[Editorial] Crying Wolfe
Editor’s note: This editorial was originally published in the June 14-20 issue of Caribbean Business.
“If we build labor reform, the jobs will come” might be a guiding principle of the Financial Oversight & Management Board (FOMB), inspired by economists of the IMF ilk, but Puerto Rico’s path to sustainable economic growth is predicated on a far more complex formula. The most recent touting of the importance of labor reform for Puerto Rico came during an American Bankruptcy Institute (ABI) podcast between ABI Executive Director Sam Gerdano and economist Andrew Wolfe, who serves as the economic adviser to the FOMB.
Wolfe, a former director of the Western Hemisphere Department with the International Monetary Fund (IMF), is well-acquainted with a Puerto Rico economy hobbled by mammoth debt; he helped draft “Puerto Rico: A Way Forward,” along with former IMF Managing Director Anne Krueger and IMF colleague Ranjit Teja.
The document, akin to a 12-step program for an island addicted to debt, breaks down the maladaptive tendencies of Puerto Rico’s government—a compulsion to overspend while issuing bonds to fund gaps jumps from those pages—that now has Puerto Rico owing some $70 billion to the creditor mob. A Path Forward is chock-full of recommendations that the fiscal control board is trying to implement, the most contentious among which is the rescinding of Law 80, which would eliminate protections for private-sector employees, making Puerto Rico an “at will” labor jurisdiction similar to Florida.
Wolfe stressed the importance of labor reform to attract investors to set up shop in Puerto Rico, thus creating much-needed jobs. Puerto Rico, which currently has a 38 percent labor-participation rate, now ranks among the 20-worst jurisdictions on the jobs front. Only a few nations torn by war, rank lower.
Although this newspaper believes in labor-reform measures that lead to job creation, we are not under the impression that there is a conga line of companies chomping at the bit to set up shop in Puerto Rico if Law 80 is rescinded. No, it is doubtful companies would come to Puerto Rico when our broken and bankrupt power grid has become the global poster child for inefficiency and lack of reliability.
There is a crying need for transformation on the energy front. Without an Integrated Resource Plan for the Puerto Rico Electric Power Authority that can deliver reliable power at affordable rates, very few companies will entertain establishing operations on the island. That is a pressing concern we must address first and foremost. Otherwise, Wolfe’s prognosis—that “it will be quite some time before we can convince creditors that reforms will lead to sustainable growth”—will become a self-fulfilling prophecy.
During the ABI podcast, Wolfe was quick to dismiss changes to federal tax policy as a conduit to growth because he sees those incentives as a fleeting solution—“so I am reluctant to go back to Congress to try to get some of those tax breaks again; who knows, 20 years from now, somebody might say let’s take them away again.”
More than a few people have taken exception to those comments, among them the Puerto Rico Manufacturers Association (PRMA), which sent a letter to FOMB Executive Director Natalie Jaresko calling Wolfe’s remarks into question. The missive signed by PRMA President Rodrigo Masses called out Wolfe, alleging the adviser’s remarks run contrary to the PRMA’s lobbying efforts to obtain manufacturing tax incentives similar to those once contained in Section 936.
The defunct tax credit was once the engine driving Puerto Rico manufacturing to a high point in 1994—180,000 jobs and more than 40 percent of the money deposited in Puerto Rico’s banks were 936 funds. Unfortunately, Puerto Rico failed to capitalize on those incentives, exposing Section 936 to attacks by Republicans on Capitol Hill, who denounced the erstwhile tax code as a conduit to corporate welfare that gave away too much money—often zero taxes—for too little in return.
Unfortunately for Puerto Rico, there is very little appetite, particularly among Republicans on the Hill to grant more tax breaks. The PRMA and all the other interest groups lobbying members of the U.S. Congress have been told time and again that Puerto Rico would not be receiving special treatment of any sort. That is unfortunate.
Those same members of Congress saw some of their predecessors now lamenting the throttling of Section 936; when you cut off your nose to spite your face, it is never pretty.
Now, congressional leadership is coming to grips with the self-evident truth that the Puerto Rico Oversight, Management & Economic Stability Act (Promesa) does not solve the island’s economic problems, nor perhaps was it truly intended to, beyond the respite from the debt behemoth. That much was made clear when one of the authors of Promesa, former House Natural Resources Committee Staff Director Bill Cooper, admitted the Task Force for Economic Development was created to appease the restless observers, who knew deep down in their hearts that we will be at this for a generation if we do not achieve sustainable economic growth.