Puerto Rico Doesn’t Need Another Costly Legal Battle

(The Bloomberg View) -- As the Atlantic hurricane season heats up, Puerto Rico finds itself caught up in a home-brewed storm: a power struggle between its elected government and the federally appointed control board that Congress created to manage the bankrupt island’s public finances. Unless the government makes peace, the losers will be ordinary Puerto Ricans and their fragile hopes of economic recovery.

The fight was sparked when the island government upended a budget compromise earlier this month. In return for restoring budget cuts of $300 million and a bonus for workers targeted by the board, Governor Ricardo Rossello agreed to push through labor-law reforms designed to lure outside investors. But Puerto Rico’s legislature balked, passing its own budget in defiance of the board’s budget authority. The governor then repudiated his own agreement; he and legislative leaders subsequently filed suit challenging the board’s powers.

These legal challenges are unlikely to succeed. The chairman of the congressional committee that created the board has affirmed its “extensive powers” to enforce compliance with any fiscal plan it approves.

Keep in mind that the legislators now bucking the board helped land Puerto Rico in its current predicament. A recent Government Accountability Office report details the lax financial management and oversight in the legislative and executive branches that yielded all-too-elastic budgets, $70 billion of outstanding debt and $50 billion worth of unfunded pension liabilities.

Consider the reform that the legislators so firmly resist: a repeal of Puerto Rico’s Law 80, which makes it hard for firms to fire workers. Surveys by the World Economic Forum, World Bank and others have found that the onerous labor laws make the island less competitive and keep businesses from investing and hiring. They help explain why Puerto Rico’s labor force participation rate lags that of the rest of the U.S. (42 percent vs. 62 percent). The structural reform the board wants might not achieve as much as projected, but even so, it would be a big step in the right direction.

A legal battle against the board can only distract Puerto Rico from its many huge challenges. As the year’s tropical storms and hurricanes start to swirl, some 60,000 homes damaged by Hurricane Maria still have tarpaulins for roofs. Unclaimed cadavers from that disaster and an ensuing crime wave remain in refrigerated trailers. The island’s battered power utility, whose top management in utter disarray, awaits repairs and privatization. And underlying these problems is the economic stagnation that, even before Maria hit, had loosed an exodus of Puerto Ricans.

Perhaps worse of all, the attack on the board’s authority stands to annoy lawmakers in Washington, whose help Puerto Rico badly needs. (This week’s ruckus over the island’s purchase of a $245,000 armored SUV for the governor won’t help.) Congress has already appropriated several billion dollars in disaster assistance and additional funding for Medicaid and food stamps. But most of the recommendations made by a congressional panel to spur economic growth remain unfulfilled. One of the most effective actions Congress could take to help — extending the Earned Income Tax Credit to Puerto Rico — would require a degree of political consensus that the island has yet to foster.

Austerity and reform alone won’t rekindle opportunity in Puerto Rico. (Indeed, as Greece has shown, too much austerity could have the opposite effect.) Debt forgiveness and investment are also essential. But no progress is possible until the commonwealth appraises its own shortcomings and demonstrates the discipline to transcend them.       

Editorials are written by the Bloomberg View editorial board.

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