Published April 11, 2014

Debt: Destroyer of Lives, Businesses, and Countries

Dear Reader,

“Raise your hand if you’re scared of flying.” The professor of my Intro to Psychology course made this request of the class on the very first day of college. Of the 30 or so students in the room, six raised their hands.

“OK, put them down. Now raise your hand if you’re scared of driving.”

Not a hand was raised.

“Statistically, you’re much more likely to die in a car than a plane.”

Thirty blank stares awaited an explanation.

“You see, we humans aren’t as rational as we like to think. Driving is more dangerous than flying, but almost everyone is more scared to fly. That’s why the study of psychology is important: so we can identify and modify irrational thoughts.”

Even as a dumb 18-year-old, I knew my professor’s example was bogus. The mathematical odds of death are just one of several valid reasons to fear something. Another is a lack of control: flying makes me nervous because I’m putting my life in the hands of a stranger. There’s nothing irrational about that.

Debt worries me much more than flying, but for the same reason: I have no control over it. Not personal debt, of course: I have 100% control over my credit card, auto, student loan, and mortgage debt. I’m talking about Uncle Sam’s big, fat federal debt, which today stands at over $17.5 trillion. As one of 115 million taxpayers, my own personal portion of that is $152,000. Add in my wife’s share, and we’re up to $304,000. Do we have to include that in our net-worth calculation when we apply for a mortgage?

Nothing is as destructive as a government drowning in debt. Though the time it takes to play out varies, the narrative is always the same:

  1. Government borrows too much
  1. Government prints money in a desperate attempt to service debt
  1. Government ultimately prints too much money, destroying its currency and the savings of all its citizens

Unfortunately, it often doesn’t end there. Several of the most horrific atrocities in human history were committed by hopelessly indebted governments. Having just watched Meltdown America, a brand-new documentary produced by Casey Research that examines how a financial crisis can turn a once-prosperous country into a literal war zone, this fact is fresh in my mind.

Meltdown America follows the stories of three regular folks who lived in the wrong country at the wrong time. One is former Serbian businessman Mica Miljkovic, who, during Yugoslavia’s hyperinflation, was exchanging foreign currency with a taxi driver. Taxi drivers often become de facto currency dealers during severe inflation because they have easy access to cash. Plus, they’re moving targets, so they’re difficult for a government to crack down on.

During the transaction, Mica spotted an Uzi underneath the cab driver’s seat. It turned out that this particular cabbie, in addition to dealing currency, was also peddling guns to people who feared civil war—a fear that eventually came true.

Personally, I like peeking into the lives of ordinary people who experienced extraordinary things. Hearing their firsthand experiences is eye-opening and, at least for me, carries the added benefit of piercing the “It can’t happen here” psychological defense mechanism that causes so many to downplay a potential crisis until it arrives on their doorstep.

You can watch Meltdown America here. Click here.

Moving along, because Alex Daley’s account of moving to Puerto Rico generated a record number of comments and a whopping 600 emails last week, we’re following up with a Q&A on that same topic. This time, Nick Giambruno joined Alex to discuss the almost-too-good-to-be-true tax benefits of relocating to the Caribbean island.

Then we’ll hear from medical doctor Jeffrey Green, a runner-up in our recent storytelling contest, with an entertaining story about the exact moment he transformed from a liberal into a libertarian.

Puerto Rico’s Tax Benefits—More Than “The Better Florida”

A Q&A with Nick Giambruno and Alex Daley

Nick Giambruno is the senior editor of and coauthor of a comprehensive report on an incredible new set of tax incentives in Puerto Rico which encourage entrepreneurs, investors, and others to relocate to the Caribbean island.

Alex Daley, beyond being Casey’s chief technology investment strategist, is a resident of Puerto Rico and is taking advantage of some of its tax incentives to build new businesses. He coauthored the report and can share his firsthand experience.

