The contentious debate surrounding the economy was temporarily put on hold this week after we were all surprised by a much-needed patriotic glimmer of hope – the demise of Osama Bin Laden. But despite our toughness on the battlefield, it seems that elected officials across the country are still lacking what it takes to tackle our stagnant economic circumstances.
With economic growth still slow, oil and gas prices rising, unemployment remaining at a historic high, and budget crises occurring on both the national and local levels, it’s not easy to find an example of a successful fiscal policy – at least not among the states.
There is, however, another glimmer of hope – and it comes in the unexpected form of the unincorporated American territory of Puerto Rico.
Despite the advantages of an American citizenry, much lower federal income taxes, college education levels similar to the U.S., a well-developed manufacturing sector, and a population greater than that of 21 states – Puerto Rico, just a couple of years ago, experienced the worst budget crisis of the entire country.
With total government spending reaching 44 percent of GDP (worst in the nation), 70 percent of which went to government salaries and benefits, every major ratings agency threatening to reduce municipal bond ratings to “junk” status, an economy retracting at six percent, and an unemployment rate nearly twice that of the U.S., policymakers on the island knew what had to be done: raise taxes and beg Congress for more financial assistance.
However, when Governor Luis Fortuño took office in 2009 and found that his administration had to taken out a loan just to make the government’s first payroll, he decided to make the tough choices everyone else is promising but few are doing – reduce spending, cut taxes, and eliminate red tape.
After the inauguration, Governor Fortuño fired nearly 20,000 government employees and ended all defined benefit pensions (switching to contribution plans, such as 401k’s), cut individual and business tax rates by more than 25 percent, radically reduced the number of bureaucratic agencies and red tape for new businesses and investors, put in place plans to reduce energy costs and increase home sales, and employed tactics to insure the receipt of those taxes that still remained.
All of these tough decisions had political repercussions, but after only two years, the results are starting to prove their validity.
By reducing the budget deficit by nearly 70 percent – on track to eliminate it within another two years – Puerto Rico has risen from last to 20th in the country in terms of its spending to GDP ratio. With such a stalwart plan in place, credit rating agencies such as Moody’s, Standard & Poor’s and Fitch all raised the government’s bond ratings to the highest levels in decades, saving millions in interest and allowing for the sale of bonds at an unprecedented level.
Although still retracting, the economy is shrinking at a rate of one third that of previous years, all while attracting new business from resorts, Hollywood filmmakers, healthcare, manufacturing, and through new world trade opportunities.
Although so many of Puerto Rico’s new policies carry the politically-divisive moniker “conservative,” it is hard to argue the fact that they are working.
Whether in Wisconsin, New York or California, the debate surrounding fiscal policy is, and rightfully should be, the most important issue of the day. However, none of these states has yet to see a financial crisis similar to that of Puerto Rico. Yet, even more surprising, is the fact that few are emulating the policies that have already proven successful.
Given the debt and fiscal crisis also occurring on a national level, no one is immune to a future financial disaster. Conservative, liberal, or something in between, tough choices have to be made by even tougher leaders – and they have to be made now. It is time U.S. politicians put politics aside and learn a lesson from Puerto Rico.
Justin Vélez-Hagan is the National Executive Director of The National Puerto Rican Chamber of Commerce, Publisher of MinorityEconomicReport.com, and an international developer of senior living facilities. He can be reached at JustinV@NPRChamber.org.