Cato’s Latest Nonsense On The Jones Act
When Cato Institute manages to place a Jones Act article in the mainstream press, it’s generally replete with material inaccuracies and out of context cherry picking. The recent article in The Atlantic (“The Obscure Maritime Law That Ruins Your Commute”, March 20, 2023) by Cato VP Scott Lincicome is one such example. I’ll address the noteworthy errors and misleading comments in the order in which they appear.
The “First, let me put direct costs into perspective” includes both deception and Cato’s favorite Three-card Monte misdirection of focusing solely on the build cost multiple. First, they exaggerate that multiple by calling it 5x when actual comparables have it 3x for tankers and 4x for container ships. They previously liked to broadcast a 6–8x multiple until the source they referenced told them to stop, as it was inaccurate and misleading. Second and more importantly, in using build cost multiples, Cato wants folks to think the customer impact is the same multiple. Crewing costs is a lower multiple. Most particularly, fuel and other ship related costs as well as all port costs and other costs on land are the same whether you’re Jones Act or foreign. In the case of container shipping, the large majority of carrier costs actually have nothing to do with the ship. When you go through the numbers, the total difference in an objective comparison for container shipping would be in the 15–20% range. In effect banging the anvil with the 5x cost multiple, their estimated differential is off by a factor of 25 to 33 on the container sector that dominates the Jones Act. Cato simply doesn’t want the actual facts to get in the way of the narrative they are pushing.
Mr. Lincicome next went on to suggest that without the Jones Act, copious amounts of freight would magically move off the highways. This is a variant of his February 17, 2022 CNBC interview where he blamed major port congestion at the time on the Jones Act. The ignorance he was showing then and now about the cost economics of container shipping is striking. He can not even say he was unaware, as his unsupportable claim was dismantled cost by cost in my detailed March 18, 2022 Medium article that he saw. The summary point in the situations Mr. Lincicome is musing about is that if all the ship related costs were free, the non-ship costs would still be more than the total cost of moving the container by land mode. Perhaps someone can explain to him that an alternative involving much more cost and more time tends to be a hard sell to freight customers.
The focus of The Atlantic article then turned to LNG, the favorite subtopic of another Cato spinner who has spent one hundred percent of his five years at Cato lobbying against the Jones Act. Here again, the apparent ignorance of the relevant cost factors is at play. I say apparent because they clearly know better, but the real facts do not fit with the narrative they are pushing. The LNG marine trade (low cargo value, high vessel cost) translates into shipping distance being the overriding factor in terms of how trade patterns in the segment develop. Because both Boston and Puerto Rico are closer to Trinidad than to the main LNG export terminals in the USGC, it is likely the most efficient source of that commodity for both and that foreign trade is not covered by the Jones Act. It’s understandable that the parties pushing for a waiver see it as improving their economics, probably by getting Trinidad to sharpen its pricing pencil, but that’s hardly a reason to change the Jones Act. My October 4, 2021 Medium article included a detailed analysis of Cato’s LNG sophistry.
Continuing on an environmental thread and blaming the Jones Act for all manner of damage, Mr. Lincicome then said that not meeting climate change goals would result from not having enough U.S. built turbine installation vessels. He ignores that no contractor has issued an RFP related to these specialized vessels and instead has spent time attempting to circumvent the Jones Act through multiple loopholes. Cato is well aware of my August 3, 2021 Medium article that went into detail on the costs of using a Jones Act turbine installation vessel, concluding that it added 1.4% to the total project cost. At no time has Cato challenged anything in that detailed analysis. I was fortunate enough to attend a well-known eastern business school where I was taught by several brilliant finance professors. I can not recall a single one of them saying that a 1.4% increase in estimated capital costs for a long term project should swing it from being a go forward opportunity to a no go situation.
Towards the end of The Atlantic article, reference was made to an OECD study that indicated that ending the Jones Act would lead to “value added by hundreds of millions of dollars a year.” Presumably this was referring to an April 2019 paper on the impact of shipbuilding subsidies by someone who has now returned to study in college. That paper was addressed in my March 18, 2022 Medium article. The paper suggested in passing that repealing the Jones Act would increase U.S. economic activity by $135 billion per year. Given that amount is more than 30 times total Jones Act revenue and the multiplier effect on basic consumption markets is almost non-existent, that’s quite a whopper. Cato banged the anvil with that one a few times in 2019, but even for them it wasn’t believable. Interesting that its returned here, only deflated by a factor in the hundreds.
If it seems like Cato’s fact-deficient and math-challenged “research” sounds more like marketing and lobbying, that’s because it is. I believe that Cato’s five year public relations crusade against the Jones Act is being directly underwritten by corporations that themselves would be the only beneficiaries of any change. There is a bit of cleverness, one has to admit, on the part of corporations to funnel lobbying dollars through a think tank. Avoids that pesky disclosure related to corporate efforts to change laws. But what the folks at that think tank are doing has nothing to do with research and everything to do with marketing and lobbying.
Interestingly, from the disclosure in Cato’s annual reports, one can see that contributions from corporations went from an average of 1.2% of Cato’s total contributions in the two years prior to their anti-Jones Act efforts to an average of 2.6% in the last four reported years from 2018 to 2021. The average difference of $550,750 per year covers my estimate of their Jones Act campaign costs while leaving something for Cato. Confirmation or coincidence? Methinks the former.
The Nobel Prize-winning economist Milton Friedman is quoted in Cato’s latest annual report saying, “Cato has really been remarkable in maintaining itself as a bastion of principle.” I’m a big admirer of this brilliant economic thinker, but he made that comment decades ago. If he were alive today and knew what I know about the balderdash Cato pumps out daily in its lobbying campaign against the Jones Act, I believe he would retract that quote. We all make mistakes. One of mine was actually contributing money to Cato Institute years ago. I never would have thought that Cato would sell its soul by carrying water for corporations that paid them to do just that. The nonsense that they put out on the Jones Act should embarrass the real researchers at Cato Institute.
John D. McCown has over four decades of operating and investing experience in the container shipping sector. He advises lectures and writes about maritime issues and is involved in developing entrepreneurial opportunities in the space. Mr. McCown worked on a daily basis for twenty years with Malcom McLean, the inventor of container shipping, and holds an MBA from Harvard Business School as well as two maritime related patents.