Casey Research: First, in case some of our readers aren’t familiar with the details, can you give us the gist of the new tax incentives in Puerto Rico?

Alex Daley: Sure. The first thing readers should understand is that for Americans, this is truly a unique option and a tremendous opportunity for the right people.

Puerto Rico recently passed what are known as Act 22 and Act 20, or the Individual Investors Act and the Export Services Act.

The Individual Investors Act allows new residents of Puerto Rico to be completely exempted from Puerto Rican taxation on their capital gains, dividend, and interest income. And the Export Services Act provides for a top 4% tax rate on earnings from businesses that perform services—like professional consulting, asset management, research and development, computer programming, and so forth—in Puerto Rico for clients outside of Puerto Rico.

Before Puerto Rico’s new laws, it was immensely difficult for Americans to take advantage of incentives like these. For decades, programs in countries like Panama and Singapore sought to attract investors by providing tax breaks—but Americans couldn’t take advantage of them because US nonresident citizens are taxed on their worldwide income. The only exceptions have been in far smaller jurisdictions—never before in a country with the modern infrastructure and a deep labor pool that Puerto Rico offers.

Nick Giambruno: When I first heard about these tax incentives, I thought for sure they were too good to be true, which motivated me to dig deeper. After extensive research, it became clear that the benefits were not an illusion and were 100% legitimate. For many Americans, including individuals operating on a modest scale, they are a huge opportunity that could really be game-changing. They’ve already helped a couple of my colleagues at Casey Research, like Alex.

Casey Research: Alex, tell us your rationale for moving to Puerto Rico. How is life there working out for you?

Alex: I was no stranger to Puerto Rico and had been to the island a number of times previously. I had long been considering relocating to the Caribbean. Of course, Act 20 and Act 22 were a huge draw, but so is the tropical weather, beautiful white sand beaches, lower cost of living, and the adventure of it all.

Just like everywhere else, of course, Puerto Rico has its negatives. Make a decision like mine and inevitably you will hear something about the crime. But to extrapolate PR’s urban crime statistics to the entire island is a mistake. It would be like not moving to Michigan because there is crime in Detroit. Like any state with a dense metropolitan area, there’s crime in some areas. If you steer clear of those areas or take the same precautions you would in any big city around the world, you’ll be fine. In fact, one of my colleagues lives right on the beach in the touristy Condado neighborhood and just loves walking to the nice restaurants.

Casey Research: So what makes these incentives in Puerto Rico different from, say, the Cayman Islands or other low-tax jurisdictions?

Alex: For non-Americans, the differences are subtle—better infrastructure, more familiar goods from home, but no tax advantages. However, if you’re an American citizen, there’s all the difference in the world. This is because the US is the only country that effectively taxes its nonresident citizens on their income no matter where they live and no matter where they earn their money. This means that while a Canadian could relocate to a place like the Cayman Islands and pay zero tax, an American could not. An American living in the Cayman Islands would still have to pay taxes to Uncle Sam. There was really no escape for Americans… until now.

Nick: Yes, that’s exactly right. This is where Puerto Rico comes in. Puerto Rico is an unincorporated territory of the US; it’s not quite a state and not quite a foreign country—it’s a commonwealth, which allows it to have a unique tax situation. Namely, Puerto Rican residents who derive their income from Puerto Rican sources do not pay taxes to the US government—they pay them to the Puerto Rican government. The same is true of the US Virgin Islands.

Combine this commonwealth status with the new tax incentives, and mainland US citizens have a window to legally lower some of the burdens of US taxation. There isn’t another jurisdiction in the world that offers such an opportunity for Americans. It’s like obtaining most of the tax benefits of renunciation without giving up your US passport.

Casey Research: Why does Puerto Rico offer such an attractive deal to new residents?

Nick: Quite simply, the Puerto Rican economy needs it. The island needs to boost its economy to reduce its debt burden, and that’s what gave impetus to Act 20 and Act 22. So in that sense, Puerto Rico’s economic troubles are a blessing in disguise.

