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Financial Crisis in Puerto Rico

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Charles K. Djou

Over the past two weeks, the American island territory of Puerto Rico has become embroiled in a massive debt crisis threatening the basic operation of the territory. What is truly frightening is that Hawaii might not be far behind.

The Puerto Rican government squandered its finances on wasteful programs built on government excess. When the local economy soured, the debt racked up by the Puerto Rican government to support a disproportionate bureaucracy is now crushing this island territory’s economy.

Like Hawaii, Puerto Rico’s economy is heavily dependent on federal government largess and tourism. When federal spending began to decline over the past several years and as tourism numbers slowed, Puerto Rico failed to curb its government spending. Instead, Puerto Rico continued to finance a local government it could not afford with ever-increasing amounts of debt.

The result for Puerto Rico is a debt crisis that is reaching the magnitude of what Greece, Spain and Italy faced just a few years ago. Puerto Rican residents are now amid a painful “austerity” regimen that is drastically cutting services while increasing taxes on an unprecedented scale. Even with such drastic steps, however, the capital markets are rightly fearful that Puerto Rico may default and its government could become bankrupt.

Hawaii unfortunately faces many of the same economic constraints as Puerto Rico. According to Moody’s Investor Services, Hawaii’s tax-supported debt as a percentage of personal income is the second highest in the United States – second only to Puerto Rico. Like Puerto Rico, Hawaii’s economy is heavily dependent on the federal government spending and tourism. Fortunately for Hawaii and unlike Puerto Rico, our tourism spending numbers have risen over the past couple of years, just as federal spending has declined.

With sequestration, budget cuts and a perpetual government crisis going on in Washington, D.C., Hawaii is unlikely to see a return to massive federal government spending in the near future. One major economic recession in Japan or China that triggers a rapid decline in tourism numbers easily can pull Hawaii into the same economic maelstrom that Puerto Rico’s island economy is now experiencing.

Financial collapse by a state or territory can seem very sudden. But such collapse only comes about through years of slow neglect of fiscal responsibility and ignorance of conservative economic principles.

Five years ago the government of Puerto Rico probably viewed its territory’s federal support and strong tourism numbers as something that could go on forever. It launched a new heavy rail system and never curbed government spending. Puerto Rican elected officials simply ignored warning signs that their local government was too large and their debt unsustainable.

In Hawaii today, we have a state government that looks much like Puerto Rico’s government a few years ago. We have a state government that spent the past week focused on same-sex marriage but not one minute on reforming and restructuring our government.

It will be ultimately up to the voters of Hawaii to heed the warnings being given to us by Puerto Rico’s financial crisis, learn their lessons and change the way our government operates. Or Hawaii can just blissfully travel down the same road of financial ruin and wake up one day in the future shocked that we failed to take action when we could have.

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