The Self-Inflicted Dimensions of Puerto Rico’s Fiscal Crisis

Abstract

The fiscal crisis in Puerto Rico, which constrains the ways in which the government can try to tackle the economic depression, is in important ways self-inflicted—the product of economic policies undertaken at the local level. When the crisis is approached in this way, the resolution of the island’s colonial situation can be seen as a necessary but not sufficient condition for solving the problems of the depression’s victims.

La crisis fiscal en Puerto Rico, que limita las formas en que el gobierno puede potencialmente tratar de hacer frente a la depresión económica, es autoinfligida de manera importante: el producto de las políticas económicas implementadas a nivel local. Cuando se aborda la crisis de esta manera, la resolución de la situación colonial de la isla puede verse como una condición necesaria pero no suficiente para resolver los problemas de las víctimas de la depresión.

Keywords

Puerto Rico Fiscal crisis Austerity

The 14-year-long socioeconomic depression through which Puerto Rico is passing has caught international attention, with characterizations such as “the biggest default in U.S. municipal bonds market history” and “the Greece of the Caribbean” feeding the imaginations of those who seek to understand it. Local and foreign bondholders, a pro-austerity government, and a fiscal control board have all become protagonists in a story of social decay in a nation once considered a model of capitalist industrial development and social welfare.

For many in Puerto Rico, past concerns and fears associated with achieving political independence from the United States, fed in large part by decades of Cold War propaganda, have become very real. The poverty level is three times that of the United States, the island is among the most unequal nations in the world, and the waves of emigration have surpassed those of the 1950s, to the point that the island is being depopulated. The unhindered mobility of the “factors of production,” capital and labor, that for decades has characterized the business environment in the island has not produced the dynamic and long-term economic growth or convergence with the metropolis that some economic theories and models would have predicted.¹

Not surprisingly, many explanations of the crisis in Puerto Rico have been put forward. Some have focused on the expiration in 2006 of a federal tax break for corporate income that had attracted foreign multinational firms since the mid-1970s, while others point to incompetent administrations. Still, it is the colonial relationship with the United States that has taken center stage. Many point as evidence to the fact that the crisis began in March of 2006, two years prior to the global economic crisis. The lack of application of Chapter 9 of the bankruptcy law to Puerto Rico, the cabotage laws, Congress’s acceptance of the colonial relationship, and the lack of monetary policy combine to give credence to the idea that the depression is due exclusively to the limits imposed by the U.S. government (Backiel, 2015).

One cannot simply turn a blind eye to the colonial status of the island, but we part ways with the many analyses of Puerto Rico solely from a nation-state perspective, using as an entry point the politico-juridical dimensions of the colonial situation. What worries us in these accounts is that politics is reduced to the relationship between the United States and Puerto Rico, a perspective from which the island and its population are conceived simply as victims of the metropolis without differentiating groups within the island’s population. This macro view of the situation, which uses nations as the unit of analysis, obscures the power relations within the class structure of the island, relations that shape and are shaped by the nation-state-level analysis. We believe that this is a mistake that has led to absolute silence on fundamental issues that have direct political consequences for potential solutions to the crisis.

To start remedying this problem, we want to complement the analysis of the colonial situation with a class analysis, examining the production, appropriation, and distribution of wealth from a political economic perspective. An important methodological and political step in this direction is to distinguish the crisis of the colonial regime of the Commonwealth of Puerto Rico from the crisis of its economic model, while recognizing that they are intertwined. This clears the way for adding protagonists to the story of social decay whose presence is obscured by the eternal discussions of the island’s colonial status. A serious approach needs to examine the role of local groups in looting the public coffers, biasing economic outcomes in their favor through public policy, and facilitating the extraction of wealth from the colony. We join other social theorists in recognizing that no external attempt at exploiting a country and its population would be successful if it were not partly “rooted in coincidences of interest between local dominant classes and international ones” (Cardoso and Faletto, 1979: xvi).

