Watching Puerto Rico’s steady slide toward default is like watching a slow-motion car crash. “What slide toward default?” most people will ask. Ah. The one that is being covered by not one single respected American publication because no one in America has thought about Puerto Rico for around 115 years, or since America took possession of the newly liberated Spanish colony. I had to learn about PR’s bond crisis through a series of articles in The Economist, and even the New York Times relegated the news to some pseudo-section called Dealbook. Whatever that is.
Puerto Rico’s situation brings two comparisons to mind. The Economist draws a comparison to Greece as “a chronically uncompetitive place locked in a currency union with a richer, more productive neighbour.” Moreover, Puerto Rico’s public sector is bloated (surprise, surprise), and it’s debt-to-GDP ratio is 70%–higher than any other American state. And while PR is not a state, it is also not a country and it’s treated by the US as a state. Technically, it’s a territory, and though its residents are citizens of the United States and pay with the greenback, they cannot vote in federal elections. Exhausted yet?! I am.
The second comparable situation is the string of bankruptcies declared by a handful of California cities and, more recently, Detroit. However, as that weird Dealbook crap points out, Puerto Rico cannot declare bankruptcy due to its territory status–it’s in a “legal twilight zone.” This article is from weeks ago but it reports that Puerto Rico has essentially LOST ACCESS TO THE BOND MARKET. Of course, this could not have come at a worse time, with the shutdown of the US government and a near-default of federal US bonds. But now that’s all over (for now) and, still, all anyone can talk about is Ted Cruz and Miley Cyrus. Enough!
All of this could be solved by granting Puerto Rico US statehood, an option that its citizens, who were historically loth to fully join America, approved in a referendum in 2012. However, like all issues that must go through Washington, this one will almost certainly result in partisan squabbling and eventual gridlock. Puerto Rico votes Democrat, and Republicans will not tolerate an influx of democratic senators, reps, and electoral college votes. And so again, US politicians will act in the interest of ensuring their party’s continued success rather than in the interests of their constituents.
Because, though politicians are not accountable to Puerto Ricans, this decision will still hurt the people that do have the right to a federal vote. In the event of a Puerto Rican default (proposed by Matt Yglesias), investors will lose out. This includes a not insignificant number of US citizens’ pensions and mutual funds. And if PR chooses instead to cut its citizens off from social spending, the US will probably have to use tax dollars to prop it up anyway. Puerto Ricans don’t pay federal taxes, so that’s all on you, America. (:
In general, this crisis really underlines the shitty shittiness involved in PR’s status as a US territory. Puerto Rico has no control over its monetary policy or exchange rate, which would be very helpful right now in restoring some competitiveness. It is subject to US labour laws, which are not really applicable to an economy as uncompetitive as PR’s. (The minimum wage in Puerto Rico is pretty much equal to the average wage.) Reforms are supposedly being passed, but there is only so much a governor can do. The tax incentives for American manufacturers to set up shop in Puerto Rico expired in 2006, and politicians appear to have just kind of forgotten to renew them, or to do anything else helpful for that matter. If Washington doesn’t start paying attention, something really stupid is going to happen–something that will require making it rain on PR from Washington’s rubber-band wallet. And that’s not good enough for a territory that produces the most pop stars per capita in the world.