Prisoner’s Dilemmas-XV: Sugar Tariffs

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“..Look at the United States. There is no country in the world where the law is kept more within its proper domain—which is, to secure to everyone his liberty and his property. Therefore, there is no country in the world where social order appears to rest upon a more solid basis. Nevertheless, even in the United States, there are two questions, and only two, that from the beginning have endangered political order. And what are these two questions? That of slavery and that of tariffs; that is, precisely the only two questions in which, contrary to the general spirit of this republic, law has taken the character of a plunderer…” Frédéric Bastiat- The Law (1850).

The tendency for people to favor protectionist policies is an understandable fallacy, but a fallacy, nevertheless. Some Americans are under the erroneous assumption that they have a moral duty to keep domestic jobs from being outsourced. Much of this sentiment; was fostered by campaigns waged by organized labor throughout American history. It is difficult to tell if the buy American fallacy is the byproduct of union propaganda or an intrinsic sense of nationalism and economic jingoism. Regardless of whether the American public is receptive to their pithy buy domestic slogans, the union interests frequently get their way. The best example is the enduring specter of import tariffs that have plagued American economic policy for centuries. The earliest example is the Tariff Act of 1789, which was strongly favored by none other than Alexander Hamilton.

Arguably one of the most notable tariffs on the books is related to the importation of sugar. The tariffs placed on foreign sugar have been upheld through various laws over the years, starting from the nascent period of the republic.

“…On brown sugars, per pound, one cent. 

On loaf sugars, per pound, three cents. 

On all other sugars, per pound, one and a half cents

(Tariff Act of 1789, P. 25)..”

From a game-theoretical standpoint, consumers are the first ones to defect. If imported sugar is cheaper American consumers gravitate toward buying the less expensive Caribbean sugar. The lobbyists for the sugar industry work to pressure lawmakers into keeping import taxes on foreign sugar. The collective pressure placed on Congress to place and uphold tariffs can be considered a defection by the domestic sugar producers. Many economists and political scientists assume that the marginal increase in the cost of sugar would be negligible to an individual customer. In turn, fulfilling the enduring axiom of Public Choice theory; concentrated benefits and dispersed costs. Few households consume enough sugar to desire to change their baking and coffee flavoring habits. Although, these costs are salient to commercial confectionary producers who purchase mass quantities of sugar for domestic and international retail goods. It has led to firms relocating production facilities to countries without sugar tariffs (Life Savers plant moving to Canada, p. 4). Technically, this could be a defection, but the irony is that it undermines the moral initiative of keeping domestic jobs within the bounds of the United States. But not every company opts to move their factories abroad, another substitute for cheaper inputs. Hence, the rise of soft drink producers using high fructose corn syrup instead of cane sugar. One noteworthy example would be when Coke and Pepsi switched to using corn syrup in their sodas for the US market in the 1980s (p.5) (Mexican cola still uses real sugar). There has been much debate over whether high fructose corn syrup is more unhealthy than sugar. If it is more injurious to one’s health, then a Prisoner’s Dilemma is afoot, the suboptimal result being the American people doing unnecessary damage to their bodies merely to appease a small subset of the overall constituency.

The Paradox of Protectionism and Domestic Production

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This concept has been submitted to the Journal of Brief Ideas.

The Paradox of Protectionism and Domestic Production:

Economic protectionism is a fallacy that has never been extinguished but persists with varying degrees of political support from elected officials. Although, most economists agree that protectionist measures such as tariffs have a detrimental impact on the economy. Per William Poole’s Federal Reserve paper Free Trade: Why Are Economists and Noneconomists So Far Apart? (2004), 90 % of economists oppose tariffs citing that “.. tariffs…reduced the average standard of living..”. It is well established that tariffs operate like an implicit tax to consumers, but how do restrictions on imported goods impact domestic production?

Currently, many domestic industries rely on imported intermediate goods for producing finished consumer goods. Adam Smith was one of the first theorists to realize that tariffs harmed domestic production. Smith suggests in the Wealth of Nations (Book IV, Chapter II) that domestic production of inputs is economically efficient only if it is cheaper than importing the goods. Policies that restrict imports may be favoring one segment of the supply chain; simultaneously, harming another, resulting in outcomes contrary to the purposed purpose of these measures. 

The Economic Lessons From Trading Halloween Candy

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Economist Art Carden wrote a brilliant Halloween-themed essay for the American Institute for Economic Research. In Carden’s essay How Kids Create Wealth By Trading Halloween Candy; he details how voluntary trade makes all participants better off than they previously were. However, Carden uses an unorthodox example to demonstrate this point, children trading Halloween candy. As mundane as this simple example may seem, it serves as a powerful analogy defending unfettered trade. When we opt to exchange one commodity (most commonly money) for another product/service, we tend to value the commodity we are giving up less than the good we seek to obtain. This maxim implicitly validates the  Subjective Theory of value, first formulated during the Marginal Revolution in the 1870s. Children trading candy with their friends demonstrates far more than the subjective nature of value. It also indirectly dispels the flawed arguments of protections, bringing the old king’s gold fallacy to its knees in capitulation. The medium of exchange may intrinsically hold value, but this value rests in the goods and services that we can buy with it. A bar of gold may be valuable to us, however to man isolated on an island in a Robinson Crusoe-style model of autistic exchange (p.84) the gold bar is of little value. A man deserted on an isolated island has nothing to gain in trading the gold bar (no trading partners).  Clearly illustrates the fact that subjective worth of money exists in its utility for economic exchange. For a trick-or-treater who dislikes Twix candy bars, this variety of candy has no value as they would be more satisfied with  Reese’s Peanut Butter Cups. However, their friend who has the opposite candy preferences between the two types of chocolate candy would want a Twix over Reese’s cups. What both trick-or-treaters can do is trade their stock of Reese’s for Twix bars and vice versa. Similar to how we exchange with friendly nations that have a comparative advantage for goods that we desire. But stubbornly holding on to the candy that the trick-or-treats do not prefer is not doing them any favors. Much how forcing domestic production of goods the U.S. does not produce efficiently is economically inefficient and a waste of resources.

