Who to Blame for Puerto Rico’s Debt Crisis

The following is an incomplete list of things valued at seventy billion dollars: the net worth of Mark Zuckerberg, Netflix, and Youtube; the gross domestic product of Guatemala; the damages caused to Puerto Rico by Hurricane Maria; and the public debt owed by the Puerto Rican government. In recent days, the world has turned its eyes on the second-to-last item on the list. Puerto Rico in the aftermath of Hurricane Maria is nothing short of “a humanitarian disaster involving 3.4 million U.S. citizens,” as Puerto Rico Gov. Ricardo Rosselló put it. The calibre of this crisis can’t be understated and deserves attention. Likewise, the inadequate response from the federal government and its commander-in-chief can’t be justified and deserves criticism. There are other articles to address such absurdities as the president’s comment on Puerto Rico throwing the federal budget “out of whack.” Instead, this article will shed light on the final seventy billion dollar question: what caused Puerto Rico’s debt crisis, and what can solve it?

The answer to that question is embedded in Puerto Rico’s history and political status. Spain ceded Puerto Rico to the US in 1898 after the Spanish-American War, and the Jones-Shafroth Act of 1917 established its status as a US territory whose residents receive US citizenship. However, a series of Supreme Court decisions at the turn of the 20th century known as the "Insular Cases" established that citizens of US territories are not owed some of the benefits of citizenship, including the right to vote in national elections. Rather, they were classified as “foreign… in a domestic sense.”

Early decisions by Congress and the Supreme Court to treat Puerto Rico differently triggered  a legislative snowball-effect in creating exemptions for the island. These exemptions dug Puerto Rico’s grave far before the 2007 financial crisis delivered a killing blow. The first exception, built into the Jones-Shafroth Act, carved out a "triple exemption" for bonds issued by the government of Puerto Rico. In order to help prop up the Puerto Rican government and incentivize investment in its economy, Puerto Rican government bonds are exempt from federal, state, and local taxes for any buyer, regardless of whether they live in Puerto Rico. The second exception was a series of favorable tax laws and subsidies which lowered the effective tax rate of citizens and businesses in Puerto Rico. The third exception, created by an amendment to a 1984 Senate bankruptcy bill, was that Puerto Rico and other US territories cannot file for Chapter IX bankruptcy, a mechanism that cities like Detroit have employed to overcome their insolvent debt. The final piece of the puzzle, which applies specifically to Puerto Rico as an island, is the Jones Act of 1920 (different Jones from the Jones-Shafroth Act), which requires that all goods shipped from one US port to another be transported by ships that are American built, operated, and owned.

The combination of artificially valuable bonds, abandonment of corporations following a tax break repeal, anti-competitive shipping laws, and an inability to declare bankruptcy collectively set Puerto Rico up for a beautiful disaster. The triple exemption artificially inflated the value of Puerto Rican bonds, thanks to the significant tax discount, and encouraged the Puerto Rican government to rely on debt via bond sales to balance its budget. While this practice began in the 1970s, it didn’t become a problem until the second exception ended. begun under President Clinton, The elimination of Puerto Rico’s tax breaks, , ruined Puerto Rico’s economic viability. Without the favorable taxation policies, Puerto Rico’s disadvantages, chief among them the Jones Act’s anti-competitive trading obligations, prompted labor and capital alike to flee to either the continental US or nearby, less-regulated and lower-cost Caribbean islands. In 2014 alone, 2% of Puerto Rico’s population emigrated to the continental US. As Puerto Rico’s economy floundered, it took on more and more debt to close government revenue shortfalls. Thanks to the discount bonds, lenders were still willing to make what otherwise should have been an extremely risky investment. Predictably, in 2014 the debt-GDP ratio reached 68%, and Puerto Rico’s bonds were devalued to “junk status.” And yet, thanks to the previously mentioned third exception, Puerto Rico’s government was unable to file for bankruptcy. An intervention from D.C. was their only hope.

Some intervention took place, namely Congress’s 2016 Puerto Rico Oversight, Management, and Economic Stability Act, or PROMESA for short. PROMESA addressed Puerto Rico’s inability to file for chapter IX bankruptcy, providing it an equivalent procedure to follow that would suspend payments to creditors and help stabilize Puerto Rico’s free-falling economy. However, the law took no steps to address the fundamental problems that led to Puerto Rico’s debt crisis and can only be viewed as a band-aid solution for a problem that cuts to Puerto Rico’s core.

In the short term, Congress’s top priority regarding Puerto Rico is funding disaster relief. The great and probable misfortune is that they will stop there. Even if it’s too little and too late, Congress is currently pushing through a $36.5 billion relief package because, after all, it wasn’t Puerto Rico’s fault that they were in the path of a category-5 hurricane. Most likely, Congress will not apply that same logic to Puerto Rico’s economic disaster, even though it also wasn’t Puerto Rico’s fault that they fell victim to archaic laws with unintended consequences.

That being said, there are a variety of steps Congress could, and ideally would, take to help Puerto Rico out of its shambles. Contrary to vague statements made by the POTUS, Puerto Rico’s debt will not be "wiped out" since the federal government does not have that legal power, short of assuming the debt for itself. However, the Jones Act should not remain in its current form. U.S. shipbuilding lags far behind the top countries. The Jones Act both props up an uncompetitive industry at a cost to American ports, most notably islands like Puerto Rico and Hawaii, and only exists because no Congress has felt compelled to pick a fight with the shipbuilding lobby in order to eliminate it. In a dream world, there could even be bipartisan support for such a reform from centrist Republicans and Democrats who still support free trade and oppose federal spending to protect failing industries.


More broadly, Puerto Rico’s political status needs revisiting. Extreme solutions like statehood or secession are unnecessary and unpopular even among Puerto Ricans. However, intermediate solutions exist. All US territories, as well as Washington, D.C., pay taxes to the federal government despite not having a vote in either the House, the Senate, or, with the recent exception of D.C., the President. To quote the D.C. license plate, it’s modern-day “taxation without representation.” D.C. was granted representatives to the electoral college with the 23rd amendment, and so a territory like Puerto Rico, with a larger population than 21 US states, should too. And while expanding Congress to include the likes of D.C. and Puerto Rico is highly controversial and tied up in partisan politics, taking a step back from this debate reveals a clear injustice for the millions of second-class non-voting citizens in Puerto Rico and other lands deemed by Washington as “foreign in a domestic sense.”