Puerto Rico Needs a Debt for Equity Swap

If anyone doubts that Puerto Ricans are Americans, just look at the state of island’s economy before Hurricane Maria. You had a bunch of rich people holding bonds exempt from income taxes, and a bunch of public employee pensioners who got their pensions retroactively enriched while traditional pensions were eliminated for those hired after 2000, all expecting to get paid by the poorer generations to follow them. You had an economy based on imports, debts and consumption that would collapse without bailouts from the federal government – at the expense of someone else, someday. You had the executive/financial class, the political/union class, and other members of a better off Generation Greed all seeking to suck money out of younger, poorer generations of serfs. (And those serfs fleeing the island in large numbers.) The Commonwealth of Puerto Rico and its government-owned utility finally went bankrupt. Puerto Rico is like the United States, only more so. I wrote a post titled “The Puerto Rico Disaster” three years ago.


And then the hurricane hit.

Puerto Rico has no money, no economic base, and very few assets of any that have value in the short run. If the public employee pensioners and debt holders expect all they have promised themselves, where do they expect it to come from? Confiscating people’s FEMA rations and Social Security checks? How can people expect to suck out more from those who are so much poorer, or others who never benefitted in the past? But the Commonwealth of Puerto Rico is going to end up with a whole lot of abandoned land, urban, rural, seaside, etc, because people will be forced to leave and there will be no income to pay property taxes. That, and a tropical climate in a part of the United States with links to New York, could have value someday. Value someday, perhaps, if they cooperate for the mutual benefit of themselves and the island as a whole, is all that Puerto Rico’s creditors deserve. I propose a debt for equity swap, with that land turned over to three of four new publicly traded Real Estate Investment Trusts (REITs) that would compete to earn money by redeveloping the island. Those who wanted to invest in Puerto Rico for the long-term could buy in. Those who did not could sell, and take what they get.

The first two paragraphs of this post include a number of assertions that are explored in detail below. This post is about is Puerto Rico ten years, twenty years and thirty years from now, not Puerto Rico ten weeks, twenty weeks, and thirty weeks from now. As terrible as the natural disaster was, it might actually help the island in the short run. It now has a source of income – federal money for disaster relief and rebuilding – that will float the economy for a while.

When that is over, however, the island will still be left with the economic, public policy and financial disaster it had before, which will undoubtedly get much worse. One cannot understand the long-term aftermath of the natural disaster without first understanding the public policy and financial disaster than preceded it. And one cannot understand the public policy and financial disaster, and the bankruptcy of the Commonwealth of Puerto Rico, without understanding the economic disaster. All this was swept under the rug for decades, but the island has no future without these disasters being resolved.

More interesting for those of us who are not Puerto Ricans are the lessons the island offers for the rest of the United States.

Puerto Rico’s Economic Reason For Being

First, a little regional economics. A region’s economic reason for being is those activities that bring in money from elsewhere. No region is an economic island, even an island such as Puerto Rico, and if goods and services are going to be obtained from elsewhere, a place needs some economic activities that bring in money from elsewhere in exchange. Those “export” activities are the “economic base.”

When the economic base grows, those who work in it have money to spend, and this creates growth in the local consumer economy. They spend money on goods and services, pay taxes for government services, require health care, and occupy buildings and use infrastructure that have to be built, maintained and operated. Next, those working in the local consumer economy spend money themselves, creating additional demand and additional jobs. This generates the “multiplier effect” that supports the size and prosperity of a regional economy as a whole. When the economic base shrinks, however, so does the entire economy, as the multiplier effect works in reverse.

The economic base of New York City is large, varied, and highly paid, in finance, advanced business services, fashion, media, information, entertainment and the arts. But what is the economic base of Puerto Rico? What is its economic reason to exist? I downloaded some data from the Bureau of Labor Statistics to illuminate this, and some American Community Survey data from the U.S. Census Bureau to make points later in this post. One can find it in this spreadsheet.

Puerto Rico Economy

The initial economic base of Puerto Rico, and much of the Caribbean, was sugar, along with other tropical agricultural products. Today, however, Puerto Rico’s sugarcane farming industry is so small that the BLS cannot report its data, for fear of (in effect) disclosing the confidential employment and payroll of an individual business. The same may be said of Puerto Rico’s production of that quintessentially Caribbean spirit, rum, since most of the jobs are in one company.


The entire Agriculture, Forestry and Fishing industry in Puerto Rico employed just 12,000 wage and salary workers in 2016, over and above self-employed workers working for themselves, out of a private employment level of 669,800.