In the case of Puerto Rico, these classes have benefited from the relative autonomy that the government has had in implementing fiscal policies and from the perpetuation of the failed dependent economic model that has been in place since the 1940s. When looking at Puerto Rico as a colony of the United States, one cannot forget the control that the various administrations have had in altering and applying the tax system and deciding how public funds would be used. Because of the motives and outcomes of these choices and the room for maneuver within the colonial relationship of those who made these decisions, we claim that the crisis can be understood, in important ways, to have been self-inflicted. In our analysis we place this recognition in the context of the perpetuation of a strategy for growth and development that had become obsolete by the 1970s, when the first postwar recession and fiscal crisis hit the island.

When the crisis is approached in this way, the ending of the colonial relationship becomes a necessary but not a sufficient condition for solving the problems of the victims of the crisis. To understand the development of the local elites and intermediaries, their relation to the state and foreign capital, and their general position within the economic model, one has to examine the history of colonialism in the island under the U.S. regime (see Dietz, 1986). Still, the particular local determination of how public resources are obtained and used within the logic of the existing economic model is one that can be reproduced even if the colonial status of the island is changed, especially if the grid of internal power relations is not addressed. The fact that certain local groups and individuals have benefited immensely from the crisis should point to the relevance of our approach.

The argument that conceives the solution to the crisis as something to which all must contribute hides the regressive distributional features of the crises and the solutions put forward. While the crisis went on, payments to the rest of the world as returns to foreign direct investment between 2006 and 2016 increased by 19 percent. Income based on property (profits, interest, etc.) paid to residents increased by 59 percent. At the same time, there was a decrease in income of 3.9 percent for wage earners. While in 2006 total income received by resident property owners was equivalent to 56 percent of the total income of the working population, by 2016 the proportion had increased to 92 percent (Junta de Planificación, 2015; 2016). The island’s Gini index (a standard measure of income inequality) stood at 0.559 in 2015, higher than the 0.535 of Washington, DC, and the 0.514 of New York (U.S. Census Bureau, 2015). Puerto Rico is among the most unequal countries in the world, joining Zambia, Honduras, South Africa, and Namibia. Not everybody in the island is experiencing the economic depression in the same way, which lends credence to the hypothesis that there are groups within the island that want to keep the present arrangement more or less intact.

In what follows we show various instances of policies that have perpetuated the basic contours of the failed economic model while also highlighting the continuous neoliberal structural adjustment that has been applied during the depression. While a more detailed and comprehensive study of inter- and intraclass conflict and its connection with global forms of capital (financial, industrial, and commercial) in the context of neoliberalism is needed, we believe that the evidence provided below supports the first step in this endeavor: recognizing that groups within the island, in concert with the various administrations of the main political parties, have benefited for years from the current socioeconomic arrangement in the colony and actively intercede to preserve it.

Perpetuation of a Failed Model

The combination of fiscal crisis and economic depression and its effects on a significant part of the population have highlighted the structural problems of the economic model of export-led industrialization that were identified over four decades ago (Tobin et al., 1976; Villamil, 1976) when the first postwar fiscal crisis and deep recession hit Puerto Rico’s economy. Ever since industrialization took off with Operation Bootstrap in the late 1940s, the state has served as an active provider for private capital, both local and foreign. After the first crisis the government became more aggressive with the use of tax incentives (Cao-García et al., 2014) while ignoring the need for major changes in development strategy as major transformations in the new international division of labor diminished Puerto Rico’s competitiveness. What has also been constant during this period is the neglect by the various administrations of comprehensive, well-defined industrial policies and a development model that seeks to satisfy the needs of the population in a sustainable way. Instead, export-led industrialization and growth based on incentivized external capital flows have been the norm. The foreign direct investment needed to support the industrial enclave dominated by subsidiaries of multinational firms has been attracted by using various incentives with no clear objectives attached to them. Multiple tax credits and exemptions, environmental subsidies, subsidized public utilities and land, and an abundant, educated, and cheap labor force, combined with industrial peace achieved through antiunion policies, have provided a bonanza for capital. In the meantime, substantial unemployment, poverty, and emigration have all been constants of the “industrial development” process (see Dietz, 1986; Quiñones-Pérez and Seda-Irizarry, 2016b).

This industrialization process has historically undermined local producers and providers, causing the creole capitalist class to focus mainly on commercial and financial activities while remaining part of the state and its various governments to guarantee their profits. During the decade-long depression their private needs have continued to be satisfied by governments offering tax incentives to encourage both foreign and local investment.

