Unintended Consequences of Protectionism: The Jones Act and Highway Congestion

In 1920, the US government passed the Jones Act, an act requiring all sea shipping between US ports be done on ships that were built, crewed, flagged, and owned by Americans.  The act is a clearly protectionist measure designed to protect domestic shipping from foreign competition (although there is also a national defense argument for it).  The idea is that a cheaper foreign shipping company could not undercut US shippers on domestic trade routes.  If I were to ship something via ocean from Miami to Boston, I’d have to do it on US built, crewed, flagged, and owned ships.

The Jones Act, to the extent it is binding, raises the cost of ocean shipping in the US (if this were not the case, say it were already cheaper to ship on US ships than foreign ones, then the Jones Act would not be binding).  When the relative price of something rises, it encourages the use of substitutes.  The main substitutes for domestic shipping are trucking and railroad (and air to a lesser extent).  With the rise of ocean shipping costs from the Jones Act, transporters would turn to trucking and rail.  Furthermore, since trucks take up a lot of room on the highways and freeways, it is likely the marginal increase in trucking from the Jones Act increases congestion on the highways.  In short, the unintentional result of the Jones Act is to increase traffic congestion (and, potentially, traffic accidents as well).

Some interesting thoughts for further research:

  1. Do trucking and rail companies lobby in support of the Jones Act (bootlegger and Baptist)?
  2. Has the Jones Act had a measurable impact on the level of traffic (this is an empirical question that would be extremely hard to answer because of the age of the Act)?

Taxation Is Not Necessarily Theft: A Rejoinder to Libertarians and Anarchists

Taxation, by its nature, is not necessarily theft.  Likewise, taking something and not giving something in return is not necessarily theft, either.  The circumstances are what matter.

By way of example: two men meet on the street.  One is selling apples.  The other man has money.  They agree to an exchange: one man gets $5, the other gets a bushel of apples.  The two go on their merry way, happy as can be.  No theft here.

A similar circumstance: two men meet on the street.  One is selling apples.  The other man has money.  While the apple seller is distracted, the other man takes an apple and leaves no money.  Now, a theft has occurred.

What is the difference between the two stories above?  In the first, there is consent between the two parties.  In the second, there is no consent.  Consent is what makes an action theft or voluntary.  There would be no argument whatsoever on this point.  So, the question becomes, can one never consent to taxation?  Is taxation inherently non-consensual?

The answer to that question is “no.”  Taxation is not inherently non-consensual.  It can be agreed upon; it can be consented to.  Let’s say a group of people get together and decide to pool their resources for some public good (let’s say, common defense).  Depending on the structure of their arrangement, they all agree to provide some annual contribution to this goal.  This is, in essence, taxation.  Furthermore, it is consensual taxation.

But if taxation can be consensual, doesn’t the use of (or threat of) force for compliance necessarily mean that taxation isn’t consensual?  Isn’t that evidence against my thesis?  Again, not necessarily.  Yes, the thief may use force to get what he wants, but even consensual agreements may carry a threat of force.  Contracts contain provisions in case one person reneges on his deal.  These are voluntary agreements that contain elements of force if certain conditions are not upheld.  So, the existence of force is not in and of itself a sign that the agreement is involuntary.

The real question, the one we should be discussing and thinking on, is “what constitutes consent?”  If governments “derive their just powers from the consent of the governed,” what constitutes consent?  At what point does government “become destructive to these ends”?*  Yes, this is the interesting question and one I will not be discussing in this post.

*A quick aside on this point: using the same logic as above, it can be shown that merely being in a minority, losing an election, or not having things go your way in politics is not necessarily a sign of oppression or malfunctioning government.

Some Links

Scott Sumner points us to some good news on trade for the world.  His conclusion is excellent:

Unfortunately, one major country stands on the sidelines pouting while the rest of the world moves toward ever freer trade. Sad.

JMM: So much for making America great again…

Mike Munger reviews Nancy MacLean’s smear-job new book on James Buchanan and Public Choice

John McGinnis discusses what happens when government moves beyond its core functions.

Mike Rappaport on law and legislation

Mark Perry celebrates Thomas Sowell’s 87th birthday

What Does Protectionism Protect?

What does protectionism protect?

Some claim that it protects jobs, but that’s not true.  By raising the price of the “protected” good, it reduces quantity demanded, thus reducing the need for labor and other inputs in that particular industry.  Plus, by increasing the price of the protected good, it reduces demand from other areas of the economy just to pay for the new price, costing jobs and inputs into those areas as well (eg, if you have $100 and a suit jacket costs you $50, you have $50 to spend on a night out.  If, due to tariffs, the price raises to $100, you now have nothing to spend on a night out if you buy the suit jacket).

Some claim protectionism protects industries/firms; helps them grow.  That’s not true, either.  As Mercatus Center scholar Dan Griswold reminds us: “Protected industries tend be lazy about innovation and customer service because they are shielded from normal market competition – think the U.S. Postal Service.”  Protectionism tends to weaken the protected industries, not strengthens them (this, in turn, could lead to perpetual calls for protection by the industry.  A good example of this is the US sugar industry.  The subsidies and tariffs it receives were only supposed to be temporary, while the new American nation got on her feet.  Almost 300 years later, they’re still around).

Some claim protectionism protects the economy, it “makes us great” by encouraging exports and reducing imports.  This isn’t true either.  As Dartmouth College professor Douglas Irwin reminds us: “a tax [tariff] on imports is equivalent to a tax on exports. Any restraint on imports also acts, in effect, as a restraint on exports.”  Whether you measure economic gain in the number of exports or the total volume of trade, tariffs reduce both, so it can’t encourage economic growth.

