An American Greek Tragedy

The Euripidean tragedy playing out in modern Greece continues, and neither the playwrights nor the actors seem to understand the script. It is fruitless to speculate about where this is headed. But I do suspect that whatever happens will not live up to the overheated predictions in the news. If little Greece, with an economy about equal to South Carolina, can wreak havoc on world financial markets, we have worse problems than Greece to worry about. Is it really all just a house of cards? I hope and believe not.

PuertoRicoIf you want to worry about a brewing disaster much closer to home, look at Puerto Rico. Just yesterday, Governor Alejandro Garcia Padilla called for the commonwealth to be allowed to restructure its debts under Chapter 9 of the U.S. bankruptcy code. I am not sure who is advising him, but this last-ditch resource, used by Detroit and Stockton in recent years, is not available to a territory such as Puerto Rico. Swamped by $79B in “unpayable” debt, losing its most productive population by 1% a year, riddled by crime and tax scofflaws, and with only 40% of the population having a job or even looking for one, Puerto Rico is not just bankrupt, it might well be unrecoverable without massive intervention.

However, this is one case where Washington is not inclined to help. Neither the administration nor Congress has any appetite for a rescue effort. Basically we have been sustaining Puerto Rico for decades through federal subsidies, transfer payments, and tax relief. Special tax breaks drew the pharmaceutical industry to this small Caribbean island, turning it into a vast medicinal maquiladora. Then when these breaks expired in 2006, the firms predictably decamped leaving things worse than before. But thanks to another ill-considered helping hand, interest on Puerto Rican debt is exempt from state, local, and federal taxes in America, making it artificially attractive to investors. And thus successive, profligate commonwealth governments have been able to just keep on borrowing, leading to the current morass of debt.

Not content with years of ill-conceived meddling, the federal government has inadvertently delivered a crippling blow to the Puerto Rican economy. The recent increase in the federal minimum wage applies everywhere in Puerto Rico and it is now not much less than the median income of $19,624. In a sickly economy, businesses simply won’t be able to pay the minimum wage, so the probable result will a major expansion of the underground economy and further erosion of the tax base.

Like Greece, Puerto Rico can’t just go cold turkey and impose crippling austerity. This would just cause a vicious cycle of business contraction, loss of jobs, and shrinking economic activity. But unlike Greece, the island has a safety valve. Austerity would probably also result in massive migration to the mainland, something we would neither welcome nor be prepared to handle. The only sensible solution is to restructure its debt and for the federal government to provide interim financing, similar to how the IMF has been helping in Europe and elsewhere. This has to be done now and it requires modification to bankruptcy law. Waiting for interminable Congressional hearings and the dithering of a timid Obama administration will not work.

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