Cooperation and Conflict

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Staying within the structure of methodological individualism it is important to see how Smith’s Pin factory example (p.54-55) exemplifies the coordination of a group of economic agents. All working in unison towards the common goal of producing pins. All of these individual works comprise the overall assembly line. The totality of all the adjacent departments related to manufacturing makes up the internal structure of the firm. Any social institution whether it be a hobbyist club, social club, buyers club (e.g. Sam’s Club, BJ’, Costco), government, business, trade association, private governing bureau/authority (e.g. homeowners association), charitable foundation, research institute, study group, etc. are comprised of multiple individuals forming the group. It is flat-out erroneous to speak of the entire organization without any consideration for its members. The collective action of all the group members acting harmoniously to achieve the same ends is much more complex than treating these collective efforts as lumped together aggregate.

Each member of an organization has their internal objectives, thoughts, feelings, and desires. It can be said that all the active participants have their utility functions (p.25-26). Meaning that to some extent their wants, needs, and desires align with the overall group goals. For example, very few people like their jobs, but they voluntarily consent to the terms of employment because of their desire to earn money. Whether it is for the intrinsic satisfaction of possessing money or what currency can be redeemed for. Keeping within the theme of a Smithian analysis of social institutions, it is important to note that more than tangible goods are exchanged through interaction with others. We exchange ideas, culture, skills, knowledge, friendship, guidance, sympathy, morality, and moral support among other forms of desirable forms of social currency. Political activities tend to be a form of social association that is frequently marred by corruption and various forms of abuse. However, is the dynamic of politics overtly a zero-sum game? Not necessarily. As it can be viewed as a form of exchange, individual actors engage in various exchanges for mutual benefits (p.25). One example being logrolling the practice of lawmakers trading votes/favors.

The intangible exchange of social commodities cannot be understated in formulating effective working relationships. One crucial assumption of Smith’s Theory of Moral Sentiments (1759) that we seek the “approbation” of others. In other words, we seek to praise and approval from others. We are constantly seeking the acceptance of our peers. Being well-liked on the individual level wields a significant amount of social currency. If the ability to seek acceptance and cooperation is applicable on the individual level, couldn’t it also apply to the harmonious relationships between groups of people? After all the scope of social and economic interactions operates on a continuum of scale, what is applicable on a minuscule level should also work on a larger scale. The principle is a general maxim governing social interactions, therefore it should be transferrable. One of the best ways to overcome cultural barriers is through finding a form of social exchange desired by both parties. It does not mean that it must take the form of economic exchange. It possibly manifests itself in alliances and treaties among nations. Special agreements, pacts, contracts among nonpolitical social units. Most often it takes the form of economic trade between foreign nations. The necessity of unilateral trade agreements is refutable. Consumer sovereignty is the true impetus of international trade. Despite the bluster and theatrics of vociferous diplomats and other garden variety elected representatives.

Why voluntary association over other coercive means do we yield harmonious interactions? There isn’t a magic bullet answer to this question. However, some insights from Public Choice pioneer Gordon Tullock may help elucidate a potential variable that sheds some light on this occurrence. It is the ability to choose our partners in voluntary social arrangements that reduce the instance of Prisoner’s Dilemma. If our trading partner is not being cooperative, we can easily do business with someone else. Because of the mobility of free association (which is purportedly protected under the First Amendment) we do not need to be held captive by aggressive or hostile social relations. Due to this consideration, it is easy to see the original sentiment behind antitrust laws, but much like all laws, they suffer from loopholes and other issues. Even from the standpoint of the definition of a monopoly. One of the common attributes of monopolistic market behavior is assessed by is market concertation. However, this is problematic how do we determine which market is categorically correct for the assessment of market concentration? Nevertheless, we can freely choose our partners whether in trade or other forms of social situations it reduces the occurrence of the perverse incentives to be noncooperative. Sullying our reputation deprives us of the esteem that Adam Smith surmised we all crave.

Considering that trade is one of the forms of association that fosters cooperation. Even if free trade is not the key to world peace, it still makes us less apt to raise the sword to our geographic neighbors. To repudiate the previous administration’s trade policy, international trade should be encouraged. It is only natural to perceive David Ricardo’s concept of comparative advantage as an extension of Smith’s pin factory.  The premise of comparative advantage is that it can make production global and explains why we tend to import higher-order goods to produce commodities domestically. No one climate can best produce glass, grapes, and corkwood in the Cognac region of France. However, all of these components are required for assembling a commercially produced bottle of Cognac brandy. This specific region in France has some of the best grapes in the world for brandy production. The climate is wholly inappropriate for cultivating and harvesting the wood used in the stopper placed in every Cognac bottle. To avoid placing great restrictions on our ability to manufacture sophisticated goods, we need to trade with other nations. We can only truly achieve this through peaceful relations. Free trade in itself helps to facilitate peaceful relations.

