Bankruptcy for Puerto Rico Will Reward Big Government Spending

At some point, politicians discovered they could spend taxpayer money to buy votes, and spending has been out of control ever since. This has been true under governments run by both Democrats and Republicans, including on the island-based Commonwealth of Puerto Rico. Puerto Rico is a territory of the United States, they elected their own government and have a non-voting Resident Commissioner representing them in Congress. Citizens of Puerto Rico are natural-born U.S. citizens.

After years of their government spending irresponsibly and failing to balance the budget, and running corrupt and inefficient state-run enterprises, the Commonwealth of Puerto Rico finds itself deeply in debt, more than all 50 U.S. States, and defaulting. The Commonwealth recently defaulted on more than $37 million in bond payments, and Puerto Rico’s bonds are trading at “junk bond” rates because of concerns about default. After years of borrowing, the Commonwealth has amassed $70 billion of debt.

Puerto Rico has incurred a per capita debt of $15,637, 10 times higher than the average per capita debt of the 50 states, according to Moody’s. This includes all of Puerto Rico’s debt, except that of PREPA, it’s largest electric utility. In comparison, the state of Connecticut has $5,491 per capita debt, the highest of the 50 states. Nebraska is the lowest of the 50 states, with $10 per capita debt. Puerto Rico’s public debt reached 87.5 percent of personal income in 2013, compared with an average of 3.1 percent among the 50 states. The debt is 26.8 percent of revenue, more than double Hawaii’s debt of 13.0 percent of revenue, while the mean of the 50 U.S. states is debt comprising 5.5 percent of revenue. Puerto Rico is reaching a level of debt that might not be sustainable.

The Obama Administration supports bailout and bankruptcy for Puerto Rico, but that clearly is not the answer, and will not address the root causes of the financial crisis there. Not only would bankruptcy not address the root causes of the crisis, i.e the excessive spending and corruption in the state-run enterprises, it would reward Puerto Rico for years of bad economic decisions and enable the Commonwealth to continue going in the wrong direction economically.

If bankruptcy protection is allowed for Puerto Rico, it might well be the direction pursued by the state of Illinois, a state that has spent excessively and irresponsibly to the point of finding itself in a serious financial crisis. Bankruptcy protection in instances like that of the Commonwealth of Puerto Rico and the state of Illinois would reward irresponsible, big spending politicians and condone and enable them spending out of control in the future. Governments of our states and territories need to learn how to pay their bills and live within their means financially without having the advantages of bailouts or bankruptcy to enable blatant fiscal irresponsibility.

The answer to Puerto Rico’s crisis is not bankruptcy, but reform. The Commonwealth needs to cut government spending and live within their means. Puerto Rico can generate significant revenue to pay down debts (rather than defaulting) by selling off and privatizing state-run enterprises. The privatizing would also help the Puerto Rico economy prosper while providing better services to the citizens of the Commonwealth. Puerto Rico needs to reform their permitting and regulatory process to reduce the red tape preventing businesses from starting, expanding, and creating jobs. Strong regulatory reform would go a long way to reducing the Commonwealth’s unemployment, which at 13.7 percent officially, is higher than unemployment in the U.S.

Puerto Rico has some of the most generous welfare policies, which creates a disincentive for many to join the workforce when it is more rewarding instead to receive welfare benefits rather than take a low-paying job. The combination of a stronger, growing economy that creates more good jobs, and strong welfare reform, would transition more citizens off programs and into the workforce.

Puerto Rico has the tools to improve their economy and reform their financial system without appealing to Washington D.C. for bankruptcy protection. The Commonwealth needs to get its house in order, governmentally and financially, in order to solve the root problems that are the cause of the current crisis, and have a brighter future. Congress needs to decline the request for bankruptcy and bailout and let Puerto Rico seek the path of reform and prosperity instead.

 


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