The Puerto Rico Dilemma
Earlier this year, the United States celebrated its 241st birthday, and while our nation has seen great progress throughout its history, it is as important to acknowledge the shortcomings of our democracy as it is to celebrate its promises. Reflecting on the politically turbulent past few years, we must take a second look at our system, which claims to value freedom over all else, and recognize some of its pitfalls.
Despite the national rhetoric of liberty and opportunity, not all Americans have been able to reap the benefits promised by this rhetoric, and expansions of freedom and power for some parties can often impair the lives of others. The lives of Native Americans were neglected in favor of Westward expansion, the humanity of African Americans was neglected in favor of slavery, and now the well-being of Puerto Ricans has been neglected in favor of using exploitative cheap labor to promote crude macroeconomic growth and capital gains.
Puerto Rico is in the midst of a massive financial crisis that has no end in sight. The island’s Gross Domestic Product (GDP) per capita and median household income are significantly below that of all 50 states. And while it may be easy for one to label Puerto Rico as merely a poor territory, this assertion represents a gross oversimplification of its debt crisis, which was largely introduced by US federal policy. While the US Government enacted policies in Puerto Rico in order to spur economic growth, they have ultimately resulted in debilitating ramifications for the people there instead.
There are two legal reasons for Puerto Rico’s road to ruin. First, the foundations began in the 1980s with the establishment of Section 936 of the Internal Revenue Code, which granted tax breaks to both American companies and their foreign counterparts for implementing operations in Puerto Rico instead of overseas. With this law, Puerto Rico became a hub of manufacturing, particularly for the pharmaceutical industry. By 1993, the manufacturing industry on the island contributed greatly to its economic performance and employed roughly 165,000 workers. However, Section 936 made foreign investment artificially favorable on the island, creating a bubble. In order to prevent the bubble from bursting, in 1996, the Clinton administration established legislation to phase out the exemptions over a 10-year period. However, the legislation failed, and the expiration of these exemptions in 2006 caused businesses to outsource production, leaving Puerto Rico with decreased employment opportunities and a feeble economy. As a result of policies such as this, even though Puerto Rico is part of the United States, Puerto Rican citizens are substantially worse off economically than most mainland Americans.
The second major reason for Puerto Rico’s struggles is the fact that bonds issued by Puerto Rico are triple-tax exempt, meaning that they cannot be taxed at a federal, state, or local level. As a result, bonds from the island are given high ratings and are exceptionally attractive for investors. However, because the exemptions remain valid in all 50 states, Puerto Rico does not reap the benefits of its own bonds. Although promoting investment in Puerto Rican assets should theoretically bolster the island’s economy, these triple-tax exempt bonds have done just the opposite. By favoring the bond owner over the citizen, lawmakers have left Puerto Rico with poor economic infrastructure and a crippled government that lacks sufficient funding to serve its constituents effectively.
Taken together, these two processes have yielded profound effects. Bond debt is up 87% since 2006. Because of high government spending without sufficient opportunities for tax collection, government debt in Puerto Rico now measures a whopping $74 billion. Payrolls have contracted by 8% since the recession, and the island’s unemployment rate is around 12%, more than twice the rate of the mainland. This absence of quality wages and job opportunities has prompted hundreds of thousands to leave the island, and this exodus – coupled with a decreased fertility rate due to economic and health concerns – has resulted in a 2% decrease in the island’s population for each of the past three years. The freedom for investors from outside of Puerto Rico to own tax-free Puerto Rican bonds has caused a striking shortage of tax revenue, leaving the government unable to hold its own. Thus, the freedom of investors to own tax-free bonds is resulting in the citizens’ demise.
When Puerto Ricans arrive on the mainland seeking new lives, the economic and social struggle continues. Mainland Puerto Rican residents face cultural barriers and limited opportunities for economic advancement once they arrive in their new mainland communities. Mike Schneider of the Associated Press described how even the most qualified and highly educated Puerto Ricans – lawyers, scholars, nurses, and more – often lack sufficient language skills and certifications to find jobs in their respective fields on the mainland.
This process is extremely problematic. Puerto Ricans are not immigrants moving overseas but Americans moving to a new place in America. And yet, Puerto Ricans relocating to the mainland are essentially living the immigrant experience in their own country. Like immigrants, these citizens suffer economic immobility in their hometowns, flock to new places to find better opportunities, and too often are left isolated within the new societies into which they enter. Economics aside, how can we be a truly United States if we neglect a territory that is home to over 3 million Americans?
But the issue of neglect isn’t even that simple. Americans throughout the nation often feel neglected economically or politically. Donald Trump, for example, was able to gain tremendous support during the presidential race by capitalizing on this sentiment, campaigning in rural areas whose residents felt ignored by politicians and whose economic situations were bleak. But the case of Puerto Rico is far different. Whereas rural communities throughout the country have suffered textbook cases of economic and industrial decline, Puerto Rico has been the subject of government and economic policies that create wealth at the expense of the Puerto Rican people. Puerto Rico, then, is by no means a neglected territory. The federal government does not merely neglect the interests of the island; it takes advantage of the Puerto Rican people in order to create prosperity elsewhere.
This cycle leaves us with a troublesome conclusion. Although traditional colonialism is long gone, the current relationship between Puerto Rico and the mainland United States is all too colonial. Resource exploitation has become legislative exploitation; as Puerto Rico Governor Ricky Rosselló declared after his November election victory, “[Puerto Rico has] been a colony for 500 years, and we have had US citizenship for 100 years, but it’s been a second-class one.” Puerto Rico should not be America’s investment factory, and Puerto Ricans should not have to leave their island to pursue their own American dreams elsewhere. If the United States claims to be the most powerful country on Earth, it should at least have the ability to empower Puerto Ricans just as it would any other citizens.
The issue of the well-being of Puerto Rico and those who live there is both an economic and an ethical one. Puerto Rico’s economic situation will not improve on its own. The federal government needs to either provide Puerto Rico with monetary relief, promote free market activities that still allow for adequate collection of taxes, or a combination of both. Although free market and incentive-based profit-maximizing systems do not have to be deliberately exploitative, in Puerto Rico’s case they have proven to be just that. While there may be a variety of strategies with which to battle the crisis, it is first necessary for the Puerto Rican government to have the funds to invest in imperatives like jobs, education, and healthcare. Even to promote free-market policies, the government of Puerto Rico must have the basic capability to function in the interest of the people, and while tax collection may create inefficiencies in the market, it is an essential aspect of what makes the government function. Holding Puerto Rico at fault for its debt crisis both oversimplifies and distracts from the problem, and if valuable change is to be brought, the federal government must take the lead to empower the Puerto Rican government.
To sum up, the problem here is that government policy made Puerto Rico a playground for large corporations, creating a temporary influx of opportunities for islanders that ground to a halt once the laws changed and left the island in a persistently depressed state. Economically, if the government seeks to promote free market activities on the island as a means of lifting Puerto Rico from its ongoing recession, it must promote investment on the island without creating an artificial bubble.
Furthermore, the federal government must fulfill its ethical obligation to its own people. Discussions of Puerto Rican statehood and sovereignty must be taken seriously, and the government should promote policies that bring opportunities to the island rather than push its people away. While the preservation of economic liberty is vital, the American government is also fundamentally responsible for the interests of all Americans. By exploiting Puerto Rico, the United States neglects the American people as well.
Ryan Mendelson ’19 studies in the College of Arts & Sciences. He can be reached at ryanmendelson@wustl.edu.