IndexIntroductionBrief history of the island and its relations with the United StatesPuerto Rico's territorial status makes its economy prosperThe elimination of corporate tax breaks negatively affects the Puerto Rican economyThe economy of Puerto Rico worsens due to its territorial statusHurricane Maria and its effects on the Puerto Rican economy Puerto Rico's debt restructuring plans Possible statehood and conclusion Bibliography Introduction When people usually think of Puerto Rico, many things may come to mind. They may think they are in Caribbean paradise where the crystal clear waters take them away. They could imagine themselves burying their toes in its white sandy beaches just to take that perfect Instagram photo while grabbing their Pina Colada. However, this utopian image of Puerto Rico serves as a false reality of what is really happening on the island. Unfortunately, Puerto Rico struggles to pay the bills despite its attractiveness as a popular tourist destination. Since 2006, its economic difficulties have crippled its economy causing widespread poverty, unemployment and massive debt. Furthermore, the Puerto Rican economic crisis has created a lack of opportunities and a mass exodus in which millions of Puerto Ricans are leaving the island. In a 2017 article published by Business Insider titled “Here's How Puerto Rico Got So Much Debt,” they concluded that the island was over $70 billion in debt to creditors. Say no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get an Original Essay When analyzing how things got so bad in the first place, there are a few main factors that will be discussed in this paper. Factors such as legal loopholes, territorial status, public debt, and lack of federal funding have all contributed to Puerto Rico's economic free fall. However, other factors will also be discussed, such as mismanagement of funds, preferential financial treatment for states over territories, predatory lending, lack of federal oversight, and corruption. The purpose of this article is to explain these important factors and at the same time find out how these things happened in the first place. To do this, we must first go back in time to explain how Puerto Rico's history and its long relationship with the United States is impacting their current economic situation today. Brief History of the Island and Its Relationship with the United States Puerto Rico is a Caribbean island in the Greater Antilles that was colonized under Spanish rule for over 400 years. As the 20th century arrived, the United States gained control of the island after going to war with Spain. For over 17 years, Puerto Rico's government status remained in limbo until 1917. According to the CIA's World Fact-Book, Puerto Rico gained territorial status in 1917. “The island was ceded to the United States following the Spanish-American War.” Shortly thereafter, the island established its own constitution, modeled similarly on the US version. The United States government allowed Puerto Rico to have a governor and a representative in congress. The people of the island were granted special citizenship status by the United States government. However, their status placed limits on their ability to vote in federal elections because Puerto Rico was not a state. In the eyes of the federal government, Puerto Rico was seen only as an unincorporated territory. Due to the island's territorial status, the voting powers of their representatives in Congress were also limited in some shape or form. Technically called commissionersresidents, Puerto Rico's representatives were seen only as symbols rather than actual members of Congress. Therefore, its status as a territory prevented the island's representatives from voting for or against proposals, budgets, tax plans and other laws that would affect the island. Puerto Rico's territorial status causes its economy to thrive. During the 1940s, Puerto Rico's first governor, Luis Marin, was concerned about how poor and underdeveloped the island was compared to the states. Marin, who would later be considered the father of modern Puerto Rico, had a better vision for the island's future. He decided to create an economic development initiative called Operation Bootstrap that would attract American companies to set up factories and offices in Puerto Rico. According to Brown University Library.edu, “Operation Bootstrap was fundamentally aimed at modernizing the Puerto Rican economy. Much of it involved granting tax exemptions to American companies that set up shop in Puerto Rico. These companies were then able to take advantage of lower labor costs on the island, which further improved their profits and made doing business in Puerto Rico even more attractive.” In other words, Governor Marin saw tax breaks and cheap labor as triggers that would entice American companies to set up shop on the island. Specifically, Puerto Rico's territorial status would allow companies to not pay as much federal tax as they do in the United States. Puerto Rico has decided to eliminate corporate tax. Instead, the trade-off would be that thousands of newly created jobs would cause an increase in sales and property tax revenues. The bootstrap operation would also give visibility to the American elite who may want to relax in the winter in Puerto Rico, resulting in increased tourism and a higher standard of living on the island. Although it took a while, in 1949 the Puerto Rican economy began to skyrocket thanks to the manufacturing industries that established themselves on the island. Brown University also notes that “in 1949 the Department of Commerce valued production in Puerto Rico at $93 million. In 1967, the industry was estimated to produce $621 million for the island. Evidently, Operation Bootstrap successfully industrialized the island. Perhaps more importantly, he successfully shifted the Puerto Rican economy's dependence from agriculture to industry in less than twenty years. legislation has become stricter on tax breaks for companies. At the time, the US federal government was very lenient in taxing businesses