The Whisk(e)y Wars- A Conflict Fought With Tariffs

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“…When there is no probability that any such repeal [of a tariff in a foreign country] can be procured, it seems a bad method of compensating the injury done to certain classes of our people to do another injury ourselves, not only to those classes but to almost all the other classes of them. When our neighbors prohibit some manufacture of ours, we generally prohibit, not only the same, for that alone would seldom affect them considerably, but some other manufacture of theirs. This may no doubt encourage some particular class of workmen among ourselves, and by excluding some of their rivals, may enable them to raise their price in the home market. Those workmen, however, who suffered from our neighbors’ prohibition will not be benefited by ours. On the contrary, they and almost all the other classes of our citizens will thereby be obliged to pay dearer than before for certain goods. Every such law, therefore, imposes a real tax upon the whole country, not in favor of that particular class of workmen who were injured by our neighbors’ prohibition, but of some other class…” (Bk. 4, Ch. 2)

 The Wealth of Nations- Adam Smith

The Biden Administration’s commitment to free trade is questionable at best. The extent to which he will champion laissez-faire policies is a difficult determination to make in the nascent period of his presidency. Biden being a centrist is more concerned with appeasing the median voter than taking principled policy positions. Only time will tell whether or not he will capitulate to the anti-market sentiment of the vociferous and passionate populous wing of the Democratic party. Epitomized in the heated rhetoric of elected officials such as Elizabeth Warren and Alexandria Ocasio-Cortez. However, there may be some light at the end of the tunnel. Free trade may not necessarily be dead in the water. Despite the multitude of flawed policies that have so far been supported and promulgated by the Biden Administration they may have done one thing correctly. Repeal some of the Trump-era tariffs. Arguably one of the most disturbing aspects of the Trump administration was his hostility towards foreign trade. Biden has taken one small step to repair America’s tarnished image in the arena of international trade. This attempt at redemption has manifested itself in an unlikely form, the abolition of the importation tariff on Scotch Whisky

The previous statement is not wholly accurate. The United States agreed to relinquish all tariffs on goods imported from the United Kingdom. Responding to the UK’s lift all of its tariffs on US imports back in January. Scotch Whisky is one of Scotland’s most highly esteemed exports. Making it an iconic symbol of the UK’s presence in the arena of global trade. Considering back in 2012 the United States was estimated to be the largest export market for Scotland’s prized spirit, it stands to reason that the tariffs were detrimental to United Kingdom’s economy. Even in light of the Trump tariffs the United States still maintained this position as top consumer nearly a decade later in 2020. Despite the United States remaining big-time scotch imbibing nation the tariffs still sent shock waves throughout the industry. It projected that since the 25 percent tariff was imposed back in 2019, Scotch producers lost an aggregate “$682 million (£500 million)” in sales. In 2019, the United States imported $2.07 billion worth of distilled spirits from the U.K., the majority of it being scotch whisky. The year 2020, delivered a two-punch blow to Scotland’s whisky producers. The COVID-19 pandemic also eroded profit. Leading to an overall 23 percent dip in global scotch sales. The US tariffs have been attributed to a 32 percent decline in overall whisky exports. As recent as last month the losses incurred by the tariffs have been described as “unsustainable” for some producers.

The United States did not escape with impunity from retaliatory tariffs being imposed by the United Kingdom. It should not be ignored that the UK is a significant trading partner of the United States. Approximately 20.3 percent of all agricultural exports from America to the UK were alcoholic beverages. The United Kingdom slapped a 25 percent tariff on American whiskey after Trump applied tariffs on steel imported from the UK. As predicted by several experts and commentators American whiskey serves as a salient target for reciprocal tariffs. The United Kingdom was previously viewed as the largest market for bourbon exports. Since the application of the tariffs overall exports declined by 35 percent. Overall, bourbon sales in the United Kingdom decreased by a staggering 50 percent. The United Kingdom did relax tariffs on American Brandy, Rum, and Vodka. However, the UK and other European Union countries will continue to maintain tariffs on American whiskey as a result of a “two-year trade war on steel and aluminum”. 

The question become what was the impetus behind this fatuous trade dispute between the US and the UK? It all came to a head in 2019, after a 16-year dispute between aerospace rivals Boeing and Airbus. The UK applying tariffs on up to $4 billion worth of goods over subsidies received by Boeing. The United Kingdom started to ratchet down the conflict by easing tariffs on some US goods and Biden reciprocated by lifting tariffs on UK imports. While Biden is not a perfect free trader, this was a shrewd decision on his part. Not from the standpoint of political strategy, but the point-of-view of sound economic theory. The words once-famous uttered by Ronald Regan ring true here: “If you want more of something, subsidize it; if you want less of something tax it”. Here is the crux of the idiocy of protectionism. Proponents seek to limit imports to encourage domestic consumption-based out on a sense of nationalism. However, they ignore the fact that their hostility towards foreign goods may stir the ire of lateral trade partners. Resulting in defensive actions that will result in the decreased consumption of American goods globally. Wouldn’t a proud nationalist prefer to see American goods consumed all across the world? After all, the two best-selling whiskies globally in 2019 were Jack Daniels and Jim Beam. This was not the byproduct of using taxation to punish Americans who enjoy drinking imported whiskies, but through many years of savvy marketing, product consistency, and rightfully earned brand recognition. 

