Jones Act, Dead Weight

Speaker 2

Magnus, the economist.

Speaker 1

Of twenty twenty six. At least normal people were not talking about the Jones Act until Bad Bunny made everybody aware of it after his ⁓ Super Bowl performance. But apparently the Jones Act has been suspended since March of twenty twenty six. I didn't know this. Phil, did you know this? I'm sure Phil knew.

Speaker 2

It because I'm a ⁓ something of a Jones Act nerd in this respect, ⁓ because it's been an area of policy that I've disliked for basically as long as I've known it existed. But ⁓ nonetheless, it's a very obscure area of U.S. trade and shipping law that rears its ugly head from time to time. And one of the reasons being here is that Puerto Rico is one of the locales that is covered by the Jones Act. ⁓ so what is the Jones Act? Well, it's a law from 1920. That basically means if you want to ship goods between two or more US port cities, it has to be carried on a certain type of vessel that is also built in and flagged in the United States. ⁓ historically it was referred to as cabotage. when this medieval practice came out, as country would say you can only use our country's vessels to trade between our ports. And this is like moving up and down the coast of England. ⁓ well, now we've adapted that to the modern era. And it means that you also must adherent habitage to transfer goods from say like the port of New Orleans to Puerto Rico or Los Angeles to Hawaii. So all of these island territories and states and regions of the United States, you think about it like geographically, they're a lot closer to several other countries that could be ⁓ shipping points. And some of them are like halfway across the ocean. So if a ship was coming from Japan to Los Angeles, why not stop in Honolulu? But you can't do that because the Jones Act requires those ships for internal trade to be flagged and built in the United States. So instead the good has to be carried all the way to California, unloaded, put on a US flagged ship and taken to Honolulu.

Speaker 1

So what was happening before nineteen twenty in shipping in the United States that that people were like, We need to we need this act?

Speaker 2

Well, and there there's the the the big story. We've always had various forms of navigation requirements, even before the American Revolution. If you read some of the pamphlets and it's hinted at in the Declaration of Independence, they are mad at the British Empire for imposing cabinage regulations on the United States. They were called the navigation acts at the time. It said you can only trade with Europe on an English flagged ship. And the American colonies are like, Well, but what if we want to send our goods to Spain or France? No, it has to go through London, an English flagship. So they were upset about that. And that was one of the protests. But after we form as a new country, there are various cabinets restrictions that are enacted in the 18th and 19th century. ⁓ not nearly as severe as the Jones Act, but it all comes to a head in World War One as so many things do. ⁓ so the United States, remember, we're a late entrant into the war. It's been raging for a couple of years in Europe, but we decide to join on the Allied side. And one of the things Woodrow Wilson did when we joined that war is he put out a call for U.S. manufacturers to build ships. Because if we're going to enter in this war, we have to carry stuff over across the Atlantic. We need our army vehicles and our troops and our munitions, and we need battleships to fight wars, all sorts of stuff like that. But they also needed a merchant marine, which was the supply route. And he basically engaged in this massive, up until that point, almost unprecedented government subsidized. Build out of the private merchant marine in the United States, but doing it as part of the public sector. And this is called the Emergency Fleet Corporation. And it's ⁓ notoriously corrupt, it's mired in a whole bunch of scandals, and it seizes control of a large part of the private sector's energy in the construction of ships for the war. And the interesting thing is like all central planning and ships building ⁓ is any other type of ⁓ central planning. They had bureaucratic delays. They ordered too many ships. And by the time the war is ended, they've signed the peace treaty. They're ⁓ the troops are being withdrawn. There are still all these unfinished hulks of ships that the US government has commissioned, as if they were going to be continuing this war for years and years, if not even decades. And the question before Congress was, well, what do we do with all these unfinished ships? And ⁓ you know.

Speaker 1

Yeah.

