Is Congress Going To Bailout Puerto Rico?

by Veronique de Rugy

The island of Puerto Rico has been in big trouble for some time now because of its leaders’ fiscal irresponsibility and overspending. The result has been a deep financial mess on top of tragically awful economic prospects. After months of debate, a fiscal plan had been put in place — a process started by Congress — and on May 1, the island is supposed to start a bankruptcy-like process.

Even though bankruptcy is clearly better than a bailout, I have expressed my concerns about it. While it sounds good on paper, it can only be productive if the special interests that created the situation in the first place do not continue to dictate the terms of the bankruptcy. Now, I should say that I have some faith that the process could be successful in this case. That’s because the Puerto Rico Oversight, Management, and Economic Stability Act, a.k.a. PROMESA, signed by president Obama on June 2016 after it gained the support of both Democrats and Republicans in Congress has Andrew Biggs, a scholar at the American Enterprise Institute, as one of the members of the Control Board. Also, from what I read, the federal board already has a good fiscal plan which was voted on in March with some austerity and cost saving measures and a baseline for the looming debt restructuring talk. Also, Republicans in Congress have been pretty consistently and rightfully opposed to bailing out the island. It increases the chances that the changes implemented will put Puerto Rico on a better fiscal footing. 

But then, I came across this tweet by President Trump, which claims that the Democrats would like to bail out Puerto Rico

Politico reports that “Democrats have been pushing to help Puerto Rico cover a Medicaid shortfall.”

What? Yes, the island has a Medicaid shortfall because it burned through the $6.4 billion in Medicaid money it was given through Obamacare more than two years ahead of schedule. They expanded Medicaid eligibility and increased provider-payment rates with the money without any attempt to be good stewards of taxpayers’ money. Is the idea that we should bailout them out and create even more incentives for them to behave badly?

What’s more, with the May 1 deadline coming up, it is a terrible idea because it will send the signal to those in the island who aren’t genuinely committed to reforms that they can take bankruptcy proceedings lightly because Washington will ultimately always be there to bail them out. Bailing Puerto Rico now would send the signal that the Control Board isn’t to be taken seriously and would give an opportunity for the Puerto Rico government to do counter-productive things with the money freed up by this infusion of cash. It is obviously a terrible policy and it won’t help the people in Puerto Rico in the long run.

 

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