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Prices on Puerto Rico’s newest general obligations sank to record lows after Governor Alejandro Garcia Padilla said investors should be prepared to sacrifice if they want the cash-strapped island’s economy to grow. … With two days left in Puerto Rico’s fiscal year, the commonwealth is struggling to pass a budget that would allow it to make payments on a $72 billion debt load. Investors should work with the commonwealth to reduce its obligations, Garcia Padilla told the New York Times in an interview. …
“The debt is not payable,” the governor said. “There is no other option.” The U.S. territory of 3.5 million people is grappling with a jobless rate double the national average and a debt load bigger than every U.S. state except California and New York. The governor’s remarks land in a jittery global debt market, as investors weigh the possibility of a Greek default and exit from the euro zone.
To put the island’s fiscal situation into perspective, it has amassed debt that is nearly half that of California’s for a population that is less than one-tenth the size, as the WSJ’s Nick Timiraos notes.
Let that sink in.
Also, its debt equals about 72% of its GDP. Now that’s about the same as the US federal government. So why isn’t Washington having a debt problem, too? Well, the US (a) has an economy that is much stronger, (b) can borrow at very low interest rates, (c) prints the currency its debt is denominated in. As for the first point, just look at this summary from Timiraos of Puerto Rico’s economy:
Puerto Rico’s problems date to the end of the Cold War, when the U.S. began closing military bases on the island, whose residents have American citizenship but don’t pay federal tax on their local income. The expiration of corporate tax breaks in 2006 prompted an exodus of pharmaceutical and other manufacturers, nudging the island into a deep recession. As the economy has worsened, migration to the U.S. mainland has accelerated, further shrinking the tax base. Puerto Rico’s population has fallen 4.7% since 2010 to 3.5 million, a period when the U.S. overall grew 3%. … The economy, meanwhile, faces big structural problems. Sprawling bureaucracy and high electricity costs stunt business investment. Tax evasion runs rampant. Unemployment is high, at 12%, and fewer than half of all civilians are in the labor force, compared with around 63% on the mainland. Economists say a bloated welfare state discourages work—the share of the working-age population on disability is nearly 50% higher than in the 50 states —while a minimum wage that is high relative to productivity and local income reduces job opportunities for young and low-skilled workers.
What a mess. So very similar to Greece. Deep supply-side structural problems, a currency straitjacket, brain drain. And a big helping of austerity on the way. One lesson for the US is that eventually the math stops working. And when that day comes, it won’t be a financial crisis as much as unpleasant choices in terms of raising taxes and cutting benefits. Reform sooner is better than reform later. And if you want to accelerate the day of reckoning, policies that stunt investment, work, and immigration will get you there ASAP.