Speaker 2

Wilson's party, the Democrats, they lose the election in in ⁓ in nineteen twenty. So they're they're kind of being on the ⁓ pushed on the way out. But there's also protectionists on the Republican side. And one of them is the Senator ⁓ Wesley Jones, I think he was from Washington State. He said, You know what? I've got a plan of what to do with all these hulks of these unfinished ships. We're going to incentivize American shipbuilding because it's better than the other parts of the world. And in order to do that, we're going to require that all the internal trade be flagged on US ⁓ vessels. And this also applied to passenger liners. And ⁓ you there's some really weird, fascinating parts of legislative history in the nineteen twenties because some of the ⁓ you know, this is before the airlines were a major thing. There weren't transatlantic and trans Pacific flights. If you needed to get to Europe or you needed to get to Asia, you got on an ocean liner. Well, if you can extend these same regulations to the ocean liners, it has to be a US flagged vessel. So you get some of these companies that were in the ocean liner business, ⁓ steamships carrying passengers, and they get a a really interesting idea. It says, Well, we can flag our vessels ⁓ in the United States and we'll build it and we'll meet the Jones Act requirements. But we want to ensure that this political patronage continues. So they started naming the ships after politicians. And you had the SS Calvin Coolidge and the SS Warren Harding and the SS whoever was president at the time becomes the the like the US's. version of the Titanic. This is all just a favor to continue currying support from politicians. So the Jones Act becomes this entrenched beast of a ⁓ regulation that has a very narrow constituency, shipbuilders and steamliners and merchant companies that are anchored in the United States, but very diffuse costs that are spread onto everyone because it means it's now more expensive to ship anything, especially to island and remote territories of the United States. And we've been cursed with it basically ever since.

Speaker 1

So it's obviously a form of protectionism, right? Makes you wonder, are the ships all built in the United States as well? Or are people building ships in like Norway and then bringing it over here and then basically having like an H one B one ⁓ version of of ships?

Speaker 2

Yep, yeah, for the ship industry. It's all very complex and heavily heavily regulated. But the gist of it is is the core of the construction occurs in the United States. ⁓ and the core of the construction has to be flagged under the United States, which is ⁓ you know, there are all these international rules that are ⁓ pretty onerous on this type of stuff. But ⁓ it's kind of funny when you look at cruise ships, ⁓ look at the the city that their their home port is on the back of the cruise ship, and you find some really interesting things there. It's all it'll be ⁓ Something we w we might consider like a developing country or a very small ⁓ nation. ⁓ some others are like flagged in Malta. You're asking, well, why are ships sailing around the Caribbean that are flagged in Malta? Malta's a very tiny little island in the Mediterranean Sea that has catered to the shipping industry and given relatively less onerous ⁓ commercial regulations there. But what that means also is if you're a cruise ship that's flagged in Malta, you can leave Miami. And they have to go to another country, but you can't like do a a cruise from Miami to Savannah to Charleston to New York to Boston. There's all sorts of different ⁓ regulations that would kick in. So yeah, large implications that come about from this. And the gist is it means that most of the building tends to be done in the United States and it has to be flagged in the United States through very complex commercial regulations that are all to advantage of very tiny number of firms. So ⁓ I won't get into naming the specific company, but ⁓ there's an acronym of a major Jones Act term today that is a derivative of one of those original steamship liners that was naming cr ⁓ their vessels after presidents. And instead of the SS Abraham Lincoln passenger liner that goes to to Europe, you now have like the SS Abraham Lincoln and it's a a cargo barge, things like that. And and I, you know, I've I've been in ports. I've been out in the port of Oakland and and seen some of these vessels. It's like, huh, that's that's weird. This thing that looks like it's a a container vessel is named after a US president. And then you look at it up and say, ⁓ that makes us that's a Jones Act ship.

Speaker 1

You know, ships are such old technology that I think a lot of people in the modern world might not even realize that we still use them. I mean, I had I had this silly realization the other week. I was a friend of mine had a had a get together and it was on a boat in Manhattan, took it all the way to the Statue of Liberty. And I was looking around and I was like, man, this is a throwback. We're you know, here here I am on a boat. And then just thinking like how many boats are necessary to for us to get the modern comforts that that we have and and man The idea that all that extra sailing and navigating that needs to happen, that must that must have a pretty hefty price tag.