If trade isn’t an option, she’s simply stuck with a lot of candy she doesn’t want to eat. With access to a market consisting in this case of her brothers and friends, she can swap the caramel-containing candies she doesn’t want for non-caramel-containing candies she does. She is better off. Her trading partners are better off. There’s an important lesson here: by getting candy into the hands of those who value it most highly, the kids are creating wealth.

It’s a mistake to think that wealth consists of stuff. Wealth, rather, is whatever people value. For someone who likes Snickers bars, Snickers bars are wealth. For someone who doesn’t like Snickers bars, they aren’t wealth–unless they can be traded. If they can, the excess Snickers bars become wealth because they can then be swapped for something better.

https://www.aier.org/article/how-kids-create-wealth-by-trading-halloween-candy/

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

 

 

 

two cargo ships sailing near city
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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

alcohol barrel basement beer
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Introduction:

 

There is a tendency to implement regulation for the betterment of society. Purportedly, consumer protection advocates claim that regulation insulates the public from harm. Safety regulations typically require costly design alterations as a harm reduction measure. Ironically, there are some unlikely beneficiaries of safety regulations.

Economist Bruce Yandle came to this realization while working for the Federal Trade Commission. To his surprise, many industry representatives were on board with these regulations. They were even concerned that government agencies would abolish these laws. Yandle was shocked by this counter-intuitive revelation as most safety regulations impede efficiency (Yandle, 1983, p.2) [1]. The true benefit of these restrictions was the artificial barriers to entry that effectively reduced competition (Yandle, 1983, p.2) [2]. Large corporations possess the resources to invest in research and development to accommodate new regulatory requirements. Smaller companies cannot afford to comply with the new mandates, effectively putting them out of business. Regulations can put severe hardships on small businesses that mimic a cartelization effect [3]. Large companies can achieve these advantages without even violating any antitrust laws!

These consequences are the byproduct of what Dr. Yandle has dubbed the Bootleggers and Baptists effect. It is the phenomenon in public policy where unlikely coalitions form to achieve common goals. The analogy used by Yandle, Baptists wanting to prohibit liquor sales on Sundays for moral reasons. In tandem, the Bootleggers support this restriction since this will eliminate the competition of legitimately licensed bars and liquor stores (Yandle, 1983, P. 2-3) [4]. Bootleggers can advocate for their self-interest under the aegis of the moral concerns of the Baptists. Shielding invested interest groups from public scrutiny. 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 us to question whom the 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. The first essay will focus on the coalitions supporting the 1968 Gun Control Act passed in the United States.

 

The Bootleggers and Baptists

Baptists: Gun control Baptists

Bootleggers: Domestic gun manufacturers

 

Parameters of the 1968 Gun Control Act: 

This specific gun control legislation is believed by many to be a direct reaction to the civil unrest of the turbulent 1960s. The political pressure mounted after the assassinations of high-profile political figures. Including president John F. Kennedy and civil rights activist Martin Luther King Jr [5]. Inner-city riots only intensified the fervor to pass gun control laws [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.

 

The combination of slain public figures and the raucous carnage of urban riots created the context for restrictions on gun ownership. After all, the outcry for gun control laws came out of concern for public safety. However, was the 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]. The interests of domestic gun manufacturers become apparent, the desire to stifle competition from foreign producers. Most of the gun control measures of the 1960s; directed restrictions towards imported guns. The emphasis is 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 imported into the United States. The line between genuine concern for public safety and protectionism becomes blurred.

 

Beyond the salient nature of the protectionist proclivities of U.S. gun makers, there is also evidence that the legislation was unequally enforced against foreign gun producers. There were some asymmetries in the enforcement parameters of the 1968 bill; vendor licensing, mail-order arms purchases, and the sale and transportation of imported weapons became highly regulated (p.4-8) [9]. The bill mandated heavier licensing fees for mail-order gun vendors (Newhard, 2015, P.2) [10]. Many may argue that placing such restrictions on mail-order sales was worth the price of keeping firearms out of the hands of children. Such an argument ignores the implicit benefit of domestic producers. Before the internet, mail-order categories were the primary source for obtaining European rifles and pistols. Making it more difficult to purchase anything from Beretta, but guns made by Ruger could still be readily available for sale from brick-and-mortar retailers.

 

Shortly before the bill went into effect, many pundits speculate that may have been deliberate delays in the approvals of gun importation licenses. The legislation went into effect in October 1968; 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 before the law passed. Despite the upsurge in requests for licenses, government officials dragged their heels when it came to approving them. It is surmised that the delay in approvals was a means of preventing a “flood of foreign handguns” from coming into the country before the law was enacted. 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 smoke-screen they would be derided by the average voter. Passively cloaking their interests under the veil of the public interest, the story changes.

The example of the 1968 Gun Control Act touches upon a point made by Bruce Yandle back in 1983; that there is a demand for regulation. There is an economic dimension of the promulgation of rules. Competition fosters the demand for more regulations; Yandle cites technological changes, demographic changes, significant changes in factor costs, and new information as factors for generating new laws(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.