Next, thanks to Puerto Rico’s low wages (relative to the United States) and federal tax breaks, a succession of manufacturing industries once located there – notably Apparel Manufacturing linked to New York’s garment industry, Electronic Manufacturing, and Pharmaceuticals Manufacturing, which is part of the Chemical Manufacturing industry. With the growth of world trade to places with far lower wages than Puerto Rico, and the expiration of the tax breaks in the mid-1990s, however, this part of the island’s economic base has withered away. From 2001 to 2016 Apparel Manufacturing employment fell by 53.7%, Computer and Electronic Product Manufacturing employment fell by 58.7%, and Pharmaceuticals Manufacturing employment fell by 39.5%, leaving not enough of an economic base to support the broader economy.


There is one decision in particular that seems to have been the tipping point for the island’s economy, plunging it into a depression that is now in its 12th year — and that decision was made in Washington in 1996. That’s when the Republican Congress overwhelmingly approved and Democratic President Bill Clinton signed legislation repealing a long-standing exemption from corporate taxes for U.S. companies’ operations in Puerto Rico. The repeal went into full effect on Jan. 1, 2006.

The tax exemption applied to other U.S. territories as well, but it was corporations operating in Puerto Rico that garnered 99% of the benefits — which added up to an estimated $2.6 billion in tax savings in 1989, according to the GAO. The law also allowed U.S. corporations to transfer patents and other intangible assets to their Puerto Rican subsidiaries and avoid U.S. income taxes on their use. This provision was tightened up a bit in the 1980s, but Puerto Rico remained an especially attractive place for patent-heavy corporations — such as the makers of pharmaceuticals and computers — to locate manufacturing operations. (Even now, pharmaceuticals and medicines account for 72.4% of Puerto Rico’s exports.)

These tax advantages coincided with decades of employment growth in Puerto Rico. Incomes rose, too. That job growth was actually slower than in the rest of the U.S., though, and Puerto Ricans continued to migrate to the U.S. mainland in search of better opportunities. Giving advantages to big U.S. corporations operating in Puerto Rico also may have had a dampening effect on local entrepreneurship. Finally, though, what sank the tax exemption seems to have been the deficit obsession of the early-to-mid-1990s.

The jobs that disappeared here were good jobs, by Puerto Rican standards, with both industries paying much-higher-than-the-island-average wages. In the case of computer and electronics manufacturing, some of the decline was inevitable, as employment has fallen in the industry nationwide. In pharma, where the U.S. employment total is now near its all-time high, there’s much clearer evidence of a Puerto Rico effect.

The economic base of most of the Caribbean, meanwhile, is tourism. But I can tell you from having been there twice that Puerto Rico’s tourism industry is underdeveloped and uncompetitive. It costs more, because everyone in Puerto Rico earns more than on the other islands, because if they didn’t they would move to the United States. And there is less investment because the local political culture discourages it.

From 2001 to 2016, Puerto Rico’s Leisure and Hospitality sector added 15,300 jobs (up 23.4%), a seemingly strong gain. But the Arts, Entertainment and Recreation component of Leisure and Hospitality, including all the things tourists would come to see and do, was up just 961 wage and salary jobs (self-employed artists and entertainers would be on top of that). The Accommodation sector, the hotels and other facilities tourists would stay at, was up just 218 jobs over 15 years, or just 1.8%. Full Service Restaurants did manage a gain of about 4,500 jobs (47.1%) from 2001 to 2010, but no data is available after that. So what accounted for the growth of Leisure and Hospitality? Presumably locals eating imported, mass-produced, industrial food at fast food restaurants, the same as everywhere else in the U.S. Not spending by tourists bringing money in from outside.

For those familiar with location quotients, those industries that are well above 1.00 based on employment might be part of Puerto Rico’s economic base – unless they are industries such as Food and Beverage Stores (supermarkets) and General Merchandise Stores (big boxes). If the Location Quotient is well below 1.00, employment in Puerto Rico isn’t even meeting its own needs. The latest spreadsheet of location quotients for Puerto Rico’s private sector is here.

Puerto Rico Location Quotient

Even prior to the hurricane, Puerto Rico’s tourism industry was stagnant, its manufacturing industry dying, its agricultural exports long-gone. And now the hurricane may have wiped out what was left. So once the multiplier effect takes hold, what will be left of the overall consumer economy?

The Local Economy and the Cost of Living

During the decades leading up to the hurricane, employment those sectors dependent on local consumer demand didn’t shrink nearly as much as the economic base that, in theory, supported it. From 2001 to 2016 total private sector employment fell by 55,800 (7.7%), but Manufacturing sector employment fell by 54,500 (42.4%) all by itself. So where did the money being spent in Puerto Rico’s Wal-Mart and McDonalds, and at its hospitals, come from? The fact is that Puerto Rico, having been a corporate welfare island, had become a welfare economy full stop, funded by money earned off the island and not on it.

