“This is truly a historic moment full of opportunities. We are truly convinced of our unparalleled incentives… to boost your profits.”
Puerto Rican Gov. Alejandro Garcia Padilla at the Puerto Rican Investment Summit in early 2016
Puerto Rico, called Boriken by the Taino (ty-ee-noh), believed to be an Arawak people who traveled from the mainland and settled throughout the Antilles, has the dubious distinction of having been ‘discovered’ by Christopher Columbus on his second voyage to the New World in 1493. The explorer arrived with strict demands from the Spanish Crown. Going forward, the peoples of the Americas would convert to Christianity and work to enrich the mother country or face brutal consequences.
Within 20 years the Taino were for the most part decimated. Although they fought back, they were soon cut apart by Spanish muskets, crossbows and cannon. Even more importantly, their new overlords brought diseases with them for which the Taino had no resistance.
Although many still believe that the Taino are a lost people, a 2010 census found that 20,000 people in the territory define themselves today as such and an earlier study funded by the U.S. National Science Foundation showed that 61% of Puerto Ricans carry the DNA of the island’s original inhabitants.
Partly due to the well meaning efforts of a Dominican priest, Bartolome de las Casas, who came to love the indigenous people of the Americas and preserved what he could of their cultures and history against the destructive tide of the Church and the Crown, but mostly due to the factors above, the Spanish introduced African slaves to the area.
In 1868, the Puerto Rican people rose up and declared independence from Spain but it would be almost twenty more years before they would receive a measure of autonomy. Any celebration was shortlived as, that same year, 1898, the island traded one colonial master for another and was ceded to American forces in their on again off again war with Spain.
The American conquest of Puerto Rico, based on the idea of Manifest Destiny, the ‘American Exceptionalism’ of its day, was from the beginning based on economic exploitation and there is ample proof of this, including the 1920 Merchant Marine Act that, “prohibits non-American ships from carrying goods between the island and U.S. mainland, which hinders growth by raising transportation costs and making it too burdensome for the island to have import-export relationships with other countries.”
As a territory rather than a state, Puerto Rico doesn’t vote in Presidential elections and is represented by a non-voting Resident Commissioner in the US Congress. It’s important to note that by the 1990s, in terms of providing for its citizens, Puerto Rico was doing fairly well by Latin American standards.
Now the island nation faces unrelenting austerity to pay more than $70 billion in debt. This begs the question, how did things get so bad? As with so many things in recent years, part of the answer lies with the victory of neo-Classical economic theory within the American Democratic Party, and more generally, in social democratic parties throughout the developed world who joined conservatives in spreading this free market gospel and the austerity that is one of its core principles.
Enter the New Liberalism
As a 2015 article in the American Prospect explained, Puerto Rico long enjoyed the benefits of something called Section 936, “a tax exemption for U.S. manufacturing on the island”. The phase out of this law was started by then President Clinton in 1996 in order to save the US treasury a little over $10 billion over ten years. As reported by the magazine, since 2005 when the tax credit ended, the Puerto Rican economy has seen its GDP contract by 10%, creating budget shortfalls for governments at all levels.
This isn’t to say that outsiders in Washington are solely responsible for the island’s problems, the political class in the territory must bear most of the blame. It was they who made the decision, as recently as last year, to sell bonds to plug the holes in their budgets, knowing full well that they didn’t have the same bankruptcy protections as US states do.
According to David R. Martin, author of “Puerto Rico: The Economic Rescue Manual”, the island’s constitution offered two protections against what is now happening: a legal requirement to balance the budget and a 10% debt service limit. Through creative interpretations of these laws successive governments piled up the debt, for all intents and purposes selling their country’s future.
The sale of bonds, which, due to Puerto Rico’s territorial status were not subject to any tax in the United States, making them attractive to investors, lies at the heart of the island’s troubles. As we might expect, the big Wall Street banks played a role in all this and profited handsomely from it, they, “smoothed the island’s path to fiscal debacle, reaping more $900 million in fees to manage Puerto Rico’s $126.6 billion of bond sales since 2000.”
