The austerity crisis America ignores: Puerto Rico is having its Greek moment—but nobody seems to care

Puerto Rico faces default, and its creditors are demanding crippling austerity. Obama must step in

By Robert Hennelly

Published August 5, 2015 11:58AM (EDT)

  (AP/Susan Walsh)
(AP/Susan Walsh)

As we head into the seventh inning stretch of the Obama presidency, the White House has been preserving what little juice it has left for heavy international lifts like diplomatic resets with Cuba and Iran. It’s all part of the White House  pre-retirement narrative of how now, having fixed health care and revived the economy, he can pivot in his victory lap to fix the world and control climate change.

During his recent trip to Africa, the President lectured that continent’s leaders about how their progression from colonialism to independence was built “on a fragile foundation” that was threatened by a “cancer of corruption.” At risk he said, was the prospect of wasting an entire generation of idle young people.

“We need only look to the Middle East and North Africa to see the large numbers of young people with no jobs and stifled voices can fuel instability and disorder,” Obama told  the members of the African Union at their meeting at Addis Ababa, Ethiopia.

African leaders could have no better example then Puerto Rico for what a heavy price can be paid when corruption and greed keeps an entire population stuck in the netherworld between colonialism and independence. Even as the president was jet setting for world peace, the alarm bells were going off about the public-debt meltdown in Puerto Rico, where 57 percent of the Commonwealth’s children live in poverty. As far as wasting a generation: 26 percent of the country's young people between the ages of 18 and 24 years old are neither in school nor working.

Puerto Rico's failure this week to make a $58 million dollar bond payment increases the likelihood of a broader default on the $72 billion in outstanding public debt. According to the Wall Street Journal, about half of the nation's municipal bond mutual funds own some of these bonds and have already taken a hit as the Commonwealth's public balance sunk in a sea of red ink.

But, as distressed as the bond holders may be, its nothing compared to the social conditions endured by the people who call Puerto Rico home. Close to half of the island’s population live in poverty, and at 43 percent, the work force participation rate on island is five points below that of war-weary Afghanistan. As a consequence, the island is losing hundreds of thousands of young people who are looking for work wherever they can find it so they can send money back home to their families.

Back at the end of June when Puerto Rico Governor Alejandro Garcia Padilla publicly announced that his government had no hope of servicing its $72 billion dollars in public debt, held by well over a dozen different entities, the response from the White House was disappointingly ho-hum and detached. “There’s no one in the administration or in D.C. that’s contemplating a federal bailout of Puerto Rico,” White House Press Secretary Josh Earnest told reporters. Nonetheless, the Obama administration remained “committed to working with Puerto Rico and their leaders as they address the serious challenges,” with free “advice” from the Department of the Treasury.

Under the terms and conditions of Puerto Rico’s status as a territory of the United States, it's specifically the Office of the President that’s most responsible for the relationship between the federal government and the Commonwealth. And the current situation is the direct result of both corrupt politics and the willingness of the federal government to let benign neglect slip into something more malignant as years became decades for a territory in an unsustainable limbo between dependency and autonomy.

The problem for Puerto Rico, as for millions of American households in urban neighborhoods of color still in an ongoing foreclosure crisis, is that it just doesn't fit in with the Obama narrative of a restored economy. Instead, they are bleeding out. Even as we celebrate the first African-American president, in the aftermath of the 2008 meltdown we have seen the largest destruction of African-American household wealth in generations. Similarly in Puerto Rico, there has been a 25 percent decline in property values since 2007, and an aggregate loss to homeowners of $30 billion dollars in lost equity.

Perhaps we look away from Puerto Rico because of how we came to own it, what remains an historical embarrassment in its demonstration of American colonial avarice -- a historical fact that does not fit in with the red-white-and-blue self image we prefer of ourselves, as exporters of democracy. It is a legacy from the late 19th century period when our leaders decided to go to war with Spain to demonstrate to the planet that we could be a great imperial power too, building an empire by force of arms because God was on our side and we could “buy” islands.

The Spanish-American War that got us Puerto Rico was instigated by the likes of publishing magnate William Randolph Hearst, who used his media empire to convince the American people that it was the Spanish that sunk our battleship the Maine in Havana Harbor in 1898. To this day, there’s no proof that’s what happened.

