Boom and Bust in Puerto Rico
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Boom and Bust in Puerto Rico

How Politics Destroyed an Economic Miracle

A. W. Maldonado

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Boom and Bust in Puerto Rico

How Politics Destroyed an Economic Miracle

A. W. Maldonado

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About This Book

Who is to blame for the economic and political crisis in Puerto Rico—the United States or Puerto Rico? This book provides a fascinating historical perspective on the problem and an unequivocal answer on who is to blame.

In this engaging and approachable book, journalist A. W. Maldonado charts the rise and fall of the Puerto Rican economy and explains how a litany of bad political and fiscal policy decisions in Washington and Puerto Rico destroyed an economic miracle.

Under Operation Bootstrap in the 1950s and '60s, the rapid transformation and industrialization of the Puerto Rican economy was considered a "wonder of human history, " a far cry from the economic "death spiral" the island's governor described in 2015. Boom and Bust in Puerto Rico is the story of how the demise of an obscure tax policy that encouraged investment and economic growth led to escalating budget deficits and the government's shocking default of its $70 billion debt. Maldonado also discusses the extent of the devastation from Hurricane Maria in 2017, the massive street protests during 2019, and the catastrophic earthquakes in January 2020.

After illuminating the century of misunderstanding between Puerto Rico and the United States—the root cause of the economic crisis and the island's gridlocked debates about its political status—Maldonado concludes with projections about the future of the relationship. He argues that, in the end, the economic, fiscal, and political crises are the result of the breakdown and failure of Puerto Rican self-government. Boom and Bust in Puerto Rico is written for a wide audience, including students, economists, politicians, and general readers, all of whom will find it interesting and thought provoking.

