How Puerto Rico Ran Out of Other People’s Money

Frank Worley: Time to Accept Responsibility, Tighten the Belt, Attract Business

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“The two major parties … acted as if they lived in a dream world where money grew on trees and every problem could be passed down the road.” (Angel Viera-Vargas)

Frank Worley is founder of the Republican Independence Movement and cofounder of the Puerto Rico Libertarian Party.

La versión en español.

What are Puerto Rico’s most immediate challenges?

Puerto Rico faces such a wide range of problems; it is difficult to sum them up with one answer. The debt is the most visible problem right now, but the debt is a symptom of a wider array of issues from poor management to widespread corruption. Internally, there are major political figures like the current mayor of San Juan, Carmen Julin Cruz, who has allegedly provided direct support to protesters acting against the Fiscal Control Board created by the PROMESA legislation and against private entities such as Walmart.  These actions impede progress and hurt the people of Puerto Rico.

Working through the PROMESA Fiscal Control Board (which in some ways mirrors my proposal for a “Governing Board” to lead an independent Puerto Rico) is the best hope for the island right now. The leadership of Puerto Rico and a political climate that are very hostile to change is going to make that difficult.

The island recently reported a deficit for this fiscal year of a staggering US$4.7 billion.  Since dozens of new taxes enacted under the current administration have failed to close the gap (which had been previously reported as much smaller), significant and immediate cuts to the public sector are the only path and that will likely lead to widespread labor unrest and have its own negative economic impact.

Given the long-term drift towards socialism in the United States, Frank Worley believes Puerto Rico can do better as an independent nation — but only with the right constitution and founding leadership. (Old San Juan, mrami)

Given the long-term drift towards socialism in the United States, Frank Worley believes Puerto Rico can do better as an independent nation — but only with the right constitution and founding leadership. (Old San Juan, mrami)

Why do you think Puerto Rico has fallen?

Puerto Rico has been mostly ignored by the federal government and its issues have been ignored by local politicians for decades. In many ways the leadership of the two major parties — the New Progressive Party (pro-statehood) and the Popular Democratic Party (pro-commonwealth) — acted as if they lived in a dream world where money grew on trees and every problem could be passed down the road to the next administration. Perhaps one of the worst decisions ever made was the unionization of public employees, passed under the Pedro Rossello-NPP administration in the 1990s. This created a public sector union behemoth that has unduly influenced elections and politicians ever since.

This combined with the leftist policies for the next two governors — Sila Maria Calderon (PDP) and Anibal Acevedo Vila (PDP) — led to an ever-growing debt and burgeoning public sector, which at its largest included more than 300,000 public employees (about one third of the total employed workforce).

The pressure from unions forced an ever-growing number of employee benefits that drove up the cost of doing business in Puerto Rico, including paying mothers a full salary for the entirety of their two-month maternity leave — a popular benefit that simply costs too much. This pro-workers-rights ideology (which has been a long-time public policy position in Puerto Rico) has led to some very complicated labor laws.

Another major issue was the closing in 2003 of Roosevelt Roads Naval Station in Ceiba, Puerto Rico. This cost the island 5,000 jobs and more than $300 million per year in direct impact which could have had a multiplying effect of up to $900 million annually. The base closure was brought about because of the closure of the bombing and exercise range on Vieques Island, a decision made after more than a year of protests and support by both NPP and PDP administrations. The primary function of that base was training; without the training, it had to close.

More recently, the island was built on a false economy of special tax breaks known as Section 936. When congress repealed those benefits, total employment (which was already in decline) began a sharp drop. This led right into the 2008 financial crisis, which was the knockout punch.

As factories built on the premise of 936 began to close, people began losing jobs and thousands began to migrate off of the island. The result was a huge government with no one to pay for it.

Following Calderon and Acevedo, PNP Governor Luis Fortuño attempted to bring the problem under control by cutting the total size of the Puerto Rican government. He was met with fierce protests and strikes and was voted out of office after just one term. Fortuño’s biggest failure was not cutting enough employees, resulting in him borrowing more money in four years than any other governor in a single term.

The new and current governor, Alejandro García Padilla won his election by promising to not lay off any more government employees. His refusal to do so has made the problem worse, resulting in the massive deficit and default on public debt.

Another problem is massive corruption, which recently led to the convictions of several PDP fundraisers and officials. Much like the campaign-financing and bribery scams of the 1990s under the Rossello administration, the PDP gave billions in contracts to party supporters who either gave donations early or gave them later, after receiving special contracts or jobs. In all, Puerto Rico has over $12 billion in professional and services contracts. Many are legitimate, but some of which were given for “special treatment.”

It is a very big mess, for a small island.

What is the best-case scenario for a Puerto Rico recovery?

The fiscal control board under PROMESA offers the best hope of recovery. The first thing that has to happen is that the government must be reshaped to fit the current economic reality. Second, the island has to find a way to get its economy going again. While some may suggest more “government investment” (code word for more spending), the only real solution will be to cut regulations and taxes and create real incentives for businesses to move to the island.

Patchwork solutions will not work. For the island to recover, fundamental pro-business policies must be instituted.

The island’s recovery will stall even after the PROMESA board has finished its work unless other changes are made.

Do you still back independence for Puerto Rico? Why?

My support for Puerto Rican independence has always been very conditional. My conditions are that either (a) my plans be instituted and I be given a chance to lead the effort or (b) a real plan be implemented and I have the opportunity to be a part of the leadership. I simply do not trust either of the political parties’ ability to lead under independence, at least at the very beginning.

Without a rational, well-thought-out plan and the authority to implement that plan, independence would be a disaster for the people of Puerto Rico. It is important to note that the current Puerto Rico Independence Party leadership has endorsed by Fidel Castro and the Chavista-Maduro regime in Venezuela. I am not a communist or socialist and would never support independence for Puerto Rico under those conditions.

My reasoning is that Puerto Rico could prosper under the right kind of independence, and overall conditions for its people could vastly improve. Furthermore, the United States is falling head long into socialism. As the current presidential election cycle has proven, the future is not bright for America, and Puerto Rico’s future with the United States will be much darker than independence if independence is done correctly.

What culpability lies with the policies from the mainland?

Much has been said about the impact of US policies on the island. I must say that Puerto Rico is poorer than any US state, but richer than any Latin American country on a per capita basis. I do not believe that Puerto Rico’s problems are primarily caused by US policies, although it is clear some have impacted more than others.

The establishment and then repeal of Section 936 tax breaks helped and then hurt the economy. Welfare programs have helped the poor, but have created a generation (roughly half of the working-age population lives on some kind of assistance) of “professionally poor” who live on public assistance and do not work or contribute in any significant way to the society.

Many have seen the Jones Act shipping rules as a burden, but those rules, which apply to vessels traveling between US ports, do not affect vessels traveling from abroad. Elimination of the Jones Act might lower shipping costs, but it might not.

I firmly believe that Puerto Rico’s problems begin and end in Puerto Rico. Federal policies provide both convenience and inconvenience but in the end balance out.

Fergus Hodgson About Fergus Hodgson

Fergus Hodgson is a traveler, economic consultant, and media executive. He holds degrees in economics and political science from the United States and New Zealand, and he divides his time between Canada and Argentina. Follow @FergHodgson.

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