8). The Sad State of Puerto Rico's Economy and Government Finances (35 points)

Many in the US first noticed Puerto Rico's troubles after Hurricane Maria hit the island hard in September, 2017 killing 1000s and leaving the entire US territory with no electrical power. The hurricane's effects were horrible, but Puerto Rico's economic troubles started many years earlier. (this is part of the reason that the power plants and electricity infrastructure were so hopelessly out of date and underfunded).

We are going to analyze the details of Puerto Rico's economy because as recently as October 2019 the Federal Control Board that oversees Puerto Rico's government debt obligations has discussed reducing the debt by as much as 80%. (Wall Street and the hedge funds are fighting this move in the courts). Many of the Democratic candidates for US President have talked about completely erasing the debt.

Below, I will present some relevant details about Puerto Rico and its economy and then ask some questions.

*First, it is important to understand that the people of Puerto Rico are US citizens and have been for well over 100 years. This means complete and unlimited free movement to live where they want in the US. In fact, once you move off the island, you receive the right to vote in Federal Elections; a right you do not have on the island. (credible polls at the time of the hurricane suggested that only 45-50% of all US citizens realized that Puerto Ricans were US citizens)

*Additionally, the payments made to key US Federal social policies such as Medicaid and Medicare are far less in US territories such as Puerto Rico than they are in the 50 US states. This leads to lower payments to hospitals and doctors, greater obligations to the Puerto Rican government and generally worse care for the 60% of Puerto Rican Citizens currently enrolled in either Medicaid or Medicare on the island.

*Between 2004-2016, Puerto Rico's population fell from 3.9 million to 3.4 million with most of the decline coming from workers moving the US mainland. Since hurricane Maria in 2017, the rate of exit has been slightly more rapid causing Puerto Rico's population in 2019 to be about 3.15Million. (this fall in population would be the equivalent of about 60 million for the US mainland over the same 15 years).

*The economy of Puerto Rico has been in recession for 13 straight years. This means the size of GDP just keeps shrinking and shrinking.

*On May 3rd, 2017, Governor Ricardo Rossello declared a form of bankruptcy in US courts (filed under Title III of Promesa, not Chapter 9). Puerto Rico at the time had $74 billion in bond debt and $49 billion in pension obligations. No US state or territory has ever declared bankruptcy and it was widely presumed by many bondholders and buyers not to be possible. (As a side note, the largest city bankruptcy was Detroit's with $18 billion in total obligations).

*As of the fall of 2019, the debt levels remain at similar levels to 2017.

*The economy of Puerto Rico is based heavily on tourism and manufacturing. The economy grew rapidly from the late 80's until early 2000s in part due to a larger tourism infrastructure than competitor islands such as Jamaica, Dominican Republic or Bahamas and part due to large corporate tax breaks for American manufacturers that produced in Puerto Rico. The tax breaks led to pharmaceutical, petrochemical and textile companies locating in Puerto Rico. The GDP grew rapidly and median wage levels rose.

*The Clinton administration passed a phasing out of the corporate tax breaks in 1996 that came to a complete end in 2006. Since then, manufacturing jobs have declined from 145,000 to 70,000 on the island.

*In 2006, the US passed legislation requiring all states and Puerto Rico as well to raise the minimum wage from $5.15/hour up to $7.25 per hour. Puerto Rico's median income was $22,000 contrasting with Mississippi's $36,000 income, the poorest US state. The $7.25 was over 70% of the median Puerto Rican income if working full time.

*As most of the tourism and a majority of the exports are connected to the US mainland, the great recession hit Puerto Rico adversely as well.

*Over the 2006-2016 decade, the Puerto Rican government debt grew and grew, but US bond buyers were happy to buy the bonds as they are tax exempt. In recent years, more and more of the debt has been bought up in secondary markets at a discount by US hedge funds.

*Puerto Rico uses US dollars and does not have its own monetary policy.

*Even with all the movement of people to the US mainland, the unemployment rate remains at 12.5%, with youth unemployment much higher.

*In the Autumn of 2016, the US Congress allowed Puerto Rico to offer a minimum wage of $4.25 for workers 25 and younger rather than the $7.25 for the rest of the work force.

*And it should be added that the Puerto Rican government has been accused of offering public pensions for employees that are too generous and spends money sometimes without careful consideration of costs and benefits and is known for corruption and bad government. (But, this was all the case back in the 1980-2005 period as well when Puerto Rico's economy did quite well).

Questions Start Here!

a). The Caribbean tourism infrastructure grew on many other islands in the 2000s and US minimum wage made Puerto Rican tourist worker salaries 50% higher on average than competitors. Show and graph these two effects on Puerto Rican tourism industry compared to say the Dominican Republic's tourism industry. (graphs please)(10 pts)

b). Graph and take a guess at demand and elasticity of demand for workers in Mississippi and Puerto Rico after the minimum wage rose to $7.25. Be sure to show any changes to Consumer Surplus, Producer Surplus and deadweight loss. Be sure to be clear about changes to employment, shortages or surpluses. Make sure to also include the data on migration to the mainland USA and unemployment in your graph and analysis. (15 pts)

c). Would Puerto Rico's economy be improved if it were either allowed to be a US state or allowed to become its own country? (pick one or the other and discuss briefly). (10 pts)

Puerto Rico is the only US territory that has any substantial population and as such is a unique case.