In 2004, two years before the economic crisis erupted in the island, there were approximately 40 tax exemption laws for the private sector. As the crisis gained momentum, more tax incentives were passed, and by 2008 there were around 60 of them. Now, in the middle of more than a decade of economic depression and a profound fiscal crisis in which the debt-to-gross-national-product (GNP) ratio is around 100 percent (not counting net pension liabilities), there are more than 90 tax exemption laws denying a substantial flow of income to the government in an economy that has, on average, contracted by 1.5 percent per year during the past decade. These laws have not been systematically revised, and, along with other types of subsidies, their numbers keep increasing.²

The Department of the Treasury has calculated that between 2008 and 2014 the total tax credits awarded by the government amounted to US$1.5 billion (Cao-García et al., 2014). Still, a study commissioned by the House of Representatives stressed that there had been no follow-up evaluations regarding the effectiveness of these credits (Cao-García et al., 2014). Changes in circumstances that at some point might have warranted the use of these incentives and mismatches between substantial allocations and sectoral performance were also identified. For example, more than US$170 million in tax credits were awarded between 2008 and 2014 to the tourism sector, a substantial amount if one considers the relatively small size of this sector (6 percent) in relation to the economy. Big capital and its luxury hotels were bailed out by the government when they defaulted on a debt of some US$419 million (Banuchi, 2014).³ These and other examples led the head economist of the House of Representatives study, Ramón Cao-García, to conclude that “it would be cheaper for the state to directly make the investments that it wants to promote given that their yield would go to the government” (quoted in Pérez-Sánchez, 2015, our translation).⁴

Finances were also undermined by tax exemptions at the level of municipalities. An estimate by the Center for the Collection of Municipal Income (Cortés, 2017) calculated that for the fiscal year 2015, municipalities failed to receive around US$1.5 billion in property taxes. Some municipalities, especially small ones, are practically bankrupt, with no money for payroll, debts that have not been serviced, and projects suspended for lack of financing.

Finally, the continuity among administrations in the perpetuation of the failed model of providing tax incentives without strict monitoring to encourage employment creation and economic growth can also be seen in their recent efforts to attract foreign investors (Law 22) and to export local services (Law 20). These tax exemption laws, passed in 2012 under Luis Fortuño (2009–2013) of the pro-statehood Partido Nuevo Progresista (New Progressive Party—PNP) and promoted by the administration of Alejandro García Padilla (2013–2017) of the pro-commonwealth Partido Popular Democrático (Popular Democratic Party—PPD) that followed, became the spearhead of the economic approach of both administrations. The present PNP administration has followed suit and provided even more flexibility for firms under these laws, which according to its current secretary, Manuel Laboy, have been the main “strategy for economic development for the past four years, at least coming from here at the Department for Economic Development and Commerce” (quoted in Soto, 2017, our translation). Speculation about the real magnitude of tax expenditures by the government of Puerto Rico to incentivize economic activity came to an end when the first tax expenditure report was released in September of 2019. According to the debt adjustment proposal report released that same month, there were 302 tax expenditures, including “tax credits, cash grants, deductions, exemptions, preferential tax rate, tax liability deferral, and other tax incentives, where the amounts allocated can materially impact the Commonwealth’s finances. While the universe of tax expenditures in the report was relatively broad, it does not consider municipal incentives and certain other expenditures such as cash grants and accelerated depreciation.” Whereas in the United States tax expenditures for individuals are greater than those for business (Tax Policy Center, 2019), in Puerto Rico the reverse is the case. The tax expenditure report identified US$1.3 billion in tax expenditures for individuals and US$16 billion for corporations (Fiscal Oversight Management Board, 2019).

In general, most tax reform projects since the mid-1980s have been class-biased, involving lower taxes for corporations as an incentive for investment and economic growth. This failed supply-side strategy has had as a result income and wealth redistribution to the top, the perpetuation of a significant unemployment rate⁵, and constraint on the growth of tax revenue. Also, whenever the government wants to raise money via an increase in taxes, it does so via regressive ones (e.g., a sales tax increase from 7 percent to 11.5 percent in 2015, currently the highest in the United States).

