The True Cost of Government Over-Regulation

Puerto Rico has garnered a lot of publicity lately but not the kind a vacation paradise wants. Instead, the recent focus has been on the dire financial situation facing that U.S. territory. This hand-wringing occurred after Puerto-Rican officials announced that they are unable to make scheduled payments on $72 billion dollars of public debt. For perspective, $72 billion is greater than 100% of their gross national product.

How can we put their debt in perspective? Puerto Rico’s (PR) debt exceeds that of every U.S. state except California and New York – hardly bastions of sound, economic policy themselves but both states have large populations who work. Puerto Rico’s population nearly mirrors that of Oklahoma while their GDP is closer to that of Kansas. PR’s poverty rate exceeds that of the poorest state in the Union: Mississippi. Further complicating their problems is the fact that nearly 25 percent of the population is employed by the government of the commonwealth.

To make matters worse, Puerto Rico’s economic output has declined by 13 percent in the last decade and they have lost over 7 percent of their population during that same time period. In raw numbers, PR has lost 80,000 jobs since 2006. With a June 2015 unemployment rate of nearly 13 percent, the trends are all poor for taxpayers and business owners in Puerto Rico. Yet despite these dire economic warnings, government leaders in Puerto Rico have ignored calls to layoff government employees or to reduce the heavy regulatory burdens placed upon local businesses. As such, an economic crisis has hit the island comparable to the economic free-fall that hit Detroit recently and New York City in the 1970s.

Rather than wait for Puerto Rico to hit bottom and default on debt payments, several economists have put together a list of suggested reforms that would allow the island to begin to recover from this economic free-fall. Interestingly, almost all of the public commentary on how to help Puerto Rico recover focuses on the vast regulations that currently hinder growth in their economy.

A few of the recommend changes include: Congress could repeal the Jones Act, a nearly 100-year old protectionist regulation that requires “that all goods shipped between U.S. ports must be moved on U.S. flagged vessels.” This law, which was passed and remains in place as a nod to the seafaring unions, applies to the entire United States but makes prices substantially higher in U.S. states like Hawaii and territories like Puerto Rico. As such, nearly every good and service, from food to building supplies, costs more in Puerto Rico as compared to costs in the continental U.S. Exempting territories from the Jones Act isn’t unprecedented: the U.S. Virgin Islands received an exemption from this law in 1992.

According to The Heritage Foundation, “predictably, the cost of shipping goods to the Virgin Islands from the mainland is now nearly half that of shipping to Puerto Rico.”Other local regulations also drive up the cost of owning or operating a business in Puerto Rico. For example, employers in that territory are required to pay mandatory Christmas bonuses and are unable to fire employees at will “without significant severance pay.” Additional burdens on employers include “mandatory paid leave including 15 vacation days, 12 sick days, eight weeks of maternity leave, and one hour per day for breastfeeding.” These, and many more regulations, garnered Puerto Rico 41st place in a Heritage Foundation business climate ranking in 2014.

The sad state of affairs in Puerto Rico should serve as a warning call to Minnesota policymakers who consider rapid growth in state spending and state government employment as well as higher debt as indicators of a healthy and growing economy.

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