Puerto Rico has enjoyed an Open Borders relationship with the United States for most of the last century, along with a plethora of tax breaks for over half a century to keep everybody from leaving. And yet, Puerto Rico has still managed to mess up.
A Washington Post editorial:
Puerto Rico’s sinking economy
ALAS FOR Puerto Rico, the Caribbean commonwealth attracts little attention on the U.S. mainland except when it’s in trouble. So it is with the looming crisis over Puerto Rican public debt, estimated at $70 billion. Detroit’s bankruptcy was bad for the municipal bond market; a default by Puerto Rico, though unlikely, could be worse: Some 70?percent of U.S. municipal-bond mutual funds hold the island’s paper, which bears tax-free interest. Large U.S. bond insurers are heavily exposed as well.
How Puerto Rico got into this mess is a long story, with plenty of villains: The island’s government frittered away funds on unproductive investments and bloated payrolls; Wall Street bankers enabled more borrowing, collecting $880 million in fees since 2000; the U.S. government's policy of tax-free status for Puerto Rico bonds, meant to boost its economic development, subsidized the island’s habit of living beyond its means.
And last but not least is the near-collapse of economic growth . Puerto Rico’s output has declined 16 percent since 2004. Its recession, triggered by the 2006 phaseout of a federal manufacturing tax break, began before that of the mainland and lasted longer. Only about a million of Puerto Rico’s 3.6 million people are employed. Not coincidentally, Puerto Rico’s population shrank 4 percent in the past decade, as many of the best and brightest sought opportunity on the U.S. mainland.
... Commonwealth officials say default is not only undesirable but, literally, unconstitutional since Puerto Rico’s constitution gives general-obligation bondholders first dibs on the island’s cash. But that guarantee has never been tested in a predicament such as this, which is economically analogous to Detroit’s — and that of Greece, another heavily indebted political entity linked in a currency union with far larger and more competitive neighbors.