The tragedy of Puerto Rico, America's very own Greece
The eyes of the world are trained on Greece, this week, as it teeters on the brink of disaster. Which perhaps helps to explain Alejandro García Padilla’s timing: the Puerto Rico governor chose Monday to announce that the island territory is insolvent, and cannot (will not) pay back its $72 billion in debt. Not on time and in full, in any case.
Like Greece, Puerto Rico’s economic problems aren’t new, and they aren’t likely to be resolved anytime soon. The Puerto Rico government recently asked a team of former IMF economists to write a report on the country, which makes for extremely depressing reading. The big economic picture is downright scary:
And then comes a litany of lowlights:
- In 1996, the US government repealed Section 936 of the Internal Revenue code, which gave tax breaks to mainland companies operating on the island, with predictable results: the Puerto Rican economy started shrinking in 2005, right as the 10-year phase-out period for the tax breaks ended.
- Home prices have fallen by 38% from their 2010 peak. That’s very bad news in a territory where almost everybody has weak credit, and so borrowing against real estate is just about the only way to raise fresh capital.
- The island’s banking sector is in crisis, and shrinking even faster than the economy as a whole, which means that it can’t boost lending to fuel a recovery.
- Just 40% of Puerto Rico’s adult population is either employed or looking for work.
- The population of Puerto Rico has already shrunk by about 10% in the past 10 years, and is going to keep on shrinking by about 1% per year at least until 2020, which means ever-fewer people supporting an ever-rising debt burden.
- The island is incredibly poorly run: it never sticks to its budgets, and its statistical agencies are so weak that almost no one knows for sure just how bad its finances really are.
- The Jones Act forces all of Puerto Rico’s imports to be delivered on US-built and US-owned ships with US crews, sailing under the US flag. This significantly increases the prices of goods on the island, where the cost of living is nearly as high as it is in cities like New York. Meanwhile, wages on the island are much lower than anywhere else in America, with per capita income of less than $24,000 per year. (The poorest US state, Mississippi, has income of $37,000 per person per year, while the richest, Maryland, is over $70,000.)
In fact, the situation in Puerto Rico is even worse than the report lets on. Nothing is more fundamental or important than clean drinking water, but even that is in such short supply that the capital, San Juan, has been forced to implement drastic rationing measures. Residents of the city have their water cut off entirely for 48 hours every three days; people who live nearby are better off, having to go without water just for 24 hours every other day.
Puerto Rico, like Greece, is the poor southern cousin of a politically-motivated monetary union which was not designed with such populations in mind. Like Greece, it is burdened with a massive debt it can’t realistically pay back. Like Greece, it is therefore going to default. And like Greece, that default is going to prove extraordinarily painful, in large part because of the constraints being imposed from the north.