The economic problems of Puerto Rico

by on February 6, 2014 at 5:07 am in Current Affairs, Economics | Permalink

Felix Salmon writes:

Puerto Rico is now shrinking at a 6% annual pace, and that number is probably going to get worse before it gets better. The chances of the island’s economy actually growing at any point in the foreseeable future seem remote: indeed, the country has essentially been in one long and nasty continuous recession since 2006.

Puerto Rico has $70 billion in debt outstanding, all of it needing to be repaid with interest — and the simple fact is that there’s no way it’s going to be able to do that, if its economy continues to shrink and its most talented nationals continue to decamp for the mainland, where their prospects are much brighter. Labor mobility from Puerto Rico to the rest of the US, and particularly to Florida, has never been higher, while most of the migration in the other direction comes in the form of retirees, who are not exactly going to kick-start the economy. In fact, in terms of the labor force participation rate, they’re just going to make matters worse, on an island where only 1.2 million of the 3.4 million inhabitants are employed.

Ryan McCarthy adds more.

prior_approval.com February 6, 2014 at 5:33 am

‘if its economy continues to shrink and its most talented nationals continue to decamp for the mainland’

So, Puerto Rico resembles Detroit? – ‘Long a major population center and major engine of worldwide automobile manufacturing, Detroit has gone through a continuing economic decline.[48][49][50] Like many American cities, Detroit reached its population peak in the 1950 census. The peak population was 1.8 million people, and as of the 2010 census had less than 40 percent of that number at just over 700,000 residents. The city has declined in population with each subsequent census since 1950.’ http://en.wikipedia.org/wiki/Detroit#Decline

Well, apart from Peurto Rico not being a world wide leader in automobile manufacturing, of course. And Detroit’s bankruptcy only involving 18.5 billion dollars, give or take a hundred million here or there.

I do wonder when we will be reading about something more comprehensive, detailing how the parts of the U.S. actually comprise the U.S.

‘Labor mobility from Puerto Rico to the rest of the US, and particularly to Florida, has never been higher, while most of the migration in the other direction comes in the form of retirees, who are not exactly going to kick-start the economy.’

Wait – Florida, like Arizona, has made a bundle off of retirees. And labor mobility is supposed to be an unalloyed good, at least if places like this web site are to be taken at face value.

‘In fact, in terms of the labor force participation rate, they’re just going to make matters worse’

Well, that is by definition true. However, the more interesting figure is how much income those retirees will be spending – in terms of things like paying rent or buying food. Pretty much like how those with income from work participate in the economy.

Slocum February 6, 2014 at 11:25 am

Really not like Detroit. The city of Detroit (the entity that lost all that population) really hasn’t had much auto manufacturing for decades. The Detroit region, on the other hand, remains an automotive center and hasn’t lost population. When considering Detroit as a whole, it’s a story of urban flight/sprawl, not shrinkage.

Marian Kechlibar February 6, 2014 at 6:00 am

The question # 1: How did Puerto Rico manage to borrow 70 billion USD in the first place? Who was courageous enough to lend this kind of money to relatively small Caribbean island? They aren’t sovereign and cannot emit currency at will.

Every debt story has two sides.

Rahul February 6, 2014 at 6:51 am

Lender assumes debt is backstopped by USA. In practice, probably true?

Effem February 6, 2014 at 10:58 am

Definitely true. Will be a 6-minute furor when they are bailed out then we’ll all go back to business as usual. Pathetic, really.

Floccina February 10, 2014 at 4:02 pm

+1

Rich Berger February 6, 2014 at 7:03 am

Sounds like a great place for an experiment. Why not eliminate the income tax and replace it with a PR specific flat tax and welcome more retirees and businesses. Can’t be any worse than the mess they have. If retirees are willing to move to Costa Rica, they sure would be willing to move to a spot in the good old US of A!

Kent February 6, 2014 at 9:46 am

Hardly anyone plays taxes there. The island is a colonial relic and an economic disaster. Hacienda audits US federal employees all the time…because it knows we (I’m one) actually pay our taxes.

chuck martel February 6, 2014 at 9:47 am

“In general, United States citizens and resident aliens who are bona fide residents of Puerto Rico during the entire tax year, which for most individuals is January 1 to December 31, are only required to file a U.S. federal income tax return if they have income sources outside of Puerto Rico or if they are employees of the U.S. government. Bona fide residents of Puerto Rico generally do not report income received from sources within Puerto Rico on their U.S. income tax return. However, they should report all income received from sources outside Puerto Rico on their U.S. income tax return. Residents of Puerto Rico who are employed by the government of the United States or who are members of the armed forces of the United States also should report all income received for their services to the government of the United States on their U. S. income tax return.” Wikipedia.

yaph February 6, 2014 at 10:17 am

Your experiment is already running. Puerto Rico is already a tax shelter for companies like Microsoft and already has a giant production facility which has been operating for a decade.

