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The Jones Act:
What Does it Cost Hawai'i?
by Lawrence W. Boyd, Ph. D.
Labor Economist
Does the Jones Act cost every Hawai'i household three thousand dollars? This is the number typically cited by the news media and those who oppose the Jones Act. The Jones Act refers to a series of laws enacted in the 1920s which among other things require that American owned ships transport goods between American ports. These laws, called cabotage laws, have been enacted by forty-five countries. Opponents of the law in the United States range from conservative free marketers to groups representing foreign shipping interests.
The theoretical reasoning behind the opposition to the Jones Act is that it is a restraint of free trade between nations. Free trade makes possible the development of a truly international division of labor which in turn allows countries to specialize in doing what they do best. Countries can have a "comparative advantage" in the production of certain goods and services. By specializing in the production of those goods which can be produced best in a given country and trading for those goods it is not so good at producing individual country's economies can generate far higher incomes and living standards than if those countries did not trade. Because the Jones Act restricts trade between points within the United States opponents argue that it is a restriction of free trade and is equivalent to a tariff on goods and services Hawai'i brings in from the mainland. (A tariff is a tax levied on imported goods).
Those who defend the Jones Act argue that it is the only way that United State's environmental, labor and other laws can be enforced within American waters. These laws range from restrictions on trash dumping to ship designs which limit oil spills to minimum wage laws. Second that there are national security reasons for maintaining a domestic merchant marine capable of transporting military cargo during national emergencies. They also argue that the costs of the Jones Act compared to the benefits are not high.
The question of how much the Jones Act costs is central to the argument of both opponents and proponents of the Jones Act. Below I analyze the claims of those in Hawai'i who oppose the Jones act.
Three-thousand Dollars per Household?
Those who oppose the Jones Act, such as the Hawai'i Shippers Council, have distributed the table I have reproduced below. (This is taken from a packet handed out at Legislative hearings and by State Senator Whitney Anderson). I have condensed some of the description in order to save space.
Table 1: Anti-Jones Act Costing of Economic Effects
Differential between existing freight rates and the world price-estimated
Common Carrier/Liner Segment
30% differential on total freights of $650 million $201.5
Non-liner/Tramp Cargo Segments
50% differential on total freights of $100 million $50.0
Subtotal: Estimated Freight Penalty (in millions) $251.5
Economic multiplier for ocean freight** x 2.5
Subtotal (in millions) $628.75
Annual Lost Economic Activity-Estimate in millions $371.25
Total Estimated Costs (in millions) $1,000.00
**Annual Multiplied Economic Burden-Estimated
The estimated direct, indirect and induced effects as computed by Hawai'i State's economic multiplier for ocean freight.
The total estimate of one billion is then divided by the numbers of households to arrive at a cost for the Jones Act of three-thousand dollars per household. This number is inflated since it assumes 333,333 Hawaiian households rather than the actual number of 420,748 in 1995 as the divisor.
While one could dispute the numbers concerning the 30% to 50% price differential on freight rates and lost economic activity, this is not the problem with the table above. One cannot use the Hawai'i State's economic multiplier for ocean freight to estimate "the direct, indirect and induced effects" of the Jones Act. In fact the Hawai'i State multiplier can be used to estimate the impact of the Jones Act, but it is in precisely the opposite manner used in the table above. Rather than adding the number from the economic multiplier it should have been subtracted from the total.
How to Correctly Estimate the Overall Effect of the Jones Act
Impact analysis, which is what the state's input-output model is typically used for, "measures the change in output (production), employment, and income in all industries of the econnomy as a consequence of a change in the final demand of a particular industry" (1987 Input-Output Tables for Hawai'i State, November 4, 1994, p. 19). Jones Act opponents mistakenly use this when they multiply the "freight penalty" above by 2.5. The number represents the reduction in final demand throughout the State. For example the $251.1 million dollars saved by consumers of shipping must be subtracted from ocean freight in Hawai'i. It basically disappears from the economy, and the Hawaiian shipping industry. The Hawai'i State input-output model is set up to provide an estimate of what happens when there is a net increase or outflow of revenue from a particular industry such as ocean freight. Thus the $251.1 should be multiplied by the 2.5 multiplier but the $628.75 million dollars represents the income lost to the state as a result of abolition of the Jones Act from all industries.
Where does the $251.5 million go? Because this represents money which shippers would have paid but no longer pay it will be pocketed by consumers of ocean transport. Some of this savings will go directly to consumers like service personnel who ship cars and household items when they move to Hawai'i. The bulk however probably would go to firms who use ocean shipping to transport goods for resale in Hawai'i. If we could indeed use the input-output tables to reallocate revenue from one industry to another, then the final gain, would be the addition of the $371.5 million listed in the table above. This means the net estimated loss to the Hawaiian economy from abolition of the Jones Act would be $257 million in output. Table 2 below summarizes these findings.
