The problem with Puerto Rico is not its debt. The problem is not the vulture funds, all demanding immediate payment. The problem is that Puerto Rico, a tiny island in the Caribbean Sea, is staring into the rifle barrel of the entire US capitalist system.
Sooner or later, there will be an explosion.
A HISTORY OF SHOCK
For 118 years, Puerto Rico has provided a textbook illustration of Naomi Klein’s Shock Doctrine: The Rise of Disaster Capitalism.
The US “liberated” Puerto Rico from Spain in 1898. Later that same year, Hurricane San Ciriaco destroyed thousands of the island’s farms and nearly the entire year’s coffee crop. Of fifty million pounds, only five million were saved.
Inauguration of Charles Herbert Allen, the first US governor of Puerto Rico
American hurricane relief was bizarre. The U.S. government sent no money. Instead, the following year it outlawed all Puerto Rican currency and declared the island’s peso, whose international value was equal to the US dollar, to be worth only sixty American cents. Every Puerto Rican lost 40% of his or her money overnight.
In 1901, the US passed the Hollander Act, which raised the taxes on every farmer in Puerto Rico.
With higher taxes, crippled farms, and 40% less cash, the farmers had to borrow money from US banks. But with no usury law restrictions, interest rates were so high that within a decade, the farmers defaulted on their loans and the banks foreclosed on their land.
The US, which was undergoing its industrial revolution, then turned a diversified island harvest (coffee, tobacco, sugar, and fruit) into a one-crop, cash-cow economy.
By 1930, all of Puerto Rico’s sugar farms belonged to 41 syndicates. 80% of these were US-owned and the largest four syndicates – Central Guanica, South Puerto Rico, Fajardo Sugar and East Puerto Rico Sugar – were entirely US-owned and covered over half the island’s arable land.
With no money, crops, or land, Puerto Ricans sought work in the cities. When the Puerto Rican legislature enacted a minimum-wage law like the one in America, the US Supreme Court declared it unconstitutional. This decision was reached despite AFL-CIO President Samuel Gompers’ testimony that “the salaries paid to Puerto Ricans are now less than 50% what they received from the Spanish.”
To make matters worse, US finished products – from rubber bands to radios – were priced 15% to 20% higher on the island than the mainland. Again, Puerto Rico was powerless to enact any price-fixing legislation.
The US did give Puerto Ricans one gift. Over the objection of the Puerto Rican legislature, Puerto Ricans were declared US citizens in 1917, just in time for military conscription into World War I.
A CLASSIC COLONY
After a fraudulent plebiscite in 1952, in which voting for independence could get you ten years in jail (see Public Law 53 – the Gag Law), the US filed papers with the United Nations Decolonization Committee, declaring that Puerto Rico had chosen to become a “freely associated state” with the US, and was no longer a colony.
However, to this day, US federal agencies control the island’s international trade, foreign relations, banking system, currency, shipping and maritime laws, customs, import/export regulations, immigration, postal system, radio, TV, transportation, Social Security, military, environmental controls, coastal operations, judicial code, civil and criminal appeals, cabotage rights, and the US Congress has plenary jurisdiction over any law or regulation promulgated by the Puerto Rico legislature. Congress can veto any law passed in Puerto Rico.
The US military presence is overwhelming. At its peak, no one could drive five miles in any direction without running into an Army base, nuclear site or tracking station. The Pentagon controlled 13% of Puerto Rico’s land and operated five atomic missile bases. The island of Vieques was bombed mercilessly for 62 years. From 1984 through 1998 alone, over 1,300 warships and 4,200 aircraft used the island for target practice, and pounded it with 80 million pounds of ordnance.
The colonial veneer is so ludicrously transparent that José Trías Monge, the Chief Justice of the Supreme Court of Puerto Rico who crafted the “Free Associated State” and drafted the Puerto Rican “constitution,” finally threw up his hands and wrote a book titled Puerto Rico: Trials of the Oldest Colony in the World (Yale University Press, 1997).
OPERATION BOOBY TRAP
From the mid 1950’s through 2006, the US paved a red carpet from Wall Street to San Juan. US corporations were given ten and twenty-year tax exemptions on all gross revenues, dividends, interest, and capital gains income. Instead of growing fruit, coffee and sugar cane, Puerto Ricans now manufactured bras and razors behind concrete walls.
Unfortunately, once Playtex and Schick found cheaper labor in Asia, the factories all disappeared. Once the IRS 936 tax exemption expired in 2006, the pharmaceutical companies vanished. All of them had repatriated their profits back to the US mainland. None of them had invested in Puerto Rico. In the end, rather than providing a true economic base and self-sustaining growth, these corporations only produced more dependency on the US, and more long-term unemployment.
The program was originally called Operation Bootstrap. With typical wit and accuracy, Congressman Vito Marcantonio named it Operation Booby Trap.
THE JONES ACT
The greatest booby trap of all is the Merchant Marine Act of 1920, aka the Jones Act. Under Section 27 of this Act, all goods carried by water between US ports must be shipped on US flag ships that are constructed in the US, owned by US citizens and operated by US citizens. That means that every product that enters or leaves Puerto Rico must be carried on a US ship.
This includes cars from Japan, engines from Germany, food from South America, medicine from Canada – any product from anywhere. In order to comply with the Jones Act, all this merchandise must be off-loaded from the original carrier, reloaded onto a US ship and then be delivered to Puerto Rico. It all makes as much sense, as digging a hole and filling it up again.
