Obama's Misguided Solution to the Keynesian Crisis in Puerto Rico

Treasury Secretary Jack Lew has sent a letter to the U.S. House of Representatives to update Congress on the Puerto Rican “debt crisis.”
Lew is referring to the fact that Puerto Rico has buried itself under a mountain of debt that it’s struggling to repay. Aided by a special tax status, the island’s total debt doubled in the 1980s and 1990s, and has tripled since 2000.
To the Obama administration, this situation is merely a government-financing problem, one that should be solved by changing the rules of the game and increasing government oversight.
The administration does not want to admit it, but what’s really in crisis here is the notion that governments can create prosperity by endlessly borrowing and spending. That’s how Puerto Rico got itself into this mess.
These kinds of policies are typically referred to as Keynesian, but that’s being a bit unfair to John M. Keynes.
Keynes only suggested deficit spending during economic downturns. Economists and politicians have twisted the original idea, and now governments borrow and spend even during prosperous times.
Puerto Rico has been a test case for this strategy, and the results are spectacularly bad. It turns out government borrowing cannot go on ad infinitum, and constantly expanding government’s role in the economy tends to destroy prosperity.
A quick rundown for what happened on the island starts in 1942, when Puerto Rico created the Government Development Bank (GDB). The GDB is a “fiscal agent…financial advisor, and primary lender to the Commonwealth, its political subdivisions, and its public corporations.”
Norbert Michel
Obama's Misguided Solution to the Keynesian Crisis in Puerto Rico

Comments

Post a Comment

Popular posts from this blog

IMF Executive Board Discusses the First Assessment of Eligible Countries under the Multilateral Debt Relief Initiative

On December 21, 2005 the Executive Board of the International Monetary Fund (IMF) established the list of countries that qualify for debt relief from the Fund under the Multilateral Debt Relief Initiative (MDRI). Debt relief delivery, which could start as soon as January 3, 2005, is now conditional on getting the consents of all the contributors to the Subsidy Account of the Poverty Reduction and Growth Facility (PRGF) Trust, whose contributions help finance the Initiative. The MDRI will deliver debt relief from the Fund to qualifying members countries with an annual per capita income at or below US$380, and to countries above the threshold that have reached the completion point under the Heavily Indebted Poor Countries (HIPC) Initiative. The implementation of the MDRI will reduce the external debt burden of a number of the world's poorest countries and will provide additional resources to help them reach the Millennium Development Goals (MDGs). Background The Executive Board appro...
Read more

Oil’s chaotic collapse deepens; stocks drop worldwide

Image
NEW YORK (AP) — Oil prices crumpled even further Tuesday, and U.S. stocks sank to their worst loss in weeks as worries swept markets worldwide about the economic carnage caused by the coronavirus pandemic. The market’s spotlight was again on oil, where prices have plummeted because very few people are flying or driving, and factories have shut amid widespread stay-at-home orders. Global demand is set to drop to levels last seen in the mid 1990s. At the same time, oil producers can’t slow their production fast enough, and all the extra crude means storage tanks are quickly running out of room. The cost for a barrel of U.S. oil to be delivered in June plunged 43% to $11.57. That’s the part of the market that oil traders are focused on and trading most actively. For oil to be delivered next month, which is when storage tanks could top out, the cost of a barrel stood at $10.01. A day earlier, it fell below zero for the first time, meaning traders paid others to take oil off their hand...
Read more

Mapping Extreme Poverty Around the World A new report from the

Image
A new report from the  World Bank  just landed, finding that a record low of 10% of humanity now live in extreme poverty, down from 11% in 2013. But poverty rates aren’t anywhere close to equal between continents or even countries, as our new series of maps clearly demonstrates. The World Bank provides an in-depth explanation for its methodology, which you can find in Appendix A of the full report  here . We focused on the percentage of people in each country living below what the World Bank defines as extreme poverty, or $1.90/day. We’ll let the researchers defend this definition on their own, but there is one caveat to keep in mind. It can be extraordinarily difficult to collect reliable data from so many countries on a regular basis, and in fact we used the latest year in which numbers were available whenever possible. For example, in some of these maps we compare 2011 figures against 2015. In short, our maps provide the clearest possible apples-to-apples compa...
Read more