The Sad State of Puerto Rico's Economy (35 pts)

*On May 3^rd, 2017, Governor Ricardo Rossello declared a form of bankruptcy in US courts (filed under Title III of Promesa, not Chapter 9).At the present time, Puerto Rico has $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).

*Puerto Rico is a long-time territory of the United States in the Caribbean. All Puerto Ricans are US citizens and have free movement anywhere in the United States.

*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.

*In 2006, these corporate tax breaks came to an end after a gradual phasing out. Since then, manufacturing jobs have declined from 130,000 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.

*Sixty percent of Puerto Ricans are on Medicare or Medicaid, but receive far less US Federal financing for these programs compared to US states.

*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.

*Between 2006-2020, Puerto Rico's population fell from 3.6 million to 2.8 million with most of the decline coming from workers moving the US mainland.

*Even with this movement, 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 pensions for employees that are too generous and spends money sometimes without careful consideration of costs and benefits.

a). Explain and graph why manufacturers might have moved to Puerto Rico in the late 80's and 90s. Then Graph and explain as best you can why many left Puerto Rico after 2006. (10 pts)

b). 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 international competitors. Show and graph these two effects on Puerto Rican tourism industry compared to say the Dominican Republic's tourism industry. (10 pts)

c). 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 and unemployment in your graph and analysis. (15 pts)