A Chance to Speak of Reform

Steven Malanga writes about the fiscal crisis in Puerto Rico. If, like me, you vaguely recall seeing the crisis in headlines now and again, your immediate reaction might be, "So what?" That reaction probably would be mistaken, because the President is getting ready to make you care -- by proposing a "rescue" of the island, and shaming Republicans into supporting his plan to end the "humanitarian crisis."

Malanga sees Obama's gambit as an opportunity to introduce much-needed reforms to the island, and kick off some long-overdue discussions that have a direct bearing on our own fiscal condition. Along the way, Malanga notes the federal government's role in stunting the island's economy:

Earlier this year, in a report commissioned by Puerto Rico's government, three international economists authored a described the territory's woes. While the report scored the territory for its lack of fiscal controls in the face of a struggling economy, the economists also argued that Puerto Rico suffered because it was forced to adhere to federal laws that have "gnawed at growth." The "single most telling statistic in Puerto Rico," they wrote, is that only 40 percent of the working-age population is employed. The biggest obstacle to jobs, the report argued, is that the territory must observe federal minimum-wage law, even though incomes in general are far lower on the island than in U.S. states. A full-time worker in Puerto Rico making minimum wage earns 77 percent of the average wage on the island, compared with just 28 percent in U.S. states. The cost of paying even an unskilled worker is so high that "employers are disinclined to hire." Even more foolishly, welfare benefits on the island -- including food stamps, Medicaid, and subsidies for utility bills -- approach mainland levels. Recipients can garner benefits equal to $1,743 a month, more than the average wage on the island. "The result," the report notes, "is massive underutilization of labor, foregone output, and waning competitiveness."

Puerto Rico also suffers from the ill-effects of the union-friendly Jones Act -- a 1920 law that drives up the cost of goods by forcing ships traveling between U.S. ports to be built and manned by Americans. The restrictions have a particularly devastating effect on the cost of transporting goods to and from U.S. island territories or states, such as Puerto Rico and Hawaii. Neighboring islands that aren't U.S. territories pay far less. "Exempting Puerto Rico from the U.S. Jones Act could significantly reduce transport costs and open up new sectors for future growth," the economists' report argues. Other factors impeding Puerto Rico's growth include complex local regulations on banking, an inefficient energy sector that drives up the price of power, and difficulties in registering property, obtaining business permits, and paying taxes. As the economists observe, the territory ranks 47th (out of 189 governments) in the World Bank's ease-of-doing-business index. The United States ranks seventh. [links dropped]

Malanga suggests further that the crisis could present the opportunity for Republicans "to start a discussion on municipal debt that the administration and its allies would rather not have." Whatever comes of any proposal to "help" the island, I agree that this would be a good time to consider how that crisis arose and how best to get rid of the laws and regulations that have contributed to it.

-- CAV