3 Reasons You Should Care About Puerto Rico's Debt Crisis
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The Puerto Rican debt crisis has yet to capture the political imagination of the American voter, if the presidential primary contests under way are any indication.
The territory’s government, which represents roughly 3.5 million Americans, is “already in default,” according to a letter that Treasury Secretary Jack Lew sent to Speaker of the House Paul Ryan last week. Lew, who is traveling to Puerto Rico on Wednesday to meet with leaders to hash out a solution to the crisis, admitted on Monday that its debt problem is actually $2 billion worse than previously thought.
Despite the severity of the crisis, Congress has not made resolving it a priority, and the issue has been barely mentioned in presidential debates. It would behoove the public however, to pay attention to what is happening to their southern compatriots, as the Puerto Rican debt crisis is likely a foreshadowing of political fights to occur on the mainland in decades to come concerning public pensions and social services.
At first glance, Puerto Rico’s debt crisis appears unique. Its economy has struggled more or less since the United States annexed the territory following the Spanish-American War. Economic interests on the mainland joined racist forces in the government to prevent Puerto Rican statehood, forcing the economy into a limbo status that created countless impediments to economic growth. For decades, economic activity was propped up by tax breaks for manufacturers that made setting up shop in Puerto Rico economical. But those benefits were phased out in 2006, triggering an economic depression that has continued unabated to this day.
Because Puerto Ricans are U.S. citizens, the best and brightest have left the island for better opportunities on the mainland. And so Puerto Rico is facing a toxic blend of a shrinking economy and population. And it must continue to finance social services without reneging on what it has promised to pay its creditors and retirees. In this sense, the Puerto Rican debt crisis is the same sort that will likely strike many American states and perhaps even the federal government in the decades to come. Here’s why we all should be paying closer attention to the drama in San Juan:
1. The longer the crisis festers, the more expensive it will be.
Debt crises inflame political passions. Those on the right tend to think that borrowers borrowed too much, and that they should be punished for doing so. Those on the left argue that it’s the lenders who lent too freely, and that they should share in the burden by accepting less than full repayment. Of course, when you’re dealing with a legitimately insolvent entity, these moral arguments are beside the point. If there’s simply not enough cash to pay back what is owed, another arrangement has to be made.
The Republican Party is loath to give Puerto Rico access to Chapter 9 bankruptcy, which is available to municipalities across the country, with the logic that this would open the door to other basket case states like Illinois clamoring for the same rights. But as muni bond market maven Kristi Culpepper has put it:
"People can talk about the government’s bloated payroll, vacation days, and whatever other financial outrage they want to hold up as An Alternative Reason for Puerto Rico’s Fiscal Crisis -- many of which are legitimate complaints, if minor in the grand scheme of things -- all they want. However, it is not possible for Puerto Rico to adopt austerity measures that will offset what it has borrowed."
As long as Puerto Rico tries to solve its crisis through budget cuts alone, the worse its economy will get. Talented Puerto Ricans will continue to leave in droves, driving up budget deficits and forcing more economy-slowing budget cuts. The death spiral will continue until Puerto Rico and its creditors come to some kind of agreement.
2. It’s merely an extreme version of the struggles that states like Illinois are going through.
While Puerto Rico’s unique relationship to mainland America and its shrinking population and economy make its crisis quite acute, it’s not much different than what other states are going through. Illinois is grappling with pension costs that it cannot meet without sharply raising taxes. Voters won’t brook paying more for the same services, forcing the state to choose between breaking promises to creditors or to pensioners, two options that in Illinois’ case might be considered unconstitutional.
Long-term projections from the federal government indicate that we will soon be having the same discussion over federal entitlements like the Social Security Disability program and Medicare. Every working American pays into these programs and expects that the benefits will be there when they need them. But without increases in taxes or cuts to benefits, both of these programs will likely run out of money over the course of the next generation. Though it’s unlikely the U.S. government will ever have to renege on its promises to creditors given the fact that it can simply print dollars to pay its debts, the fight over whether to raise taxes or cut benefits will be a central political struggle for at least a generation.
3. The crisis lays bare crippling divisions in American politics.
The Congressional Republican’s plan to help Puerto Rico wouldn’t allow the territory to access bankruptcy courts. Rather, it would hand over fiscal decisions to a federal control board and force the territory along with other states in the union “to disclose, for the first time, the true financial condition of their pension systems for government workers,” according to report in Dealbook.
Public pension funds have long plagued state governments. The Pew Charitable Trusts estimates that there is nearly a $1 trillion gap between what is promised America’s public sector workers and what is needed to make those fulfill those obligations. The Republican bill in Congress would force states to reckon with this problem publicly, possibly drawing a rift between Democrats and one of their biggest constituents -- public sector unions.
The drama in Puerto Rico is a prelude to a bitter fight over whether the defined-benefit pensions that many public sector workers receive today are lavish relics of a previous age in which the American economy could support high living standards for our retirees, or if they are something that many more workers deserve in an age of high corporate profits but low wage growth.