Table 2: Corrected Estimate of the Impact of Repeal of the Jones Act
Gain to Consumers of Ocean Shipping (millions of dollars) $251.1
Multiplier x1.47
Total $371.25
Direct Loss to Ocean Shipping $251.1
Multiplier x2.5
Total $628.5
Gain $371.25
Loss -$628.5
Total -257.25
Why are these results so different? Often when highly charged debates take place you occasionally see "dueling experts" for both sides who provide different results because they are paid or committed to one side or the other. This is not the case here. This research is a spin off of a larger research project where I am trying to determine the degree to which competition exists in the Hawaiian shipping trade. Neither the Center for Labor Education and Research nor myself have received any financial support for this effort. What has happened here is the opponents have triple counted. First they did not subtract the loss to the ocean shipping industry, second they multiplied the loss by the state's multiplier and added that to the total, third they added the gains from the reduction in freight charges to the previous totals. This is not a disagreement over numbers, it represents an incorrect use by Jones act opponents of the State's Input-Output Economic Model.
Some Further Considerations
I have not been able to confirm the actual numbers used by opponents of the Jones in evaluating its effect. They seem to be related to a report by the International Trade Commission (ITC) released in 1991 which had a low estimate of the economic impact of the Jones Act on the U. S. economy of approximately $4 billion and a high of almost $10 billion. These estimates were revised by the ITC in 1993 to "approximately $3.1 billion" and in 1995 to "2.8" billion." The numbers above appear to be high numbers which would in turn effect the overall loss or gain to the Hawaiian economy.
Second, the ITC used a much more appropriate theory in evaluating the impact of the Jones Act and this has come across in garbled form when used here in Hawai'i by Jones Act opponents. If the Jones Act restricts competition, it leads to higher prices for ocean shipping. Because there are some consumers who are willing to pay this higher price a reduction will increase their welfare. Using the $251.1 million number above one can say this is the amount by which their welfare will increase through the repeal of the Jones Act. Per household this works out to a cost of $596.44 (when using correct number of households as denominator) not $3,000. It should also be noted that the 30 and 50 percent shipping cost differential seems to be an unreasonably high estimate.
Finally in terms of the losses to the Hawaiian economy the above estimate is probably an underestimate. I have assumed that there will be no further loss beyond the $250 million dollars to foreign carriers. This is not a very reasonable assumption. For example Sealand and Matson could register their ships in a foreign country in order to avoid the loss of business. This means they would not have to comply with labor and environmental regulations. It would also mean a further gross reduction in terms of the economic loss to Hawai'i. Or we could assume that the remaining shipping will be taken over by foreign carriers. The shipping revenue after the Jones Act Repeal would be about $500 million. If 20 percent were taken over by foreign carriers ($100 million) then the gross loss would be an additional $250 million in output. If it all went to foreign carriers the gross loss would be $1.5 billion in output.
In summary, using Jones Act opponents' numbers, there would be a net loss of $257.25 million to $1.5 billion in output per year in Hawai'i, or a loss ranging from $611 to to $3,563 per household if the Jones Act were repealed. The number of jobs lost in ocean shipping ranges from a low of 5,675 to a high of 17,025. This compares with a total loss of jobs in the Hawaiian economy of approximately 13,000 since 1991. The loss in personal income would range from a low of $157,750,000 to a high of $473,250,000.
In conclusion, the Jones Act opponents are simply misusing the State's input-output tables. Though I have used their own numbers in this analysis, they too appear suspect. For example, they appear to use an incorrect number of households in order to arrive at the $3,000 per household number. None of the material put out by the Jones Act opponents details job loss, as I have done above. And they appear to be confused when it comes to defining "economic activity." Economic activity can mean output by various industries, and this appears to be what they mean when they use a multiplier of 2.5. But output does not translate directly into income. There is a different multiplier for that. Thus the per capita income lost from repeal of the Jones Act would range from -$37.50 per household to -$1,124 as results from a decline in the ocean shipping industry.
For more information on this project, call, write or E-Mail Dr. Lawrence W. Boyd, Jr. at:
CLEAR
University of Hawai'i - West O'ahu
96-043 Ala 'Ike, Bldg. 400
Pearl City, HI 96782-3366
phone: (808) 454-4774;
FAX: (808) 454-4776
E-Mail: lboyd@hawaii.edu
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