Bipartisan legislation to help resolve the Puerto Rican debt crisis is actively being debated in Congress. The Obama Treasury Department worked with Speaker Paul D. Ryan (R-Wis.) and various House Democrats to hammer out a compromise that would allow the commonwealth to restructure its $70 billion in debt.
This is good news and while I have serious qualms, I believe the bill should quickly pass. Once it does so, a stay of litigation begins immediately, lasting either six months after enactment or until February of next year, whichever is later, providing vital relief from both creditor pressure and a series of large, forthcoming defaults, and giving the island a chance to start turning things around.
I recently noted on this page that, in fact, Puerto Rico has already defaulted several times and is struggling to provide even “gas for police cars and fire trucks [and] electricity for hospitals.” Because the island is a commonwealth, the same bankruptcy options available to cities and states aren’t available there, and some form of restructuring, which this bill provides, is essential to resolve the crisis.
The question then is whether this legislation is worth supporting. There’s no way any bill of this sort would pass this Congress without significant compromise and in a quid pro quo for the debt restructuring, the administration accepted the creation of an outside fiscal oversight board to implement the deal and monitor Puerto Rico’s fiscal and economic policy going forward. Given the extent to which the decades of fiscal mismanagement by the Puerto Rican government got them into this mess, the creation of this board is not de facto objectionable, a view accepted by various progressive supporters of debt restructuring. But critics have raised cogent concerns that are worth examining.
President Obama would be required to select a majority of the oversight board’s members from lists drawn up by Ryan and Senate Majority Leader Mitch McConnell (R-Ky.). Subject to the board’s approval, the governor could reduce the island’s minimum wage for workers under 25 from $7.25 to $4.25. Finally, there’s language in the bill that could be read as putting a thumb on the scale on behalf of creditors.
Let’s consider these issues in light of the need for compromise if this bill is to become law and the 3.5 million people of Puerto Rico can begin to see a way out of an untenable situation that is already extracting serious human costs. Like my old boss, Vice President Biden, used to say, “don’t compare me to the Almighty; compare me to the alternative.”
Regarding the minimum wage, Max Ehrenfreund reported in The Washington Post that while $7.25 is about 40 percent of the national minimum wage, it’s 75 percent of the Puerto Rican median, a very high ratio of this sort, indeed. So I don’t think it’s crazy to raise this as an issue. But I do think it would be a mistake to lower it.
First, the economics. While the minimum wage has a strong “bite” in Puerto Rico, meaning it cuts much higher up the wage scale there than on the mainland, the research does not find much in the way of job loss effects (the research The Post cited on this point has since been revisited and the original findings didn’t hold up). And remember, there’s no Earned Income Tax Credit in Puerto Rico, so while we’re talking younger workers here, nobody can get by on $4.25 an hour (the child poverty rate in Puerto Rico is over 50 percent). Economists Arindrajit Dube and Ben Zipperer evaluate this question of whether the minimum wage is a significant part of Puerto Rico’s growth problem and find little evidence in support of that case. As Puerto Rico’s economy has deteriorated, the bite from the minimum has gone down, not up, so the timing doesn’t match up.
Second, there’s a very pointed equity issue at stake here. Irresponsible government borrowing and spending, along with risky debt purchases by hedge and pension funds, helped get us to where we are today. How do you get from there to: “I know what to do: Let’s whack low-wage workers!”?
It’s up to the governor of the island to decide whether to move forward with this lousy idea. I have a hard time seeing the governor making that call, so this sounds like a smart control to add to the bill.
As per the restructuring, there are a number of passages in the bill that invoke “the best interests of the creditors,” leading some to reasonably worry that the bill might prioritize creditors’ interests over those of its citizens. I share that concern, but remember, in the absence of a debt restructuring, creditors would risk getting nothing. And this language refers to all creditors as a group. No one creditor can undermine the deal by saying it’s not in their individual interest. Both in a legal and economic sense, bankruptcy proceedings are likely to find that what’s best for creditors is for Puerto Rico to restructure, begin to resolve its humanitarian crisis, pull out of recession, and generate some growth.
Senator and presidential candidate Bernie Sanders has suggested a role for the Federal Reserve in resolving the crisis, through similar bailouts to those the Fed enacted in 2008 when Lehman, AIG, and other “systemic” institutions were similarly mired in unsustainable indebtedness (journalist David Dayen provides a useful discussion of this idea, along with a strong set of arguments against the bill). It’s an interesting idea, but I see two problems with it.
First, the Fed won’t intervene unless there’s systemic risk. While the risk to millions of Puerto Ricans is clearly a crisis that Congress must address, the Fed doesn’t break the glass unless they believe there’s a clear threat of contagion to the broader economy (and, as Dayen points out, Dodd-Frank raises the bar to such Fed bailouts). One could certainly argue, as Sanders convincingly does, that the Fed should help. My point is that since the Fed sees no systemic risk here — even the municipal debt market has thus far shrugged off the PR defaults — it won’t intervene.
But the second problem is more serious. While not a taxpayer-funded bailout, this would still be a bailout, not a restructuring, and would thus leave Puerto Rico deeply indebted (i.e., to the Fed).
This bill is far from perfect. But it does offer the only lasting solution, the one wherein Puerto Rico can come out from under its debt burden and figure out a way to generate real growth. Absent that, I see little hope for resolving the crisis. Puerto Rico’s present and future depend on finding its way onto a growth path ASAP. This bill doesn’t look perfect, but given that we must go with the Congress we have, not the Congress we might want, I’m convinced it provide the island its best chance to find that pathway.