mead cohen berger shevtsova garfinkle michta grygiel blankenhorn
Blue Island on the Brink
How Low Can Puerto Rico Go?

There are two reasons Americans need to pay close attention to the disaster unfolding in Puerto Rico. First is that thousands of our island fellow citizens are joining us on the mainland in states like Texas, Florida, Virginia, and New York in search of opportunity. These are not hordes of low-skilled workers; things have gotten so bad in PR that many of its most educated, trained, and skilled workers are fleeing. The second reason is that PR is enduring a sped-up version of the malady threatening many of our mainland blue states, namely Illinois.

The New York Times has a harrowing report on what happens when the blue governance model not only runs a society into the ground but is tasked with finding a way to dig it out. The story is familiar. Puerto Rico’s economic model (mainly built around tax incentives for foreign companies) could no longer keep up with the dramatic economic changes sweeping the world. It crashed in 2006, coinciding with the irretrievable decline of its manufacturing sector. Puerto Rico followed the path of Detroit rather than Pittsburgh: no attempts were made to adjust to new realities, or to create a new revenue model. Deficits and pensions spun out of control. After years of chaos Puerto Rico’s governing class turned to the only strategy it could think of: borrow money, raise taxes. These attempts now verge on the absurd:

Perhaps the most maligned is the new lucrative gross receipts tax, which some owners of small- and medium-size businesses say threatens to put them out of business. Because of the way the tax is structured, it affects companies with less than a 5 percent net profit margin. This means that many food-related companies, like supermarkets, and new businesses, are hit hardest. The smaller the margin, the higher the tax.

Some stores are paying an effective tax rate of 130 percent, said Manuel Reyes Alfonso, the vice president of a trade association that represents the food industry. If the tax is not revised, some will be forced to shut down and others will have to raise prices, he said.

“It is absurd,” said Mr. Reyes Alfonso [vice president of a trade association that represents the food industry]. “It’s like selling the car to buy gas.”

Puerto Rico’s debt has now been downgraded to junk by two ratings agencies. It has $70 billion in debt, a 15.4 percent unemployment rate, $2.2 billion deficit, falling birthrate, and an aging population; it’s experiencing an exodus of professionals and middle-class residents, an egregious crime rate, and is watching its public schools literally decompose. This is a human tragedy on a large scale, and unfortunately the pattern of Puerto Rico’s decline and the numbers that describe its fall could all too easily be mistaken for Illinois. Let’s hope that the governing elite in President Obama’s home state are paying attention.

Features Icon
show comments
  • Pete

    The silver lining in this situation is that hopefully it will put an end to the talk of statehood for Puerto Rico.The idea was absurd from the get-go.

    Multiculturalism not withstanding, the commonality of P.R. and the U.S. is a minimum, and if it wasn’t for the island linkage to the U.S., it would be another Dominican Republic.

    Too bad P.R. couldn’t be cut loose.

    • bigfire

      The option has alway been Statehood, Independence or Status Quo. Status Quo has always win out due to the non-Federal Income Tax with the benefit of welfare from the Fed. Statehood gain them at least 3 seats in Congress, but they loose the income tax part. Independence will get them off Washington’s gravy train, so that’s a non-starter.

      Right now, there’s really no solution.

      • charlesrwilliams

        The US can declare its independence from PR. We have no particular obligation to them.

        • bigfire

          Congress with the mighty stroke of pen of Emperor Barack H. Obama I can of course unilaterally grant Puerto Rico their own nationhood. With the current make up of the congress itself, that’s highly unlikely. Perhaps God Emperor Obama will make that happen with his ALMIGHTY pen by himself. Afterall, L’Etat, c’est moi.

  • Kavanna

    Illinois is the state in the worst shape, but CA, NJ, and NY are all heading in the same direction. NJ and NY can still be saved. But IL and CA are probably beyond saving. CA is hiding it with accounting gimmicks.