So what, then, does protectionism protect?  Nothing, so far as I can tell.  All it does is reduce the number of goods a society can enjoy by increasing prices.  This is why I call protectionism by its proper name: scarcityism.

What-ifs and Whatnot

Two friends are sitting by a pool on a hot day.  One of the friends, Joe, casually says to Smith (the other): “Smith, it sure is a hot day today.  I hope the sun doesn’t dry up all the water!”

“Don’t be stupid!” says Smith.  “The sun doesn’t cause water to evaporate.  It causes the water level to go higher!”

Joe looks at his friend perplexed.  Smith continues:

“It’s real simple.  The sun hits the water, water gets warmer and starts to evaporate, right?  So the pool master comes out and adds more water to the pool.  On net, the water rises!  Ergo, the sun causes a higher water level!”

Joe, still confused, says “No, that’s not true.  The effect of the sun is to evaporate the water.  The pool master coming in is serendipitous; it’s a ‘what-if’.”

Smith laughs.  “Oh Joe.  Don’t be so dogmatic in your thinking!  Always insisting that the sun causes evaporation!  But I have clearly proven that wrong.  These chemists who constantly insist evaporation occurs because of the sun are just ideologues.”

Joe, rolling his eyes, goes back to his book.

 

And so it is with minimum wage, too.  Minimum wage advocates love to construct all kinds of “what-ifs” to explain why minimum wage has no effect (or even a positive effect) on employment.  But by doing this, they hide the effect of minimum wage behind all sorts of stories and claim, then, they have turned theory on its head.  But constructing what-ifs are easy.  Any storyteller can do it.  But what-ifs and serendipity make poor bases for public policy.

 

An Open Letter to President Trump

Mr. Trump-

Over the past year, the Washington Metropolitan Area Transit Authority (Metro) has been doing repairs on their subway lines, called “Safe Track.”  During this period, stretches of the different Metro lines have slowed service considerably or closed them entirely for weeks on end.  During this period, Lyft and Uber drivers such as myself have made lots of money ferrying frustrated commuters back and forth to operational Metro stations or their offices.  During rush hour, one could easily command high surge pricing.  As you can imagine, this has been quite a financial boon to us.

But now, Safe Track is coming to an end.  This will mean lost money for us Uber and Lyft drivers.  It is often cheaper for commuters to ride the Metro than pay us.  Furthermore, the Metro is subsidized by the evil governments of Virginia, Maryland, and the District of Columbia.  This is hardly fair.  Surely, you can see how this would be bad for America.

Mr. President, in order to Make America Great Again, I insist you demand the Metro to immediately cease their repairs.  Further, they should be required to rip out all the repairs they’ve already done, redo them, and then rip them out again just before being finished.  This cycle should be done into perpetuity.  This would have the duel effect of keeping Lyft and Uber drivers’ incomes high and keeping construction jobs in the area which would otherwise disappear once the work is done.

Some commuters might object to this, saying that the costs of their commutes are already too high.  Don’t listen to them!  They’re just being greedy.  They don’t care about America.

Some businesses might object and say the high cost of commutes may force them to relocate outside of the area.  Don’t listen to them!  They just want to protect their bottom line and don’t care about us workers.

Some economists might object and say that the dearth of transportation options is a cost, not a benefit, to the DMV.  Don’t listen to them!  They’re just in the pockets of Big Business.

Mr. President, for the sake of our jobs and incomes, I demand the above actions be taken!

Signed,

Jon Murphy
Fairfax, VA

Make Sure the Cure Isn’t Worse Than the Disease

TANSTAAFL.  Every action taken has costs, and sometimes those costs are borne by those who had no say in the matter (“negative externalities” to use the technical term).  The existence of externalities is often used to justify government involvement in markets (pollution tends to be the common example).  Lately, however, protectionists scarcityists have begun using that argument to promote their policies, noting job loss as an externality.  Some, more generally, claim “practical people not tied to free trade dogma understand that trade sometimes is good and that it’s bad other times.”

It certainly is possible that, any given transaction, may have enough unforeseen negative consequences as to have negative net benefits.  However, the bar needed to justify government action is high:

From a purely economic perspective*, protectionists have two tasks before them:

1) Prove that imports cause greater net harm than domestic production

and

2) Prove the proposed solution minimizes the net loss (or, inversely, maximizes net benefits). This is where comparative institutional analysis comes in.

The mere existence of condition (1) is neither necessary nor sufficient to justify government intervention. If the cost of government intervention exceeds the benefits therefrom, then even though the free market option has a net loss, it is the optimal solution because the resulting intervention would make matters worse!

The existence of condition (1) may require collective action to solve, but it may be more cheaply solved via non-government collective decision making (ie, a firm).**

There may be cases where government decision making is the lowest cost option.  However, it is very much a case-by-case basis.  Blanket legislation (like a tariff) does not allow for the necessary flexibility to make such decisions.  In order to minimize costs (and thus maximize net benefit), freedom must be given first preference, with the burden of proof upon protectionists.

*There could be many other arguments for protectionism, such as legal, or national defense.  I shan’t get bogged down in a discussion here.  I’ll leave that to the experts.

**For a more in-depth discussion on this point, read The Calculus of Consent by James Buchanan and Gordon Tullock, in particular Chapter 5.