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OpEdNews Op Eds    H2'ed 4/18/16

Colonialism at Work in Puerto Rico

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Puerto Rico is in trouble. Their public debt is coming due and they just don't have the money to pay it off. They have petitioned Congress for a little help, and some on the hill are sympathetic. But there's resistance, and it comes from the usual suspects.

You may have seen recent TV and cable ads claiming that bankruptcy by Puerto Rico would crush your retirement fund. It's a preposterous claim, of course, but in the event of a bankruptcy or even a reorganization of debt, there would be winners and losers.

"Center For Individual Freedom" sounds like a pretty noble cause, doesn't it? They're the ones trying to get you to call your congressman and tell him to block the "bailout." They warn that if Puerto Rico is allowed protection, high-spending states like Illinois will be next. This organization is a 501(c)(4) "dark money" coalition supported by Karl Rove's Crossroads GPS, hedge fund managers, and Tea Party activists. It's safe to say that these interests would benefit in some way from Puerto Rico's collapse.

How did this US possession get into the current mess? We could go all the way back to the second voyage of Columbus - "bloody Chris" - but that's a rant for another day. Let's start with 1898 when Spain ceded the island to the US following their defeat in the Spanish-American War. From the beginning the nation was treated as a colony, accorded a modicum of self-rule - while the US Congress maintained the power of veto. In 1917, Congress passed the Jones-Shafroth Act granting US citizenship to residents of the island. Interestingly, the Puerto Rican House of Delegates voted unanimously against it.

Poverty dogged the colony from the beginning. Between natural disasters and the Great Depression, times were usually tough. Perhaps the event that wreaked the greatest long-term damage was Congress's passage of the Merchant Marine Act of 1920, also known as the Jones Act. Still in effect today, it requires that all shipping to and from Puerto Rico (among other possessions) be via US-built, US-flagged, and US-crewed vessels. This generally means that goods from anywhere in the world must stop at a mainland US port where they are unloaded, reloaded, and re-shipped on American vessels. The economic impact for Puerto Rico is negative - costing $1.4 billion in good years and perhaps $600 million in lean years. It raises the price of both imports and exports without providing any tangible advantages - except to the American Maritime Partnership, which speaks for its industry. You can buy goods in the US Virgin Islands - where the Jones Act doesn't apply - for a little more than half what they cost in Puerto Rico.

The oil shocks to the global economy of the 1970s hit the island hard. In 1978 I found myself in San Juan. Clearly, things had been booming just a few years before - the urban landscape was punctuated with half-finished high rise buildings that stood abandoned and neglected. I suspect that certain savvy investors later waltzed in and bought those properties for a song and developed them profitably.

Recovery ensued, and by 2006 a $100 billion economy had developed - the most vigorous in Latin America. It was built on agriculture, of course, but was supplemented by the manufacture of textiles, pharmaceuticals, and electronics. Then came US tax law changes, NAFTA, and the financial crisis - and the economy has been in decline for a decade. Meantime, Congress demanded greater "fiscal responsibility" and in response the sales tax rate was raised from 5.5% to 11.5%. Just this month, the sales tax was replaced with a VAT expected to generate similar revenues.

And of course there's the debt - $67 billion worth. Yeah, that's just a fraction of the US national debt, and relative to GDP, it's about 2/3 the level of debt issued by the US Treasury. Interestingly, the annual budget deficit of $1.1 billion is roughly equal to the economic damage done by the Jones Act alone.

Puerto Rico should be allowed to restructure its debt, and it needs to be exempted from the Jones Act. But it does not control its own destiny - it's dependent on the US Congress and the interests it represents. When Tea Party activists and hedge fund managers are clamoring for a hard line against Puerto Rican interests, it's not really about your retirement account. You can bet they're planning to waltz in and pick up the pieces. They'll get richer, and Puerto Rico will suffer. And besides - it's just wrong.
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Thirty five years as a small business consultant, CFO, and university educator specializing in quantitative business and economic modeling - a suite of experience now focused on economic inequality. Carefully attributed data, thoughtful (more...)

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