Some of that money was remittances from family members living and working in the Untied States. Some of it was public assistance payments, but while affluent Puerto Ricans don’t have to pay federal income taxes, poor Puerto Ricans also get far less from government programs such as Medicaid, SSI and Food Stamps than they would if they were in the mainland United States. A stunning 45.5% of those living in Puerto Rico were poor – before the hurricane – according to American Community Survey data (the ACS tab at the bottom of the spreadsheet linked above). That compares with just 15.5% for the U.S. While 13.2% of U.S households reported Food Stamp/SNAP income, 38.1% of those in Puerto Rico did.

The biggest source of transfer payment funds, however, was likely Social Security and Medicare – both for the older people left behind on the island as workers moved away, and for those who had worked on the mainland and retired to the island. This, along with pension payments and savings, provided a source of income for the local consumer economy that did not depend on the local economic base.  Of total households, 42.2% of those in Puerto Rico had Social Security income, compared with 29.8% of U.S. households. And while 32.1% of U.S. households reported public health insurance (including Medicare and Medicaid), the figure for Puerto Rico was 60.0%.

Senior citizens could have become an economic base of their own if additional, better off people decided to retire to Puerto Rico. Consider The Villages, a senior housing development north of Orlando in Florida that is now so big that it is considered its own metropolitan area – with 119,000 people and rising.


As seniors get older, they require additional care. The Continuing Care and Assisted Living Facilities Industry added 1,733 jobs in Puerto Rico from 2001 to 2016, nearly doubling. The Services for the Elderly and Disabled people industry was up nearly 1,300 jobs (56.8%).

But Puerto Rico’s doctors and nurses had been leaving the island, to purse better and higher paid work on the mainland. And Hurricane Maria knocked out Puerto Rico’s hospitals, leaving elective surgeries cancelled and seniors unable to get care. The media reports seniors seeking to leave the island, and their mainland children seeking to evacuate them, meaning even this source of income may shrink.

While Puerto Rico’s local consumer economy is too big for the economic base that supports it, it is also smaller than it should be. Goods are imported that could be produced locally, because an expensive U.S. lifestyle has been imported as well – leaving the island with a cost of living the income of its people cannot support.

Puerto Rico’s energy use is high, as its people have come to expect air conditioning, and its publicly-owned mass transit system is highly subsidized, inefficient, and indifferent. While 76.4% of all Americans drive alone to work in their own motor vehicles, 81.1% of those living in Puerto Ricans do. Public transportation is half as popular on the island, and despite the warm climate, walking and biking to work and working at home are uncommon.

Puerto Rico’s government-owned electric utility is also inefficient, and almost all the energy it uses to produce electricity is imported, mostly imported oil. When oil prices soared and Puerto Rico’s electric utility couldn’t pass on the cost of using it to produce electricity, it went bankrupt – before the rest of the island did. And it hasn’t had the money to expand its capacity, leading to ongoing rolling blackouts for years before the hurricane even hit.

Looking to the future of solar power, some focus on the need for batteries to get through the night, but I know the greater challenge in New York is getting through the winter.  We have solar power for electricity, and I ride a bike to work. But the solar panels only generate one-third of the power in winter that they do in summer, so I need to purchase electricity from Con Edison. And natural gas heat accounts for half our energy use.

Puerto Rico should be cheap to live in, because there is little if any need for heat in the winter, and plenty of sunshine year round, because it is near the equator. If you can’t build a house that generates all the power you need in Puerto Rico, you can’t do it anywhere. And yet the island is locked into far more expensive imported energy sources. And its poor people cannot afford the up-front investment that something like solar power requires.


Hawaii is in the same energy boat as Puerto Rico – reliant on imported oil for expensive electricity. But solar power use has soared so much in Hawaii that the government has begun demanding that solar homeowners store their excess power on-site, to avoid overwhelming the grid.

Puerto Rico also imports 80.0% of its food, despite a year-round growing season. The problem is on the supply side and on the demand side.   Most Puerto Ricans, it seems, don’t want to be campesinos, and don’t really know how to run a successful tropical farm. And like other Americans, more and more islanders have chosen they easy – industrial pre-made food from elsewhere – over the good – their own cuisine with local ingredients cooked at home.


I’m told by someone who knows that if you want good Puerto Rican food you have to get it in New York City. It isn’t as available in Puerto Rico. Meanwhile, the media reports that the farms Puerto Rico did have were wiped out by the hurricane, ending an incipient agricultural renaissance. Many will likely be abandoned.


In the short run, rebuilding might boost the Construction sector, which lost more than two-thirds of its jobs (48,000) from 2001 to 2016. But if Puerto Rico were rebuilt exactly as it was, it would still be an island of very poor people where it is very expensive to live, an island that imports just about everything it uses but has little to sell in exchange, an island where people have to drive everywhere in expensive imported vehicles using imported oil and eat imported food.

