Puerto Pobre - How Government has Guaranteed Puerto Rico's Economic Failure.

With Puerto Rican statehood showing up again as a trending topic, many news sources are outlining the economic state of the Island. I find it refreshing that the issues in Puerto Rico are getting some press, but find it concerning that a close examination of why the island's economic situation is so dire, and what policies have not only led to that outcome but ensured it. But first some background:

Though Puerto Rico has been held as a US territory since 1889, it wasn’t until 1917 when President Woodrow Wilson needed to find a way to force Puerto Ricans to fight in WWI that they were granted a pseudo-citizenship that came with many caveats and limitations…  sort of a 'friends without benefits' arrangement. Hence, the Jones-Shafroth Act was born and granted the status of US Citizen to all Puerto Ricans, which granted them the privilege of dying in their oppressors’ wars.

Since then, Puerto Rico has never really flourished under US control, though it has certainly seen much better days. Government regulations have always stifled their little economy, but it just seems to keep getting worse. Local policies aren’t the only ones to blame either. Several US federal policies are among the largest contributors to the hardships felt by everyday residents of the small, Caribbean island. I want to call these policies antiquated, but that word implies that there was ever a time when the policies were fair or appropriate, and it would be impossible to make that case.

 

MINIMUM WAGE LAWS

Puerto Rico is a part of the United States. The dollar is their currency and they are bound by US laws, including the federal minimum wage. But how is that a bad thing? Don’t people in Puerto Rico deserve a living wage? I would argue that certainly, they do and it is exactly the minimum wage requirement that prevents them from earning one.

Though only 46 percent of the 3.7 million population of Puerto Rico participates in the workforce, as compared to about 60% in the mainland US, their median household income is just under $20,000 per year. Compare that to the almost $52,000 US median, which is slightly lower in my home state of Indiana's at $50,532. Yet, a person making the current federal minimum wage of $7.25 per hour would make $14,500 per year based on a 40-hour workweek for 50 weeks per year. That sounds like nothing and, even compared to a very modest $50k per year. But consider that minimum wage in Puerto Rico is 74.3% of the median, things start to come into perspective. Since prices are generally higher in Puerto Rico, it’s kind of like if we were to have an $18.50 per hour minimum wage here on the mainland, except that $18.50 would only buy you $10 worth of goods and services.

So, Puerto Rico has an idle workforce that can't go to work because it's illegal for them to work for less than minimum wage. Yes, people who make minimum wage are poor, especially in a place where everything costs more, but in an effort to make it illegal to pay people below a living wage, minimum wage laws have forced many Puerto Ricans into living on no wage at all. In its attempts to outlaw poverty, the government has created more poverty and made it more severe.

 

THE MERCHANT MARINE ACT OF 1920 (The Jones Act)  

This federal statute is intended to ensure that maritime commerce between US ports be conducted using US ships, which also must be constructed in America and owned by Americans. This protectionism keeps Puerto Rico from being able to import or export anything unless they use the US Merchant Marine, which means US ships, constructed in the US, and crewed by US personnel. This makes imports cost twice as much as they do in neighboring Caribbean nations. Their incentive to export is likewise reduced as Puerto Rico's goods are more expensive and less competitive than mainland consumers and wholesalers can get elsewhere.

 

EXCESSIVE TAXATION

As it is not officially a state and therefore does not have representation in US Congress, they are not subject to the federal income tax. This often plants the notion that Puerto Rico is some kind of tax haven in the minds of typical mainlanders. This is not the case. Puerto Rico imposes its own income tax and sales tax. Still, the biggest blow to Puerto Rican prosperity came in the form of Section 936 of US Internal Revenue Code, which removed tax exemptions for US companies with subsidiaries located in Puerto Rico. Former President Bill Clinton signed legislation in 1996 that scaled back these exemptions over a 10 year period. This effective tax hike went into full effect in 2006 and has since led to massive job losses and Puerto Rico has endured 12 consecutive years of economic depression across the island. 

 

ENORMOUS GOVERNMENT AND SOCIAL FUNDING

One-third of Puerto Rico’s workforce are employed by the government. One-third of Puerto Ricans are on food stamps, not to mention other forms of assistance. Let’s assume that there’s no convergence between those groups for the sake of this article, though I suppose it is entirely possible that government employees may also be on some forms of assistance.

The largest employer on the Island is the government, due to the fact that there is so much assistance that needs to be distributed. More assistance means less incentive to work, and the less people work, the more they require assistance. The more assistance they require, the more government programs and employees are needed yet, with the decrease in jobs, the less money there is flowing into the government to pay those government salaries and cover the program budgets, creating a massively unsustainable situation that will lead to a crash.

Yet, like much of the world, they will most likely see the failures of government as a pressing need for more and more government and they will suffer more and more unintended consequences. I’m rooting for Puerto Rican statehood if that’s what they really want. They deserve proper representation, but I fear that the United States and its own twenty billion dollar debt and thousands of unsustainable public programs could never save them from the consequences of the US’s poor decision making and underhanded dealings that put Puerto Rico in this situation in the first place. If they could resist the call of socialism, they’d be much better off pursuing independence. 

 

REFERENCES:

https://www.census.gov/newsroom/press-releases/2014/cb14-17.html
https://en.wikipedia.org/wiki/Puerto_Rican_government-debt_crisis
https://www.law.cornell.edu/uscode/html/uscode46a/usc_sup_05_46_10_24.html
https://www.law.cornell.edu/uscode/text/26/936
https://www.loc.gov/rr/hispanic/1898/chronpr.html
https://taxfoundation.org/tax-policy-helped-create-puerto-rico-s-fiscal-crisis/