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Recap: Report on Puerto Rico’s Economic and Fiscal Crisis

A report commissioned by Puerto Rico’s Government  Development  Bank received much attention upon its release last week. The report, prepared by Anne O. Krueger, Ranjit Teja, and Andrew Wolfe, begins by acknowledging that Puerto Rico is in a financial crisis and that the coming years will be difficult. In fact, the study found that the Island’s debt is even larger than previously thought.

“The debt cannot be made sustainable without growth, nor can growth occur in the face of structural obstacles and doubts about debt sustainability,” the authors write.

The “structural obstacles” include the very high cost of electricity in Puerto Rico, “obstacles to the ease of doing business,” and a need to encourage employment.

Puerto Rico’s economy continues to shrink. According to the report, it shrank 1% in 2014 and appears to be shrinking even faster in 2015. Apart from a rally in 2012 and 2013, the economy has been contracting for nearly a decade.

The report references the recent recession, changes in oil prices, and the loss pf tax prices, but cites employment as the single most significant factor.

The majority of Puerto Rico’s residents are neither employed nor looking for work. Only 40% of the working-age adults in Puerto Rico are in the labor market, though the report recognizes that there is a shadow economy that may provide employment for many people who are not counted in the official totals.

The authors of the report consider two factors to be of primary importance in the employment problems they describe:

  • Employers hesitate to hire workers because the minimum wage is too high, and there are restrictive regulations.
  • Workers hesitate to take jobs because the welfare system may offer more benefits than a minimum wage job.

28% of hourly workers in Puerto Rico earn the minimum wage, compared with about 3% in the United States as a whole, according to the report.

It has also been claimed that welfare can be more lucrative than a minimum wage job on the mainland, notably by the Cato Institute. Others disagree. Since the minimum wage is the same in the States as in Puerto Rico and federal social benefits can be less in Puerto Rico, further analysis may needed to confirm this claim.

The report also identifies Puerto Rico’s debt as a significant fiscal issue. What the authors call “opaque data” has led to an underestimation of the degree to which debt and deficits have affected Puerto Rico’s financial position, and the report holds out little hope for simply “turning around” the economy.

Growth, they claim, is the only option for Puerto Rico that will work for the long term, and a comprehensive strategy is essential. The authors point out that the current government’s efforts have not been successful, and conclude that the piecemeal nature of the changes has been the problem.

The report identifies a number of advantages Puerto Rico can use to work toward growth, including “its situation as an integral part of the United States.”

The specific tactics recommended in the report include lowering both the minimum wage and the government assistance for the people of Puerto Rico; increases in taxes and cuts in services; exempting Puerto Rico from the Jones Act; and an independent fiscal review board.

The prescription also assumes that it will be possible for Puerto Rico to renegotiate debt in some way. The authors recognize that the steps they have recommended will be unpopular. “Support or no support,” they write, “the island has little choice but to press ahead.”

Read the full report.

1 thought on “Recap: Report on Puerto Rico’s Economic and Fiscal Crisis”

  1. Lowering the federal minimum wage is the dumbest thing I’ve ever heard as a medium to try to fix PR’s economic downward spiral.

    That statement in itself makes me question the validity of that report.

    Give the people less money so that the economy magically fixes itself. As if the corporate tax welfare companies on the islands weren’t taking enough out of the econony already.

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