Repealing the Jones Act Is Not the Slam Dunk Decision That Many People Claim

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There has been a lot said about the Jones Act, and rightfully so. It has been billed as the worst sort of cronyism by its detractors and the savior of American industry and jobs by its defenders. Oddly enough both are correct. But this masks a larger issue for which the Jones Act serves as a proxy. What does a nation do about a critical defense industry that has ceased to be economically competitive?

My colleague, Patterico, has taken a strong position against it. I find myself a lot more conflicted.

Let me give you a story.

In August 1990, a mechanized infantry division that was on orders for Saudi Arabia as part of Operation DESERT STORM was at a port of embarkation. A mech division is half tanks and half mechanized infantry and the vehicles move by what is called a Roll-On-Roll-Off ship, aka RO-RO. (see image at the top of the page)

The US flagged merchant fleet did not have enough ships available to meet military requirements (there were ~50 US flagged RORO but very, very few of them could make it to the embarkation ports in time to meet movement orders because they were in the Pacific). What is an Army to do? It leased Soviet RO-ROs to move US Army equipment to Saudi Arabia. The problem was more acute in Europe where heavy, this mechanized infantry and armor, divisions stationed in Germany had difficulty moving to Saudi Arabia because of lack of shipping. Keep in mind that the division that used the Soviet ship was on the troop list to defend Europe from a Soviet invasion.

The purpose of the Jones Act is a national defense measure:

“It is necessary for the national defense and for the proper growth of its foreign and domestic commerce that the United States shall have a merchant marine of the best equipped and most suitable types of vessels sufficient to carry the greater portion of its commerce and serve as a naval or military auxiliary in time of war or national emergency, ultimately to be owned and operated privately by citizens of the United States; and it is hereby declared to be the policy of the United States to do whatever may be necessary to develop and encourage the maintenance of such a merchant marine.”

The Jones Act seeks to do three things. First, it was intended to maintain a large US flagged merchant marine that could be pressed into service during wartime. Second, it was meant to keep a vigorous shipbuilding industry in the United States that would be available during wartime. Third, it was meant to provide a large number of professional mariners who could work those ships in wartime.

To accomplish those ends it does the following. All shipping that originates and terminates in an American port (except the US Virgin Islands and the town of Hyder, AK) must be carried out by an American owned ship, built in an American shipyard, and which has a crew that is at least 3/4 American.

In practice, the Jones Act has been a fairly imperfect instrument. It has driven up costs and hasn’t accomplished its core missions all that well.

Moreover the economic absurdities caused by the Jones Act are legion. The Act makes it cheaper for U.S. livestock farmers to buy grain from overseas than from American sources. States like Maryland and Virginia import their road salt rather than buy it from Ohio. The east coast of the U.S. cannot afford to get lumber from the Pacific Northwest. And shipping oil from Texas to New England costs about three times as much as shipping it to Europe.

Consumers in Hawaii, Alaska, Puerto Rico and Guam have the prices of their goods pushed up more than U.S. mainland consumers, since a much greater proportion of their goods are supplied via ship. These higher prices have an impact that goes beyond higher costs of living: The Federal Reserve Bank of New York[4] and the World Economic Forum[5] both recently concluded that the Jones Act hinders Puerto Rico’s economic development. Given the island’s longstanding economic troubles, this is not a little thing.

Another protection provided to seamen is the origins-of-crewmen requirement, which mandates that fully 75 percent of a ship’s crew must be U.S. citizens. This requirement artificially maintains seafaring wages above the levels set outside the U.S. via international competition. Crew requirements decrease labor competition, inflate wages and increase the costs of transported goods. The difference is significant; Patrick Holland estimated that U.S. crews cost nearly 4.5 times more than foreign crews.[8] Given that wages and other employee compensation comprise nearly 80 percent of the operating cost difference between U.S. and international ships, it is hard to overstate its significance.[9]

Today, the U.S. has fewer public and private shipyards than any time in the recent past. For instance, the 15 public shipyards in the U.S. during World War II have diminished to just five public domestic shipyards as of 2011, which perform solely maintenance and decommissions on the existing naval fleet.[11]

The large private shipbuilders operate 20 domestic shipyards, and they are the ones who produce the Navy’s big ships and submarines. There has been substantial retrenchment here as well, with 38 companies operating 60 shipyards exiting the market since the 1940s.[12] Furthermore, William Yost has noted that the majority of port terminals in the U.S. are actually leased to foreign shipping companies by the port authorities.[13]

The policy machinations that keep these shipyards going come at a steep cost: Joseph Francois, Hugh Arce, and their co-authors estimate in a study published in the Journal of Canadian Economics that the Jones Act protects about 1,800 jobs in shipyards, including shipbuilding and repair, while ensuring an additional $163 million of domestic activity in these sectors.[14] This comes at an annual economic cost of roughly $3 billion — a horrible return on investment even by government standards.

If you want to really understand the Jones Act, read the article from which the above pullquote originates.

The Navy’s shipbuilding program is as much a cousin of the Jones Act as it is a function of the needs of the service. Why does the Navy always have submarines that it may not really need under construction? The skills needed to construct a pressure hull have to be used to be kept current and new workers have to be hired to learn those skills. You can’t just go out and hire welders off the street and put them to work on a submarine. Many, if not most, of the major commercial shipyards rely upon US Navy construction and refits for their livelihood. The Navy mothballs ships well before their service life is over to generate demand in shipyards.

The problem is not unique to the maritime industry. American steel has exactly the same problem. In a perfect and peaceful world, we could import all the steel we need cheaper than we can produce it domestically. But the world is not perfect or all that peaceful and what is the downstream cost of having no domestic steelmaking capacity?

Yes, the Jones Act has a lot of flaws. Major flaws. But the underlying purpose of the act was to ensure that in time of war that there was a domestic merchant marine, domestic shipbuilding capacity, and a supply of mariners for that merchant marine and for the US Navy. Before getting rid of the Jones Act there needs to be a debate on how we will accomplish those ends without that law or if we even care.