Puerto Rico is facing a catastrophic financial crisis similar to that of Greece. In a few minutes, the island government will default on a bond payment, which will generate an automatic sequence of events similar to a run on the banks.
This is all our fault. And we’re not helping.
The economy of Puerto Rico wasn’t all that good before we conquered it from Spain in 1898. A period of more-or-less continual revolts had entered a lull, but agriculture still hadn’t recovered from the abolition of slavery a couple of decades previously, and there was as yet no manufacturing of any real moment.
It wasn’t until former Governor Allen used his political connections to systematically engineer a sugar monopoly, thereby massively exploiting the new territory, that the economy finally began to prosper again. The influx of cash from America’s entry into the First World War was a further (though also not entirely welcome) spur to growth.
But then in 1929 came the Great Depression, and the whole world suffered. The sugar industry in Puerto Rico took a blow, but it continued. When the National Industrial Recovery Act was passed in 1933, however, and a minimum wage was introduced, the island’s plantations shut down and sugar farming mostly moved to other, less costly areas. As a result of this, a large number of Puerto Ricans began to emigrate to mainland America in search of better jobs, a trend that has only accelerated in recent years — to a point where, at present, Puerto Rico is experiencing a net population decline due to emigration.
Today the population of Puerto Rico lives in poverty. Over 60% rely on Medicare or Medicaid, which is not paid at a full rate on the island; instead, the territorial government is forced to spend a vast percentage of their budget subsidizing health care. The work force is extremely small, so tax revenues are quite low. The government has been borrowing heavily, mostly through bond sales, for over a decade, and the money has run out. And now, with the projected epidemic status of the Zika virus, things are about to become much worse.
Later today (that’s 2 May 2016), the governor has ordered that payment on some government bonds and loans be stopped. This will place the government in default and reduce many of those bonds to junk status. It’s also highly likely to cause a crash in the international bond market.
It’s no coincidence that this is happening during a highly contentious Presidential election year. The crisis could have been delayed or at least handled quietly. But the territorial government wants free press in order to attract Congressional attention and Federal aid. To be fair, Puerto Rico deserves both, since it’s still ultimately the responsibility of Congress to administrate Puerto Rico, local government notwithstanding.
Normalization of American relations with Cuba should help a fair amount. Since Cuba is incredibly close to Puerto Rico, and since it has a solid agricultural base, relatively inexpensive imports are going to become possible. Additionally, Cuba can act as a foreign shipping port, which would reduce the impact of the Jones Act on local shipping prices. But this is a tiny spot of hope in a massive slough of depression.
There are tremendous obstacles to a Puerto Rican recovery. One of the biggest is illegal immigration; it’s estimated that more people seek refuge every year in Puerto Rico than are born there. Care for these refugees, usually quite unhealthy, places a tremendous drain on the already overburdened insular medical system. And yet, that people flee in such numbers to Puerto Rico from elsewhere in the Caribbean tells us that conditions on the neighboring islands must be worse.
Puerto Rico has very few natural resources, and mismanagement by both Congress and a moderately corrupt territorial government has conspired to prevent the development of those it does possess. If restored to pre-colonization species, the local timber could be regularly harvested; if properly farmed, it could become quite lucrative. And yet Puerto Rico imports all the wood it uses. Agriculture, particularly sugar beet farming, has long been a staple of the local economy, but at present there is so little farming done that almost all the food is imported. One would think that an island in the middle of a vast great sea would be able to at least support itself by fishing, but Puerto Rico, with its very Catholic populace, is a net importer of fish. The location would be a perfect one for solar farming, but instead, Puerto Rico imports oil. And all this importation is done at artificially high rates due to Jones Act restrictions.
And we haven’t even touched on the impact of the vastly diminished work force.
As a result, the present economy, largely derivative and service-based, is insufficient to the task of paying even for basic services. The four utility companies, each of which operates as a corporate subsidiary of the government, all haemmorhage money in huge quantities; this is true despite charging extremely high rates. And corruption (which is endemic) is only one of many factors operating against efficiency.
One would expect that income from mainland tourism would compensate somewhat for the shortfalls in other areas. After all, Puerto Rico is a tropical island destination with some of the loveliest beaches in the Caribbean, and Americans can get there without a passport. Unfortunately, between anti-American sentiment, crime, the recent Zika outbreak, and corrupt mismanagement by the (you guessed it) government-run Tourism Development Corporation have conspired to turn even this into a losing proposition.
(Side note: Even as I write this, word is going out that Uber is recruiting drivers in Puerto Rico. The local taxi union is extremely powerful and owns great chunks of the government; it has long been violently opposed to this service — and this is no metaphor; unions in Puerto Rico do more than snide comments and sabotage. But the present instability is such that the company feels they now have the opportunity. Since almost anything would be an improvement over the island’s horrific transportation system, one of the worst turn-offs to tourists, I’m compelled to be in favor.)
In another article, I’ve described the bill now before the U.S. Congress which is designed to address Puerto Rico’s economic woes. In brief, it permits the territorial government the right to sell the former bombing range on Vieques, permits flexibility on the minimum wage for young workers, and creates an oversight board with the power to stem corruption. The Senate version, which authorizes a Federal loan designed to avert the disastrous consequences of government default, has been gutted by the House, and the current version, while effective, is quite evidently too little, and the longer it takes for even this half-measure to get passed, the deeper the crisis will become.
But the debate is still intense. Many union-backed Democrats oppose the bill due to the minimum-wage provisions — never mind that it’s partly the imposition of an artificially high minimum wage that precipitated this crisis in the first place — and others dislike the Vieques sale provision (since it’s currently a wildlife refuge). Conversely, many Republicans are opposed to anything that looks like a bailout — and again, never mind that this mess is the fault of Congress in the first place.
And, just to make matters ever-so-slightly worse, Congress has decreed that the bonds issued by the Puerto Rican government are not backed by the “full faith and credit” of the United States. It’s moderately likely their decision here will ultimately have little power since it conflicts with an actual article in the Constitution, but at least for the moment it’s exacerbating issues in the international bond markets.
“But what can I do about all this?” you ask. “Why tell me?”
Bottom line? This is the fault of Congress. They need to clean up their mess, and they need to take steps to ensure it doesn’t happen again. And Congress is responsible to the American voting public.
If you’re an American citizen, you have representation in Congress. You can write to them, call their offices, send telegrams and emails. Tell them you want Puerto Rico’s problems addressed and soon. You can also do the same with the White House. They do listen; though it often seems they exist in a vacuum, politicians live and die by public opinion, and your vote is the most important currency they have.
You can also share this article and those like it on social media. Tell your friends about this and have them call or write too.
(If you don’t know how to write Congress, look here. It’s easy, people.)