Cliff February 6, 2014 at 12:10 pm

Not really

Michael February 6, 2014 at 7:14 am

Tyler, you keep telling us that labor migration is good, and now you tell us that Puerto Rico will have problems paying its bills because of brain drain. So which is it–is labor migration good or is it not good?

Rahul February 6, 2014 at 7:44 am

Is steak good or bad? Good for the foodie bad for the cow.

Axa February 6, 2014 at 7:45 am

Good for the migranting people, good for the receiving country, not so good for the emitting country. But, who is more important? The people or the state?

Steve Sailer February 6, 2014 at 7:56 pm

“Good for the migranting people, good for the receiving country, not so good for the emitting country.”

Like all those great Puerto Rican cultural accomplishments like those four Puerto Rican guys who composed and choreographed “West Side Story.”

A Definite Beta Guy February 6, 2014 at 9:16 am

Puerto Rico’s collapse is a feature, not a bug. Much like the Sears bankruptcy, open borders allows laborers to flee institutionally failing regions, which eventually should compel those regions to reform.

Steve Sailer February 6, 2014 at 7:56 pm

Real Soon Now.

chuck martel February 6, 2014 at 12:58 pm

Don’t more Puerto Ricans live in New York and Philly than in Puerto Rico itself?

dwb February 6, 2014 at 8:37 am

Every state in the union has labor mobility with every other state. Puerto Rico has been treated as a defacto state for a long time. Blaming this on labor mobility is like blaming Illinois budget problems on labor mobility. Or, New York. Or, California.

No, and no. They spent too much relative to the economy’s expected growth path.

dwb February 6, 2014 at 8:46 am

Indeed, looking through to the Economist article, labor mobility is not to blame, its underlying structural problems in the economy. The same phenomena that causes people to flee high-tax states like CA and NY. They need to address their structural problems and figure out a way to get through bankruptcy.

Z February 6, 2014 at 8:49 am

I recall libertarians talking about Luis Fortuno being the savior of the Right. He made all the noises that make libertarians swoon. Here we are five years on and we’re hearing PR may follow Guam and tip over or something.

Locke February 6, 2014 at 10:22 am

Yeah, racking up $70 billion in debt, guy was just a libertarian darling.

Z February 6, 2014 at 4:13 pm

I guess “Fortuno” means “snowball” in libertarian.

Rahul February 6, 2014 at 11:51 am

Aren’t Peurto Rico’s problems a little bigger than Fortuno? And predate his watch by a decade or more?

Milo Minderbinder February 6, 2014 at 11:57 am

Here’s reason.tv on how Puerto Rico avoided becoming Greece. Heh.

http://reason.com/blog/2012/04/08/reasontv-governor-luis-fortuno-on-how-pu

Z February 6, 2014 at 5:47 pm

Is that a dog whistle?

Colin February 6, 2014 at 7:43 pm

You realize Fortuno was only in office for four years, right?

The Anti-Gnostic February 6, 2014 at 10:16 am

Puerto Rico and the other US territorial possessions sound like perfect candidates for Charter City experiments. How come libertarian economists don’t hop all over these places? They’re full of untapped human potential, you can get to a federal courthouse, US military and law enforcement are on call, you don’t need a visa … It’s got to be easier than bribing the Honduran parliament.

msgkings February 6, 2014 at 2:01 pm

+1

Kabal February 6, 2014 at 8:30 pm

“They’re full of untapped human potential”

Bahaha, good one.

Yancey Ward February 6, 2014 at 11:09 am

an island where only 1.2 million of the 3.4 million inhabitants are employed

Where is the problem- looks like to me 2.2 million Puerto Ricans have been freed from the need to work. They should borrow more money so the other 1.2 million can stop working too.

revver February 6, 2014 at 10:05 pm

+1

Chris February 6, 2014 at 11:41 am

Bear in mind that Puerto Rico receives Medicare payments at levels almost on par with wages in other states. These must be growing to an extraordinary share of the island’s economy.

Cliff February 6, 2014 at 12:12 pm

No mention of the minimum wage? Imposition of the minimum wage in Puerto Rico crushed employment. Plus the elimination of subsidies for companies operating there.

