Debating the Puerto Rico Debt Crisis

The Ed - icon size  Contributed by Ed

The Puerto Rican debt crisis is a complex web with many different threads.  Any solution to the crisis will involve ripples that will leave winners and losers everywhere.  These ripples will be felt for cities like Detroit, Michigan; San Bernardino, California; Stockton, California; and other municipalities.  It will ripple to the states whose fiscal conditions are worst: Illinois; New Jersey; Massachusetts; Connecticut; and New York.

Map of US public bankruptcies since 2010City/county (red) and utility authority (gray) Ch 9 bankruptcies since 2010

(image credit)

Politicians know the best place to raise revenue is from individuals who will not express their anger at the ballot box.  They raise it from dead people with confiscatory estate taxes, from corporations with tax rates that drive corporations to other countries, and from the young and unborn with government debt.  None of these are able to raise enough of a cry to keep the hands of the state out of their pockets.  While all of these taxpayers deserve protection from the state, it is the young and the unborn that I speak for in this article.

Ziggy - indentured servant to IRS(image credit)

Looking back in history to the days of indentured servitude and slavery, one of the differences between an indentured servant and a slave was that the children of the indentured servant were born free.  The children of the slave were not.  Parents, whether indentured or not, had no right to force their children to labor to pay their debts.  Like slavery, indentured servitude is a bad system and we have laws to prevent it.  But with public debt, creditors can and do lay claim to present and future taxes.  Our labor and our children’s labor that pays today’s and future taxes is the collateral – the sweat and payment of public debts we have incurred. It is not right to pledge our children’s labor and wealth to our – their parents’ – private debts.  It is equally not right to pledge our children’s labor and wealth to public debts.

Our founding fathers recognized that it is wrong to burden our children with public debt.

“Avoid occasions of expense. . . and avoid likewise the accumulation of debt not only by shunning occasions of expense but by vigorous exertions to discharge the debts, not throwing upon posterity the burden which we ourselves ought to bear.” – George Washington

 “The principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.” – Thomas Jefferson

This is an idea that deserves rebirth.

For an individual, bankruptcy laws are in place to allow a person or a company to start over.  It puts the responsibility on the creditor to be sure that the debtor can actually pay his debt before lending the debtor money.  The debtor also has responsibility to be in a position to pay his debt before borrowing the money.  But there is currently no provision in U.S. law for Puerto Rico to declare bankruptcy.  There has to be a change in federal law for Puerto Rican bankruptcy proceedings to occur.  This does not make much difference.  Puerto Rico does not have the money to make the payments that are due on the debt.

Puerto Rico’s creditors are insisting that they get paid in full.  Puerto Rico insists that it does not have the money to make the payments.  Let’s take a quick look at the responsibility.  In America’s 50 states the average ratio of state debt to personal income is a little over 3%. Moody’s, a debt ratings agency, puts Puerto Rico’s tax-supported debt at an eye-watering level of nearly 90%.  It seems that both sides – the creditors and Puerto Rico – have been irresponsible.  If there ever was a case for bankruptcy, this is it.  Creditors are trying to squeeze a bathtub of water out of a kitchen sponge.  It will not happen.  The creditors will only be paid in full if the U.S. Government decides to cover the debt.

Graph of debt vs personal income for states and Puerto Rico(image credit)

That would be wrong.  It is wrong to burden the taxpayers for any part of the country that is not fiscally responsible.  People in Kansas have no say about how much debt another state, territory or municipality incurs.  Why should they have to pay any part of another state’s debt?  It would set a very bad precedent.  Illinois, New Jersey, Massachusetts, Connecticut and New York would have no incentive to curb spending and keep from declaring bankruptcy with the expectation that the federal government would cover them.  The consequences belong to the responsible parties:  the creditors and Puerto Rico.

