Most Americans think that the Framers provided for a pretty good form of government – but most don’t like the government overreaching in trying to control society and reaching too deeply into our pockets.
The U.S. territory of Puerto Rico is a prime example of high-tax, liberal welfare state policy failures that have brought the islands to the brink of a government shutdown.
The U.S. took the islands to have the country extend into the Caribbean. But instead of following the model that the First Congress laid out for territories requiring equal responsibilities as well as rights, the federal government tried to experiment.
An incoherent mix of federal laws has been applied. The territory is treated as a State in some, foreign in others, and uniquely in yet others. Many taxes haven’t been extended but most big government dependency programs have, if only on a second-class level.
The results: Economic failure. So many Puerto Ricans – who are U.S. citizens – moving to the States for a better life that they far outnumber those left in the islands. The territory’s population is shrinking. The economy has lagged that of the States for four decades and been in recession for almost all of nine years.
New Deal experimentation in Puerto Rico transformed private utilities into subsidized government “corporations” that could borrow easily – and too much – because the interest from their bonds is taxed even less than bonds of States and their municipalities. With Puerto Rico’s recession, at least one, the Electric Power Authority, can’t pay all of its debts when due. And the territorial government can no longer afford to subsidize it.
The Constitution calls for Congress to establish a uniform national bankruptcy system. The system that Congress enacted delegates to each State the decision of whether government instrumentalities within the State should be allowed to restructure their finances under national rules and judicial supervision.
Puerto Rico exercises the jurisdiction that States possess under the Constitution in most areas. But in another experiment, the “uniform” bankruptcy system for local government entities wasn’t extended to the territory. So, its government can’t authorize the Power Authority to restructure its obligations in a compromise with bond owners and all other interests that a federal judge determines to be fair.
There’s a bill in the U.S. House to treat the territory as a State in this area, the Puerto Rico Chapter 9 Uniformity Act, but bond funds that own a minority share of the Power Authority’s debt are fighting H.R. 870. They want a bigger piece of the pie.
And without the national legal structure for talks between the Authority and its creditors, the two sides are talking past one another and getting nowhere.
The situation has caused national labor unions and other bond funds to lobby the Obama administration for a U.S. taxpayer bailout. They seem to be making progress. Treasury Secretary Lew called Puerto Rico’s Democrat Senate President April 28th and, reportedly, didn’t rule out federal aid at the expense of taxpayers in the States.
Congress should pass the bill to give the territory the bankruptcy authority of a state and put the issue where it belongs: First, with the territorial government and, then — if the territorial government chooses, in a forum presided over by a judge. This would have the parties settle the dispute among themselves and not try to get the federal taxpayer to foot the bill.
Second, Puerto Rico must get its fiscal house in order by immediately imposing a spending freeze on all non-essential government spending: The government subsidizes political parties, hotels, athletic organizations, and much more.
And finally, Puerto Rico must adopt pro-growth tax policies to improve investment and expand upward mobility. The current “commonwealth” government in Puerto Rico has levied billion-dollar plus tax increases on Puerto Ricans in each of its first two years in office and is trying to do it again right now. It boasts that it has attracted two billionaires from the States to the territory and 500 multimillionaires — most hedge fund traders of stocks and bonds — by exempting them from almost all taxation but it doesn’t require them to invest in the territory in return.
A better strategy would be to make Puerto Rico a Carribean free enterprise zone. Why should the dynamic and growing trade boom between Latin America and Florida not benefit the American territory right smack in between? While the Obama administration talks of a pivot to Asia using the TPA to secure American economic engagement with the Pacific Rim, should we not be concerned about cleaning up our own metaphorical backyard?
The American people need to reconsider the not-really-separate but unequal status of our economic colony of Puerto Rico.
Unless policymakers in Washington and in San Juan take these steps to strengthen investor confidence and improve the Puerto Rican economy, taxpayers in the States will face a bailout for Puerto Rico, which owes $164 billion in principal and interest to lenders.
Niger Innis is a prominent Tea Party activist and National Spokesman for Congress of Racial Equality, a 73 year old Civil Rights organization.