Sunday, November 29, 2015

Why US Mainland Citizens Will End Up Paying for the Financial Crisis in Puerto Rico (And a Warning for Those Holding Illinois Debt)

The Economist, correctly, reports (my emphasis)
[T]he economic outlook for America’s Caribbean dependency is anything but sunny. Its government owes $72 billion in debt, which it says it cannot repay. On December 1st the territory is supposed to make—and is almost certain to miss—a $354m debt payment. And that is just the first of a series of repayments that add up to $1.4 billion (or nearly 1.5% of GDP) due in December and January.

Politicians in Washington are scrambling for a solution. The island’s fiscal woes are in part the result of chronically bad budgeting. But they also stem from structural economic weakness. Bailing out Puerto Rico, which is self-governing but not a state, is not a popular option. Yet when any corner of America faces a deterioration in its long-run economic fortunes, the costs will end up being shared, one way or another...

As the economy has withered, obligations to creditors have loomed larger.

Many Puerto Ricans have not waited for a recovery. More than 200 move to the mainland every day. Roughly 5m Americans of Puerto Rican descent live in the continental United States; 3.5m remain on the island. Its labour force has shrunk 11% since 2009...

Migration reduces unemployment, but it cannot liberate struggling spots from accrued obligations—most notably pensions. Puerto Rico’s biggest government-pension programme has sufficient funds to cover just 0.7% of future obligations. State pension pots are not in quite such bad shape, but massive liabilities still loom. In Illinois, where the labour force has shrunk by about 3% since 2007, pensions are just 39% funded. Puerto Rico will not be the last local government to run out of money...

The administration of Barack Obama has released a...plan to repair Puerto Rico’s finances. It would allow indebted government agencies, such as the island’s power company, to declare bankruptcy, and would provide for a restructuring of other debts and pension obligations. The federal government would also oversee the territory’s future public spending; as a sweetener, residents of the territory would gain full access to various anti-poverty schemes that are less generous there than on the mainland.

If Congress spurns this plan, Puerto Rico’s government will be forced to raise taxes to crippling levels and slash spending to pay its bills. That would hit the island’s residents, 40% of whom live below the poverty line, hard. It is difficult to imagine the federal government ignoring the humanitarian crisis that would probably follow. In addition, emigration to the mainland would presumably jump, initiating a vicious cycle whereby a shrinking tax base leads to rising taxes and curtailed services, prompting further emigration. As American citizens, the migrants will be eligible for public support of various kinds on the mainland. There is no question, in other words, that America will end up bearing much of the cost of Puerto Rico’s past profligacy. The only question is how considered and efficient its assistance will be.


  1. Gee, what a surprise, American taxpayers on the hook to recoup government and corporate losses. When will we see a tax revolt in the tens of millions in America? Until then, nothing will change for the better for the average taxpayer.