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PART I
The Rise and Fall
CHAPTER ONE
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Operation Bootstrap
In 1953, Rexford Tugwell, Puerto Rico’s last American governor, wrote, “It is not too much to say that a transformation is in progress [in Puerto Rico] which for a long time will be one of the wonders of human history.”1 In 1954, Chester Bowles, anticipating Puerto Rico’s role as the “showcase of democracy” after the 1959 Cuban Revolution, wrote, “At a time when we Americans urgently need to burn deeply into our private conscience and public policies a sympathetic grasp of the hopes and striving of the underdeveloped world, it is both fortunate and arresting that Puerto Rico can teach us so much. . . . [T]he United States should take special pride in its own recent and enlightened co-operation with Puerto Rico’s ‘Operation Bootstrap.’ That is why this test case in American attitudes towards the generic problems of underdeveloped areas could be so pertinent elsewhere, if we wanted it to be. Let us make full use of the opportunities given us by this instant of special success.”2
In 1961, the economist Kenneth E. Boulding wrote, “There is a type of revolution which does not fit into any type . . . of category and which may be the most fundamental in the long run. I call it the ‘Fomentarian Revolution’ in honor of a remarkable institution in Puerto Rico which embodies it known as Fomento.”3 In 1965, the Harvard constitutionalist Carl J. Friedrich wrote, “Rare are the instances in which the transition to self-government of a former colonial territory has been achieved with comparable success.”4 And in 1987, Eric Hobsbawm wrote that Puerto Rico had experienced “the biggest and most intense, fastest and universal transformation in the history of humanity.”5
On August 24, 1977, the Wall Street Journal associate editor and supply-side economist, Jude Wanniski, wrote a column, “A Conversation with Muñoz Marín,” that sought to explain Puerto Rico’s remarkable economic growth. Muñoz, once an ardent critic of U.S. “colonialism” and passionate advocate of independence, described his transformation: “At the time I had held the classical theory of empire—that empires are good for the empires but not for the colonies. But here I saw Roosevelt, the head of the American empire, willing to back us in our fight against the capitalists in Puerto Rico. It showed me that I had to revise my theory of empire.”6
Convinced that the United States was not the enemy but would now support his ambitious social and economic reforms, Muñoz campaigned in 1940, not on independence, but exclusively on his social justice agenda. Against all odds, he was elected president of the insular senate in 1940, becoming the island’s top political leader.
But power brought about another change in Muñoz. As he told Wanniski, “When you are the party in opposition, you can afford to be the party that demands redistribution of wealth. But as we became the party of government we had to give more room to the idea of growth, so there would be more to distribute.”7
This was the turning point in the island’s history. Muñoz prioritized economic growth, upending the island’s political culture by putting aside the political status issue. And he focused his government on the creation of wealth, the industrialization program called Operation Bootstrap.
That the United States would support Puerto Rico was manifest when President Franklin D. Roosevelt appointed Rexford Tugwell, famous as a member of Roosevelt’s original New Deal “brain trust,” the last of the American governors and by far the most successful. His personal relationship with Roosevelt was crucial, especially in the height of the war when the island, totally dependent on marine transportation, was effectively isolated by Nazi submarines seeking to impede the sea lanes and the flow of petroleum to the United States and Europe.
Tugwell, appointed governor in 1941, known for his academic career as an economist and an early admirer of the Soviet Union, would collaborate with Muñoz’s left-wing agenda. Known by his critics as “Red Rex” because of his socialist tendencies, he was determined to introduce powerful economic planning into Puerto Rico’s governance. He had served in the Roosevelt administration Department of Agriculture and was an expert in land reform, which made him an ideal ally for Muñoz. Forced by conservative Republicans in Congress to leave Washington because of what they considered his socialist ideas, he now believed and resented that Roosevelt’s early New Deal was being overtaken by what he perceived as the return of conservative capitalists to power in Washington, in part as the result of World War II. Now he was delighted to have another opportunity, with Muñoz running the island government, to finally bring the New Deal spirit and programs to Puerto Rico.
Working in tandem, they created the first modern, efficient, honest government bureaucracy in Latin America and, according to some historians, among the best in the world.8 They established numerous new government agencies and public corporations, including the Department of Transportation, the Budget Office, and Fomento, an agency in charge of attracting U.S. industry to the island. Among his initiatives, Tugwell was particularly proud of the powerful Planning Board—convinced that economic planning was indispensable to good government—and the Water Resources Authority. After a long legal battle with the private, Canadianowned power company in San Juan, he had achieved his goal of a government monopoly on electric power.
Tugwell left the island in 1946, after five years as governor. World War II had ended, and he was convinced, as he wrote in his memoirs, The Stricken Land, that his usefulness to Puerto Rico and to Roosevelt had also ended. He was aware that he and Muñoz had accomplished a change comparable to the early New Deal on the mainland, but he left feeling skeptical about Teodoro Moscoso’s new agency, Fomento, doubting that Puerto Rico could replace agriculture with industrialization. He was also skeptical about Puerto Rico’s future under Muñoz’s leadership. He admired Muñoz the man but distrusted Muñoz the politician, just as he distrusted most politicians in Puerto Rico and Washington. In his memoirs, he wondered if all that he and Muñoz had accomplished would survive what he saw as the viciousness of Puerto Rican politics.9
Tugwell’s skepticism in 1946 was rooted in what had been the island reality. He well understood the power and destructiveness of island politics. He had been a witness to the attempt to extend the New Deal to Puerto Rico in the 1930s and its breakdown due to ferocious island political conflicts. Now he wondered, would Puerto Rico revert to the sense of hopelessness?
Hopelessness
“As for Puerto Rico,” President Roosevelt lamented to Ernest Gruening in 1934, “the place is hopeless, hopeless,” throwing his hands up for emphasis and in frustration.10 Gruening was director of the Division of Territories and Island Possessions of the Interior Department and led the effort to extend the New Deal to Puerto Rico. Roosevelt and his administration, under the enormous weight of lifting the nation from the Great Depression, dedicated extraordinary time and effort to the small island territory in the Caribbean. This was partly because Eleanor Roosevelt had visited the island with Tugwell in 1934 and had taken a personal interest in Puerto Rico after witnessing the deplorable condition of these U.S. citizens—worse than anything she had seen on the mainland.