Without a white knight, reality will eventually set in for both parties.  The creditors will take a haircut for ignoring their responsibility to be sure that Puerto Rico was credit-worthy before lending them money.  Puerto Rico will still owe money after the bankruptcy proceedings.  Creditors will not lend Puerto Rico any more money.  Puerto Rico will have to learn to live within their means.  These lessons have to be relearned by debtors and creditors.  These lessons are good things.  If the Federal Government instead took the role of a white knight, it would just enable bad behavior.

Government Subsidies Cause CodependencyGovernment — The Codependent Enabler

The innocents in the Puerto Rican debt fiasco are the current and future children of Puerto Rico and of the rest of the U.S. that did not lend money to Puerto Rico.  They will only be protected if there is no enabler.  They will only be protected if Puerto Rico is allowed to go into bankruptcy.  They will only be protected if Puerto Rico finds a fiscally sustainable path.  Our best chance is in bankruptcy court.  This decision will have ripples throughout the U.S. economy.

Let the bankruptcy proceedings begin.

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Footnote from Ed:  When Jeff suggested that I submit an article on the Puerto Rican debt crisis, maybe I misunderstood, but it seemed that he felt Puerto Rico’s feet should be held to the fire.  I have always felt that we should never agree on everything because we should think for ourselves.  I look forward to a rebuttal.


About Necessary and Proper

Jeff believes in the Individual's ability to excel when liberty and freedom of choice are protected. Also believes in the Community's ability to take care of the vast majority of its own issues and needs when the federal government leaves the Community's resources and sphere of control alone. State and local choice produce better results than centralized federal control.
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15 Responses to Debating the Puerto Rico Debt Crisis

  1. First of all, Ed: On your #1 most important point, we’re in 100% agreement: There should NOT be any bailout by the Federal Government.

    Even where we differ, I think perhaps a bit more examination will reveal general agreement after all. When your footnote said it seemed that I want to hold Puerto Rico’s feet to the fire, you’re lumping all Puerto Rican’s together. I do not. The poor citizens and the affluent government officials should not be lumped together when the consequences arrive.

    You have only scratched the surface of the next layer of details, with the following statements:

    “This does not make much difference. Puerto Rico does not have the money to make the payments that are due on the debt.”

    “It seems that both sides – the creditors and Puerto Rico – have been irresponsible.”

    “Puerto Rico will still owe money after the bankruptcy proceedings. Creditors will not lend Puerto Rico any more money. Puerto Rico will have to learn to live within their means.”

    My concern stems from the General Motors sham “bankruptcy” of 2009 which left a nasty taste in my mouth. It was very politicized, and not handled according to the legal principles of bankruptcy. The Obama Administration’s ideological finger tipped the scales of financial “justice” heavily in favor of his union constituency that had put so much collective bargaining pressure on GM management over the years to achieve elevated (and therefore non-competitive) compensation levels. The UAW suffered far less consequences than they should have (their pay scale, benefits, and pensions were not reduced), and the creditors suffered far more than their share (recovering 10 cents on the dollar, or less). The taxpayers footed the $23 billion bill. Here is a comprehensive description of the UAW bailout from the Heritage Foundation.

    I think any law created to allow a Puerto Rican bankruptcy would also be very politicized. I would need to hear the details of the distribution of consequences, to assure that Puerto Rican elected officials and government bureaucrats aren’t allowed to make off with a “golden parachute” of retirement benefits that they’ll be collecting long after the story recedes from the headlines, but while the rest of Puerto Rico’s citizens are still suffering the consequences of this massive social mismanagement. I have previously written about the Detroit municipal financial crisis, and who should be held responsible by being made to suffer consequences commensurate with their contribution to the fiasco.

    The fiscal consequences of Social Engineering failures must be made to hurt the masterminds that foisted a failed scheme on their citizens. If you agree and are awaiting the details of public jurisdiction bankruptcy rules to make sure they emphasize accountability, then we’re probably in substantial agreement.

