For the second consecutive year, Puerto Rico was the U.S. jurisdiction with the least economic freedom, with an index of 2.85 out of a maximum of 10.
The presentation of the Economic Freedom of North America 2023 report by the Puerto Rico Institute for Economic Freedom took place Thursday at the Hyatt Places hotel in San Juan. In the photo, from left to right, Joanisabel González, Business Editor; Fred McMahon, Research Fellow at the Fraser Institute; Dean Stansel, Research Associate Professor at the Cox School of Business, Southern Methodist University; José Torra, Research Fellow at Pathways to Freedom; and Ángel Carrión Tavárez, Director of Research and Public Policy at the Institute for Economic Freedom (ILE). (Ramon "Tonito" Zayas).
Framed by Puerto Rico's recidivism as the U.S. jurisdiction with the least economic freedom, the co-authors of the Economic Freedom of North America (EFNA) 2023 report, in addition to presenting solutions and recognizing gray spots in the free market model, agreed that to achieve prosperity, the island's status should not be defined.
Although the political debate on the island revolves around statehood, commonwealth and Puerto Rico's independence, Ángel Carrión Tavárez, director of Research and Public Policy at the Institute for Economic Liberty (ILE), said that "economic freedom has nothing directly to do with Puerto Rico's status situation".
"We have to aspire to be the best society possible in terms of economic freedom, regardless of what is going to happen to Puerto Rico in the future. Because to be a State with the same policies we have now, we would be in the same position we are in now," Carrión Tavárez said.
"When you talk about these things (economic freedom), it's hard to divorce or get the idea out of your head that status has anything to do with what we're saying. The second most economically free jurisdiction in the world, you know what it is? Hong Kong: a territory of a communist country (China)," he said.
In the study, published by the Fraser Institute of Canada and which considered data from 2021, Puerto Rico ranked 51st, with 2.85 points (out of a maximum of 10), being surpassed by New York, with 4.09 or 43% more than the island, and California, which registered an index of 4.27, according to the report.
For the first time, the EFNA also analyzed Puerto Rico in relation to the 10 Canadian provinces, the U.S. states and those in Mexico (31). In that comparison among 93 jurisdictions, the island ranked 61st with a preliminary score of 6.65, below the lowest-ranked Canadian province (Newfoundland and Labrador) and slightly above the top-ranked Mexican states in the Aztec country (Baja California and Chihuahua). Since 1994, Canada, Mexico and the United States, to which Puerto Rico belongs, have formed the North American Free Trade Agreement, the second largest trade bloc in the world with over $24.3 billion (trillions). This trade pact was modified in 2020 under the United States-Mexico-Canada Agreement (USMCA). The three economies account for just over 17% of Global Domestic Product, according to the World Bank.
According to the definition provided in the report, economic freedom refers to the opportunities that people have to act in an economy without regulations that delay their prosperity. For the measurement, considering qualitative data, the analysis examines several variables, grouped into three broad areas: public spending, taxes and labor market restrictions.
Nor does the size of the economy have an impact
Fred McMahon, Research Fellow at the Fraser Institute and co-author of the report, agreed that the island's prosperity does not depend on its territorial status.
"Your destiny is in your own hands. You can make Puerto Rico a prosperous place, whether it is a commonwealth or a State, with or without the Jones Act," McMahon said, referring to the Jones Act cabotage.
In the EFNA, like Puerto Rico, Alaska and Hawaii, states that are also required to transport goods between U.S. ports on U.S.-flagged vessels, are in the segment of jurisdictions with the least economic freedom. But in both cases, they scored higher than Puerto Rico. Alaska obtained 5.42 points in the EFNA 2023 and Hawaii, 4.58.
The researchers' statements were made on Thursday during a forum coordinated by ILE and attended by local business leaders and various political figures.
The states that reported the highest index of economic freedom were New Hampshire, with the first position and a score of 7.96, and Florida, the state to which Puerto Ricans have moved the most in the past decade. The so-called Sunshine State scored 7.80.
A common denominator of those states with greater economic freedom is that they do not have labor legislation, lacking, for example, paid maternity leave, a benefit that mothers in Puerto Rico can receive and that grants at least two months in the private sector and three months in the public sector. The absence of specific legislation on the subject, however, does not mean that companies do not grant such benefits to their workers.
One of the criticisms of the ideology of economic freedom is that it does not support labor regulations, which for many jeopardizes the requirement for employers to offer benefits such as sick days, vacations and others.
However, José Torra, Caminos de libertad researcher and co-author of the report, insisted that this is "incorrect optics," since he insisted that, in addition to attracting new businesses to the island, eliminating regulations would encourage employers to compete for workers by offering their own benefits.
"What we have to look at is whether employers are obligated by the state to offer particular benefits or whether they are going to offer them on their own. Why? Because what they want is to hire, have and retain the best possible talent," Torra said.
Economic freedom vs. equality
Although the co-authors insisted that the most economically free jurisdictions demonstrate better benefits in segments of education, health, prosperity, among other indicators, the analysis does not demonstrate a close relationship between free markets and social equality. In other words, economically free societies have levels of inequality that may be similar to levels of inequality in more restrictive or less prosperous societies, according to McMahon.
Dean Stansel, associate professor of research at the Cox School of Business at Southern Methodist University and co-author of the study, said that one of the controversies in the study of inequality is that it "ignores" the taxes paid by the wealthy and the benefits obtained by low-income people as a result of the distribution of the tax burden.
Stansel also mentioned that the difference in more prosperous jurisdictions is that "it is much more pleasant to have low income in a country with a lot of freedom, because the income itself is higher.
For his part, Carrión Tavárez indicated that "the aspiration should not be to eliminate inequality, but to increase wealth" as a way to eradicate poverty.
A middle class "trapped" in taxes
One of the aspects that most caught the attention of the four researchers when examining Puerto Rico is that tax payments on the island are very high and penalize the productive class, given that it is the social sector that cannot opt for other possibilities such as those with great purchasing power, according to Stansel.
"If you make $70,000, that's about $6,000 in extra taxes, it's pretty bad. But if you make $2 million and you pay $6,000 more in taxes, really, it's not a big reduction in your income. So, when you look at it, it's typically the middle class, the lower class that pays the most taxes because they're the least mobile. You've got them trapped," McMahon said, referring to the income base established in Puerto Rico to apply the maximum rate of 33%, which is about $64,000.
"People who have a lot of money benefit more by going to a no-tax state than middle-class or lower-income people," Stansel said.
In whose hands is prosperity, in the hands of the government or in the hands of the private sector? asked Joanisabel González, editor of Negocios and moderator of the forum.
To which Stansel explained that what is left in the hands of the political process should be minimized, since government incentives and investments revolve around political decisions.
"So, at the very least, the best way to avoid those bad outcomes is to minimize what we put into the political process and leave it up to private individuals to pursue whatever it is they're passionate about to make good decisions. We don't need the government to make it easy for us. We need the government to get out of the way and let us do what we do best," Stansel.
For his part, Torra mentioned that the solution to Puerto Rico's economic prosperity lies in lowering taxes and reducing government spending. However, he clarified that the latter does not depend on eliminating social assistance, since "there is still a lot of fat in the government that can be cut first".
This article was originally published in Spanish by El Nuevo Dia.