Yancey Ward February 6, 2014 at 12:56 pm

Employment wasn’t “crushed”. People were freed from the tyranny of work. Get with the program.

Vivian Darkbloom February 6, 2014 at 2:49 pm

Martin Sullivan of Tax Analysts wrote a very insightful piece recently on how the Obama Administration is organizing a back door bailout of Puerto Rico through a very dubious tax scheme:

http://www.taxanalysts.com/taxcom/taxblog.nsf/Permalink/MSUN-9FRGEN?OpenDocument

Jimbino February 6, 2014 at 3:42 pm

It’s my understanding that the residents of PR, Guam and other USSA territories aren’t subject to the misery of Obamacare. If I were a young entrepeneur, I’d set up shop there, so as to attract the young, productive, single, childfree males of the type who resent supporting the breeding females–I could put up a couple of garages to attract the Edisons, Fords, Jobs, Wozniaks and Zuckerbergs of the world.

msgkings February 6, 2014 at 5:02 pm

There’s a whole lot of places in the world not subject to the misery of Obamacare, or Social Security, or the Democratic Party. And yet, those people you mention all seem to crop up here in the US.

So Much For Subtlety February 6, 2014 at 4:08 pm

The present currency crisis in Europe just seems determined to prove Max Weber right – capitalism is the preserve of the Protestant North of Europe. The Catholic Latin South is in dire trouble.

So PR proves the perfect experiment. It is sort-of part of the US. It has an excellent climate, a young population, access to a huge market. If Catholics could run a decent economy, PR should be doing brilliantly. What else do they need?

That is unless Max Weber is wrong and it is not a Protestant thing. It is a Herbert Spencer thing. Detriot, after all.

mofo. February 6, 2014 at 5:09 pm

I dont remember who said it, but the quite i always remember is:

“No former Spanish colony will ever amount to shit”

Id say that is more or less the case.

Axa February 6, 2014 at 5:54 pm

Being destroyed every once in a while by hurricanes is excellent climate? Life’s not a Royal Caribbean add.

So Much For Subtlety February 6, 2014 at 6:33 pm

Doesn’t seem to hurt Hong Kong. Or Taiwan. Or even Japan. Some of the fastest growth in the world is in China which also gets hits by big winds. As does part of Australia. Not noted for being poor.

Sure, hurricanes are not ideal, but the big costs are snow and cold. Which is why so many American businesses have moved to the Sunshine states. Florida and Texas also get hurricanes.

Steve Sailer February 7, 2014 at 12:33 am

Being a colony of the U.S. with Open Borders with the U.S. has been bad for Puerto Rico. I’d point to the Dominican Republic as at least having more self-respect than Puerto Rico.

So Much For Subtlety February 7, 2014 at 1:49 am

It may well be bad for PR, but it shouldn’t be. It should be an ideal situation for their economy. Is self-respect all that important? At least self-respect that can only be expressed by hatred of the Yankee? By that measure Cuba ought to be doing brilliantly. On the self-respect front they are way ahead of everyone.

But all those years of Communism has not changed Cuba’s economy one little bit. Still dysfunctional. Still based on sugar. And underage prostitution. With some foreign tourism. It is as if Batista never left office. Except for all the dead people I guess. And the torture. And the totalitarian one party state. Apart from that, exactly as they used to be. A lot of smashed eggs and they are still pimping their daughters to foreign tourists.

The past is not only hard to escape, I am coming to think it is impossible to escape. You make the voters of California Mexican, and California becomes part of Mexico once more.

Peter Schaeffer February 7, 2014 at 6:31 pm

SMFS,

Belgium has its issues. It’s far (very far) from poor. Luxembourg is (very) wealthy. Sadly, North vs. South appears to explain more in Europe these days than religion. I say sadly for several reasons, not the least of which is that Southern Europe was clearly more dynamic than Northern Europe in the post-WWII period up until around 1990. Since 1990, this is longer so true and may well have reversed. Why isn’t clear.

Steve Sailer February 6, 2014 at 6:01 pm

Another triumph for the ideology of Open Borders.

So Much For Subtlety February 6, 2014 at 6:36 pm

Hey, that’s not fair. For a start their problems are not caused by illegal immigration. Or any immigration. They are entirely home grown. Second, they did not illegally cross a border, that border forcibly crossed them. You annex a colony, you have to expect to put up with the locals. You don’t get islands without islanders.

New York’s coming collapse is another triumph of Open Borders.

Rahul February 6, 2014 at 11:22 pm

When your only tool is a hammer, everything looks like a nail.

