A few days ago Puerto Rico’s public debt was downgraded to non-investment grade by Moody’s and S&P, with a third rater, Fitch, waiting to follow suit closely behind. These events have reverberated powerfully across Puerto Rico and the mainland’s economic community. There has been another potent, albeit less discussed, effect of the downgrades: how the island’s financial turmoil impacts its status politics.
Puerto Rico’s road to statehood has become significantly bumpier. The quest for admission into the Union is “breaking bad.” The reason for this negative turn is simple: unacceptable cost. The dismal condition of the territory’s economy, amply discussed in the mainland press, implies the need for massive transfers of federal money into Puerto Rico in the event of admission into the Union.
There is solid historic evidence to sustain this conclusion. Back in 1989-1991 Puerto Rico was embarked on a status resolution process to reach a binding plebiscite on status. The Congressional Budget Office (CBO) was charged with estimating the cost to the federal government of executing each status alternative. The CBO came back with an estimate of the incremental cost of statehood ranging at several billions of dollars in addition to transfers already provided to Puerto Rico. The reason for this additional cost was Puerto Rico’s poverty level, which would have required huge increases in Medicare, Medicaid, Social Security and other outlays to reach parity with the several states. Statehood was the most expensive status alternative by orders of magnitude.
The economic conditions of Puerto Rico back then were very different. The Commonwealth’s economy was still growing, public finances were relatively healthy and the financial debacle now gripping the island was only a vague possibility. Fast forward to 2014: the island is now in its eighth year of recession, its industrial base is a shambles, its population is in flight and its credit is junk. Should the CBO repeat its evaluation today the incremental cost of granting statehood to Puerto Rico would be astronomical.
This is precisely the crux of the matter. Statehood leaders are, consciously and otherwise, selling statehood as the remedy to the island’s financial woes. In doing so they are framing statehood as the mother of all bailouts: statehood will cure the island’s unpayable debt, recapitalize the economy and lead Puerto Rico to the promised land. This is a very dangerous proposition: the federal government clearly is not in the bailout business and Congress will surely turn a very negative eye on any attempt by Puerto Rico to freeload its way out of debt on the shoulders of its admission to the Union.
Many posit that the greatest blow to Puerto Rico’s quest for statehood is the inability of its supporters to successfully petition for admission. The truth is different: the biggest threat to the territory’s admission to the Union is the unbearable cost of its insolvency.
Jorge Galva lives in Vega Alta, Puerto Rico. You can follow him @JorgeEGalvaR.