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The federal government should help rebuild Puerto Rico after Hurricane Maria. It should not bail it out of its longstanding fiscal crisis

On September 20th, Hurricane Maria made landfall on Puerto Rico. Four days later the commonwealth’s governor, Ricardo Rosselló, estimated that Maria had done more damage than 1998’s Hurricane Georges, which came to $8 billion. Approximately 80% of the territory’s agriculture was lost at an estimated cost of $780 million. As of October 4, the death toll on Puerto Rico stood at 34. 

Puerto Rico’s debt crisis

Last week, members of the Coalicion de Boricuas en Minneosta (The Coalition of Boricuas in Minnesota) rallied on Minneapolis’ federal plaza to demand that President Trump make good on his promise to wipe the island’s debt. “Our signs here say ‘relieve, rebuild’, ‘more aid, zero debt,’” said Javier Morillo,“There’s a very unequal relationship between Puerto Rico and the U.S. that has created this debt, and that’s why it’s clear you cannot rebuild an entire island under austerity and under the structure that has been imposed so far.”

Puerto Rico’s debt crisis was around long before Hurricane Maria struck. Between 1980 and 2013, Puerto Rico’s total debt rose by 183% in real terms. As a share of the commonwealth’s GDP, total debt increased from 48.5% to 67.9% over that period.

No doubt ‘predatory’ lending by Puerto Rico’s creditors has been part of this. But so, also, has ‘predatory’ borrowing on the part of its officials. Quite simply, the island’s governments have spent more than they can afford to by borrowing. Borrowing is simply the act of pulling tomorrow’s consumption into today. Now, Puerto Rico finds itself in that tomorrow. Like Greece, it is a salutatory lesson for all spendthrift governments who lack the authority to print their own money.

Why this matters for Minnesota

How Puerto Rico’s fiscal crisis is resolved matters for the United States, including Minnesota.

If Puerto Rico cannot afford to pay back its bondholders it shouldn’t pretend it can. This would involve short term pain. But Greece, with its near decade long death spiral economy, is a terrible example of what happens when a political elite persists in believing that its creditors will start throwing money at them again if only they can hang in there a little longer. It is far better to simply acknowledge the truth that what can’t be paid back won’t be paid back. Like Greece, Puerto Rico should default on its obligations. It will have to say to its bondholders and those to whom it owes payments for such as pensions, “Sorry, but we have no money for this”.

What should not happen is a federal bailout. The federal government should not step in and pay off Puerto Rico’s debts (nor, legally, could it). This is not because the commonwealth’s debts would break the bank. In an era of trillion dollar deficits, Puerto Rico’s $74 billion debt is small change.

But if Washington bails out Puerto Rico, why not Illinois? Why not California? And with an estimated $1.75 trillion in unfunded state pension liabilities on the way, the federal government might find that once it starts bailing out it is very hard to stop. Gone, also, would be any incentive for states like Minnesota to retain any budgetary sense.

According to White House Budget Director Mick Mulvaney, President Trump was referring to a disaster aid package that includes money for Puerto Rico to deal with “rebuilding, repair, debris removal, getting the electric grid up, getting the water back running and so forth.” So it should. But for the fiscal health of the federal government and the states of the union, that is all it should do.

John Phelan is an economist at Center of the American Experiment. 

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