In fact, since there were only 22,800 working construction workers still working on the island in 2016, down from 70,800 in 2001, Puerto Rico will probably have to import most of the workers who will rebuild it. And when the federal funding for rebuilding is gone those workers would have to go back where they came from, unless another income source to pay for additional construction were found.

Interestingly, the nearby island of Cuba is in exactly the same situation. Instead of a hurricane and a link to an inflated-value dollar, it has had bad communist policies and the U.S. embargo keeping it down. But the fundamental problem – what is the economic base? – is the same on both islands.


The Impact of Out-Migration

One difference between Cuba and Puerto Rico is that working Puerto Ricans can move to the mainland United States. That has been happening on a large scale, and after the hurricane it certainly needs to happen more. From 2006 to 2016 the number of employed residents of Puerto Rico (including the self-employed) decreased by 281,695, a decrease of 22.2%. Working age Puerto Ricans moved to the United States during that decade even though the U.S. was going through an economic downturn, because things were even worse on the island.

And now the U.S. has reached full employment. With the Baby Boomers retiring, the millennials all in the labor force already, and smaller generations coming up behind them, the U.S. as a whole now has the economy I expected it to eventually have. Plenty of jobs, but only at wages much lower than previously born generations of Americans had received at the same age for the same work, and limited wage increases. Because businesses won’t raise wages, because they can’t raise prices. Because their customers – the wage earners – are broke. If they can’t hire, they’ll cut back instead.

Economics firms are predicting U.S. job growth will sputter to a halt soon, not due to a lack of openings, but due to a lack of qualified workers to fill them. In some places, employers have stopped drug testing entry-level workers, because otherwise they wouldn’t be able to hire anyone. Hopefully U.S. businesses will be forced to turn to older workers and teenagers, groups they have been reluctant to hire in the past. But on a regional basis economic development is now simple. Those places that have a growing number of young workers win – businesses will have to go where they are. Those places that young workers are leaving, and leaving the old and their burdens behind, lose.

U.S. politicians of Puerto Rican descent have tried to extract more aid for the island by threatening other parts of the U.S. with an influx of Puerto Ricans. But in very few parts of the U.S. would that be considered a threat.


If one-third of Puerto Rico’s remaining employed workers were to move to the United States tomorrow, they would absorb (and perhaps allow) two months of U.S. job growth at the current pace. The reality is that many will have to make the move to the mainland, and the federal government should help them. It is perhaps the best thing the federal government could do for the actual people of Puerto Rico, as opposed to the island itself. The island already didn’t have the economy to support them, and it the wake of the hurricane it doesn’t have the housing and infrastructure to provide for them either. They could improve the lot of themselves and their families by moving out now – even if they hope to someday return.

There is, however, a problem caused by the out-migration that already took place. Consider what Lin-Manuel Miranda’s father said in the documentary “Hamilton’s America.”


In his experience, he said, immigrants aren’t the lazy people, or the stupid people. They are the hard working creative people.

He’s right, and the United States in general, and New York City in particular, have benefitted from the influx of young, hard working, creative immigrants over the decades and centuries. But what about the reverse? What does the outmigration of such people mean to Puerto Rico?

It means that most of the sort of people who might be able to envision and create a new economic base for the island, and a new, more economically sustainable way of life there, are not there now. They would need to be attracted there from elsewhere. Hardworking creative people often go somewhere else to pursue their dreams; it is almost a rite of passage for such people. Most of yours will leave, so you need others from elsewhere to come. But they haven’t been coming to Puerto Rico, they have only been leaving.

Bribing big U.S. companies with tax breaks to open branch plants there left nothing lasting. It was just another, more indirect form of welfare. Puerto Rico needs something else.

Why go there? Perhaps because you could buy in cheap to a tropical paradise with a great culture and links to the United States, and start from what is now a blank canvas to create something new.

Why not go there? Because any attempt to build or create something new there would be undermined and exploited by costs and privileges from the past you had nothing to do with. People with pieces of paper who say they are entitled to things that they are looking for someone to make good on, with nothing provided in exchange. It is almost as if slavery, or partial slavery, is being re-created on the island. But all one needs to do to avoid slavery is move away. And all ones need to do to become a slave is move to, or invest in, Puerto Rico.

Princes and Princesses of Puerto Pobre

Before the hurricane hit, the focus had been on the bankruptcy of the Commonwealth of Puerto Rico, its bankrupt electric utility, and its drastically underfunded public employee pensions. As in Detroit, the questions were how much of this public sector catastrophe was caused by the overall economic collapse, how much was caused by a bloated and serf-serving political/union class controlling the government, how much is left for bondholders and pensioners to extract from the rest, and who gets what share?