All of the above examples provide a glimpse of the way the resources and limited powers of the government of Puerto Rico are being used for the benefit of local and foreign capital to enforce an economic model that did not serve the needs of the population even during its so-called golden period of 1947–1973, when the economy grew on average 6 percent per year in constant dollars. In addition, the waste of public funds via corruption schemes is equivalent to US$900 million (EFE Agency, 2009). Recently the Federal Department of Justice published a report that places Puerto Rico in the top 10 most corrupt jurisdictions on the basis of number of convictions (Delgado, 2019). Budget waste was considered more than 10 percent of the total budget in the mid-1970s, when institutional decay was not as advanced as it is today (Quiñones-Pérez, 2009). Also, the tax evasion rate hovers around 30 percent of potential revenues, and in 2015 uncollected taxes amounted to an estimated US$4 billion. Historically, tax evasion has been more commonplace as one moves farther up the income scale (Cao-García and Cruz-Pol, 2003). Probably the most striking assault on the Treasury was an income-tax boycott by more than 21,000 businesses (around 33 percent of the total) in April 2014 that robbed it of an estimated US$400 million—a significant amount in light of the fact that the government defaulted on a debt payment of around US$400 million in the summer of 2016.

The lack of accountability and controls, combined with the historically provided corporate welfare, continues as the fiscal crises and economic depression deepen. As we have seen, the incentives provided to firms have not been monitored and constantly evaluated, and their shady operations to enhance profits pass under the fiscal radar. Businesses that have operated for years report that their economic activities are producing minimal profits, just breaking even, or even suffering losses, hiding their revenues through “profit-stripping” strategies with transfer pricing and income shifting in an effort to lower their effective global tax rates.

The experience of Puerto Rico’s economy is reminiscent of the post–Bretton Woods neoliberal capitalist era of financial flexibility and the attack on labor that has undermined the finances of governments and the performance of economies around the world. Since 1976, when Section 936 of the Internal Revenue Code provided firms with more flexibility to repatriate their earnings, a growing mass of reported profits estimated now to be around US$30 billion per year leaves the island and is not reinvested in the local economy.⁶ During the same period there has been a growing gap between productivity growth and real average employee compensation in many sectors of the economy, which represents wealth that “is available for investment on the island, but it is concentrated in Puerto Rican industries or Puerto Rican capitalists that are not necessarily conducive to economic development” (Fuentes-Ramírez, 2018: 12–13).The seeds of these outcomes have been embedded in the model of industrial development since the 1940s, and the current fiscal and economic crisis is the result.

The fact that the economy is so dependent on foreign capital that is heavily subsidized and not linked to the local economy (more than 80 percent of what is consumed in the island is imported, while less than 15 percent of the purchases made by multinationals are from local suppliers) and this capital can move its profits around freely with minimal investment in the island’s economy also points to the limits of the potential of Keynesian-type expansionary policies in the island. Simply put, the lack of links between the enclave and the local economy precludes any significant expansionary multiplier effect on growth. Combined with the miniscule dimensions of a stagnant local private sector subsisting on a state that operates as a tax haven, all this leads to a stagnant economic model of extreme wealth extraction and unequal distribution. But the problems do not stop there. Other tools that also highlight the self-inflicted dimensions of the crisis have been locally deployed during the depression to squeeze and exploit large sectors of the population.

Expansive Austerity

The various administrations that have governed Puerto Rico during the depression and fiscal crisis have not only relied on tax exemptions and credits but also engaged in systematic strategies of neoliberal structural adjustment. These strategies, endorsed by the ruling extractive elites of the island, have four main ideological components: (1) an emphasis on the “excessive size” of the government, (2) the understanding that people are living beyond their means, (3) the need for a national adjustment in which all sectors of society must sacrifice and contribute, and (4) the need to keep costs of doing business low in order to maintain competitiveness. In addition to tax exemptions and credits, other types of public policy have centered on the private sector of the country and abroad in an effort to create a better investment environment for capital. Some of these are the privatization of public assets, the firing of thousands of public employees, tax reform favorable to the rich, the deregulation of business permits, increases in tuition fees for higher public education, cuts in public services, and the slashing of the budgets of public agencies. Economic growth and the ability to repay the debt of the island to regain access to credit markets was supposed to flow out of this structural adjustment, sometimes referred to as “expansive austerity.” Unfortunately, and contrary to what its ideologues want us to believe, expansive austerity as a guide for public policy during an economic downturn is both theoretically and empirically untenable (Jayadev and Konczal, 2010; Shapiro, 2012). Simply put, expansive austerity does not work; there is no possibility of growth while structural adjustment is taking place.

