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.