The assertion that Puerto Rico refused to downsize its public sector does not appear to be true. From a peak of 300,100 government jobs in 2004, Puerto Rico’s government downsized to about 223,000 in 2016, a decrease of 21.0%. The private sector job decrease was just 7.7% during those years.

Puerto Rico Percent Gov

On the other hand, the Government sector accounted for 28.0% of the jobs on the island in 2001, and still accounted for 25.0% of total jobs in 2001. True, Puerto Rico’s utilities are part of that government sector, but in New York State, not know for its small government, the Government plus private utilities only accounted for 17.8% of total wage and salary employment in 2001, and just 15.4% in 2016. Moreover, part of that decrease in government employment in Puerto Rico was the U.S. Navy, which the Commonwealth doesn’t have to pay for, and which Puerto Rico essentially kicked out to stop it from using the island of Vieques for target practice.


What is happening in Puerto Rico should be familiar to observers of government employment trends in Upstate New York, Connecticut, and similar places. As high-paid economic base jobs disappear, influential and organized people face a downsizing of their standard of living and retirement benefits. This increases the demand for government jobs, over and above the need for services actually provided.

The number of school children on Puerto Rico has fallen by 44.0%, according to press reports, but I doubt the number of people working in Puerto Rico’s schools has fallen that much. The government knows that if it laid off that many people, there would be no jobs other than poverty jobs to take their place. But according to American Community Survey data, those who said they were working in the      Educational services, and health care and social assistance sectors were 23.6% of Puerto Rico’s workers, public and private, not much different from the 23.1% for the United States as a whole. Those working in “public administration” accounted for 9.0% of those working in Puerto Rico, but just 4.8% of thse working in the United States.

It isn’t just the number of jobs, moreover, but also the relative the pay and benefits. I would imagine that in the past the total compensation of Puerto Rico’s public employees, including their pensions, was somewhat higher than the compensation of the private sector workers who paid for it. But as the private sector workers have come poorer, the gap has probably increased. As in New York.


I wasn’t able to find Bureau of Economic Analysis data for Puerto Rico, but I would guess the trend would be similar. In New York public employees have become far richer, in retroactively enriched retirement benefits, even as the average New Yorker has become poorer. But thanks to the economic collapse Puerto Rico’s government employees have to squeeze their poorer neighbors – or someone — harder just to get what they had been getting.

With the tax base shrinking, because there are fewer workers and they earn less than prior generations have, how to balance the budget? Apparently if you are in the United States you cut pension funding, cut infrastructure investment, and borrow money. That New York City has continued to do so through three economic booms is a crime. One could make an argument about Puerto Rico either way. As in New York City in the 1970s, when there is no other alternative and austerity finally comes, the government could slash the number of public workers and the public services they provide, and benefits for the population. Puerto Rico has done so. But debts and the retirement benefits of past workers remain.


The origins of Puerto Rico’s pension problems go back decades. The provincial government expanded retirement benefits — like a summer bonus and employee loan programs — but didn’t set aside enough money to pay those benefits in the future.

Funding shortfalls forced layoffs, which further reduced the number of active employees paying into the system; the government workforce has shrunk by nearly a third since 2008.

My guess is that, as in New York State, politics in the Commonwealth of Puerto Rico is dominated by organized, entitled, unionized public employees. Having taken extra benefits in the past, Puerto Rico has already “screwed the newbie” at the expense of younger generations to keep the richer benefits for those older, which is what unions always do.

Although the defined benefit plan, which guarantees future payment levels, was closed to new employees in 2000 and many perks later eliminated, the system is scheduled to run out of money in 2018. After that, the government will have to dig deep into its general revenues to keep the pension checks flowing. In 2016, Congress passed a law called PROMESA, which created a bankruptcy-like process for resolving Puerto Rico’s pension liabilities as well as its $73 billion in municipal debt. The retirement systems cover about 257,000 people, 119,000 of whom are currently working.

The article cites $73 billion in financial debt, which others report at $74 billion, and nearly $50 billion in unfunded retirement promises. That’s a total of about $100,000 per Puerto Rico household in 2016. Puerto Rico’s median household income was $19,350 that year.

In the United States, there are two reasons for the pension disaster. Unjustly rich and retroactively increased benefits politically powerful people, and the failure of past taxpayers (many now dead or moved away) to fund the basic pensions public employees had been promised to begin with. Although few make these sorts of distinctions, the public employees I worry most about are those who will not be entitled to Social Security, not those who will be getting both Social Security and a pension. On Puerto Rico, those disadvantaged former workers are teachers and police.

But who is really disadvantaged?

