Monday, November 20, 2017

[Column] It was not supposed to happen

By on September 11, 2017

Puerto Rico was not supposed to go bankrupt.

Section 7 of Article VI of the Commonwealth’s Constitution mandates that the government cannot spend more than it receives in revenues.

Yet the government ran up one budget deficit after another that, according to the Promesa Fiscal Board, would reach $65.7 billion in the next 10 years.

Section 2 of Article VI sets a limit on how much the government can borrow, based on government revenues. This links borrowing to economic growth.

Yet the government not only continued but increased borrowing as the economy declined, by 2016 running up a debt of $70 billion that it declared it could not pay.

How did this happen? Did the government of Puerto Rico, in recent decades controlled by both political parties, simply go berserk?

No, the government knew what it was doing.

Each year the Legislature cannot approve a government budget for the next fiscal year that exceeds the government estimate of its revenues in that fiscal year.

But this, in fact, does not limit government spending. If the government wanted to spend more, as it always did, it simply inflated its estimated revenues. And at the end of the fiscal year it filled the inevitable deficit borrowing from itself – from the Government Development Bank.

And there is, in fact, no real debt limit. In addition to the constitutional debt, there is what is called the “extraconstitutional debt.” The government lending to itself that is not subject to the constitutional limitation.

Now, everyone knew all this. And since 1995, knew that Puerto Rico was headed towards a terrible economic crisis. When in 1995 Governor Pedro Rosselló supported in Congress the elimination of Section 936, everyone knew that this would have a devastating effect on the island economy.

To cite one example, one of Puerto Rico’s most experienced economists, Eliezer Curet Cuevas, was the chief economist in Rosselló’s 1992 campaign for governor, and served in the new administration. But in 1966 he wrote a book predicting that the new Governor’s policies and spending would have a terrible effect on the economy.

Towards the end of the book he predicted the effect of losing 936:

“The consequences for the Puerto Rican economy will be an enormous loss of direct and indirect employment and an ever greater reduction in productivity growth… Puerto Rico will experience a stage of economic crisis, social tensions and personal suffering that will shake the fiber of our society.”

Again, this was in 1966. And Curet was not alone.

Children play in the flooded streets of Ponce, Puerto Rico on Sept. 5, 1967 after Hurricane Beulah passed to the south. (AP Photo/Toby Massey)

Yet U.S. investors continued lending? It was not until 2014 that Puerto Rico lost its credit. On February 4th Standard & Poor’s degraded Puerto Rican government bonds to “junk.”

How to explain this? Part of the answer, I think, is that there was here and in the U.S. a mindset of precisely, this is not supposed to be happening. Yes, of course, everyone could see that the island was spiraling toward bankruptcy. But there was, I think, a sense that somehow, Puerto Rico is going to recover.

An anecdote from 2001 makes the point. The newly elected governor, Sila María Calderón, learned that the previous administration had run up a $5.9 billion “extraconstitutional debt” to pay for very big and expensive projects that had no funding.

Then Calderón got a call from her new Secretary of the Treasury: The government was not able to meet its February payroll.

She called an emergency meeting of her cabinet that night, and began saying that no one was to say a word to the press about the crisis.

All this is described by Juan Agosto Alicea in a 2011 book also worth reading today: “Crisis: al Borde de la Quiebra.” After a long career in the private sector, head of Peat Marwick, he had served as Secretary of the Treasury and in other posts.

Calderón had convinced Agosto to return to government, head and rescue the Government Development Bank. He agreed although he had a low opinion of “politicians”: indeed his book was a highly critical indictment of how “politicians” of both parties had fouled the economy.

But he writes in the book how pleased and even proud he was of Calderón for doing what no “politician” ever does, for not using the crisis to attack the Rosselló administration. For insisting to her cabinet that they were not elected to play the usual partisan blame-game, but to solve the problems, and they were going to solve this one.

This anecdote, I believe, reveals the fundamental mindset: If this is not supposed to happen, it’s a matter of making right decisions. And, yes, don’t panic, keep spending, put more not less money into the economy, and the economy will recover.

It didn’t. It was not a matter of making the right decisions to correct mistakes, making adjustments to correct bad policy. It was that, more than anything else, the loss of 936 and the enormous growth in “extraconstitutional debt” had mortally damaged, ruined the economy. It didn’t recover because it couldn’t.

In their hearts of hearts, I believe, the governments of Puerto Rico always believing that they would revive economic growth, never believed that the island would go bankrupt.

It was not supposed to happen.

But it did.

–A.W. Maldonado was a reporter and columnist for the San Juan Star, executive editor of el El Mundo, and publisher and editor of El Reportero.

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