Peter Schaeffer February 7, 2014 at 6:16 pm

Rahul,

You are missing the point Sailer is (apparently) trying to make. Puerto Rico is what you get when you combine the American welfare state with a low-skill, low-human capital population. Obviously, the disaster in Puerto Rico has implications for the rest of the United States. We are importing low-skill, low-human populations into the United States on a gigantic scale. The welfare state is (massively) expanding.

Check the NAEP statistics for Puerto Rico. They are far lower than any American state. A few quotes may help here. From

“On NAEP, Puerto Rican students lag far behind other U.S. kids” (http://ny.chalkbeat.org/2008/12/15/on-naep-puerto-rican-students-lag-far-behind-other-us-kids/)

“According to Education Week, Puerto Rican students have performed far worse than students in the nation as a whole on the math component of the National Assessment of Educational Progress, a test used to compare student performance across states. (The test, translated into Spanish, has been given in Puerto Rico since 2003. Puerto Rican students don’t take NAEP’s reading section.)”

“Virtually no students in Puerto Rican schools scored at the Proficient or Advanced levels on the test 2005. And while the 2007 scores were reported in a different format, they also show a wide gap between students in Puerto Rico and the rest of the country.”

“Puerto Rico Falls ‘Below Basic’ on Math NAEP” (http://www.edweek.org/ew/articles/2007/04/04/31naep.h26.html)

“Long-awaited results on how Puerto Rico’s students fared on the National Assessment of Educational Progress in math are finally in—and they’re not good.

Only 12 percent of 4th graders and 6 percent of 8th graders in public schools scored at or above the “basic” level on “the nation’s report card” in 2005. So few students scored at the “proficient” or “advanced” level that the percentages rounded to zero.”

However, some folks in Puerto Rico do have a plan for solving this problem. They want to ban the NAEP. I have a better solution. Independence. ¡¡¡¡¡¡Vive Puerto Rico Libre!!!!

Seriously, I do favor independence. However, the U.S. should make every effort to aide the newly independent nation. For example, we could impose import tariffs on labor intensive goods and exempt Puerto Rico.

For fun read http://pennance.us/puerto-rico-naep-results/.

Donald Pretari February 6, 2014 at 8:24 pm

Since the Beginning of Operation Bootstrap, PR has been one long Economic Experiment. After reading Rum Diary a while back, I decided to bone up on PR. I read a number of things on-line, which eventually led me to this book: http://books.google.com/books/about/Economic_History_of_Puerto_Rico.html?id=7lUqqXjo9csC I couldn’t finish it. PR is a record of Economic Incentives and Unforeseen Consequences. Even Programs that “Worked Economically” had negatives associated with them. At some point in life, you begin to feel that you’ve read a book a hundred times before. Some books even age you when you read them.

I have no idea what’s going to happen in PR, but the US is so bound up with what has gone on that we will probably engineer the ending. Where the Debt of Nations is concerned, it’s often a morass that has many contributors and few easy outs. Facile Chair-Reclining Solutions are seldom of use.

Turkey Vulture February 7, 2014 at 12:43 am

Wait so there may be budgetary downsides to policies that encourage lower labor supply? I was just told lowering labor supply was a positive, apparently intentional effect of a recently enacted health care law. So I think this debt issue must be a misunderstanding.

freethinker February 7, 2014 at 4:24 am

Why not offer residency in Puerto Rico to people who are desperate for US citizenship, namely Indians and Hispanics? Have an arrangement which gets the guys a US passport but no the right o settle in the mainland. Who knows, in a few years the economy may be turned around

Rostovian Bake-Off February 7, 2014 at 12:26 pm

Non-contiguous areas of the US like PR, Guam, Hawaii and Alaska are economic basket cases because of the Jones Act, which effectively doubles the cost to ship stuff to and from them to the mainland. IT Costs $3064 to get a 20 foot container from the US east Coast to PR, but only $1,504 and $1,687 to ship that same container to Santa Domingo or Kingston, Jamaica respectively. They pay twice the price to ship raw materials in from the US mainland, and pay twice the price again to ship finished goods back, this is a tremendous economic disadvantage. Here is a New York Fed Report that Recommends exempting PR from the Jones act among other things; this should really be an economic no-brainer.

Rahul February 7, 2014 at 12:51 pm

Good point. I feel the whole Jones Act is ripe for repeal. Sadly I’m sure the political will is absolutely lacking.