Puerto Rico Chart

As in the United States, only more so, Puerto Ricans who were age 65 and over in 2016 were richer than Puerto Ricans who had been age 65 and over had been in 2006, as the richest generations in U.S. and island history continued to move into that age group. The poorer generations to follow were worse off than their predecessors had been at the same ages.

And yet it is these poorer younger generations who would be expected to pay taxes for the pensions they will never get, and the debts they didn’t decide to run up, with more and more money diverted from the public services and benefits that will continue to decline. All for the princes and princesses and all they have promised themselves.

True almost everywhere in the U.S. at the federal, state and local level. The Puerto Rico chart is just a more extreme version of the U.S. chart.

Median Household Income Age of Householder

True even more so in Puerto Rico, for those who don’t leave and any who show up.

Predators and Pushers Seeking Bailouts

As in the U.S. as a whole, one can question the values of Puerto Rican members of Generation Greed who sold off their children’s future, albeit in the face of what would otherwise have been a big decrease in their standard of living. But one could also question the sanity of those bond buyers who lent the island $74 billion, with nothing behind it other than a promise that either they or their children would become vastly poorer in the future to pay the bonds back.

As I have noted each year, the use of soaring debts to cover up the difference between falling wages and rising consumer spending has been an American trend, not just a Puerto Rican trend.


With total U.S. non-financial debts (public and private) rising from a stable 140.0% of GDP before 1980s to nearly 250.0% of GDP today.


Over the long term, debt should never have been used for consumption at all. It should have been used for investment.   With businesses borrowing to invest in plant, equipment, training, and research and development to create assets that would provide more than enough ongoing income to pay off the debt. Students borrowing money for college only to the extent that the resulting knowledge and credentials would allow far more of an increase in income than paying the interest on the debt would absorb.   And households borrowing to purchase consumer durables such as homes, autos and washers and dryers only to the extent that doing so allowed them to save money, over the long run, compared with the cost of rent, mass transit, and trips the coin operated public laundry.

Back in the day, in fact, if one wanted to take out a second mortgage, the bank would want to know what the money was for, and would only lend if it could be described as investment and not just short term spending. Borrowing money to take a vacation, or go to Applebee’s, was not what anyone did.

One person’s debt is another person’s paper asset. Those paper assets are claims on someone’s, or everyone’s, future income, and the wealthiest have piled up huge dollar values of them. So have people in other countries, as the U.S. has run a trade deficit year-after year. At one time paper assets, stock and bonds, were backed by real income producing assets. Today, however, most of them are backed only by promises from most Americans, individually and collectively, to live poorer in the future (now the present) in exchange for having been allowed to live richer in the present (now the past). Puerto Rico is just an extreme example of this.

The United States has been addicted to debt and selling off its future, with Wall Street as the pusher that collects fees on the deal. For the U.S as a whole it isn’t sustainable either, and the economy would have collapsed in 2008 had not the federal government stepped in, massively, to bail out the value of the financial assets of the rich, even as average wages and life expectancy fell.


As result the federal government is deep in debt even as the Baby Boomers retire, and yet the Trump Administration wants another round to tax cuts – to be paid for after Generation Greed is gone — by the poorer generations coming after.

And now, Puerto Rico’s bondholders are looking for someone to bail them out too. Who? Poorer, younger generations of Puerto Ricans left even more destitute by Hurricane Maria? Poorer, younger generations of ALL Americans left worse off by Generation Greed? That money wasn’t borrowed to upgrade Puerto Rico’s infrastructure. It was borrowed to keep people on the public payroll and the pension checks coming as Puerto Rico’s tax base collapsed. And in any event, Puerto Rico’s infrastructure is now wrecked. There is no asset backing those debts and pension promises. Just blood from a stone.

Given the island’s economic realities, it is likely that those who lent money to Puerto Rico and bought Puerto Rico’s bonds did so based on the assumption that, after collecting high interest for years, they would eventually be made whole in a federal bailout. Like Fannie Mae and Freddie Mac bondholders during the financial crisis of 2008. Post hurricane, however, any federal money used to pay interest on those bonds would come at the expense of money that could be used to rebuild the island, investment the island will need if it is to have any chance of having a future at all. Donald Trump was right the first time. Those debts – to the extent the represent the first call on any money any Puerto Ricans will ever have in the future – have to be wiped out, or replaced by something else. Something else that only pays off later, not now, and last, not first, after those who could create a new Puerto Rico are allowed to do so, and are adequately compensated for having done so.

Counter Culture Island

Puerto Rico has two potential futures. Welfare island, shrinking and suffering as the willingness of other increasingly-less-well off Americans to pay for it diminishes.