But the massive effort of millions in federal spending floundered. Pro-independence violence during the decade and the ambiguous reaction of local politicians triggered resentment in Gruening and others. Convinced that Puerto Rican politicians were not only ungrateful, but favored anti-American sentiment, Washington’s enthusiasm for extending the New Deal to Puerto Rico waned. The sense of hopelessness reached all the way to the First Lady. “Increasingly frustrated,” wrote Ruby Black in her biography of Eleanor Roosevelt, “her ambitious plans snarled by petty politics in Puerto Rico, incompetent administrators and congressional opposition, the First Lady began to withdraw.”11 Muñoz, politically damaged by the effort’s failure, pronounced, “And so ends the most glorious, the most fair-minded, the most generous, and the most dastardly four years of the American regime in Puerto Rico.”12
The fundamental cause for the sense of hopelessness was the perception that Puerto Rico represented an American failure. In their visit, Eleanor Roosevelt and her team could not believe that after nearly four decades of American rule, they were witnessing men, women, children—U.S. citizens since 1917—living in putrid slums, sleeping in shacks propped up over running sewage. “The misery of the people,” Tugwell wrote, “was very nearly as deep as that of any people in the world.” Speaking for the president who had ordered U.S. troops to take Puerto Rico, General Nelson Miles had issued a solemn proclamation in 1898: America had come to bestow “the advantages and blessings of enlightened civilization.” More than an American failure, it was seen as a shameful “broken American pledge.”13
It was not that the Americans did not try. In the early 1900s, there was an extensive effort to build infrastructure, roads, schools, and hospitals. Diseases that decimated the islanders were nearly wiped out, including bilharzia, caused by parasitic flatworms found in contaminated bodies of water that sapped the energy from its victims, leaving Puerto Ricans weak, passive, and indifferent. Then, in the 1920s, pro-business presidents promoted private spending, all in agriculture—sugar harvesting and refining, tobacco, and rum—but failed to lift the island out of poverty. Now liberal New Deal spending, despite its successes in surmounting the Great Depression on the mainland, had also failed.
The inevitable conclusion was that nothing worked. But why? Was it, after all, a problem with Puerto Rican culture? Efforts to “Americanize” Puerto Ricans—by conducting public instruction in English, for example—had failed. Was Puerto Rico, regardless of its political relationship to “enlightened civilization,” destined by its Spanish heritage to follow the failure of Latin America?
Was it the nature of Puerto Rican politics? Except for outbreaks of nationalist violence that lacked popular support, Puerto Rican politics was pacific, unlike that of many of its Latin American neighbors. But it was also abstract, idealistic, personalistic, sterile, and at times destructive.
Or was it simply the fundamental economic reality of size and population? Puerto Rico, a small island, one hundred miles long by thirty-five miles wide, was already overpopulated in 1898, with nearly one million inhabitants. As Tugwell found during his 1934 trip, American success in wiping out disease had triggered a population explosion, now approaching two million. Although there had been significant improvements under the Americans, Puerto Rico was losing the race against population growth, and living conditions kept worsening. As an overpopulated island where 80 percent of the land was not suitable for large-scale agriculture, lacking sufficient valuable natural resources, a thousand miles from the U.S. mainland, what chance did Puerto Rico have to lift its exploding population from misery?
For many in Puerto Rico, and increasingly in Washington, the answer was none. But seven years after leaving Puerto Rico, Tugwell changed his mind. By 1953, he knew that his administrative revolution had not only survived, but thrived beyond his dreams. He wrote that now he saw the economic, political, and social changes that he and Muñoz had carried out had led to a “transformation . . . which for a long time [would] be one of the wonders of human history.”14 He no longer had doubts about Muñoz as a political leader: he wrote a book in 1958 on the art of politics, comparing Muñoz to Roosevelt and New York mayor Fiorello La Guardia.
For Tugwell, it was not hyperbole. His five years in Puerto Rico had left him with the pessimism that Puerto Rico was a “stricken land” where nothing, even his own best efforts, would last. Now he believed that he was witnessing a true economic miracle.
The Sleepless Night
Muñoz and Tugwell’s sweeping reforms and creation of an efficient and honest government administration had made possible the remarkable economic takeoff. And it began on an early morning in 1947. It was still dark outside, and Teodoro Moscoso, head of Fomento, had not closed his eyes. Hours earlier, something terrible had happened to him and, he was convinced, to Puerto Rico.
A year before, he had convinced senate leader Muñoz to approve legislation to offer tax exemption for American job-creating investment on the island. Since the island’s status gave it exemption from federal income tax laws, this would give the investments total tax exemption. But the 1946 law, Moscoso believed, was seriously defective and needed to be amended. The Moscoso proposal, however, reignited what had always been strong opposition within the Popular Party leadership and within the administration. After what seemed an endless meeting with his entire economic team and other political leaders, Muñoz yielded to the cacophony of opposition and finally decided to reject Moscoso’s plea.
Muñoz’s rejection should not have surprised the thirty-six-year-old Moscoso. He had always known that the very idea of offering full tax exemption provoked in Muñoz strong and conflicting emotion. He was, after all, an anti-capitalist, a Marxist in his youth, and until recently a radical proponent of Puerto Rican independence. His program of deep social and economic reforms, including land redistribution, was aimed at breaking up the stranglehold of absentee corporations on the island economy and politics. And, most important, as governor, Tugwell, who had recruited most of the administrators and economists, some of them with Ivy League degrees and who saw him as their mentor, had been firmly opposed to tax exemption.
Tugwell’s Opposition
It was Tugwell who had plucked a restless and unhappy Moscoso from a family pharmacy in Ponce and made him his principal Puerto Rican aide, impressed by his talent for getting things done. Moscoso, however, became a nuisance at La Fortaleza, badgering the governor about the need to create an agency dedicated to promoting the island’s industrialization. But like almost all island economists, Tugwell believed that Puerto Rico’s economic future depended on agriculture. Although people had talked about industrialization since the early 1900s, it was always in the context of agriculture-dependent industries such as sugar mills and rum distilleries. Nonagricultural industrialization, as Moscoso envisioned it, had never materialized, and Tugwell was convinced it never could.
But somehow Moscoso got Muñoz and the Popular Democratic Party–controlled legislature to create a small agency, the Puerto Rico Development Company, which would become known as Fomento, with a budget of $500,000, and the Government Development Bank. On May 11, 1942, Tugwell signed the law creating the agency. A few months later, he got around to naming Moscoso to head it, saying, “This is your idea so you might as well run it.” As he admitted in his memoirs, he didn’t think much about it then.15
World War II g...

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