Comparative Advantage = Global Extension of The Division of Labor

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Observation: The concept of comparative advantage operates as a natural extension of the division of labor. If it is most efficient for each worker and firm to focus on what they are most proficient at producing, this naturally gives way to vocational specification. The more specification within the division of labor the more complex and advanced the economy. As technological innovation drives the consumer demand for intricate technologies, the need for specialization within the workforce becomes more pressing. An advanced technological product such as a smartphone could not possibly have all of its components harvested, processed, and manufactured by one firm. Generally, the constituents of such a device are produced by multiple companies. These parts serve as the higher-order goods in the production of a smartphone. It would be naïve to assume that all of the companies that possess a comparative advantage at crafting these components all reside in the same country. If we look to Leonard Read’s iconic essay I, Pencil it becomes evident that even a commodity as simple as a pencil requires the services of companies across the globe to be satisfactorily produced. Demonstrating that the principle of comparative advantage extends the division of labor to an international scale. It is impossible that one nation would possess all the conditions necessary to efficiently make one product of any degree of complexity. Never mind a gadget as elaborate as a smartphone. Providing another concise yet realistic reputation of the obstinate justifications for protectionism.

Bootleggers and Baptists VII: Jones Act

 

 

 

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Introduction:

 

The Jones Act is an enduring piece of legislation that benefits only a few select invested interests.  The costs are borne by the rest of the country in the form of higher shipping rates and retail prices.  June marked the 100th anniversary of the law, yet it is seldom discussed in public discourse. Due to the relative obscurity of the Jones Act. Considering the number of unforeseen externalities caused by the law it would be worthwhile to reexamine the law. Even entertaining the possibility of a total repeal.

 

Because of the crewing and U.S. build requirements imposed by the Jones Act operating cost of a U.S. flagged ship are 2.7 times more than that of a foreign vessel. These higher costs are reflected in shipping rates which are based down the supply-chain in retail prices to the consumer. The costs of the Jones Act is not relegated to the costs of goods and services. The American taxpayer also pays for the Jones Act in the form of higher maintenance costs for infrastructure. Many U.S. to U.S. bound shipments travel by rail or truck when watercraft could be utilized. Due to the high costs. Trucks account for over 75 % of the maintenance cost on public roads in the United States. Also, the Jones Act has contributed to environmental externalities. Logistics companies opting to use more cost-efficient, but less fuel-efficient trucks. Contributing to the increases in greenhouse gas emissions. The higher shipping costs have generated the opportunity cost of lost business. For example, the states of Virginia and Maryland import road salt from foreign suppliers to avoid the costs of using a Jones Act compliant vendor.

 

What is the Jones Act:

The Jones Act is section 27 of the Merchant Marine Act of 1920. This clause implements what is known as cabotage laws. Laws that govern the transportation of goods between two domestic ports. For example, goods sailing on a vessel departing Boston and bound for Miami would be subject to the Jones Act. The bill was signed into effect on June 5th, 1920. The bill’s vociferous proponent Senator Wesley Jones (R-WA) promoted Section 27 as a national security measure. Due to the utilization of foreign-flagged ships for sealift in World War I. Presenting a grave national security concern. Some find the notion of this being a national security matter to be dubious. Rather it was an attempt to pander to his constituency by protecting the railroads from the competition of foreign-flagged ships. However, the law also aimed to give a boost to the domestic shipbuilding industry. An industry that enjoyed a comparative advantage due to North America’s dense woodlands. Until the later half of the 19th century when steel displaced lumber as the primary building material for watercraft. Relinquishing the U.S. domination of the shipbuilding market.

The United States has had cabotage laws in one form or another since the nation’s infancy. One of the earliest examples dating back to 1789. The Jones Act as a more stringent version of previous laws. Boosting a domestic flagging requirement, requiring the crew to be made primarily of U.S. citizens, domestically owned, and to be the U.S. built. There are a few stipulations concerning the U.S. built and domestic ownership requirements. Foreign cooperation can own a Jones Act vessel providing 75 % of their stock is owned by U.S. citizens. The U.S. build requirement does allow for minor components of the ship to be foreign-made parts. For the vessel to remain Jones Act compliance major upgrades to the ship cannot be done abroad, even if it is required for a repair. These requirements have resulted in higher U.S. port-to-port shipping rates and ultimately passing down higher costs to the consumer.

