Badly targeted

[T]he United States government assumed too big a role in the Puerto Rican economy, and its largesse enabled the commonwealth's government to do the same. Through hubris, clumsiness and sheer size, these governments knocked Puerto Rico off the promising path that it was following, and the island's economy is now lost in a thicket of bad incentives. Two federal intrusions stand out: an oversized welfare state, and misguided rules on business investment.

Federal transfer payments to Puerto Rico…reflect the sensibilities of a wealthy country. So by Puerto Rican economic standards, they are huge. ...[F]ederal disability allowances are much higher than the United States average as a share of wages and pension income. Unsurprisingly, therefore, one in six working-age men in Puerto Rico are claiming disability benefits.

...For many people...the money that can be earned through federal transfers and a little informal work is more than the market wage—and requires much less effort. Meanwhile, in a strange echo of America's immigration debate, people from the Dominican Republic do many of the jobs in Puerto Rico that pay too little to attract the locals.

Through tax laws, the federal government has also favoured some business investments in Puerto Rico over others. Most notorious is "Section 936", a rule that skewed investment towards technologies that were too advanced for Puerto Rico's stage of development. Drug firms and chemical producers built factories that used lots of capital and few workers, because doing so lowered their global tax bills....

High technology sounds wonderful. But what Puerto Rico has needed over the past few decades is more medium-tech plants. These would employ more people, teach them skills better suited to the island's level of development, and tighten links to local suppliers and business services. More service jobs for the unskilled would be good, too.

Well-intended policies don't always work.