because they created millions of jobs and generated enormous revenue. The American government had experienced the Industrial Revolution, World Wars I and II, and the Great Depression. Therefore, the government's agenda was to never penalize companies because its economy was highly dependent on these companies. During the 1940s, there had been a loophole for businesses that wanted to qualify for tax-exempt status in Puerto Rico. Those who moved their businesses to the territory enjoyed the luxury of not paying some federal taxes. Laws such as 26 US Code § 931 had provided a tax exemption for these companies whose business operations originated in Puerto Rico. However, as time passed, Congresses would become less forgiving of tax breaks and would eventually roll back many of the previous tax laws. In 1996, many companies on the island began to downsize and lay off workers. The number of businesses coming to the island to set up shop was decreasing. Poverty and unemployment began to increase. At theEventually, in 2006, these tax breaks were completely eliminated and their effects negatively affected the Puerto Rican economy. At this point, companies began to leave the island, laying off remaining workers. Once the multinationals disappeared, its economy sank like the Titanic leading to a deep recession. Puerto Rico's economy worsens due to its territorial status During the onset of the Puerto Rican recession, the island faced a major dilemma. The government had to make a proper decision on how to deal with the emerging debt problem. Ultimately, they decided to borrow money by allowing investors through banks to purchase bonds. From a temporary perspective, allowing these bonds to be issued seemed like a great idea. However, there were actually three main problems with these bonds. First, Puerto Rico's territorial status has allowed banks and investors to take advantage of their need for liquidity. Since Puerto Rico was not a state, there was no real presence of federal oversight over the practices and issuance of these bonds as there were in the states. Therefore, the island's territorial status has made them vulnerable to investors whose goal is to engage in predatory lending practices. In an NPR.org article titled: "How Puerto Rico's Debt Created a Perfect Storm Before the Storm" they discuss how the island's status has led to banks trying to capitalize on their misfortune. They go on to say, “Many bonds were designed specifically to be sold to Puerto Ricans, packaged in special funds that were less transparent than anything regulators would allow on the mainland. Regulations against things like banks recommending their own bond trades to investors did not apply on the island.” This validates my thesis that banks were actively trying to take advantage of the Puerto Rican debt crisis and its territorial status. The second problem with these bonds concerned Puerto Rico's ability to repay them. Banks essentially sold bonds to investors like hotcakes, while Puerto Rico continued to take their money with no real plan to pay it back. NPR.org goes on to say, “When you start borrowing long-term just to pay next month's payroll, you know you're going down a rabbit hole. It was crazy. The government was borrowing at an incredible rate.” Wall Street banks like UBS and Morgan Stanley knew that the Puerto Rican government could not pay these long-term bonds. However, these banks continued to push their customers to invest their pensions in Puerto Rico. They wanted to receive steady commissions from selling these bonds, and greed drove their aggressive sales tactics. The latest issue involved banks bailing out their investors after Puerto Rico's debt became too large to handle. This has been a big deal for investors who may have invested their entire life savings into these bonds. The whole problem started when there were too many bonds sold. There were so many investors and the potential wasn't enough to pay them all back plus interest. Therefore the status of these notes has become junk bonds. When this happened, NPR.org goes on to explain how the banks responded. They say that “The banks are gone and everyone else is stuck with the account. Most of the audience didn't understand what was happening. The obscurity of this bond deal made many people on Wall Street happy, butit was immoral in many ways. Fifteen months later, Puerto Rico announced that it could not repay its debt. The island was broke. Bond funds collapsed and many Puerto Rican investors lost savings, pension funds or pensions.” The banks didn't care about the island or its investors. As long as they got their commission, they were determined to ride that horse until they couldn't ride it anymore. Puerto Rico's financial mismanagement is another factor that has led to the collapse in the value of its bonds. When the island's bond classification became junk (junk bonds), this also caused potential investors to leave. This damaged the image of the island and all current investors involved because it meant there was no certainty as to whether they would get their money back. Puerto Rico's financial mismanagement was so bad that they were borrowing money to repay the interest on their debt. Despite governments' mismanagement and failure to be fiscally responsible, there are others responsible for the island's economic crisis. In a Business Insider article titled “Here's How Puerto Rico Got So Much Debt,” another major entity is named as having to share the blame. They explain that the US federal government is also guilty. “Underlying all these huge questions is the real kicker. Puerto Rico has little ability to make itself heard in Washington, allowing the federal government to implement policies that affect it without its own consent.” Not only does Puerto Rico not have the power to make its own decisions, but it is also treated differently when it comes to federal appropriations than states. Business Insider goes on to say, "while more than 60 percent of Puerto Ricans are on the programs' payroll, the territory receives far less federal funding