What Trade Studies Has Cato Done, Who Was Mr. Stiefel & Who Funds Cato’s Jones Act Attacks?
We are now past the fifth anniversary of the beginning of Cato’s relentless lobbying campaign against the Jones Act. Seems like it was just yesterday that Colin Grabow penned his “The Jones Act: A Burden America Can No Longer Bear” article. However, you would be wrong to think that Grabow, the Research Fellow in the Herbert A. Stiefel Center for Trade Policy Studies at the Cato Institute, has been focused solely on the Jones Act since joining Cato in September 2017. In point of fact, in his first six months he did actually write about other subjects such as sugar. But ever since that landmark article more than five years ago, the only thing Grabow’s written, posted, talked or otherwise communicated about is the Jones Act. You could say he’s found his sweet spot, as every one of the last four hundred links under his name on the Cato website is related to the Jones Act.
So what does the Herbert A. Stiefel Center for Trade Policy Studies actually do? Despite the broadness implied in its name, its only output the last five years has been on the Jones Act. And even there, it’s not about studies, as Grabow’s modus operandi is to cherry-pick and trumpet selected work of others and articles in his daily attacks on the Jones Act. His favorite way to communicate is the social media platform formerly known as Twitter, where a previous analysis over several months showed that he averaged 12 posts per day. All related to the Jones Act. Who would have ever thought that “research” involves so many tweets of up to 128 characters?
While Grabow’s title at Cato is Research Fellow, what he does can hardly be referred to as the systematic investigation into and study of materials and sources in order to establish facts and reach new conclusions. His work is totally devoid of the primary research typically associated with think tanks. Grabow’s activities are more consistent with those of a public relations professional. He bangs the anvil with a proliferation that the best of flacks would admire. From a communications standpoint, Grabow is like a Three-card Monte maestro who is constantly shuffling selected talking points so fast that the real facts always manage to be hidden in everything he presents.
The anatomy of this dubious research effort is in part highlighted by the entity name, the Herbert A. Stiefel Center for Trade Policy Studies. It is certainly not plural, as it exclusively involves the Jones Act, and along with that it does not technically even involve trade. The Cambridge English dictionary defines trade as “the activity of buying and selling, or exchanging, goods and/or services between people or countries.” In its most common usage, trade always involves the international exchange of goods. The Jones Act just involves domestic commerce. It has always been clear where Cato stood on the policy, or more accurately the law, of the Jones Act. Based on meanings of words in the dictionary, a better entity name would be the Herbert A. Stiefel Center for Domestic Commerce Study.
So whom was this center named after? What’s interesting is that there is a Jones Act linkage here also. Herbert A. Stiefel was CEO of Stiefel Laboratories, Inc., the world’s largest independent pharmaceutical specializing in dermatology. He had a 62-year career at the company and grew it to include major international operations outside of the U.S. As Mr. Stiefel was building it, he lived and worked in Puerto Rico, the United Kingdom and Singapore. He died in 2006 at the age of 79. At that time, the privately owned company employed more than 3,000 people across 30 countries. GlaxoSmithKline acquired Stiefel Laboratories in 2009 for $2.9 billion.
Puerto Rico was a favorite place for pharmaceutical companies to base their manufacturing operations as it allowed them to take advantage of Section 936 of the tax code. Profits from manufacturing operations in Puerto Rico were effectively tax-free as long as the funds remained on the island. The largest beneficiaries of Section 936 were pharmaceutical and software companies. Based on the significant cost to the treasury and the relatively small incremental employment linked to Section 936, Congress voted in 1996 to begin a phase out that was complete in 2006. This was driven by a congressional study that determined that each job created in Puerto Rico by Section 936 resulted in a cost to the treasury of $700,000 per year.
As a resident in Puerto Rico for many years, Mr. Stiefel would have been familiar with the Jones Act. He may have even had a negative view of it, as the Jones Act is a favorite scapegoat due to exaggerated cost estimates and a constant stream of misinformation from businesses and politicians to all island residents. Mr. Stiefel may never have reflected on the fact that the Jones Act provided consistent and reliable service that brought in his raw materials from the mainland at a container shipping cost that was less than most other Caribbean destinations. He most likely did not credit the Jones Act as being the reason for the northbound rates back to the mainland being less expensive than any inbound freight rate to the U.S. The Jones Act resulted in extraordinarily low rates to ship Stiefel Laboratories finished products back to the mainland.
The raw materials to make Stiefel Laboratories products as well as the finished goods moving back to the mainland moved via Jones Act vessels. Given that the business was sold for $2.9 billion, it’s hard to make a case that the Jones Act hurt Mr. Stiefel or his family. Indeed, both the Jones Act and Section 936 contributed to the ultimate value the family would receive from selling the company. Despite this fact, that does not mean there was not latent negative views about the Jones Act. With a small portion of the wealth from the sale used to establish the Herbert A. Stiefel Center for Trade Policy Studies, its easy to see that it may have come with a codicil to not go easy on the Jones Act. In that sense, this initial act would be analogous to what Cato has done the past five years, ie, ignore the facts and push the misinformation. On the other hand, perhaps it was initially provided to focus on the benefits that accrue from engaging worldwide trade, of which Stiefel Laboratories was a great example, and Cato hijacked that purpose when it realized a narrower approach would generate a new income stream.
