Economic growth may be staggeringly slow across the country, but Puerto Rico’s lengthy decline makes even seasoned economists blush. Last week’s island-wide blackout didn’t help boost confidence in a near-term turnaround when a small fire dominoed into everyone losing power (yes, everyone), offering yet another reminder that a decade of economic decay doesn’t mix well with poor fiscal choices.
While we can only hope this recent episode serves as but the climax to the horror story Puerto Ricans have had to live through, turning the tide in Puerto Rico will require legislators and the new fiscal oversight board to adhere to the one truth that all recovering economies eventually learn: growth only comes when the private sector leads the way.
This year’s gubernatorial election in Puerto Rico offers the same two economic choices as were previously witnessed: one that represents the status quo and a philosophy of government intervention that likely led to the current crisis, and another who has an “outside” perspective, offering a plan to help its people to lead the way instead.
One of the great ironies to last week’s blackout, was that it immediately preceded several events many of us held as symbols of a Puerto Rican renaissance. While en route to the first, led by a group of investors offering its own private sector solutions and touting the investment climate in Puerto Rico, I couldn’t help but laugh to myself reading the following on a government website: “”[Puerto Rico has] abundant and reliable electricity to meet the demands of industry…”
Fortunately, power recovered rapidly for most of the island, nevertheless the outage still served as another example of how desperately Puerto Rico needs experienced and accountable private sector managers to lead the charge toward prosperity.
The follow up act was the one so many of us have been waiting for: the first official board meeting for the fiscal oversight board set up by Congress’ PROMESA bill. Although the board seems intent on taking rapid action, setting a mid-October deadline for Governor García-Padilla to submit his first fiscal plan, no one really knows whether they will have to intervene in Puerto Rico’s affairs or if the island will self-correct knowing it has a new overseer with a heavy hand.
Regardless of how it will come about, it is increasingly clear that Puerto Rico will have no choice but to cut spending, implement structural economic reforms, and step back to watch the rest of us work. Though this may worry the thousands of private-sector skeptics around the country protesting against D.C.’s “overreach” in the island’s affairs, history shows that properly implemented reforms (even dramatic ones) can lead to economic magic.
In fact, with an onslaught of fresh data since the Great Recession, an entire subset of economic literature has recently been devoted to this idea. Most of the research focuses on the two basic types of austerity measures that governments can implement to counter periods of economic contraction: tax-based policies that rely on higher taxes to meet expenses and spending-based policies that focus on cutting back.
While it might make intuitive sense (or perhaps best fit your political ideology) that cutting spending leads to a reduction in GDP, in actuality, results are starting to show that spending cuts are less harmful to the economy than tax increases. Combined with specific structural reforms, spending reductions can even lead to more rapid economic growth.
Although a number of countries around the world have experienced this exact phenomenon, Puerto Rico may have already proved the theory in its own backyard. In the years beginning its lengthy recession, Puerto Rican legislators thought it best to cover shortfalls with more borrowing and higher taxes. After years of doing the same thing begat a continued economic downturn, a new governor passed reforms that led to the only period of growth the island has seen over the last ten-plus years.
Regrettably, the results didn’t keep pace with politics, as a new governor (the current one) was elected to undo the new measures. The unfortunate result is, well, Puerto Rico’s headline-making fiscal falter of 2016.
The roadmap is there for anyone willing to put in the work. But, it takes a perspective that is wider than Puerto Rico, and an understanding that a few educated lawyers are probably less adept at creating a dynamic and growing economy than thousands of entrepreneurs.
Interestingly enough, this year’s gubernatorial election in Puerto Rico offers the same two economic choices as were previously witnessed: one that represents the status quo and a philosophy of government intervention that likely led to the current crisis, and another who has an “outside” perspective, offering a plan to help its people to lead the way instead. The political success of the latter may have been ensured by a fiscal crisis, but if voters have the patience to wait for his policies to take effect, Puerto Rico may finally have a long-term solution at hand.
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