Puerto Rico is no novice at sculpting tax rules to attract foreign investors and expatriates. For decades, the country has offered tax incentives to many types of businesses, especially manufacturers, which is why today you’ll find plants belonging to Praxair, Merck, Pfizer, and other big names dotting the island’s lush interior. However, after watching India attract knowledge workers and Singapore attract asset managers, it was glaringly obvious that Puerto Rico could up its game to bring in less environmentally impactful businesses. After all, Puerto Rico has some built-in advantages: the populace is well educated, speaks English more fluently as a whole, and doesn’t have to man the graveyard shift to work with American customers due to time-zone differences. So, the government set out to attract service businesses.

Casey Research: Couldn’t the US government force Puerto Rico to change its tax incentives?

Alex: Of course they could pressure the government here, but it likely wouldn’t affect those who’ve already obtained the benefits. Such an action would just close it off to new participants. But we believe even that is unlikely. The US government understands that Puerto Rico needs to boost its economy to help it address its debt problem. Act 20 and Act 22 help the island do just that. The last thing that the US government wants is a disorderly default or to have to come to the rescue in the form of an unpopular bailout. As of right now, it looks like Act 20 and Act 22 are here to stay.

Nick: There’s also the issue of Puerto Rico becoming the 51st state or its legal status otherwise changing. This would end the tax incentives. However, this issue has languished for decades; Puerto Ricans themselves are divided—some want statehood, some want the status quo, and others want complete independence. I think it is very unlikely that Puerto Rico’s current commonwealth status will change anytime soon.

Casey Research: Where can people go to find more information?

Alex: Nick, some of our other colleagues at Casey Research, and I have put together the definitive guide on the Puerto Rico option. It’s been reviewed by dozens of professional sources in Puerto Rico and the mainland US, including top law firms and accountants in the area. It’s an A-Z guide with information you won’t find anywhere else. If you’re considering taking advantage of the programs here, get started with this guide, as it will save you a lot of time in the process. I certainly wish there had been a resource like this when I made my move. You’ll find the report by clicking here.

My Conversion

By Jeffrey Green, MD

Please allow me to paraphrase a famous quotation: “If you are young and you don’t believe in Big Government, you have no heart. If you are old and you don’t believe in Small Government, you have no brain.” Most savvy investors go through this conversion at some point in their early-adult lives. I imagine that most conversions occur slowly after much time for deliberation and life experience, but that’s not how it was for me. I can remember the exact moment when my conversion occurred.

I grew up in New York, where the current governor recently said that citizens who do not support abortion and gun control have “no place” in his state. It’s a state whose leaders attempt to control everything, from the amount of salt on the table at your favorite restaurant to the size of the cup from which you drink your soda. None of my teachers ever used the word “Keynesian”—they probably had never heard of it!—but that’s how they thought and that’s what they taught. It’s no wonder that I grew up believing in Big Government ideals since I was incessantly spoon fed this tripe in my formative years.

Yes, I admit it: I used to believe that the government should collect more tax money to fund the “war on poverty.” I used to believe that “evil corporations” needed more government oversight to thwart them from screwing over the public. I even believed our leaders should adopt new laws to combat global warming. I never questioned my sixth-grade public school teacher when he predicted we’d be living in subterranean cities by the time I turned 40 due to an expanding ozone hole and runaway global warming rendering the surface of the Earth uninhabitable.

I know, I know… ridiculous, isn’t it? I probably would have believed him if he claimed he owned a unicorn and that a pot of gold lay at the end of every rainbow! Well, age 40 is several years in the rear-view mirror for me and I’m living in a subdivision, not an abandoned gold mine. (As an aside, does anyone even talk about the ozone hole anymore? Just curious.)

