SUPPORT OF PUERTO RICO

Ever since the advent of the current Commonwealth territorial arrangement, Puerto Rico was supposed to enter into a period of economic growth and prosperity. To some, the economic numbers for the fifties and sixties were reason for hope, but under closer scrutiny a more somber reality lurked underneath. Ever since, there have been some periods of increased growth and prosperity, particularly the late seventies and the nineties. Still, the limitations of Puerto Rico’s current political status, misguided economic policies by various administrations and the negative effect of long-term dependency on federal welfare benefits make it imperative for people, both in the Island and the Mainland to provoke the resolution of Puerto Rico’s political status.

Why should you continue to spend upwards of $22 billion per year in Puerto Rico? How much damage has the current Commonwealth territorial arrangement done to the economy of Puerto Rico and to the aspirations of its people?

The blame for this worrisome situation should be placed both in Washington, DC and in San Juan, Puerto Rico. Perhaps, Alexander Odishelidze and Arthur Laffer, put it best when they described the situation in the following manner:

Puerto Rico has been a test case now for more than five decades of a different kind of nobly intended ideology. That ideology, protected by powerful lobbies, turned an industrial outreach program into a long-term tax boondoggle. That boondoggle became, in turn, a cardinal principle of a political party wed to a particular form of government needed, naturally, to preserve that boondoggle. As a result, a dependent territory, half-filled with dependent individuals and families at or below the poverty line, has never approached the level of growth and freedom it might otherwise have obtained. Economic stagnation has gone hand in hand with political stalemate. Altogether, these factors have made modern Puerto Rico a less attractive partner to entrepreneurs than the fate of similar nation/territories suggests it should have been.[1]

Clearly, you may see how Puerto Rico’s nefarious economic model is totally intertwined with the maintenance of our current Commonwealth territorial arrangement.

In order to better understand how this “deal” benefits no one, let us briefly discuss the following factors:

Throughout the years, even during the various prosperous periods, Puerto Rico’s economic model has never able to generate enough jobs. Many discouraged workers just drop out of the labor force, thus leaving the unemployment rates artificially lower than the actual reality. This situation is clearly demonstrated by the Island’s low labor-force participation rate.

Comparative figures from the 2000 Census survey show that the labor force participation rate was 23% lower in Puerto Rico when compared to the U.S. mainland (63.9% vs. 40.7%).

For over half a century, migration has proved to be an escape valve for many of the Island’s unemployed. It has even been encouraged under various administrations. In essence, it has effectively and dramatically disguised Puerto Rico’s inability to create sound and stable jobs for its residents. Contrary to most stereotypes, research indicates that Puerto Ricans migrate in search of jobs, rather than to receive welfare benefits.

Today, there are more Puerto Rican born US citizens or people of Puerto Rican origin living in the fifty states than the number of people living in the Island. Recent information shows that since the beginning of this decade migration towards the mainland has spiked, particularly among the young and the well educated. Areas like Orange County in Orlando, Florida currently see an influx of a few thousand Puerto Rican migrants per month.

As the economy was not able to provide sufficient jobs in the private sector, ever more, the government became a primary source of mass employment. Statistics from the Department of Labor Establishment Survey show that in FY 2003 there were 298,800 workers in the public sector, accounting for 31% of Puerto Rico’s nonagricultural workforce.

In 1940, almost 20,000 people worked in government, 4% of a labor force of approximately 500,000 workers. Ten years later, the number had increased to somewhat over 45,000, or approximately 7.6% of a total workforce of 596,000. As such, government employment became a quick fix used by various administrations unable to address the economic situation in the Island. Even periods characterized by reductions in the government payroll, such as that of the late nineties, were followed by periods such as the last four years, when government employment grew by close to 15%.

Puerto Rico’s inability to provide much needed job opportunities has kept close to 50% of all Puerto Ricans under the poverty level as ascertained by the 2000 Census. Although the 2000 Census reported a 10% decrease from the 1990 level, approximately the same number of people (1.8 million) were living below the poverty level as in 1970.

