How to save Puerto Rico

Hurricane Maria decimated the U.S. territory of Puerto Rico. The entire island of nearly 3.5 million Americans could be without power for four to six months. Nearly all wireless service is down, roads across the island are unusable, and a major dam might collapse. Elected officials call the situation "apocalyptic."

Puerto Rico's economy was already in shambles before Maria hit, thanks to a decade-long recession and resulting debt crisis. And the "fixes" U.S. policymakers had put in motion could well ensure that the island never recovers from Maria's wrath.

The bitter perversity is that the solution to both problems — fixing the damage from both the debt crisis and hurricane — is simple: Just spend the money necessary to repair Puerto Rico's society. All that stands in the way are policy myths, economic ignorance, and blinkered ideologies.

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A bit of economic backstory: Puerto Rico's residents are U.S. citizens, but Puerto Rico is a U.S. territory rather than a state. The island doesn't control the currency it taxes, spends, and borrows in — the U.S. federal government does. In this way, Puerto Rico is in the same boat as the 50 state governments. But unlike states, Puerto Rico does not have access to helpful bankruptcy laws and proceedings. It also gets far less help from the federal government to pay for Medicaid, nutrition assistance, and other forms of cash aid for the poor. Federal tax law has also often singled Puerto Rico out for a strange grey-area treatment.

The island's bonds are more heavily subsidized in the tax code than any state, making them exceedingly attractive to wealthy investors. So Puerto Rico gorged on debt for years with little to show for it in terms of lasting public investments or infrastructure updates. This was undoubtedly poor management by the territory's government. But bad debt always has two parents — the lender is as responsible for the failure as the borrower.

Finally, starting in 1986, federal tax breaks encouraged U.S. companies to actually set up shop in Puerto Rico. They were very effective. But in 1996, a 10-year phase-out of those tax breaks began. Around 2006, the island plunged into a recession. This timing was not coincidental.

The federal government can always issue more dollars to pay off its debt obligations. So while it can potentially cause runaway inflation, it can never really suffer a debt crisis. But Puerto Rico can't just print money. To get cash to pay off its creditors, Puerto Rico must either hike taxes or cut spending on public services: power, health care, infrastructure, education, pensions, and so forth.

The more Puerto Rico bleeds its citizens to appease the Wall Street hedge funds that own its debt, the more it imperils its own economy. Then its tax receipts fall, even as it hikes tax rates, and its debt burden compounds. It's a never-ending, self-defeating cycle.

If Puerto Rico was a U.S. state, federal spending on the island's welfare aid would increase, injecting demand into its economy from outside. It could also get access to standard bankruptcy proceedings, and courts could write down Puerto Rico's debt and force Wall Street to eat a loss.

But not so for a territory. As a result, the recession ground on for a decade.

Today, Puerto Rico's infrastructure is dilapidated, and its power grid is a mess. The armies of public workers who would normally respond to a disaster like Maria are often furloughed, or have fled for the mainland in search of better pay. Last year, President Obama and Congress created a new bankruptcy-style law for Puerto Rico. But they also imposed an appointed board to manage the island's fiscal affairs, bypassing elected democracy to both negotiate with creditors and impose further savage cuts on public spending.

This was the sorry state of affairs before Maria came storming in. You can surely imagine how much worse things are now.

Over the long term, Puerto Rico should be made a U.S. state. But in the short term, the federal government needs to step in and spend the money necessary to rebuild the island. Obviously this would include a complete revamp of its grid and power sector. Staffing across the public sector needs to be rebuilt. Then there's the repair of roads, buildings, food aid, medicine, repair of water systems, and more. It's way too soon to know how much it would cost. But if rebuilding Houston, a city of over 5 million, will cost $200 billion after Hurricane Harvey, we can probably assume Puerto Rico will be in that neighborhood, or maybe a bit less. For context, $200 billion is less than 6 percent of one year of total federal spending.

There are plenty of people ready, willing, and able to do the work of rebuilding Puerto Rico. Puerto Rico's unemployment rate is around 10 percent. Not all of those people will have the right skills to repair the island, but plenty will. In fact, sectors in Puerto Rico like public service, construction, and manufacturing are estimated to lose the most jobs absent outside intervention.

And what of Puerto Rico's debt? It would be best if the courts just wrote it down. But the federal government could also pay off the entire $70 billion in one go. That is certainly not nothing, but it is doable. It would increase federal spending by all of 1.8 percent for one measly year.

We already tend to set cost aside when we talk about disaster relief. Four thousand U.S. Army Reserve members and 1,600 National Guard members have already been deployed. FEMA and other agencies are bringing meals, water, generators, and more. Very few people are asking, "How will we pay for all this disaster relief?" The government determined it was needed, produced the necessary money, and everyone got moving.

We just need to expand that logic to a far greater scale — and recognize that the disaster we're responding to goes far beyond Hurricane Maria.