Co-authored by Brent McKee, New Deal Historian
Last week, Puerto Rico defaulted on a $58 million payment, the largest municipal default in U.S. history. Additional defaults are expected, as San Juan struggles to address a $72 billion dollar debt the island's governor declared "unpayable." Yet efforts to restructure San Juan's debt have largely been met with opposition from the island's creditors.
Most notably, a group of 34 hedge funds who spent years preying upon, exploiting and benefiting from Puerto Rico's distressed economy commissioned a report calling for increased taxes and additional cuts in public spending as a means of debt repayment.
Put together by a team of former IMF employees, the report conveniently concluded that a string of harsh austerity measures -- including firing teachers, reducing university subsidies, and cutting workers' benefits -- could prevent further default.
Not only is such a proposal bad economic policy, it is, what Bernie Sanders deemed a "moral outrage." Indeed, Puerto Rico's inhabitants -- 45 percent of whom live below the poverty line -- have already been hit with tax increases and cuts to education and social programs, including an expected 11 percent cut to Medicare programs in January of 2016.
Austerity would disproportionately burden the middle-class and poor, while driving the island's economy further into recession and making the debt even more difficult to pay off. And though there may be some room for cuts in Puerto Rico's budget, "extreme austerity alone," as Governor Garcia Padilla's chief of staff Víctor Suárez Meléndez recently made clear, "is not a viable solution for an economy already on its knees."
Indeed, while spending cuts and tax increases are to be expected, austerity is not -- and should not be -- the only solution. Below are five austerity-free ways to address Puerto Rico's debt crisis.
1. Increase federal assistance.
Pedro Pierlusi, Puerto Rico's nonvoting representative in Congress, recently wrote: "Puerto Rico has a debt problem because our government has over-borrowed, and the main reason our government has over-borrowed is to compensate for the lack of federal economic support." Yet history has demonstrated that there was no such lack of support during the Great Depression and the New Deal era. Programs like the Puerto Rico Reconstruction Administration built up the island's infrastructure (e.g., schools, health clinics, water lines); the Works Progress Administration and the Civilian Conservation Corps hired the unemployed into public works jobs; the National Youth Administration helped young Puerto Rican men and women finish high school and college; and the Federal Surplus Commodities Corporation delivered hundreds of tons of food to those in need.
These New Deal investments had a positive economic impact on Puerto Rico for many decades. We could help Puerto Rico in a similar fashion today, were there a will to do so. However, since the Obama Administration has ruled out any kind of bailout, and since our Republican-led Congress is more interested in war spending than domestic spending, it's painfully clear that this type of assistance will not be forthcoming.
2. Extend bankruptcy protections to the island.
U.S. states can utilize certain provisions of the bankruptcy code to restructure debt held by their municipalities and public agencies. While Puerto Rico could greatly benefit from this type of debt restructuring, Republicans in Congress have made clear that they will not grant Puerto Rico the same bankruptcy protections given to states. Simultaneously, many of the island's creditors are lobbying Congress against bankruptcy as an option to address San Juan's mounting debt. Yet another lifeline withheld.
3. Resolve the status issue.
As the debt crisis has made devastatingly clear, Puerto Rico's status as a commonwealth is innately unequal, structurally flawed, and economically unsustainable. Currently, Puerto Rico has no control over its monetary, immigration, trade and foreign policies, little control over its fiscal policy, and no real representation in Congress. Whether Puerto Ricans vote for independence, free association, or statehood, resolving the status issue would grant the island the stability and structural capacity to more adequately address the debt crisis.
4. Exclude Puerto Rico from Jones Act restrictions.
As an unincorporated territory of the United States, Puerto Rico must adhere to all U.S. trade agreements, even those which negatively impact its local economy. The Jones Act is a prime example. Enacted toward the end of World War I to protect the U.S. shipping industry from foreign competitors, the law prohibits foreign vessels from shipping goods between U.S. ports.
Such restrictions mean that Puerto Rico's shipping costs are double those of its Caribbean neighbors, ballooning the costs of goods brought to the island and adding to its economic woes. Some economists estimate that the Jones Act costs Puerto Rico hundreds of millions of dollars every year, accounting for half of one percent of its GDP. Unfortunately, requests to Congress by the local Puerto Rican government to exclude the island from the Jones Act have consistently been denied.
5. Conduct an independent audit of Puerto Rico's debt.
Some in Puerto Rico are calling for a thorough independent audit of the island's debt -- similar to those conducted in Greece and Ecuador -- to assess the validity and legality of the creditors' claims and further understand the conditions which led to the crisis.
The people of Puerto Rico did not benefit from high-stakes bond sales or turn a profit by exploiting a distressed and vulnerable economy. And because of their colonial status, the island's residents have never had any say over the imposed U.S. economic, trade and monetary policies which contributed significantly to the current economic crisis. So why are they now being asked to shoulder the bulk of the burden through austerity?
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