Puerto Rico panic PUERTO RICO | Will the can politicians kicked down the street become a boomerang? By MARVIN OLASKY SYMPATHY VS. PRECEDENT-SETTING IN THE CARIBBEAN The U.S. territory of Puerto Rico is $72 billion in debt, Gov. Alejandro García Padilla says he has no money to pay the interest due Jan. 1, and liberals and conservatives propose different solutions to the fiscal crisis. The eventual resolution will affect not only 3.5 million Puerto Ricans but 315 million other Americans. Liberals are trumpeting a looming “humanitarian crisis” that demands a federal bailout: Otherwise, Puerto Rico will have to cut spending on schools and hospitals. Conservatives are emphasizing a governance crisis: Many Puerto Rican politicians have won votes by overspending; and if they get away with it, their counterparts in California, Connecticut, Illinois, Massachusetts, New Jersey, New York, and other states will keep running toward the cliff. One piece of political evidence: New York Gov. Andrew Cuomo and New York City Mayor Bill de Blasio flew to Puerto Rico last month and marched with thousands who demanded that Washington send more money to San Juan. Yes, the governor and the mayor have native Puerto Ricans among their constituents, but they were also looking ahead to a time when they or their successors will demand bailouts of their own. As is typical in such protests, politicians said they had to speak up for the sake of the children. Some Puerto Ricans would like to have the island declare bankruptcy, but U.S. states and territories, unlike cities, cannot legally do that. A “Detroit solution” is not possible unless Congress changes the law, which would be precedent-setting: If territories and states can declare bankruptcy, state bond holding will become riskier and states will have to pay more interest, which means state government costs and debt will increase even faster. Matt McClain/The Washington Post via Getty Images An abandoned building along the beach in San Juan. Some Washingtonians propose a “middle ground”: Put new billions for Puerto Rico in a lockbox controlled by a tough federal board to make sure funds are used responsibly. That promise leaves many giggling, given Washington’s tendency to turn lockboxes into readily breakable piggy banks, but it’s also a nonstarter for Pedro Pierluisi, Puerto Rico’s non-voting member of Congress, who lashed out at a “blatant exercise in colonialism.” Suite-level rhetoric and action have an enormous effect at street level. Erwin Ferri, a resident of Sabana Grande, Puerto Rico, said “many people have been affected by depression and hopelessness” as they see a deteriorating healthcare system, a fall in home values, and the prospect of unpaid pensions. The question at hand: Does concern for poor Puerto Ricans demand acquiescence to political blackmail? THE COMMONWEALTH OF PUERTO RICO has a higher per capita gross domestic product than any Latin American country but a lower one than any U.S. state: 45 percent of residents sit below the federally defined poverty line. The island has a lot going for it: natural beauty, warm winters, free and easy access to U.S. markets, a good location for regional commerce, and many bilingual workers. But a drive through San Juan, the capital, reveals economic decline. One major thoroughfare, Avenida Ponce de León, used to be busy: Now many buildings on it are closed, with graffiti-covered walls. Rush hour is less rushed. Some grim statistics: Puerto Rico’s economic productivity has declined every year since 2006. Its population is down 7 percent (Puerto Ricans are U.S. citizens and can move freely to any of the 50 states), and its fertility rate is 1.6 children born per woman (below the replacement rate). Puerto Rico’s youth unemployment rate is 27 percent, and its overall unemployment rate is 12.4 percent. Grim government housing projects display fences topped by razor wire, yet illegal drug profiteers fill expensive restaurants and make parking spaces at the Caribbean’s largest mall hard to find. Puerto Rico’s illegal drug trade comprises perhaps one-fifth of the economy of an island now known as “the perfect trampoline to the mainland.” For local consumption xylazine (aka horse tranquilizer) is the scariest new object of desire: It may be even worse than heroin, with users weaving in and out of consciousness for six hours and walking in a bent way that makes them look like movie zombies. (A National Geographic Channel video recently referred to Puerto Rico as “zombie island.”) Ramon Zayas/GDA/AP Puerto Rico’s Gov. Alejandro García Padilla and New York Gov. Andrew Cuomo talk to the press. The drug trade has pushed up the island’s homicide rate, now four times higher than New York City’s. Problems