In exchange for help, congressional Republicans are threatening to impose on Puerto Rico a fiscal control board similar to the one established in 1995 in response to the fiscal crisis in Washington, DC. Bad idea. Not only would such a board smack of colonialism and be politically untenable; the scheme would also lack the flexibility needed to avoid a depression in Puerto Rico, while reassuring everyone, including investors, that fiscal policy will remain prudent in the future.A much better solution is a rule of fiscal responsibility like those adopted in countries as different as New Zealand, Sweden, Colombia, and Chile. The idea is to keep expenditure below what the government can raise in taxes in the long run (thereby ensuring sustainability), while allowing deficits whenever the economy is operating below potential and tax revenue is abnormally low (thereby guaranteeing flexibility and contributing to macroeconomic stabilization).
This is sound advice for those dealing with Puerto Rico’s debt woes that’s built on a solid review of the Greek tragedy. I’ll be shocked out of my gourd if it’s heeded (not by Puerto Rican leadership, but by the U.S. government and banks who the debts are owed to).