I have spent the last several weeks studying the Puerto Rican debt crisis, trying to understand how the situation got so bad. It appears that Puerto Rican officials have been essentially running an open ponzi scheme, selling lucrative bonds to an eager municipal bond market. Much of that borrowing went to close significant structural budget gaps, caused in part by required debt service payments to other creditors. To make matters worse, at the same time, the Puerto Rican government neglected to fund its public employee pension systems, allowing payments to retirees to nearly liquidate its investment reserves.
Today, the over $70 billion that is owed to bondholders and the over $43 billion owed to retirees far exceeds what the island’s beleaguered tax base can possibly service.
What were government officials, union leaders and bondholders thinking? All of them played a role in the creation of this crisis; government officials by refusing to make the tough choices to fix structural budget issues; union leaders by pushing for wage increases and bonus payments while allowing politicians to shortchange the pension system; bondholders by lending more and more money to a clearly distressed government.
It seems to me that everyone involved got caught up in a collective neurosis, dissociating themselves from reality, clinging to ever-changing and ever more tenuous assumptions about the future prospects for the island, all while bleeding it dry. The psychiatrist Carl Jung had a theory about the root cause of neurosis. He said, “Neurosis is always a substitute for legitimate suffering.”
While pain avoidance is a natural instinct, avoiding pain at all costs creates mental illness. According to Jung disciple M. Scott Peck in his classic 1978 book "The Road Less Traveled," legitimate suffering techniques are those employed by healthy people to maintain perspective and avoid neuroses. These techniques include delaying gratification, accepting responsibility, being dedicated to truth and balancing conflicting pressures.
In Puerto Rico, government officials were unwilling or incapable of making painful spending cuts to balance budgets during a prolonged recession. In doing so, they refused to both accept responsibility for their situation and balance conflicting pressures. Instead, they chose to believe that their economy, despite all the evidence to the contrary, would magically bounce back, allowing them to make up lost ground and repay their debts.
Public sector union leaders were unwilling to accept responsibility for and push back on the catastrophic pension funding policies that allowed the near complete liquidation of the pension trust fund. Instead, they focused their efforts on “getting while the getting was good,” refusing to delay gratification today to save the pension system from collapse tomorrow.
Just one anecdote from decades of neglectful union actions — last December, as their pension fund was collapsing, union leaders insisted that the Puerto Rican central government pay $120 million in Christmas bonuses to public workers instead of making the required contributions to their pension system.
Municipal bond holders were blinded to the severity of the Puerto Rican financial crisis by the most lucrative of bond offerings — triple tax-exempt bonds with high comparative yields. The potential profits to be made drowned out the warning sirens from dozens of economists and financial analysts who could clearly see that the island was already insolvent. Still the money kept rolling in as eager institutional investors snapped up new bonds, perhaps believing that they could time the market and exit before things got too bad.
Reality has finally caught up to Puerto Rico, and the pain is only beginning. Government leaders everywhere must embrace the principles of legitimate suffering if they are to avoid a similar fate.
Dan Liljenquist is a former Republican state senator from Utah and former U.S. Senate candidate. He is nationally recognized for work on entitlement reform.