Furthermore, while the Island has managed to reduce its poverty rate throughout the last thirty years, the rate of reduction in the fifty states has been much higher. For example, back in 1969, Mississippi had the highest poverty rate among the fifty states. Since then, Mississippi has been able to reduce it in half, while Puerto Rico has only been able to cut its poverty by less than 25%. If we compare Puerto Rico’s poverty level to that of the fifty states, it is nearly 2.4 times as high as that faced by New Mexico which, according to the 2000 Census, has the highest poverty rate (20.4%). Therefore, this is one of many examples of how Puerto Rico’s economic profile is clearly diverging from that of the Mainland.

Experts point out that the poverty level has declined because federal transfer payments (welfare and social security) have increased significantly during the past couple of decades. For example, in 1952, total transfer payments from the federal and local governments represented 8.2% of personal income. By 2003, it had increased to 32.8% of personal income.

As anyone may recognize, the main problem is that the other components of personal income, such as employee’s income and the proprietors’ income, have not grown as they should have.

The outrageously high levels of unemployment and poverty can also be explained by the fact that over the years, Puerto Rico’s Gross Domestic Product (GDP) has exceeded its Gross Product (GP). As is the case everywhere, not all the GDP stays in Puerto Rico, but rather the GP which remains in the Island, thus fully contributing to the economy.

Based on statistics provided by Puerto Rico’s Planning Board, in 1950 the Island’s GP was higher than the GDP. By 1960 they had evened out. Worse of all, by 2003, Puerto Rico’s GDP was $74.4 billion, or $27 billion more than its GP. According to the Penn World Tables Version 6.1, from the Center for International Comparisons at the University of Pennsylvania, if Puerto Rico was compared to sovereign countries, only Equatorial Guinea (37.2%) and Angola (53.8%) had lower ratios of GNP to GP than Puerto Rico’s. On the other side of the spectrum, in 2000, Ireland’s ratio was (85.5%) and Singapore’s (106.6%). Furthermore, according to the Penn World Tables, Puerto Rico’s ratio has been on a steady decline from (99.1%) in 1960, to (93.1%) in 1970, to (64%) in 2000.

It is safe to argue that tax credits have always been an essential element of our system of taxation. Most, if not all of these credits have always been included in the Internal Revenue Code as a way to incentivize, either corporations or individuals, to act in a certain manner, so as to achieve the legislative objectives of such given provisions. Thus, if there ever came a time when those objectives were finally achieved, some people would then feel justified to conclude that it was money “well spent”.

The report on H.R. 10612, which later came to be known as the Tax Reform Act of 1976 indicated that it was meant

[to] assist the U.S. possessions in obtaining employment-producing investments by U.S. Corporations, while at the same time encouraging those corporations to bring back to the United States the earnings from those investments to the extent they cannot be reinvested productively in the possession.)))

For further detailed information on this matter please refer to the following sources that provide the basis for this synopsis:

Pay to the Order of Puerto Rico: The Cost of Dependency to the American Taxpayer, Alexander Odishelidze and Arthur Laffer, Allegiance Press, 2004.

What if? Puerto Rico’s economy: it’s a matter of status, Carlos Márquez and Manuel Maldonado, Special Report by the Caribbean Business, compilation of various newspaper articles published August 5 to October 28, 2004.

Leave No State or Territory Behind: Formulating a Pro-Growth Economic Strategy for Puerto Rico, Lawrence A. Hunter, Institute for Policy Innovation Policy Report #177, July 28, 2003.

Position Statement by the Honorable Angel M. Cintrón-García, Majority Whip, House of Representatives of Puerto Rico, regarding Section 936, as requested by The Honorable Eni F.H. Faleomavaega at the Joint Public Hearing in Congress on October 17, 1995.

America: What Went Wrong?, Donald L. Barlett and James B. Steele, Andrews and McMeel, 1992.

America: Who Really Pays the Taxes?, Donald L. Barlett and James B. Steele, Simon and Schuster, 1994.

[1] Pay to the Order of Puerto Rico: The Cost of Dependency to the American Taxpayer, Alexander Odishelidze and Arthur Laffer, Allegiance Press, 2004, p. 104.