Puerto Rico Squaredance

First these words from the prophet Marshall Mathers:

"All these people I had to leave in limbo
I'm back now, I've come to release this info
So I'll be brief and let me just keep shit simple..."
You know that one metaphor about re-arranging the chairs on the Titanic?  Well since we have to Boriqua-ize everything, try this one on for size.  The debt-reduction plan that Puerto Rico's Governor, Alejandro Garcia Padilla announced this week, amounts to nothing more than installing new glass windows in your house, right before a category 4 hurricane hits the island.

While the jury, read the US Congress and Wall Street, is still out on whether the new plan will be accepted, the news leaking out about the plan is very disturbing.  In general, the new plan seems to be constructed on basic financial and psychological assumptions about Puerto Rico which are just not true.  Chief among these assumptions are:

Lowering government spending will help the local economy grow

Only on the spreadsheets of the Governor’s advisors and in the wet dreams of Republican presidential hopefuls does spending less equate to more and better paying jobs in the public sector.  As I’ve noted before, the financial clout and largess of our economy was purchased on the backs of various administrations creating unnecessary government jobs and doling out cushy government contracts.

Is it any coincidence that our economy peaked, just as the government payroll peaked?  No, the only way to grow the economy in Puerto Rico is to stimulate the creation of more high paying jobs.  Just as Operation Bootstrap brought the island out of an agrarian economy and into 20th century using high paying manufacturing jobs, Puerto Rico needs hundreds of new hi-tech global businesses and the creation of thousands of high paying jobs.

By tightening up tax policy and other business restrictions, the grey economy will produce more taxable income

While it isn’t everyone’s first talking point, the plan includes all of the previous tax reform policies.  Remember all of that hullabaloo about the IVA?  Well it’s back!  Only this time the stakes are even higher.  The new plan contains even more policies that are aimed at making tax evasion more difficult.  I’ve written ad nauseum about this, so I won’t rehash those points.  The bottom line remains the same, as long as the grey economy is easier, more profitable, and carry minimal risk of punishment, the underground economy will thrive.

Much of our current tax evasion problem comes from people and organizations who simply choose not to follow the existing rules.  Unless these new policies make tax collection easier to enforce, they are mere words and promises.

Labor participation rates will increase

This should be evident from the first two assumptions, but it is worth it’s own discussion.  Think of it as their corollary.  One of the primary justifications for this new plan is that by adjusting our economic policies, it will encourage more people to join the labor market.  I can’t think of a more ridiculous idea than suggesting that lowering wages will incite more young people to join the job market.  That is, unless you're a Republican, which theoretically the Governor is not.

In the past, this ploy was feasible, because they were cushy government jobs, however isn’t that what this new plan is supposed to eliminate?  Where will these new low paying jobs come from?  Isn’t our economy just about saturated with service economy businesses?  Let’s get real here, thinking that Puerto Rico can compete with the low cost labor available in China, Mexico, or even the Dominican Republic is impossible.

Rico will eliminate it’s debt

As hard as these new policies have been defended, you’d almost expect them to leave Puerto Rico free and clear of it’s debt, but that has never even once been suggested.  So let’s be clear, in order to pay for it’s current debt, Puerto Rico must refinance, or restructure,  that debt with more debt.  Further, the only legal mechanism for restructuring debt is bankruptcy, which both Congress and Wall Street are dead set against.

So where does that leave Puerto Rico? In my summation, I’d say just about exactly where it is now.  The only thing different is that the “economic hurricane” that is just about to hit Puerto Rico has been upgraded to a category 5, but it’s just going to hit us just a little bit later.  

With lower than expected tax incomes due to a stubborn and evolving underground economy, lower than expected labor participation rates, and without a rapidly growing economy, Puerto Rico will revisit, time and time again, the looming "economic hurricane" of outstanding debt. Alas, the lost Xanadu that Operation Bootstrap brought to the island will never be seen again.