Raising a Sinking Ship: America’s Challenges in Puerto Rico

Raising a Sinking Ship: America’s Challenges in Puerto Rico
By Kenneth D. McClintock
Georgetown University
Washington, DC
September 18, 2013

My son Kevin, who honors me with his presence tonight, a freshman at GW, is part of the first class of Puerto Ricans in stateside colleges who may not have a Puerto Rico to go back to when he graduates, at least the Puerto Rico that he knew.

Since the month of August, as Kevin moved into his dorm, the yields of Puerto Rican bonds grew exponentially. PREPA’s mid-August bond issue broke the unheard-of 7% barrier. Two weeks later, the market registered Puerto Rico bond transactions that broke the 8% barrier. Two days later, they hit 9% and last week, yields grew past 10%.

Kevin’s generation, your generation, considers me old, but I can assure you I wasn’t around when the market crashed and the Big Depression began in the late 1920’s and early 30’s. However, acutely aware of how Puerto Rico bonds are going south in the municipal bond markets, I may not have lived that time in history, but these past few weeks I’ve come to know how it must have felt.

Ever since sovereignty over Puerto Rico changed in 1898, every ten years the federal government’s census has reflected an increase in population to nearly 3.8 million in 2000. The population growth projections then placed the islands’ population at 4 million by 2010, 4 million until they actually counted heads and realized that the passenger count onboard the ship of Puerto Rico had gone down by 2010 to almost 300,000 fewer people than originally projected.

To put this in greater context, according to some estimates, more people will have moved from Puerto Rico to the mainland this year than emigrated from the port of Mariel to the United States during the Mariel crisis in 1980.

Likewise, every year virtually every house in Puerto Rico grew in value and, in times of temporary needs, Puerto Rican families could draw upon the growing equity in their homes to refinance and pay for a college education, a wedding or start-up costs of a new business. Since 2007, real estate prices are dropping and most homes today are worth 30% less than 6 years ago. Home equities have been wiped out, many properties are financially underwater and families’ net worth has gone dowbn the drain.

As one financial analyst put it two weeks ago, Puerto Rico is “an economy shedding population, jobs and wealth”. But many in Puerto Rico refuse to notice that.

Puerto Rico’s ship is sinking and most of the passengers are focused on the great musicians who are playing on the deck.

Many of Puerto Rico’s top institutions are among those distracted passengers.

I attended a Puerto Rico Chamber of Commerce forum last week at which attendees could choose among different roundtable discussions. I chose the fiscal discussion, figuring that I’d encounter an intense brainstorming session between private and public sector officials recognizing our grave crisis and trying to come up with solutions to prevent Puerto Rico from slipping from its de facto junk-bond status into a formally declared catastrophic de jure junk-bond status. Unfortunately, I walked into a room full of government officials on the defensive and private sector leaders seeking relief from the recently increased tax burdens—hardly no talk about Puerto Rico’s crisis on Wall St.

Most politicians, on the other hand, are also among the passengers on the ever more uneven deck enjoying the music. Some reading off the administration’s talking points, others off the opposition’s tweets, most paying more attention to the bacteria infestation at one hospital or whatever other 48-hour issue the media comes up with to sell papers or inflate their ratings.

Despite the distractions, the ship is listing and it will take more effort and time to right it than it took to salvage the Costa Concordia, but right it we must.

It will be up to you, Puerto Rico’s students on the mainland, to help accomplish that task. Why you?

First, in spite of your access to Puerto Rico’s social media, the geographical distance still insulates you students somewhat from the daily bombardment of distractions that people are subjected to in Puerto Rico and will allow you to focus on Puerto Rico’s real problems.

Second, because you’re being exposed to a superb education in campuses not subject to strikes and shutdowns, you will emerge from your stateside college education with the knowledge to help fashion solutions to Puerto Rico’s real problems.

Third, because, as you see Puerto Rico deteriorate, as you see the ship listing to one side, hopefully, you will be inspired to lend a hand to prevent it from slipping into the ocean and, on the contrary, refloat it, recover and help move our people forward.

