114th Congress, Big Government, Budget, Capitalism, Congress, House of Representatives, Issues

A Semi-Acceptable Indirect Bailout for Puerto Rico?

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I wrote last year about why Puerto Rico got into fiscal trouble.

Like Greece and so many other governments, it did the opposite of Mitchell’s Golden Rule. Instead of a multi-year period of spending restraint, it allowed the budget to expand faster than the private sector for almost two decades.

As the old saying goes, that’s water under the bridge. Since we can’t un-ring the bell of excessive spending in the past, what’s the best option for the future?

The House of Representatives has approved a rescue plan that is getting mixed reviews.

Desmond Lachman of the American Enterprise Institute is supportive but not enthusiastic about the proposal.

The proposed Puerto Rican Restructuring Bill is to be welcomed as a first step towards resolving the island’s chronic debt problem… However, …the bill will be little more than a stop-gap measure to get us through the U.S. election cycle without a full blown Puerto Rican economic and financial crisis before November.

The legislation creates a board with some power to force fiscal and economic reforms.

…a seven-member oversight board…is to have exclusive control to ensure that Puerto Rico’s fiscal plans are enacted and enforced as well as to ensure that necessary reforms are undertaken to help the island regain fiscal solvency. The bill also includes a stay on debt-related litigation to create an environment for consensual negotiations with creditors. It is explicit that it will not involve taxpayer money to bail out the island.

So if there’s no taxpayer money involved, why do people say the legislation is a bailout?

Because the proposal allows Puerto Rico to defer payments on existing debt and then to restructure at least some of that debt. And “restructure” is a politically correct way of saying “partial default.”

So Puerto Rico will be bailed out to the extent that it will be able to stiff bondholders to some degree.

…it would afford the island with a temporary stay on debt principal repayments to allow more time for the voluntary restructuring of its debt mountain. That stay would forestall an otherwise disorderly Puerto Rican default as early as July 1, when some $2 billion in debt repayments come due.

Lachman views that as the least worst of the possible options, so this indirect bailout is not an argument against the legislation. At least from his perspective.

He’s more worried about the fact that much more needs to be done to restore growth on the island.

…it should be obvious that if the island’s economy were to continue to contract at its present rate of around 1 percent a year and if 2 percent of its able-bodied population were to continue to migrate to the mainland each year as is presently the case, the island would become progressively less capable of servicing its $72 billion in public debt or honoring its $45 billion in pension liabilities. A lack of restoring economic growth would also mean that the island would probably need a series of debt write-downs over time.

Writing for Forbes, Ryan Ellis has a much more optimistic assessment of the overall deal.

…the bill is a big win for limited government conservatives. It has no taxpayer bailout of Puerto Rico–not a single dime of taxpayer money is sent down there. …Puerto Rico will have to work their own way out of $72 billion in debt and defaults. They will be helped by an “oversight board”…modeled after the D.C. control board from the 1990s and 2000s, and their job is to approve fiscal plans and budgets, conduct audits, etc.

But Ryan acknowledges that “work their own way out of” is just another way of saying that there is likely going to be a partial default.

The oversight board…will first try to get the 18 classes of bondholders to agree to a voluntary debt restructuring with the Puerto Rican government and government sponsored enterprises. If that fails, the control board will recommend a debt restructuring plan to be enforced by a non-bankruptcy federal judge.

That being said, he’s confident that the legislation won’t be a template for profligate states such as Illinois and California.

Congress is exercising its Constitutional authority to provide all “needful and useful” laws to govern possessions, which is a separate power from the federal bankruptcy clause. There’s no risk of “contagion” to other states.

Though he agrees with Lachman that there’s very little hope for a growth spurt.

It lacks the necessary pro-growth reforms needed for Puerto Rico to get out of its decade-long depression, reverse migration back to the island, attract capital, and create jobs.

Which is why Ryan likes the ideas being pushed by Congressman McArthur of New Jersey. He’s especially fond of territorial taxation for American companies that do business on the island.

The solution is to enact the same type of international tax reform we want to do in the rest of the world–the U.S. companies pay tax in Puerto Rico, but don’t have to pay a second tax to the IRS just to bring the money home. That’s what the rest of the world does, and it’s called “territoriality.” It’s a basic principle of conservative tax reform to move from our outdated “worldwide” tax system to a “territorial” one. There is no better place to start than Puerto Rico.

That would be a good step, and it would be a nice bookend to the very good law Puerto Rico already has for high-income taxpayers from the mainland.

Other conservatives have a less sanguine view of the legislation. Here are excerpts from a coalition statement.

People, companies, states, and territories don’t just “go” broke. Willful prior activity is required. …Puerto Rico has a long history of financial mismanagement brought about by progressive politics and crony capitalism.

Amen. Puerto Rico got in trouble because of bad policy. And the bad policy wasn’t just excessive spending. There have also been grossly misguided interventions such as price controls.

So it’s quite understandable that signatories to this statement are not overly excited that Puerto Rico will have a route for partial default.

Progressive politicians, who are already seeking an indirect bailout – in the form of upending the existing legal structure to allow bankruptcy ‐‐ in the U.S. Congress, argue that a bailout or bankruptcy will help the people of Puerto Rico.

