Puerto Rico: A sort of U.S. Version of the Greek problem

An interesting article from "The Week". a bit like an American version of the EU's Greek problem?

Want to save Puerto Rico? Make it a U.S. state by

Ryan Cooper:

Though the debt crisis in Greece is eating up most of the media oxygen, a somewhat similar crisis is happening in Puerto Rico. They've got way too much debt, and have been struggling badly since the 2008 financial crisis. The situation has reached a breaking point, and Governor Alejandro Padilla has flatly admitted the island colony cannot pay in full.

Though it is an unlikely prospect, this is an area where the United States government can do some good. By proposing a referendum on statehood, and assisting with an orderly debt write-down, America can atone for past sins and put Puerto Rico back on an upward trajectory.

The roots of the crisis are explained well in a piece by Matt Yglesias. For a number of years Puerto Rico had some odd tax advantages that allowed it to borrow extremely cheaply, and so it did, running up a debt vastly larger than any other American state. In 2006 the tax advantages were finally phased out, which made it particularly badly positioned to deal with the financial crisis only two years later. Now with the economy in deep trouble, the government is running short of cash, its citizens are emigrating for the mainland, and it will basically have to default.

First, one must always keep one thing at the forefront of our minds: The United States bears a large moral obligation to Puerto Rico. We started a war of aggression to steal it from Spain, and treated it like dirt for five decades, imposing U.S. law and ignoring several votes for independence. Puerto Ricans only got citizenship in 1917 so they could be drafted to fight in World War I.

It hasn't been all bad, of course. Puerto Rico has achieved moderate industrialization and middle-income status partially with U.S. support during the New Deal and post-WWII years. But fundamentally, it is unjust for people to be subject to U.S. laws and taxation without representation in Congress or presidential voting rights. If they so wish, they ought to be given either full statehood or independence.

One wrinkle in that argument is that in most votes, Puerto Ricans have chosen to maintain their commonwealth status. That changed with the most recent referendum, in 2012. Despite some strange uncounted ballots, 54 percent voted for a change in their colonial status, and of those people, 61 percent voted for statehood. Arguably that should have triggered a final up-or-down plebiscite on statehood and a congressional vote on admission, since both parties and President Obama theoretically support admission.

It didn't, because Congress is a broken jalopy. But now would be the perfect time to do so, with Puerto Rico in dire need of help. As Yglesias notes, one of the biggest problems here is that there is no legal provision for a state or territory to declare bankruptcy. This means that a default is going to be dragged out for years or even decades as the richest creditors try to force Puerto Rico to pay up through the courts.

Admitting Puerto Rico as a full state would be the perfect time to either implement some process by which a state can declare bankruptcy, or construct a one-off legal framework. Though the details would obviously be complex, the idea would be for creditors to take a sizable haircut (as they bear some responsibility for making obviously bad loans in the first place), and Puerto Rico to be put on a sustainable footing to pay off the rest, perhaps with a sort of Fed-backed refinancing plan. Above all, the process should be over quickly, and the new state should not be crushed with austerity.

It's true that Puerto Rico would be the poorest state, a status it would likely retain indefinitely. But from the Post Office to the Great Society, America has a long history of bringing straggling states up to scratch. Moreover, full statehood might help solve some longstanding problems.

For example, one of Puerto Rico's chronic problems is low quality of government. That can be partially chalked up to the fact that, like D.C., Puerto Rican politics are a cul-de-sac. One does make decisions and wield some power, but there is always the knowledge that one can be overridden by an unreachable and unaccountable overlord at any time. And once one has reached the governor's office, that's the end — there are no national seats or possible springboards to a presidential run. As a result, there is less incentive to keep one's nose clean and rack up an impressive economic record.

That's not to say all Puerto Rico's problems would be solved overnight. But the government could genuinely help here. After all the moral debts America has incurred, it's the least we could do.