The Minimum Wage Is One of the Key Policies That Will Cause Puerto Rico to Go Bankrupt

03 Jul, 2015 by Terresa Monroe-Hamilton

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Puerto Rico just signaled that it will file for Chapter 9 protection. They just hired former Detroit judge Steven Rhodes to assist them with this. This is the same tactic that was used by the City of Detroit. A lot of Puerto Rico’s woes can be traced to entitlements and the minimum wage in that country. Sound familiar? Puerto Rico is a precursor of what is to come here in the US. With Marxist cities such as Washington DC, Seattle, Portland, San Francisco, New York and Los Angeles all raising their minimum wages in the midst of a debt death spiral, default is in our not-so-distant future. Right now, there are a number of cities on the verge of bankruptcy due to pensions, student loans and welfare. Sooner, rather than later, the piper is coming to call and he’s pissed.

Photo credit: Joe Raedle/Getty Images

From Foreign Policy:

Puerto Rico staved off default Wednesday, scrounging together a little more than a billion dollars to pay off some due debt. But this is only delaying default on $72 billion in additional loans, something Puerto Rican Gov. Alejandro García Padilla says is inevitable without outside help.

Many are now drawing parallels between the American commonwealth and Greece, another country that’s going broke. There is one obvious difference: A Grexit would have far-reaching implications for the world economy, while financial fallout from Puerto Rico going belly up would be limited. Still, they do share one common trait: Their people are the underlying problem.

Greeks are up in arms about Europe demanding changes to their retirement system. Right now, the retirement age there is 67, but Greek law allows many workers to retire much earlier. Germany’s retirement age is a hard-and-fast 69, and Berlin wants Greece to crack down on its citizens who abuse Athens’s pension system. But Greek Prime Minister Alexis Tsipras has refused; in Greece, as in Italy, Spain, and Portugal, generous welfare benefits and early retirement have long been a part of the landscape.

The same thing is happening in Puerto Rico, except the controversy surrounds the issue of the minimum wage. It has the same pay floor as the rest of the United States — $7.25 per hour. But unlike the United States as a whole, where this amounts to about 28 percent of the $49,803 per capita income, the minimum wage in Puerto Rico amounts to about 77 percent of the per capita income of $23,840.

And more workers there rely on the minimum wage to get by. A 2012 report by the Federal Reserve Bank of New York found that, as of 2010, one-third of Puerto Ricans work for the bare minimum, compared with 16 percent of Americans.

One of the proposals contained in a report on Puerto Rican economic woes, released to coincide with García Padilla’s debt admission, recommends that Congress lower the minimum wage for workers there. In theory, this would free up money for employers to hire more workers, which could spur economic growth. But according to Sergio Marxuach, policy director at Center for the New Economy in San Juan, allowing this to happen would be politically toxic on the island.

“That’s not going to fly at all,” Marxuach said in a recent interview with Foreign Policy, adding that he didn’t think the proposal was politically viable.

However, Marxuach said unpopular proposals like this might be the only thing that can save the Puerto Rican economy.

“We don’t have access to anything like the IMF or the World Bank. The federal government is not interested at all in bailing out Puerto Rico. Neither is Congress,” he said. “We’re in a difficult position in terms of the tools we have [related to] economic policy.”

Chapter 9 looks to be a long shot and some negotiations are going on despite the lack of a legal framework. Puerto Rico’s utility PREPA continues to negotiate a restructuring of its $9 billion debt and on Wednesday struck a deal to avoid default. The besieged country could also consider setting up a financial control board, such as that used by the then nearly-bankrupt District of Columbia in 1995. It’s a conundrum for their leaders and politicians… either cut the minimum wage and help save the country – thereby guaranteeing that you’ll never get elected again, or continue with wage increases and go belly up, but stay in control of a sinking ship. Puerto Rico is simply a preview of the festivities that await the US and Greece is our dessert. All because of a lack of responsibility on spending and debt. We have only ourselves to blame… well, that and a bunch of corrupt, grasping politicians and bankers.