Probably the most emblematic example of the expansive-austerity approach in Puerto Rico was Law 7 of March of 2009. Against the recommendations of various local economists,⁷ then-Governor Luis Fortuño declared a fiscal state of emergency and launched a massive offensive against public employees, with a layoff of close to 20,000 public workers and a significant reduction of fringe benefits and acquired rights for the rest. The adjustment triggered a process whose effects went beyond the public sphere through the multiplier effect and contributed to the undermining of employment in the private sector just when the economy was nosediving and the U.S. and world financial crisis was at its peak.

The blatant hypocrisy of Fortuño’s austerity plan, which echoes the hypocrisy of Republicans in the United States who have historically claimed to be fiscal conservatives while bursting budget deficits, was revealed with the massive issuance of debt for deficit financing under his tenure. Gross public debt rose over 30 percent in this period. Seventy percent of the new debt was issued to service or repay already existing matured debt (González, 2018). The procyclical nature of the neoliberal policies of the Fortuño administration was cushioned by the injection of billions of dollars in programs like the federal fiscal stimulus during the summer of 2008, the US$7 billion in American Reinvestment and Recovery Act funds, Toxic Asset Relief Program assistance, Federal Deposit Insurance Corporation intervention for bank consolidation in 2010, and additional health funding with the Affordable Health Care Act beginning in 2011, these funds provided a cushion for the negative effects of the structural adjustment and the global financial crisis. Still, the massive injection of local and federal funds during the 2006–2012 years, over US$30 billion total equivalent to 44 percent of GNP in 2012, was not enough to reverse the free fall of the economy. A meager 0.5 percent growth rate for fiscal year 2012 was the only significant improvement beyond a brief reversal in job loss.

Alejandro García Padilla of the PPD, who succeded Fortuño as governor, continued the adjustment where his predecessor had left it in 2013 by privatizing the most important airport in the country, dramatically reducing the pension benefits of public employees, and enacting his own fiscal emergency bill (Legislative Assembly of Puerto Rico, 2014). The reduction of the public sector labor force continued through attrition and other austerity measures (Working Group for the Fiscal and Economic Recovery of Puerto Rico, 2016). Finally, the current PNP administration (2017–present) has been very clear about its guiding ideology. Months before ascending to power, their then-candidate for governor, Ricardo Rosselló, expressed the view that they had to “once and for all dismantle the current government apparatus, which is costly and ineffective, [and] . . . simultaneously implement real and strong free market reforms that open up our economy and lead to robust growth and job creation” (Rosselló, 2015). Rosselló’s labor “reform” law (January 2017), which was supported by important groups in the island’s private sector, is the latest version of the continued attack on workers by both administrations.

The results speak for themselves: apart from increasing inequality and poverty, (1) an economic contraction of the economy, measured in gross national product (GNP) terms, of 15.2 percent (Junta de Planificación, 2015; 2016); (2) a decline in nonagricultural wage labor of 16 percent, a loss of 168,000 jobs (Junta de Planificación, 2015; 2016); (3) a general collapse of the real-estate market in terms of loss of value, mortgage foreclosures, and abandoned housing properties;⁸ and (4) a demographic imbalance caused by increasing waves of emigration and a reduction of the natural growth rate of the population.⁹

These and other results, caused by the policies implemented by the two main political parties and consistent with the general principles of the economic model in place, are in tune with the agenda of capital’s representatives in the island. The Private Sector Coalition, made up of groups such as the Puerto Rico Manufacurers’ Association, the Chamber of Commerce, and the Products Association of Puerto Rico, and one of its subgroups, Bonistas del Patio Inc. (a local group of bondholders; see Ríos-González, 2016), is an example of those that hide behind the eternal discussions on status while trying to shape local policies for their private gain. During the crisis they have pushed for more corporate welfare (credits and tax incentives), lower nominal wages (PROMESA does contain a clause not implemented yet with a minimum wage of US$4.50 per hour for persons under the age of 25 entering the labor force), privatization, and other policies that continue to destroy the economy, especially via the increase in labor market precarity.¹⁰ At the same time they appeal to the fact that they are Puerto Rican to demonstrate that their interests are in tune with those of the island’s residents. In the case of Bonistas del Patio Inc. this has translated into pushing for priority in the payment of the debt owed to them over the claims of other debt holders. These parasitic “captains of industry,” along with the main political parties, are the modern incarnations of the barons of the sugar plantation era.

