by Allen L Phillips
The law of unintended consequences plays a big part in Puerto Rico’s problems:
The Island long enjoyed strong employment due to a U.S. tax break for American companies who established subsidiaries on the island. Pat’s brother, Ron, worked for one of those companies. In 1996, Washington began phasing out that tax break, removing a significant driver of economic growth. Combine that with the general recession that began in 2008 and…..
The government of Puerto Rico did not adjust to the new reality, partly because they could still find a market for their bonds which were tax free in all jurisdictions. This unique tax free classification was authorized in 1917 as part of the same U.S. law that made all Puerto Ricans U.S. citizens. This made the bonds irresistible and allowed the Puerto Rican government to sell out a last round of 8% bonds in 2014 even though they were rated as “junk”.
Another factor allowing them to sell junk bonds was that there was no mechanism for a state or territory to file bankruptcy. Whoops, the U.S. Congress changed that in 2016 and under that law Puerto Rico filed for bankruptcy late last year. It remains to be seen what the final impact will be on bond holders. For many on the island, those bonds make up a substantial portion of their retirement income. 8% tax free!
The Jones Act was passed into law by the U.S. Congress in 1920 which, among other things, mandated that goods shipped between U.S. ports must be on U.S. owned vessels. This resulted in consumer goods from the U.S. costing about 12% more in Puerto Rico according to some reports. In addition it was hampering the movement of goods to Puerto Rico in the wake of the hurricane and has now been temporarily waived by President Trump.
This harks back to the age old question: Is government the problem or the solution? THE ANSWER IS YES!!!
So what’s next? There is no question that Puerto Rico and Puerto Ricans will be better off at some point in the future because of the new attention on their plight. It is a shame that it took a direct hit from Hurricane Maria to create the focus on 3.5 million American citizens that are in a heap of trouble.
The hurricane is not the problem. Hurricanes happen. The hurricane exposed the problem. Puerto Rico’s infrastructure was on the brink of collapse before the hurricane. It’s up to us to make sure that focus stays on Puerto Rico until the problems are fixed. One London based economist predicts a “deeper decline in economic activity for the first half of 2018 followed by a more dynamic environment driven by investment in infrastructure and recovery effort.” We can pray that it happens more quickly.
While the information I have is that only six percent of Puerto Rico’s economy is tourism based, I can’t believe it’s that low. The island is amazing, with everything from mountain rain forests and rushing rivers to coffee plantations, to gorgeous beaches, crystal clear waters, great snorkeling and diving, an incredible fort protecting San Juan’s harbor that was started by the Spanish in the 1500’s and really good food (this is an incomplete list). Some in Puerto Rico’s tourist industry are saying they are back in business and some oceanfront hotels should start to reopen later this month. They will welcome you with open arms. Go and see.
Here is a recent text message from Pat’s brother, Ron. (Mayaguez is at the west end of the island, about a 2 hour drive from San Juan.)
”Just a quick update. We are doing fine in Mayaguez, got water back for now, still no electric in our neighborhood. Fortunately we have a generator that we run 10 hours a day, which allows us to keep the refrigerator cold, access the internet and watch the news. Gas is much more available and lines much shorter. Some banks are opening and allowing some cash withdrawals from ATMs. Many supermarkets are open and pretty well stocked except for water, liquid gold. Even though we have running water it is not advised to drink it even if filtered. Still long lines at places like Sams Club and Walmart. Cash is still king but some places are accepting plastic. Still disastrous in remote areas and mountain towns. Looks like support finally got to Barranquitas (a town in the mountains) where folks lost possessions and some their homes without access to food and water. More hospitals are up and running, where they are caring for patients that require power to survive. Power and Water authority working 24/7. Truckers on the road. Remember these folks have their personal disasters and family’s to care for also. Our new heroes. US troops, FEMA and National Guard are performing outstanding service. Remember this is the 3rd major disaster FEMA is handling with a forth brewing in the Gulf. Hopefully we are getting everyone out of life threatening situations and getting some form of stability even if it is a new normal. Special thanks to Doctors and Nurses and others volunteering their time. Staying positive.”
I (Al speaking) now have a charity recommendation: Fondos Unidos de Puerto Rico Inc. is a United Way affiliated charity serving Puerto Rico. You can access them through the U.S. based Charity Navigator at http://www.charitynavigator.org.
allenlphillips 