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A “Humanitarian Crisis” or Just Bad Government?

eye on the news

A “Humanitarian Crisis” or Just Bad Government?

President Obama wants to rescue Puerto Rico; Republicans should call his bluff and demand some real reforms. October 25, 2015
Photo by Joe Raedle/Getty Images

Last week, the Obama administration doubled down on efforts to aid Puerto Rico. The administration proposed to change American law to allow the territory and its municipalities to seek bankruptcy protection. The “Roadmap for Congressional Action” on Puerto Rico seems more calculated to embarrass Republicans than to find an actual solution to the deeply indebted island’s problems. Republicans had serious concerns about previous Puerto Rico bailout proposals. Rather than addressing these concerns, Obama simply cast the issue as a “humanitarian crisis.” The implication? Rejection of his plan would be heartless. But instead of dismissing it, Republicans should demand more substantial concessions on union-friendly federal policies that have helped deep-six Puerto Rico’s economy. Then we’ll see how serious Obama is about this “humanitarian crisis.”

Earlier this year, in a report commissioned by Puerto Rico’s government, three international economists described the territory’s woes. While the report scored the territory for its lack of fiscal controls in the face of a struggling economy, the economists also argued that Puerto Rico suffered because it was forced to adhere to federal laws that have “gnawed at growth.” The “single most telling statistic in Puerto Rico,” they wrote, is that only 40 percent of the working-age population is employed. The biggest obstacle to jobs, the report argued, is that the territory must observe federal minimum-wage law, even though incomes in general are far lower on the island than in U.S. states. A full-time worker in Puerto Rico making minimum wage earns 77 percent of the average wage on the island, compared with just 28 percent in U.S. states. The cost of paying even an unskilled worker is so high that “employers are disinclined to hire.” Even more foolishly, welfare benefits on the island—including food stamps, Medicaid, and subsidies for utility bills—approach mainland levels. Recipients can garner benefits equal to $1,743 a month, more than the average wage on the island. “The result,” the report notes, “is massive underutilization of labor, foregone output, and waning competitiveness.”

Puerto Rico also suffers from the ill effects of the union-friendly Jones Act—a 1920 law that drives up the cost of goods by forcing ships traveling between U.S. ports to be built and manned by Americans. The restrictions have a particularly devastating effect on the cost of transporting goods to and from U.S. island territories or states, such as Puerto Rico and Hawaii. Neighboring islands that aren’t U.S. territories pay far less. “Exempting Puerto Rico from the U.S. Jones Act could significantly reduce transport costs and open up new sectors for future growth,” the economists’ report argues. Other factors impeding Puerto Rico’s growth include complex local regulations on banking, an inefficient energy sector that drives up the price of power, and difficulties in registering property, obtaining business permits, and paying taxes. As the economists observe, the territory ranks 47th (out of 189 governments) in the World Bank’s ease-of-doing-business index. The United States ranks seventh.

The president’s plan says zero about these issues. Its only mention of welfare benefits is a demand for island residents to get more from Medicaid. Its chief suggestion for stimulating economic growth is to extend the Child Tax Credit and the Earned Income Tax Credit—a tool for rewarding low-income workers who stay employed—to Puerto Rico’s residents.

Republicans should make reform of Puerto Rico’s anti-business climate central to any plan to help it. That would include not only exemptions to U.S. labor laws that don’t make sense in an economy like Puerto Rico’s, but also assurances from the island’s leadership that it will reform its anti-growth regime of bad regulations and wrongheaded laws.

In the past, Republicans in Washington took a dim view of granting bankruptcy for Puerto Rico. But the GOP may be ignoring an opportunity that the Puerto Rico crisis presents for dealing with a problem closer to home: the state and local pension crisis. With his proposal, President Obama was careful to wall off the municipal bankruptcy code from larger changes. He and his political allies, especially public-sector unions, fear that helping Puerto Rico might make it easier for municipalities or other entities within states—including deeply indebted pension systems—to file for bankruptcy protections. In places like Illinois, New Jersey, and California, where taxpayers’ efforts to reform public-sector debt run into one stumbling block after another, bankruptcy might be the only way of clearing away these steep fiscal obligations. The GOP should use Obama’s Puerto Rico gambit, clearly a political ploy, to start a discussion on municipal debt that the administration and its allies would rather not have.

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