January 8, 2016

In a sign of severe political and financial upheaval, and after years of ongoing economic instability, Puerto Ricodefaulted on $174 million this week — a portion of the country's total debt measured at $74 billion.

“It’s very simple,” explained Alejandro Garcia Padilla, Puerto Rico’s governor, during a recent appearance on CNBC. “We don’t have money to pay.”

Puerto Rico found itself especially vulnerable during the Great Recession, and the situation has only worsened since: its economy has contracted by 10 percent since 2006 and the island territory is currently reeling under a poverty rate of 45 percent.

 For decades, places experiencing economic crises face punitive austerity measures; Puerto Rico is no different. There are countless historical examples of austerity—a solution for economic growth based on a calculus lacking human concern—that demonstrate the harm of this policy and its inability to generate fair economic outcomes. Austerity is the orthodox solution, but there is an urgency to implement unorthodox strategies that promise to build equity and create an economic growth that benefits people. This will require pursuit of less dominant and less prominent strategies, correctly differentiating between causes and effects of the economic problem, and exhibiting respect for Puerto Rican self determination and needs.

Apathetic governance

In addition to Puerto Rico, austerity conditions have come to characterize a number of American cities, particularly since the Great Recession. Under austerity, local public services wither and the means for people to contest harmful political strategies erode. Residents suffer the dual insult of an economy that increases reliance on social services at the same time that those services financially struggle. Under austerity, public needs fail to dictate political priorities. Struggling residents are exiled and alienated by a political system that is not only apathetic to their situation, but also directly responsible for their hardship, solidified through decades of neglect and flawed policy. People are similarly deprived of avenues to dictate alternative political and economic strategies.

If austerity leaves public needs and concerns outside of political calculations, then whose concerns are included?  Today, the political landscape is dominated by corporate needs and concerns that are increasingly entangled with questions of finance. Austerity preserves capital in the private sphere to circulate and grows through investment rather than production. It is then no surprise that austerity is the orthodox political response to economic crises.

State and federal governments can provide unique assistance to help local economies recover. Such proactive responses, however, are rare. Government at all levels has been perverted by corporate interests and promotes those interests through political language that distances society’s empathy from certain people and certain places. 

This uneven balance of power and shift in ideology should be examined in comparison to just a few decades ago. In 1970, New York City was on the verge of bankruptcy. Although President Gerald Ford initially refused federal bailout of the city’s $14 billion debt, federal legislation was eventually passed and $2.3 billion in short-term loans rescued the city’s economy.

More recently, struggling places like Detroit, Stockton, Puerto Rico, and other places receive no political assistance to current economic crises, despite that their crises come after decades of federal disinvestment and neglect.

The case of Puerto Rico

President Harry Truman once commented on the cruelty of Puerto Rico’s history of governmental neglect and corporate control: “Puerto Rico almost blew apart because of the selfish sugar landowners,” he said. “They owned tremendous tracts of land in Puerto Rico, which they devoted entirely to sugar, then worked these poor people for a dollar a day or 50 cents, if they could get them for that. And they’d rather see those people starve. I don’t mean to imply that we were in any way cruel to the Puerto Ricans, but there is another kind of cruelty. That’s indifference—indifference and neglect.”

Much attention has been drawn to the “unique” position of Puerto Rico: despite the classification of Puerto Ricans as US citizens, the territory remains disenfranchised, largely at the mercy of corporations and the whims of the US government. Citizenship for Puerto Ricans, granted in 1917, preserved US corporate and governmental control of a valuable colonial asset: it was a tactic tomoderate support for Puerto Rican self determination and preserve a population to increase the US war effort.  

Clarence Miller, a US representative at the time of the law’s passing, clearly stated the motives for granting citizenship: “The congress of the United States says to the people of Puerto Rico, once and for all, that they are part of the United States domain and will always remain there; that the legislation for independence in Puerto Rico must come to a decided and permanent end.” This was in response to the 1914 request from the Puerto Rican House of Delegates that the US grant Puerto Rico independence in 1914.

Puerto Rico remains subjected to the colonial power of the US and the finance system. The Federal Reserve, US Treasury, and Congress have yet to assert authority and exercise their unique powers. Inspired by the wave of municipal bankruptcies following 2008’s financial crisis, not only has Congress not provided help, but has also tried to create structural barriers that would incapacitate its ability to do so at all. The Detroit bankruptcy inspired a 2013 Senate amendment that would have prohibited the use of federal dollars to support insolvent municipalities.

To garner support for that amendment, Sen. Ron Johnson explained that Detroit is a “poster child,” a term originally applied to charity campaigning through images of children with diseases or physical disabilities. He referred to “the people who live there” as debtors who belong in court, going further to say that “the people who live there” were in an “unholy alliance” with “powerful unions.” He reasoned that “municipalities and states who have a similar history” would expect a handout, should Congress provide financial relief to Detroit.

