by David Noll, Associate Editor
The people of Puerto Rico have, for the first time ever, voted in favor of statehood in the United States. While all 50 states have citizen petitions to secede from the Union, Puerto Rico has chosen to enter our Union. Puerto Ricans voted against statehood twice in the Clinton administration, a time when a booming U.S. economy would have made statehood very beneficial. The vote for statehood now, in a weak U.S. economy, signals two big changes in Puerto Rico and the U.S.
The general expectation would be that Puerto Rico would want to keep its commonwealth status in weak economic times. In strong economic times Puerto Rico benefits from massive U.S. tourism and the easier it is for people to travel there the better for tourism. In an economic slowdown, the lower tax rate that can be sustained in a protectorate (especially for the gambling industry) is more important to keep vacations to Puerto Rico cheap. But this would suggest Puerto Ricans should have voted against statehood in the November elections.
The change in Puerto Rico, to support statehood, is quite likely based on the changed economic breakdown. Over the last 20 years, Puerto Rico has transformed from a tourism destination with low education rates into a burgeoning manufacturing center that has a wealth of its own skilled labor force. Puerto Rico is attractive to business because it’s products are easier to ship into the U.S. and are not subject to the scrutiny and regulation of those products coming from foreign nations. Additionally, the average annual wage in Puerto Rico is lower than in the U.S.; in 2010 Puerto Rico had an average wage of about $27,000 versus the U.S.’s $43,000. Hopefully, these factors have allowed private industry in Puerto Rico to strengthen enough that statehood will now benefit the people more than they benefit from being a protectorate.
However, there is great concern that the vote to become a state reflects the economic woes of Puerto Rico and not its possible benefits. The Puerto Rican government is very weak. Many people still remember the 2006 Puerto Rican fiscal cliff which was only avoided through intervention. The situation in Puerto Rico has not improved since then. Puerto Rican bond issuance is high, and Puerto Rico has a weak BBB rating for its general municipal debt. It is possible that Puerto Ricans hope to gain a credit rating bump and other fiscal benefits from statehood. It is also possible that Puerto Rico’s high unemployment and public mismanagement would mean that it received more grant money from the federal government than it would be paying in taxes.
As it is, the vote last November is unlikely to yield any change to the number of stars on the American flag. The vote was non-binding and the power to create a state falls to Congress. Political leaders have long trumpeted self-determination and vow that any vote by Puerto Rico would be honored by the government. Even so, Congress would need to vote to accept Puerto Rico as a state. With 2013 already a year of budget tightening, further economic standoffs and a continuing roll-out of Obamacare provisions, it is unlikely that Congress will be admitting a new, liberal state.