As aptly described in Walter Isaacson’s biography of Steve Jobs, this late genius of technological innovation was prone to deploying a “reality distortion field” to bend friends, foes and facts alike to his will. Jobs’ reality distortion field had both bright and dark sides. It worked in the case of creating Apple’s iconic products. Yet it evidently failed in Jobs’ fateful decision to delay surgery and chemotherapy for the pancreatic cancer that ultimately claimed his life. In any event, a creative genius of Jobs’ stature, who can sometimes defy reality, appears very rarely on this Earth.
In attempting to defy fiscal and economic reality, Puerto Rico’s policymakers should take this lesson to heart. Teetering on a precipice of $73 billion of public debt, the U.S. island territory is scrambling once again to pay debt with debt by lining up nearly $3 billion dollars in new financing. Last year, it managed to pull off a similar fiscal stunt when it borrowed $3.5 billion at yields exceeding 8%.
The strategy behind this year’s new borrowing is the same: The island seeks “breathing room” to revive an economy that has been in virtual free fall since 2006 when a gargantuan federal tax subsidy for manufacturers expired. Known as Section 936 of the U.S. Internal Revenue Code, it was the last embodiment of decades of federal tax breaks that made possible Puerto Rico’s once-vaunted manufacturing sector.
Most media attention has focused on the magnitude of the Island’s debt and very little has been paid to Puerto Rico’s misguided economic development efforts. Despite losing almost 40% of its manufacturing jobs, island policymakers insist that, even without the massive federal tax subsidies, the island can resurrect itself as a player, not only in pharmaceuticals and high-tech but also in aerospace and complex financial services.
Since 2004, both main political parties, as well as prominent local professionals and business leaders, have promoted tax haven strategies (Puerto Rico is treated as foreign for U.S. corporate income tax purposes) and indulged in self-aggrandizement in science, technology and financial expertise to try to attract major investments in these sectors.
In terms of job creation and tax revenue enhancement, the results have been a bust. Automation steadily minimizes labor needs in manufacturing and finance. Witness that a shrinking 6% of Puerto Rico’s workforce is devoted to manufacturing, which reflects about 50% of the island’s GDP. Similarly, with only about 300 employees, Puerto Rico’s international banking entities have managed to capture almost 30% of the territory’s banking assets.
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In terms of their effect on the island’s psyche and morale, hog-wild grants of local tax exemptions and government loans and guarantees mostly favor non-residents. This discriminatory treatment causes local resentment to fester. And the paltry successes of a few hundred jobs – paid for mostly by commonwealth subsidies – throw salt in the wounds inflicted by false government promises of future glory in activities that have very little bearing on Puerto Rico’s true talents and distinct advantages.
Regarding its genuine strengths, Puerto Rico can be a major player in tourism and entertainment. But, perhaps to the surprise of many, the island’s lodging, transportation and visitor infrastructure are still in diapers. With only 15,000 hotel rooms, Puerto Rico’s tourism sector is incapable of handling major conventions, tradeshows and sporting events. Due to poor urban planning, the San Juan metropolitan area cannot accommodate the 50,000 new hotel rooms that the island needs to begin to compete with its Caribbean neighbors in the Dominican Republic, Mexico and, in the rapidly approaching future, Cuba.
Fortunately, these dire circumstances can be significantly rectified and the island can be placed securely on the path to sustainable growth and competitiveness with the proper use of the former U.S. naval base of Roosevelt Roads on the east coast. Final transfer of the 13-square mile site to the local government occurred last year. Its substantial airport grounds, harbors and land resources are perfect for Puerto Rico to rebrand itself to the world with a new entertainment city to rival Las Vegas, Orlando and Macau.
However, island policy makers are too busy giving away the tax base to non-competitive industries and trying to borrow money to keep the lights on. Worse still, they are projecting a reality distortion field about Puerto Rico’s most realistic place in the world economy.
Steve Jobs was Steve Jobs. Puerto Rico is Puerto Rico. And we should be proud of that.
