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Redeeming an Island Paradise

We meet today because Puerto Rico borrowed billions of dollars to fund bloated government salaries and pensions, sumptuous social welfare programs and corrupt public contracts.  It is now more than $70 billion in debt, overwhelmed by poverty and suffering an unprecedented population exodus of citizens fleeing these policies.

The question now is what to do.  Its failed political leaders want to re-write the law to allow it effectively to declare bankruptcy. They point to city governments that have this option.  But our state governments and the Commonwealth of Puerto Rico are different. Their debt is backed by the full faith and credit of their constitutions.  Because of this, they pay much lower costs for their borrowing — specifically because of this constitutional guarantee.

If Congress re-writes the law for Puerto Rico, every lender to every state will no longer trust the security of their own loans.  They will naturally recognize that if Puerto Rico can get de facto bankruptcy protection from the loans to which it had pledged its full faith and credit, so too can California, Illinois and New York.

If these loans are not secure, the interest rates will skyrocket.  Taxpayers in every state will end up paying through the nose to service debts that are no longer perceived as being secure.

In response, we hear that this isn’t really bankruptcy.

First, let’s be clear.  This is bankruptcy.  Title III of the bill, starting on page 63 incorporates no fewer than 98 sections of federal bankruptcy law and applies them to Puerto Rico.

Second, we’re told that states don’t need to worry because bankruptcy cannot apply to sovereign states – only territories.

This, too, is nonsense.  Chapter IX specifically provides for municipal governments to declare bankruptcy and municipal governments ARE divisions of the states.  If bankruptcy can be constitutionally afforded to divisions of the states, it can obviously be afforded to the states themselves.  All that it takes is an act of Congress.  With this bill, Congress clearly declares that it is perfectly willing to undermine the full faith and credit provisions of a territorial constitution and therefore perfectly capable of undermining the full faith and credit provisions of any state constitution.

Some have proposed imposing an all-powerful oversight board of appointed officials in exchange for this bankruptcy protection.  But this doesn’t solve the problem of preserving the full faith and credit of state debts.  It still re-writes the rules after the fact and calls into question the reliability of every constitutional debt owed by every state in the union.

So what should we do?   I suggest two remedies.

First, honor the rule of law and maintain the terms under which these loans were originally made.  This would be a powerful signal to bond markets that the United States stands by its promises, even when it is inconvenient. Until the prospect of a congressional bailout arose, Puerto Rico was negotiating terms of a debt restructuring with the mutual consent of its creditors. Under current law, it is in the interest of both sides – debtor and creditor – to work out terms that both can live with to restructure and repay this debt.  It is also in the interest of the people of Puerto Rico to hold accountable the elected officials that got them in this mess.

But that alone is not enough.  The Puerto Rican economy is in a death spiral as its population flees and new investment is repulsed by crushing taxes and leftist economic policies.

Puerto Rico is an island paradise that people should be flocking to – not fleeing from.  Change these policies and Puerto Rico could become the Hong Kong of the Caribbean.

Here’s what I would suggest:

  • Exempt Puerto Rico from the Jones Act which makes it virtually impossible for the Island to trade with the mainland.
  • Change the corporate tax laws to allow Puerto Rican companies to be taxed territorially to begin repatriating American overseas investments.
  • Exempt Puerto Rico from the stultifying effects of environmental and labor laws that aren’t necessary to protect the public’s health and safety.

Puerto Rico faces both crisis and opportunity: a crisis born of slavish devotion to failed leftist economic policies and an opportunity to replace those policies with proven free market solutions that can create a fresh start for the people of Puerto Rico and shine as a beacon of hope for other similarly afflicted states.

I fear the net result of this legislation will be to spread the crisis to other states with heavy debts by dramatically increasing their debt service costs, while squandering the opportunity to revive the Puerto Rican economy and restoring the American dream to that beautiful island.