It’s a progressive paradise. Public
employees get 30 vacation
days a year. Anyone who works over eight hours
in a day gets paid time-and-a-half. Employees have strong rights. The minimum wage is high: 77 percent of the median wage.
Environmental regulations are
settled beyond the pressure of local economic
interests. The forests and mountains are
pristine destinations for ecotourism.
Energy costs are kept high, pushing
consumption down to a level deemed “socially beneficial”. Utilities have strong
public backing and provide jobs
to thousands.
The social safety net is buoyant and
provides a solid working-class standard
of living. People who are injured can rely on
disability insurance to maintain their income.
Student-to-teacher ratios are very
low so that every child gets the very best.
The flagship research institution is
a well-funded public
university. Just ten years ago, the university
was linked to downtown and the suburbs by a new light rail line.
Best of all, richer people living
far away pay most of the taxes. This little paradise has open access to large export
markets and is part of a major currency union.
The government borrows at low
interest rates and runs large deficits when output is below trend and does not
give up on stimulus after a
few years. But economic output, oddly, is
always below trend.
Puerto Ricans have lived through
decades of this left-wing utopia, and they are fleeing it. The island’s
working-age population declined by 100,000 since 2005, as the economy shifted
from stagnation to depression.
In a parallel universe with free
markets and low regulation, Puerto Rico could have become the Singapore of the
Caribbean.
It has a sizable educated, bilingual
workforce, is a natural hub for regional commerce, and has free access to U.S.
markets.
Credit must be given to left-wing
Gov. Alejandro García Padilla for commissioning an independent economic report
on Puerto Rico’s economy, and his administration did not repudiate the
economists’ blistering critique of the commonwealth’s progressive policies and
shabby governance.
In the report, economists Anne Krueger, Ranjit Teja, and Andrew Wolfe
call for spending cuts, tax reforms, and structural reforms—necessities if
Puerto Rico is to resume economic growth.
Spending Cuts
Krueger, who
will present her research at The Heritage Foundation on July 8th, argues that fiscal
stimulus by successive Puerto Rican
administrations failed to end the stagnation because it was based on a
misdiagnosis.
“Solving Puerto Rico’s problems
through fiscal expansion has not worked,” she writes, “and will not work.”
Instead, spending cuts that reduce
the footprint of government can return the commonwealth to solvency and allow
economic growth. Their suggestions include:
- Cutting subsidies to the University of Puerto Rico to save $500 million per year (throughout, annual savings are estimated as of 2020).
- Cutting extra Medicaid spending to save $150 million per year.
- Gradual cuts in public school employment and closure of some rural schools to reflect the shrinking number of students and save over $400 million a year
- Renewing a law that freezes the real value of certain transfer-spending formulas to save $1 billion a year.
- Staffing cuts at bloated public utilities.
Tax Reforms
The economists advocate
comprehensive tax reform. Replacing a 35 percent corporate tax rate riddled
with exemptions with a 10 to 15 percent, broad-based corporate tax would
increase annual revenues by $250 million.
Governor Padilla’s administration
has called for a new sales tax, which the authors estimate would raise $1
billion annually.
However, many
European countries can now attest
that raising taxes during a crisis is a recipe for slower growth and lower
revenues.
The largest potential revenue gains
come from reforms to the labor market and business sector rather than from tax
increases. By spurring economic growth, Puerto Rico could add $1.35 billion in
revenues without a tax increase.
Labor and Social Reforms
Tax reforms and spending policies
will not be sufficient without reforms to Puerto Rico’s social safety net.
By using a welfare system designed
for the mainland U.S., where average wages are much higher, both federal and
Puerto Rican policies discourage work.
The U.S. minimum wage of $7.25 is only
slightly lower than the median wage in Puerto Rico, $9.42. Contrary to the claims of some progressives, a higher minimum wage destroys jobs.
Puerto Rico cannot compete with
similar regional economies at mainland-U.S. wage rates. But only the U.S.
Congress can grant Puerto Rico a minimum wage exemption.
The economists recommend Puerto Rico
repeal its European-style labor laws, which make it difficult to lay workers
off, expensive to employ them, and thus risky to hire them.
Reforms of the benefits Puerto
Ricans receive when they are not at work are important as well.
The economists show in one estimate
that “a household of three eligible for food stamps, AFDC, Medicaid and
utilities subsidies could receive $1,743
per month—as compared to a minimum wage earner’s take-home earnings of $1,159.”
Since the minimum and median wages
are so close, the welfare income would also exceed a median wage earner’s
income by about $240 a month.
