The Rich Are Already Paying For Puerto Rico's Problems

Puerto Rico’s economic problems are not entirely and wholly of its own making. Being tied into the Federal minimum wage when productivity is much lower than the mainland is a problem. Being subject to the Jones Act when the other islands around are not subject to such a cost raising measure is also not its fault. Yet, obviously, some blame must fall upon those who have governed the place in recent decades as well, as they spent the heck out of the tax revenues and then went and borrowed more to do it again. However, my point here is a very simple one: there’s a call that it must be the rich who pay the costs of clearing up this mess. The problem with this being that those calling for this solution seem not to understand that the rich have already lost their money here. Calling on them to lose yet more isn’t really, therefore, sharing the burden, is it?

The call is here:

But this Friday, labor unions and other activist groups on the island plan to march in protest of the plan. “The rich should pay for this crisis!” the Socialist Front posted Wednesday in its announcement of the march. “Come out and defend your rights.” Other organizations like Todos Somos Pueblo have been meeting in local churches, denouncing the proposal for targeting “the most marginalized sectors of the country” through cuts to social services and tax hikes.

Depending upon how good your Spanish is you might prefer that call in the

OK, standard political posturing, someone else should pay for whatever it is. But it’s also entirely to miss the point.

Here’s a listing of the values of the various Puerto Rican bonds. The point to concentrate upon there is the “price” column. Bonds are priced against $100. That is, if I issue a bond for $100, you give me $100 for the bond, then the issue price of the bond is “at par”, or that $100. So, we stylise this as saying that the bond price is 100.

After that issuance price (and bonds rarely are issued at par, it’s always 99.5, or 101.25, to take account of moves in the market in between the setting of the interest rate on the bond and the actual issuance) the price will vary according to two things. What’s the general interest rate environment and what’s the risk of the bond not being repaid?

If I issue a bond, a perpetual (which lasts for ever, just to make our arithmetic easier) at 100, and a 6% coupon or interest rate, then general interest rates halve, then that bond should rise to 200 in price so that the 6% coupon gives a 3% yield. Yes, this is a very simplistic reading of it but as far as it goes, true.

Tim Worstall

The Rich Are Already Paying For Puerto Rico's Problems