October 7, 2017

MEGAN MCARDLE: Debt Alone Won’t Crush Puerto Rico. Depopulation Is the Curse.

“They owe a lot of money to your friends on Wall Street,” Donald Trump told Geraldo Rivera. “We’re going to have to wipe that out. That’s going to have to be — you know, you can say goodbye to that. I don’t know if it’s Goldman Sachs but whoever it is, you can wave goodbye to that.”

Bond markets didn’t appreciate the verbal wave. The territory’s bonds, already weak from the pounding of Hurricane Maria, fell another 31 percent. White House budget director Mick Mulvaney hastened to say the president didn’t mean what he said. “I wouldn’t take it word for word with that,” he said demurely. Nor should you; as debt expert Cate Long told CNN Money, “Trump does not have the ability to wave a magic wand and wipe out the debt.”

Yet the fact remains that Puerto Rico is not going to be able to pay all of its debts. Prior to the hurricane, the territory had $73 billion in outstanding debt, and a population of 3.4 million people. That’s approximately $21,500 for every man, woman and child on the island – just about enough to buy each of them a brand new Mini Cooper, provided that they don’t insist on the sport package or the heated seats. . . .

And why was the government borrowing so much? For one thing, because the government doesn’t work very well. The operations of the Puerto Rico Electric Power Authority, for example, defy belief: It essentially gave unlimited free power to municipalities and government-owned entities, which used it to do things like operate skating rinks in the tropics. Everywhere you look, you see signs of a government struggling to perform basic tasks: collect taxes, maintain the infrastructure, improve the health system. In the jargon of development economists, the island lacks “state capacity”: It is simply unable to exert the amount of power over its operations that we on the mainland mostly take for granted.

But you can’t entirely blame the Puerto Rican government for the state of the underlying economy, which is what had plunged the island into a bankruptcy crisis even before the hurricane. For that you have to look to the federal government, which eliminated a tax break that had given companies incentives to locate in Puerto Rico, and then oversaw a financial crisis that sent them into an even deeper spiral. We also made sure that a relatively poor island was forced to adopt the federal minimum wage, which was too high for the local labor market. That has contributed to the 11.5 percent unemployment rate. And Puerto Rico uses the U.S. dollar, leaving it unable to adjust monetary policy to overcome economic stagnation.

None of those things will change just because we wipe out the bondholders. And the bondholders are not Puerto Rico’s only creditors; it has an unfunded pension liability of roughly $50 billion. Covering the current liability will consume more 20 percent of the budget.

That figure will only grow, because the biggest problem of all is Puerto Rico’s rapid demographic decline. There has long been a steady migration from Puerto Rico to the mainland. By 2008, there were more Puerto Ricans in the rest of the U.S. than there were in Puerto Rico. But the economic crisis has accelerated that flow to staggering levels.

So I’m guessing that if Steve Bannon were still around, he’d be encouraging Trump to do things that would make Puerto Rico so attractive that not only would people want to stay there, but expat Puerto Ricans would want to return, since most of them vote Democrat, and Puerto Rico doesn’t have any electoral votes. Which would be good for Puerto Rico, and also for Trump. In Bannon’s absence, I’m not sure there’s anyone in the White House who thinks that way.