Luckily, I had good parents who, despite the oppressive regulations from the overlords in Albany, were able to eke out a reasonable living running a small private business. My parents taught me to work hard and try to better myself. I got my first taste of the real world when I got a minimum-wage job at the local McDonald’s.

Imagine my surprise when I received my first paycheck! I knew how many hours I worked. I knew how much I was supposed to be paid per hour. So why was my paycheck so much lower than it should have been? Despite feeling somewhat irate over Uncle Sam pilfering a third of my pay, I still subscribed to Big Government theory because I felt confident that my tax money was being put to good use for worthy causes.

I learned quickly that I didn’t want to work at McDonald’s for the rest of my life, so I attended college and then medical school. College, of course, was also a sheltered land of unicorns and rainbows, where professors universally proclaimed that every government program was an unbridled success because everything worked exactly as the government promised it would. But they couldn’t shield me from reality forever. During my third year of medical school, they finally burst open the ivy-tower doors and thrust me onto the wards of the hospital to deal with real patients and real problems.

My fellow medical students and I were in the first week of our psychiatry rotation, and the attending physicians were already growing tired of us shadowing their every move. So they dumped us on their underlings, forcing us sit in on “group,” the slang patients used to describe group counseling sessions. Group sessions were run by counselors and were exactly like the stereotypical Hollywood versions we’ve all seen and laughed at: “Let’s go around the room and introduce ourselves, tell everyone why we’re here, and what we hope to accomplish in today’s session. Maybe later, if there’s time, we’ll break into smaller groups and do a little role playing!”

I was paying $20,000 a year in tuition for this?

The med students hated group. Each session was a total waste of time, despite the attending physician’s insistence that they were good “learning opportunities.” I hated them too, but it was during one of these “groups” when my conversion occurred.

I don’t remember his name. Let’s call him Hank. Hank was a young, 20-something, able-bodied man who was admitted to the hospital for alcohol abuse. Hank drank a lot of alcohol and would do stupid things while drinking. Things like beating up his girlfriends, picking fights with bar patrons and police officers, petty theft. He was there not because he wanted to give up his drinking and turn his life around, but because a judge told him if he didn’t check himself into the nearest detox center, he would go to jail. Hank had destroyed a fair amount of gray matter from years of beer and hard liquor, but he had enough sense to fake sincerity to the judge and accepted treatment at our facility.

When it was Hank’s turn to tell why he was here and what he hoped to accomplish with today’s session, he spun a sad tale of woe. The whole world was against him. He just couldn’t catch a break. He drank alcohol to escape from his emotional pain. And then, he uttered the words that finally opened my eyes to reality: “The gub’mint only gives me $900 a month and that don’t do me nuthin’!”

Boom! The real world just jumped out from behind Hank, lunged across that room, and bitch-slapped me on the cheek. There I was, a wide-eyed medical student just embarking on life’s great adventure… I was going to save the world! Unicorns and rainbows for everyone! In the blink of an eye, my conversion was complete. I walked into that room as Paul Krugman and walked out of it as Ludwig von Mises.

I couldn’t believe Hank’s audacity. I was a starving student, burying myself in student debt so I could become a productive member of society. What I could have accomplished with a $900 handout each month! And this guy had the nerve to not only accept it, but then to complain that it was not enough?

Please don’t get me wrong. I am not trying to make light of drug or alcohol addiction, and my heart goes out to those who have problems and truly want to get better. But I contend that Hank’s main problem was not his alcohol addiction. Hank’s main problem was Hank himself. His attitude. His philosophy on life.

Hank relied on the gub’mint for everything. He had no desire to better himself or to care for his own needs. He had the gub’mint for that. It clothed him. It fed him. It paid his rent. It enabled his drinking. The gub’mint couldn’t help Hank fight alcohol addiction. Only one person could help Hank: Hank himself. And until Hank realized that simple truth, he was doomed to continue his slow spiral downward.

