What Can We Learn From the Puerto Rican Debt Crisis?

By Joseph Plummer

Imagine for a moment you live on an island. The island has roads, schools, businesses and a beautiful landscape. On this island the money supply is $100, and the people of the island have decided they never want to be taxed more than 20 percent of the money supply. This worked well until recently when the cost to operate and maintain the island and all of the public infrastructure, goods and services increased to some amount over $20. It is now projected that the cost to operate and maintain the island and all of the public infrastructure, goods and services will soon reach $40 (the equivalent of 40 percent of the money supply). The government is now looking to you for a solution. What would you do?

In an ideal scenario, we want to be able to maintain the current quality of life on the island. So, what are our options? We could increase taxes above the 20 percent threshold and risk the possibility of people leaving the island. We could stop funding certain public infrastructure and programs, risking the possibility of a major reduction in quality of life. Or, we could increase the money supply so that the $40 required to pay for public infrastructure, goods and services remains equal to or less than 20 percent.

This scenario might seem obscure and unrealistic, but this is the exact decision-making process Puerto Rico is in right now. Puerto Rico’s debt is now well above $70 billion, which is roughly 70 percent of the island’s GDP. That is not an insignificant amount of debt. Put yourself in the shoes of the Puerto Rican government. How would you pay that off? Paying that amount of debt off in any reasonable amount of time inherently means considering an increase in taxes and/or a decrease in government-funded programs. Just imagine an annual budget of $10 billion. To pay off the $70 billion debt in less than 15 years, it would take at least half of the annual budget committed to debt payments … for 15 years.

We can already see some of these things happening. Puerto Rican lawmakers recently approved an increase in the sales tax from 7 percent to 11.5 percent. At the same time, the governor of Puerto Rico has proposed a budget that includes a $200 million cut to education. This has already resulted in protests, which have not been covered by any major U.S. press. This is just the tip of the iceberg when it comes to the effects of the island’s massive debt. Since 2010, the island’s population has dropped drastically from 4 million in 2009 to less than 3.6 million in 2014. The middle class of Puerto Rico is literally leaving the island.

So what? Who cares what’s happening in Puerto Rico? Well … I do, and you should too. I’m sure there are some investors and organizations that would love to see Puerto Rico fail, such as America’s Future Fund, which advocates for conservative, free-market ideals. But, Puerto Rico is family. No matter your perspective on the structural connection between the United States and Puerto Rico, Puerto Ricans are part of the fabric of America. Moreover, Puerto Rico’s problems are very similar to the problems the U.S. federal government is facing, namely the massive debt. As a country, we should be paying attention to the Puerto Rican debt crisis, because we need to solve the riddle too.

How does a country get out of massive debt? The obvious answers are increase taxes, decrease spending and don’t take on more debt. But, there is a limit to how much we can increase taxes and decrease spending. What is the next set of answers to this riddle? The next set of answers might include investing in an ecosystem of entrepreneurs, intentional research and development efforts, more efficient infrastructure, and actively recruiting top-tier talent. In the case of the United States, increasing the money supply could also be considered.

There is a clear opportunity to collaborate with Puerto Rico to develop high-impact strategies that will guide us out of debt. It is in the best interest of the U.S. federal government to help solve the Puerto Rican debt crisis. Helping to solve the Puerto Rican debt crisis will inform and help develop a set of strategies to effectively address the U.S. debt crisis without increasing taxes and/or cutting valuable government programs. It is clear that Puerto Rico is a canary in the coal mine. What is happening in Puerto Rico is prologue. What happens next is up to us.

Image credit: Flickr/Trish Hartmann

Joseph Plummer is a degree candidate in the Executive Master of Natural Resources (XMNR) program at Virginia Tech, expecting to graduate in May 2016. He currently works for a non-profit organization that works with schools and school districts on renewable energy and sustainability initiatives.