Austerity for Puerto Rico would be a "terrible idea":
America’s Un-Greek Tragedies in Puerto Rico and Appalachia, by Paul Krugman, Commentary, NY Times: On Friday the government of Puerto Rico announced that it was about to miss a bond payment. It claimed that for technical legal reasons this wouldn’t be a default, but that’s a distinction without a difference.
So is Puerto Rico America’s Greece? No, it isn’t, and it’s important to understand why.
Puerto Rico’s fiscal crisis is basically the byproduct of a severe economic downturn. The commonwealth’s government was slow to adjust to the worsening fundamentals, papering over the problem with borrowing. And now it has hit the wall. ... But ... while the island’s economy has declined sharply, its population, while hurting, hasn’t suffered anything like the catastrophes we see in Europe. ... Why have the human consequences of economic troubles been muted?
The main answer is that Puerto Rico is part of the U.S. fiscal union. When its economy faltered, its payments to Washington fell, but its receipts from Washington — Social Security, Medicare, Medicaid, and more — actually rose. So Puerto Rico automatically received aid on a scale beyond anything conceivable in Europe.
Is Puerto Rico’s status as part of the U.S. all good? A recent report ... argues that its economy is hurt by sharing the U.S. minimum wage, which raises costs, and also by federal benefits that encourage adults to drop out of the work force. ...
But the evidence that minimum wages or social benefits are really a problem is, as one careful if older study put it, “surprisingly fragile.” Notably, Puerto Rico’s low rate of labor force participation probably has more to do with outmigration than with welfare: when job opportunities dry up, young, able-bodied workers move elsewhere, while the least employable stay in place. ...
There is, of course, the problem of maintaining public services for those who remain. ... What this tells us ... is that even for a part of the United States, too much austerity can be self-defeating. It would, in particular, be a terrible idea to give the hedge funds that have scooped up much of Puerto Rico’s debt what they want — basically to destroy the island’s education system in the name of fiscal responsibility.
Overall, however, the Puerto Rican story is one of bad times that fall well short of utter disaster. And the saving grace in this situation is big government — a federal system that provides a crucial safety net for American citizens in times of need, wherever they happen to live.