Puerto Rico May Be the Next Detroit

Puerto Rico has a $87 billion debt. Half the men in Puerto Rico don't work. One in six working-age claim disability benefits.


Anyone talking statehood for Puerto Rico really needs to look at these numbers. We have some messed up states, but Puerto Rico is just Detroit on a larger scale.

While Detroit has preoccupied Americans with its record-breaking municipal bankruptcy, another public finance crisis on a potentially greater scale has been developing off most Americans’ radar screens, in Puerto Rico.

Puerto Rico has been effectively shut out of the bond market and is now financing its operations with bank credit and other short-term measures that are unsustainable in the long run. The biggest concern is that the territory, which has bonds that are widely held by mutual funds, will need some sort of federal lifeline, an action for which there is no precedent.

The only lifeline should involve cutting Puerto Rico loose. It's a hole and we've shoved enough money down it.

Puerto Rico, with 3.7 million residents, has about $87 billion of debt, counting pensions, or $23,000 for every man woman and child. That compares with about $18 billion of debt for Detroit, with a little more than 700,000 people, or about $25,000 for every person in the city. Detroit and Puerto Rico have been rapidly losing population, leaving a smaller, and poorer, group behind to shoulder the burden.

And the population has been heading to the United States where they vote Democratic almost down the line. Part of the shift in Florida happened because there are more Puerto Ricans and fewer Cubans.

Meanwhile the average income in Puerto Rico was around 12K which leaves them even more incapable of paying off the debt than Detroit. And their unemployment rate is 13.9%.

Half the working-age men in Puerto Rico do not work. Officially, only 46% of those who are not pursuing a degree have formal jobs, compared with a United States average of 76%.

Federal transfer payments to Puerto Rico rose sharply in the 1970s. Some programmes have been modified since then, but transfers still make up more than 20% of the island's personal income. These federal handouts reflect the sensibilities of a wealthy country. So by Puerto Rican economic standards, they are huge. And the more a man or woman earns through paid work, the more they decrease.

Puerto Ricans are eligible for federal disability payments, for example, through Social Security. Ms Enchautegui and Mr Freeman point out that, in the territory, federal disability allowances are much higher than the United States average as a share of wages and pension income. Unsurprisingly, therefore, one in six working-age men in Puerto Rico are claiming disability benefits.

Many families do not view the federal handouts as temporary. Neither does Raúl Vega, who owns a consumer-finance outfit in Aguadilla. His firm treats the benefits as income when deciding whether to lend people money for new televisions.

What do Puerto Rico's men do all day? Some get into trouble. But many others hang out in pleasant places that require little money, such as beaches, shopping malls and the armchairs in Borders bookstores. They also watch plenty of television

One idea being considered is that Congress might establish a financial control board, perhaps like the one that helped guide the District of Columbia through a turbulent period from 1995 to 2001. One of that board’s first steps was to appoint a financial official with power to override the mayor and City Council.

So Congress would have to end up running Puerto Rico while battling constant accusations of racism. Because Puerto Rico's problem is that it's a welfare state that it can't afford to pay for.

But let's look at how Puerto Rico got into this mess.

In each of the last six years, Puerto Rico sold hundreds of millions of dollars of new bonds just to meet payments on its older, outstanding bonds — a red flag. It also sold $2.5 billion worth of bonds to raise cash for its troubled pension system — a risky practice — and it sold still more long-term bonds to cover its yearly budget deficits.

Mutual funds in particular were eager buyers; by adding Puerto Rican debt to an otherwise ho-hum portfolio, they could lift the overall yield without seeming to add much risk.

That cycle — a bountiful supply of debt feeding a seemingly insatiable demand — sputtered to a halt this summer, leaving Puerto Rico with more debt than it can easily pay. Its government must still borrow to finance its operations. Now it will cost much more to do so.

If this sounds familiar, it should be. It's how a lot of American cities and the country as a whole got into this mess. And Puerto Rico is a welfare state that points us to where we will end up with enough Democrats in power.

Cut them loose.