How to End Puerto Rico’s Public Debt… Right Now

Apr 27, 2015
12:26 PM

Thirty-five years ago Rubén Berríos, the president of the Independence Party of Puerto Rico (PIP), made a very dramatic speech. He informed the world that both of the major parties in Puerto Rico were a complete fraud. The reason was very simple: both of them defined their candidates, and trolled for votes, and structured their party platforms on whether or not Puerto Rico should be the 51st state of the United States.

Berríos identified this as a complete sham because the Foraker Act (1900), the Jones-Shafroth Act (1920), the Puerto Rico Federal Relations Act (1950), Public Law 82-447 (1952), the U.S. Constitution (Article IV, Sec. 3.1), the U.S. Republican Party, Wall Street, the U.S. shipping industry and virtually all of corporate America were all opposed to statehood for Puerto Rico.

According to Berríos, the obstacles to statehood were so dense, that any political campaign based on the statehood issue (either for it, or against it) was an outright lie—since statehood was virtually impossible, and therefore a moot point.

Rubén Berríos was correct. The status issue is often used by people with no qualifications, political program or personal ethics, in order to get elected and put their entire family on the government payroll. This is part of the reason that Puerto Rico has a $73 billion public debt.

Instead of arguing endlessly about the status issue, the politicians and journalists in Puerto Rico should unite behind tangible, achievable goals. They should identify problems and offer solutions. Here are two problems and one solution:

PROBLEM #1: Puerto Rico’s Public Debt

The public debt of Puerto Rico is currently $73 billion. This debt is made worse because the three Wall Street rating services —Fitch, Moody’s, Dun & Bradstreet— all downgraded it to “Junk Bond” status within the past year. This means that Puerto Rico has been given the lowest possible credit rating: and therefore, the interest rate on this debt will be at the highest possible level.

This debt, and this high level of interest, is why the government of Puerto Rico has raised gasoline taxes in two years, raised the water and electrical rates, raised property and small business taxes, proposed a 16% VAT (value added tax, also known as IVA), and even proposed a “fat tax” on overweight children.

PROBLEM #2: The Cabotage Law

Under Section 27 of the U.S. Merchant Marine Act of 1920 (also known as the Jones-Shafroth Act), all goods carried by water between U.S. ports must be shipped on U.S. flag ships that are constructed in the U.S., owned by U.S. citizens and operated by U.S. citizens. That means that every product that enters or leaves Puerto Rico, other than highly taxed and severely regulated foreign registry vessels, must be carried on a U.S. ship to and from U.S. ports. That means that every product that enters or leaves Puerto Rico to U.S. ports must be carried on a U.S. ship—or face extremely protectionist quotas, tariffs, fees and taxes that are ultimately passed on to the Puerto Rican consumer. (In contrast, a 2013 GOA study speaks to how complicated the issue is.)

AT SEA (46 App. U.S.C. 883 (2002)).6 No merchandise, including merchandise owned by the United States
Government, a State (as defined in section 2101 of title 46, United States Code), or a subdivision of a State, shall be transported by water, or by land and water, on penalty of forfeiture of the merchandise (or a monetary amount up to the value thereof as determined by the Secretary of the Treasury, or the actual cost of the transportation, whichever is greater, to be recovered from any consignor, seller, owner, importer, consignee, agent, or other person or persons so transporting or causing said merchandise to be transported), between points in the United States, including Districts, Territories, and possessions thereof embraced within the coastwise laws, either directly or via a foreign port, or for any part of the transportation, in any other vessel than a vessel built in and documented under the laws of the United States and owned by persons who are citizens of the United States,7 or vessels to which the privilege of engaging in the coastwise trade is extended by sections 18 or 22 of this Act: Provided, That no vessel of more than 200 gross tons (as measured under chapter 143 of title 46, United States Code) having at any time acquired the lawful right to engage in the coastwise trade, either by virtue of having been built in, or documented under the laws of the United States, and later sold foreign in whole or in part, or placed under foreign registry, shall hereafter acquire the right to engage in the coastwise trade: Provided further, That no vessel which has acquired the lawful right to engage in the coastwise trade, by virtue of having been built in or documented under the laws of the United States, and which has later been rebuilt, shall have the right thereafter to engage in the coastwise trade, unless the entire rebuilding, including the construction of any major components of the hull or superstructure of the vessel, is effected within the United States, its Territories (not including trust territories), or its possessions…