Politics as usual won’t pull us out of this one. It’s not a matter for those of us in the opposition to step back, let the incumbents dig their hole deeper and wait for the next election to take over.

If we wait for the next election, the ship may have taken on too much water and there may not be much left to govern in 2017.

To prevent our ship from sinking, we must all man our stations now, and seek short-term solutions to prevent it from taking on more water, medium-term solutions to right itself and long-term solutions to send a recovered ship back on its way to progress.

In the short-term, we in the opposition must share our best ideas with the incumbents, and we must offer our collaboration in rolling out those solutions.

On the other side of the aisle, the incumbents have to accept that they cannot right the ship alone and that everyone’s help is needed. In order to recruit and accept that help, they have to move away from the blame game they’ve started to succumb to, and they must outstretch their hand in seeking cooperation.

In the medium term, Puerto Rico must recognize that the ship is not upright, that up is not necessarily up, down is not necessarily down, that the population, far from growing, is shrinking, that property values, rather than going up, are going down, that yesterday’s solutions are not necessarily the answer to today’s problems, and that no one party or faction has the strength to right our ship on its own.

In the long term, everyone in Puerto Rico has to take a second look at our political status problem.

In March, 2011, President Barack Obama issued his report on Puerto Rico’s political status, which clearly stated that Puerto Rico’s economic ills are linked to Puerto Rico’s political status problem and that Puerto Rico’s economic problems could best be resolved if we first resolve our lack of a permanent political relationship with the United States, and he was right.

From the perspective of a statehooder who doesn’t think that the state of Puerto Rico will rise like a phoenix from the ashes without a status change, and that only statehood can guarantee that we can turn our listing ship into a vibrant vessel that moves us in the right direction, allow me a few minutes to walk you through a few of the reasons why I believe that our admission is more necessary than ever before…

First of all, after 115 years of indecision and smoke and mirrors, first by Puerto Rico, now by the federal government, we’re running out of time.

The myth that our status changed in 1952 has boiled down to that, a myth. The United States Department of Justice since President George Herbert Walker Bush over the past quarter century has made it clear to those Puerto Ricans who want to hear, that we’re a territory and have been such since 1898. Those who advocated, quite successfully since 1952, that we were not, have continued lame attempts that we are not but began using a word that you virtually never heard Governors Luis Muñoz Marín or even his modern-day disciple, Rafael Hernández Colón, use: the word “nation”. This word is now used to appeal to underlying nationalism as a last defense of the status quo and the need to “perfect” the status quo as an alternative to the allegedly culture-devouring growing statehood movement.

Second, the instruments that were used for years to sugar-coat the failings of our current status are no longer available. For example, since the 1940’s, Puerto Rico’s pro-status quo, anti-statehood Popular Democratic Party, in power for 28 consecutive years and during more than half of the past 50 years, used the safety valve of relocating big chunks of Puerto Rico’s population as a way to “resolve” many of its economic problems—high unemployment rates, low per capita income, and so forth. That safety valve was used, not so much to lower our population and demand for government services, but to induce some of its poor to transfer their demand for services to the states, somewhat moderating Puerto Rico’s population growth. Today, however, it is not a government, but the people who are using that “safety valve”. It is not a government pushing some people to the mainland, but the people voluntarily fleeing to the states, seeking better paying jobs, educations and safety and benefits. By 2013, 60 percent of all Puerto Ricans no longer live in Puerto Rico, and the economic gap with the mainland in 1952 has not closed—twice the unemployment, one third the per capita income, and so forth, and the safety valve is no longer an instrument of the government but of the people to resolve, not the government’s economic problems, but the people’s economic problems.

Another example of instruments of economic value gone bust is Puerto Rico’s alleged “fiscal autonomy” under the current status. Despite the creative use of whatever benefits that federal income tax exemption provides, no recent administration can claim any remarkable record in attracting manufacturing, or any other kinds of jobs thanks to our so-called fiscal autonomy. On the contrary, the nation as a whole is having greater success in “insourcing” foreign jobs back to the United States than Puerto Rico is having in even holding onto its existing industrial base.

