Scott Sumner  

Does Germany "care" about Greece more than America "cares" about Puerto Rico?

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The answer is probably yes (and the scare quotes head off complaints that big impersonal governments don't actually have human feelings.) The administration has clearly been upset that the Eurozone isn't doing more to help Greece. They complain that a failed Greece would undermine NATO and open the door to Russian influence. And yet America also seems oddly uninterested in bailing out Greece. Indeed the administration announced it wouldn't even bail out our Greece---Puerto Rico.

Here are some similarities between Greece and Puerto Rico:

1. Had an economic miracle in the not-so-distant past, but is now a failed economy.

2. Borrowed recklessly and didn't use the money wisely. Both are now almost bankrupt.

3. Has low productivity relative to its larger and richer neighbor to the north.

4. Is part of a monetary union, but not a fiscal union.

5. Has trouble collecting taxes. Here's a recent story on Puerto Rico:

Given its desperate need for cash, the government has gotten into some bad habits, Krueger and her colleagues write -- like negotiating with citizens who evade taxes to get them to pay and granting businesses fat subsidies to locate on the island, The result is that fewer taxpayers and investors seriously believe the government will make them pay all of what they owe.
6. Inflexible labor markets:
The report also cites regulations and restrictions that make it difficult to set up new businesses and hire workers, although it's difficult to know just how large an effect these rules might or might not have on the labor market.

A report by the New York Fed also suggests that Puerto Rico has a relatively large underground economy employing a big part of the population. These workers aren't taxed or counted in formal employment numbers.


7. Workers moving away to the north in search of jobs.

The eurozone has actually provided Greece with some debt relief. But even if you don't believe that, they have certainly not forced structural reforms on Greece that would destroy its economy. Has the US done that to Puerto Rico? Well they are certainly trying to do so.

Consider the following:

The report cites one surprising problem: the federal minimum wage, which is at the same level in Puerto Rico as in the rest of the country, even though the economy there is so much weaker. There are probably some people who would like to work, but because of the sickly economy, businesses can't afford to pay them the minimum wage.

Someone working full time for the minimum wage earns $15,080 a year, which isn't that much less than the median income in Puerto Rico of $19,624.


That's an extraordinarily high minimum wage relative to the median wage. The story suggests that the Puerto Rican labor market has been gradually collapsing, even during the US recovery:

Another problem is that just 40 percent of the population has a job--or is even looking for one. That figure has plummeted in recent years. In the United States as a whole, it is 62.9 percent.
But it gets worse. The administration and Congressional Democrats want to raise the minimum wage to $10.10/hour. That would (theoretically) put the minimum wage above the median wage in Puerto Rico! (Actually that needs to be qualified a bit, as they assumed a 40-hour workweek.) I've never heard of something like that happening, except perhaps in some developing countries. Even left of center economists tend to be skeptical of a minimum wage above the median wage.

Just to be clear, I'm not suggesting that getting rid of the minimum wage is a sufficient condition for Puerto Rican prosperity. They have lots of problems. But I am suggesting that raising the minimum wage to $10.10 is a sufficient condition for destroying the Puerto Rican economy.

Let's not forget that while Puerto Rico is small, it is part of the United States. And it's not that small. Its population is about the same as North Dakota, South Dakota, Wyoming, Vermont and Alaska, combined. If the administration was proposing a piece of legislation that would destroy the economy of those five states, I think it might receive at least a tiny bit of discussion in the US press. On the other hand Puerto Rico's population is likely to shrink dramatically in the coming years, as "austerity" takes hold.

BTW, Puerto Rico's problems are obviously not simply due to its using the US dollar. Should that make us re-evaluate the relative importance of the euro in Greece's problems?

PS. I just noticed that Congressional Dems changed their minds, they now want a $12 minimum wage. You can't make this stuff up.

PPS. Syriza just announced that it will raise the minimum wage in Greece. Turkish hotel owners on the Aegean must be smiling from ear to ear.

