Donald Trump has been blasting Puerto Rico for its financial woes, lamenting the state of the island’s economy in a constant barrage of tweets and in his press conference during his visit. The President insists on debt-shaming Puerto Rico at a time when Hurricane Maria has left most of its 3.5 million people without power, food and clean drinking water.
I want to clarify the facts here, because they matter – not only in crafting a long-term solution to PR’s debt-crisis but in times when some would offer “alternate” facts. NOPE. No, no and no.
It is certainly true Puerto Rico has a massive debt crisis but to take this stance is to blame PR for being the victim of a series of short-sighted, unsustainable and eventually crippling financial decisions made by the federal government.
In 1947, the United States government started Operation Bootstrap, which was a series of projects meant to jump-start the economy and firmly put the island’s largely agrarian economy on the road to becoming a manufacturing powerhouse. The efforts were paying off; according to the Center for a New Economy, between 1950-1980, per capita gross national product grew nearly tenfold and disposable income and educational attainment rose sharply.
In 1976, the government introduced an appealing tax loophole for manufacturing companies that basically said “Hey, you can avoid corporate income taxes on all profits made in U.S. territories COUGH COUGH PUERTO RICO.” You will not be shocked to learn companies, a lot of them pharmaceuticals, got themselves over there as fast as the planes would go.
The 1980s and 1990s brought with them a federal deficit. When American tax laws were under review in 1984, Senator Strom Thurmond (the erstwhile Southern segregationist, you know the one) managed to work in an amendment barring Puerto Rico from ever filing for bankruptcy. This will be important later. The budget deficit, coupled with growing criticism of what many saw as “corporate welfare” led to the closure of the tax loophole by President Clinton (that’ll always mean Bill…), in 1996. By this time, the island had become dependent on the manufacturers’ jobs and could not recover from giant plant closures and a sharp rise in unemployment.
By 2006, this tax provision known as Section 536 was fully phased out; it is no surprise then, that 2005 was the last year the island saw positive economic growth. Today, the poverty rate is 46 percent, and 58 percent for children — about three times that of the 50 states.
Over the course of this “Lost Decade” 2005-2015, the local government increased borrowing to offset the plummeting revenues to cover its cost. Young people left Puerto Rico in droves to find work in the continental United States, leaving a significantly older population in PR. (side note: more Puerto Ricans have resided in the continental United States than Puerto Rico since…yes, 2015). Puerto Rico sold over $61 billion dollars in bonds to Wall Street to get the fast cash it needed to function, and were charged unconscionably high underwriting fees. Take UBS, one of the major underwriters of Puerto Rican debt, which not only charged fees to underwrite Puerto Rican bonds, they then neatly packaged these bonds into their own “closed end mutual funds”, charged retail investors a “front end load” of 4.75 % and annual fees of 1%. This is pure unfiltered profit on an island’s paralyzed economic circumstance.
In 2015, Puerto Rico was importing 85% of its produce – the once thriving agrarian economy in tatters. Today, Puerto Rico debt has skyrocketed to $70 billion — and that's not even counting the $43.2 billion it owes its own people in pension payments. President Obama passed PROMESA, a law to work out a solution to PR’s woes, but if anything, the eight individuals on the board, – 4 Democrats and 4 Republicans – seem to be advocating
increased austerity that would strain Puerto Rico even more.
So now what? Hurricane Maria has ravaged the island and as the White House pushes an ambitious tax reform agenda this year, it is possible relief aid will be in the form of a loan. If that happens, it will quite possibly herald in another “Lost Decade” or two. Puerto Rico has been denied a voice in its own economic policies. It is routinely being denied the respect and response it deserves in this time. While new headlines out of DC emerge almost daily, it is so incredibly important to keep the spotlight on Puerto Rico and find a workable solution – with the help of understanding the genesis of the dilemma. Shaming the island’s inhabitants does NOT do that, obviously, and only underscores the decades-long feeling of being used and abused.
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