    Meanwhile, here’s new information on how Congress is handling the crisis. It seems like reasonably good news: No bailout, no fullscale bankruptcy (yet), revised repayment terms to the bondholders (as you wanted, Ed), and a financial oversight board created to impose spending discipline. But without a concerted effort to restore Puerto Rico’s employment and economic vitality, it probably only prolongs a slow, slow resolution to the problem.

    – Jeff


    • The Ed says:

      I guess that I should lay out the principles that should be followed:
      1. Only involve the creditors and the debtors.
      2. There is a process in bankruptcy from needing the pressure taken off so that reorganization can happen and the debt can be paid off til the cupboard is bare and there is nothing to collect. Debts should be paid where they can be paid. They should be dismissed where there is no hope.
      3. If there is to be a haircut then it is the debt holders who take it.
      4. There is a legal process as to who gets paid first. It should be rigorously followed.
      5. Puerto Rico has to restructure its income and spending so that they fall in line with each other.

      Note that this will end PR’s welfare state as they know it. Note that the bondholders are going to take a haircut. Note that it will take some years for PR to get back on its feet. Tough love is what is needed.

      Liked by 1 person

  2. The Ed says:

    It is true that I only scratched the surface. Just to be as brief as possible here are just a few:
    1. Puerto Rican society is in shambles due to the welfare state.
    2. The welfare state has made it better to have illegitimate children than an intact family
    3. Minimum wage laws of the continental US apply in Puerto Rico. Unemployment is rampant.
    4. The debate among politicians is how much to promise.
    5. There is no fiscal discipline in Puerto Rican government. It is sad to say that they are worse than our congress.
    6. There is a brain drain happening in Puerto Rico. Anyone with talent or ambition leaves for the mainland US.
    7. The labor force is 1.2 million, a quarter of the population. The participation rate is one million, less than 39 percent of the total population. Only 39% of older people who work.

    What is happening in Congress has only kicked the can down the road. Fortunately, the bill does not further encumber the federal government with Puerto Rican debt.

    The island is so dependent on other people’s money that I am not sure what will happen when there is no more. We should watch because this may be coming our way some day.

    Liked by 1 person

    • This point is well taken:

      6. There is a brain drain happening in Puerto Rico. Anyone with talent or ambition leaves for the mainland US.

      It seems appropriate to post this political comment … from West Side Story:

      ===|==============/ Keith DeHavelle


  3. Incidentally, I was amused when I received the notification of this post. It began, “Contributed by Ed The Puerto Rican …”

    ===|==============/ Keith DeHavelle


  4. Jim says:

    Like the article and the discussion. I am absolutely and totally against all bailouts. That practice subverts the market economy, rewards failure, and lets government elitists pick winners and losers. No money should be given to Puerto Rico or their creditors.

    On the other hand they should be able to declare bankruptcy. I agree though that the way that some large bankruptcies have looked more like bailout for special interests. From what I understand of the Puerto Rico situation, a lot of it was created by the banking industry having many special rules made for them to use Puerto Rico as an offshore profit scheme. Therefore I say let everyone get soaked! The creditors basically invented this mess as a way to make money by having all kinds of special rules made, and the Govt of PR was more than happy to swim in the supposed money flowing in. Unfortunately the people of PR are bearing the burden of crony capitalism and govt corruption, but maybe this leads them to wake up and change things.

    Many advocate “better rules”, more oversight, or blah blah blah fairness. In my opinion these kind of solutions are backward thinking. The oft repeated “the solution to bad government is not more government” rings true here. A bailout and a minor loss for PR and the Banks will just lead to the same thing happening again. People get the government they deserve, unfortunately nothing ever really gets changed unless the pain is extreme enough to motivate people. Puerto Ricans, and Americans in general need to realize that unless we clean house (politically) and become active citizens we will continue to get more of the same.

    Great article ‘The Ed’


    • The Ed says:

      Agreed. No bailouts. No elitists picking winners and losers as Jeff alluded to. Not everyone should get soaked, just Puerto Rico and its creditors. And the children need a way out from this burden. That should be bankruptcy.
      I want this to apply to the states and municipalities when their turn comes.