In terms of ongoing funding to perpetuate Grabow’s consistent and persistent attacks on the Jones Act, Cato’s annual reports breaking down where contributions come from give insight. The segment to focus on is corporate contributions. The reason for that is because there is no natural reason for a corporation to give to a think tank. Look at another way, when a corporation contributes to a think tank, it does so because it fits with their agenda. My assessment from analyzing the level and trend of the actual data is that certain corporations that would benefit from a change in the Jones Act fund Cato and Grabow’s efforts.
Cato’s latest annual report for the fiscal year 2023 ending 3/21/23 shows that corporate contributions were at a record. For that year, the $1,688,000 given by corporations was equivalent to 2.96% of total contributions. In contrast, six years ago during fiscal year 2017, corporate contributions were $441,000 or 1.15% of total contributions. A broader review of the actual data during the period Grabow has been at Cato is also instructive. For the last five fiscal years, Cato’s annual corporate contributions have averaged $1.151,000 or $685,000 more than the $466,000 for the prior two years. The variance is more than sufficient to fund the direct cost of the anti-Jones Act efforts while leaving a net benefit for Cato itself. Below is a chart showing the actual corporate contributions in each of the last seven years.
The same actual contribution data is shown in the chart below based on corporate contributions as a percent of total contributions over the last seven fiscal years. Those corporate contributions over the five years coinciding with Grabow being at Cato have averaged 2.70% of total contributions, well above the 1.23% average for the prior two years.
Comparing the period that broadly aligns with Grabow as a Cato employee who works exclusively on the Jones Act to the prior years, the absolute contributions are up by a factor of 3.83 times and the relative contributions are up by a factor of 2.57 times.
Of course, one way a corporation could justify giving money to a think tank would be if that think tank in effect promoted positions that were seen as in the best interest of the corporation. Such efforts are typically accomplished through hiring public relations or lobbying firms, but attempting to achieve the same thing with contributions to a think tank has its benefits. Top of the list is that with the implied independence and research focus most assume with a think tank, what they write and say will be given more credibility than the same thing from a public relations or lobbying firm.
Better than an occasional such communication would be a constant effort where what a particular person put out was exclusively focused on the issue that would benefit the corporation. That is precisely what I believe has been going on for more than five years with Cato’s efforts related to the Jones Act. No doubt there is lots of rationalizations on each side to say it doesn’t reduce down to that, with Cato thinking it was against the Jones Act before getting such corporate contributions and the corporation thinking we are supporting a think tank that shares our views. But whatever is the chicken and whatever is the egg, it simply reduces down to a think tank selling part of its soul to act just like a lobbyist.
In addition to its own efforts, Cato has been successful in developing an echo chamber of other organizations to promote what it pumps out daily. My October 2021 article went into an example of how Forbes was co-opted while also identifying two corporations that I believe are actively supporting Cato. If any corporations contributing to Cato specifically because of its Jones Act lobbying are foreign controlled, such an approach has further benefits. That is because of laws precluding foreign lobbying in the U.S. Along those lines, a smaller think tank that has become a favorite echo chamber to repeat Cato claims has sponsored Jones Act forums that start with a disclaimer that no attempt is being made to change laws. They then proceed to do just that, as any change in the Jones Act requires an act of Congress.
I’ve written a number of articles that specifically address the ridiculous and unsupportable claims made by Cato on the Jones Act over the years. My appreciation for math and knowledge of the actual facts often compels me to counter the piffle that comes out from Cato on the Jones Act when I come across it. Yes, the Jones Act does increase costs. With U.S. wage levels several times that of the rest of the world, how could it not be? The same laws, regulations and labor practices that comprise our economic system also affect this domestic industry. However, in container shipping involving the U.S., the large majority of costs are unaffected by the Jones Act. When you go through the numbers, the overall cost difference would be in the 15–20% range. That bears no relationship to the 5 times to 50 times multiples Cato has been known to push. Why does Cato believe that U.S. laws, regulations and labor practices should not apply to this domestic industry? And why does Cato consistently ignore the clear national security aspects that also need to be factored in on any discussion of the Jones Act?
Suffice to say the material inaccuracies and the constant misinformation and dis-information underscore that something different is going on with Cato’s efforts in this area. Real think tanks just would not address any topic the way that Cato consistently and inaccurately addresses the Jones Act. My May 2023 article addressed some of Cato’s latest nonsense and it also includes links to several earlier articles.
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 was alive today and saw the balderdash Cato pumps out daily in its lobbying campaign against the Jones Act, he would ask Cato not to use that quote today. The nonsense that they put out on the Jones Act that masquerades as “research” should embarrass the real researchers at Cato Institute.
John D. McCown is a shipping expert with over four decades of operating and investing experience, primarily in the container shipping sector. That experience includes CEO of a U.S. flag container shipping company he co-founded and managing worldwide transport investments at a $20 billion hedge fund. He currently advises lectures and writes about maritime issues that interest him. Mr. McCown worked on a daily basis for more than 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.