Speaker 2

Right. Yeah. I mean these things are expensive to maintain. And then you think about it, you add the the layer of regulation on there. ⁓ well if a a vessel is under US Coast Guard rules, that means that they have to have periodic inspections to prove that they're seaworthy. That means they have to be up to fire code. ⁓ you know, like that the history of shipping is actually a ⁓ it is a lot like the history of the Titanic. It's a succession of disasters, of collisions, fires, ship sinking, ⁓ Well, generally terrible things happening. But what it's meant meant is it's one of the oldest areas of our economy that has a regulatory presence in it. And some of those regulations, you know, they they align with you, we we want enough lifeboats to be on board the ship. ⁓ we want a fire suppressant system. But behind every one of them is a story of when they didn't have enough lifeboats, or when the fire suppression system went out and the whole thing burned to the waterline, ⁓ or when there was a collision because they had the wrong navigation systems in place. So there's all sorts of stories behind that, but it's a huge regulatory edifice and it's pretty deeply entrenched. ⁓ in other words, people in the shipping industry have a stake in keeping this in place, and that's why every time there's been an effort to repeal something or relax something like the Jones Act, which is ⁓ it's not a safety feature, it's a protectionist regulatory obstacle, ⁓ even though a tiny part of shipping. is tied up by the Jones Act and it's a very small number of companies that are the primary beneficiaries, they carry a lot of weight in Washington because all the costs of it are diffused onto the American consumers, the public, or the people of Hawaii or the people of Puerto Rico.

Speaker 1

So it's been suspended since March. What have we learned?

Speaker 2

It turns out that the Jones Act is very costly. And we already kind of knew this ⁓ from some relatively recent examples. So Puerto Rico, ⁓ a few years ago, you know, it's one of these ones that it's an island in the Caribbean. Hurricanes happen there and it takes out the power grid. It means that there's food that's not around. And I think this actually in Trump's first term was the last time that they had suspended the Jones Act for a hurricane in Puerto Rico. And it was like, well, well, why are we suspending this? Because now you can get disaster relief material in there. You can get the bottles of water, the food and groceries when the island is under a blackout. You don't have to sail all the way to the port of Miami and turn around and come back. You can just take it directly from wherever the supplies happen to be. And they discovered from that temporary suspension in the aftermath of the hurricanes, wait a minute, we've been paying way too much for all this stuff because you got this extra shipping cost produced by the Jones Act. Here we are, you know, 2026. Jones Act suspension. And it's ⁓ making that realization even more firm in the present day. But the irony here is also you have temporary suspensions that occur. I still don't think they could get a vote through Congress that suspends it outright and repeals it outright, even though almost every economist will say you need to do this. It's a terrible law. It's not serving as purpose. ⁓ and ⁓ by the way, you know, Senator Jones back in nineteen twenty, it was like, well, we're going to ensure that the United States has a massive merchant marine in perpetuity because of all these hulks we have to finish from World War One that were never used and that kind of thing. Where's the US shipping industry today? It's actually gone into rapid decline under this scenario because there's no competitive pressure or mechanism. And I've seen some studies where they try to estimate what are the Jones Act eligible vessels that are currently in the fleet, if you want to call it the US fleet. And most of them are old rusted out barges. Most of them are smaller ships that aren't up to the standards of ⁓ like these super tankers and supercargo ships that ⁓ you see going across the Atlantic and Pacific. ⁓ there are older vessels. So it's kind of like the ⁓ the more obsolete area of the shipping industry is the precise thing that's protected by the Jones Act. Meanwhile, there's economic obstacles to be being at the cutting edge of that industry. So

Speaker 1

Recently we have the closing of the Strait of Hormuz. ⁓ I don't know if it's open again, but everybody in case you didn't know, well, we're at war. ⁓ so it seems like suspending the Jones Act has been helpful because you have this Strait of Hormuz that has been closed down. We don't know what's going on with it, but it seems inevitable that it will be reinstated or reenacted or however you want to describe it again. when? I mean when is that when is that gonna happen?

Speaker 2

Is it Tuesday or Wednesday? ⁓ yeah, yeah. Well, ⁓ and I I think there's eventually the political pressure will come about because ⁓ there are still beneficiaries of the Jones Act that are gonna say, Hey, wait a minute, this thing that we've been using to keep our company afloat for now when it was a hundred and six years now, you took that away from us. Now we're hurting and all it'll take over whatever that congressman's district is starts to put pressure on it and everyone's like, All right, fine, reinstate the Jones Act. ⁓ so that's the pattern of history. And the fact that it's on the books versus suspensions are just a temporary order means the suspensions do eventually go away.