seem distant during a walk around the lovely San Juan campus of the University of Puerto Rico, but students worry. Freshman chemistry major Gabriel Maldonado said, “The economy is going down. I don’t see how students can achieve a future here.” Business major Natalie Ramos said, “It’s bad. I don’t see a future here for me.” Tomas Gonzalez, a poor senior who travels with his bongo via bicycle to make some money playing street music, plans to move to Europe or Latin America: He says, “The government people here are just [obscene insult].” The spiritual deficit may be even larger than the fiscal one. Nominally, Puerto Rico is 75 percent Roman Catholic and 15 percent Protestant. In practice many put their trust in saints’ miracles, witchcraft, and ways to ward off “the evil eye.” Last month at a Reforma Dos (Second Reformation) conference on the island attended by more than 600 Puerto Ricans, Pastor Gadiel Ríos spoke of how for 30 years many mile-wide, inch-deep churches have tolerated heresies including the prosperity gospel and quasi-occult practices. His biblical solution: “Preach the Word.” WHEN THE UNITED STATES GRABBED Puerto Rico from Spanish control in 1898, Gen. Nelson Miles, fresh from two decades of Indian fighting, led the U.S. occupation force. He told Puerto Ricans they “for centuries had been oppressed,” but rule from Washington would “promote your prosperity [and] bestow upon you the immunities and blessings of the liberal institutions of our government.” Government “blessing” No. 1: A century ago Puerto Rico moved from subsistence farming to production of a cash crop in high demand, sugar. By 1930 sugar plantations took up nearly half of Puerto Rico’s arable land. That may have been temporarily helpful to the island’s workers, but in the long run it became a big problem, as Puerto Rico tied its fortunes to the fluctuating price of a single crop. Keystone-France/Gamma-Keystone via Getty Images San Juan in 1900. “Blessing” No. 2: In 1941 President Franklin D. Roosevelt made one of his most left-wing advisers, Rexford Tugwell, governor of Puerto Rico. Although Puerto Rico has a perfect climate for agricultural development, Tugwell favored manufacturing over farming and had the government own and run companies making cement, pulp board, paper, glass, shoes, and clay products. The inefficient enterprises lost money: Tugwell left in 1946, and by 1951 the government had sold all the factories to private companies. “Blessing” No. 3: In 1974 and 1977 Congress amended the Fair Labor Standards Act to bring the Puerto Rican minimum wage to the U.S. level. Problem: The minimum wage is now 77 percent of Puerto Rico’s average wage, versus 28 percent of the average wage para afuera, “over there” on the mainland. The change, according to a National Bureau of Economic Research study, “reduced total island employment by 8 [to] 10 percent compared to the level that would have prevailed had the minimum been the same proportion of average wages as in the United States.” “Blessing” No. 4: The Economist calls Puerto Rico not “zombie island” but “Welfare Island.” Over the past three decades some welfare payments have remained lower than those para afuera, but a household of three can pull down $1,743 per month in food stamps, Medicaid, needy family payments, and utility subsidies, compared with $1,159 in minimum-wage take-home earnings. That’s a huge disincentive to work, so it’s no surprise that only 4 in 10 adults are working or even looking for work, compared with 6 in 10 in the United States. Since Puerto Ricans do not pay federal income tax, they are ineligible for the one welfare program that rewards work, the earned income tax credit. Much of the help that ends up hurting has come from Washington, but Puerto Rican legislators have added their own wrinkles. Many government offices are overstaffed, with employees who take 30 vacation days and have a reputation for hardly working. Employees of every private company have at least 15 vacation days and 12 sick days. Everyone must receive el bono de Navidad, a $600 Christmas bonus. Anyone who works more than eight hours in a day gets time-and-a-half pay. (Para afuera, the overtime bonus comes only after working a 40-hour week.) Hiring often depends on whom you know, not competence, and three months is all it takes to become a quasi-tenured employee. THE FAILURE OF WASHINGTON’S BLESSINGS suggests that Puerto Rico will be better off in the long run making its own hard choices. I’ve plowed through reports and articles on Puerto Rico debt all fall and still have not found a better analysis than Puerto Rico: A Way Forward, put out this summer by Anne Krueger, former president of the American Economic Association, and other financial brains.