Puerto Rico

Over the past few weeks, I've written twice about Venezuela (here and here) as the most recent example of the complete failure of socialist governance. But realistically, we have to look no further than Puerto Rico to understand that over the long term the big government model is a recipe for bankruptcy. John Gray provides the gory details:

Puerto Rico’s unemployment rate has been stuck well beyond 10 percent since before the Great Recession. Today, it hovers above 12 percent. Puerto Rico has one of the lowest labor-participation rates in the west; less than half the population is working. Why? Well, it costs more to hire a worker in Puerto Rico that it does in some of the richest areas of the mainland United States. The minimum wage in Fresno, California is $9. However, the Puerto Rican minimum wage (which is enforced by Washington) is equivalent to 77 percent of the median wage of Puerto Rico, or $9.42 per hour.

The red-tape and overregulation of the island has eliminated jobs and increased welfare. Presently, nearly 35 percent of the island is on food stamps compared to only 15 percent of the population on the mainland.

Compounding Puerto Rico’s labor market woes is the fact that those who are employed are likely to be on the government dole. Nearly one in four people work for the government in Puerto Rico. That is, of course, when they are working. Puerto Rico government employees receive a European-competitive 30 days of vacation — and of course, must not be productive beyond eight hours per day — anything more costs the government time and a half ...

The New York Federal Reserve’s assessment is even sterner:

The Island appears to face two alternatives: either manage its own economic adjustment and put the Commonwealth on a secure fiscal basis, or wait for outmigration and the discipline of the market to force an even more painful adjustment.

The "severe adjustment" that the fed is talking about is bankruptcy—government pensions will go unpaid and chaos will reign.

Gray notes the many reasons for Puerto Rico's dire situation. All boil down to government intervention, overregulation of the private sector, profligate spending to provide "free stuff" by the Puerto Rican government, an underfunded pension program, and a series of "distorted incentives" for doing business in Puerto Rico that did more harm than good. Sadly, it's the same blue model that has been used in places like Connecticut, Illinois, and Detroit.

It should come as no surprise that Puerto Rico wants a bailout. Gray writes:

This is a Puerto Rican-created mess and, like other financially burdened states, it is a problem they must resolve.

But Washington is not resigned to let Puerto Rico fix its own problems. Instead, Republican Leadership has demanded that Congress draft legislation to facilitate the territory’s budgetary troubles.

Democrats have been in favor of a Chapter 9 bankruptcy proposal, a legal status not currently allowed to any state or Puerto Rico. Republicans, on the other hand, have offered a financial bailout, while President Obama is looking for all of the above — additional welfare, a bailout, and a modified Chapter 9 bankruptcy option. Puerto Rico is looking for a bailout; they are after yerrr money!

Unfortunately, bailouts eliminate moral hazard—the notion that one must take responsibility for one's actions and suffer the consequences if those actions are irresponsible or stupid. The vast majority of U.S. mainland tax payers have never been to Puerto Rico. But their tax dollars will flow there as part of a bailout, as sure as the sun rises on the territory's beautiful Caribbean shores.