A Time for Disasters: The Fiscal Control Board, María, and Earthquakes

Near the end of a decade of economic depression, the impossibility of Puerto Rico’s servicing its debt became the focal point of the crisis. Studies commissioned by the government and the private sector in 2015 and led by former International Monetary Fund economists coincided on the need for the government to intensify the austerity recipe in order to avoid default on the public debt—something that eventually happened. It was in this context that local and international lobbying pushed the U.S. Congress to impose a fiscal oversight board that took away the relative autonomy of the commonwealth and operated, in effect, as a debt collector (Quiñones-Pérez and Seda-Irizarry, 2016a). This board, which is paid from Puerto Rican public funds and whose operating costs alone exceed US$3 million a month (thus far the whole process cost is close to US$1billion, all paid by the people of Puerto Rico,) is the main mechanism created under the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), with powers over the budget, taxes, public finance strategies, and the corresponding laws. Section 108 of the law illustrates the absolutism of its powers: “Neither the Governor nor the Legislature [of Puerto Rico] may (1) exercise any control, supervision, oversight, or review over the Oversight Board or its activities; or (2) enact, implement, or enforce any statute, resolution, policy, or rule that would impair or defeat the purposes of this Act, as determined by the Oversight Board” (U.S. Congress, 2016). Although this is not the first oversight board imposed in the United States, its imposition on a territory that had relative autonomy in matters of self-government, similar to that of a state, and with unfinished business concerning self-determination makes the initiative sui generis, since the majority of fiscal boards so far have been imposed on U.S. cities. Also, and very important for our purposes, there is continuity and affinity between the board, previous administrations, and factions of capital that contributed to the increase in the debt burden during the decade of depression.

Among the Puerto Ricans appointed to the Fiscal Oversight Board we find some of the protagonists in the formulation and execution of the structural adjustment imposed by Fortuño, arguably the most far-reaching and deepest of the adjustments so far. One of these creole appointees, José R. González, was the former president of the Government Development Bank (GDB) during the PPD governor Rafael Hernández Colón’s second and third terms (1986–1989) and worked with the Advisory Committee for the Economic and Fiscal Reconstruction of Puerto Rico set up by Governor Fortuño a few months before he took office in January of 2009. The blueprint of Fortuño’s disastrous economic plan came in part from the procyclical austerity policy recommendations made by the advisory committee. Another Puerto Rican member of the Junta, Carlos García, was presiding over the now defunct GDB during Fortuño’s term. The bank was the fiscal agent for the government of Puerto Rico and the epicenter of many of the institutional flaws found by the Kobre and Kim (2018) report (ordered by PROMESA) on the origins of the fiscal crisis.

The dealings of both García and González are excellent examples of Karl Marx’s observation that “the public debt becomes one of the most powerful levers of primitive accumulation,” since these experts “play the role of middle-man between the government and the nation and the tax-farmers, merchants, and private manufacturers, for whom a good part of every national loan performs the service of a capital fallen from heaven” (Marx, 1982: 919). It turns out that both of them have not only led the GDB but been executives at Santander Bank, which used to hold sales tax revenue bonds issued by the GDB that are part of what at the time was termed “extraconstitutional” (illegal) debt.¹¹ This situation of evident conflict of interest has been glossed over and deemed “not problematic” in what is business-as-usual in the island and the United States.