Speaker 1

So I think it's sort of death, taxes, the Jones Act, and tariffs as well. So we're gonna talk about tariffs and Phil, I've never met a man who has more hate in his heart for tariffs than you. Hey man, what's your beef with tariffs, huh? What what do they ever do to you?

Speaker 2

That's the thing. ⁓ you know, as I I often joke that my favorite sty favorite vice president in U.S. history is Aaron Burr. And ⁓ that's because he finally ⁓ dealt with the problem of Alexander Hamilton, who was the source of the original tariff. ⁓ which is only, you know, partially true. But yeah, tariffs are an economic inefficiency. ⁓ tariffs are a quintessential case of special interests getting favors from the federal government, or really any government. ⁓ they're almost always enacted ⁓ you know, under the pretext that it usually starts in history as well. We need revenue to pay for something. Well, what's easy to tax? Goods arriving at the port. Let's put a tax on that. ⁓ it's simple enough so far. And if it was a very low, stable, ⁓ uniform impost, which is what the founders kind of envisioned when they wrote the constitution, ⁓ say like goods at the port arrive and we tax them at three percent. That's enough revenue that comes in and we can fund the government. But what really happens in practice is every time that a tariff is authorized, special interests show up and say, okay, we could tax other things at three percent, but ⁓ we are facing unfair competition from this other company over in England. Can you tax it at twenty percent? Or we don't like the fact that ⁓ someone in Japan Is ⁓ producing raw materials at a lower price than we can do it here in Pennsylvania. You slap a 30% tax on them and level the playing field, ⁓ even though you know the reality is it just means everyone else's ⁓ stuff becomes more expensive. So this is the history of tariffs. ⁓ every time they're tried for revenue purposes, they eventually become protective tariffs for a very narrow group of special interests, propping up their sector, propping up their industry, and Where do the costs from that go? Well, who pays the taxes? Despite what Donald Trump and JD Vance and some of these nationalists are all saying, it's not the foreign country that pays the tariff because the tariff is absorbed into the price of the good. And the price of the good is paid by you and me, US consumers. It means that our automobile that we purchased this year is now more expensive than it would have been a year or two ago. Because there are tariffs on steel and aluminum, which are a big component of automobile production. And you know, the automobile company's not going to say sit there and say, hey, ⁓ yeah, you taxed our raw materials. ⁓ we're just going to absorb that. We're going to keep prices the same. They'll pass them on to their consumers and eventually it hits the price tag on the lot. It's true of almost any good. You throw that in an international economy where, you know, almost anything that we build today, it doesn't come from start to finish in the same factory. It has parts and components. components and raw materials and packaging and ⁓ transport components, you name it, comes from all over the world. Even if it says made in the USA, it probably has some part or probably has metal in it that came from some other country. So tariffs affect everything and they spread their costs onto everybody, all for the benefit of a tiny few.

Speaker 1

Well, it seems like tariffs have really been emblematic of this administration, ⁓ so much so that we even had a Supreme Court case, Learning Resources Inc. versus Trump. And I don't know what goes into the selection of court cases for ⁓ for the Supreme Court, but it seems like this must have been a pretty important issue if the Supreme Court said, Yeah, w we're gonna take this one.

