Does Germany "care" about Greece more than America "cares" about Puerto Rico?
By Scott Sumner
The answer is probably yes (and the scare quotes head off complaints that big impersonal governments don’t actually have human feelings.) The administration has clearly been upset that the Eurozone isn’t doing more to help Greece. They complain that a failed Greece would undermine NATO and open the door to Russian influence. And yet America also seems oddly uninterested in bailing out Greece. Indeed the administration announced it wouldn’t even bail out our Greece—Puerto Rico.
Here are some similarities between Greece and Puerto Rico:
1. Had an economic miracle in the not-so-distant past, but is now a failed economy.
2. Borrowed recklessly and didn’t use the money wisely. Both are now almost bankrupt.
3. Has low productivity relative to its larger and richer neighbor to the north.
4. Is part of a monetary union, but not a fiscal union.
5. Has trouble collecting taxes. Here’s a recent story on Puerto Rico:
Given its desperate need for cash, the government has gotten into some bad habits, Krueger and her colleagues write — like negotiating with citizens who evade taxes to get them to pay and granting businesses fat subsidies to locate on the island, The result is that fewer taxpayers and investors seriously believe the government will make them pay all of what they owe.
6. Inflexible labor markets:
The report also cites regulations and restrictions that make it difficult to set up new businesses and hire workers, although it’s difficult to know just how large an effect these rules might or might not have on the labor market.
A report by the New York Fed also suggests that Puerto Rico has a relatively large underground economy employing a big part of the population. These workers aren’t taxed or counted in formal employment numbers.
7. Workers moving away to the north in search of jobs.
The eurozone has actually provided Greece with some debt relief. But even if you don’t believe that, they have certainly not forced structural reforms on Greece that would destroy its economy. Has the US done that to Puerto Rico? Well they are certainly trying to do so.
Consider the following:
The report cites one surprising problem: the federal minimum wage, which is at the same level in Puerto Rico as in the rest of the country, even though the economy there is so much weaker. There are probably some people who would like to work, but because of the sickly economy, businesses can’t afford to pay them the minimum wage.
Someone working full time for the minimum wage earns $15,080 a year, which isn’t that much less than the median income in Puerto Rico of $19,624.
That’s an extraordinarily high minimum wage relative to the median wage. The story suggests that the Puerto Rican labor market has been gradually collapsing, even during the US recovery:
Another problem is that just 40 percent of the population has a job–or is even looking for one. That figure has plummeted in recent years. In the United States as a whole, it is 62.9 percent.
But it gets worse. The administration and Congressional Democrats want to raise the minimum wage to $10.10/hour. That would (theoretically) put the minimum wage above the median wage in Puerto Rico! (Actually that needs to be qualified a bit, as they assumed a 40-hour workweek.) I’ve never heard of something like that happening, except perhaps in some developing countries. Even left of center economists tend to be skeptical of a minimum wage above the median wage.
Just to be clear, I’m not suggesting that getting rid of the minimum wage is a sufficient condition for Puerto Rican prosperity. They have lots of problems. But I am suggesting that raising the minimum wage to $10.10 is a sufficient condition for destroying the Puerto Rican economy.
Let’s not forget that while Puerto Rico is small, it is part of the United States. And it’s not that small. Its population is about the same as North Dakota, South Dakota, Wyoming, Vermont and Alaska, combined. If the administration was proposing a piece of legislation that would destroy the economy of those five states, I think it might receive at least a tiny bit of discussion in the US press. On the other hand Puerto Rico’s population is likely to shrink dramatically in the coming years, as “austerity” takes hold.
BTW, Puerto Rico’s problems are obviously not simply due to its using the US dollar. Should that make us re-evaluate the relative importance of the euro in Greece’s problems?
PS. I just noticed that Congressional Dems changed their minds, they now want a $12 minimum wage. You can’t make this stuff up.
PPS. Syriza just announced that it will raise the minimum wage in Greece. Turkish hotel owners on the Aegean must be smiling from ear to ear.
HT: Tyler Cowen