Puerto Rico officially defaulted on part of its $73 billion in debt on Monday afternoon, when the U.S. territory only paid $628,000 toward a $58 million debt due by 5 p.m. When the island’s Governor Alejandro Garcia Padilla, said the economy is in a “death spiral,” he could have also been referring to an insolvent liberal state like California, whose citizens should be worrying about a future default.
Puerto Rico’s economy had been shrinking at a 6% annual pace and only 1.2 million, or 32%, of the island’s 3.7 million of the inhabitants are employed.
Thomas Jefferson famously said, “I sincerely believe…that the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale.”
Likewise, Governor Padilla, who has difficulty speaking English, told Bloomberg News last year that Puerto Rico had a constitutional and moral obligation to not default on the island’s $73 billion of debt. But he then passed a law giving local court proceedings the power to cancel much, if not all, of the island’s bond debt.
The Puerto Rican economy should be benefiting enormously from the fact that Commonwealth residents are exempt from paying U.S. federal income taxes, unless the income is earned outside of the island. But poor English language skills are a major impediment to relocating call centers and other U.S. service businesses to Puerto Rico.
The Puerto Rico Department of Education only requires that students receive 50 minutes of daily English instruction throughout their twelve years of schooling. The 2005-06 academic assessment data showed that 81% of the students in the Public School System had not developed the “basic” English language skills necessary to be able to use English in either oral or written discourse. Just 60 percent of the population over 25 years old has graduated from high school, compared to 80 percent for the U.S.
Unlike like the municipal bonds that were almost exclusively held by rich people when Orange County, California filed for bankruptcy, a huge percentage of Puerto Rico bonds are held by ordinary Puerto Ricans through their credit unions. So the next shoe to fall will be a banking crisis. With the ruling Popular Democratic Party controlling the credit unions, government officials seem intent on hurting small savers.
Puerto Rico’s Government Development Bank President Melba Acosta Febo said in a prepared statement about the default, “This was a decision that reflects the serious concerns about the Commonwealth’s liquidity in combination with the balance of obligations to our creditors and the equally important obligations to the people of Puerto Rico.”
In early July, Breitbart News reported that 52 percent of Greeks are currently working, but only 43 percent of Puerto Ricans are employed. Greece does have a welfare problem, with 23 percent of the population on Greeks are on the dole. But over 27 percent of the people in Puerto Rico USA are on welfare. Greek politicians are blamed for trying to buy votes by spending 29 percent of the nation’s GDP on government “transfer payments” for disability, housing, family, old age, unemployment and health benefits. But transfer payments in Puerto Rico amount to over 40 percent of GDP.
Emily Raimes of Moody’s Investors Service stated in response to the default, “This is a first in what we believe will be broad defaults on commonwealth debt.” To put that in perspective, Puerto Rico has the same amount of debt outstanding as New York, but with an economy one seventeenth as big–$69 billion versus New York’s $1.2 trillion.
The lessons are relevant for California, which is undergoing rapid social and demographic change. Only about 25 percent of the residents in certain Los Angeles neighborhoods have a high school diploma and over 1.5 million residents speak only limited English. The state’s welfare burden is enormous.
As Breitbart News has noted, the Golden State will be wildly insolvent if the $15 billion in annual capital gains tax revenues from Silicon Valley IPOs drops to its usual low of $2 billion during a recession.
If that happens, it will be California that will be in a “death spiral.”