Before the hurricane the Puerto Rican economy was already caught in a serious downward spiral, which included the negative feedback loop of increasing out-migration shrinking the economy and thus causing more to leave the island. The Puerto Rican economy stopped growing in 2005 and entered a “lost decade” of negative GDP growth, which was exacerbated by fiscal austerity. The poverty rate was a staggering 46 percent, and 58 percent for children (nearly three times the rate for the overall US); 11.8 percent of the workforce was unemployed; and population fell by nearly 10 percent between 2007 and 2016. The government coped with the fiscal effects of this downward spiral by issuing more debt.
By 2015 the government could not pay its debt but was not eligible for the same kind bankruptcy proceedings as US municipalities. In June 2016, the US Congress approved the Puerto Rico Oversight, Management and Stability Act (PROMESA). The law did not provide any additional federal funding, whether in the form of Medicaid parity for Puerto Rico with the States, an earned income tax credit (“EITC”) or an expanded child-tax credit (“CTC”). But it did create a bankruptcy-like procedure to restructure the islands debt in a court of law. And it established a Financial Oversight and Management Board of Puerto Rico (FOMB) to oversee the island’s finances. It approved a 10-year fiscal plan in March of 2017.
The pre-hurricane fiscal plan, proposed by the Governor and certified by the FOMB, did not provide for economic recovery. As a result, the economy was not expected to return to growth for another decade, and probably substantially longer than that, because of a number of unrealistic assumptions. These assumptions included a failure to take into account the full multiplier effect of spending cuts and the loss of tax revenues as the economy declines; an underestimation of expected out-migration (even without the hurricane); and an over-optimistic view of how structural reforms, such as pension and other spending cuts, or downsizing the government labor force might stimulate growth, when the most likely effect is the opposite. Puerto Rico was thus facing one of the longest depressions in this hemisphere for at least the past century, before the hurricane damage.