Federal Reserve Bank of New York President and CEO William C. Dudley spoke recently in Puerto Rico on the lessons learned from crises faced in other places, and how Puerto Rico can look forward to economic growth.
“The Island has been suffering from a vicious cycle,” Dudley began. “As employment declines, people move to the mainland to find jobs. Accordingly, economic activity and tax revenues decline, forcing the government to raise taxes and cut spending, which further reduces employment and prompts still more residents to move. At this point, the outlook for anyone who has been living here must be bleak, and it may be hard to imagine this situation turning around anytime soon. And yet, history tells us that a turnaround, though not inevitable, is indeed achievable.”
He listed a number of U.S. cities that lost the power to make their own financial decisions and ended up under the control of a fiscal oversight board, just as Puerto Rico has. These cities also suffered a loss of population and had to make uncomfortable changes to adjust to new economic realities. “The economic pain was also very real,” he acknowledged, citing the large numbers of government workers who lost their jobs in New York City during its downturn in the 1970’s.
Dudley then moved on to changes that could improve Puerto Rico’s position. He pointed out that residents and businesses in Puerto Rico pay twice as much for electricity as people do in the states, and that water bills are also high. Utilities are less reliable in Puerto Rico than in most parts of the mainland U.S., and that affects corporations’ willingness to invest. “Streamlining regulations” is another area of opportunity, according to Dudley.
He spoke also about the value of extending the Earned Income Tax Credit (EITC) to Puerto Rico. This tax credit, designed for working families who typically do not earn enough to pay federal income taxes, has provided an incentive to work and lifted families out of poverty in the States. It does not apply to Puerto Rico, but many leaders have suggested that it should. Dudley suggested that the current tax structure in Puerto Rico “creates disincentives to work.”
The call to diversify industries on the Island and make it easier to do business there meshes with Governor-Elect Rosello’s plan to make it clear that “Puerto Rico is open for business.”