 

The Bootleggers:

It is difficult to pinpoint an exact party that benefits from the Jones Act. Mainly because there are so many that stand to benefit from it. Ranging from domestic shipyards, labor unions, to merchant marines. It could even be said that the Railroad companies and drayage enterprises are silent beneficiaries. The business lost due to the high naval shipping rates becomes their gainful opportunity. It seems fitting to assign the role of bootleggers to the merchant marines operating complaint U.S. flagged vessels. This is since the salaries of the crew are the largest contributor to the costs throughout the supply chain. 68 % of the operating costs are due to the salaries of the crew members. This accounts for U.S. vessel operations being nearly three times that of a foreign-flagged ship. As previously mentioned, these costs are spread passed on down to consumers. The factions in favor of the merchant marines are not arguing from a moral standpoint. Rather they are arguing in their self-interest. Making them Yandle’s proverbial bootleggers.

 

The Baptists:

One of the flimsy arguments used to justify keeping the Jones Act enacted is national security concerns. These half-baked repudiations tend to fall apart quickly under the scrutiny of factual analysis. The point of needing the Jones Act to maintain a commercial fleet to provide sealift capacity in times of national emergency is spurious at best. During the first Persian Gulf War, the United States heavily relied on foreign ships for sealift assistance. The lack of a domestic fleet was a direct result of the Jones Act placing restrictions that have drastically reduced domestic ship production. Utilizing the pretext of the threat of terrorism is weak at best. Incidents of foreign terrorism are rare. Your odds of being injured in a terrorist attack on U.S. soil are 1 in 678,399. The odds of being injured in an act of terrorism influenced by Islamism on U.S. soil are  1 in 106,110,338.

 

The Baptists in this scenario are national security-minded Neo-Conservatives. Many are vestiges of the Bush administration. Swiftly being supplanted by the Trumpian Republican of the populous right. The “country-club” Republican is becoming an endangered species. They are the ones providing the moral smoke-screen for the invested interests who are shielded from innovation and competition by the Jones Act. It could be argued that the Reaganite conservatives support the Jones Act for security reasons. That the populous conservatives that have infiltrated the GOP are the bootleggers of not just the Jones Act. But of all protectionist measures. Typically, the country-club dwelling conservatives would not bother with protectionism. However, if it is in the name of national security, they are onboard.

 

 

 

Why Puerto Rico Should Be Exempt From The Jones Act

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Introduction:

Back in 2017, Hurricane Maria ravaged the commonwealth of Puerto Rico. The island experienced debilitating fallout from this natural disaster Effects ranging from flooding, vast power outages, destruction to infrastructure, and disrupted communication and supply lines. Puerto Rico is estimated to have lost approximately $43 billion as a result of Maria. This is only insulting to injury for a nation that was previously suffering from economic woes. Despite the unfortunate consequences of hurricane Maria’s carnage it did resurrect interest in the Jones Act. Many experts speculated that this protectionist measure profoundly hampered recovery efforts for the island. Mainly through drastically inflating shipping rates. This proves to be disastrous in times of an emergency, especially considering the commonwealth’s economic woes.

The late senator John McCain from the landlocked state of Arizona proposed legislation to repeal the Jones Act. McCain even directly suggested that Puerto Rico should receive the permanent exemption. Addressing the inadequacy of President Trump’s 10 -day exemption to assist with the recovery efforts from Hurricane Maria. The late senator was met with little support. However, he was able to obtain the advocacy of the bill’s co-sponsor Utah senator Mike Lee. The lack of fanfare for repealing the Jones Act should not be surprising. Considering the lobbying-power of the vast array of invested interests fighting any efforts to eliminate the law. Such groups include “shipbuilders, ship owners, and labor unions representing seafarers”. All organizations that have a lot to gain from keeping competitively priced foreign operators out of the U.S. market.

Imposing the additional costs of the Jones Act on the commonwealth of Puerto Rico is at best tone-deaf. Puerto Rico’s economy is in shambles and has been for some time. The island was in an 11-year recession before Maria. Their economic hardship is only exacerbated by the higher shipping costs due to the Jones Act. Also magnified by the fact that using waterborne vessels is the only means to transport goods from the mainland to Puerto Rico. Holding the noncontiguous U.S. territory captive to U.S. vessel operators. By geographical exclusion ruling out the use of cheaper modes of transportation such as rail and trucking. For the reasons for the impact on an already ailing economy, the higher prices imposed on Puerto Rico, and a lack of better transit alternatives Puerto Rico should be exempt from the Jones Act. A piece of legislation that only benefits a small group of invested interests and the costs are borne by the majority of Americans. However, what is the Jones Act? After all, it is an obscure law that seldom comes up in typical public discourse.