Still, the accumulation by dispossession goes beyond these regressive and unconstitutional sales-tax-backed financial instruments. During Garcia’s presidency at the GDB, Santander Asset Management obtained a contract of US$270,000 to provide technical expertise regarding the management and investment of the financial assets of the public pension system, a system that is now insolvent. Along with UBS it was the financial consultant in the issuance of US$3 billion in debt in 2008 that translated into over US$35 million in commissions for them for the transaction and “negative investment income since day one” for the insolvent public system (HedgeClippers, 2016). These are but two examples of the revolving-door mechanism between government and capital that permeates the structure of the state and has looted the public coffers.¹²

In general, PROMESA and its oversight board represent the latest and decisive stage of a continuous structural adjustment process in Puerto Rico that is decades old and since 2009 has turned into a declaration of war on the postwar consensus order, imposing substantial cuts in social spending in the name of “fiscal responsibility.” The challenge of growth is faced with the cut in public and personal spending. In this scenario growth projections for the economy are challenging and from the outset were questioned for being too optimistic, particularly with projections of savings and more income from expanded economic activity due to structural reforms in the public sector and the labor market. To make matters significantly worse, during the month of September of 2019 Puerto Rico was struck by two major hurricanes, Irma and María. María was the harder one, a Category 4 hurricane of devastating force crossing the island from the southeast to the northwest. The death toll related to this event was around 4,000, and damage estimates go as high as US$100 billion. The clumsy and negligent public response before, during, and after María still resounds as the various cases of shady handling of reconstruction contracts by the government of Puerto Rico are exposed and corruption charges against several Federal Emergency Management Agency (FEMA) officials are filed. President Trump has taken over this issue by personally trashing the government of Puerto Rico as corrupt and incompetent while doing everything within his power to slow down the flow of badly needed federal funds to Puerto Rico with new requirements and many additional layers of supervision. All this amounts to a major paradox: a president of the United States with total disregard for the rule of law and due process is leading the charge against corruption in Puerto Rico. Trump’s position has several major consequences for the well-being of the island. In the first place, it prolongs the suffering of many thousands of families in the island still going through a humanitarian crisis after Maria. Secondly, infrastructure and business reconstruction is slow, forestalling growth. FEMA funds are a major variable in growth forecasts for the economy, and these forecasts in turn are basic information for the negotiation of debt restructuring agreements. Right timing and predictable amounts of transfer money are essentials for economic planning.

A major agreement was reached with the debt issued by the Puerto Rico Urgent Interest Fund (backed by a sales tax), with the restructuring totaling US$17.6 billion, 24 percent of Puerto Rico’s total bond debt (Bradford, 2019). Another agreement with the general obligations bonds of the commonwealth is pending. Without significant growth in the foreseeable future, the restructuring of the debt will not avert another default, since the debt service on US$1.5 billion a year is not sustainable (Gluzmann, Guzmán, and Stiglitz, 2018), leaving the island in an indefinite position of debt peonage with the credit markets. On top of all of this, the southwest portion of Puerto Rico suffered a series of earthquakes at the end of December 2019 and the beginning of January 2020. The articulation of disaster relief and reconstruction efforts after María was already an enormous challenge. With the earthquakes, the complexity of operations for relief and reconstruction has increased exponentially.

The masquerade of what is being done in the name of the well-being of Puerto Rico takes the form of tensions between the oversight board, the government, and the bondholders, with the government hypocritically painting itself as the defender of the Puerto Rican population against the tyranny of the board and bondholders appealing to the constitution and its debt-related sections to push for the payment of what is “owed to them” in an electoral year that promises a complex political scenario. This scenario transcends Puerto Rico’s borders with a diaspora of 5+ million in the continental United States, a population increasingly organized and willing to use its votes and other means to help Puerto Rico at this critical juncture. While it is true that factions within the capitalist class are colliding with regard to the restructuring and payment of the debt, access to health services for over a million people dependent on the government health plan, now running with Medicaid funds, is subject to the vagaries of the Congress and the president. Schools keep closing, public employees keep seeing their benefits reduced, and the definition of essential social services is still unknown. Meanwhile, thousands are leaving the island in an attempt to escape the adjustment. If the rosy growth projections are true, why is net migration to the United States expected to remain positive for the next several years (Fiscal Oversight Management Board, 2019)? In this complex and fluid scenario the present government reacts by juggling with the budgets of the different public branches in what in effect is an attempt to encourage intraclass tensions.¹³ At the same time, the interclass dynamics keep being obscured by the “frictions” at the top and the eternal debates regarding colonial status.¹⁴