Rostovian Bake-Off February 7, 2014 at 2:24 pm

I think you are right, every now and then John McCain and representatives from Hawaii and Alaska get together to and mount a vain attempt to appeal, but I can’t help but wonder; with all we do to subsidize the economies of non-contiguous economies to account for their lack of growth, would it not be cheaper and politically more advantageous for all players including the unions to just parlay the state subsidies into a smaller more direct subsidy to the shipping and shipbuilding industry? After all the shipbuilding industries of France and Finland survive to this day despite high labor rates and no benefit of a law as stringent as the Jones act.

Peter Schaeffer February 7, 2014 at 6:26 pm

Rahul,

Bad point. Hawaii and Alaska are hardly basket cases. In any case, the Jones act does not apply to Puerto Rico’s trade with the rest of the world.

This is a testable hypothesis. The cost of living in Puerto Rico is more than 20% below the U.S. average.

Peter Schaeffer February 7, 2014 at 11:35 pm

Rahul, RBO,

Just for fun I decided to test the Jones Act thesis. It turns out that there are freight rate calculators online. Here are some actual numbers

Miami to San Juan – $1,239.09 – $1,369.52
Miami to Kingston – $1,173.59 – $1,297.13 (shorter distance)
Miami to Santa Domingo – $1,255.50 – $1,387.66

Newark to San Juan – $1,487.20 – $1,643.75
Newark to Kingston – $1,403.17 – $1,550.88
Newark to Santa Domingo – $1,507.32 – $1,665.99

Not so obvious that the Jones Act is imposing any significant additional costs. However, we have other data points as well. See “Shipping shakeout for Puerto Rico trade” (http://www.bizjournals.com/jacksonville/print-edition/2011/05/27/shipping-shakeout-for-puerto-rico-trade.html?page=all). Quote

““Within the past 15 years, rates have fallen 22 percent and have only had some moderate recovery in 2010,” said John Reeve, a maritime analyst at Reeve & Associates in Massachusetts. “In comparison, JB Hunt [Transportation Inc., a national logistics company] has raised its rates 59 percent within the same time period.”

It costs roughly $1,050 to move a TEU from Jacksonville to San Juan and about $475 per TEU the opposite way.”

The issue is contentious enough that the GAO has studied it. See “Characteristics of the Island’s Maritime Trade and Potential
Effects of Modifying the Jones Act” (http://www.puertoricoreport.com/wp-content/uploads/2013/03/CRSreport032013.pdf). The results were ambiguous in terms of any potential savings because foreign carriers proved unwilling to provide the data.

Another source provides a summary “New Study of U.S. Ocean Freight Law and Puerto Rico Inconclusive” (http://www.puertoricoreport.com/new-study-of-u-s-ocean-freight-law-and-puerto-rico-inconclusive/#.UvWkgs4Vx8E)

“Critics say that American shipping is more costly than foreign transportation and the cost increases the price of consumer goods in Puerto Rico. But the GAO could not substantiate that exemption from the U.S. requirements — enabling foreign shipping between the States and Puerto Rico — would lower most consumer costs.”

Of course, the big picture answer is that freight costs have fallen dramatically worldwide over the last few decades. As a consequence, freight costs simple aren’t nearly as material as they once were. If Japan can export goods across the Pacific to the rest of the world, Jacksonville to San Juan can’t be a material obstacle.

See “Why have containers boosted trade so much?” (http://www.economist.com/blogs/economist-explains/2013/05/economist-explains-14)

“For many years it was thought to be impossible to quantify the value of containerisation, because the advent of the metal box coincided with a global reduction in trade barriers as a result of European integration and the work of the General Agreement on Tariffs and Trade (GATT), the predecessor of the World Trade Organisation (WTO). But a paper published in February cleverly disentangles the impact of trade deals from that of containers. Looking at 22 industrialised countries, it finds that containerisation is associated with a 320% increase in bilateral trade over the first five years and 790% over 20 years. A bilateral free-trade agreement, by contrast, boosts trade by 45% over 20 years, and membership of GATT raises it by 285%. In other words, containers have boosted globalisation more than all trade agreements in the past 50 years put together. Not bad for a simple box.”

The bottom line is that focusing on the Jones Act is yet another example of “free market” absolutism and libertarian idolatry when the real issues facing Puerto Rico are the toxic interactions of the welfare state and third-world skill levels. Of course, those are very tough issues and even mentioning leads inexorably to the immigration question. However, that’s no excuse for ignoring the facts.

Rostovian Bake-Off February 7, 2014 at 2:18 pm

Opps, I accidentally the link to the fed report: http://www.newyorkfed.org/regional/puertorico/report.pdf

vxt February 9, 2014 at 4:25 am

Puerto Rico is Greece. Default and leave the dollar zone.

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