Puerto Rico is Sinking

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By: Hector Luis Alamo

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“Puerto Rico
My heart’s devotion
Let it sink back in the ocean”

Anita del Carmen, the grateful Puerto Rican migrant from Bernstein and Sondheim’s popular musical, just might get her wish.

The three major credit agencies – Standard & Poor’s, Moody’s and Fitch Ratings – all lowered the island’s credit rating to “junk” status in a week’s span, which now has U.S. investors seriously worried that Puerto Rico will default on $70 billion in public debt. That’s more debt than any U.S. state besides New York and California, and Puerto Rico only has a population of 3.7 million – and shrinking.

Since the recession hit the island in 2006, Puerto Rico has lost 138,000 of its citizens, presumably all of them to the mainland. Now in its eighth year of recession, the unemployment rate hovers just above fifteen percent and its poverty rate is twice that of Mississippi, the poorest state in the union. While Puerto Ricans have been moving to the United States for over a century, the current economic crisis has sparked the largest flight from the island since the 1950s, when half a million Puerto Ricans left for the United States in search of jobs. Back then, Operation Bootstrap was set in motion to modernize the insular economy by changing it from mainly agricultural to industrial.

Since 1996 the number of factory jobs has dropped from 160,000 to 75,000. And this isn’t just a Puerto Rican problem. For nearly a century U.S. investors have exploited Puerto Rico’s exemption from federal, state and municipal taxes. Coupled with high yields, and it’s no wonder why Puerto Rican bonds are held by three out of four municipal bond mutual funds in the United States. But U.S. investors weren’t the only ones having a field day with Puerto Rico’s special tax status. The colonial government, too, relied on the attractiveness of Puerto Rican bonds to borrow heavily whenever it needed to cover its budget deficits, which have grown wider and wider in the last decade.

So now that the gravy train has broken down, the island’s basically left with a credit card bill higher than that of any U.S. state, except two – the two largest states, and a more difficult time borrowing money. Nevermind the $37 billion in unfunded pensions the government needs to cover, too, which puts the grand total somewhere north of $100 billion.

Puerto Rico isn’t actually sinking, but it is bleeding to death. The only thing that could stop the bleeding is a bailout from Washington, but the constitutionality of such a move is in question.

See, three years after the United States took Puerto Rico away from Spain in 1898, the U.S. Supreme Court ruled that the island belonged to but was “not a part of the United States,” and that the Constitution did not apply to Puerto Rico. That sounds like a good thing, since the Constitution doesn’t allow states to file for bankruptcy. Detroit was able to file for bankruptcy last summer because it’s a municipality.

But because Puerto Rico isn’t a state or a municipality, which U.S. bankruptcy law defines as a “political subdivision … of a State,” the colonial government cannot file for bankruptcy. Puerto Rico could do what Argentina did a little over 10 years ago and use its sovereign immunity to say it just isn’t going to pay its debts, but Puerto Rico isn’t a sovereign nation either.

Puerto Rico is legally nothing – a big, bleeding nothing. U.S. corporations have used its weird status to make tons of tax-free dollars, but now that the island’s in trouble, it doesn’t have the legal power to save itself.

There’s a word for a situation where people aren’t given sovereign rights and other people who do have rights make all their free money by using the first people. The law calls it “commonwealth,” but that’s not the word I’m thinking of.

From an economic standpoint, the best Puerto Rico can hope for is statehood, but considering that an estimated $7.7 billion a year (at least) in social welfare programs would have to be spent on the Puerto Rican people, and that Puerto Rico would add more Democratic members of Congress and another blue state to the electoral map, I don’t see our severely divided Congress granting the island statehood anytime soon.

As Chicago Professor José E. López once explained to his class, “For the United States, the problem with Puerto Rico is that it’s filled with Puerto Ricans.” Now those Puerto Ricans are sick of the status quo and clamoring for change. The 2012 plebiscite showed that most islanders believe one thing: the Commonwealth has to go. The plebiscite came and went, but Congress hardly noticed.

So Puerto Rico has come to the moment of truth, a proverbial fork in the road where it has to decide what kind of society it will be. History already holds the answer. Time and again when the people are abused and neglected and their demands for change go unheard by an unresponsive government, a government they can’t elect, it only leads to one outcome.

Some say “statehood,” but that’s not what I’m thinking of.

References:

Fox, Washington PostFox, Bloomberg, Here and Now, Bloomberg, NPR, Forbes, New York Times.

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