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Trejos: Don’t let Puerto Rico declare bankruptcy

Jose Trejos, Columnist

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A couple of weeks ago, the famous comedian John Oliver teamed up with Lin-Manuel Miranda, the creator of “Hamilton,” to raise awareness about Puerto Rico’s economic crisis. Puerto Rico’s government has spent massive amounts of money to maintain a variety of public services and is currently unable to pay in the middle of a desperate recession. Puerto Rico faces a seemingly insurmountable debt of $72 billion in bonds and $40 billion in unfunded pensions, and has already defaulted on a $422 million dollar payment.

The government is now being forced to consider closing schools and cutting pensions and social services. In response, Oliver and Miranda aggressively call for one specific policy: rewriting Section Nine laws so Puerto Rico can file for bankruptcy. Although it is good that they draw attention to a crucial issue, they are lacking in much-needed nuance. Allowing Puerto Rico to file for bankruptcy would be a catastrophe for the commonwealth.

Allowing Puerto Rico to declare bankruptcy would provide a short-term benefit of lowering the current debt, but would cause worse economic problems in the long-run. Declaring bankruptcy would indubitably make it much harder for the island to borrow money in the future and force it to pay much higher interest rates. The main drivers of the Puerto Rican crisis are not fading away, but rather getting worse. Puerto Rico’s job market is so terrible that the island has been experiencing a net population loss for at least the last decade and less than half of the adult population is employed or looking for a job. And yet, the Puerto Rican government, wary of losing future elections, has refused to cut the real driver of the government’s debt: its massive, unsustainable pensions and entitlements. If Puerto Rico is allowed to declare bankruptcy, it will only be a few years before it finds itself unable to pay its pensions and services, except that with the precedent of a bankruptcy, it would have to pay colossal interest rates the second time around.

Puerto Rico’s more fundamental problem is the lack of political willpower to tackle economic realities. The minimum wage of $7.25 in Puerto Rico is considered to be far too high, and a key cause of its economic situation, but Democrats refuse to even consider cutting it. They have a massive and overpaid public sector they can never hope to sustain. The worst issue facing the Commonwealth is the absurdly massive pension debt, but the governor adamantly refuses to even consider cuts. Puerto Rico should be dedicating its resources to a coherent plan to fix its recession, perhaps by investing in education and job training, or attempting to streamline regulations, or implementing tax incentives for companies or funding research and development or targeted infrastructure projects, to name just a few possibilities. But it won’t. Unfortunately, politicians who try to cut entitlements tend not to win elections, and the left-wing would jump to attack any attempt to bring businesses back to the territory as heartless attacks on the poor. The powerful and wealthy public sector unions in particular militantly refuse to even consider taking cuts.

This is why it is very fortunate that the U.S. can deny Puerto Rico the ability to declare bankruptcy. Leveraging the right to a bankruptcy and a potential bailout can force the incompetent government to adopt the necessary reforms. Although reforms may be painful, the people of Puerto Rico will be much better off free of their perpetual recession even if they must sacrifice some benefits. If Puerto Rico is allowed to continue ignoring its financial situation by declaring bankruptcy without the reforms, the situation will repeat itself, much worsened, in a few years.

This situation is not just restricted to Puerto Rico. Detroit famously succumbed to a similar situation, with devastating human costs. Illinois faces a budget deficit of $9 billion, arguably even less sustainable than Puerto Rico’s. Out of the 50 states, Illinois faces the largest shortfall in funding pensions, the expense that pushed Puerto Rico into bankruptcy. State Democrats have repeatedly refused to stop spending money that simply does not exist and merrily refuse to consider the reforms that Gov. Bruce Rauner hopes to impose on the public sector.

In a few years, the situation that has brought Puerto Rico into mass poverty may repeat itself in Illinois and other states that decide to bravely fight the forces of mathematics. Any individual spending cut will always hurt, and it is very easy to argue that they cause suffering. However, as Illinois and other states fall into increasingly desperate situations, we should always remember the steep price to be paid if every time we make the easy choice of continued spending. Northwestern students and the American people should learn the lessons of Puerto Rico’s budget crisis and not make the same mistakes that impoverished the once-prosperous people of Puerto Rico.

Jose Trejos is a Weinberg freshman. He can be contacted at josetrejos2019@u.northwestern.edu. If you would like to respond publicly to this column, send a Letter to the Editor to opinion@dailynorthwestern.com. The views expressed in this piece do not necessarily reflect the views of all staff members of The Daily Northwestern.

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