Speaker 2

Yes, I was pretty deeply involved in that case and some of the successor ones is ⁓ doing some research around it. ⁓ in fact ⁓ helped craft some of the amicus briefs that went before the courts and ⁓ we were real happy one of them got cited at the Independent Institute and AAF and a few other groups ⁓ that I was working with. But the gist of it comes down to so the constitution says the power to impose tariffs and really all types of taxes belongs in one place, and that's Congress. ⁓ it's right there. It's like the very first thing they authorize Congress to do is that you can collect taxes, which big mistake, but ⁓ nonetheless, that that's there in the Constitution. And one of those types of taxes is the impost or the tariff. That being clear in the Constitution, trade law has evolved in some really unusual ways because it's been around since the founding. ⁓ I mean, this was the original tax system of the US, but it's become much more complicated. And for various reasons over the years, particularly starting in the nineteen thirties. Congress started saying, okay, yeah, we still retain this power to tax and we've enacted laws, but we've also decided that we'll give the president power to temporarily modify some of the tariffs that are on the books or to to ⁓ and the big one is to really to negotiate agreements with other countries that allow them through treaties and international trade agreements and all these formal diplomatic documents to bypass the tariff system of the United States. So even though the tariff is on the book. If we sign a trade deal with England, England and the US now can trade goods ⁓ and be exempt from what that statute says. And the court said, All right, this is part of ⁓ a legitimate exercise of your authority. You can allow the president to do that. ⁓ you can formalize it as an international treaty or an agreement or something like that, and ⁓ we'll follow by it. And this was also part of a way to de entrench themselves from protectionism after the Smoot Hawley tariff that really worsens the Great Depression. So that's the big impetus. Trump comes into office and Trump, for some weird reason since the 1970s, has had this obsession with tariffs. It's like the one word that he keeps repeating over and over again. He likes tariffs and ⁓ and gold plating on everything. But but he comes into office and says, Well, on my second term, I'm gonna make tariffs the centerpiece of my ⁓ agenda. And the problem he faces he is he k he doesn't have the votes to get a tariff bill through Congress, but he looked at all these other clauses that they had passed. And he says, I'm going to take a really creative legal interpretation of these past clauses that have come into place. And I'm going to stretch them to their absolute limit and claim a presidential prerogative to not just modify rates and engage in international agreements, but to declare an emergency and use that emergency power to rewrite the tariffs schedule myself. We have trade deficits.

Speaker 1

What was the emergency? ⁓ I thought it was gonna be like wokeness. Like the the world is too woke, we need terrorists.

Speaker 2

They haven't gotten to that one yet. ⁓ well the the big one was he said, Well, trade deficits are an emergency. And I'm I'm sitting here reading the scratch of my head is US has had a trade deficit since the nineteen seventies. Why is it suddenly an emergency in two thousand twenty-five or twenty-six? And no one really has an answer to that. ⁓ and in fact, a trade deficit by economic definition cannot be an emergency because it means you're you're you're ⁓ you know, you're importing more goods and services total than you're exporting, but Trade is not a one-way street. It means you have to give something in return. That means that other countries are receiving payment or engaged in investments. You have the there's a whole complex system of international accounts. And that system actually evens out because trades are mutual. ⁓ they don't give us stuff for free and we don't take it without paying for it, and vice versa. ⁓ so trade deficit is just like an accounting relic. It can't be an emergency. But he claimed that was the big emergency. They said, we're gonna rewrite the tariff schedule. And then he started to invent all these other different emergencies. He said there's a fentanyl smuggling crisis at the Canadian border. And you look at the stats on that, ⁓ and the entire year before they had found maybe like one backpack's worth of fentanyl across the Canadian border into the US.

Speaker 1

Are we arguing that the fentanyl is too costly? We want cheaper fentanyl coming crossing our border.

Speaker 2

There was actually a study right after he declared the fentanyl emergency where I I guess they get these black market drug prices, but somebody in Vancouver looked up what the street price of fentanyl was there versus Seattle. And it turned out it's more expensive in Vancouver than Seattle, which, you know, if you know anything about trade, that means it's actually probably Seattle fentanyl that's being smuggled into Canada, not the other way around. 'Cause if if you're a a drug smuggler, there's your prof profit opportunity in that black market.

Speaker 1

So so all of the drug smugglers who are loyal listeners, now you guys know what what's been going on in your ⁓ in your trade.

Speaker 2

⁓ he said, Well, no, Canada's the source of fentanyl and everybody's gonna scratch in their head. Well, where did you come up with this? The the reality is most fentanyl smuggling comes from Mexican cartels. It's coming from the other border. And yet we didn't declare a border there. He just wanted a pretext to put tariffs in Canada. Well

Speaker 1

Obviously the arguments weren't strong enough to stand up to a sub the Supreme Court. So Trump lost ⁓ Learning Resources Inc. won. And also it looks like every other major corporation conglomerate won big time too. So you have refunds that have gone out to companies. So just to go through some of them, and these are estimates. I haven't counted all of them with my own hands. Apple received 2.2 billion, Walmart 10.2 billion. Target 2.2 billion, Home Depot, another two billion, Costco 2 billion. A lot of in the two billion range, which is really interesting how I don't know how they came to that mathematically, but you're talking about billions of dollars in refunds going back to these to these companies. Who's paying that? Like w where's the money that's going back?

