Pennies Add Up
From Grassroot Institute
Pennies add up. And when we’re talking about the Jones Act, they add up to billions of dollars.
Last week, the Grassroot Institute of Hawaii hosted a series of events with John Dunham, president of the highly regarded New York-based economic consulting firm John Dunham & Associates.
Dunham discussed the Jones Act and how it has failed to meet the goals that prompted its passage in 1920. In the century since the Jones Act went into effect, the number of Jones Act-eligible ships has shrunk, U.S. shipbuilding has almost died out entirely, and employment on U.S. flag vessels has dropped to about only 10,000.
The Jones Act was intended to keep American shipping strong. Now, the U.S flag fleet carries only 1.5 percent of all world cargo, much of it oil. Shipping in America is so expensive that a mere 4.6 percent of domestic cargo moves by water, including inland waterways, despite the fact that it's more efficient.
Common sense tells us that the Jones Act is costing Americans. The question everyone is asking is: How much?
In the case of Puerto Rico, Dunham’s company was retained by leading business groups there to find out how much the Jones Act has been costing the U.S. island territory.
Obtaining data on shipping costs can be a challenge, so he created an economic model that compares the cost of shipping goods to Puerto Rico from the U.S. mainland and internationally. From there, his team ran a series of different scenarios to find the cost differential in shipping caused by the Jones Act. The one they settled on as the “best” determined that the Jones Act makes it 88.9 percent more expensive to ship containers to Puerto Rico and 55.8 percent more expensive for other shipments, like grain or sand.
Next, they ran those increased costs through the whole economy of Puerto Rico. For example, if it costs more to ship oil, then that cost is passed on to the power plant in the form of higher fuel prices. The electric company then passes it on through higher energy prices, which have to be absorbed by other businesses and consumers. If you’re a visitor, your hotel bill will be slightly higher because it costs more to cool your room. If you’re a resident, it will cost more to cool your home.
Using the model to measure the downstream effect of the Jones Act, Dunham found it costs Puerto Rico’s economy approximately $1.2 billion. Shipping costs account for $740 million of that, but as the effects of the Act spread out through the economy, those additional costs add up.
Dunham estimated that the Jones Act costs Puerto Ricans approximately $375 a year per person. On an island where the annual mean wage is $29,460 per year, it’s not a trivial amount of money.
That’s why it’s inaccurate to claim that the Jones Act costs only “pennies.” As Dunham pointed out, those pennies can add up.
There are other costs as well. Dunham found the Jones Act has resulted in 13,250 fewer jobs and $1.5 billion in reduced economic activity. It also has reduced tax revenues by more than $106.4 million.
Of course, Hawaii isn’t Puerto Rico. Our economy is bigger and our average wage is higher. So it’s reasonable to expect that the effect of the Jones Act on Hawaii would be even worse than it’s been on Puerto Rico.
Under the circumstances, it’s easy to understand why policymakers from Puerto Rico have been advocating Jones Act reform. The numbers make it clear that this antiquated law is badly in need of modernization.
One simple change that could make a difference in how the Jones Act affects jobs, businesses, consumers and the economy as a whole would be to remove its U.S.-build requirement. Give American ocean-carrier companies the option of buying their vessels from foreign shipbuilders, whose ships cost three to eight times less than those built in the U.S.
As Dunham’s research shows, we’re looking at costs in the billions of dollars for a law that doesn’t achieve its goals. It’s time we updated the Jones Act for the 21st century.
E hana kakou! (Let's work together!),
Keli'i Akina, Ph.D.