US plan for Puerto Rico isn’t good enough

Douglas Holtz-Eakin, president of the American Action Forum

Puerto Rico, facing a serious debt crisis, has asked for and deserves help from the U.S. government.The commonwealth is a U.S. territory and its residents are United States citizens. Puerto Rico has seen real output plummet since 2005, and forecasts anticipate essentially stagnant territorial income for the next decade. Unemployment there is expected to average nearly 13 percent over the next 10 years. Puerto Rico is suffering the loss of population and declining labor-force participation.

The Obama administration’s recently announced plan to address the fiscal crisis is not going to cut it.

Getty Images A pedestrian walks past a building painted with graffiti in San Juan, Puerto Rico last June.

Getty Images
A pedestrian walks past a building painted with graffiti in San Juan, Puerto Rico last June.

In essence, it consists of a broad new bankruptcy regime, increased Medicaid spending, a “tax credit” for labor supply, and a financial control board. The most prominent policy debate to date has been the possibility of providing Chapter 9 bankruptcy protection for governmental-owned entities; the administration expanded this idea to include the government itself. It is always dicey to change the rules midstream. Moreover, bankruptcy would not increase economic growth or alter the fundamental fiscal trajectory. There may be a place for bankruptcy protection of some sort, but this idea should be at the end of the line; not the front.

Similarly, there is nothing about increased Medicaid spending that will help the economy or budget problems. It may be the case that superior health policy would involve more federal dollars, but that is an issue separate from the fiscal crisis.

The administration argues that Puerto Ricans should be allowed access to the Earned Income Tax Credit. The EITC has been successful in raising labor supply – particularly among single mothers – but it is odd to argue that the island’s workers should receive a federal income tax credit when they do not pay the income tax. This is a proposal to pay the Puerto Ricans to work, an outcome that is better generated by broader economic reforms.

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