  5. The way our system works, cities can declare bankruptcy but states cannot. Puerto Rico, a territory, is in the position of a state. And they cannot even appear to the International Monetary Fund, as they are not themselves a nation.

    While that 90% looks impressive, it is relatively modest in real dollars, on the order of $80 billion. To put this in perspective, Obama’s Department of Labor is promulgating a new rule regarding financial advisers that would cost the middle class $80 billion in lost savings. This doesn’t mean we should give $80 billion to PR; the island is a mess and needs to get its debt fixed.

    One more comment: That comparison to “personal income” was selected quite intentionally. Using the more conventional comparison, PR’s debt-to-GDP ratio is about 70%. On that basis, they are much better off than certain countries … like the US, now well over 120% debt-to-GDP ratio and increasing every day.

    We should not bail them out. But it would be interesting to see what they come up with, as they are desperately poor and don’t have much room for austerity. They need a full-on free market, and they were working on attracting capital to the island with favorable tax treatments — but it is too little too late.

    ===|==============/ Keith DeHavelle


    • The Ed says:

      It is illegal, yet I see no reason why states and PR should not be allowed to declare bankruptcy. That law should be changed. Otherwise, we will have Greek states that have overextended themselves and can’t get out from under the mountain of debt.
      Irrespective of their debt to GDP, the people of PR do not have the money to pay. Neither do we for that matter.
      I think we all agree. We should not bail them out.


      • The unintended consequences are there, nonetheless. Right now, states cannot declare bankruptcy. They can be bailed out at the federal level. So what effect does this have? It has a positive effect on the rating of the states’ debt. (Some states are so upside down and so irresponsible in spending that even with this effect, their debt gets poor ratings.)

        Now imagine that rule changed. All of a sudden, the many states with huge pension debts now have a way out. This is from their own spending decisions, of course, but it gives them a relatively low-cost exit.

        And yet almost all of the states have debt — and the cost of that debt, and the ability to use more of it as needed, is a function of their rating. Now all those ratings are markedly reduced, as lenders are taking a much higher risk.

        Net effect? Almost all the other states and territories must pay — for years and decades — extra interest on their debt because of a rule change ostensibly to help one of them out by providing a way to evade current obligations.

        I don’t know how the costs would work out; it would be a complex model and needs info (and time) I don’t have. But it would be substantial. A voluntary bilateral restructuring agreement might accomplish something similar without the ripple effect that legalizing a state/territory BK would cause.

        ===|==============/ Keith DeHavelle


        • The Ed says:

          I hate to quote Dr Phil, but he has one thing right. Money does not solve money problems. The ultimate solution lies in the spending. These states with pension problems should not have made those promises. It happened because public sector unions get the officials, with whom they negotiate these pensions, elected. Then there is nobody at the table to represent the taxpayers.
          If the pensions are too high, then the pensioners (one of the creditors) have to take a haircut. It is sad but it is true. There is only so much blood to be squeezed from taxpayers. Whether that occurs in BK or in a bilateral/multilateral agreement which would occur before BK is okay with me.


          • No argument with the solution, it i just that the law change will have broad effects, probably more costly than PR’s troubles. And it will put the US in a weaker position than even it already was, financially.

            ===|==============/ Keith DeHavelle


  6. tannngl says:

    Perhaps the US has not helped Puerto Rico with our laws: minimum wage. I wonder how many other ‘laws’ are hurting them fiscally. Does anyone know how they became so indebted? Where did they overspend? For example, Pennsylvania is horribly in debt and has even more in unfunded liabilities. Most of it has to do with a pension that no private sector employees have as benefits anymore. Instead of defined funding, our employees in PA (teachers, staff, public officials, etc.) have defined benefits. Bad bad bad. And the governor will not agree to change this.

    Public officials were never meant to have life long jobs, NOR PENSIONS! Sorry to go off topic.

    Liked by 1 person

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