This includes cars from Europe and Japan, food from South and Central America, medicine from Canada—any product from anywhere. In order to comply with the Jones Act, all this merchandise must be off-loaded from the original carrier, reloaded onto a U.S. ship and then delivered to Puerto Rico. It all makes as much sense, as digging a hole and filling it up again.

This is not a business model. It is a shakedown. It’s the maritime version of the “protection” racket. A 40-year study of this “cabotage cost” to Puerto Rico shows the following figures:


From 1970 through 2010, the Jones Act cost Puerto Rico $29 billion. Projected from 1920 up to the present, this cost becomes $75.8 billion.

Ironically, this $75.8 billion cost is higher than the amount of Puerto Rico’s current public debt, and a great portion of this public debt is owed to U.S. investment bankers, private equity firms and hedge funds.

SOLUTION: Problem #2 can solve Problem #1

The solution to these two problems is quite simple. Neither problem should have existed in the first place. But the two problems can now solve each other. Here is how that would happen:

  1. The U.S. acknowledges that the 1920 Merchant Marine Act was a dysfunctional and harmful piece of legislation.
  2. The U.S. Congress rescinds the 1920 Merchant Marine Act.
  3. Since the 1920 Act was harmful and unjust, the U.S. reimburses Puerto Rico for the adjusted net revenue losses from 95 years of this Cabotage law.
  4. The amount of this reimbursement (nearly $76 billion) will completely offset the public debt of Puerto Rico ($73 billion).

In one fell swoop, this will eliminate one of the principal vestiges of the colonial relationship between the U.S. and Puerto Rico.



It will also eliminate Puerto Rico’s public debt, and put the entire island on a firm financial footing.

It will eliminate a recurring hole in the island’s budget, which often reaches as high as $1 billion annually.

It will restore the island’s credit rating.

It will create an entire new industry in Puerto Rico: that of international shipping.

It will create many thousands of permanent jobs.

It is grounded in justice and common sense.

A Challenge to Both of Them

As Mercutio said just before dying in Shakespeare’s Romeo and Juliet, “A plague on both your houses!” He was referring to the Montagues and the Capulets, two families whose ridiculous and petty squabbles were causing many needless deaths, including his own.

These days, Governor Alejandro García Padilla (of the status quo PPD party) and Resident Commissioner Pedro Pierluisi (of the pro-statehood PNP party) are circulating petitions demanding each other’s impeachment. They criticize each other at every turn, and “position” themselves for the 2016 election cycle.

They “work” the federal government like a pair of high-priced lobbyists. The governor helps U.S. hedge fund managers to use Act 22 (with its 20-year interest, dividend and capital gains tax exemptions to foreign investors) to devour prime pieces of Puerto Rico real estate. The resident commissioner holds “Jones Act hearings” on giving specific shipping waivers to specific businessmen.

The message this sends to the U.S. government and journalists, is that Puerto Rico’s leadership is divided, disorganized and dripping with self-interest. No wonder the U.S. does not take our plebiscites, our protests, or even our people very seriously.

So here is a challenge to both the PPD and PNP: stop squabbling like children. Stop stuffing your pockets. Show a little discipline, and get united behind something important

We challenge you to stop acting like politicians, and be the leaders that Puerto Rico so desperately needs. The solution presented in this editorial is simple, sensible and solidly documented.

End the public debt of Puerto Rico. End the cabotage law. NOW!

Editor’s Note: Additional clarifications about the Jones Act were made.


Nelson A. Denis is a former New York State Assemblyman and author of the upcoming book, War Against All Puerto Ricans.