I don’t think Hank realized the profundity of the words he spoke, which sounded to me like “The government took $900 from people who earned it and gave it to me, and it did me no good whatsoever!” If that doesn’t sum up the problems with Big Government economic theory, I don’t know what does.

Truthfully, no amount of money would have cured Hank’s woes. The gub’mint could have given him $9,000 or even $9 million a month and he’d still be in the same predicament: sitting in a useless group therapy session, complaining about how it was someone else’s fault that he was down on his luck.

Hank wasn’t the only example I saw that month. There was also “Pete.” Pete cashed his gub’mint check on the third of every month and happily accepted the $900 that was stolen from his fellow citizens for the stated purpose of assisting him with food and shelter so that he wouldn’t starve or freeze to death. Pete then skipped on down to the closest bar and grill with his fistful of money and purchased alcohol and drugs.

For two or three days, he reveled in a glorious bacchanalian binge that would end abruptly when the money ran out. Then Pete faced a dilemma. He had no money to pay his rent and therefore no shelter from the harsh New York winter. He had no money to purchase food and therefore faced hunger and possibly even starvation. What was a guy to do?

Well, Pete was quite resourceful. He would go to the nearest emergency room and tell the doctors he was “hearing voices.” Pete had learned that that was a surefire way to gain admission to the hospital. And just think of all the fringe benefits! Free food. Your own warm and cozy room. Free cable TV. An adjustable bed. A cleaning crew to keep your room spic and span. Room service! Cool psychedelic medicines, aimed at stopping those pesky voices you’re hearing, but having a pleasant side effect of making you feel good.

Pete would dutifully play his part. He’d attend “group” whenever asked. He would take all his meds and act respectfully to the doctors, nurses, and medical students like me when they visited him every day. Then, near the end of the month, the voices would miraculously dissipate. He’d be discharged from the hospital just in time to mosey down to the post office and claim his next gub’mint check.

I’m not sure why, but one day Pete brazenly admitted his scheme to me. I immediately marched down the hall and, as I searched for the doctor in charge, dreamt about what would transpire. I smiled in my mind’s eye as I imagined Pete getting tossed out to the hospital’s back alley by a couple of big, burly bouncer types. I imagined him near tears as his precious gub’mint money dried up. I could just see him sporting that bright orange vest as he picked up trash—judge’s orders—in a futile attempt to pay back his fellow citizens for all the ill-gotten money he’d wasted. I wanted to be there when that same judge cut up his Medicaid insurance card that paid for his monthly hospital visits—and sprinkle its remnants like confetti onto the courtroom floor.

Sadly, the opposite happened. The attending physician just laughed when I told him what Pete had confessed to me. “You have to respect his ingenuity,” was all he said. Pete was allowed to continue on his merry way and is probably still running the same scam in some hospital right now. I wish Pete’s story was my only example of this type of behavior, but there are countless others. I’ve been a doctor for almost 20 years, and I still see examples every day.

I learned a lot during my time on the psychiatric ward. Not about psychiatry, heavens no… I barely learned anything about psychiatry. But I did learn a lot about economics and the reality of what the workers and producers are up against. The users and abusers are out there; they are clever and resourceful, and they’re being propped up by politicians in Washington. Most aren’t as brazen and obvious as Pete, but almost all of them share Hank’s warped sense of external blame coupled with that self-destructive specter of passive dependence and entitlement.

And—thanks to the policies of our Big Government leaders—we are breeding more and more of this poisonous mentality.

Jeffrey Green, MD, is a 43-year-old family physician who owns a private medical practice in a small town in Kentucky. He attended Johns Hopkins University for undergraduate school and SUNY Upstate Medical University in Syracuse, NY, for medical school.

Friday Funnies

What men do when their wives are shopping

Having been held hostage in my fair share of department stores, I sympathize with these guys:

That’s It for This Week

Enjoy your weekend!

Dan Steinhart
Managing Editor of The Casey Report