No More Colonialism Disguised as Financial Assistance: The US Must Relinquish Puerto Rico

This year, 2016, marks a new era in Caribbean colonialism.

The US Congress is preparing a “Financial Control Authority,” which will supervise the finances of the entire government of Puerto Rico — its legislature and courts, public authorities, pension system and all leases, union contracts and collective bargaining agreements. The authority will also restructure the entire public workforce (including teachers and police), freeze public pensions and ensure “the payment of debt obligations.” Then it will issue its own debt, spend the funds as it sees fit and leave Puerto Rico to pay the bill.

The authority will also have prosecutorial powers. It will be empowered to “conduct necessary investigations” into the government of Puerto Rico, or in other words, be empowered to hold hearings, secure government records, demand evidence, take testimony, subpoena witnesses and administer oaths — under penalty of perjury — to all witnesses.

Any witness who fails to appear or to supply information will be subject to criminal prosecution and removal from office. This includes any elected official on the island: even the governor and attorney general.

All of these powers are enumerated in the 157-page Senate Bill 2381, also known as the “Puerto Rico Assistance Act of 2015,” which is currently under review in the US Senate.

The bill is supported by banking lobbyists in Washington, DC, since it will ensure the repayment of $72 billion in public debt and exclude any bankruptcy protections.

It is opposed by many of the island’s journalists, union leaders and independence advocates, who view the looming “authority” as nothing more than a hedge fund collection agency. They also fear the imposition of a de facto dictatorship in the Caribbean: created in Washington, operated from Wall Street, all disguised as a “management assistance authority.”

But the problem in Puerto Rico is not its debt, the vulture funds or even the Financial Control Authority. The problem is that Puerto Rico, a tiny island in the Caribbean, is staring into the rifle barrel of the entire US capitalist system.

Sooner or later, there will be an explosion.

A History of Colonialism

For 118 years, Puerto Rico has provided a textbook illustration of Naomi Klein’s The Shock Doctrine: The Rise of Disaster Capitalism. The United States “liberated” Puerto Rico from Spain in 1898. The very next year, in 1899, Hurricane San Ciriaco destroyed thousands of the island’s farms and nearly the entire year’s coffee crop. Of 50 million pounds, only 5 million were saved.

US hurricane relief was bizarre. The US government sent no money.

Instead, the following year, it outlawed all Puerto Rican currency and declared the island’s peso, whose international value was equal to the US dollar, to be worth only 60 cents. Every Puerto Rican lost 40 percent of his or her money overnight.

In 1901, the United States passed the Hollander Act, which raised the taxes of every farmer in Puerto Rico.

With higher taxes, devastated farms and 40 percent less cash, farmers had to borrow money from US banks. But with no usury law restrictions, interest rates were so high that within a decade, the farmers defaulted on their loans and the banks foreclosed on their land.

The United States, which was undergoing its industrial revolution, then turned a diversified island harvest (coffee, tobacco, sugar and fruit) into a one-crop, cash-cow economy.

The very first US-appointed governor of Puerto Rico, Charles Herbert Allen, leveraged his tenure on the island into the presidency of the American Sugar Refining Company — which today is known as Domino Sugar.

Inauguration of Charles Herbert Allen, the first US governor of Puerto Rico. (Credit: US Gov)

By 1930, all of Puerto Rico’s sugar farms belonged to 41 syndicates. Eighty percent of these were US-owned, and the largest four syndicates — Central Guanica, South Puerto Rico, Fajardo Sugar and East Puerto Rico Sugar — were entirely US-owned and covered more than half of the island’s arable land. With no money, crops or land, Puerto Ricans sought work in the cities. When the Puerto Rican Legislature enacted a minimum wage law like the one in the mainland United States, the US Supreme Court declared it unconstitutional. After a visit to the island, AFL-CIO President Samuel Gompers held a press conference to declare: “In all my life I have never witnessed such misery, sickness and suffering.”

To make matters worse, US finished products — from rubber bands to radios — were priced 15 to 20 percent higher on the island than on the mainland. Again, Puerto Rico was powerless to enact any price-fixing legislation.

