Paul Krugman: How the US Govt Can Prevent Financial Catastrophe in Puerto Rico

Anyone who pays attention to the news knows that Puerto Rico has hit some hard times. How bad? Not as bad as Greece, fortunately, thanks mostly to the fact that poor Puerto Ricans still benefit from the U.S.'s social safety net, Paul Krugman points out in Monday's column.


The island is a victim of a "severe economic downturn," Krugman writes, and the fact that its government, "was slow to adjust to the worsening fundamentals, papering over the problem with borrowing. And now it has hit the wall."

At one point Puerto Rico was a manufacturing center and was boosted by a federal tax break, Krugman explains, but no more.

These days manufacturing favors either very-low-wage nations, or locations close to markets that can take advantage of short logistic chains to respond quickly to changing conditions. But Puerto Rico’s wages aren’t low by global standards. And its island location puts it at a disadvantage compared not just with the U.S. mainland but with places like the north of Mexico, from which goods can be quickly shipped by truck.

The situation is, unfortunately, exacerbated by the Jones Act, which requires that goods traveling between Puerto Rico and the mainland use U.S. ships, raising transportation costs even further.

Puerto Rico, then, is in the wrong place at the wrong time. But here’s the thing: while the island’s economy has declined sharply, its population, while hurting, hasn’t suffered anything like the catastrophes we see in Europe. Look, for example, at consumption per capita, which has fallen 30 percent in Greece but has actually continued to rise in Puerto Rico. Why have the human consequences of economic troubles been muted?

The main answer is that Puerto Rico is part of the U.S. fiscal union. When its economy faltered, its payments to Washington fell, but its receipts from Washington — Social Security, Medicare, Medicaid, and more — actually rose. So Puerto Rico automatically received aid on a scale beyond anything conceivable in Europe.

Some conservatives might argue that the U.S. is carrying Puerto Rico with its low rate of labor force participation -- Krugman digs into the issue and finds that this probably has more to do with the fact that the young and able-bodied probably leave the island in search of better opportunities, and the less able stay home, and make more use of the social safety net. 

"And how terrible is that, really?" Krugman writes. "The safety net is there to protect people, not places. If a regional economy is left stranded by the shifting tides of globalization, well, that’s going to happen now and then. What’s important is that workers be able to find opportunities somewhere, and that those unable for whatever reason to take advantage of these opportunities be protected from extreme hardship."

The picture is by no means rosy. Puerto Rico is having trouble maintaining services, and too much emigration could mean a disappearing tax base. One scary factor: Hedge funders have bought up a lot of a lot of the island's debt, and want to "basically to destroy the island’s education system in the name of fiscal responsibility," according to Krugman.

The lesson is that sometimes so-called "Big Government" can prevent hard times from turning into a total catastrophe.

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