Puerto Rico: Here Comes The Next Greece

Even as Greece has shut its banks and its stock market and prepares for its big default, the next big sovereign default is coming right behind it.  I'm talking of course about Puerto Rico.  On Sunday the New York Times reported that Puerto Rico's governor, Alejandro Garcia Padilla, had said that Puerto Rico's debt of some $72 billion "is not payable."

You are probably thinking: but Puerto Rico is part of the United States!  It has the huge advantages of free trade and free travel with the United States.  It's in the U.S. dollar currency union.  How could it possibly be in such a position?

But if you start investigating Puerto Rico's economy, you find that it is far worse than you might have imagined.  Median household income is only about $20,000 (per badly lagged Census data here from 2014).  That compares to well over $50,000 for the United States as a whole, and about $36,000 for the poorest of the 50 states, Mississippi.

Completely free trade should gradually be bringing Puerto Rico up to the income levels of the rest of the country, but it is not happening.  Instead, it's income is stagnating, and indeed the population has been shrinking.

And then there is the most astounding statistic of all about Puerto Rico, the labor force participation rate -- the percentage of working age people either working or seeking work.  For the U.S. as a whole, that rate has recently been 62.8%, itself a significant decline from numbers around 67% prior to the recent financial crisis.  In Puerto Rico the figure is around 42%.  That means there is a full 20% of adults who would be working if they were in the rest of the United States, but are not working in Puerto Rico.   Knowing that, is it any wonder that the government is broke?

Now, in considering why this might be, I would invite you to entertain the hypothesis that the federal minimum wage might have something to do with it.  That minimum wage is only $7.25 per hour, far lower than numbers like $15 per hour that are gradually taking effect in places like San Francisco and Seattle, or than the $12 per hour that President Obama has discussed for the country as a whole.  But for Puerto Rico, $7.25 per hour for a year of full-time work represents a very high percentage of that median household income figure above -- assuming full time work of around 1900 hours per year, it's in the range of 70%.  By contrast, full time work for one person at the current federal minimum wage is only about 40% of median household income in Mississippi, and not much more than 25% for the country as a whole.  A $12 minimum wage would only bring the full-time minimum wage worker's annual pay to about 35% of median household income for the country as a whole.

I am not the only person noticing these dramatic numbers.  Here is what Max Ehrenfreund had to say in yesterday's Washington Post wonkblog:

While labor organizers around the country along with most major Democratic politicians have said the federal minimum wage is too low, it seems clearly too high in Puerto Rico, at 77 percent of per capita income. That puts a lot of people with less education and fewer skills out of consideration for a job.

Of course it is not possible to do fully controlled experiments to see what is causing economic performance to lag in one location versus another.  But it's hard to come up with an alternative hypothesis that explains Puerto Rico's dramatically low labor force participation.  The next best one is that federal benefits, like food stamps, are of much more relative value in poor Puerto Rico, and strongly discourage work.  Of course, those two factors could be working together.

If the minimum wage hypothesis is correct, it means that that law has put a huge contingent of low-education, low-skill workers out of work in Puerto Rico.  Intended to benefit the poor, it in fact has made huge numbers of them much poorer.  As to the $15 dollar minimums in rich coastal cities like San Francisco and Seattle, likely the effect will not be so large as to show up quite so dramatically in the government statistics.  But that doesn't mean that the effect will be zero.  And those who get hurt are of course the poorest of the poor.  Shouldn't they be the ones that public policy should most be seeking to benefit?