The United States did give Puerto Ricans one “gift.” Over the objection of the Puerto Rican Legislature, Puerto Ricans were declared US citizens in 1917, just in time for military conscription into World War I.

A Classic Colony

After a fraudulent plebiscite in 1952, in which voting for independence could get you 10 years in jail (see Public Law 53 — the Gag Law), the United States filed papers with the United Nations Decolonization Committee, declaring that Puerto Rico had chosen to become a “free associated state” with the US, and was no longer a colony.

However, to this day, US federal agencies control the island’s international trade, foreign relations, banking system, currency, shipping and maritime laws, customs, import-export regulations, immigration, postal system, radio, TV, transportation, Social Security, military, environmental controls, coastal operations, judicial code, civil and criminal appeals, and cabotage rights (i.e. the Jones Act). In addition, the US Congress has plenary jurisdiction over any law or regulation promulgated by the Puerto Rican Legislature. Congress can veto any law passed in Puerto Rico.

The US military presence is overwhelming. At its peak, no one could drive five miles in any direction without running into an Army base, nuclear site or tracking station. The Pentagon controlled 13 percent of Puerto Rico’s land and operated five atomic missile bases. The island of Vieques was bombed mercilessly for 62 years. From 1984 through 1998 alone, more than 1,300 warships and 4,200 aircraft used the island for target practice, and pounded it with 80 million pounds of ordnance.

The colonial veneer is so ludicrously transparent that José Trías Monge, the chief justice of the Supreme Court of Puerto Rico who crafted the “free associated state” and drafted the Puerto Rican “Constitution,” finally threw up his hands and wrote a book titled Puerto Rico: The Trials of the Oldest Colony in the World.

Operation Booby Trap

From the mid-1950s until 2006, the United States laid a red carpet from Wall Street to San Juan. US corporations were given 10- and 20-year tax exemptions on all gross revenues, dividends, interest and capital gains income. Instead of growing fruit, coffee and sugar cane, Puerto Ricans now manufactured bras and razors behind concrete walls.

Unfortunately, once Playtex and Schick found cheaper labor in Asia, the factories all disappeared. Once the IRS 936 tax exemption expired, the pharmaceutical companies vanished. All of them had repatriated their profits back to the US mainland. None of them had invested in Puerto Rico. In the end, rather than providing a true economic base and self-sustaining growth, these corporations only produced more dependency on the United States, and more long-term unemployment.

The program was originally called Operation Bootstrap. With typical wit and accuracy, Rep. Vito Marcantonio named it Operation Booby Trap.

The Jones Act

The greatest booby trap of all is the Merchant Marine Act of 1920, also known as the Jones Act. Under section 27 of this act, all goods carried by water between US ports must be shipped on US flag ships that are constructed in the United States, owned by US citizens and operated by US citizens. That means that every product that enters or leaves Puerto Rico must be carried on a US ship.

This includes cars from Japan, engines from Germany, food from South 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 US ship and then be delivered to Puerto Rico. It all makes as much sense as digging a hole and filling it up again.

There is one major exception.

A foreign-flagged vessel may enter directly into Puerto Rico — after paying an extreme levy of taxes, customs and import fees, which often double the price of the goods they carry.

This is not a business model. It is a shakedown. It’s the maritime version of the “protection” racket. This maritime mafia is so entrenched that several Jones Act carrier company executives were indicted and jailed for price rigging in Puerto Rico.

A 40-year study of this “cabotage cost” to Puerto Rico shows the following results:

(Credit: US General Accounting Office)

From 1970 through 2010, the Jones Act cost Puerto Rico $29 billion. Projected from 1920 till 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. In other words, if the Jones Act did not exist, then neither would the public debt of Puerto Rico.

In addition, if the Jones Act did not exist, 10,000 maritime jobs would immediately shift to the island from Jacksonville, Florida.

Fourth-Largest Market for US Corporations

The tiny island of Puerto Rico — with only 3.5 million residents — is the fourth-largest market in the world for US products.

Because their island is a captive economy, Puerto Ricans are the largest per capita importers of US goods in the world.

Eighty-five percent of all fruits and vegetables consumed in Puerto Rico are sold by US corporations.

