Wednesday, May 25, 2016


House Speaker Paul Ryan, who needed a lift after losing his arm-wrestle with Donald Trump, is being celebrated for striking a deal with President Obama and the Democrats for a plan to rescue Puerto Rico. The House will vote soon. The Hill, a newspaper on Capitol Hill, touts the deal as Mr. Ryan’s first major bipartisan “big win.” But is it?

Not yet. There’s still work to be done to protect the constitutional and other legal rights of bondholders, and to put in place economic reforms to solve the island’s long-term economic profligacy.

Mr. Ryan is correct that Congress should try to help Puerto Rico. Puerto Rico is an American commonwealth and Puerto Ricans are Americans, who have been severely harmed by political mismanagement and corruption, much like residents of Detroit who were done in by their government. Mr. Ryan has correctly rejected liberal Democratic demands for a taxpayer bailout. That would be unfair to citizens in the 50 states, because the Puerto Rican government brought this on itself. Puerto Rico must learn the bitter lesson that “free stuff,” despite what the Democrats have told them, is not free.

These problems are severe. The island is already technically financially insolvent, with the San Juan government unable to make its bond repayments. The unemployment rate is in double digits and the poverty rate is almost twice as high as in even the poorest of the states. The welfare state has run amok on the island, with welfare benefits often paying better than a full-time job. Only half of young people are working. Debt now exceeds 100 percent of the island’s annual Gross Domestic Product.

The compromise plan would appoint a powerful financial control board to take over fiscal decision-making and debt restructuring in San Juan, and that’s good. This reform is urgent. Such reform worked in the District of Columbia, following decades of financial malfeasance and addiction to free stuff, and it should work on the island.

But the draft of the compromise plan is deficient in some particulars. Bondholders who own the government obligation bonds, which carry a full faith and credit obligation of repayment, must be clearly recognized as first in line for repayment. The Ryan bill is intentionally vague on this, and could enable the control board to pay off other stakeholders, like unions, first. The bill should explicitly require Puerto Rico to honor the legal prioritization of claims on assets. The bill’s current language talks about honoring union pensions, which sounds like an excuse to steal from private retirees who own the bonds in order to take care of public-sector workers whose fat pensions contributed to the crisis.

The compromise does not fix the underlying problem of Puerto Rico, which is that it has become a welfare island with few job opportunities. The business sector is fleeing. If the cycle isn’t broken, no financial restructuring can prevent continuing economic meltdowns. Mr. Ryan and the Republicans dropped regulatory reforms, such as suspension of a federal minimum wage, which has killed starter jobs on the island. Where is business tax relief?

It’s not too late for Mr. Ryan to insist on more market-based reforms, the only real way to save Puerto Rico. If Barack Obama, Nancy Pelosi and their Democratic colleagues want to vote that down, everyone will know who lost Puerto Rico.

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