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As Puerto Rico Teeters toward Default, Congress Must Take Action

By: Nick Zaiac - @NickZaiac - Dec 1, 2015, 4:09 pm
Puerto Rico is suffering the effects of years of government mismanagement of the economy.
Puerto Rico is suffering the effects of years of government mismanagement of the economy. (Mundomax)

EspañolThe mood in the Senate Judiciary Committee on Tuesday was bleak. On a rainy day in Washington, congressional staffers, members of the press, and others converged on the Dirksen Senate Office building to learn the latest of Puerto Rico’s fiscal nightmare.

A deadline loomed over the room. Would the territory make the approximately US$250 million payment on its government-backed General Obligation debt, due the same day as the hearing? Outside, the hallways were abuzz with discussion of the laundry-list of problems that the island faces. The general feeling was one of impending doom. What is wrong in Puerto Rico?

When it comes to politics, nearly everything: from a bad tax system to weak governance, political status issues, lack of access to some federal programs, and 50 years of failed industrial policy. Something must be done, and Senator Orrin Hatch (R-UT) made clear that the committee was looking for any options available, short of a full-blown bailout, to make this thorny political issue go away.

During his testimony, Governor Alejandro García Padilla stated that Tuesday’s payment would be made, but after that, the island will have exhausted its cash reserves. It has been unable to borrow further for many months, and before that, borrowing rates were extremely high.

Trust funds for things like future public-sector pensions have been raided to the point that pension payments will soon need to be paid out of general-fund spending. Simply, there is — for real this time — no more money to sustain the government without notable cuts in spending.

The governor’s written testimony notes that he has already authorized so-called clawbacks from creditors to pay for essential government services in the near future. He makes no mistake about what this means for creditors: “In simple terms, we have begun to default on our debt in an effort to attempt to repay bonds issued with the full faith and credit of the Commonwealth and secure sufficient resources to protect the life, health, safety and welfare of the people of Puerto Rico.”

Default is not something that might happen if we don’t fix Puerto Rico’s problems. It is already happening. Now, the question is what can be done to stop the bleeding. A few senators and hearing witnesses, most notably the American Enterprise Institute’s Alex Pollock, thought the concept of a fiscal control board would be the best way to reign in government spending and put the territory on the path to fiscal responsibility.

Witnesses debated the form and function of this board, but largely agreed that such a board would successfully reign in spending, although a witness noted that past boards have failed to fully tackle fiscal problems, such as unfunded pension liabilities, in the municipalities they oversaw.

A fiscal control board would be a sound first step. It could work to bring the territory closer to the balanced-budget norm among states which rules against territorial default failed to do in the past. But that will only address part of the problem. The island faces an economic crisis as well as a fiscal one. An economic crisis will only be solved with economic-policy reforms.

The territory has been a basket case of failed industrial policy for decades. For too long, Washington has attempted to spur growth through targeted tax breaks and spending programs. It has failed.

Choices will be hard, but Congress can make effectively whatever (constitutionally sound) law it wants regarding Puerto Rico. They could force the selloff of all government-owned corporations, allowing competition to thrive in the utilities sector. They could waive regulations, ranging from the Jones Act to the minimum wage to union work rules. Puerto Rico lags well behind the mainland in business climate.

Local rules that make construction and starting businesses can be lifted. If the territorial legislature fails to do enough to fix this, Congress can force them to go further. Puerto Rico can’t afford the luxury life bound by comfortable, popular regulations as they struggle with a decade-long economic crisis brought on by failed government economic micromanagement.

If the crisis continues, it is because Congress has failed to force the hand of the Puerto Rican government and its legislature, shielded by public apathy for the 3.5 million Americans who happen to live on an island on the edge of the Caribbean.

Collapse may have been staved off for now, but it is coming. Complete default is a matter of days and weeks, not months and years. Congress must act. There is no other choice. The only question is whether their actions allow bad habits to persist, or whether Congress will finally say “enough is enough.”

It is their choice. Their prerogative. At the end of the day, Congress oversees Puerto Rico. The buck, constitutionally, stops there.

Nick Zaiac Nick Zaiac

Nick Zaiac is a public-policy researcher in Washington, DC. He also serves as a policy analyst at the Maryland Public Policy Institute. His column, The DC Leviathan focuses on the often-ignored bureaucratic agencies, from the Department of the Interior to the General Services Administration. He has been published in the Baltimore Sun, City AM, CapX, and other outlets. Follow @NickZaiac.