Sen. Johnson characterized federal support for municipalities as “charity.” He furthermore calls on the public to withhold charitable sentiments for debtors engaged in unholy practices, asserting that they belong in bankruptcy court. This language fuses brutalizing stereotypes of poor people and people of color and their neighborhoods.

Sen. Johnson’s language is notable in its attempt to strategically trigger conscious and unconscious stereotypes and bias against marginalized groups. This language serves to rally popular support for shrinking the role of federal government in providing support for cities, even when this support can be support could be argued as a remedy for decades of federal neglect and harm.

According to Sen. Johnson’s logic, “the people who live” in places like Detroit, Stockton, and Puerto Rico do not warrant the public’s compassion nor the political intervention it accompanies. The politics of austerity is financial governance. And, racially coded language enables popular support for the hidden hand of financial governance.

Continuing to support austerity as a solution is to neglect and ignore the suffering of places like Puerto Rico and the people who live there. It continues to promote popular support for the systemic political neglect of entire groups of people and places.

Planning Puerto Rico

A flurry of solutions have been proposed to address Puerto Rico’s current fiscal crisis. A technically correct solution—that is to say a solution that will actually bring the benefits of economic growth to people—is critical. However, to achieve a “technically correct solution,” policymakers must have a complete and proper understanding of the problem itself. Fundamentally, the problem is a long system of colonialism and violent subjugation that has created Puerto Rico’s faltering economy. Local mismanagement, corruption, or incompetence are often falsely identified as root problems. However, these are merely effects of the problem, which is, in fact, grounded in histories of neglect and exploitation. 

In a failed effort to postpone revenue crisis, Puerto Rico’s government has raised the sales tax to a higher rate than in any US state. Tuition at one of Puerto Rico’s public universities increased by 1,175 percent from 2011-2013. Ninety-two percent of students in Puerto Rico’s higher education system depend on financial aid, including Pell Grants, federal loans, and work-study programs. Additionally, the cost of water increased by 60% in mid-2013 in the midst of extreme drought; the tax on gasoline has increased; and 2013’s pension plan reforms raised the retirement age to from 58 to 65 for workers longest in the system, and from 60 to 67 for new employees. 

In the landscape of escalating austerity measures as described above, Puerto Rico officially announced it couldn’t service its debt. US bankruptcy law allows municipalities of states, not US territories, to declare bankruptcy. Puerto Rico is not considered a US state and even if it were, Puerto Rico itself would not receive relief under US bankruptcy law. If it were a state, only its cities could declare bankruptcy protection. However, the most burdensome debt is with Puerto Rico and its publicly owned corporations. In reality, many of its municipalities are fiscally solvent and comprise only $4 billion of the oft-repeated $72 billion in public sector debt. To reiterate, Puerto Rico is neither a US state nor a sovereign territory; this colonial condition also blocks Puerto Rico from seeking an infamous IMF financial bailout. 

In the summer of 2014, the Puerto Rico Legislative Authority—anticipating today’s situation—enacted the territory’s Public Corporations Debt Enforcement and Recovery Act. This Recovery Act would allow the commonwealth’s public utilities to restructure $20 billion in debt. In February 2015, however, the US District Court for the District of Puerto Rico struck down the Recovery Act, which was upheld by the US Court of Appeals for the First District the following summer. As made evident, decisions in US courts in a suit filed by Puerto Rico’s creditors dictate the exercise of Puerto Rican legislation.

In early December, the Supreme Court agreed to take up the question of whether Puerto Rico’s Recovery Act violates the US constitution. The court may reverse earlier decisions and allow the Recovery Act to stand. This will allow a portion of Puerto Rico’s debt to be restructured by forcing creditors to the negotiating table. The case is expected to be heard in March and a decision issued by June 2016.

A choir of notable people have spoken out in favor of providing bankruptcy protection to Puerto Rico, including the New York Federal Reserve President, President Obama, some presidential candidates, the Federal Reserve Chair, and the US Treasury. There are different visions of what this bankruptcy protection may look like. President Obama’s visions is a “super bankruptcy”that is coupled with making Puerto Rico’s Medicaid reimbursement rate commensurate with other US states, extending the EITCto Puerto Rican tax payers, and appointing an independent oversight committee to monitor Puerto Rico’s finances. Puerto Rico’s nonvoting representative in Congress, Pedro Pierluisi, introduced a bill that would allow public agencies and municipalities access to U.S. bankruptcy protection, however this bill faces powerful objections from Senate and House Republicans.

On Dec. 9, Senator Orrin Hatch (R-Utah), chair of the Senate Finance committee, filed Senate Bill 2381 to provide assistance to the Commonwealth of Puerto Rico. This plan shares one element of President Obama’s “super bankruptcy” plan: the bill includes the creation of an appointed federal control board to oversee Puerto Rico’s economic crisis. Unlike President Obama’s plan, this billstops short of extending bankruptcy protection. 