Puerto Rico has more Walgreens stores per square mile, than anywhere in the United States — and more Walmart stores per square mile than anywhere on the planet.

Thanks to the Jones Act, all these US products have been “price-protected” for the past 96 years. Automobile prices are 30 to 40 percent higher in Puerto Rico than the United States.

Some products — particularly unprocessed food items — cost twice as much in Puerto Rico.

The tragedy of all this is that Puerto Ricans cannot afford to pay these inflated prices. The per capita income of Puerto Rico is $16,400 — roughly half that of Mississippi, the poorest US state. But the cost of living is 12 percent higher in Puerto Rico than in the United States thanks to the Jones Act.

Shrinking Tax Base

When the IRS tax exemptions expired in 2006, dozens of pharmaceutical companies abandoned the island and unemployment became rampant. With no economy of its own and no real private sector, the government of Puerto Rico became the island’s largest employer.

Over the past 12 years, 1 million Puerto Ricans have moved to the United States, largely in search of employment. The island’s tax revenue has eroded and public debt is skyrocketing due to a population loss of 22 percent. This unhealthy equation — shrinking tax base plus large payroll equals mounting public debt — has exposed the government of Puerto Rico to the ways and whims of Wall Street.

Lies From Wall Street

Puerto Rico’s bonds are highly attractive because they are triple-tax-exempt: All capital gains are exempt from federal, state and local taxes. But with a 22 percent population loss, Wall Street demanded a higher level of taxation from the remaining 78 percent of island residents. The Wall Street credit ratings services — Standard & Poor’s, Fitch, Moody’s and Dun & Bradstreet — insisted on “fiscal austerities” in order to avoid the downgrading of Puerto Rico’s debt.

The Puerto Rican government complied. They laid off 30,000 workers, charged 67 percent more for water, raised electricity rates, raised property and small business taxes, hiked the gasoline tax twice in one year, cut public pensions and health benefits, raised the retirement age, closed 200 schools and hiked the sales tax to 11.5 percent.

After all this austerity, three rating services still downgraded the island’s debt to “junk bond” status. In other words, Wall Street lied to Puerto Rico, and then hiked the premium payments. And now they want to collect.

The debt service on $73 billion will be roughly $7 billion annually: $4 billion on its GO (general obligation) bonds, and $3 billion for PREPA (the Electric Power Authority) and PRASA (the Aqueduct and Sewer Authority).

With a population of 3.5 million, this means that every man, woman and child in Puerto Rico will be paying $2,000 per year just to cover the interest on Puerto Rico’s public debt. Since per capita income is only $16,400, this $2,000 represents 12 percent of everyone’s personal income.

With a shrinking tax base, Puerto Ricans are unable to meet this crushing debt burden. Any further “austerities” will force more people to abandon the island — and the tax base will shrink even further. As Puerto Rico’s Gov. Alejandro García Padilla stated in a nationally televised speech, “Puerto Rico is in a death spiral.”

The death spiral is so pronounced that García Padilla was recently seen begging for a Financial Control Board, as a shield against impending bondholder lawsuits. This is neoliberalism on steroids, a Caribbean Hobson’s choice: to be eaten by a jackal or a wolf.

A Banquet Table for John Paulson

While Puerto Ricans are forced to flee their own island under a pogrom of taxes and “austerity measures,” a banquet table of “business incentives” has been laid out for US billionaires and hedge fund operators. Two tax laws enacted in 2012 — Act 20 and Act 22 — provide 20-year tax exemptions to high net-worth individuals on all their dividend, interest and capital gains income. The primary beneficiary of this has been John Paulson.

Paulson deals in human misery and “distressed assets.” He made his greatest fortune — billions of dollars — by profiting on home foreclosures during the 2007 US mortgage crisis.

In 2007 alone, Paulson made more than $15 billion by “short-selling the US housing market, effectively betting on its collapse, even perpetuating the magnitude of the collapse.”

Using Acts 20 and 22, Paulson has imported this business model into Puerto Rico. He currently owns the Condado Vanderbilt and La Concha Renaissance, the San Juan Beach Hotel, the St. Regis Bahia Beach Resort and the 326,000-square-foot AIG building in the Hato Rey financial district.

