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.
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.
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.
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.
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.