Amid telling Puerto Rico that its suffering has “thrown our budget out of whack,” blaming residents for wanting “everything done for them,” and tossing rolls of paper towels into a crowd as if he were shooting hoops, President Donald Trump finally landed on something useful to say about the humanitarian crisis facing the American territory.
“We have to look at their whole debt structure,” he said Tuesday evening on Fox News’s Hannity. “You know, they owe a lot of money to your friends on Wall Street, and we’re going to have to wipe that out. 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.”
As with lots of offhand remarks by the president, it’s not entirely clear what he’s proposing. And his team is already trying to walk it back: OMB Director Mick Mulvaney was quick to say the next morning that Trump’s comments shouldn’t be taken literally or seriously. “I think what you heard the president say is that Puerto Rico is going to have to figure out a way to solve its debt problem,” he told Bloomberg News. “We are not going to bail them out. We are not going to pay off those debts. We are not going to bail out those bond holders.”
But after decades of mainland economic policies that have decimated Puerto Rico’s economy, we owe it to residents—who are now trying to recover from an utterly devastating natural disaster—to ease their debt burden. An aid package to rebuild houses and electrical grids won’t cut it. Puerto Rico’s debts need to be dramatically reduced, if not entirely erased, so that the territory has a shot at a functioning economy in the future.
Puerto Rico’s economy has been in crisis for about a decade. It never really recovered from the additional hit of the recent recession. Its unemployment rate is still in double-digits. Almost half of the population lives in poverty; its poverty rate is more than double that of the poorest state in the country.
While not a state, Puerto Ricans are American citizens. But American policy has done them few favors. Its economy is heavily dependent on manufacturing. A provision in the tax code, Section 936, had long allowed corporations to avoid paying income tax on profits in Puerto Rico, so many flocked to the island to reap the benefits. When Congress approved a phased-in repeal of that provision in 1996, it pulled the rug out from under the economy. A recent paper found that this change reduced the number of manufacturers by about 10 percent and decreased average wages in the sector by nearly 17 percent.
The country is also still bound by the Jones Act, a law enacted during World War I that requires ships carrying goods between American ports be built and crewed by Americans. Today it means that any foreign ship that docks in the territory has to pay extra tariffs and fees. Those then get passed onto consumers: The cost of imports from the mainland is at least double that of neighboring U.S. territories that aren’t subject to the law. Because it’s an island, it imports many of its necessities, so residents pay sky-high prices for everyday things. The cost of living in Puerto Rico is 13 percent higher than most mainland communities. One report found that the Jones Act resulted in a $537 million hit to its economy in 2010 alone.
As a recent New York Times op-ed put it, “[I]f the Jones Act did not exist, then neither would the public debt of Puerto Rico.”
Meanwhile, even though they are U.S. citizens, there are key threads of the safety net that Puerto Ricans can’t fall back on. Because residents don’t pay federal income taxes, the federal government gives the territory much less Medicaid funding than it gives to states. The match rate for Puerto Rico is 55 percent; Mississippi, the poorest state, gets a 76 percent match. Puerto Rico’s funding is also capped, so it essentially operates under a block grant, unlike states that share costs with the government. That means the money covers a small fraction of its Medicaid costs. So the territory’s health care system has become overburdened, leading to talks of cutting back on health care spending to deal with its fiscal crisis.
Residents also can’t claim the Earned Income Tax Credit or Child Tax Credit, pieces of the tax code that serve to both cushion the blow of living in poverty while enticing people into paid work. Those could be useful in a place where the labor force has fallen by about 20 percent over the last decade.
The territory’s economic struggles led it to borrow heavily by issuing bonds in an attempt to keep its budget balanced. But it hasn’t been able to climb out of the hole, and in 2015 its governor announced that it couldn’t keep paying its creditors. Because Puerto Rico isn’t a state, it has been denied the ability to go through municipal bankruptcy. Congress instead set up a Financial Oversight Management Board to come up with a plan. So far, the plan calls for austerity measures that include $25.7 billion in spending cuts. The plan even acknowledges that his will lead to another “lost decade” of economic growth for the island (which could easily end up being worse than their projections).
As Joseph Stiglitz and Martin Guzman have pointed out, though, if the territory’s economy can’t recover, it will continue to have trouble paying anything to creditors, not to mention prolonging the suffering of its residents. Conversely, if the economy is allowed to regain its health, it will have more revenues that it can use to pay people back.
If Trump wanted to act on his vague promise to address Puerto Rico’s debt, he has two options. One would be a full bailout for the island, using federal funds to pay what it owes. It’s not popular and would be costly, but it would also give Puerto Rico real breathing room and the chance at a functioning economy. That might allow it to generate enough revenue to eventually pay the government back.
Another option would be to push for the hedge funds and other firms that own Puerto Rico’s debt to write off large portions of it. Under Congress’s plan, the island can unilaterally reduce its debt with the approval of a federal judge. Doing so could have other ramifications—such as increasing borrowing costs—but it’s also worth remembering that investments are inherently risky. If the bet these creditors made when they bought the island’s debt ended up going sour, well, perhaps they won’t be able to recoup all of their costs. Perhaps it’s more worthwhile to use government money to allow Puerto Ricans to survive the effects of the hurricane and rebuild their economy so that it can function once again, rather than pay interest on municipal bonds.
As with his promise that his health care plan would offer universal coverage or that his tax plan will give the middle class tremendous relief, it’s likely that Trump’s promise to wipe out Puerto Rico’s debt is empty. Still, it’s the wisest thing he’s said about the island’s excruciating crisis thus far.