Puerto Rico’s Newest Problem: The Population Can Leave Even If The Debts Don’t

Puerto Rico is a lesson in the failure of Socialism as it drives the productive members of society to leave or work less, just as it happened in Cuba and Venezuela, Puerto Rico’s Latin neighbors.


Jan 5, 2016 @ 11:35 AM

Puerto Rico’s Newest Problem: The Population Can Leave Even If The Debts Don’t

Tim Worstall – Contributor
I have opinions about economics, finance and public policy.
Opinions expressed by Forbes Contributors are their own.

Puerto Rico seems to be facing just one more economic problem, over and above the fact that the place is essentially bankrupt and yet the law won’t let it go bankrupt to solve that problem. This newer, or perhaps just realised, problem is that the population can just up sticks and leave: but the debts get to stay behind. And an economy that has a shrinking tax base and yet a static debt can all too easily fall into a death spiral. The debt per person, and the taxes needed to pay it, rise ever higher, leading to more of the productive population leaving and that raises the debt per productive capita again and thus the tax rate on those who remain. This isn’t, it should be said, something that worries us only about Puerto Rico. It’s something that’s gnawing away at the minds of people considering Portugal, where I am now, and Greece as well here in the eurozone. If the austerity needed to pay the current debt bills leads to the young leaving, then who will there be left to pay the future debts and tax bills for the maintenance of the old who stay?

The WSJ has the numbers for Puerto Rico:

Puerto Rico’s population loss accelerated last year, a troubling sign for an island facing a severe fiscal crisis and a recession entering its 10th year.

Well, yes, that is troubling:

The population figures, which were released last month, illustrate how Puerto Rico’s fiscal and economic crises are likely to worsen. Puerto Ricans are American citizens, and as they leave the island to seek employment or retirement in the U.S., the island faces a shrinking tax base to pay for debts incurred over the past decade.

The Census Bureau report showed that Puerto Rico’s population fell 1.7% in the year ended June, an acceleration from the 1.6% decline for the year before that. The island’s population has fallen by more than 1.1% for five straight years.

And it’s not a new thing:

The population is now 9% lower than it was one decade earlier, a period in which its debt burden has increased 64%.

And that’s really terrible.

There’s three things that determine the gross size of an economy. There’s the number of people, how many of those people are working and the productivity with which they work. That last is really “technology” in its economic sense and doesn’t concern us here. But the demographics of the other two are obviously hugely important. The more skewed to the old, say, the population is as a result of retirement then the smaller portion of the population will be working to build the economy. And the fewer people there are in total then of course the same is true. What makes this sort of immigration outflow so damaging to an economy is that it’s largely the young and educated who leave in such circumstances: this is largely always true of emigration by the way, it’s not the dirt poor who move, it’s the aspirant middle classes. But what this means is that the economy being emigrated from has already incurred the expenses, with the associated debts, of raising and educating these people, while the tax revenues they will produce in future to pay off those debts (or, perhaps, to pay for the next generation to be raised and educated) will be accruing to the new host country.

The general view is that Puerto Rico’s government has simply been spendthrift in the past and that’s certainly a story I’m willing to believe from what I’ve seen, however, at least part of the problem is that a significant part of what was PR’s tax base is now on the mainland, and thus not part of that tax base. Which is one, but not the only, reason why this is happening:

Puerto Rico defaulted on about $174 million of debt payments on Monday, as planned, stripping cash away from its lower-ranked creditors so that higher-ranked creditors could be paid in full.

Alejandro García Padilla, Puerto Rico’s governor, defended the default as best he could on Monday in an appearance on CNBC, saying, “It’s very simple. We don’t have money to pay.”

The payment default does not change Puerto Rico’s underlying economic troubles, although it could spur efforts in Congress to find ways to help the island.

Puerto Rico has been struggling with more than $72 billion of debt, mostly in the form of municipal bonds.

There’s certain things that need to be done here as the island’s own government has suggested. Puerto Rico needs to be exempted from the mainland minimum wage, it needs to be freed from the Jones Act and so on. But while these are necessary conditions into the future, they’re not sufficient. Whatever the contributions of past profligacy and the demographic decline, the two together mean that the current total debt burden just isn’t going to be paid. And thus whether we call it bankruptcy or something else, something akin to bankruptcy and a writing down of the current debts is simply going to be necessary.

And if this isn’t done then it’s going to happen anyway. Simply because as the tax burden rises to pay those debts then more and more of the productive part of the population are going to move to the mainland. Meaning ever fewer to pay taxes, ever less paid in tax, and the place will indeed go bankrupt whatever the law says about it being legal to do so. Because we just cannot, in either legal or moral, terms insist that the population stay there to be fleeced for the sins of the past. So they won’t: and the debts just won’t get paid.

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