How Congress Can Save Puerto Rico From Insolvency by Dr. Arthur B. Laffer and Stephen Moore – FreedomWorks
Washington, DC– Founder and Chairman of Laffer Associates Dr. Arthur Laffer and FreedomWorks Senior Economic Contributor Stephen Moore have released a study on how Congress can responsibly address the severe debt issues facing Puerto Rico. The study, “How Congress Can Save Puerto Rico from Insolvency,” was sent to House leadership, members of the House Natural Resources Committee, and members of the House Freedom Caucus.
“Puerto Rico faces an extreme crisis. Unemployment is at nearly 12 percent and the labor participation rate is at a depressing 41 percent. Politicizing this crisis, as Nancy Pelosi and Democrats are doing, doesn’t solve anything. Congress must pass a bill that protects taxpayers and respects the Constitution,” said Dr. Laffer. “Pro-growth policies that rein in Puerto Rico’s runaway spending and reform its tax code will give the island a needed burst and restore confidence to investors.”
“This study offers conservative guidelines on how Congress can address the debt crisis in Puerto Rico in a way that respects the rule of law, taxpayers, and the markets. American taxpayers shouldn’t be responsible for the bad decisions made by the Puerto Rican government,” said Moore. “Congress should, however, establish an independent financial oversight board to help the island develop a balanced budget and restructure its debt in a way that respects the legal rights of creditors. We also encourage Puerto Rico to implement pro-growth economic reforms that restore prosperity and opportunity for its citizens.”
How Congress Can Save Puerto Rico From Insolvency – Executive Summary
The U.S. Commonwealth territory of Puerto Rico is very near financial collapse.ii The island’s $72 billion debt now eclipses 100% of its GNP. The government is already in technical default on many of its bonds and San Juan now says it may not be able to make its next $400 million bond repayment on May 1st and then another $2 billion payment that comes due this summer.
The economic woes of Puerto Rico stand at the heart of the crisis. The island’s unemployment rate is near 12%, the labor force participation rate is close to an abysmally low 41%, and its population has fallen by almost 10% over the past decade. Puerto Rico is losing its greatest asset: its people.
So as the debt has doubled, the economy has shrunk and there are 10% fewer island residents to pay for the borrowing and spending. Welfare benefits in Puerto Rico have been a severe impediment to work, investment and growth. One estimate shows that a household of three eligible for food stamps, AFDC, Medicaid and utilities subsidies could receive $1,743 per month—as compared to a minimum wage earner’s take-home earnings of $1,159. With work discouraged, non-work encouraged and employers fleeing, the poverty rate in Puerto Rico is above 40% (and above 50% for children), almost double the rate in the poorest states, such as Mississippi, West Virginia, and Arkansas. Liberal welfare policies in Puerto Rico have impoverished the island.
The danger Puerto Rico faces is that the continuing outflow of people and capital could turn into a stampede from the island if the financial/economic crisis isn’t resolved with urgency and in the most economically constructive and equitable way possible. Making matters worse, the mosquito-borne Zika virus may infect as many as one-in-five Puerto Ricans over the next year, which is scaring away from and conventions.
Puerto Rico has been to this barbecue before.
As a result of the high-tax rate policies pursued in the late 1960s and early 1970s, Puerto Rico was an economic basketcase in the early 1970s. Just like the United States at that time, and in fact even before Reagan took office, Puerto Rico had the wisdom to begin pursuing pro-growth, supply side economic policies in the late 1970s on the advice of Dr. Laffer. Puerto Rico’s then Governor Carlos Antonio Romero Barceló assumed office in 1977, inheriting a top marginal income tax rate of 87.1%, a 5% surcharge tax on personal incomes, referred to as La Vamparita or “little vampire” by Puerto Ricans, an estate tax rate of 70%, and an unemployment rate of 20%.
Then, just as now, supply side reform was the antidote. And then just as now, proposals for supply side reform were met with claims that the United States was pursuing colonialist policies.
To their credit, House Republicans are engaged in a good faith, and in many ways thankless, effort to resolve the crisis in a way that is timely, economically wise, and equitable to all the stakeholders directly affected by the debt crisis. Nancy Pelosi and the Democrats, who profess to care deeply about the residents of Puerto Rico, have been obstacles to reform by insisting on federal bailouts, unconstitutional bankruptcy protections, and business as usual governance in Puerto Rico. These are all, thankfully, total non-starters. Democrats know this, but they seem far less focused on finding a workable solution and far more focused on politicizing the issue with, for example, language that accuses the GOP’s plans of an oversight control board of being forms of “colonialism.” This has made the Republicans’ fix-it job all the more difficult.
We agree with the major direction of the House bill, but we have some remaining concerns. These concerns are generally shared by the large faction of conservative House members inside the Republican Study Committee and the Freedom Caucus. The hang up in the House appears to be a so-called “cram down” provision forcing certain categories of bondholders to give up constitutional protections-which is not fair, equitable, or economically wise.
We believe that any bill to help Puerto Rico must abide by the following six principles of good economics and respect for the rule of law:
- No federal taxpayer bailout of Puerto Rico. This means no federal funds appropriated directly or indirectly (for example, through Medicaid or Obamacare expansions) to pay Puerto Rico’s bills. Just as federal taxpayers should never be required to repay the debts of Illinois or California or Alaska, Puerto Rico’s government and its residents are primarily responsible for their debts.
- A federal control board. Almost all parties agree that a strong and independent financial control board must be established by Congress. The control board would have financial authority over the debts, finances, budgets, and taxing authority in Puerto Rico with the goal of restoring the island to a firm financial footing. The control board would also have broad authority to restructure Puerto Rico’s debt subject to the legal safeguards listed below. This control board model worked very well to turn around Washington, D.C. when it was financially insolvent in the 1990s. The assignment of this control board is a de facto declaration of bankruptcy—though under federal law, Puerto Rico as a Commonwealth territory of the United States is not permitted to declare Chapter 9 bankruptcy.
- Any rescue plan for Puerto Rico must have “buy in” from the local government. Hence, the legislature in Puerto Rico should vote up or down on establishing the control board and ceding control of its financial affairs to the outside control board. Congress should make it