The U.S. has its own version of Greece in Puerto Rico, and the meltdown could be nearly as ugly when it arrives. . . the territory’s $72 billion debt “is not payable.” Europeans will notice the Greek-like reasons: excessive borrowing, anti-growth policies, human and capital flight, and the refusal of local politicians to address the failure of entitlement state politics. Oh, and don’t forget the policy damage from Washington.
Puerto Rico’s economy has been contracting for nearly a decade, and employment has shrunk by 14% since 2005. Its 12.4% jobless rate would be higher if not for its astonishing 40% labor participation rate, compared to 63% nationwide. The island’s population has declined by roughly 300,000 in a decade as young people flee to the mainland, where they can work as U.S. residents. . .
Rich welfare benefits provide a disincentive to work. A household of three can receive $1,743 per month in food stamps, Medicaid, utility subsidies and welfare compared to minimum-wage take-home pay of $1,159. Employers are required to provide 15 days of vacation and 12 sick days annually and a $600 Christmas bonus. Government employees make up a quarter of the island’s workforce.
To pay for all this, politicians have borrowed and taxed to the limit. Public debt has tripled since 2000 and exceeds 100% of gross national product. In 2006 the territory instituted a 7% sales tax, which this year was raised to 11.5% and next year will become a value-added tax. Since 2013 Mr. Padilla Garcia has raised the petroleum tax to $15.50 from $3 per barrel, imposed a 1% tax on insurance premiums and the gross income of financial institutions, and increased sewage rates by 60%.
Puerto Rican officials like to blame destructive Washington policies, and they have a point. The U.S. minimum wage is a killer for a territory with relatively low labor productivity. A 1992 study from the National Bureau of Economic Research found that Congress’s 1974 minimum wage hike reduced Puerto Rican employment by 8% to 10% compared to what it otherwise would have been. . .