In the public arena, there are many myths about the Puerto Rican economy that have become“truths” because of their continuous repetition. Here I share some information to start demystifying two of these “truths.”
“Dependency caused the crisis in Puerto Rico”: In a previous op-ed, I provided information about the underlying factors that caused the present crisis in the Puerto Rican economy and debunked the myth about corruption or “a bloated government” causing indebtedness. Another popular myth is that the debt grew when the local government issued excessive debt to pay its “socialist” policies: a pejorative adjective always used to criticize help for the poor, not the bailouts of corporations.
First of all, the vast majority (perhaps all) of social programs in Puerto Rico are provided by the federal government, not by Puerto Rico. One of them is the Supplemental Nutrition Program (PAN) (the local version of the Supplemental Nutrition Assistance Program), introduced to Puerto Rico in 1974.The percentage of the population that participated in PAN was consistently reduced from 58 percent in 1980 to 27 percent in 2006 (the year the economic depression began).
Meanwhile, government debt was reduced between 1977-88 and increased afterward. It was after 2006 that PAN participation grew again. Thus, if there is a relationship between PAN participation and indebtedness, it would be an inverse one!
Many of these federally-funded programs act as a safety net given the combination of a relatively-high cost of living in Puerto Rico with historically-low job creation. Low job creation existed before the introduction of these programs: The unemployment rate has never been lower than 10 percent in Puerto Rico, not even in the period of high industrialization when almost no federal programs were in place.
In fact, the correlation between families participating in PAN and the employment-to-population ratio is close to zero. Thus, a dependency that could have caused this crisis was the dependency on the Congress’ willingness to provide strong economic tools to Puerto Rico, especially after the removal of Section 936 of the federal tax code.
“Puerto Rico does not pay federal taxes”: Before 2006, Puerto Rico paid more federal taxes than Vermont, Wyoming, South Dakota, North Dakota, Montana and Alaska. In fact, from 1998 to 2016, Puerto Rico has paid approximately $74.4 billion in federal taxes (without adjusting for inflation). Vermont paid $66.7 billion in the same period.
Even though the tax base was reduced after 2006 because of the economic depression, in 2016, Puerto Rico paid $3.5 billion. This is five-times more than the U.S. Armed Service members overseas and territories other than Puerto Rico altogether! However, Congress provides better economic tools to other territories: The U.S. Virgin Islands is exempt from cabotage laws and Northern Mariana Islands and Guam have a visa waiver program that boosted their tourism.
Individual income generated in Puerto Rico is exempt from federal taxes, but that does not imply that Puerto Rico is exempt from paying any federal taxes. That misstatement has led Congress to refrain from giving the long overdue parity in many federal programs, such as Medicare and the Supplemental Social Security Income, both of which are paid by workers in Puerto Rico.
Let us hope that more adequate information guides the federal policies regarding the Puerto Rican economy, upon which both families and U.S. bondholders depend.
Jose Caraballo-Cueto has a Ph.D. in economics, works as a professor in the University of Puerto Rico at Cayey, and is the president of the Puerto Rico Association of Economists. Follow him on Twitter @CaraballoCueto.
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