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Puerto Rico Economy - A View From the Ground

Puerto Rico Economy – A View From the Ground

By now, you’ve surely heard the bad news about the Puerto Rican economy and debt crisis. Many of the problems with the Puerto Rico economy, are due (directly or indirectly) to the $70+ BILLION debt that Puerto Rico simply cannot pay back. In fact, a few days ago (May 2nd) the government missed a scheduled payment on the debt which may open the door for the bond holders to take legal action against the island.

Setting the reasons for this debt aside, many people blame Puerto Rico’s inability to pay those debts on the fact that too many people (especially young/educated people) are leaving the island to escape a recession that’s been in effect since 2006. This results in a smaller tax base.

A smaller tax base results in less taxes collected, higher taxes charged, poor public services, and less employment opportunities, which then, results in even more people leaving the island in the vicious cycle….. you get the idea.

Now, let me stop to point out that I am not, and I am not pretending to be, an economist. I have an understanding of basic economics but, for the purposes of this article, digging into the economics is not the point.

Instead, in this post, I want to focus on how the debt crisis is affecting the people and the day-to-day life of the people actually living on the island, like us.

Puerto Rico Economy: How It Happened – A Laypersons Viewpoint

Of course this vicious cycle didn’t start out with a bunch of people deciding out of the blue to leave one day. The roots of Puerto Rico’s economic problems go all the way back to the cold war when Puerto Rico may or may not have been a Potemkin Village for the US in the Caribbean.

Congress began giving tax breaks to businesses in order to encourage them to bring jobs to the island. When Congress let those tax breaks expire between 1996 and 2006, those businesses, that  were only here for the tax advantage, pulled out of the island and took their jobs with them. As a result, the island’s economy fell into a recession and Puerto Rico’s government had to borrow more and more money just to keep things running.

The global recession in 2008 just exasperated matters.

Of course, in addition to the causes above, there have been problems with corruption, rampant inefficiency, a huge underground economy (cash only, unreported sales of items and services), disadvantageous legislation (Jones Act), rampant tax/fee dodging, and other factors that combined have gotten us to the point.

And the list of how it happened goes on and on and on. Everyone has an opinion of what the root of the problem was. The bottom line is this: Puerto Rico economy is in BIG trouble – I don’t think anyone can argue that.

Puerto Rico Economy: Day to Day Life on The Island

For the most part, here in Puerto Rico, the economy and debt crisis is treated as someone else’s far away problem and most people don’t seem to worry about it – unless they are directly affected.

Oh sure, there is talk about it on the news and there’s frequent articles in the newspapers but, the shopping malls are full of people buying stuff every day and you see people going to work and in restaurants or bars every night. Life goes on.

The “average” person doesn’t seem too worried about the Puerto Rico economy. Don’t get me wrong that doesn’t mean that there are no concerns or that it’s not talked about but, in general, I see a sort of complacency or perhaps denial.

Puerto Rico economy
Local mall parking lot. Packed on a weekday morning.

 

We went to the local mall yesterday; this was Friday morning at 11:00AM. Nothing special about yesterday really. Yet when we arrived there were no parking spaces available anywhere in the lot! I couldn’t believe it; it was like Christmas in the States. And, this is not a small mall or parking lot. There people driving around in circles looking for a spot. I thought to myself – what in the world..? But that’s pretty normal here.

Being from the Midwest, my instinct when presented with a possible financial crisis is to spend less just in case I lose my job. However, that’s not the case here, at least not that I’ve noticed. One of my neighbors (born raised in Puerto Rico, worked in the states for many years) told me that your average Puerto Rican (that has stayed on the island, anyway) will “spend every dollar he has as soon as he gets it. There’s no such thing as saving for the future. It’s all about living for the moment.”

This is a foreign concept to me, so I struggle to understand it. And, I ask a lot of questions. Another friend (native resident) put it to me this way: “You have to remember that unemployment and welfare have been an accepted thing here since long before the debt crisis. Unemployment is nothing new in Puerto Rico. If it happens, it happens, and people will just spend their days at the beach until something else comes up.” – Hhhhhmmm… I’m not sure i believe that but, OK.

