Sunday, December 22, 2013

Americans think Puerto Rico's problems are Puerto Rico's responsibility alone. They're not.

"Standard & Poor's dowgraded the debt of Puerto Rico to junk status," declares the paper of record in the U.S. in it's lede sentence on a tragic event for the U.S. territory. The rest of the sentence explains why this is significant to the American people: "[Puerto Rico's] financial condition is of outsize importance to the rest of the United States because its debt is widely held by individual investors through mutual funds." Not because there are 3.6 American citizens on the island (and many more natives of Puerto Rico who have fled to the mainland) who will suffer the consequences of an insolvent government. Because it could slightly decrease the value of peoples' retirement funds. 

Puerto Rico is in the midst of a brutal financial crisis, with a recession that has lasted 8 years and a jobless rate double that of the mainland United States.  The government's bonds have been declared - by the three largest ratings agencies - to be sub-investment grade (junk) status.  Their interest rates to borrow are now nearly 10%.  

To try to prevent a further downgrade of Puerto Rico's credit, the current administration has been answering the calls of creditors to reduce the public workforce, reform the public pension system, and cut spending. It has been done in spite of public protest, like when the legislature passed drastic cuts to teacher pensions in the middle of the night last month. And in spite of academic research, real-life evidence in Europe, and common sense that cutting spending in the midst of a recession will only lead to a further downward spiral. The irony is that, in the end, the "fiscal response" was not enough for the ratings agencies anyway. And it is the ratings agencies whose opinion determines how much people willing to lend money should demand in return.

The country's problems are now so bad that no one has any reasonable proposals to change the course of the economy. Defaulting on the debt, the way Argentina did in 2002, seems to be the only way to perform surgery without killing the patient. The country is now the guy who maxed out his credit cards and has to pay his whole salary each month just to cover the interest payments. Puerto Rico's situation has been compared to Detroit, whose $18 billion in debt prompted the city to declare bankruptcy to restructure its debts and try to start fresh. Unfortunately for Puerto Rico, which faces a much larger debt burden of $70 billion, that option seems to be off the table.

Puerto Rico, as a territory, is not eligible for Chapter 9 protections.  With an economy that is still contracting and interest rates on debt ballooning, it is hard to envision a way that Puerto Rico can institute further spending cuts and tax increases that could dig them out of this hole.  Another option would seem to be a federal bailout, but in the current political climate it is hard to imagine U.S. politicians agreeing to such a commitment of taxpayer dollars for a territory many Americans don't even realize belongs to the United States. The White House has already declared that this won't happen anyway. What looks inevitable is more of the same: misery for many businesses and residents of the island and more erosion of whatever financial and social security they have left.

It is easy to blame opportunistic politicians in Puerto Rico, who for decades have written checks that they knew would bounce long after they had left office.  This is probably how the U.S. government would like to view the situation. We will find out from a group of consultants sent from Washington to "advise" (read: demand) a plan of action.

But, this misses the larger point: Puerto Rico does not have sovereignty over its own territory.  The U.S. took sovereignty from Puerto Rico (more accurately, from Spain) in 1898 and has never agreed to relinquish it. Under human rights laws, the government which holds sovereignty over a territory holds the responsibility to provide for the welfare of its residents. 

This is guaranteed in the Universal Declaration of Human Rights as well as the International Covenant on Economic, Social and Cultural Rights (which the U.S. has signed but not ratified). The human rights guaranteed in both treaties include "the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control" and "the highest attainable standard of physical and mental health."

The basic conditions that the United States is obligated to provide Puerto Rico are obviously not being met. Even before the economic crisis started in 2006 in Puerto Rico, the island had an average income 50% less than the poorest state. In order to comply with its human rights obligations, the U.S. has to use its national wealth to ensure an adequate standard of living for all Puerto Ricans who have not been able to obtain this through the existing economy.  

There are people who assign blame, and say Puerto Rico got itself into this mess and now they should get themselves out. While spend-happy local politicians surely play a large part in the situation Puerto Rico finds itself in, one must consider the economic structures imposed on the island by the U.S. to understand the full context.  


The Cabotage Laws in effect since 1920 make shipping to and from Puerto Rico prohibitively expensive, impeding demand for exports and driving up prices on imports. Operation Bootstrap, designed and implemented at the direction of the United States post-WWII, transformed a primarily agricultural economy into an industrial economy and revolutionized the island. Corporations were lured by tax breaks and cheap labor, but the initiative failed to jump start sustainable production. When the tax breaks disappeared, so did the companies and their jobs. 

What was left in Puerto Rico were highways where fields used to be. There is no way to unpave the concrete now covering fertile soil, which could have been used to feed the population and sell fruits and vegetables abroad. Instead, Puerto Rico is now the country with the most cars per square mile in the world and 85% of its food sources are imported.

As a hostage to the neoliberal agenda, Puerto Rico is forced to offer health insurance through private, for-profit companies. This system, found nowhere else in the world outside the U.S., has been proven to cost much more than a universal, single-payer system and deliver worse results. Puerto Rico has chosen to extend coverage to as many people as possible through this grossly inefficient system. There are other areas as well, such as banking, telecommunications and agriculture, in which forced privatization has put the interest of foreign investors before the nation's citizen-subjects. 

The island's resources were thoroughly exploited in the first half of the 20th century, when American corporations hijacked sugar and coffee plantations and generated massive amounts of wealth as native laborers suffered malnourishment and disease. 

Today many people who don't have a way to put food on the table find themselves dependent on means-tested government programs like welfare, food stamps or disability. Faced with long hours of stressful labor for meager wages or government-offered bare-bones subsistence, many choose the latter. Or they supplement their income with other under-the-table activities that are not subject to government taxes. The drug trade is rapidly growing into as big a part of Puerto Rico's economy as tourism. 

If adequate food, housing and health care were guaranteed regardless of how much someone makes, they would be free to try to supplement their basic standard of living with on-the-books economic activities that could generate taxes. As long as the marginal benefits of working promote a perverse incentive not to work, most people at the margin will continue to follow their self-interest at the expense of the larger economy.

Puerto Rico does not have enough jobs. There is no sustainable economy. And there is no going back to the days before the Americans landed at Guánica. 

The neoliberal-imposed socioeconomic system has not resulted in the standard of living Puerto Ricans are entitled to from the government of the United States. Puerto Rico is now being asked to pay the piper. But how is it fair for the U.S. to pretend the crisis affecting them is something that Puerto Rico is responsible for on their own?