    The worst thing, from an investment point of view, is that some money and hedge fund managers are still lining up for PR debt. Some idiot was on Bloomberg the other day talking up how PR is making the necessary changes, will repay all in full, blah, blah. The reporter looked on incredulously with that look, “OK … whatever you say ….”

    • bigfire

      But Jerry Brown assured me that the High Speed Railway is the economical revival Nirvana that will save the state. Have I been lied to?

      • Andrew Allison

        Would a progressive lie?

      • mgoodfel

        Could we build the high speed rail inside the delta water tunnels? We might have the world’s most expensive hole in the ground when we’re done. We could sell tickets!

    • Andrew Allison

      CA is doomed, and so is NY (see today’s discussion).
      The impending default of PR, whose bonds are a huge chunk of many mainland pension plans will hasten the spread of the contagion elsewhere.

  • TommyTwo

    “the pattern of Puerto Rico’s decline and the numbers that describe its
    fall could all too easily be mistaken for Illinois. Let’s hope that the
    governing elite in President Obama’s home state are paying attention.”

    Please join me in the chorus: “But it couldn’t possibly happen here. Things are different!

    • Andrew Allison

      It’s already happened here (Detroit) and, as Kavanna points out, is inevitable in many cities and States under the Blue Thumb of Death.

      p.s. there’s an edit button which, hypothetically speaking, would permit the removal of superfluous carriage returns and make your gems easier on the eye ;<)}

      • TommyTwo

        Sure, it might have happened in Puerto Rico and Detroit and however many other other examples you care to provide. And yet (eppur!) it will not happen here. We renounce you and cast you out, Gods of the Copybook Headings!

        P.S. Did I mention I find Disqus highly annoying?

        • Andrew Allison

          Did you mean Eppur si muove? Does this mean that are you switching linguistic allegiance?
          p.s. I don’t think it’s the fault of Disqus; rather that TAI is inserting hard CR/LFs into its text.

          • TommyTwo

            I thought I was supposed to pledge allegiance to a flag and a republic; nobody said nothing about no language.

            Whatever TAI is doing, there is more than enough blame to ascribe to Disqus. Copying and pasting in the Disqus edit panel changes line-ends in ways I cannot predict. Besides that, the edit button works only hypothetically; I need to open the Dashboard for any edits. (This apparently as a result of Disqus not playing nice with my security/privacy setup.) I generally check for line-end snafus, but this one looked normal on my screen and slipped by. I hereby sincerely and sonorously pledge that this oversight shall not go unpunished. The next TAI intern to cross my path shall be flogged.

            It moves!

          • Andrew Allison

            “The next TAI intern to cross my path shall be flogged unmercifully, and then some” might be more apropos.
            As to you your problems with Disgust, are you not seeing Comments on TAI? If not, click the Hide link (loading comments on TAI requires not just being logged into Disgust, but also un-hiding comments — they both get reset randomly).
            p.s. Mrs HTT (or H Mrs TT), please note the fact that your errant
            spouse has pledged allegiance to something or other, doesn’t give him license to promiscuously reference languages (among which I include the English language), unfamiliar to most Americans, and take appropriate remedial action.

          • TommyTwo

            Oh, I see comments alright, it’s inserting mine that’s the problem. My previous comment took several login attempts and several pastes, some of which did the line-ends correctly. (Suggestions, while well-motivated, are unlikely to be helpful.)

            Regarding the H Mrs TT, following my pledging allegiance to her, the only two words in my vocabulary are “Yes” and “Dear.” Which occasionally leads me to wake up in the hospital when it turns out that her question was: “Does this dress make me look fat?”

  • Anthony

    The governing elite (combine) in President Obama’s home state has not paid attention in at least 30 years and portents do not seem promising.

  • free_agent

    It’s interesting that the voters haven’t put some sort of stop to this. But I suspect that any solution will require a great deal of short-term pain for a lot of people, and voters usually postpone that sort of thing as long as possible.

© The American Interest LLC 2005-2016 About Us Masthead Submissions Advertise Customer Service