HT: Tyler Cowen


Comments and Sharing






COMMENTS (14 to date)
E. Harding writes:

A $12 minimum wage would be the highest real minimum wage in U.S. history and would also be the highest minimum wage relative to the average wage in U.S. history.

foosion writes:
Indeed the administration announced it wouldn't even bail out our Greece---Puerto Rico.
The US is providing lots of support to the people of Puerto Rico. The people get Social Security, Medicare, Medicaid, food stamps, etc. They don't have to worry about their bank deposits, which are insured by the FDIC. The housing market is supported by Fannie and Freddie.

Greece and its people are not really receiving any bailout. The vast bulk of payments are going to Greece's creditors. Initially to the foreign banks (who seem to have loaned recklessly) and more recently to the IMF, etc.

There's essentially no direct support of the form the US supplies to Puerto Rico.

Jose Romeu Robazzi writes:

Prof. Sumner
It is refreshing to see a lucid view on the problem.
Other commentator, on the other hand, make me a little depressed...

http://www.theguardian.com/business/2015/jun/29/joseph-stiglitz-how-i-would-vote-in-the-greek-referendum

Nathan writes:

No, Puerto Rico's problems aren't all due to the US dollar. But between the US dollar and the US government, you could make a strong case they'd be much better off independent (not that most Puerto Ricans would agree).

ThomasH writes:

Presumably knowing that they would not be bailed out must have put a lot more caution into PR's creditors than Greece's. On the other hand, temporary tax breaks for manufacturing there was rather cruel.

Maybe Congress should impose a higher EITC and lower the minimum wage. That and phasing out the Jones act starting with PR.

Scott Sumner writes:

Foosion, You said:

"Greece and its people are not really receiving any bailout."

I'm confused. Suppose I owe person A $500,000. I'm struggling. Person B says, "I'll pay $200,000 of your debt to A." Yes, that's helps person A, but how does it not also help me?

Jason Sorens writes:

Despite its high minimum wage, it's worth pointing out that income inequality in Puerto Rico is much higher than in the rest of the U.S.

Partly the failure of the Greek bailouts is a strong argument for the US Feds not to get involved: they'd be taking responsibility for a failure to come [http://blog.jaibot.com/the-copenhagen-interpretation-of-ethics/]

*

The idea that only the creditors of Greece got bailed out is a common trope, but is anyone seriously arguing that without the bailout they be able to keep running primary deficits (and they have been running them every year, with the possible exception of 2014 and even that one is debatable)?

Miguel Madeira writes:

"4. Is part of a monetary union, but not a fiscal union."

No?

Spencer89 writes:

The very least that we need to do is eliminate the Jones rule that forces all ships going between the continental us and Puerto Rico to be American and roughly doubles transportation costs to the island.

Scott Sumner writes:

Jason, Interesting link.

Luis, I agree.

Miguel, I should have been more specific. A least it's not a complete fiscal union. Puerto Rico runs its fiscal policy at least partly as if it were a independent country. It has a large sovereign debt, similar to independent countries but unlike American states. It's citizens pay no personal income tax to the US, unlike American states. On the other hand its citizens receive far more in transfers from Washington than Greece receives from Brussels. So there is a difference.

Spencer, I agree.

Boonton writes:

The difference, of course, between Puerto Rico and Greece is that Puerto Rico is being done right. the gov't of Puerto Rico may default. That makes it much harder for them to borrow again for a while and will cause their interest rates to be higher when they do. That might mean higher taxes and less services from the local gov't, which of course impacts Puerto Ricans but that is it.

A person in Puerto Rico who, say, wants to sell his house to someone else for $100,000 can do it. A person who has money in his bank account and no problems with debts can go to the ATM and withdraw $100 if he wants to enjoy a night on the town. The banks are indeed FDIC insured but banks in Puerto Rico are in no distress....unless one happened to be heavily invested in the bonds that are at risk.

William Barghest writes:

I suppose an exception will be made for Puerto Rico, since to do otherwise would be crazy. If not then the upside is that this (wildly unethical) experiment will really be run on the effect of large exogenous minimum wage increases.

khodge writes:

Of course the Democrats are going to push for a ridiculously high minimum wage: They know that it will not pass and they earn extra points by proposing it. It actually illustrates the problem with Puerto Rico: no points to be scored by helping them address their problems (much like Baltimore and Detroit).

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