Conclusion

For a long time, governmental administrations in Puerto Rico, supported by the local elites, have neglected their people’s basic rights and well-being while seeking to please vested foreign and local interests, political investors, and themselves. These administrations have managed the budget as private accounts, allocating resources with no long-term vision of development and social welfare. They have granted tax exemptions and credits with no rigorous analysis of the projects in question, tolerating rampant tax evasion and corruption. Then, when the fiscal crisis emerged, they declared themselves incapable of fixing it, asking Congress for a moratorium and restructuring of the debt, more money for a corrupt and poorly designed health system, and certain development tools while claiming that it had all happened because Puerto Rico was a colony with no powers at all. Contrary to the public perception that the oversight board was simply a colonial imposition by the U.S. government, it was exactly what the ruling class coalition in Puerto Rico wanted.

There are two general approaches for addressing the crisis. One is a progressive path with deep restructuring, a strong commitment to egalitarian principles, long-term planning, restoration of the environment, community-based initiatives, and more self-government. The other, which has been intermittently applied to the Puerto Rican economy since the Tobin Report of 1975 and undermines the possible future realization of the first, is the selective use of the austerity policies that have perpetuated high unemployment, poverty, income inequality, mediocre growth, increasing debt, mass migration, public services scarcity, dependence, and a lack of vision and hope for the future, especially among the young. This second path denies basic rights for the majority of the population while allocating more resources to debt service and corporate welfare.

As we have tried to highlight, a change from austerity to expansionary fiscal policy by itself will not be enough, given the current structure of the economic system and the rotten institutional framework within which it operates. Puerto Rico’s circular flow of income is broken. Too many institutional leaks need to be addressed: corruption, tax evasion, the informal economy, the deficient performance of Treasury Department, poorly thought-out allocation of private and public resources, etc. Given the rampant corruption that has characterized the different administrations, it is clear that the solution to Puerto Rico’s problems is highly political. While a more comprehensive study of the extractive framework is required, the parasitism exhibited by both foreign and local capital and facilitated by local administrations points to the urgent need to address class relations within the capitalist colony that is Puerto Rico. To understand the crisis, for example, as simply a debt problem is to confuse the symptoms with the ailment. In general, solutions to the crisis cannot be seen simply in terms of restructuring the debt, regaining access to credit markets, developing this or that sector of the economy, injecting more money, or changing the status of the island. They must also be considered in terms of the DNA of the economic model in place and the groups that have benefited from it.

Eliminating or modifying the myriad corporate welfare mechanisms in the country’s economy will be a major challenge, since it touches the very essence of class relations in colonial Puerto Rico. For 70 years, Operation Bootstrap has fed the corporations’ insatiable quest for profits at the expense of social welfare. An intermediary class coalition allied with U.S. multinationals, including local businesses, professional services providers, and public administrators, has had enough power not only to maintain the incentives that have served as the basis for corporate welfare but also to increase them amid the crisis. It is no wonder that the primary distribution of income has being tilting more and more toward the various forms of capital income (profits and interest, principally) and less toward working people. The search for solutions to the crisis has to identify and consider these groups, their dynamics, and the political instruments necessary for progressive change toward a more just society. This will certainly require directing mounting pressure toward the top so that a new, more equitable internal and external order is reached. Ultimately, the processes unfolding will profoundly change Puerto Rican society, its population, culture, and identity, its relations with the enviroment, and the possibility of a more just and sustainable economic and social system for this and future generations. The powers that be in the island may not be ready to negotiate and share more of their power and wealth. However, as the events of the summer of 2019 showed, with the forced light-speed resignation of Governor Ricardo Roselló, a uneasy and restless society is looking for change. Too many hardships are being unjustly imposed on the majority of the island’s community. This needs to end.

Footnotes

Notes

Argeo T. Quiñones-Pérez is a professor in the Department of Economics of the University of Puerto Rico, Río Piedras Campus. Ian J. Seda-Irizarry is an assistant professor in the Department of Economics at John Jay College, City University of New York. They thank Jean Díaz, Emelio Betances, and the participants in conferences in Havana, San Juan, New York City, and Massachusetts, where earlier versions of this paper were presented in 2017 and 2018.

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