speech about responsibility and then a few will ask Ward if he was too hard on the Beaver.
Here’s the other thing: While we’re talking down to the Puerto Ricans, we’re actually in worse shape than they are. We will compare the Puerto Rican debt to that of individual states and maybe smaller sovereign nations, but in Puerto Rico they only have local and territorial debt. On the mainland we have local and state debt, but we also have federal debt which Puerto Rico doesn’t have (at least not to the same extent). Sure comparable sized states have a quarter of the debt of Puerto Rico, but we all also have our share of the $17 trillion dollar US Federal debt. So we might want to choose our words and actions carefully when it comes to dealing with the Puerto Rican debt crisis.
Although I don’t think Uncle Sam will get the lion’s share of the blame for this on the island, I think it will increase left wing populist sentiments that are all so common in Latin America. It’ll also increase sappy patriotic sentiments towards the US down there as some of their leaders will try to play up the attachment to butter up to their favorite uncle for a little loan…and honestly, they will have some real, tangible things to say. Like I said earlier, Puerto Ricans are a big part of some of our biggest cities, they serve in our military at high rates and everyone loves “Jenny from the block”. The cultural dynamics will be interesting…
At the end of the day, I don’t know how they will solve this or if we’ll see a complete breakdown in Puerto Rico – our outer fringe. I hope the people down there find a way to make it work….