Speaker 2

That's the thing. So for the year that these emergency tariffs were in place before the Supreme Court ruled, Trump went full speed ahead collecting revenue. So the tax man continued taxing, even though they were on illegally dubious grounds. And they brought in, you know, it's ⁓ depends on how you look at it and which of the tariffs you count. It's somewhere in the neighborhood of about two hundred billion dollars over the year. And most of that's invalidated in the Supreme Court decision. And it it actually got them into a bit of a fiscal problem because they counted on that revenue in the one big beautiful bill. If we remember that from last summer, it had all this new spending in there. Well, Trump was like, Well, we have 200 billion give or take every year coming in from all the new tariffs I've enacted. ⁓ that means we have more money to spend. So they spent the money and then the Supreme Court came back and said, Nope, sorry, you got to refund it. The Trump's like, Well, we already spent it. course, no, it was illegal. You have to refund it. So now they're having to go into the U.S. budget, ⁓ go into the U.S. Treasury's holdings and refund money that they really in the long term cannot ⁓ afford to. So it's just blown a big hole in the federal deficit. And eventually that'll transmit over into the national debt.

Speaker 1

So I'm looking at these companies. I've purchased a good amount, I think, from each one of them. There's a few ⁓ shirts from Target. I I brought some back, but but there are still ones that I bought. They're in my closet. Am I gonna get a refund? Are consumers gonna get a refund, Phil?

Speaker 2

The problem because the consumers probably carried the bulk of the effects of these taxes. It passes through onto us. Now, some companies they they did try to temporarily withhold the price ⁓ pass through. In other words, like if you if you're in a small import company and and you these tariffs happen, but you know they're likely to get struck down by the Supreme Court or something, you're like, Okay, I can carry that for a couple of months, and my consumers, my customer base will still be happy. Yeah, I'll probably eat the cost of the tariffs, but I'm just praying and hoping the Supreme Court does the right thing and then I'll get the refund. But if you're a large corporation, you're a big retailer, you cannot do that on that margin. If you're a grocery store, you're operating on a thin margin as it begins with. So what this means is a lot of these companies, it's really up to their discretion if they try to pass through the refund back to consumers. They don't have to. ⁓ there's one exception here. I actually got a tariff refund. Whoa. Yeah. There's some funny thing because Trump also extended these illegal tariffs to mail order purchases from abroad. So if if you order something on eBay or you think the little old lady who's doing antiquing on Etsy or something.

Speaker 1

I thought you were gonna say Mail Order Brides.

Speaker 2

I don't I don't know if there's tariffs about ⁓ but but yeah you know the whole retail mail order industry. ⁓ so I ordered coffee that I like from this company in Guatemala, drinking a glass of it right now. and just a good flavor coffee. I always ever periodically order one. And then this one arrived with the tariff, ⁓ because it was right after Trump had put these in place. And what they had done is the small mail order companies, they basically Ask UPS or FedEx or one of the major ⁓ shipping firms to do the tariff collection for you. So when my coffee was delivered, I get this email from I think it was UPS that said, You have an international shipment arriving tomorrow. ⁓ before we can deliver it, you must log in and pay your due your customs fee. ⁓ so I did and I had to charge like an extra, I don't know, $10, $20 or something like that. And then the Supreme Court rules, and then I get another email way down the line, like six months later, from UPS saying you're customs fee that you did from your coffee order is now being refunded because it's been invalidated. And what that means is the federal government gave that money back to UPS and UPS turnaround. And I guess they sent out emails to every single person that ⁓ had been affected by this in the period that the illegal tariffs weren't in effect and they did get their refunds and I got my refund. What?

Speaker 1

You know, do wonder if we might see sometime in the future a a case regarding the Jones Act being brought to the Supreme Court and wonder how that ruling would go and if there was a a refund, what that refund would look like. But ⁓ that's gonna have to wait until another time.

Speaker 2

Get a stake in the Jones Act Barge as your your your payment for for all the years of higher prices in Puerto Rico.

Speaker 1

Well, I'll tell you what, if I can get myself an anchor from one of those barges, that would be really cool. We hope that you enjoyed this episode of Happy Hour Econ. No tariffs here. It's totally free from the Jones Act. And we will see you next week.