However, any appointed financial control board will have the power to override decisions by Puerto Rico’s elected officials. In theDistrict of Columbia in 1995, for example, the creation of its appointed financial control board deprived the city of home rule for eight years, giving unelected officials the largest influence of the District since home rule was granted by Congress. New York and Philadelphia residents have also been disenfranchised under the auspice of fiscal crisis and control boards. A more recent and familiar suspension of liberal democratic practice in the name of economic recovery has been the appointment of emergency managers in Michigan, New Jersey, and even more cities. Before Detroit’s restructuring plan was approved by courts in 2015, half of the state’s Black and African American residents were living under unelected local control. Dominating solutions for economic crisis become a pretext for shrinking an already hollow democratic practice.

Proposals to restructure Puerto Rico’s Electric Power Authority (PREPA) have garnered much attention. Many proposals are ill-advised as they focus exclusively on restructuring PREPA’s debt PREPA bond holders have proposed  “swapping” new bonds for old bonds to deal with its $1 billion shortfall and $8.3 billion in outstanding debt.

To reduce costs, PREPA has laid out a misguided solution that would rely less on oil and more on natural gas in its fuel mix. Currently, Puerto Rico’s fuel mix uses more oil than is standard in the US: Puerto Rico’s fuel mix is 69 percent oil, while the US’s fuel mix is only one percent. Natural gas is marketed as a clean energy source, but it is a non-renewable fossil fuel as well a the leading source of methane emissions in the U.S., holding more warming potential than any other greenhouse gas. Most importantly, natural gas is the product of hydrolic fracturing, an endeavor that provides a source of modest economic income for some landowners at great costs to the Earth. While natural gas is certainly cheaper than oil, and will reduce the costs of generating electricity, it is not smarter, and not the best strategy for meaningful economic growth and development. 

El Puente Latino Climate Action Network and the Institute for Energy Economics and Financial Analysis have developedalternative plans for restructuring PREPA. These include increasing electricity generated by solar and wind, increasing energy efficiencies, and resolving PREPA’s debt crisis by bond insurers paying claims on PREPA’s bonds. El Puente’s president said, “Amidst all of the attention that has been placed on the debt crisis of Puerto Rico, this is the first report that focuses on solutions that could result in lower electric rates, cleaner energy consumption, greater employment, and a stronger economy for the entire island.” This is a solution to economic recovery, debt, and responsive to climate change. It frees PREPA’s reliance on fossil fuels.

In August, simultaneous with the Pope’s visit to the United States, Puerto Rican religious leaders called for the US Federal Reserveto purchase Puerto Rican debt and facilitate a restructuring deal. Federal Reserve Chair Janet Yellen objected to this remedy, explaining that the Federal Reserve looked for Congressional solutions and that the agency “doesn’t step in as a creditor to any state or municipality.”

Federal systems to which Puerto Rico is subject have failed to provide relief that only they have the power to provide. This includes the Federal Reserve, US Congress, and the US Treasury. The US Court system, as of this date, has continued to find that Puerto Rican legislation to allow financial protection is in conflict with the US Constitution.

Alternative solutions to austerity

Not only do austerity measures fail as a recovery strategy, but they also deprive the popular imagination of alternative policies that are rooted in empathy and a real concern for struggling cities and the people who live there. So what might such an alternative solution look like? 

Firstly, traditional strategies should not define the spectrum of possible solutions, nor should their prominence connote superiority. Importantly, some less prominent strategies may enable Puerto Rico to not only recover, but thrive. Puerto Rico can be a model for economic growth that is in harmony, rather than dissonance, with our planet.

Just solutions for economic recovery should restore balance to revenue and expenditures, and not through shrinking line items in the public expense column.

For Puerto Rico, financial reports will become sustainable only if:

Secondly, to generate popular support and advance incredibly beneficial and promising strategies,the way we talk about Puerto Rico’s economic crisis must change. These strategies can only garner the requisite popular and political support if we speak about Puerto Rico’s crisis in responsible terms that account for its enormous contributions to US corporate economic development. Relatedly, we must discuss the crisis in terms that account for Puerto Rico’s colonial subjection to the US through its entangled corporate and governance structures. Beneficial strategies, those both technically correct and in the cause of equity, depend upon correctly identifying the problem. Language used to discuss political and economic strategies must reflect appreciation of root causes.

The ideas expressed on the Haas Institute blog are not necessarily those of UC Berkeley or the Division of Equity & Inclusion, where the Haas Institute website is hosted. They are not official and not of one mind. Thoughts here are those of individual authors. We are committed to academic freedom, free speech and civil liberties.