Where’s the Long-Term Plan for Puerto Rico’s Fiscal Crisis?

USA overall labor force participation rate 63% vs 40% in Puerto Rico because far more able-bodied people in PR are choosing not to work, instead choosing to live on welfare.


Where’s the Long-Term Plan for Puerto Rico’s Fiscal Crisis?

The U.S. flag flies in front of Puerto Rico’s capitol in San Juan.

Associated Press

Puerto Rico’s plan to pay some of the roughly $1 billion in bond payments due Jan. 1 involved diverting funds from debts with weaker legal obligations to cover some debt guaranteed by the island’s constitution. The plan, which the commonwealth’s governor outlined last week, aimed to delay potential lawsuits and give Puerto Rico more time to negotiate with creditors. Some analysts expect lawsuits to be filed this week, and holders of the constitutionally backed bonds believe other creditors should be wiped out before changes are made to the terms of their debt. Whether Puerto Rico and its creditors negotiate directly or go through the courts, a legal framework exists for settling disputes.

The Puerto Rico Electric Power Authority, or PREPA, reached a partial-default deal with creditors and bond insurers on Dec. 23 that would cut debt payments almost by half for each of the next five years. Pending legislation to confirm the arrangement, the deal would impose a 15% loss on creditors in exchange for stronger legal claims on the remaining debt.

Congress has faced calls for months to do something about Puerto Rico’s fiscal crisis. But most proposals do nothing about the underlying issues that led to today’s situation. The least damaging proposal offered so far would freeze litigation until March 31, giving the commonwealth more time to offer creditors and bond insurers a negotiated solution. Other ideas include changing federal bankruptcy law, increasing federal payments to Puerto Rico, and establishing fiscal advisory boards (of the sort that has usually proven toothless in other situations).

Real legislative help for Puerto Rico would take account of the big picture: Puerto Rico needs economic opportunity for residents, a lower cost of living, and higher productivity. Most of the responsibility for better policy lies with the commonwealth’s government. But Congress could help by exempting Puerto Rico from the Jones Act, which raises the cost of living and has suffocated most potential industrial growth. Other positive steps include giving the commonwealth flexibility to set its own minimum wage and welfare rules.

With or without quick fixes and bailouts, Puerto Rico’s finances are unsustainable. Arresting the long-term economic decline caused by decades of irresponsible governance will require major reforms.

Salim Furth is a research fellow in macroeconomics at the Heritage Foundation’s Center for Data Analysis. He is on Twitter: @salimfurth.

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