for its insurance programs than states on the U.S. mainland, meaning Puerto Rico must fund the insurance programs". remaining costs themselves. This is a further factor in the growth of the island's debt." When the federal government does this, it is sending a message that states will always have top priority over territories. Puerto Rico's territorial status also plays a factor in determining whether or not it can file for bankruptcy. In another Business Insider article, they explain the “Top 3 Reasons Why Puerto Rico Cannot Declare Bankruptcy.” They argue that Chapter 9 bankruptcy laws apply to states' municipalities. Therefore, there is a technicality for States. While states cannot declare bankruptcy, their municipalities could. Puerto Rico's municipalities do not get the same benefits due to its status as a territory. However, there is a bill in the Senate that would try to change this rule by including the municipalities of the territories. According to the Supremacy Clause contained in Article VI, Section Two of the United States Constitution, “This Constitution, and the laws of the United States which shall be made pursuant thereto; and all treaties made, or which shall be made, under the authority of the United States, shall constitute the supreme law of the land; and the judges of every State shall be bound thereby, notwithstanding any provision of the Constitution or laws of any State to the contrary. This clause means that Congress has the power to extend the protections, provisions, and authority of federal law to include all territorial entities. The bill presented by Senator Chuck Schumer and Senator Richard Blumenthal intends to achieve precisely this goal. Furthermore, “on June 29, the governor of Puerto Rico announced that 72 billionof Commonwealth debt were unpayable. This debt burden amounts to more than $20,000 for every man, woman and child.” Hurricane Maria and its Effects on the Puerto Rican Economy In early 2017, the Puerto Rican economy was still in dire shape. Many people on the island were in poverty and opportunities were hard to find. Yet, when the people of Puerto Rico didn't think things could get any worse, Hurricane Maria occurred. Puerto Rico suffered a series of devastating blows from Mother Nature as the hurricane moved from east to west leveling the island. The storm damaged numerous buildings and other properties, causing severe damage to infrastructure and forcing thousands of Puerto Ricans to flee. Hurricane Maria brought the island to its knees. A situation has arisen where the island needs immediate aid. According to the National Oceanic and Atmospheric Administration's Office of Coastal Management (NOAA), the rough estimate of the damage done to Puerto Rico is approximately $90 billion. CBS news.com mentions this costly infrastructure damage in an article titled: "Puerto Rico's grim prognosis: Island may never recover." They mention how difficult it is to find funding to clean up the island. CBS news.com goes on to say, "Puerto Rico was already insolvent before the 2017 storm, with creditors and the island's government engaged in negotiations over how to restart the economy or strip it completely to repay the $70 billion owed to the bondholders. And the island's government owes another $50 billion that does not have to cover current and future pensions. Even before Maria, half a million people had left Puerto Rico and its economy had been in stable decline since 2005. hurricane, there is even less to work with.” It doesn't take rocket science to figure out that $70 billion in debt before Hurricane Maria plus more than $90 billion in infrastructure damage equals a $160 billion deficit find a way out of this debt prison to stabilize its economy Many people point to its territorial status as an argument that debt repayment is not solely Puerto Rico's. There are many people who believe that the federal government shares some level of responsibility for repaying debt. However, there are some political officials who disagree about the federal government's responsibility to help Puerto Rico repay its debt. Indeed, some people may disagree with the amount of aid proposed to the island following the hurricane. These people, like the President of the United States, have been vocal about not supporting Puerto Rico financially. PBS NewsHour recorded President Trump's remarks during a visit to the island after the hurricane. As the president spoke about the devastation, he said, "I hate to break it to you in Puerto Rico, but you've thrown our budget a little out of balance because we spent a lot of money in Puerto Rico." However, according to a Washington Post article on disaster relief funding, Puerto Rico says it has not received enough federal funding to get the island back to normal functioning. HUD gave Puerto Rico $20 billion in disaster relief funding. However, 20 billion only made a dent in the problem. In total, according to nbcnews.com, "the federal government has allocated $40 billion for disaster recovery in Puerto Rico, but Puerto Rico has suffered at least $90 billion in damage." To this day, politicians disagree about how much Puerto Rico really needs and whether the U.S. federal government should help it financially. With everything that has happened in Puerto Rico in the last 10 years, manyEconomists believe it will take decades to repay the debt they have accumulated. Puerto Rico Debt Restructuring Plans On March 13, 2017, the Puerto Rico Agency Fiscal and Financial Advisory Authority (AAFAF) released a plan to restructure debt by reducing general spending and increasing taxes. Their plan also includes specific reductions in healthcare spending, increased revenues and pension reform over a 10-year period. They want this plan to help them restructure their debt so they can be on the path to economic recovery. They believe the first step on the road to recovery is creating a financial mission. In its financial mission, “the government believes that communication, grounded in fiscal responsibility, can create the opportunity for maximum consensus among