With Cumberland’s quarter-end publishing cycle coming to conclusion, we will use this missive to deliver a bullet aimed at the Jones Act. (Readers may have noted that we try to have most of our folks offer comments at the end of each quarter, which is why there has been a flurry of missives.)
The Puerto Rico story has been front-page news and has been discussed several times by my colleagues John Mousseau and Shawn Burgess and myself. See cumber.com/munis-in-third-quarter-2017-all-about-storms/, cumber.com/quick-note-on-hurricane-maria-and-insured-puerto-rico-bonds/, and cumber.com/a-marshall-plan-for-the-caribbean/.
The Marine Merchant Act of 1920 is nearly a century old. Created by Sen. Wesley Jones of Washington, it requires that all goods shipped between US ports be carried on US-built ships owned and operated by Americans. In the wake of Hurricane Maria some members of Congress sent a letter to the Dept. of Homeland Security, asking for a temporary suspension of the Jones Act. Here is the link to that letter: velazquez.house.gov/sites/velazquez.house.gov/files/09252017 FINAL Letter to DHS JonesAct Federal requirements waivers.pdf. (Note that the US Virgin Islands is already permanently exempt from the Jones Act. Source: Fox News)
The Trump Administration granted the waiver. Better if sooner, but it has been done.
Sen. John McCain, R-Ariz., who urged Trump to waive the law, said shipping costs to Puerto Rico are approximately twice as high as to other nearby islands that allow foreign ships to dock. “It is unacceptable to force the people of Puerto Rico to pay at least twice as much for food, clean drinking water, supplies, and infrastructure due to Jones Act requirements as they work to recover from this disaster,” McCain said, as he also called for the “full repeal” of the “archaic and burdensome Act.” McCain has called for repeal of this law before and has offered repeal legislation without success.
We believe Senator McCain is correct. A hundred years ago, the law had one purpose. It was right after World War I, and US shipping needed bolstering. The impact today is to raise prices and slow down shipping. The law protects a few special interests in shipping and labor, who make a spurious argument based on homeland defense and who are bent on economic protectionism, while imposing costs on most of society. We seem to tolerate these politics normally, but every time there is an emergency we use temporary suspension of the Jones Act to overcome obstacles that wouldn’t be there if the act were repealed.
So the law is currently waived because of Hurricane Maria, and it was waived because of Hurricanes Harvey and Irma. It was previously waived after Hurricane Sandy. Most analysts want the law repealed. Hawaii and Alaska officials want the law repealed.
Note, too, that many shipping companies use a workaround method to avoid the Jones Act and ship from the US to a foreign place and then transship to a US port so they are not directly shipping US to US. That practice adds costs and reduces efficiency.
Please understand that we do not want to compromise our nation’s defenses. A Jones Act replacement law could achieve the national defense purpose in times of emergency but not impose higher costs and procedural delays such as we saw for a week during the Puerto Rico crisis.
We should also bear in mind that Puerto Rico has been hurt by the Jones Act for decades. See money.cnn.com/2017/09/28/news/economy/jones-act-puerto-rico.
Here is a modern metaphor. Suppose today the Congress were to pass a law that every commercial airplane flight from a US airport to a US airport had to be on a plane made in the US. Airbus and Bombardier, and others would not be permitted unless they flew from the US to a foreign airport and then had a separate flight from that airport back to the US. The same would be true for delivery of goods by the US Postal Service or FedEx or UPS. What would happen? Costs would skyrocket. Prices of aircraft would rise. Global competition, which has the effect of lowering costs for all of us, would be reduced.
The new law would be couched in an argument that all US aircraft needed to be available for defense purposes first – but that waivers could be granted in emergencies. We wouldn’t for a moment tolerate such a law today for air transport, yet we permit it to continue with shipping.
Our country has trouble repealing bad or unneeded laws. For example, we had a national prohibition on alcoholic beverages, but the method resorted to for repeal of that law was to pass jurisdiction to the states. Now, we are engaged in a fierce debate over healthcare, and the default approach seems to be to pass jurisdiction to the states. We seem trapped in a paradigm that allows the federal government to say yes but not to say no. Once a yes is granted, special interests become embedded, and they then achieve enough influence and financial power to protect their niches. When we have finally had enough or when we come to a real crisis, we end up passing jurisdiction to the states. If the Jones Act were passed to the states and Puerto Rico, it would be repealed by nearly all of them that had seaports.
It usually takes a crisis to get laws like this changed. Puerto Rico is an American territory with American citizens and is in deep trouble. It ranks higher in population of US citizens than 20 of the 50 states (source: US Census Bureau). Not one of those 50 states would tolerate the Jones Act’s doubling its food prices and hampering its gasoline deliveries if that state were hit by a crisis like the one that Puerto Rico is presently enduring.
Let’s get the Jones Act repealed and replaced. Then, when the next hurricane strikes, there won’t be as much needless suffering as the federal process grinds toward a costly temporary waiver.
David R. Kotok
Chairman and Chief Investment Officer
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