Will Puerto Rico Tip Over – Economically?

At an infamous congressional hearing on military readiness in the Pacific, Rep. Hank Johnson (D-Georgia) asked the Admiral of the U.S. Pacific Command whether sending more Marines to Guam would “so overly populated that it will tip over and capsize.” While informed that the military did not anticipate such an event happening, Johnson may have been ahead of his time. Puerto Rico, another U.S. island territory, may be past its financial tipping point sending the whole government toppling into the sea.

Puerto Rico has been at the forefront of decades of spending liberal policies and its $72 billion debt has come due. This past June, Puerto Rico Governor Alejandro Padilla said “the debt is not payable.” The territory has been forced to borrow money simply to pay its outstanding bills. Sadly, rather than implementing radical measures to get shrink government and get the economy moving again, Padilla and his supporters are doing what General Motors and others have done before them — they want a bailout.

The bottom line is that changing federal law to bail out Puerto Rico or allowing them special treatment in bankruptcy would offend free market principles and harm all the investors who relied on Puerto Rico to pay off debts. If Puerto Rico is bailed out, they will have zero incentive to reform the fiscal situation of an island that is a financial mess. Structural reforms are needed and Puerto Rico does not need special treatment not extended to American cities experiencing the same problems.

This is just like the Wall Street bailout, because the same investors who stuck it to the taxpayers with TARP are the ones trying to get bailed out today. Conservatives need to dig in and kill this terrible idea. The House Freedom Caucus and members like, Reps. Jim Jordan, Justin Amash and Thomas Massie take note, because we need you to step up and stop the establishment from another government bailout.

House Minority Leader Nancy Pelosi and Speaker Paul Ryan have floated a number of trial balloons designed to protect the islands big spenders.  Pelsoi has introduced legislation that would temporarily block any legal action by creditors while Congress moved to restructure the island’s debt and Ryan “agreed to take action on restructuring legislation by March 31, 2016…”

This is troubling to say the least.

Benjamin Zycher wrote for The Hill that “the absence of government action can be better than ill-advised government action. The latest illustration of this eternal truth is Senate Bill 1774, which would amend federal law to make Puerto Rico government corporations eligible for Chapter 9 bankruptcy retroactively.” Zycher correctly identifies this as a mistake. He further gives some background “Puerto Rico is the third-largest issuer of municipal bonds in the U.S., with debt now totaling about $73 billion. Legislation enacted by Congress in 1984 prevented it and its various municipal agencies and bureaus from using Chapter 9. That has had the effect of reducing the interest rates that they have had to pay because purchasers of the bonds had greater resulting confidence in repayment. Moreover, Puerto Rico and its various borrowing units have been granted a nationwide tax exemption for their bonds — a preference bestowed upon no U.S. state — thus reducing Puerto Rico’s borrowing costs even more.”

And this is merely the beginning. The economics and politics of this bailout stinks. A bankruptcy is no better, because it will set a precedent that will crush taxpayers. It would be a smart move for the federal government to just say no to this horrible idea and for conservatives to step up and block it right now.