What Is The Jones Act?

The Jones Act is section 27 of the Merchant Marine Act of 1920. This clause implements what is known as cabotage laws. Laws that govern the transportation of goods between two domestic ports. For example, goods sailing on a vessel departing Boston and bound for Miami would be subject to the Jones Act. The bill was signed into effect on June 5th, 1920. The bill’s vociferous proponent Senator Wesley Jones (R-WA) promoted Section 27 as a national security measure. Due to the utilization of foreign-flagged ships for sealift in World War I. Presenting a grave national security concern. Some find the notion of this being a national security matter to be dubious. Rather it was an attempt to pander to his constituency by protecting the railroads from the competition of foreign-flagged ships. However, the law also aimed to give a boost to the domestic shipbuilding industry. An industry that enjoyed a comparative advantage due to North America’s dense woodlands. Until the later half of the 19th century when steel displaced lumber as the primary building material for watercraft. Relinquishing the U.S. domination of the shipbuilding market.

The United States has had cabotage laws in one form or another since the nation’s infancy. One of the earliest examples dating back to 1789. The Jones Act as a more stringent version of previous laws. Boosting a domestic flagging requirement, requiring the crew to be made primarily of U.S. citizens, domestically owned, and to be the U.S. built. There are a few stipulations concerning the U.S. built and domestic ownership requirements. Foreign cooperation can own a Jones Act vessel providing 75 % of their stock is owned by U.S. citizens. The U.S. build requirement does allow for minor components of the ship to be foreign-made parts. For the vessel to remain Jones Act compliance major upgrades to the ship cannot be done abroad, even if it is required for a repair. These requirements have resulted in higher U.S. port-to-port shipping rates and ultimately passing down higher costs to the consumer.

Insult to Injury For An Ailing Economy

The Jones Act has contributed to Puerto Rico’s economic turmoil. Not just from the standpoint of hastening relief efforts from every sizable hurricane. It is merely another obstacle for an economy that is already bleeding out. The origins of the island’s extensive recession date back to 2006. When section 936 of the Internal Revenue Code was fully repealed. Many of the pharmaceutical companies with operations in Puerto Rico moves abroad. Amounted to significant losses in the island’s GDP. This was a significant blow to the commonwealth’s economy. Outside of the loss of jobs the loss of tax revenue left Puerto Rico with few options but borrow large amounts of money to compensate for lost revenue. Naturally, this policy came with profound consequences. Puerto Rico struggled to attract investors. Brokers at the banks were encouraged to sell off debt in the form of bonds. The bonds started to crash in 2013. Puerto Rico filed for bankruptcy in May of 2017, at the time owing creditors $70 billion.

The Jones Act only exacerbates Puerto Rico’s current economic turmoil. It is estimated that the island loses $537 million annually due to the Jones Act. The artificially inflated shipping rates make imports from the mainland more expensive and exports less profitable. It has also been projected that the economies of Alaska, Hawaii, and Puerto Rico stand to gain $5 billion to $15 billion if the law is fully repealed. The already dreadful economic conditions coupled with the Jones Act restrictions limiting commerce “…has resulted in a massive outmigration to the contiguous US states“. This only works to further reduce economic productivity and tax revenue. Being tantamount to the death knell for the island’s economy.

Costs of the Jones Act on Puerto Rico

The higher costs of the shipping rates for the mainland to Puerto Rico shipments are invariably are passed down the supply chain to the consumer. A Jones Act compliant vessel has an annual operating cost totaling $6 million making it 2.7 times more expensive than foreign operators. The higher cost of operating a U.S. flagged ship is reflected in the shipping rates. Shipping a container from New York to Puerto Rico is estimated to cost $3,063.00. In contrast, shipping the same container from New York to Jamaica comes in at only $1,607.00. As a result of the higher costs, where possible Puerto Ricans will purchase goods from foreign countries. The farmers of Puerto Rico import livestock feed from foreign sources to cope with the high shipping rates. The island opts to import jet fuel from Venezuela rather than the Gulf Coast. The irony being the Jones Act intended to protect American Jobs! The higher prices have forced the residents of the commonwealth to seek cheaper alternatives.

The higher shipping rates is a slap in the face to a dedicated trading partner. Considering the mainland Unites States makes up 90 % of their exports and over 55% of their imports. These costs are also being imposed on a constituency that is drastically less affluent than their mainland counterparts. The per capita income of Puerto Rican residents is averaged to be a third of what mainland residents make. The Jones Act not only is a hidden tax to the citizens of the commonwealth it is also a regressive tax. It disproportionately impacts the citizens of an economically disadvantaged region.

