Bettering the instruction of a parricide pleading his orphanage as a mitigating sentencing factor, New York City strutted through the halls of Congress in 1975 like a peacock demanding a federal rescue for its municipal profligacy.
President Gerald Ford's firm pledge to veto any federal bail-out legislation provoked the widespread headline, "FORD TO CITY: DROP DEAD."
But necessity is the mother of invention. The City embraced austerity. Its fiscal fortunes climbed. And the City is now flourishing.
Thereby hangs a tale for Congress to respond to Puerto Rico's plea for special federal bankruptcy legislation to evade the consequences of its reckless borrowing spree exceeding $72 billion used by the island to underwrite extravagance, waste, and indolence: DROP DEAD.
Puerto Rico's financial woes are self-inflicted.
It is saddled with debt equal to 70% of the commonwealth's GDP-- higher than for any American state. Its debt-to-personal income ratio is off the charts. Its public sector workforce is as high as 20% of all employment compared with 4% for most states. And its public pension system is only 8% funded--a recipe for financial catastrophe. In comparison, Illinois is tottering on a precipice with a 40% funded pension plan.
Puerto Rico's business unfriendly regulatory environment has spiked unemployment to approximately 13 percent. Many residents live on welfare. One-third of the population receives Supplemental Nutritional Assistance Program benefits. Labor market participation rates are low. Tax collection is spasmodic. Public utilities are notoriously mismanaged. And the bleak economic landscape has spawned a brain drain to the United States. At present, the number of Puerto Ricans residing in the continental U.S. exceeds the number that dwell on the island.
Every parent knows that a child will spend up to his or her allowance. If there is no penalty for overspending the allowance, the overspending will continue. Human nature does not change when children grow up to hold the reigns of government. The United States Supreme Court correctly observed in United States Trust Co. v. New Jersey: "A government entity can always find a use for extra money, especially if taxes do not have to be raised."
Letting Puerto Rico escape from its own prodigality would have adverse spillover effects in the adjacent 3.6 trillion municipal bond market. Perceived investor risks would climb, and interest rates for municipal borrowing would climb accordingly.
Furthermore, to change the law for Puerto Rico's creditors in midstream would be self-defeating. A free market environment featuring the rule of law is the time-honored remedy for the island's financial plight. More than two hundred fifty years ago, Adam Smith instructed in The Theory Of Moral Sentiments, "Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things."
Writing three decades later, James Madison, father of the Constitution, similarly explained in Federalist 62 that without stable laws that protect reasonable investor expectations, an economy will stagnate:
""What prudent merchant will hazard his fortunes in any new branch of commerce when he knows not but that his plans may be rendered unlawful before they can be executed? What farmer or manufacturer will lay himself out for the encouragement given to any particular cultivation or establishment, when he can have no assurance that his preparatory labors and advances will not render him a victim to an inconstant government?"
When Puerto Rican officials and lobbyists predictably approach Congress to plead for federal relief from its $73 billion in debt, Members should lecture them about Smith and Madison and direct them to return to the island.