Puerto Rico is America’s drug factory. Most major pharmaceutical companies have facilities there. This includes Bristol Myers Squibb, Eli Lilly, GlaxoSmithKline, Johnson & Johnson, Pfizer, Procter & Gamble, and Wyeth. Hurricane Maria has nearly shut it down.
FDA chief Dr. Scott Gottlieb has said that his agency is working to prevent shortages of 40 crucial drugs produced on the island. They include stroke-prevention and childhood leukemia drugs. The FDA has taken the unprecedented step of helping drug companies get fuel for emergency generators.
Power outages aren’t the only problem that could affect production for months. Many employees can’t make it back to work. Transportation needed for raw materials and product shipping is crippled.
Infrastructure Is Key to Survival
After hurricanes hit, our efforts tend to focus on emergency aid. This is understandable. But the most effective help for those who live in storm-prone areas is preparation.
I’m not talking about hurricane “prep” like storing non-perishable food and bottled water. I’m talking about planning and investment in infrastructures hardened for natural disaster. But for that you need a fairly competent government.
Puerto Rico, like pre-Katrina New Orleans, wasn’t prepared. Instead, politicians spent money on programs that would get them reelected. They put resources into lavish pensions for the politically powerful public employee unions.
Even before Maria, the island was more than $70 billion in debt. Almost $50 billion of that debt is the unfunded portion of pension obligations to the growing retired population.
The biggest bill payer in Puerto Rico is pharma. It accounts for more than half the territory’s manufacturing and 25% of its GDP. The New York Times reports that the industry employs about 100,000 people. These workers make nearly three-quarters of the territory’s exports.
Drug companies wanted improved infrastructure. Blackouts are a danger to an industry that needs low temperatures to produce goods. This was an issue even before Maria. Though the industry pays much of the island’s taxes, it lacked the political clout needed to get those changes.
The Demographic Disaster
The real clout belongs to the 200,000 government employees and many more retirees living on government pensions. Puerto Rico’s largest public pension, Employee Retirement System (ERS), supports almost 100,000 retirees.
ERS runs out of cash next year. It also owes more than $3 billion to bondholders who bought debt that was supposed to bail out the failing fund.
The other side of this demographic disaster is the shrinking population of young workers. As services and infrastructure deteriorated to pay for government retirees, the economy slowed.
Desperate for opportunity, young families have fled. While the aged population increased, total population fell. The growing cost of the aged fell on a shrinking younger population.
As Megan McArdle points out in Bloomberg View, more Puerto Ricans were living in the US proper than on the island by 2008. Since then, the shift has continued. In 2014 alone, almost 3.5% of young Puerto Ricans left for the mainland.
McArdle’s article is aptly titled, “Debt Alone Won't Crush Puerto Rico. Depopulation Is the Curse.” Now, to escape dire post-hurricane conditions, hundreds of thousands more will join families in Florida and the Northeast. In fact, many will stay, returning only on vacations.
Puerto Rico was already in an economic death spiral. Hurricane Maria adds energy to that vortex.
Pharmaceutical companies were attracted to Puerto Rico at first by tax incentives for US-based drug manufacturers. But those incentives expired long ago. Taxes are sure to go up as the island struggles to pay pensions it can’t afford and recover from the storm. At the same time, skilled tax-paying labor is shrinking due to out-migration.
I don’t think that pharmaceutical production levels will be restored to pre-hurricane levels. This will further reduce tax revenues, making the pension crisis worse.
All of this was foreseeable. Much of this was preventable. It was no surprise that a big hurricane would hit Puerto Rico. We knew it was coming even if we didn’t know when it would arrive. We also knew that the island’s demographic and political problems would result in a pension crisis.
Puerto Rico is not unique in this. It’s just ahead of the curve. Most American states are headed for the same demographic cliff. California, Illinois, New Jersey, and Kentucky are leading the charge.
As it happens, Hurricane Maria coincided with Puerto Rico’s demographic storm. It is ironic that it will almost certainly help kill (or at least cripple) pharmaceutical manufacturing.
It’s doubly ironic that the only solution for the demographic collapse must come from pharma. Specifically, the answer is anti-aging therapies that can keep older people productive and healthy for much longer.
On a personal note, I should mention that I wasted much of my life as a policy economist. Back then, I thought that government policies could be changed to prevent Social Security, Medicare, and pension crises.
Today, those crises loom greater than ever but few seem to know or care. Any politician who tells voters that we must cut spending to prevent bankruptcy is denounced as uncompassionate.
For that reason, I don’t see a political solution to the demographic storm that is ravaging Puerto Rico. The scientific solution is within our grasp but few know that it exists or that we need it.
Read more from Patrick Cox at Mauldin Economics.