Puerto Rico Held Captive

The reality of being a noncontiguous territory of the United States is that is impossible to avoid using Jones Act carriers. Utilizing alternatives such as rail and truck to transport goods from the continental U.S. is out of the question. For one very simple reason, there are no adjoining landmasses that would make either option feasible. Limited by geographical restrictions the residents of Puerto Rico are limited to two alternatives. Either air freight or purchase goods from a foreign supplier. Even though air freight rates have come down from soaring heights since April, it has never been cheap to ship via aircraft. Certain items may be better suited for water-borne transit. Such as dry-bulk commodities. If it is a resource that cannot be purchased from a foreign supplier Puerto Rico will have to be confronted with the higher shipping costs imposed by the Jones Act.

Conclusion

The Jones Act impedes the continental United States and its noncontiguous territories. Particularly for the bankrupt commonwealth of Puerto Rico, it is a malignancy. Placing exorbitant costs on a region grappling with the consequences of an economic collapse. Not only has the Jones Act stunted Puerto Rico’s potential for economic growth it continues to suffocate the island. This policy continues to fail in Puerto Rico. Making it nearly impossible for the commonwealth to achieve economic stability.

Beyond the Jones Act demonstrating the deep-rooted fallacies of protectionist policies, it is more than just bad economics. The Jones Act is also a moral failure. The residents who average make a third less than a resident on the mainland have to cope with unnecessary cost distortions. The compliance parameters of the Jones Act artificially inflates the cost of shipping. Which is reflected in the cost of consumer goods. Making it a circuitous form of regressive taxation. Few would argue that it is just to force undue costs on the poor. Especially when those costs benefit only a small group of individuals.

U.S. Trade with South Korea

 

cargo container lot
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Doing some research on trade policy I happened to come across a very interesting website. It is hosted by the Korean Trade Association and details the by state,  what the state imports from South Korea, and what each state exports to South Korea. Many of you may be wondering why would I take arbitrary interest in such a specific topic? My interest isn’t t arbitrary. My first professional job after college was working for the Korean steamship line Hanjin Shipping. I stayed with the company until they closed the doors to their Chandler, Arizona office on December 31st, 2016.

 

To this very day, I miss working there. More importantly, working at Hanjin taught me a lot about applied economics. Working primarily with freight being imported from the Trans-Pacific corridor, you begin to intimately understand how crucial international trade is for the U.S. economy. Adam Smith’s proverbial “invisible hand” finally began to take on a life of its own. Animating Leonard Read’s iconic essay I, Pencil.Seeing for myself that markets are self-guiding with the seemingly endless flows of goods from Asia coming into U.S. shores. Witnessing the invisible hand at work helped insulate me from the straw man arguments and other fallacies supporting protectionist rhetoric. Much of which has come back in vogue amid the rise of the Trump presidency. Imports do not destroy jobs, but rather creates them.

 

Many who use the displaced factory worker as the poster-child for the downtrodden victims of outsourcing are not seeing the whole picture. The displaced factor worker toiling to produce widgets is only a small sliver of the national economy. When you impose tariffs and other trade restrictions there are many unintended consequences. Frédéric Bastiat’s premise of the seen and unseen (later clarified by Henry Hazlitt). The superficial effect of trade barriers is that such restrictions keep out foreign competition.  The what is not seen are all the jobs lost due to these restrictions. Many jobs rely on the importation of goods.  Everything from stevedoring, freight forwarding services, to even trucking, are vocations highly dependent on imports. Demonstrating a natural shift in the job market. The economy is subject to economic laws such as the law of supply and demand and the law of comparative advantage. Any time we try to implement policies that go against these immutable laws there are adverse consequences. Attempting to work around economic law is analogous to attempting to defy gravity. Eventually, you will be pulled down by the gravitational force of the Earth.

Bootleggers & Baptists- Part I- Gun Control Act of 1968

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Introduction:

 

There is a tendency to assume that regulation is implemented for the betterment of society. Consumer protection measures and other regulations are seen as necessary for the common good. Safety laws typically require amendments to product design which would result in costly alterations. Ironically, there are some unlikely beneficiaries of safety regulations.

As economist Bruce Yandle came to find out while working as for the Federal Trade Commission.  To his surprise, many industry representatives actually were on board with these regulations. They were even concerned that that government agencies would abolish these laws. Yandle found this to be quite counter-intuitive many safety regulations impede efficiency (Yandle, 1983, p.2) [1]. The true benefit of such restrictions was the reduction in competition (Yandle, 1983, p.2) [2]. Larger corporations would be able to financially withstand the new safety requirements.  For smaller companies, these restrictions operate as a barrier to entry. Regulations can put severe hardships on small businesses that have a cartelization effect [3]. Eliminating competition without even violating the Sherman Antitrust or the Clayton Act.

