America shares the blame for the “massive debt” in hurricane-stricken Puerto Rico

America shares the blame for the “massive debt” in hurricane-stricken Puerto Rico
Jose Javier Santana holds a Puerto Rican flag he found on the ground after Hurricane Maria passed through on October 6, 2017 in Utuado, Puerto Rico. Joe Raedle/Getty Images
Jose Javier Santana holds a Puerto Rican flag he found on the ground after Hurricane Maria passed through on October 6, 2017 in Utuado, Puerto Rico. Joe Raedle/Getty Images

After Hurricane Maria, Puerto Rico’s power grid is utterly destroyed. As little as 5.4% of the U.S. territory’s 3.5 million residents were able to get electricity last week, and thousands are in dire need of food and water to survive.

But since the storm tore through the island after making landfall on Sept. 20, the U.S. government’s relief efforts have come under serious fire. Some international aid groups are criticizing the U.S. for dragging its feet on helping Puerto Ricans, and President Donald Trump has both attacked the mayor of San Juan on Twitter and implied the island’s “broken infrastructure” and “massive debt” are obstacles to providing aid.

But how legitimate are Trump’s excuses, and what part of Puerto Rico’s broken power grid and debt crisis should the federal government take responsibility for?

Don’t blame Puerto Rico for its economy, experts say

First of all, it’s true: Puerto Rico is in massive debt — to the tune of roughly $74 billion — and it suffered from intermittent power outages even before Hurricane Maria, thanks to a weak and outdated power grid. But now the island has practically no electricity grid and no money to build a new one.

The Puerto Rican National Guard delivers food and water brought via helicopter to victims of Hurricane Maria in the neighborhood of Morovis in San Lorenzo, Puerto Rico. Ramon Espinosa/AP

“Puerto Rico has had a weak economy and certainly more debt than it can repay,” Council on Foreign Relations senior fellow Brad Setser said in a phone interview. “But in the short run, Puerto Rico’s economic troubles don’t explain the relatively slow pace of federal disaster response.”

The heart of Puerto Rico’s infrastructure problem is in its failing economy, which the U.S. federal government certainly had a hand in destroying (as did Puerto Rican politicians, to be fair). The island has been in a recession since at least 2006, with several factors leading to its financial downfall: nearly destroyed manufacturing and pharmaceutical industries, tax increases and a real estate crisis, among others.

Many of these factors can, in some way, be attributed at least in part to changing federal regulations. Now, two hurricanes washing up on Puerto Rico’s shore are just exacerbating the problem.

“I think it is neither the case that Puerto Rico is blameless, nor is it the case that Puerto Rico alone deserves full blame,” Setser said. “Puerto Rico has not done a good job at maintaining its budget; at the same time, it’s also the case that a combination of federal policies toward Puerto Rico … just hasn’t been working.”

Racking up debt and losing jobs

When we talk about debt, it’s important to remember two things: First, Puerto Rico is part of the United States; anyone born there is a U.S. citizen. Second, while its total debt has tripled over the last 17 years, according to political economist Gibran Cruz Martinez as quoted by Forbes, U.S. national debt is over $20 trillion and growing.

A man bicycles in an area of Puerto Rico without electricity or running water about two weeks after Hurricane Maria swept through the island. Mario Tama/Getty Images

The debt itself isn’t necessarily the dominant issue. It’s the debt combined with a failed economy, which then leads to high rates of poverty and unemployment along with very small tax base to keep the island afloat.

“First and foremost, it was decades of Puerto Rican politicians abusing Puerto Rico’s credit card,” Amílcar Antonio Barreto, associate professor of cultures, societies and global studies at Northeastern University, said by phone. “But then there were the federal politicians of the 1990s who undermined the Puerto Rican economy by taking the lifeblood out of it.”

This “lifeblood,” as Barreto calls it, was Section 936 in the U.S. tax code. Essentially a tax break allowing businesses with operations in Puerto Rico to avoid paying taxes on profit earned there, the policy “attracted factories and pharmaceutical companies to move into Puerto Rico and provide thousands of jobs,” Barreto said.

But in 1996, former President Bill Clinton and then-House Speaker Newt Gingrich — with the support of former Puerto Rico Gov. Pedro Rosselló, father of current Gov. Ricardo Rosselló — decided to phase out Section 936 over a 10-year period. According to Barreto, Carlos Romero Barcelo, Puerto Rico’s resident commissioner in Washington at the time, wanted the island to become a U.S. state and thought the appearance of “special treatment” would make that impossible.

In 1996, former President Bill Clinton and then-House Speaker Newt Gingrich decided to phase out Puerto Rico’s “lifeblood.”

With Section 936 effectively destroyed and no replacement in place, Puerto Rico quickly lost its manufacturing base, particularly its pharmaceutical industry. Before it was abolished, an estimated 110,000 people in Puerto Rico were working jobs at companies that benefited from Section 936, and the manufacturing industry amounted to 40% of Puerto Rico’s yearly gross product, the New York Times reported.