As responsible funds realized the risks outweighed the gains for these bonds they stopped buying them and some dumped their holdings onto the market for pennies on the dollar. Much of this debt was purchased by so-called “Vulture Funds” who demanded it be paid in full, where other financial companies might be willing to negotiate a lower rate. Throughout the world, from Greece to Argentina to Detroit, vulture funds like Aurelius Capital and Marathon Asset Management are found wherever we find crippling austerity being imposed on restive populations..
As mentioned above, if this had taken place in a US state, its government would have the right to declare bankruptcy and restructure the debt, relief that territories like Puerto Rico are denied. A further decision by the 1st Circuit U.S. Court of Appeals last July also denied these protections the island’s municipalities and utilities, likely worsening the island’s long term financial problems in the process.
Although it can be easy to see all this in the abstract and lay the blame squarely on all of the territory’s citizens, the fact of the matter is that the people least able to pay these debts are the ones who will carry the burden of them in the form of school closures, lowering the minimum wage from the federally mandated $7.25 an hour to $4.25 for people under 25 (for up to four years) and the loss of public utilities and services like garbage collection.
While the circumstances in Flint were very different, we can‘t help but be reminded of the suffering that city has endured when we read this recent quote in the New York Times, “…this week officials also warned that they would stop testing the water supply, to save money.”
One result of all this is an unprecedented exodus of young people to the American mainland over the last couple of years. Perhaps some good can come from this because Puerto Ricans residing in US states can vote and may, in time, become a political force big enough to force Washington to take some action.
There is some irony in the fact that one of the last bills approved by the US Congress “before jetting off for the July 4th break” was the Puerto Rico Oversight, Management, and Economic Strability Act (PROMESA) to prevent the territory defaulting on its debts. Although the bill was crafted by Republican law-makers and introduced by Wisconsin congressman Sean Duffy, many Democrats also voted for it. When powerful Democrats like Nancy Pelosi back a bill like this we have to conclude that on these economic issues there is very little difference between America’s two major political parties.
In fact the establishment of a seven member oversight board, “four of whom would be appointed by Republicans, two by Democrats, and one by the president, with only one required to maintain residence in Puerto Rico” demonstrates the bipartisan consensus in Washington about the need to impose austerity on the territory.
In fairness, there were some in Congress who fought against PROMESA, including New Jersey Senator Bob Menendez , who said after its passage, “I’m afraid this bill provides little more than a Band-Aid on a bullet hole with regard to Puerto Rico’s unsustainable debt. Mark my words – if we don’t seize this opportunity to address this crisis in a meaningful way, we’ll be right back here in a year from now picking up the pieces.”
A New Playground for the 1%
One of the most chilling things about what’s happening in the territory is that while the youth of Puerto Rico flee the country, a new class of people, many drawn from the same financial elites who are looting it, are moving there and buying up the best land the island has to offer. Anecdotally, this new jet set seems to prefer using helicopters rather than driving to get around. This probably has the added bonus of keeping them from dealing with locals who aren’t in their employ.
While 46% of its citizens live in poverty, the island has been marketed to these rich people who, if they live there at least half of the year, are not obligated to pay federal taxes on their earnings and investment income. A piece in the Guardian put these new arrivals into a familiar perspective, “And there is much that investors will recognize in the troubled island. There is little sign of economic crisis in the island’s luxury resorts of Bahia Beach, Dorado Beach, and San Juan’s exclusive waterfront West Condado neighborhood with its Gucci and Cartier stores.”
Most of us were taught that the price of doing business in the world of finance is the risk that such adventurers take, especially in the modern era. Unfortunately, revolving door regulators and bought politicians have become an insurance policy that allows speculators to take bigger and bigger risks without worrying about the potential fallout. We saw this on a massive scale in 2008.
Ordinary citizens don’t profit from this at all but are being made to pay for this kind of speculation when it fails. A story repeated in Greece, in Ireland, in Cyprus and in Puerto Rico where working people are being made to pay for these financial highrollers, most of them leaving it to the lawyers to extract their profits while moving on to their next victims.