These consequences are the byproduct of what Dr. Yandle has dubbed the Bootleggers and Baptists effect.  It is the phenomenon in public policy where improbable coalitions are formed to achieve the same goal. This analogy is drawn from Baptists wanting to prohibit liquor sales on Sundays for moral reasons. The bootleggers in tandem supporting this restriction due the eliminating the competition of legitimately licensed bars and liquor stores (Yandle, 1983, P. 2-3) [4]. Bootleggers are able to advocate for their own self-interest under the aegis of the moral concerns of the Baptists. Forming a dynamic where moral concerns provide cover for those who can enrich themselves. As the Bootleggers are criminals and laws are not a deterrent for them. A law banning liquor sales on Sundays will deter law-abiding alcohol vendors. Leading to us to question who the true beneficiaries are of any zealously petitioned regulation.

 

This essay will be the first installment of a continuous series of real-life applications of this theory. Considering the wide breadth of practical examples there will be many essays to come. The first essay will be dedicated to the impact of the 1968 Gun Control act.

 

Who are the Baptists and who are the Bootleggers:

Baptists: Gun control Baptists

Bootleggers: Domestic gun manufacturers

 

Parameters of the 1968 Gun Control Act: 

This specific piece of gun control legislation was popularly believed to be in direct reaction to the civil unrest of the turbulent 1960s. Political press mounted after the assassinations of high profile political figures. Including president John F. Kennedy and  civil rights activist Martin Luther King Jr [5]. The fervor to pass gun control laws only was compounded by a series of inner-city riots that occurred throughout the course of the decade [6]. Some commentators have even hinted towards gun control measures in the 1960’s being racial bias [7]. More extreme civil rights advocates such as the Black Panthers were well known for regularly carrying semi-automatic rifles.

 

Slain public figures and the raucous carnage of urban riots superficially like an appropriate context for restrictions on gun ownership. After all, the outcry for gun control laws came out of concern for the safety of the public. However, was this 1968 law evenly applied to all gun makers and vendors? Not exactly. The legislation tended to skew in favor of domestic gun manufactures. Dating back to the late-1950’s domestic gun companies in New England’s “gun valley” expressed to local politicians concerns over foreign competition (Newhard, 2015, P.2) [8]. Blatantly exposing the desire stifle competition from foreign producers. Much of the gun control rhetoric of the 1960s was pointed at imported guns. The emphasis that Lee Harvey used an Italian mail-order purchased rifle to kill JFK (Newhard, 2015, P.4) [12]. Complaints of “surging” numbers of cheap guns being imported into the United States. Blurring the line between genuine concern for public safety and protectionism.

 

Beyond the salient nature of the protectionist proclivities of U.S. gun makers, there is also some evidence that the legislation was disproportionately angled at foreign gun producers. It can be argued that there were some asymmetries the parameters of enforcement in the 1968 bill. Restrictions were established for vendor licensing, mail-order arms purchases, and the sale and transportation of imported weapons (p.4-8) [9]. Heavier licensing fees were directed at mail-order gun vendors (Newhard, 2015, P.2) [10]. Many may argue that placing such restrictions on mail-order sales were worth the price of keeping firearms out of the hands of children. Such a stance ignores the implicit benefit of domestic producers. Mail-order prior to the internet was the main avenue for obtaining European rifles and pistols. Making more difficult to purchase anything from Beretta but guns from Ruger could easily still be bought brick and mortar.

 

It can be speculated that shortly after the bill was signed that there may have been deliberate delays on the approvals of gun importation licenses. The bill was signed into effect in October 1968  and gun dealers had a deadline of December 15th (Newhard, 2015, P.5)[11]. Anyone versed in economic-behavioral patterns or just plain common sense could foresee the litany of vendors racing to get their licenses prior to the law passing. Despite the upsurge in requests for licenses, government officials dragged their heels when it came to approving them. It was suggested at the time to be a means of preventing a “flood of foreign handguns” into the country prior to the enactment of the new law. This circuitous form of bureaucratic activism did more to hurt small firearms dealers than did promote public safety.  Small-time foreign gun dealers found it easier to stop selling guns than continue to comply with the new laws (Newhard, 2015, P.4) [13].

 

Final Thoughts on the Dynamics of this B&B Dynamic:

This example is a classic example of ignoring the incentives of invested interests.  I would argue that this is a defining feature of most Baptists and Bootleggers relationships. On one side you have the advocates compelled by moral convictions. Who unwittingly provides the veiling moral cover for the self-interested bootleggers. If the bootleggers ever directly advocated for the policies that benefited them without the moral smokescreen they would be derided by the average voter.  Doing so under the guise of the common good the story changes.

The example of the 1968 Gun Control Act touches upon a point made by Bruce Yandle back in 1983, there is a demand for regulation. There is an economic dimension to the supply and demand of regulation produced by the government. When there is a profound increase in market competition many major companies favor regulation. Yandle cites technological changes, demographic changes, significant changes in factor costs, and new information as being factors swaying the demand for regulation (Yandle, 1983, p.3-4) [14]. Often there are anti-competitive consequences of imposing new safety regulations. Time and money are required to adapt business practices to the contingencies of compliance. This will often be devasting to small businesses.

