The imposition of an insupportably high minimum wage has meant that entry level jobs simply don’t exist in Puerto Rico. Unemployment is over 12% (BLS), and the labor force participation rate is about 43% (as opposed to 63% on the mainland) (The World Bank). A “success” by the Obama administration in raising the Federal minimum to $10 per hour would mean that the minimum wage in Puerto Rico would be higher than the current medium wage. Such a move would result in layoffs on the Island and another step down into the economic pit. I predict that it could bring on a crisis similar to the one created in the last decade in American Somoa when that island’s economy was devastated by an unsustainable increase in the minimum wage

It will be interesting to see if our progressive politicians will have enough forethought and mercy to exempt Puerto Rico from minimum wage increases. But to do so would force them to acknowledge the destructive nature of the law, an admission that they would take great pains to avoid.

Welfare

In 2013 median income in Puerto Rico was just over half that of the poorest state in the union (Mississippi) but welfare benefits are very similar. This means that the incentive to forgo public assistance in favor of a job is greatly reduced in Puerto Rico, as a larger percentage of those on public assistance would do better financially by turning down a low paying job. Because of these perverse incentives not to work, fewer than half of working age males are employed and 45% of the Island’s population lived below the federal poverty line (U.S. Census Bureau, American Community Survey Briefs issued Sep. 2014). According to a 2012 report by the New York Federal Reserve Bank, 40% of Island income consists of transfer payments, and 35% of the Island’s residents receive food stamps (Fox News Latino, 3/11/14).

In other words, Puerto Rico’s problems are strikingly similar to those of Greece. Its government spends chronically more than it raises in taxes, its economy is trapped in a regulatory morass, and its economic destiny is largely in the hands of others.

The solutions to Puerto Rico’s problems are simple, but politically toxic for mainland politicians to acknowledge. Puerto Rico must be allowed to declare bankruptcy, the Federal incentive for the Puerto Rican government to borrow money must be eliminated, Puerto Rico must be exempted from both the Jones Act and the Federal Minimum wage, and Federal welfare requirements must be reduced. Puerto Rico already has the huge advantages of being exempt from both the Federal Income Tax and Obamacare, so with a fresh start, free from oppressive debt and federal regulations, capitalism could quickly restore the prosperity socialism destroyed. With the current incentives provided by Acts 20 and 22 (which basically exempt Puerto Rico-sourced income for new arrivals from local as well as federal income tax – see my report on America’s Tax Free Zone) and with some additional local free market labor reforms, in a generation it’s possible that Puerto Ricans could enjoy higher per capita incomes than citizens of any U.S. state.

If Washington really wanted to accelerate the process, it should exempt mainland residents from all income taxes, including the AMT, on Puerto Rico-sourced investment income, including dividends, capital gains, and interest related to capital investment.