The whole pitch for war on Spain was to liberate the close to 200,000 Cuban freedom fighters that the Spanish had in concentration camps to quell a rebellion that was getting traction. But as Howard Zinn recounts in “A People’s History of the United States,” when we came  "to the rescue" of Cuban revolutionaries, defeating the Spanish, we co-opted their revolution with our military presence, inaugurating an asset-and-natural-resource grab by American corporations. And why not? By December of 1898, when Spain was looking to make peace, the U.S. ended up with Guam, Puerto Rico and the Philippines for just $20 million dollars.

To this day, Puerto Ricans can’t vote for president, but residents have a long tradition of  serving with distinction in the U.S. military. Island residents don’t have to pay the federal income tax, but are subject to paying into the Social Security system. They get to weigh in on the presidential primaries, but only can elect a non-voting member to Congress. If Puerto Rico were a state, it would be entitled to five members in the House of Representatives -- more than some actual states in the union -- and two senators.

In 2012, in a non-binding referendum and for the first time, 61 percent of Puerto Rican voters backed statehood over their current status. Just 6 percent voted for total independence. In three prior referendums, in 1967, 1998, and 1998, Puerto Ricans rejected statehood. Last year, a General Accounting Office study concluded that statehood would be financially a  mixed bag for both the U.S. and Puerto Rico. While it would mean the island would be eligible for billions more in direct federal spending and program aid, multinational corporations with operations on the island might then opt to leave; and residents of Puerto Rico would be on the hook for $2.3 billion in federal income tax, from which they are now exempt.

Now, as Puerto Rico faces the prospect of defaulting, the American Future Fund has launched an ad campaign insisting that Governor Alejandro Padilla’s declaration that the island can’t pay “is unlawful,” violates the U.S. Constitution and puts the Commonwealth on the same footing as what AFF calls the "rogue nation" of Argentina, which has also pushed back on its creditors.

Supporters of the bondholders are touting a report prepared by the Centennial Group International, entitled “For Puerto Rico There is A Better Way.” Key findings include that over the last 10 years, while spending on education jumped 39 percent, enrollment dropped by 25 percent. According to the report, Puerto Rico only collects 56 percent of the sales tax its owed, compared to the 83 percent average collection rate for the 50 states.

The analysis by CGI says Puerto Rico can meet its obligation to bond holders by: cutting public education, reducing support for the University of Puerto Rico, as well selling off public buildings and raising taxes. It also suggests that the island become more self reliant agriculturally since so much of what it consumes is imported and just 1 percent of the Commonwealth’s Gross Domestic Product is currently generated by farming.

However, over the last couple of years Puerto Rico has reduced public spending; and, just as we have seen in Greece, austerity might cover the bondholders’ and bankers’ payments but it doesn’t kick start broad based prosperity.

This won’t take care of itself.

President Obama needs to roll up his sleeves and engage here directly as hundreds of Puerto Rico boosters, led by New York Mayor Bill de Blasio, challenged him to do last month on the steps of New York City Hall in lower Manhattan. “Now, let’s be clear," de Blasio said. "It’s the federal government’s obligation to act, because they can’t stand idly by and watch Puerto Rico fail, especially because its circumstance has so much to do with decisions previously made by the federal government.”

President Obama has a shot to be a 21st century FDR after all, for surely what’s going on in Puerto Rico is a depression. One thing the president could do is use the ecological reconstruction of the Caribbean Island as a demonstration model for dealing with the ravages of climate change: In addition to a public finance crisis, Puerto Rico is in the throes of a prolonged drought, even as the Army Corps of Engineers warns of a worsening coastal erosion, with a projected 22-inch sea-level rise by 2060. Restoring coastal wetlands, reclaiming lands ravaged by industrial chemical contamination as well as by the Pentagon's  use of the island of Vieques for target practice could employ several generations.

We bought the place and ever since, its people have helped build this nation and made the final sacrifice for this country, war after war. The status quo is a global embarrassment. Mr. President, if we can't fix an island we don't have a shot at the world.

Robert Hennelly

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Austerity Economics History Puerto Rico