And counter-culture island. A adaptive, tropical equivalent of the new economy and lifestyle that younger, poorer generations of Americans are having to create all over, notably in places such as Brooklyn, to cope with the burdens that have been shifted to them. With less consumer consumption, less space per person, less use of personal automobiles, more local food, more local value added, and less energy use.

Part of the counter-culture future could be as an alternative to Florida for the next generation of more modest living, more multi-cultural Northeastern retirees. Puerto Rico is already late to the game. Senior housing is getting overbuilt, and a higher share of the next generation of seniors, far poorer than Generation Greed, will want and need to live near its children and age in place.

While retiring at all may be out of reach for a growing number of Americans, and retiring to somewhere distant out of reach and/or unappealing for the rest, there are a growing number of older Americans retiring to other countries that are cheaper, where they could live on less. Similarly, when the generation before Generation Greed retired to Florida, it did so to very small, one-bedroom patio homes on small lots. These homes often sell for peanuts today, because Generation Greed expects something far more grandiose.

Puerto Rico could attract a newer breed of retiree if it were, in fact, cheaper and had, in fact, a working infrastructure and a vastly cheaper government – and if the airlinks to the mainland, where the children would live, remained cheap and convenient. More retirees would mean more tourist visits by those retirees’ children, seeking a vacation and visiting parents at the same time. As for tourism, consider this review of the west Puerto Rico town of Rincon in The Lonely Plant Guide to the island. I’m just taking their word for it – never been there.

A wonderfully barefoot ambiance, no traffic, eclectic paradores and tempting barkeries. And this is all set in an area of green mountains and cow pastures pushing up against the Caribbean…It’s full of environmentally and politically active residents; the town exudes a youthfulness, energy and athleticism that engages most of the community…And while the region may seem dominated by English-speaking business owners, the unique “Spanglo” culture of Rincon has fostered a palpable sense of equality among the residents. Contrary to what’s visible in other parts of the island, there is very little economic disparity (at least on the surface) between expat and native lifestyles. Whatever wealth comes into the area via the tourist industry seems to be getting rather fairly spread around…While the old-style bunkhouses are all but gone, imaginative and moderately priced guest houses remain a staple in Rincon.

Oh no! Hipster gentrifyers!

Puerto Rico could also attract more working, non-elderly residents if it offered a low cost lifestyle based on all the things people no longer need, many of which – post hurricane – Puerto Rico no longer has.

A fast-over-the-air internet connection, not cable. Bicycle, private buses and vans, and carshare, not personally owned cars. Small cottages with power from solar panels, not McMansions with oil-based electricity off the grid. Home-based teachers of 12 local kids that get lectures from and do exercises on laptops, not far off schools with lots of out-of-classroom costs only accessible by bus. Home delivery and stuff sold off the back of a truck, not big box stores.

On the mainland, young people and immigrants are figuring this stuff out with the government working against them, let alone with them, because they have to. I find this guy’s picture-based (not number-based) stuff interesting, and a lot more people look at his pictures than download my spreadsheets.

Garden Grove: The Other Kind of Incremental Urbanism

The Precariat Shoppe

Hacking School

The Ghost of Mamie Eisenhower

To be replicated in the tropics, perhaps?

I get a feeling, however, that there are plenty of New York-based politicians of Puerto Rican descent who would much prefer the “Welfare Island” alternative, with some of the sort of corporate welfare the island once received in the past, along with someone paying for the sort of rich-benefit, placard-parking lifestyle the political class gets for itself in New York, and in this scenario would continue to receive in Puerto Rico. Maybe, as part of the deal, the hedge funds could get paid too. And as for the rest, particularly those born after 1960 (and hired by the Commonwealth after 2000) well who cares? As long as Puerto Rico could be authentic, like the South Bronx and Bushwick in the 1970s.


Rubén Díaz junior, the elected Bronx borough-president, notes predictions that hundreds of thousands of islanders might leave, and hopes they are wrong. Even a tenth of that number would put a “real strain” on schools and housing, he says. Mr Díaz, a Democrat, expresses fears of an indebted, depopulated island falling prey to “vultures” from Wall Street and the world of high finance, bent on privatising its assets. Among Puerto Rican politicians in states like New York, such hard-left arguments are both common currency and largely without consequence for national politics.

Well, to hell with that attitude Ruben.

I guess the only thing worse than hipster gentrifyers is people actually investing their money – unless they are doing so with government subsidies. “If we are for it let’s subsidize it, and if we’re not subsidizing it we’re against it, and we’ll decide if we’re for it in discussions at fundraisers.” This was the New York political class’s approach to economic development for decades, until it was overwhelmed by an influx of young entrepreneurs. Perhaps they can re-create the good old days on Puerto Rico, which would then have to stay in welfare island mode for a couple of decades until there is almost no one is left there, prior to turnaround.

