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  • Puerto Rico: America’s Greece

    Photo credit: Chad Ehlers Stock Connection Worldwide/Newscom

    Photo credit: Chad Ehlers Stock Connection Worldwide/Newscom

    Pop quiz: Which economy has high unemployment, soaring debt, and beautiful beaches? If you answered Greece, you wouldn’t be wrong. But the answer is America’s own little Greece: Puerto Rico, whose bond investors met last week in New York to discuss a potential debt restructuring.

    As the U.S. recovery has slowly sputtered along, Puerto Rico, a U.S. territory, has been left behind. Since 2006, the economy has been in a recession, and, since 2004, the economy has shrunk by 8 percent. Today, unemployment is near 15 percent.

    To right the economy, the government has turned to spending, attracting investors to its high yields bonds through tax exemptions offered by the federal government. Its debt is now at $70 billion, about the size of the economy. Over $40 billion in unfunded pensions makes the island’s situation even more precarious.

    Since 1990, the federal government has sent Puerto Ricans billions of dollars, almost three times what the territory pays to the federal government in taxes as a percentage of gross domestic product. The fact that Puerto Rico is performing poorly—despite this massive stimulus—demonstrates the ineffectiveness of federal stimulus money.

    Even worse, instead of cutting government spending to tackle the debt, the governor has opted for higher taxes, a policy that Heritage Foundation research has shown to be ineffective in comparable situations, such as in Greece.

    What the Puerto Rican economy needs is structural reforms and economic freedom, not more federal or territorial government spending. The most obvious move is to tackle government largesse by cutting spending, not increasing taxes. Next, policymakers should improve business freedom. The economy ranks 36 places below the U.S. in the World Bank’s Doing Business report. This scares off investors, makes local entrepreneurship difficult, and pads the pockets of bureaucrats. The federal government also has a role to play. It could start by repealing the Jones Act, which would make goods that Puerto Ricans buy cheaper.

    Easy money is never easy, and Puerto Rico has learned that the hard way. But there is hope—in economic freedom.

    Posted in Economics, Front Page [slideshow_deploy]

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