Puerto Rico and its subdivisions cannot repay all their debts. Due to an anomaly in federal law, the bankruptcy protections that apply to the subdivisions of the 50 states do not apply in Puerto Rico. If orderly procedures are not instituted to determine how much of a haircut various creditors will take, we run the risk of a humanitarian crisis on the island or a taxpayer bailout — or the first of these followed by the second.
Four sets of reforms are needed to address the island’s problems. First: Bankruptcy protection should be enacted, to ensure that creditors rather than taxpayers take the hit from the island’s insolvency. This is not ideal, since it involves retroactively changing the rules on creditors. But most major changes in bankruptcy law have had retroactive application; this change is needed because of a hole in the old law; and it is better than the likely alternative of taxpayer exposure.
Second: The island needs fiscal reform to prevent a recurrence. That should include cuts in public-employee pensions. Third: The island needs to change its anti-growth policies. Its labor laws should be less restrictive, and many of its public enterprises privatized. Fourth: Federal policies that hobble the island should end. The federal minimum wage is too high for Puerto Rico, and the protectionist Jones Act governing cargo shipments raises costs.
#share#House Republicans are advancing legislation that makes some progress on these issues. It would allow debts to be restructured, albeit using a convoluted process that it pretends does not amount to an extension of bankruptcy protections to the island. It would create a control board for the island, of the type that brought order to the finances of Washington, D.C., in the 1990s. And it would reduce the minimum wage within Puerto Rico.
The legislation does not go far enough to spark economic growth or impose fiscal responsibility. It does not, for example, touch the Jones Act. Conservatives should work to strengthen the bill, but they should also keep in mind that a perfect bill will not get President Obama’s signature, and the imperative here should be to enact a law that reduces the likelihood of a bailout. The House Republican bill does that.