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Tue December 10, 2013
Puerto Rico Bound For Bailout?
Originally published on Tue December 10, 2013 10:59 am
CELESTE HEADLEE, HOST:
This is TELL ME MORE from NPR News. I'm Celeste Headlee. Michel Martin is away. We're going to spend some time today talking about money. In a few minutes, we'll ask how you can make some extra cash by selling either the junk around your house or the junker in your driveway.
But first, a look at a much bigger and more serious economic issue. The national unemployment rate is at its lowest level in five years. It's now down to 7 percent. But in Puerto Rico, it's more than double that. The latest figures put unemployment there at nearly 15 percent. That's worse than any state in the continental United States. And we're joined by Michael Fletcher who traveled to Puerto Rico to investigate the issue. He's national economics reporter for the Washington Post, and he joins us from their offices in Washington, D.C. Michael, thanks for joining us.
MICHAEL FLETCHER: Good to be here.
HEADLEE: And also with us, from her office in Puerto Rico, we have Rosario Rivera. She is an economics professor at the University of Puerto Rico. Rosario, welcome.
ROSARIO RIVERA: Hi, thank you. Thanks for having me.
HEADLEE: So, Michael, during your reporting from Puerto Rico, I understand they have about $70 billion in debt. And just to put that into context, the city of Detroit filed for bankruptcy with $18 billion in debt and some change. Help us understand the gravity of the economic situation there.
FLETCHER: It's probably far more serious than Detroit. As you note, Celeste, it's not only a bigger debt amount, but the economy is in equally or probably worse straights than Detroit's is. The labor force participation, for example, in Puerto Rico is 40 percent. And think about that. That means 3 out of 5 working-age people are out of the labor force - not unemployed, but out of the labor force - not even looking for work. They've been in a recession for, I think, it's going on eight years now. There's no economic growth to speak of. A lot of the economy is existing underground, essentially. The government's having a hard time collecting tax revenues.
So you kind of have this situation where the string is being pulled on both ends. You really need to have some kind of government investment to stimulate the economy, to stimulate growth again. But there's no money to do that because all the money that the government can get, they have to sort of turn around to pay off this humongous debt. And they've taken a lot of austerity steps in the government, but it feels like they maybe are not enough.
HEADLEE: Well, Professor Rivera, you've lived on the island your entire life. What does this look like on a daily basis? When we talk about 40 percent participation level and an underground system of employment, what does that mean?
RIVERA: Well, as Michael said, we've been facing what we can call - it's more than a recession. It's not a recession anymore. It's more a structural problem, some sort of depression - economic ongoing depression that has been reducing our GNP almost by 14 percent since the recession started in 2006. And what we are looking at is the result of what has been an economic trend since the '70s - an economy that was slowing down, that was losing kind of its industrial base for some years.
And then we have, in 2006, the result of that. And what we are having is, like, basically, say, seven to eight years of recession - of structural recession. And we see a labor market that's being reduced since 2006 and an informal economy that is growing...
HEADLEE: Well, informal...
RIVERA: ...Basically because we are losing the productive economy base.
HEADLEE: Let me have you pause there for just a second. And, Michael, can you explain what informal economy means?
FLETCHER: It's what we in the states, you know, here on the mainland, call the underground economy. It's where...
FLETCHER: ...People are doing work for people, but kind of off the books or under the table. So an accountant may do the books for a business but not bill that. And the problem with that is, OK, the accountant makes money, but the government is unable to tax that.
RIVERA: That's right.
FLETCHER: And that's a huge, huge problem for Puerto Rico 'cause they really have to figure out a way to step up their revenue generation. And a big part of their problem is the inability to collect taxes...
RIVERA: That's right.
FLETCHER: ...Knowing that they have very favorable tax structures for corporations. That's been kind of their calling card in terms of economic growth in the past. And they have to figure out a way, I think, to extract more money from foreign corporations without running them off the island. And one tax break went away in 2006. It was phased out over 10 years. And that's been kind of their proximate cause for the kind of the current, more extreme downturns.
So I don't envy Governor Garcia Padilla. He has a very, very tough job. It feels like he's getting pressure on both sides. And meanwhile, of course bondholders on Wall Street are saying, you guys have to pay or you will not be permitted back into the money market, into the capital markets and, which as we know, would be the death knell for any government.
HEADLEE: If you're just joining us, we're talking about Puerto Rico's economic problems. And we're speaking with Michael Fletcher, who you just heard, national economics reporter at The Washington Post. And also Rosario Rivera, economics professor at the University of Puerto Rico. Rosario, give me an idea of what this looks like when you're walking around the streets of Puerto Rico. If there's 3 out of 5 people out of work, are there just people sitting at home? What's happening there?
RIVERA: The thing is that because of the reduction on the formal labor market, you have a lot of people working. And as Michael says, we have a lot of people working underground. So we don't quite see them. The distortion here is that because you're working on the informal or underground economy, you cannot say that you are working, so you have access to social transfers, to social programs. And what you see is a distortion that is, oh, you have 39 percent of the people receiving social programs, so they are not working. And that is a distortion because...