There is one major exception.
A foreign-flagged vessel may enter directly into Puerto Rico – after paying an extreme levy of taxes, customs and import fees which often double the price of the goods they carry.
This is not a business model. It is a shakedown. It’s the maritime version of the “protection” racket. A 40-year study of this “cabotage cost” to Puerto Rico shows the following results:
From 1970 through 2010, the Jones Act cost Puerto Rico $29 billion. Projected from 1920 till the present, this cost becomes $75.8 billion.
Ironically, this $75.8 billion cost is higher than the amount of Puerto Rico’s current public debt. In other words: if the Jones Act did not exist, then neither would the public debt of Puerto Rico.
In addition, if the Jones Act did not exist, 30,000 to 50,000 maritime jobs would immediately shift to the island from Jacksonville, Florida.
FOURTH LARGEST MARKET FOR U.S. CORPORATIONS
The tiny island of Puerto Rico – with only 3.6 million residents – is the fourth largest maket in the world for US products. 85 percent of all products consumed in Puerto Rico, are sold by US corporations. Puerto Rico has more Walgreens per square mile, than anywhere in the US – and more Walmarts per square mile, than anywhere on the planet.
Thanks to the Jones Act, all these US products have been “price-protected” for the past 96 years. Automobile prices are $6,000 higher in Puerto Rico than the US. Some products – particularly unprocessed food items – cost twice as much in Puerto Rico.
Thanks to the Jones Act, the cost of living is 12 percent higher in Puerto Rico than in the US. Yet the per capita income of Puerto Rico is $16,400 – roughly half that of Mississippi, the poorest state in the US.
SHRINKING TAX BASE
When the IRS tax exemptions expired in 2006, dozens of pharmaceutical companies abandoned the island and unemployment became rampant. With no economy of its own, no real private sector, the government of Puerto Rico became the island’s largest employer.
Over the past ten years, nearly one million Puerto Ricans have moved to the US, largely in search of employment. This population loss of 22% has eroded the island’s tax revenue, and accelerated the issuance of public debt.
This unhealthy equation…shrinking tax base + large payroll + mounting public debt…has exposed the government of Puerto Rico, to the ways and whims of Wall Street.
LIES FROM WALL STREET
Puerto Rico’s bonds are highly attractive because they are triple-tax exempt: all capital gains are exempt from federal, state and local taxes. But with a 22% population loss, Wall Street demanded a higher level of taxation from the remaining 78% of island residents. The Wall Street rating services – Fitch, Moody’s, Dun & Bradstreet – insisted on “fiscal austerities” in order to avoid the downgrading of Puerto Rico’s debt.
The Puerto Rican government complied. They laid off 30,000 workers, charged 67% more for water, raised electricity rates to 29 cents per kilowatt hour, raised property and small business taxes, hiked the gasoline tax twice in one year, cut public pensions and health benefits, raised the retirement age, closed 200 schools, and hiked the sales tax to 11.5%.
After all this austerity, the three rating services still downgraded the island’s debt to “Junk Bond” status. In other words, Wall Street lied to Puerto Rico, then hiked the premium payments. And now they want to collect.
The debt service on $73 billion will be roughly $7 billion annually. With a population of 3.6 million, this means that every man, woman and child in Puerto Rico will be paying $2,000 per year, just to cover the interest on Puerto Rico’s public debt. Since per capita income is only $16,400, this $2,000 represents 12 percent of everyone’s personal income.
With a shrinking tax base, Puerto Ricans are unable to meet this crushing debt burden. Any further “austerities” will force more people to abandon the island – and the tax base will shrink even further. As Governor Garcia Padilla stated in a nationally televised speech, “Puerto Rico is a downward spiral.”
PUERTO RICO VERSUS THE ENTIRE U.S. CAPITALIST SYSTEM
The stakes are very high. If Puerto Rico defaults, it would be the largest in the history of the $3.7 trillion market for debt sold by US state and local governments. All over the country, pension funds will be unable to meet their payment obligations.
On the other hand, if Puerto Rico is allowed to file for Chapter 9 bankruptcy protection, then every state in the US will demand the same privilege. The US financial system cannot withstand fifty states, all potentially filing for bankruptcy at the same time.
For this reason, the Puerto Rico debt crisis is a national financial crisis, with no clear resolution in sight. President Obama is trying to ignore it – hiding behind Congress, the courts, and the bankruptcy laws – but sooner or later, he will have to address it.
The entire system of municipal bond financing, and the fiscal integrity of all fifty states, are threatened by the crisis in Puerto Rico. Even a simple debt re-structuring will not resolve this mess. So long as Puerto Rico has no real industry, economy, or entrepreneurial class, the systemic problems will deepen.
The Gordian knot of predatory capitalism must be cut in Puerto Rico.
FAIRNESS AND COMMON SENSE
After 118 years, it is time for America to relinquish the oldest colony in the world. The present arrangement – the so-called “Free Associated State” – benefits only a few bankers, bond traders, hedge funds, corporate executives, real estate hustlers, and John Paulson. Morally and economically, it is time to move on.
It is an international scandal for the US to turn Puerto Rico into a land of beggars and billionaires – bossed by absent landlords, fought over by lawyers, and clerked by politicians.
The sooner it recognizes the fundamental evil of maintaining a hidden colony in the Caribbean, the sooner the US will repair its credibility in the global community.
For a history of the War Against All Puerto Ricans, read the book…
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