by Michael Hansen, President, Hawaii Shippers’ Council
Economist Joseph E. Stiglitz, a Nobel laureate and one-time key advisor to President William J. Clinton, spoke at UH Manoa March 13th about economic sustainability and impediments to growth – identifying the Jones Act as a great distortion to the Hawaii economy – before an audience which included Governor Abercrombie who has been a long time and ardent Jones Act supporter and recipient of much support from Jones Act interests.
Professor Stiglitz admonished that government fails when it doesn’t support competition. And the corollary--that a lack of competition leads to inequality and an unsustainable economy. He referred to three man-made impediments or barriers to making the State’s economic growth stronger and more sustainable.
The first two barriers he mentioned were: the lack of competition in the inter-island transportation market which creates a high barrier to economic activity between the islands; and, the very high electricity prices to which he sarcastically noted “your electricity prices are really very impressive” referring to the high level of economic rent seeking achieved by Hawaiian Electric Industries.
The third impediment Professor Stiglitz spoke about was the Jones Act, which is the 1920 federal cabotage law requiring vessels be U.S.-Built, U.S.-Flag, U.S.-Owned and U.S.-Crewed to carry cargo between two domestic points.
In describing the impact of the Jones Act on the State, Professor Stiglitz said, “it is a distortion that affects Hawaii a great deal,” it has led to “less competition in the maritime trades between Hawaii and the Mainland than there ought to be,” and “it really increases the cost of shipping to Hawaii.”
Professor Stiglitz explained that the first time the Jones Act came to his attention is when he worked on the President’s Council of Economic Advisors and it was identified as a major impediment to the national U.S. economy. At the time, he said he had not really thought about its impact on Hawaii. He mentioned a contemporary study had shown the Jones Act “cost $250,000 per job each year which is not very efficient and the number of jobs affected were miniscule.” From this perspective he said “The Jones Act is an outrageous restriction on trade in a country that believes in free markets.”
Professor Stiglitz was particularly critical of anticompetitive practices that create barriers to entry, support monopolies and foster rent seeking activities; as these lead to inequality and impede economic growth and development. Paraphrasing, he said that government fails when it does not encourage competition; as competition leads to more equality and stronger and more sustainable growth.
When taking office in 1993, President Clinton appointed Professor Stiglitz to his Council of Economic Advisors 1993-1995, first as a member, and then as Chairman in June 1995 (succeeding Laura Tyson) which also made him a member of the President’s cabinet. At the beginning of President Clinton’s second term, Professor Stiglitz resigned as Chairman of the Council and took a position with the World Bank as its senior vice president for development policy and chief economist, where he remained until January, 2000. His most important policy contribution during this period was helping define a new economic philosophy called the "third way" which sought a middle path between conservative and liberal economic principals. Professor Stiglitz won the Nobel Prize in economics in 2001. Today he is a professor of economics at Columbia University.
During the time Professor Stiglitz was a member of the President Clinton’s Council he also worked with the National Partnership for Reinventing Government which began as the National Performance Review (NPR) and was nicknamed the Reinventing Government Task Force. President Clinton formed the NPR on March 3, 1993, with Vice President Albert Gore as its leader. Its first report was issued on September 7, 1993, and it continued to operate throughout President Clinton’s two terms in office focusing in later years on implementing its proposals. The concept for this initiative came from a book published one year earlier, in January 1992, “Reinventing Government; How the entrepreneurial spirit is transforming the public sector,” by David Osborne and Ted Geabler.
Although the Jones Act became a forefront issue early during the first year of the Clinton Administration, primarily through Vice President Gore’s reinventing government initiative and it still resonates with Professor Stiglitz today, it was not mentioned in the first NPR report released in September 1993 because the pro Jones Act interests had it squelched.
Bob Zelnick in his 1999 book, “Gore: A Political Life”, (pp247-8) recorded the demise of Clinton-era Jones Act reform efforts:
After getting battered by the unions Gore threw in the towel on yet another area of reform – the heavily subsidized maritime industry. Not only does the industry receive $215 million in direct subsidies each year, but protectionist Jones Act prohibits foreign ships to haul cargo between U.S. ports, at a $600 million annual cost to American consumers. A Gore reinventing government task force was prepared to recommend ending the subsidies and rescinding the Jones Act. But after word of the recommendation leaked, the unions threatened to confront Gore publically. Gore scuttled the recommendation and instead urged only a new commission study the problem.
The initial draft of Vice President Gore’s National Performance Review reportedly contained proposals for sweeping change (of existing maritime policy): essentially complete deregulation. The draft was leaked to the media, reportedly from one of the maritime agencies. Vigorous opposition succeeded in preventing inclusion of the proposals in the final report.
The USITC found that the Jones Act protections in the coastwise, inter-coastal and noncontiguous trades cost American consumers between $3.0 billion and $10.0 billion annually and allowing foreign-flag ships over 1,000 gross tons into those trades would affect approximately 2,450 shipboard and 36 shipyard jobs.
The USITC’s first update, issued in 1995, found that allowing foreign flag ships over 1,000 gross tons into the coastal, inter-coastal and noncontiguous trades would reduce freight rates by an estimated 26% and provide a $2.86 billion national welfare gain.
USITC's second update (pp109-128), in 1999, indicated a 22% reduction in freight rates and [produce] a $1.32 billion gain based on the same criteria.
The last USITC report to mention the Jones Act was the fifth update of 2007, but it did not attempt to estimate the costs. The 6th and 7th updates of 2009 and 2011 do not mention the Jones Act at all.
Obviously, the Jones Act interests led by the American Maritime Partnership (formerly the Maritime Cabotage Task Force) have over time succeeded in suppressing the USITC efforts to provide unbiased data regarding the cost to the American consumer of the Jones Act. But Prof Stiglitz' talk reminds us that some in the Democratic Party remain interested in reform.