HEADLEE: I see.
RIVERA: ...Both of them are working...
HEADLEE: It skews the numbers.
RIVERA: ...But because that is informal work, you don't report it. You don't pay taxes. You hold a lot of cash. That sums up with the social transfers. Then you have a lot of cash available to spend. That's why consumption here hasn't - basically hasn't had a reduction.
HEADLEE: I see. Consumption hasn't had a reduction. But...
RIVERA: That is right.
HEADLEE: ...As Michael was explaining, there is a problem with taxes. All right, so...
RIVERA: That is right. And that's because the tax system is very burdensome. It's very heavy for the working class.
HEADLEE: I see.
RIVERA: It's regressive. It's regressive. So it's a disincentive to work because you have to pay so much taxes. And then it's more attractive to be on the underground or receiving social aid or social programs because working is highly taxed.
HEADLEE: Right. So, Michael, we were talking about this being the government's problem. And you were talking about the government of Puerto Rico. But what about the federal government? The White House created an economic advisory team on Puerto Rico. What is the U.S. government's responsibility here? Or what kind of steps could they take if they had the will?
FLETCHER: I think the White House is very much interested in keeping the Puerto Rico government afloat, essentially. They don't want to use the word bailout because they know a bailout would be a tough thing politically.
FLETCHER: But they know they cannot have Puerto Rico default. It would be catastrophic. Puerto Rico has built into its constitution strong protections for investors. So...
FLETCHER: ...If you were to follow the Constitution through a default, the governor would be obliged not to pay government workers...
FLETCHER: ...But then turn around and give that money to bondholders. But imagine the social chaos that would ensue if that were to happen.
RIVERA: And that...
FLETCHER: So as a practical matter, I don't think that that can happen. And we've seen fallout already. Puerto Rico has gone into its biggest exodus of people...
FLETCHER: ...Since the 1950s in the last couple of years alone. Between 2010-2012, one and a half percent of the population has left the island. And most of that is headed to the United States - New York, Orlando, Philadelphia, Tampa, Miami - where there, you know, are huge Puerto Rico populations. And particularly the middle class, even though it really extends beyond the middle class - but certainly people who are middle class and can get jobs on the mainland are going for them.
HEADLEE: You know, Rosario, this - what the situation that you are both describing sounds not very much like Detroit, but more like Greece - the country of Greece to me, when you're talking about the government not paying government workers and paying off bondholders. Is there any danger of unrest in Puerto Rico? Rosario?
RIVERA: There has been a lot of, you know, comparisons between Greece and Puerto Rico. The thing is that unrest in Puerto Rico is not likely as we saw in Greece or other countries having the same fiscal crisis because there is quite an easy solution to each individual crisis. And it's taking a plane to the United States.
RIVERA: So that is like an escape valve. So you can release the pressure of the crisis because you can solve your problem rather easily.
RIVERA: You take a plane and you go. And you leave the country. And that has a lot to do - that has everything to do with the political relationship with the United States because we have that ease of movement. That's why we are...
HEADLEE: Right, there's no immigration problem.
RIVERA: like a migrant country for most of our lives - since 1898.
HEADLEE: So, Michael, what's the next step here? With this economic advisory team coming out of the White House, are we just waiting for someone to talk about what would be the best way to solve Puerto Rico's problem that clearly goes back decades?
FLETCHER: Yeah, I think so. I mean, for the time being, I think their cache full of problems is OK, but the time being is a number of months. The White House has downplayed, so far, this advisory team. They don't want to call it a financial control board. But tellingly, there's no end date for this advisory team's being in place. So I think what they want to do is really get inside the government. You know, see that there - what kind of decisions are being made fiscally and try to clamp down. But it feels to me like there's going to have to be some kind of infusion of money at some point - or something - to keep things going.
FLETCHER: The pensions are poorly funded. Cash flow's OK for the moment, but it's very precarious.
HEADLEE: And is the U.S. government in any way financially responsible? Should Puerto Rico default?
FLETCHER: Not directly, except it's part - Puerto Rico is part of the United States.
FLETCHER: That's the thing, you know. They're a U.S. territory. So again, if you had - say you had to default, and say you got into a situation where government workers aren't being paid - I don't think that can stand for long. Just - the social contract would be shredded if...
FLETCHER: ...Something like that happened. And I feel like the United States would be obliged to step in with some kind of bailout.
RIVERA: You have to take into account also that U.S. retail - principal retail stores are here in Puerto Rico.
RIVERA: If you go into the sales reports on the district sales of a lot of those great retail chain stores...
HEADLEE: Yeah, they have...
RIVERA: ...The main - major money-making machines are here.
HEADLEE: Right, and we're going to have to end it there, Rosario. Unfortunately, I hate to interrupt you. But we're out of time. Rosario Rivera, economics professor at the University of Puerto Rico. She joined us from her office there. And Michael Fletcher, national economics reporter for The Washington Post. And he joined us from their newsroom in Washington, D.C. Thanks to both of you.
FLETCHER: Yeah, thank you. Transcript provided by NPR, Copyright NPR.