Insights From Our CEO: Government vs. Free Market

 There is a worthwhile article by George Will in the April 17 Washington Post. In it, he discusses the federal government's use of tax credits to influence the marketplace (consumers) toward a particular decision. The rationale for doing this is almost always that the government knows better than the marketplace what the consumer should decide. There may be times when government intervention has some lofty, long-term vision or goal in mind. Encouraging consumers to make a “green” choice in their purchases comes to mind as a potential “social good.” However, as Alan Beaulieu wrote, the unintended consequences of government forays into the market are legion and at times onerous.

An intervention into the marketplace can be something less direct and obvious than a tax credit. Legislation is oft times the intervention method of choice. One of our economists, Michelle Kocses, came across the Jones Act/Merchant Marine Act of 1920. Us older hands may remember it, but the reality of the case is instructive for the new generation.

The Jones Act requires that goods shipped between US ports be transported on ships that are built, owned, and operated by US citizens. Exclusive access to the US cabotage market has propped up the US shipbuilding industry for almost a century, but it has also been, debatably, the cause of its undoing.

Put forth by Washington Senator Wesley Jones, the act benefited Jones’ constituents by giving Washington state’s large shipping industry a near-monopoly on shipping to Alaska. As with many pieces of protectionist legislation, the act cited national security concerns. The Jones Act has caused a myriad of unintended consequences, notably:

The Jones Act has resulted in significantly higher shipping costs from the mainland US to Hawaii, Alaska, and Puerto Rico. A recent study by John Dunham and Associates estimated increased shipping costs to Puerto Rico of 57.3% (containerized) and 61.9% (non-standard or bulk) relative to foreign-flagged ships. Artificially high shipping costs from the mainland US means that in some cases it is cheaper for Hawaii, Alaska, and Puerto Rico to purchase from foreign sources. Furthermore, higher maritime shipping costs encourage freight in the continental US to be transported via truck or rail, as opposed to boat, clogging up infrastructure. 

Ultimately, the Jones Act failed to boost the US merchant marine fleet or the shipbuilding industry. US shipbuilders have priced themselves out of the market — Drewry Maritime Research concluded that Jones Act vessels cost approximately five times as much to build than comparable foreign ships. The US merchant fleet has shrunk considerably, down from 2,752 ships over 1000 tons when the law was enacted to just 182 ships in January 2019. In 2016, the US fleet was a mere 0.4% of the world fleet.

It is difficult to take a “perk” away. People come to see them as the “norm,” and that morphs into an entitlement. The Jones Act is but one long-term example. Pushing Electric Vehicles (EVs) is a newer cause. George Will’s article makes a case that the EV tax credit, which many politicians are looking to expand, is unnecessary and more of a help to well-off people (as defined by income) versus those with lower incomes. The EV industry loves the credit because otherwise people don’t love EVs. The climate/pollution advantage is arguable according to Will’s references.

For many free market economists, like us at ITR Economics, the marketplace is a much better arbiter of what we should be striving toward. Protectionism, in its many guises, decreases competition, which inhibits innovation, efficiencies, and, ultimately, higher standards of living for all (as opposed to the relative few).

Brian Beaulieu
CEO