The Economist and PR: Some things are not right
This week The Economist wrote two articles on PR, both with dubious statements, which need correction and analysis. In the first article, “The bill will come due” The Economist argues for providing PR with Chapter 9 protection. The article calls arguments of moral hazard against Chapter 9 unfair because “Congress itself lumbered the island’s economy with its biggest burdens. It is Congress, after all, that imposed America’s minimum wage on Puerto Rico.” Actually, the Government of PR lobbied for minimum wage to apply to PR for many years before it was implemented. Of course not everyone agreed at the time but the workers rejoiced. It continues saying “Congress has also set some welfare payments at relatively high levels. And, again, Congress imposed costs on Puerto Rico by banning foreign vessels from carrying goods between American ports, making it unnecessarily expensive to ship anything to or from the island.” PR, however, receives much less on welfare than the states and the Jones Act applies to Hawaii and Alaska, and the last time I checked, they are doing much better than PR.
As to emigration, it is Paul Krugman’s position that that is what Puertorricans should do. Moreover, emigrants will not be a burden but rather a asset for the US. Just ask Central Florida.
The Economist also says “Without Congress’s help, a long and messy court battle, accompanied by worsening economic conditions, widespread hardship and mass emigration, seem inevitable.” It seems that The Economist, like most of the US media, don’t understand what a Chapter 9 is or that Judge Rhodes’ handling of the Detroit case is atypical of these procedures. Most bankruptcy cases of this nature have thousands of adversary proceedings, which are lawsuits within the bankruptcy case and in general they are very messy. Also, the cases can take many years. In the San Bernardino more than three years have elapsed without a plan being approved by the Court.
In the second article “When the Salsa Stops” also contains missteps. Yes, Governor García Padilla did say it did not have enough money to pay its debts and defaulted on $58 million dollar debt in August, 2015, for the first time, not as the article say January 4, 2016. And the article fails to explain that in July 2015, it paid many, in August, 2015 $667 million, in December 2015 $397 million and in January $902 million. Therefore, a default of little over $100 million since his claim in June is nothing.
It then goes on to say that the US “granted its residents citizenship in 1917, just in time to draft 20,000 of them for the First World War.” This is a popular but incorrect factoid. Puertorricans would be subject to being drafted as aliens during WWI and in any event, most, like my Grandfather Justo González, were volunteers. Puertorricans have served with great distinction in the US armed forces in all of its wars, including the Banana wars Haiti and the Dominican Republic in 1915. We even had soldiers in the punitive expedition of 1916 on Pancho Villa.
It is true that “in 1952 the island became a self-governing “commonwealth”, subject to American law but excluded from federal income taxes and from voting representation in Washington.” What it does not say is that it was a self-governing territory since at least 1948 when Puertorricans got to elect its own governor. It had been electing its legislature since 1917. Moreover, no territory has voting representation in Washington.
The article continues saying “If Puerto Rico were either an independent country or the 51st state, it could abrogate its central-government debt, because states cannot be sued in federal court. As an “unincorporated territory”, it may not enjoy this privilege.” This is hogwash. States cannot be sued in federal court for collection of moneys due to the 11th Amendment of the US Constitution. Happens to be that PR is considered a state for purposes of this Amendment, see, Vaquería Tres Monjitas, Inc., v. Irizarry, 587 F.3d 464, 478 (1st Cir. 2009), cert denied, 131 S.Ct. 2441 (2011). In addition, no state, including for these purposes PR, can abrogate its debt. The Constitution says “No State shall…pass any…Law impairing the Obligation of Contracts….” ARTICLE I, SECTION 10, CLAUSE 1. Moreover, it would also run afoul of the Fifth Amendment prohibition of takings of property without just compensation.
It also states “Fortunately, a solution could be forthcoming. The Treasury Department has proposed a mechanism that would allow a restructuring of the constitutionally guaranteed debt.” This approach has been rejected by all Republican Congressional leaders and could also run afoul of the Constitution. “The Congress shall have Power To…establish…uniform Laws on the subject of Bankruptcies throughout the United States….” ARTICLE I, SECTION 8, CLAUSE 4. Not only would a law permitting a territory but not a state to file for Chapter 9 protection for all its debts be potentially unconstitutional, but it would politically untenable in Congress. Senator Hatch’s Financial Control Board is more probable and would address the reforms that are necessary to address what really caused PR to get to this situation, i.e. spending instead of producing.
We are used to much better reporting from the Economist than these two.
John Mudd, you are a man among men. A lot of wisdom on your blog. The Economist has also earned published rebukes from Melba Acosta and Richard Carrion, albeit back in the good old days when we were trying to spray paint everything with gold.