The U.S. island territory of Puerto Rico just entered history books as the largest municipal bankruptcy in U.S. history. Puerto Rico’s default on $73 billion in bonds is almost 4 times larger than the next largest municipal bankruptcy, Detroit in 2013. How did this happen? Puerto Rico implemented every unaffordable socialist program that they could find:
- Public health care and heavily subsidized public university
- 40% of all workers are employed by the government
- Ever-growing union and government employee benefits
- Pension plans underfunded by 96%
- High minimum wage makes island labor uncompetitive in the region
- Welfare payments make up 20% of the island’s personal income
- High-speed train boondoggles to nowhere
Adding to their economic troubles, the legislature made Spanish the official language in 1991 for all school and government use. Since English literacy has now fallen to only 14%, U.S. businesses cannot expand there, not even for low-skilled call centers. This leaves Puerto Rico with a horrifically-high unemployment rate of 45%, even if you include an estimate for their “informal economy.”
Now, Puerto Rico and its allies now call all the bond investors “Vultures” for suing the government for what they are owed. Sure, some money managers recently bought their imperiled bonds for 30 cents on the dollar, hoping for a big score if the U.S. federal government bails them out. It is hard to sympathize with the island’s leaders who have refused to restructure or get on a financially sustainable path for the last decade. Instead, Puerto Rico’s leaders have sprinted even faster toward the financial precipice that it now finds itself.