They correctly list several procedural reforms and also point out that there are some obvious policy reforms that should be undertaken.

Sensible economic reforms include allowing Puerto Rico (1) to set its own minimum wage law, including not having a minimum wage law; (2) to be exempt from U.S. overtime rules (which have just been greatly expanded by presidential fiat); and (3) to be exempt from the Jones Act, a protectionist measure that regulates U.S. shipping practices.

Sadly, the legislation is very tepid on these non-fiscal reforms.

So what’s the bottom line? Should the law get three cheers, as Ryan Ellis argues? Two cheers as Desmond Lachman prefers? Or only one cheer (or maybe no cheer), which seems to be the position of some conservative activists?

My answer depends on my mood. When I’m going through a fire-breathing-libertarian phase, I’m with the conservatives. Puerto Rico spent itself into a ditch so they should suffer the consequences.

But when I’m in my long-time-observer-of-Washington mode, I try to imagine the best possible (or least-worst possible) outcome, then I think Paul Ryan and the Republicans did a decent job.

In other words, this is like the fiscal cliff deal back in late 2012. Disappointing in many respects, but not as bad as I would have predicted.

The key question now is whether Republicans insist on putting good people on the oversight board.

And that’s not a trivial concern. I remember thinking the 2011 debt limit fight led to a decent outcome because we got sequester-enforced caps on discretionary spending (not as good as a comprehensive spending cap, but still a good step).

And we even got a sequester in early 2013. But then later that year, and last year as well, Republicans joined with Democrats to bust the spending caps.

That doesn’t bode well for any policy that requires long-run fiscal discipline. Though maybe GOPers will be tougher this time since the spending restraint will be imposed on people who don’t vote in congressional elections.

This is a guest post by Dan Mitchell “a high priest of light tax small state libertarianism”
  • Charlie

    How about holding the politicians that created the debt be responsible for said debt . If this were to be the politicians would perhaps be more financially responsible and the debt would never occur in the first place . Just a thought —–

    • plum82

      I’ll vote for that…………the scum bags ~~~~~~~~~~~~

  • disqus_BAvz0LV7zw

    No bailout for Puerto Rico. These are massive Latin American crooks and their leaders are most corrupt. if we do this many will follow and there will be no end. All free loaders will flock, and if you don’t hey will cause havoc and mayhem.
    Let Puerto Rico restore their strength though hard word and capitalist ideas.
    NO BAILOUT!!

  • Robert

    Look up what Corporate welfare is, then tell me abouit Fiscial restraint, the Conservative Republicans think Corporate Welfare is the best thing for this country.

    http://www.forbes.com/sites#/sites/taxanalysts/2014/03/14/where-is-the-outrage-over-corporate-welfare/#41c62fc66881
    http://usuncut.com/class-war/10-corporate-welfare-programs-that-will-make-your-blood-boil/

    http://www.heritage.org/research/reports/2015/06/corporate-welfare-wastes-taxpayer-and-economic-resources

    HAVE A LOOK AT THESE AND THEN TELL ME WHERE ALL THE WASTE IS IN GOVERNMENT
    This webb site wants you to think it is the lazy freeloaders.
    HAVE A NICE DAY

  • jim

    no bailout otherwise every liberal state that spent its way into bankrupsy will look for a bailout

  • Phil

    Hell NO! If Puerto Rico is bailed out Illinois, and California will want a bailout for the mess they have gotten themselves in. Just like Puerto Rico those states elected officials have made the mess let them clean up there own house! Just the the American people need to do with Congress. Demand accountability or vote them out of Congress. It’s time Americans woke up to all these politicians who are lining there own pockets with money they’ve stole from us!!!!!

  • donald540

    Myself, I can see helping them a LITTLE but definitely NOT everything they ask for!
    The help should be only to get them started in the right direction and MIGHT get them past the first year and it should be under the condition they follow a STRICT budget and CUT their spending by a HUGE AMOUNT.
    Like if they requests say $100,000,000.00 bailout then maybe they might get say $1,000,000.00 or maybe even as little as $100,000.00 IF that would help along with the CUTS, they will be required to CUT from their budget, to get the money to help them, to get them to the next budget discussion, so they can CUT their budget to the BONE and then cut maybe ten % more.

    BUT NO FULL BAILOUTS for anybody that can NOT balance their own budgets and can NOT hold their spending down to a level they have to CALL FOR HELP.

  • This situation is a direct result of out and out criminal behavior by the politicians who controlled the purse. They must be held liable for this failure, somehow, and NO bailout entertained, which would be preferential treatment for EVIL!

  • DAVID

    this is crap why is AMERICA and the AMERICAN PEOPLE always expected to bail out countries that just want to ruin AMERICA and who’s people and their government officials hate the AMERICAN people i say hell no to bailing out any more of these crappy countries and hell no to government dk heads bent on forcing AMERICA to bail them out just because we have a piece of crap sitting in the white house and it’s part of his insane agenda to ruin AMERICA.to hell with the bailouts and puerto rico.

  • N.McDaniel

    DEBT 20 Trillion! Not one more cent unless equal amount taken from some thing else! !!!

  • Vega632

    We are at 20 trillion in debt with 10 trillion all on Obama’s back. Who is going to bail us out???

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