After months of dramatic negotiation in Washington, complete with heartfelt pleas from Lin-Manuel Miranda, Puerto Rico is switching out its leadership. Soon, the U.S. territory will be run by a group of seven unelected individuals, most of whom will be appointed by Republicans in Washington.
Under the new regime, Puerto Rico will slash its minimum wage, in an attempt to boost employment. The new governing body, which will be known as the Oversight Board, has a mandate to act “in the best interests of” the hedge funds who bought up Puerto Rican debt on the cheap, and the elected government will be answerable to Washington alone.
What’s more, just to pour salt in the wound, anybody who has ever been elected to be part of Puerto Rico’s government is explicitly barred from membership in the new Oversight Board, whose work is far too important to be tainted by any hint of democratic legitimacy.
It sounds like a disaster, but this could turn out to be the best thing to happen to Puerto Rico in years.
Puerto Rico is America’s very own Greece: an economic basket case, with a shrinking economy, shrinking workforce, and insolvent government that can’t afford to pay back its debts. To make matters worse, a quirk of U.S. insolvency law essentially made it impossible for the U.S. territory to declare bankruptcy and restructure its debts.
Which is where the Republican-dominated U.S. Congress comes in. Congress – and only Congress – can pass legislation giving Puerto Rico any ability whatsoever to get out from under its current crushing debt burden.
Enter Promesa, the Puerto Rico Oversight, Management, and Economic Stability Act, a bill cobbled together by the House Committee on Natural Resources (don’t ask) that now seems very likely to become law.
Promesa comes with the blessing of hardcore right-wingers like Americans for Tax Reform: it spends no federal funds on Puerto Rico, and it forces the local government to answer to a seven-member Oversight Board, four of whose members will be nominated by the Republican Congressional leadership. (Two members are appointed by Congressional Democrats, and the last one is appointed by the president.)
But Promesa is also being welcomed by the likes of the Jubilee USA Network, which represents some 550 churches and synagogues as well as Islamic Relief USA and essentially all of Puerto Rico’s religious leaders.
In truth, Promesa is a godsend for Puerto Rico, which has been woefully mismanaged by a long series of elected governments. The first order of business for Puerto Rico has to be a comprehensive debt restructuring, which requires not only legislation making such a thing legal, but also a certain amount of credibility on the side of the Puerto Rican government.
In the coming debt negotiations, the Oversight Board—which is temporary, not permanent, and will probably feature a bunch of Wall Street debt-restructuring types—will essentially offer to swap creditors’ existing bonds, which will never get paid back in full, for new securities. Those new bonds will have a much lower face value, in total, but also a much lower chance of default.
Bondholders will only take the deal if they believe that the new bonds, unlike the old bonds, will be paid back in full. And since they’ve been burned by a succession of elected governments, an unelected Oversight Board is exactly the kind of reassurance they need that they’re not just giving up claims for nothing.
Per the proposed bill, the Oversight Board’s mandate is to put together a plan that is “in the best interests of creditors and is feasible.” That sounds bad for Puerto Rico, but it’s not as cruel as it might seem at first glance. According to the legislation, a plan is considered to be “in the best interests of creditors” if it ends up paying out more to bondholders than they would get using “available remedies under the non-bankruptcy laws and constitution of the territory”. In other words, so long as the plan being offered is better, overall, than a chaotic rush to courthouses across Puerto Rico, the Oversight Board should be happy to sign off on it. That won’t be hard: just about any plan would meet that description.
Even cutting the minimum wage is, on balance, a good thing. The federal minimum wage of $7.25 per hour may be too low for workers in big American cities, but it is simply too high in Puerto Rico, where it impedes employment and thereby encourages emigration to Miami, New York, and other mainland cities with relatively abundant job opportunities. By allowing the minimum wage to fall for new employees under the age of 25, Promesa will reduce youth unemployment and give a boost to hundreds of small businesses.
Meanwhile, the Oversight Board has other, more positive, mandates, with “the funding of essential public services” at the top of the list, followed by “adequate funding for public pension systems”. (Neither has been in place for years.) The Oversight Board also has to appoint a Revitalization Coordinator, whose job it is to improve Puerto Rico’s woeful infrastructure, possibly with the aid of much-needed outside capital.
Will the Oversight Board be able to achieve these goals? That’s unknowable, for the time being. But it’s unlikely to be worse than the succession of ineffective governments that Puerto Rico has elected to oversee a steadily-eroding infrastructure and a debilitating brain drain of the island’s most promising employees.
Puerto Rico’s biggest loss, under Promesa, will be its status as a self-governing territory: it will, for the time being, effectively become controlled by technocrats appointed in Washington. But democracy has not served Puerto Rico particularly well, either. The territory has never had full control over its own fate: it voted for independence in 1914, for instance, and was promptly overruled by Washington. Puerto Rico residents can't vote for president in the U.S. general elections, and economically speaking, Puerto Rico's booms and busts are generally a function of tax breaks granted by Washington more than they are of any fiscal decisions made on the island itself.
Here, again, Puerto Rico mirrors what is happening in Greece: democracy is all well and good, until you default on your bonds. At that point, if you don’t have true national sovereignty, your creditors will start imposing their will on whatever form of local government you have.
Puerto Rico hasn’t been a sovereign nation since 1493; it’s been part of the United States since 1898. Mostly, that’s been good for the island. But it has always meant that Washington has reserved the right to take control, and to overrule the island’s democratically-expressed wishes. With Promesa, Washington is exercising that right. The good news is that it might yet turn out for the best.