The authors conclude that the
“federal government should therefore give the Commonwealth more latitude to
adjust welfare requirements and benefits.”
It would then be up to Puerto Rico’s
lawmakers to administer transfer payments in less distortionary ways.
Business Barriers
The World Bank’s “Doing Business”
survey ranks Puerto
Rico significantly below the mainland U.S.
in its “Ease of doing business” rankings.
One barrier to business is the
Merchant Marine Jones Act, which gives a monopoly on trade between Puerto Rico
and the U.S. to a small fleet of old, inefficient vessels.
This partial embargo raises prices
of all sorts of consumer goods, making Puerto Rican residents poorer.
In particular, Puerto Rico has been
shut out of the energy boom on the mainland.
But lack of access to mainland gas
and oil is not the only reason energy prices are so high in Puerto Rico.
The report notes that only in
insolvency is the Puerto Rican electrical utility beginning to address its
“over-staffing and inefficiency,” which have kept electricity prices high.
They recommend assigning a
“high-level official” in the Puerto Rican government to improving the island’s
“ease of doing business ranking.”
Their hope is that someone whose
reputation is on the line will have the willpower to break through the
bureaucratic inertia and enact reforms on registering property and permitting
new businesses.
Beyond the content of Puerto Rico’s
policies, Krueger and her team were clearly troubled by the opacity of the
commonwealth’s civil service.
Their immediate problem was a lack
of accurate, up-to-date economic data. But the data deficiencies reflected generally
chaotic record-keeping and poor coordination throughout the central
bureaucracy.
The Stricken Land
Puerto Rico’s progressive policies
are not a coincidence. President Franklin Roosevelt appointed Rexford
Tugwell, one of his most progressive
lieutenants, governor of Puerto Rico in 1941.
Tugwell created a unique stream of
tax revenue and used it to experiment with a centrally planned economy,
extending the reach of the government of Puerto Rico into every sector of the
economy.
Stricken and stunted by the plans of
Tugwell and his successors, Puerto Rico has never lived up to its promise as an
American commonwealth.
Now in a depression and a debt
crisis, Puerto Rico serves as a warning against the very policies that Tugwell
championed.
Puerto Rico has lost population from 3.82
million in 2006 to 3.62 million in 2014. http://www.tradingeconomics.com/puerto-rico/population
Puerto Rico’s GDP has grown from $82.81
billion in 2006 to $103.13 billion in 2014.
Puerto Rico’s Debt has increased from $40
billion in 2006 to $72 billion in 2014. Unemployment rose from 10.5% in 2006 to
17% in 2010 to 12.5% in 2015.
Puerto Rico’s government revenue is about
$9.6 billion a year and their expenses are about $9.8 billion a year
Wall Street smoothed Puerto
Rico’s path to fiscal debacle. After the U.S. territory adopted a sales tax in
2006, investment banks worked with officials in San Juan to create new bonds
backed by a portion of the tax. Banks including UBS, Citigroup and Goldman Sachs reaped
more than $900 million in fees to manage Puerto Rico’s $126.6 billion of bond sales since 2000. These helped the government, which employs more than a
quarter of the workforce, put off cuts. The island’s bond rating had
fallen below investment
grade in March 2014 as it issued $3.5 billion of general
obligation bonds. The idea was to balance the budget, refinance debt and buy
time to revive a shrinking economy. But it paid
dearly, as these junk-rated bonds had an 8.7 percent interest rate. Like U.S. states, it can’t file for
bankruptcy. Puerto Rico’s special tax status dates to 1917 and the passage by
the U.S. Congress of the Jones-Shafroth
Act. Puerto Rico, ceded to the U.S. in 1898 after a war with Spain,
has relied for 50 years on this and other tax breaks to drive its economic
development. The incentives attracted
pharmaceutical, textile and electronics companies. The U.S. phased out the
incentives from the mid-1990s to 2006, contributing to the loss of 80,000 jobs.
Since 2006, Puerto Rico’s economy has
contracted every year except one and its poverty rate is now almost double that of Mississippi, the
poorest state. As jobs disappear, more Puerto Ricans are leaving. Population is
heading toward a 100-year low by 2050.
Comments
30 year Bonds at 5% interest can cost double
their loan amount. Governments would save double the money it they set up
accrual accounts for large infrastructure work instead of borrowing from banks.
Having 25% of the workforce on the government payroll is unnecessary. The Light
Rail and raising taxes were multi-billion dollar mistakes. Making welfare pay
better than work is sovereign suicide. Trying to grow you way out of this
global economy is naïve.
Norb Leahy, Dunwoody GA Tea Party Leader
No comments:
Post a Comment