If people living on Puerto Rico want to eat at McDonalds and shop at Wal-Mart, they need to move to the United States. To be replaced by innovative people who actually want to eat locally grown rice, beans and plantains, and can come up with a way to actually earn money there. Whether “Spanglo” hipster gentrifyers or, perhaps, the returning offspring of Puerto Ricans who moved to New York from the island decades ago.

Generalizing this concept, after observing trends over the past few decades I find few examples of poor people advancing and poor places improving together, in the same place, at the same time. The economic and social conditions in places of concentrated poverty work against that advancement and improvement.

Instead, I observe, poor people tend to advance by moving out of poor places. Away from the “Five Points,” out of the ghetto, away from the Barrio. To places with more jobs and better schools. Not by staying where they were.

And poor places tend to turnaround and improve when non-poor people from elsewhere move in, start fixing things up, start opening businesses. The remaining poor people may also benefit from that kind of reinvestment, if they aren’t priced out by the new arrivals.

Both things – people held back by living on Puerto Rico moving to the mainland to get ahead, and other people moving to Puerto Rico and investing there, need to happen now.

Cornell operates an Observatory at Arecibo in Puerto Rico (or did, before the hurricane).


It also has four land grant colleges where the tuition is SUNY, not Ivy. One of these is the College of Agriculture and Life Sciences. It also operates a School of Hotel Management. Did any New Yorkers of Puerto Rican descent go there?

Debt for Equity

If Puerto Rico’s public pensioners and bond creditors insist on being paid everything they have promised themselves, and have been promised by those who later died off and/or moved away, they demand to be parasites at the expense of whatever future Puerto Rico might otherwise have. The people who benefitted from the public services those pensioners once provided, but did not fund the pensions, and those who benefitted from the spending that Puerto Rico’s bonds paid for, are going, going, gone. (As in, for example, Connecticut and Illinois). Nobody younger and poorer owes them anything. They are fellow victims, or greater victims. As in the U.S. as a whole.

The only people with a legitimate up-front claim against younger and future residents of the island, and any people who might move there or open a business there, are those former public employees who were promised pensions in lieu of Social Security, rather than in addition to it. They ought to get whatever they would have been entitled to if they had been eligible for Social Security, before anyone else gets a dime. (I feel the same way about Illinois, etc).

For all the other debts, pension, bond, and otherwise, the solution is a debt for equity swap.

All of the land in the hands of the Commonwealth of Puerto Rico, and all the land that will fall into its hands in the next decade, that isn’t used for public facilities, nature preserves and the like, should be turned over to four competing Real Estate Investment Trusts (REITs) whose shares would be initially allocated to the creditors on a dollar for dollar basis. Each REIT would get land all over the island, urban and rural, seaside and island, including some chunks that are big enough to make large-scale development and redevelopment practical. Someday in the future, if and when that land asset paid off, when something was done with the land that created some kind of income for the REITs, the creditors – or whoever owned the REIT shares at the time — would get the money. Not before.

That would turn the relationship between the creditors and the island as a whole from parasitic to symbiotic. Because that land would only produce income when something productive was done with it – when it was leased or sold or developed by the REITs themselves. And that could only happen if Puerto Rico as a whole was a viable place – with hospitals and health care, public safety, public health, roads, and other government functions.

Instead of just seeking to suck money out of anyone who tried to create economic activity in Puerto Rico with nothing in exchange, the REITs would be competing to attract such people and firms to the land they owned.   The REITs could dilute their shareholders by issuing additional shares to get money to clear the properties and prepare them for occupancy, and then borrow money for additional investment when money started to come in. They could sell land, lease it, or develop it themselves, depending on their strategy, and may the best strategy win. If the land could be turned over to REITS quickly, they could start by harvesting and selling all the blown down tropical hardwood before it rots on the ground.

Right now, Puerto Rico’s public pensioners and other creditors have pieces of paper backed by nothing more than a promise that poorer, younger generations will be made even poorer to pay them back. Just like most of the piece of paper the rich and public employee pension funds hold on the mainland. Equity in a real asset, even if that asset has zero short-term value in the wake of Puerto Rico’s economic collapse and natural disaster, is a better deal than many would say they deserve.


1 thought on “Puerto Rico Needs a Debt for Equity Swap

  1. larrylittlefield Post author

    We somehow elected a President who is good at only one thing. But negotiating a debt for equity swap after a near bankruptcy so development could proceed happens to be it.

    How much of an economy could tourism and the retired support? Most people know how many huge theme parks are in metro Orlando, Florida. The area has about 120,000 hotel rooms, the most in the U.S., and is adding them at the rate of 1,300 per year.

    Metro Orlando has about 2.4 million people. Puerto Rico had about 3.6 million people before the hurricane.

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