NEW CASTLE, Pa., April 11, 2016 – Puerto Rico is the Greece of the United States. Like Greece, Puerto Rico is a tourist paradise shifting toward a service industry economy that has failed to build a sufficient production economy, while assuming billions of dollars in outside debt.
Like the highly publicized and ongoing Greek debt crisis, the solution to the problem may involve illiberal economic policies that create economic hardships for the residents of the U.S. territory by slashing essential government services and public employee pensions benefits.
Facing a default on the First of May and dwindling reserves, Puerto Rican lawmakers passed the “Puerto Rico Emergency Moratorium and Financial Rehabilitation Act,” affording Governor Alejandro Garcia Padilla new powers he immediately used to declare a state of emergency at the Commonwealth’s Development Bank to halt the payout of a $423 debt payment due May 1.
Unlike the Greek crisis, however, few politicians are actually focusing on the Puerto Rican crisis, even though Puerto Rico is a part of the United States. Unlike the Eurozone’s response to the situation in Greece, the U.S. has no intention of bailing out Puerto Rico. In fact, Congress appears more concerned about how states facing similar debt issues, unfinanced pension liabilities and economic decline might respond when they may face default.
Sadly, the Puerto Rico story is a familiar one in the United States and Europe. As Puerto Ricans are US Citizens, they can migrate to the US mainland. This, of course, means increasing the social welfare burden of other U.S. states and cities while increasing competition for jobs among American workers.
Although the Puerto Rican economy had a thriving manufacturing sector, it has not proved enough to sustain the needs of the local population. Ever since the United States stopped offering Puerto Rico preferential tax treatment in 2006, the U.S. territory has suffered from economic decline.
Unfortunately, the American economy does not offer very good prospects for those who might be forced to leave their homeland of Puerto Rico. They are likely to find a similar economic situation right here, given the local basket cases of Rust Belt cities like Detroit, the looming disaster in Illinois, and similar issues in other jurisdictions.
Although it is easier to focus on the debt troubles of these struggling areas, insufficient job creation, growing income inequality, rising costs and an increasing number of impoverished families demonstrate these widespread debt issues are symptoms of an underlying economic problem that is far too common.
The real problem is that the Puerto Rican government does not collect enough revenue to pay its debt and cannot do so without financially crushing its citizens. What Puerto Rico lacks is an economy capable of providing for the needs of its own people.
The national economies of the world are no longer driven to serve the needs of their citizens and help them to become more productive. They have been transformed to cater to the needs of the global economy and that economy needs more consumption and more production, not more producers. In other words, the global economy relies on continual increases in consumer spending and continual increases in the productivity of workers, which means there is less need for more workers.
As the world’s largest and most successful economy, the United States is a prime example of why the global economy is not serving the needs of people and why it is unsustainable.
Before the 2008-2009 Great Recession, wealth distribution here was narrowing significantly, the median income was shrinking, and the U.S. trade deficit was exploding.
Consumer spending was reasonably strong while the stock market was rapidly expanding and home prices were exploding. Regrettably, much of this economic activity was financed by cheap, easily obtained credit.
At the same time, policymakers decided the future of the economy was in financial services and intellectual property, which most people do not own. Holding onto jobs that required manual and skilled labor was, therefore, a waste of a time. These “throwaway jobs” could be outsourced to help boost the profits of corporations to increase stocks and dividends to benefit investors who owned these companies.
The problem is that most Americans still rely on jobs for their primary income, not capital gains. Because service industry jobs often pay poorly and the Internet economy offers too few opportunities to obtain a decent, living wage, America still needs those vanishing production jobs.
At the onset of the Great Recession, reality hit home when people suddenly realized the fuel of the American economic engine consisted of poorly vetted and unsustainable debt, particularly in retail real estate. In turn, the world discovered consumption was not the engine of the economy. Instead, the driver was the kind of overconsumption being encouraged by most Western economies—the kind of overconsumption financed by bad debt.
The unfortunate truth about excess debt and overconsumption is that they cannot be sustained. More importantly, the world cannot continually consume more and pile on more debt to pay for that consumption.
The common thread uniting the economies of the world appears to be a mountain of debt that cannot be repaid and the desire of individuals to finance consumption they cannot afford. For both consumers and creditors, not to mention their respective governments and institutions, this does not bode well. For the producers in particular, a sudden loss of customers will require a painful readjustment. But there is still a chance to lessen the impact of a global economic catastrophe.
First, the economies of the world need to refocus their attention on production and providing for the needs of their local population before they use their excesses production to feed the global economy.
Second, creditors and/or governments, with the leverage to force creditors to make concessions, need to be willing to forgo expected profit levels on their loans to ease the burden of debt. If they do not, they will quickly discover an debt-fueled economy funded by loans and credit that cannot be repaid is not a real one.