 

 

 

 

 

 

Coronavirus- Its Impact on Nutanix and the Global Economy

 

photo of gas masks
Photo by Александр Македонский on Pexels.com

 

 

Hyperconverged pioneer Nutanix is once again starting to falter. At the start of 2020, the outlook was much rosier after a slump in August 2019. Stocks rebounding by approximately 83%. Speculated improvement stemming from greater confidence in their transition from software to subscription services [1]. Nutanix exhibiting a 97% retention rate on their subscription services is promising [2]. Back in January, the threat of the COVID-19 (Coronavirus) was dormant. Its impact on commerce is now a matter of concern for the tech industry.

 

Nutanix shares sank as much as 24% in extended trading on Wednesday after the developer of cloud storage and networking software cited coronavirus concerns as one reason for lowering its 2020 revenue outlook”

CNBC

 

This resulting in the company’s lower revenue projections from $1.3- $1.4 billion to $1.29 -$1.36 billion [3]. 22 % of  Nutanix’s 2019 revenue came from Asia [4]. This is problematic due to Asian countries being profoundly impacted by this emergent illness. Nutanix is far from the only tech company that grappling with the economic complications of the COVID-19 outbreak. Both Apple and Microsoft have indicated that they will not meet their quarterly business goals [5]. Fears of the virus certainly have sullied sales prospects industry-wide. The reverberations are also being felt on the opposite side of the supply-chain.  Considering 73 percent of all of Microsoft’s components are manufactured in China [6]. One of the world’s prominent production hubs being the epicenter for an obscure virus is disastrous.

 

Naturally, the economic stress engendered by COVID-19 is not relegated to the tech sector. Substantial downturns have been estimated for other industries as well. For instance, the hospitality sector is anticipating stalls in sales internationally [7] [8]. The constraints on the economy may stretch beyond restricting the supply in some sectors and reducing demand in others. Countries are stifling commerce through various restrictions to prevent the spread of COVID-19. In the United States, it has even been stated that measures such as quarantining entire cities [9]. At first, glance does appear to be slightly excessive. Especially considering how much more pervasive the Flu is when compared to COVID-19 [10]. The perceived threat seems to stem more from the obscurity and ambiguity of COVID-19. Mirroring the reactionary stances taken in the event of an outbreak of communicable diseases. Regardless of whether this outbreak is truly a world health crisis or not, its impact on the economy will be all too real.

 

Placing restrictions on the flow of foreign goods will prove to be detrimental. Whether those restrictions are through tariffs or pragmatic embargoes to prevent the spread of disease. All modern economies are heavily reliant on imports. Not due to callous self-interest, but out of the virtue of efficiency. Comparative Advantage has allowed for intense specialization which enables countries to focus on the production of specific types of goods and services. Thank you, David Ricardo. Concentrated specialization has lead to increases in product quantity and quality. Whatever you cannot produce can be acquired through trade. Hence, why 60% of our global productivity is dependent on international trade [11]. Making it imperative that all restrictions placed on international trade be necessary. Per the AIER article Economic Policy Must Prepare for Pandemic Disease :

 

“What we do not see are the infinitely complex ways that productive structures depend on smoothly functioning markets that could all face deep disruption.

Efforts to examine the possible economic impact are few but a 2006 Congressional Budget Office study suggested that a 1918-style pandemic today could drop GDP by 4.25%, which would put the economy in painful recession territory”  [12].

 

Granted these findings are theoretical and most likely retrieved from economic models, still eye-opening. COVID-19 can present a serious risk to the United States. However, the benefit of being cautious needs to be weighted in relation to economic losses. Is it worth the losses in productivity to attempt to secure the U.S. against this virus? There are already confirmed cases here in the United States. There is little to stop COVID-19 from spreading. Quarantines and trade embargoes with nations that have confirmed cases cannot guarantee the number of cases domestically will not rise. Such measures only create a false sense of security. What isn’t speculative is production shortages, an increase in prices, and even the loss of jobs. Imports are the lifeblood of our advanced economy. Putting up barriers to our trading partners is merely cutting off circulation to the arteries.

As the quote above indicates, what initially seems reasonable doesn’t always work. Superficially, trade restrictions seem like a great way to curb the spread of this disease. Taking this course of action ignores the consequences downstream. It could even be said it lacks foresight. It is ineffective and impractical to produce all the goods that we utilize domestically in production. There is a reason why Target purchases its plastic lawn furniture from vendors in China. If produced domestically the same products would be triple the price and not maintain a level of quality commanding such a price tag. It becomes quite evident how a chain of such events could be harmful to the entire economy.