Puerto Rico would be bankrupt if there were such a thing as bankruptcy law for U.S. commonwealths; it is on the verge of defaulting on its bonds, which has all the familiar miscreants in Washington — led by Senate Republicans — scurrying to protect the credulous fools who lent money to this backward basket-case of tropical misgovernment.
Puerto Rico’s troubles are both straightforward and familiar: It has terrific rum and lovely beaches, but the more high-value aspects of its economy (such as manufacturing and pharmaceuticals) are insufficiently robust to carry the rest of the economy forward. It has one of the lowest labor-participation rates in the Western world, the result of the perverse interaction between over-generous welfare spending and a minimum wage that is too high. Less than half of Puerto Rico’s adult population is employed or looking for a job. Because Puerto Ricans are American citizens who need no special permission to move to the mainland, both the island’s best and brightest and the unskilled workers rendered unemployable by the artificially high minimum wage have left in large numbers.
Who did that leave behind? People employed by government. Government is, in fact, Puerto Rico’s largest employer — by far. As on the mainland, the combination of rapacious public-sector special-interests and political cowardice has led Puerto Rico to shift a great deal of public-sector compensation into pensions, which have been systematically underfunded. (How underfunded? Nobody knows. If you’re looking for something to keep you up at night . . . ) Underfunding of pensions is how the Left swells the paychecks of its foot soldiers (and hence contributions to the Democratic party) without having to put the expenditures on an annual budget.
In sum: Giant welfare state, crippled private sector limiting the tax base, massive shift away from full-time employment, and public-sector union goons with their hands out repeating the only slogan that really matters to them: “F*** you, pay me.” Which is to say, Puerto Rico today is Illinois the day after tomorrow, along with California, New Jersey, Connecticut, etc.
Senate Republicans propose to make things better by making them worse.
EDITORIAL: What to Do About Puerto Rico
The Senate is looking to help Puerto Rico avoid a default on its bonds, partly because it wants to protect the bondholders, which include the usual assortment of Wall Street jerks (one in five U.S. bond funds is invested in Puerto Rican debt) and institutions with a high appetite for risk. Puerto Rico has something like an island-wide commitment to screwing its creditors, for instance by commandeering funds earmarked for future debt payments for other purposes. Puerto Rico intends to steal money intended to pay bond-holders and use it to continue paying its bloated and underfunded pensions. Republicans, incredibly, intend to help ease Puerto Rico’s way toward doing that.
What the Republicans need here is a broad, long-range strategy, but one that begins with a single word: “No.”
#share#Many U.S. states and territories have statutory and constitutional guarantees that public-sector pensions must be paid. Puerto Rico is one of these. It also has a constitutional guarantee of its bonds. What we have in Puerto Rico is a version of the question that we almost certainly will face in several U.S. states: What happens when those legal guarantees run up against the cold, hard fact that the cupboard is bare? There isn’t really an established body of law to rely upon here. There is a bankruptcy law for U.S. cities and municipal agencies, but not for states or for a commonwealth such as Puerto Rico. Some in Washington wish to pretend that Puerto Rico is a municipality and to then extend to it the protections of Chapter 9 of the bankruptcy code, which Detroit took advantage of recently. But Puerto Rico is not a municipality, and declaring that it is one does not make it so.
If we thought of the United States as something like the European Union, then Puerto Rico is Greece.
If we thought of the United States as something like the European Union, then Puerto Rico is Greece. Just as it makes little or no sense for the monetary policy of Greece to be identical to the monetary policy of Germany, it makes no sense for Puerto Rico to share a minimum wage and other provisions with the mainland United States. Puerto Rico’s economic productivity simply is not high enough — and probably is never going to be high enough — to carry that burden. Rather than try to paper over this with many billions of taxpayers’ dollars, Congress should act to put Puerto Rico on a path to stability. Puerto Rico should be allowed to default on its debt payments, leaving creditors — who knew the risks when they were chasing those high returns — to work out what they can. Puerto Rico should face up to fiscal reality and repudiate, at least in part, its unfunded pension liabilities. Rather than face that reality, the current governor, Alejandro Garcia Padilla, has ruled that out. He can rule that out all day, but the arithmetic is what it is. The sooner we all acknowledge that, the better.
In the long run, Puerto Rico’s economic status cannot be rationalized until its political status is sorted out. That is a dilemma, inasmuch as Puerto Rico is suited neither for independence nor for U.S. statehood. With apologies to Karl Rove and his entertaining new book on the subject, we must consider this situation a blight upon the reputation of William McKinley, not that that provides much illumination about what to do today.
But what not to do is to bail out Puerto Rico — and that is what is being considered, despite all the official protestations that this isn’t a bailout per se. We should not bail out Puerto Rico because a bailout will not fix what is wrong with the commonwealth and will, in fact, delay necessary reform. It also establishes a precedent that is much more worrisome: When the time comes, we will not have the option of simply granting Illinois its independence and wishing it the very best of luck. If we bail out Puerto Rico, we are going to end up bailing out every Democrat-run fiscal hellhole across the fruited plain and every grasping public-sector union promised pension benefits that look more like a lottery prize.
And, note: Illinois can’t pay lottery winners, either. Nobody can say that they didn’t see coming what is coming.