From a financial standpoint, Puerto Rico could and did access America’s financial markets, armed with Congressionally-granted triple-tax exemption, to acquire capital that could be used to grow Puerto Rico’s economy through infrastructure development. Triple-tax exemption theoretically allowed Puerto Rico to acquire capital for investment at a lower cost than a state could, and Puerto Rico did for many decades. Today, however, that is no longer the case. By 2008, Puerto Rico had an annual budget deficit that hovered between $3.3 and $4.4 billion dollars, over 40% of every dollar spent by the government that year. Three years later, a New Progressive Party-controlled government had brought that deficit down to anywhere between $0.7 to 2 billion dollars, depeding who you ask, on the way to a balanced budget by 2014. Much of the mountains of extraconstitutional unpaid bills found during the 2008-2009 transition were financed through access to the financial markets. Today, with government spending rising once again, with no clear strategy towards economic growth, Puerto Rico’s government discovers that triple-tax exemption no longer cuts it on Wall Street and that Puerto Rico no longer has access to capital at reasonable rates.

The instruments that our current status provided and that were used or abused by previous governors to plaster up colonial cracks or resolve inherited problems, are no longer available to the current administration.

As I said before, Puerto Rico now has “an economy shedding population, jobs and growth”.

If and when Puerto Rico were admitted into the Union, we would acquire valuable instruments that in and of itself do not guarantee economic growth but that put to good use by our state government would allow us to correct the ship of state and generate significant economic growth.

First, we would acquire the perception of being a part of the United States that 115 years of living under the American flag, somewhat “foreign in a domestic sense”, has eluded us. Not only will that change in perception virtually eliminate the questions that you ad students are subjected to by your peers regarding what exactly is Puerto Rico, but it will help attract more investment to the islands by investors wary of plunking down their dollars in foreign venues.

Second, the macroeconomic effect of an increased flow of federal resources in Puerto Rico would generate many new, well paying jobs on the island.

Third, foreign direct investment, FDI, would increase in a Puerto Rico that is one of the smallest FDI recipients in the world’s largest FDI recipient in the world.

Fourth, American citizens would be able to find in Puerto Rico the hard-earned federally-provided benefits that today they can only find in the states, thus eliminating the current inducement to move to the mainland. For the first time in decades, Puerto Rico would have a fighting chance to preserve and grow its population.

Fifth, the exercise of the right to vote for our national leaders and to elect voting representation to our national legislature will accrue to Puerto Rico’s benefit. I’ll give you two examples related to the 1980 Democratic presidential primary in Puerto Rico. After lobbying by 5 governors over a quarter century, Puerto Rico had failed to get its maritime jurisdiction extended from 3 miles to 10.35 miles offshore. Governor Romero, in exchange for endorsing President Carter’s reelection in the face of Senator Ted Kennedy’s Popular Democratic Party-backed challenge, got it in two weeks. After Romero eked a narrow victory for Carter in the primary, he was then rewarded with the inclusion of one public housing project in a new federal public housing rehab program, and that’s how Puerto Rico largest, Llorens Torres project was redone, thanks not to the presidential vote, but to the intelligent exercise of a primary vote.

I could go on all night about how statehood, now more than ever, is the only political status alternative that can pull Puerto Rico out of impending economic depression, out of its current economic status characterized by the shedding of population, jobs and growth, but I’d rather leave time for Q & A’s.

In closing, students like you are uniquely poised to become part of the solution, rather than part of the problem to straighten Puerto Rico course, to raise a sinking ship and to help Puerto Rico achieve its full potential.

Study to the limits of your intellectual capacities, enjoy all that this city has to offer, but remember that Puerto Rico invested a lot to get you here and desperately needs you back to apply everything you’re learning to make Puerto Rico a better place to live, to work, to love and to succeed.

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