A real Hamiltonian response for Puerto Rico

After the U.S. War of Independence, Alexander Hamilton advocated legislation by which the federal government took on the debt that had been incurred by the colonies/new states up to that point. The less indebted states were not too pleased to take on as national debt the burden of the heavily indebted states. However, the welfare of the newly independent United States was served by changing the rules of the game. Hamilton was not afraid to change business rules in order to advance other objectives, such as political independence. Thus, he also advocated granting freedom to slaves who took up arms against the British.

{mosads}Puerto Rico’s circumstances are completely different from those of the U.S. in the 18th century; the territory’s crisis requires different policies. However, as a man born in the Caribbean, Hamilton would have understood the need for sensible policies toward a colony inhabited by U.S. citizens. Puerto Rico would benefit from a Hamiltonian moment from Congress.

Reasonable people are trying to come together on a compromise package to address Puerto Rico’s crisis. It would include a federal financial-control board and a debt-restructuring mechanism. The board would impinge on democracy and the limited home rule granted since 1952 to the territory. The board would have powers granted by the U.S. Congress that would violate the Puerto Rico Constitution. By the same token, Congress would set up a debt-restructuring mechanism that would violate the Puerto Rico Constitution.

Bondholders are being hypocritical with respect to the rule of law. They are asking Congress to respect the Puerto Rico Constitution regarding the payment of bonds, but to violate the Puerto Rico Constitution regarding home rule by establishing a federal control board and regarding pension payments by disallowing their constitutional protection.

In the end, the Puerto Rico Constitution is not above the laws of physics. The Constitution protects both certain debt and pension payments, but if there is no money, there is no money and something has to give. A major pension reform was enacted in 2013 that moved most current employees to a system of defined contribution. However, the funds to pay current retirees are projected to run out in the summer of 2018. In the case of retired policemen and teachers, they only have these pensions because they are not part of the Social Security system. U.S. Rep. Raúl Labrador (R-Idaho) advocates for hedge funds to collect first and retirees without Social Security benefits to come afterward.

While I believe that pensioners should be touched, the right thing to do is for bondholders to take the majority of the burden of the adjustment. This is what the bankruptcy court imposed in Detroit’s bankruptcy case. Moreover, I believe that Puerto Rico government spending must be cut and part of the achieved savings should go to bring teachers and police officers into the Social Security system.

An indication of hardship is the outward migration from a jurisdiction in trouble. Puerto Rico’s population declined close to 10 percent from 2005 to 2015. Airport movement figures indicate a likely population loss of some 3 percent for 2016 alone. This recent figure is similar to Detroit’s pre-bankruptcy population loss numbers. The emergency manager imposed by the state of Michigan upon Detroit steered the city through a bankruptcy process and court-ordered cuts in the value of the debt.

Another indication of human hardship is issues with water services. In a move that has shades of Flint, Mich., the Puerto Rico Aqueduct and Sewer Authority increased water rates to cover operational expenses, but not for the required capital expenditures. Therefore, the island was unprepared for a drought. Last summer, thousands of San Juan households had dry taps up to five days a week. Those who have emigrated to the U.S. enjoy uninterrupted water service seven days a week.

The tentative deal to restructure the debt of the Puerto Rico Electric Power Authority will result in a 20 percent increase in electricity rates this summer and some 40 percent by the end of the year. Curiously, there has been no effort to model scenarios on the impact that these increases would have on variables such as economic activity, taxes collected by the Puerto Rico government and population migration.

Perhaps the most famous piece of satire in the history of the English language is Jonathan Swift’s “A Modest Proposal.” Faced with famine in his country, Ireland, Swift was appalled at the callousness of the English government’s policies. His modest proposal was for the rich to eat poor children, providing nourishment and reducing the number of mouths to feed in one go.

It would be preposterous, of course, to state that the crisis faced by Puerto Rico in the 21st century is similar in scale to the one experienced by Ireland in the 19th century. However, you would have to be blind not to see the parallels of the most powerful nation in the world protecting its own special interests at the expense of human hardship in its colony next door.

Feliciano is president of Advantage Business Consulting.