stakeholders and pave the way for Puerto Rico's fiscal stability and long-term economic growth.” They follow up this mission statement by explaining their desire to “reduce the fiscal gap by $39.6 billion while creating a 10-year cash flow surplus of $7.9 billion.” This essentially means that Puerto Rico wants to reduce its deficit by more than half within ten years. This plan also means that they will pay nothing on their debt for 5 years. Instead, they expect to consolidate their funds and start paying lump sums within 5 years. While there are many problems with this plan, the overall idea is a good step in the right direction given the years of poor decision-making and mismanagement by politicians. In 1996, as the economy began to gradually decline, the island's politicians decided to borrow money they didn't have rather than make the necessary spending cuts. Puerto Rican politicians believed they would lose re-election bids and face widespread protests if they implemented spending cuts. Therefore, they found it rational to borrow money while continuing to spend that money at the same levels as in previous years, when they had more income coming in. To this day, Puerto Rican politicians continue to borrow money and make fiscally irresponsible decisions despite the economic crisis. According to the Heritage Foundation, “At $72 billion, Puerto Rico's debt now represents more than 100% of its gross national product (GNP). The debt does not include another $35 billion in unfunded pension liabilities and other unfunded liabilities, which must be taken into account. Addressing this enormous debt will require difficult political decisions. If the Puerto Rican government had not engaged in financial mismanagement, there would have been no debt in the first place. Instead, they began borrowing to the point that their debt became a fiscal avalanche aimed right at their economy. Despite Puerto Rico's mismanagement, the federal government has failed to oversee and review the island's financial needs. The federal government has also adopted preferential treatment regarding appropriations. More importantly, the federal government does not give Puerto Rico the same congressional representation as the states. Although Puerto Rico has a representative in congress, it has no real voting power. This essentially means that Puerto Rico does not even have the opportunity to vote on decisions that affect it directly or indirectly. However, there are some ways that congress can get around the rules so that Puerto Rico's representative can have a say in certain decisions. There are some federal politicians who believe that the US government has a responsibility to help Puerto Rico clear orrestructure your debt. While researching how the federal government allocates money to the territories, I made an interesting discovery. At the federal level, there is a plan to restructure Puerto Rico's debt through the House Committee on Natural Resources. The plan is called PROMESA (Puerto Rico Oversight, Management, and Economic Stability Act). When I read this, I thought there had been a mistake or typo. Why should a natural resources board be responsible for financial appropriations and oversight for a U.S. territory? Then I started digging deeper into the members that make up that committee and found something very interesting. Current Puerto Rican Representative Jennifer Gonzales Colon sits on the same house committee. Therefore, he gets a certain decision-making power and can also influence his colleagues on the committee to a certain extent. According to H.R. 5278 in CBO's June 2016 cost estimate, if passed, “the committee would be responsible for overseeing the fiscal and budgetary affairs of certain territories of the United States.” The bill would also “automatically establish an Oversight Board for the Commonwealth of Puerto Rico to help Puerto Rico address its growing financial difficulties, the bill would also establish a seven-member Financial Oversight Board, as well as establish a congressional task force to recommend changes to federal laws and activities that would support economic growth in Puerto Rico.” According to the PROMESA plan, the supervisory board would be tasked with reversing any decisions that could have a negative impact on the Puerto Rican economy by any legislative officer, public official or governor could be legally overturned. In an article published by nbcnews.com titled “here's how PROMESA aims to address Puerto Rico's debt,” it outlines how PROMESA would work. First, they said the bill passed the Senate with 68 votes in favor and 30 against. President Obama would later sign the proposal into law in July 2016 making PROMESA official law. Second, the new law would force Puerto Rico to balance its budget and initiate a debt restructuring if there isn't one currently in place. Finally, the Fiscal Oversight Board will act autonomously from the Government of Puerto Rico. Overall, the PROMESA plan is designed to provide crucial federal control over a financial situation that has spiraled out of control. Possible Statehood and Conclusion There is currently a bill in the U.S. House of Representatives that would push for statehood for Puerto Rico. Democratic lawmakers believe statehood will ensure Puerto Rico's economic recovery in the future. Allowing Puerto Rico to become a state would also help them file for Chapter 9 bankruptcy. Beyond that, statehood would give Puerto Rico electoral representation in congress and therefore it could vote on things that affect it. While I agree that Puerto Rico should be a state, I don't know if the bill will pass through both houses. The Senate is controlled by a Republican majority and will side with the president in not allowing Puerto Rico to become a state. I believe there are two main reasons why some legislators do not want Puerto Rico to become a state. Please note: this is just an example. Get a custom paper from our expert writers now. Get a Custom Essay The first reason is about restructuring how we get our money back so we can include Puerto Rico in the.