Another Austerity Casualty: Puerto Rico

According to Fox News Latino, Texas' economy isn't the only one showing that the road to prosperity is paved by austerity. Since March of this year, the unemployment rate in Puerto Rico has fallen from 16.9 to 14.9 percent. Never mind that the Puerto Rican economy still endures an unemployment rate greater than any other state. Conservative commentators argue that, if this trend continues, Puerto Rico, not Texas, will be the conservative economic example that the Right has been searching for. Fortunately, there are good reasons to believe that the Puerto Rican success story is as phony as the Texas Unmiracle.

Conservative John Stossel attributes Puerto Rico's declining unemployment rates to Luis Fortuno, the Reaganite governor who sought to reduce the territory’s budget deficit from the moment he was elected. Fortuno has cut government spending by 20 percent, fired tens of thousands of government workers, frozen the salaries of the rest, cut his own salary, and in January cut corporate tax rates from 35 to 25 percent. 

The result: According to Justin Velez-Hagan, the National Executive Director of The National Puerto Rican Chamber of Commerce, Puerto Rico has cut its deficit by 70 percent, Moody's and S&P have upgraded the territory's credit rating, businesses are buying construction permits (600 in the last few moths) to start new projects, and unemployment is falling.

Success, right?

Unfortunately for Stossel and Velez-Hagan, there are several facts that tell a different story.  Just over a week ago, Moody's actually downgraded Puerto Rico's credit rating to Baa1, which is the lowest rating for any U.S. State. The rating agency claimed that the U.S. commonwealth was struggling with an underfunded pension systems and a weak local economy. To add insult to injury, Moody’s also declared that it had a negative outlook on the commonwealth's fiscal future.

How could it be that Moody's and Fox Latino are so far apart?

For starters, the "cut corporate tax rates" mantra is the wrong response to today's economy. This recession is driven by a consumption deficit. Consumers aren't consuming so businesses, the producers, won’t produce. It doesn't matter how much money you allow corporations to keep, they are going to resist investing because there's no one to buy their goods and services.

Second, most states are wrestling with weak economies, but Puerto Rico is walking in lockstep with those who believe slashing public sector spending is the key. This is bad economics. In a recession, public spending is a solution, not the problem. Spending creates the demand that leads businesses to hire so that they can produce, and the new hires spend their earnings which leads businesses to hire and produce some more. Government spending therefore breaks the consumption diet and gets the economy revved up. By firing government workers, all you've done is further stymie consumption in your economy. Thus, austerity helps to explain why the Puerto Rican economy continues to be weak.

Last, the decline in unemployment is artificial. Unemployment is calculated by looking at two numbers, labor force participation and employment. The difference between those two numbers is equal to the number of unemployed persons; the number of unemployed persons divided by the total labor force equals the unemployment rate. What this means is that there are two routes to producing a decline in unemployment: either you increase employment or you decrease the labor participation rate.

Data from the Census Bureau suggests that Puerto Rico has been doing a little bit of both, but mostly the latter. Since Governor Fortuno took office, labor force participation has declined steadily and employment has grown only slightly in the last few months. In other words, what we're seeing in Puerto Rico is not a true recovery, if we measure that by employment rates and labor force participation equal to pre-Great Recession norms.

The truth is that, much like the Texas Unmiracle, the Puerto Rican economy and its people are struggling. That is why, if the election were held today, Fortuno would lose 47 to 25 percent. Ordinary people can tell whether their lives are improving day by day. Conservatives would be wise to dial the voters up before claiming victory.