Review of the Council’s 1997 Jones Act Cost Estimates

by Michael Hansen, President, Hawaii Shippers’ Council, July 10, 2019

The Hawaii Shippers’ Council (HSC) recently reviewed its 1997 estimates of the cost of the Jones Act on Hawaii and a contemporary critique by a well-known University of Hawaii labor economist who found the Jones Act increases the State’s economy.

The HSC estimates are from a paper, “Effects of Maritime Cabotage on Hawaii,” dated November 1, 1997, and publicly released at a legislative hearing in the Hawaii State Capitol sponsored by then Hawaii State Senator Whitney T. Anderson (R) representing Senate District 25 (Kailua-Waimanalo).

In preparing its estimates, the HSC adopted the Jones Act countermodel used by the United States International Trade Commission (USITC) in their 1990’s investigations of the Jones Act’s national cost.  The USITC assumed that the Jones Act would be changed to allow foreign self-propelled ships of 1,000 gross tons and greater to be employed domestically in the coastal, intercoastal and noncontiguous trades of the United States.

The HSC generally estimated the cost of the Jones Act to be approximately 3% of Hawaii’s Gross State Product (GSP), now known as the State Gross Domestic Product (GDP), and about $3,000 per household per annum in 1997 dollars.

At the time, this estimate was cited by Sen Anderson, Hawaii State Representative Gene Ward (R) representing an East Oahu district, and Orson Swindell, who was a Republican candidate for the U.S. House of Representatives (CD-1) challenging the incumbent Neil Abercrombie (D) in 1996. They have been widely circulated since.

The HSC estimate was contemporaneously analyzed and critiqued by Lawrence W, Boyd, Jr., Ph.D., Labor Economist, Center for Labor Education and Research (CLEAR), University of Hawaii, West Oahu. He picked up a copy of the HSC estimates at the hearing sponsored by Sen Anderson.

Boyd’s critique, “The Jones Act: What does it cost Hawaii?”, (attached) was released on November 19, 1997, and concluded that removal of the Jones Act from the Hawaii trade would result in a loss of $611 per Hawaii household per annum. In other words, the application of the Jones Act to Hawaii actually adds to the economy and  increases the consumer welfare and income of Hawaii residents.

This result is based upon his view that the differential between very low “international freight rates” that would be brought about by the changes to the Jones Act stipulated by the HSC and “existing freight rates” (or more descriptively, the significantly higher Jones Act freight rates) would substantially reduce consumer welfare and income for Hawaii residents.

The rationale for Boyd’s result arises from the conventions for compiling national and regional GDPs, known as the System of National Accounts (SNA), which include inbound external freight and charges in the importing economy. Thus the higher the external freight and charges, the larger the importing economy, the greater the economic welfare and thus a gain in personal income.

However, this explanation does not express the correct relationships between the variables and the methods for compilation of national accounts.

Rather, if the Jones Act were removed, the existing resources not expended on importing higher cost external transportation services are free to be spent on other useful goods and services and will variously increase other consumption, investment and government in the importing economy.

In fact, lower inbound transportation costs will not cause the importing economy to contract as asserted by Boyd, and contrary to his conclusions will increase consumer welfare and personal income to residents by providing a surplus.

The complete review and appendices are available here >>> LINK.

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