Frankly, this type of attitude is way outside of my paradigm and it blows my mind. But, perhaps I’m the one that needs to adjust my attitude because, after all, worrying about things doesn’t really help the reality much.

However, it is true that as far back as 2006 (probably much earlier) the media was already calling Puerto Rico “The Welfare Island“. So, I suppose that after more than a decade of having an estimated 40% of households on some sort of assistance (welfare, food stamps, medicaid), it has become the new normal.

That doesn’t mean that people here don’t realize that there is crisis with the Puerto Rico economy. They do and it is a big topic of conversations, complaints, and debates.

Puerto Rico Economy taxes

Myself, I have some concerns, as well. Here are some of them:

  • Taxes keep going up. In the 16 months we have lived here, the sales tax was raised from 7.5% to 11.5%. In addition, there was a 4% service tax implemented that effects everything from haircuts to medical tests. To make it worse, there is talk about the sales tax going up again to 16%.
  • Inflation is getting worse. Many people have blamed this jump in inflation on businesses taking advantage of the tax increase by hiking up their prices too. For example, we saw our favorite dish in a local restaurant go from $9 to $14 overnight, and we have to now pay that in addition to the increased sales tax.
  • The tourist industry in Puerto Rico seems to be faltering. Between worries about Zika and all of the doom and gloom around the debt crisis, people just aren’t coming to the island as much.
  • The underground economy is growing. In reaction to the increased taxes, many small-businesses and people working for themselves are not reporting cash-only transactions.
  • Schools are being closed. In fact, many schools have already closed.
  • They are discussing lowering minimum wage on the island. As you can imagine, people aren’t happy about that and I think it would really hurt the island.

But, not all of the changes are bad. In fact, the local government is getting more efficient in collecting money, back taxes, etc. For example, getting your car registration (Marbete) used to be a fairly annoying ordeal. However, now, you basically show up with your $200 and walk out with your new Marbete. So, after spending the better part of 3 days to get my car registered the first time, I was ecstatic to be able to get my Marbete in a single morning this year.

I also want to say that because of the constant media hype, Puerto Rico is being portrayed in a less than favorable light and this only adds to its problems. There are people that fear that someday soon, there will be power brownout and other utility shortages. I don’t want to dismiss such concerns outright because they are technically possible but I do not feel that they are probable.

So, what does all this Puerto Rico economy talk mean for us?

Well, it means that when people ask us why we haven’t bought property on the island, we give them our list of concerns and say we are waiting to see what happens. It also means that when people ask us how long we will be here, we honestly do not have an answer, it will depend on a lot of factors, not the least of which is the Puerto Rico economy.

We love this island, we truly do. And we hope that things improve for the people and that things will get better. As it is right now, we do not depend on the island  for our income but things are still very much up in the air on the economic front. So, we will just have to wait and see if Puerto Rico will be a permanent home for us. After all, as with everyone else here, we too have to worry about paying the bills first.

So, people just keep on living here and, frankly, I kind of admire them for doing so in the face of circumstances that would paralyze and panic most mainland Americans, like me.

Tim

About Tim

is a professional geek. He is a founding partner of JTR Tech and enjoys all things technology. He and his wife Joanna started AbroadDreams.com to help them plan and solidify their dream of moving abroad. After two years in Puerto Rico and Europe, Tim and Joanna are now back in the USA and exploring the American Southwest.

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10 comments

  1. Francisco A. Ortiz

    Nice blog. I followed you on twitter.

    I am a PRican that left the island because of my retirement. I used to work for the government and I did it for 16 years. I contributed around $50k to my retirement and the gov put around $60k. That’s over $100k and that is gone now, imagine when I retire in 21 years. Imagine how much would I have paid in all, to have nothing or maybe just $300 a month because it is underfunded.

    We decided to cut our loses. I got a great job with the feds and I will only need to work for 20 more years (not 21) and I will have a retirement. And if I don’t get one (which I doubt), I am making a lot more now than in PR.

    We love PR, but our kids are all grown ups, and me and my wife are alone with each other. We have to prepare for retirement and in PR we can’t do that.