But as 936 disappeared, many workers lost their jobs, the island lost an important revenue source and little money was available to invest in critical infrastructure. By then, Puerto Rico was already in massive debt, which eventually came to a head in May when it filed for bankruptcy.

“It’s typical of Trump to shift the blame,” Barreto said. “The federal government was directly involved in undermining the Puerto Rican economy by eliminating 936 and not replacing it. Under those circumstances, how can Puerto Rico rebuild? It literally does not have financial resources to rebuild all the electrical infrastructure. Pretty much every single power line is on the floor.”

People look at a section of collapsed road caused by Hurricane Maria in Barranquitas, Puerto Rico. Joe Raedle/Getty Images

Other experts are less convinced Section 936’s dismantling played such a big role in Puerto Rico’s economic crisis. According to Setser, Puerto Rico experienced a housing boom in the early 2000s that later went kaput.

“It’s typical of Trump to shift the blame. The federal government was directly involved in undermining the Puerto Rican economy by eliminating 936 and not replacing it.” — Amílcar Antonio Barreto

“The boom turned into a bust, with an overbuilt housing sector that led to a weaker banking system and a big fall in construction and economic activity,” Setser said. “To me, that’s probably the biggest [factor] in terms of what triggered the economic decline.”

Encouraged debt

When Congress drafted Puerto Rico’s civil government in 1917, it came up with something called the triple tax exemption. The exemption excuses Puerto Rican bonds from being taxed on local, state or federal governments. Bonds are pieces of loans made to large organizations; bondholders are essentially debt collectors who collect interest payments until the bond is paid in full, according to the Balance.

The triple tax exemption is an unusual scenario that makes Puerto Rican bonds especially alluring, since investors can purchase bits of debt without having to pay taxes on their earnings. In addition, Puerto Rican bonds are tax-free regardless of where the bondholder lives. As a result, investors “continue to buy up Puerto Rican debt even as the island’s finances began to look more unsustainable,” according to the Tax Foundation.

“It made Puerto Rican bonds more attractive to municipal bond investors throughout the U.S.,” Setser said. “It made it too easy to borrow. It basically provided Puerto Rico with the rope to hang itself.”

Poverty and the high costs of living

Not only is Puerto Rico’s economy deep in a roughly decade-long recession, its residents also face low incomes and high costs of living compared to many other Americans.

That’s partly because of a U.S. regulation from 1920 called the Jones Act, which mandates that only American-built, American-owned ships employing U.S. citizens can transport items domestically from port to port.

Efrain Diaz Figueroa washes his hands after repairing the roof of his sister’s hurricane-destroyed house in San Juan, Puerto Rico. Ramon Espinosa/AP

The increased shipping costs make the price of goods from the U.S. mainland “at least double that in neighboring islands,” according to the New York Times, further hampering the delivery of food and other aid to Puerto Rico. While the federal government waived the Jones Act on Sept. 28, the waiver expired Sunday and there are currently no plans to extend it.

Many workers lost their jobs, the island lost an important revenue source and little money was available to invest in critical infrastructure.

“The Jones Act unambiguously raised the cost of living in Puerto Rico and made it more expensive to ship goods to the United States and Puerto Rico,” Setser said.

An uncertain future

With parts of Puerto Rico expected to go years before full services are restored, it’s hard to imagine the situation as anything but a state of emergency — one that requires immediate relief in the form of clean water, food and generators, in addition to long-term planning.

“We don’t expect Florida to manage a hurricane entirely on its own. That’s why we have [the Federal Emergency Management Agency],” Setser said. “The goal should be a Puerto Rico that has better quality infrastructure in good times, and infrastructure that is more resilient and can be back up and running relatively quickly if there’s another disaster in the future.”

“We don’t expect Florida to manage a hurricane entirely on its own. That’s why we have FEMA.” — Brad Setser

The alternative, Barreto believes, is more islanders seeking refuge on the U.S. mainland — particularly Florida, where a vibrant Puerto Rican community already exists. About 2% of the Puerto Rican population left in 2014, before Hurricane Maria, but those numbers could soar if people are forced to live without access to jobs and the most basic of resources.

“Can you imagine 90-plus degree heat and no air conditioning for months, no refrigerator?” Barreto said. “Since Puerto Ricans are U.S. citizens, the only logical consequence for literally hundreds of thousands [of people] is migration to the mainland U.S.”

President Donald Trump tosses paper towels into a crowd at Calvary Chapel in Guaynabo, Puerto Rico. Several criticized the move as a tasteless way of distributing aid to the disaster-stricken island, which still remains largely without power after Hurricane Maria. Evan Vucci/AP

Barreto’s not holding out much hope for a long-term plan under the Trump administration, at least until he sees an actual bill to repair Puerto Rico.

“In [Trump’s] world, white people suffer and people of color don’t.”

“There clearly are politicians in D.C. and in some states who are paying attention to these issues, but some are ignoring it,” Barreto said. “Donald Trump has been remarkably consistent. In his world, white people suffer and people of color don’t. … My expectation is nothing serious is going to happen. Puerto Rico is going to continue to hobble on crutches economically without any hope of relief, and there will be more migration off the island.”