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Congress to Puerto Rico: Drop Dead

“FORD TO CITY: DROP DEAD.” So read the headline of The Daily News on October 30, 1975, one day after President Gerald Ford had delivered a blistering speech declaring that an indebted New York City on the edge of default would not receive federal aid. This was a startling development for a city that had, only 30 years prior, emerged as an economic powerhouse, home to 40,000 factories and over 1,000,000 industrial laborers. But the Wheel of Fortune never stops turning and New York’s prosperity eventually faltered. When the economy fell into recession in the early 1970s, New York faced some of the worst economic contractions in the country. Its reliance on manufacturing—an industry decimated by globalization and automation—as well as white flight to the suburbs, meant falling tax revenues and, as a result, chronic budget deficits. The city’s flirtation with fiscal disaster would ultimately lead to the imposition of austerity measures—a strategy for debt reduction that, while disastrous, is resurfacing today on the island of Puerto Rico.

With its strong safety net and powerful municipal unions, New York’s loss of tax revenue proved a significant challenge and the city turned to the sale of municipal bonds to cover the widening gaps between revenue and expenditures. By 1975, the city had accrued billions in debt, held almost exclusively by large banks; when the banks stopped purchasing bonds, the city found itself at their mercy. The banks forced the establishment of an unelected fiscal oversight board, the Municipal Assistance Corporation (MAC), which set to work slashing welfare protections, restricting municipal unions, and imposing harsh austerity on the city.

If this story sounds familiar, that’s because Puerto Rico has found itself in a disturbingly similar situation. In 1976, the US government developed Section 936 of the Internal Revenues Act, hoping to bolster economic growth on the island by providing federal tax breaks for US companies. Though the incentive did indeed draw capital, by the mid-1990s many had come to see Sec. 936 as unfairly beneficial to corporations and wasteful in the loss of possible federal revenue. In 1996, the US began its dissolution. Many companies left the island, leaving Puerto Rico in recession by 2006—only exacerbated by the mainland’s own slide into recession the following year. Massive population loss, as hundreds of thousands of Puerto Ricans depart from the island in search of more promising opportunities on the mainland, has only compounded the issue of economic contraction. Ultimately, these issues resulted in contracting tax revenues, and the Puerto Rican government responded by increasing its sales of municipal bonds to avoid deep cuts in public expenditures. Just as in New York four decades before, economic realities had shifted under Puerto Rico’s feet and the expansion of debt seemed the only way to prevent major disruptions in citizens’ lives. And, just as in New York, the road to redemption from current debt levels—at least as far as the US government and bondholders see it—lies in significant austerity measures.

Due to its status as a territory, Puerto Rico can find reprieve neither in the US Federal Bankruptcy Code nor through the International Monetary Fund, which provide relief to US cities and sovereign nations, respectively; instead, the island must rely on Congress for any assistance. When Puerto Rico pushed for relief last year, Congress imposed an unelected Fiscal Oversight Board with largely the same powers as the MAC in 1975 New York. In the year since, this Board has forced Puerto Rico to gut public services throughout the island, even the most essential, such as emergency services. The poorest Puerto Ricans are bearing the brunt of these spending cuts, which are mainly aimed at the social safety net. As a result, unemployment as of December 2016 stood at a staggering 12.4 percent—almost eight points higher than the US average. For proponents of austerity, however, these measures are necessary evils: unrestrained welfare growth provides a much larger threat to Puerto Rico’s prosperity than the decimation of one generation’s quality of life. After all, they contend, it was Puerto Rico’s democratically-elected leaders that had incurred the debt. Just like New York City, Puerto Rico must simply face the music.

From the vantage point of 2017, however, we have the privilege of hindsight to understand the consequences of austerity as a solution to debt crisis. In New York, the MAC and its successors faced an uphill battle against the city’s inhabitants, with some of the fiercest opposition coming from municipal unions. And, even though the unions eventually relented, reformers still could not fully remake New York’s progressive identity—the city still boasts a low-cost higher education system and rent-control persists.  Where they did succeed, proponents of austerity often inflicted a great deal of damage upon the residents of the city: high fire rates decimated the Bronx as the number of firehouses across the borough was slashed to cut costs and epidemics of Tuberculosis, HIV, and homicide erupted as a direct result of fiscal changes in the city’s governance.

Though the humanitarian costs alone are enough to chill one’s spine, the financial costs to repair these outbreaks significantly outweighed any positive effects of austerity. As Puerto Rico’s fiscal crisis continues to demand federal response, those of us who have voting representatives in Congress must keep in mind the lessons of 1975 New York. When economic realities shift and municipalities face rising deficits and debt levels, we must seek solutions than do not rely upon austerity measures. We must not sacrifice the livelihoods of our fellow citizens in the name of fiscal responsibility. We must reject doctrines of austerity and we must refuse to tell Puerto Rico to drop dead.

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