    • Hi Francisco,
      Thanks for your comment. It is good to hear a voice from a native’s prospective. You are right, of course. Retirement, economy, healthcare are all big problems on the island and it is unfortunate but many people are in the same boat as you.
      I feel sad that often times the only option is to leave. Unfortunately, we too have friends that have left and this seems like only thing left to do for many.
      Good luck and many blessings in your new life.
      Joanna

  2. Hi guys,

    Thanks so much for all the info you provide. My fiance and I are pretty much exactly where you were, (although we are already expatriated from the US,) trying to decide on a permanent move between Panama and Puerto Rico.
    I was just wondering, since the deciding factor for you to move to PR over Panama was the income tax benefits, now that PR’s sales tax is on the rise and other taxes are being added to everyday purchases, would you, in my position, re-consider PR and lean more towards Panama? They seem to have a fairly stable economy, and lack the massive debt crisis of PR.
    Another important factor to consider: our business venture would be dependent upon tourism, which you mention is on the decline in PR.
    So, my question: Is Panama currently the better choice for an investor like me, or, do you think it would still be worth it for us to invest in the island of PR? Because with the right advertising, tourists could (hopefully) be attracted back, which would benefit both our personal business and the local economy.

    Hope this question makes sense. Thanks in advance for your response!

    Keri

    • Hi Keri,
      This is a tough question. In some ways, I think PR is better and in others I think Panama is better. Right now PR’s sales tax has been on the rise but this does not apply to food. So, for us, it’s not that much of a big deal because we only occasionally buy non-food items. The only place it really effects us is on eating out. Panama economy seems stable but with the recent Panama Papers scandal, this could change quickly.
      Big advantage to PR is that it is still US, so no visas (which cost money, even if you just hire a lawyer, but if you’re not retirement age, there is a bank deposit requirement, etc etc), so in that regard PR is a lot easier of a transition for Americans. Also, it depends on how much you like your American products, they are scarce and expansive in Panama. So, I don’t really know how to answer your question.
      As far as the tourist goes, there are still tons of tourist here and Zika is present in Panama as well, so I think that’s not a factor. There are also other nasty things that live in Panama..
      Anyway, I am glad we decided on PR but I don’t if it would be the same for everyone. I think Panama would be a bigger culture shock, for sure.
      Joanna

  3. Great blog! You touched on Zika effecting tourism. My family and I plan to visit in June and will be prepared as we can be by following guidelines from the government. How are the locals reacting to Zika. Is it as bad as the media makes it out to be?

    • Hi Kay,
      In my opinion, the Zika virus is all hyped up by the media. It is not that bad, and in fact, if you google it, Zika is not even that serious (unless you’re pregnant and even that is debatable). We just wear bug repellent on cloudy or rainy days, the rest of the time, we don’t even have a problem with mosquitoes here on the beach.
      Joanna-

      • Dengue and chikungunya are far worse. Dengue has been a very big problem although last year and now not so much but just wait for the rainy season. My biggest concern was all the infections people got by swimming at the polluted beaches on the West Side. Just look at the beach watch data that shows how bad it is. That didn’t stop me but as soon as I got out of the water I would rinse off with fresh water.

        I like owning a house. 20% vacancies! But, the house that was once $300K and is now $150K sounds like a steal but you can still loose $150K because you may never be able to sell it or you may have to sell it for $75K but just think of that loose as rent. We were lucky and broke even with our two houses and basically lived rent free but put a LOT of sweat equity into it for that free rent.

        • Hi Jeff,
          We experienced the exact same thing with our house in Michigan – just broke even after putting tons of sweat equity into it. For right now, we want to freedom to go wherever we want, whenever we want, so no real estate to ties us down.
          Joanna

  4. Alexandres Lugo

    Spot on. My son and I moved to the island about two months ago and every time we have to visit a mall I dread it. We have visited about 4-5 different malls and it sometimes takes 20 minutes just to leave in your car and all of the lots are full. I hate to see what it’s like during Christmas.

    The underground economy and lack of future planning are definitely evident.