Historical Perspective: The Slow March To Disaster in Puerto Rico

On May 1st 2016, Puerto Rico’s Government Development Bank (GDB) defaulted on a $389,000,000 bond payment.

The GDB, which according to recent financial disclosures at the time showed less than $600,000,000 in total assets was subjected recently to capital controls via executive order issued by then Gov. Alejandro Garcia Padilla that had frozen almost all withdrawals, while also suspending lending.

The default immediately closed the island’s access to capital markets and simultaneously halted the issuance of almost 1 billion in tax revenue anticipation notes the Puerto Rican Government was expected to issue through the end of 2016.

The default had been preceded by a failure to make $143,000,000 in debt obligation payments on subject-to-appropriation bonds issued by the Public Finance Corporation since August of 2015, and foreshadows a $780,000,000 general obligation bond payment due July 1st which is guaranteed by the Islands’ constitution.

Politically, Puerto Rico currently operates in a multiparty system consisting of 6 mostly center-left to far-left registered electoral parties.

The Island has however, historically leaned left as many inactive parties have ranged from center-left to socialist in platform.

This spiral towards fiscal calamity, which has accelerated over the past 10 years, had its roots in a crippling economic decision that occurred during the Clinton administration.

The Puerto Rican economy was forecast to be somewhat compromised by provisions in the North American Free Trade Agreement (NAFTA) which was agreed upon and ceremoniously signed on December 17, 1992, by Canadian Prime Minister Brian Mulroney, Mexican President Carlos Salinas, and U.S. President George H.W. Bush.

These provisions, which were officially signed into law by President Bill Clinton on Dec. 8, 1993, would go into effect on Jan. 1, 2014 taking away a key trade advantage held by the island over many Latin American countries with regard to duty-free imports to the U.S.

Further exacerbating the potential for economic stagnation were the federally mandated minimum wage laws, which gave non-minimum wage countries in the Caribbean a pronounced economic advantage over the commonwealth.

With those factors in play, the Clinton administration made a shortsighted decision to increase revenue intended to reduce the federal deficit by proposing elimination of Section 936 of the Internal Revenue Code, which gave mainland U.S. companies an exemption from federal taxes on income earned in Puerto Rico.

Section 936 actually came into effect in 1976 replacing a similar exemption, IRS Section 931, which prompted industrial growth driven by tax breaks for the manufacturing sector dating back to 1921.

The manufacturing sector, which primarily benefited from the tax break, accounted for 40 percent of the islands $34,000,000,000 in yearly gross product.

Companies had been able to pay livable wages and stay profitable while citizens enjoyed stable employment and drove the retail markets.

The Clinton plan also affected $16,000,000,000 in deposits that American companies kept in Puerto Rican banks. That money allowed banks to make loans to businesses and citizens at lower interest rates than they would get in the United States.

By March of 1993 the island was consumed in a movement to preserve the tax break which helped to usher in industrialization and stave off the poverty suffered by some of their neighbors in the Caribbean.

The local headlines were dominated by the subject, marches were organized and “I Support Section 936” bumper stickers were prevalent as well.

Despite the best efforts of the citizens to halt the Clinton Administration, the tax benefit was eliminated.

The advantageous position enjoyed by Puerto Rico was eliminated instantaneously dealing a crushing blow to the Puerto Rican economy.

Most industries disappeared immediately with some pharmaceutical and electronic manufacturing remaining in small pockets.

It was a death knell to the job market on the island which had so heavily depended on it.

The stated intention of eliminating the exemption was to reduce the federal deficit. Out of the 23 subsequent yearly budgets since Puerto Rico was consumed with the fight to save Section 936, the federal budget ran a deficit 19 times.

Originally Published on Newsmax as: Puerto Rico: Another Victim of the Clintons | Newsmax.com