He also owns 8.6 percent of Banco Popular, the island’s largest bank.

Paulson also owns a large share of Puerto Rico’s “public debt.” If Puerto Rico cannot pay, and if the US Congress extends no Chapter 9 bankruptcy relief to the island, then Paulson will soon own a portion of Puerto Rico’s physical infrastructure (water, electricity, schools, roads, bridges) as the underlying collateral for this debt.

Thanks to Act 20 and Act 22, Paulson will own major pieces of Puerto Rico without paying one cent of interest, dividend or capital gains taxes on any of his hotel, office, banking or infrastructure income for 20 years.

The banquet table is enormous. While enjoying their 20-year tax breaks, neither Paulson nor dozens of hedge funds want Puerto Rico to receive access to any Chapter 9 bankruptcy protections. They want Puerto Rico to default on its debt so that the creditors can convert this debt into P3s — public-private partnerships — and turn the physical infrastructure of Puerto Rico (the PREPA electrical grid, the PRASA water supply, highways, bridges, schools, prisons and airports) into ATMs for the hedge fund creditors.

Puerto Rico vs. the US Capitalist System

In this game of fiscal brinkmanship, the stakes are very high. If Puerto Rico defaults, it would be the largest in the history of the $3.7 trillion market for debt sold by US state and local governments. All over the country, pension funds will be unable to meet their payment obligations.

On the other hand, if Puerto Rico is allowed to file for Chapter 9 bankruptcy protection, then every state in the United States will demand a similar privilege. The US financial system cannot withstand 50 states, all potentially filing for bankruptcy at the same time.

In addition, the $3.7 trillion municipal bond industry is more than 20 percent of US GDP, which was $18 trillion in fiscal year 2015.

With more than 20 percent of the entire US economy filtered through these municipal bonds every year, the industry is too big to fail — a fundamental component of Wall Street revenue and financing, which no one wants destabilized.

For these reasons, the Puerto Rico debt crisis is a national financial crisis, with no clear resolution in sight. President Obama is trying to ignore it — hiding behind Congress, the courts and the bankruptcy laws — but sooner or later, he will have to address it.

The entire system of municipal bond financing, pension funds nationwide and the fiscal integrity of all 50 states are threatened by the crisis in Puerto Rico. Even a simple debt restructuring will not resolve this mess. So long as Puerto Rico has no real industry, economy or entrepreneurial class, the systemic problems will deepen.

Solutions

The Gordian knot of predatory capitalism must be cut in Puerto Rico.

• The Jones Act must be repealed as soon as possible. This will establish a shipping industry throughout the island and end the price inflation of US products.
• The Jones Act carrier companies — Crowley, Sea Star, Horizon and Trailway — should all be replaced by Puerto Rican shipping companies.
• All import fees levied on foreign-flagged vessels should be paid into the Puerto Rican Treasury, not the US Merchant Marine.
• Puerto Rico must be permitted to negotiate its own international trade agreements. This will enable it to develop capital resources, an entrepreneurial class and a diverse economy.
• A large number of maritime jobs in Jacksonville, Florida, must be rightfully relocated to Puerto Rico.
• Any 10- and 20-year tax abatement deals with US corporations should require the reinvestment of a stipulated percentage of profits into Puerto Rican infrastructure and industrial development.

Fairness and Common Sense

After 118 years, it is time for the United States to relinquish the oldest colony in the world. The present arrangement — the so-called “free associated state” — benefits only a few bankers, bond traders, hedge funds, corporate executives, real estate hustlers and John Paulson. Morally and economically, it is time to move on.

It is nakedly self-serving to inflict a Jones Act on Puerto Rico, deny it any bankruptcy relief and then impose a hedge fund collection agency known as “the Financial Control Authority.”

It is an international scandal for the United States to turn Puerto Rico into a land of beggars and billionaires — bossed by absentee landlords, fought over by lawyers and clerked by politicians.

The sooner it recognizes the fundamental evil of maintaining a hidden colony in the Caribbean, the sooner the United States will repair its credibility in the global community.

A shorter version of this article originally appeared at The New York Times.