The Jones Act: A Hidden Cost to Farmers

Do you know about The Jones Act? You should. It has a profoundly negative impact on your farming business.

The Cato Institute recently published Policy Analysis No. 845 The Jones Act: A Burden America can no longer bear. It is the latest in a long list of studies on a little-known federal law known as The Jones Act, a federal law that requires goods shipped between U.S. ports to be transported on ships that are built, owned, and operated by United States citizens or permanent residents.

I became interested in the Act when a client of mine said it cost over $3,000 to ship a container of soybean meal on a boat to the East Coast and it only cost him approximately $1,700 to ship the same container to Japan. The difference in price is caused by the Jones Act which restricts water transportation of cargo between U.S. ports and must be on U.S.- owned, U.S.-crewed, U.S.-registered, and U.S.-built ships.

Outdated law from First World War

The Jones Act passed after the end of the First World War. During the war the U.S. had to depend on foreign-flag vessels to move troops which some said created a weakness in U.S. national security.

U.S. Senator Wesley Jones from Washington State served as Chairman of the Senate Commerce Committee and introduced the bill that today requires moving product from U.S. port to U.S. port be on 75% U.S.-owned and 75% crewed by Americans. Furthermore, the components of the hull and superstructure must be fabricated domestically.

Sen. Jones claimed opponents of his legislation were more concerned about helping foreigners than helping American interests. Sen. Jones wanted to strengthen national security and create a strong shipbuilding industry. The Act created neither.

The Jones Act restricts foreign vessels from transporting cargo between two U.S. ports. According to the Cato report, the “…United States is the third-most restrictive among all 38 countries and the most restrictive among OECD [Organization for Economic Cooperation and Development] countries with respect to maritime freight services.”

This hurts agriculture

The movement of agricultural products has been greatly distorted by the Jones Act. For example, North Carolina and Southeastern farmers find it cheaper to import grains from other countries rather than from the American Midwest. The Mercatus Institute states “Puerto Rico farmers and cattle ranchers have imported feed grain and crop fertilizers from Canada rather than buying from New Jersey because products shipped from New Jersey to Puerto Rico were subject to higher Jones Act freight rates.”

North Carolina hog farmers are also importing soybeans and soybean meal from Brazil because Jones Act restrictions have made it more profitable to import from Brazil and Argentina than from our farms in the Midwest.

Even though the U.S. is the largest producer and second largest exporter of soybeans, parts of the U.S. find the Jones Act transport costs too high and use foreign flagged vessels to import into Wilmington, NC and Norfolk, VA. The Cato claims, “Grain and soybean farmers in the Midwest, for example, must make due with only two dry bulk ocean-going Jones Act vessels to transport their commodities.”

As we know, there are small rate differences between the costs of commodity prices on soybeans, for example, but choosing between a Jones Act carrier and a foreign carrier is not a hard choice. In fact, Jones Act transportation costs are so high that Hawaiian cattlemen have been forced to ship their cattle to Canada before sending them on to the U.S. for slaughter or on some occasions it is less expensive to “fly” their cows to the United States rather than use a Jones Act vessel.

Another example described by the Cato study involves rock salt. In the winter, Cato claims, “Maryland and Virginia, for example, obtain the product for wintertime use from distant Chile instead of domestically, despite the United States being the world’s largest producer of that commodity.”

It is time to repeal this law which impacts agriculture substantially. This will be difficult because of a 100-year accumulation of special interests, regulators and politicians seeking to benefit themselves and not the American farmer or consumer.

A version of this commentary was originally published in the July 2, 2019 issue of Farm Futures.

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Increasing Defense Contracts Good News for Virginia Economy

Virginia firms handled more defense contracts than any other state except California in the most recent fiscal year.

The $37.4 billion performed in Virginia during the fiscal year that ended Sept. 30, 2018, makes up 4.6% of the state’s gross domestic product compared with 1.7% in the nation.

These Department of Defense contracts provided jobs for an estimated 139,483 workers in the state.

But by using a multiplier effect, employment rose to 224,797, or 5.8% of the state’s workers. The multiplier is an economic estimate to reflect suppliers to defense contractors and local establishments where households who work at these firms spend their income.

Defense contracts performed in the state have been rising since fiscal year 2016 when the contracts totaled $33.8 billion.

That’s good news for the state economy, but such a high dependence is bad news during defense cuts or economic downturns.

Defense Department contracts in Virginia are still 13.2% from the peak of $43.1 billion in contracts performed in the state during the fiscal year that ended in September 2012. That fiscal year also was when Virginia received more Defense Department contract spending for work performed than any other state.

During fiscal year 2013, contracts fell by $3.8 billion and employment stalled in the state, growing only 0.7% compared to 1.6% growth in the nation.

In light of the state’s dependence on defense contracts, the Department of Defense’s Office of Economic Adjustment awarded Virginia a grant in 2012 to create a tool that gave the state and localities an understanding of the regions and industries that would be adversely affected by cuts in defense spending.

The tool was created to allow users to estimate the impact of reductions in DOD spending on localities so that mitigating strategies could be employed. The tool can be accessed at http://dod-va.chmuraecon.com.

Many of the employees who work on defense contracts work in professional, scientific and technical services firms and possess computer-related skills.

In fact, the Northern Virginia portion of the Washington metropolitan area performed $23.1 billion in these contracts in the most recent fiscal year, the most of any region in the state.

Sixty-five percent of these contracts were in professional, scientific, and technical services firms. Professional services and consulting giant Booz Allen Hamilton had $1.4 billion in contracts, followed by Northrop Grumman Systems Corp. at $1 billion and Leidos Holdings (formerly Science Applications International Corp.) at $881 million.

The Virginia portion of the Hampton Roads metro area received $11.4 billion in contracts — the second-largest amount of contract spending for work performed in fiscal year 2018. As one might expect, shipbuilding firms received a large amount in contracts ($6.0 billion) with Huntington Ingalls Industries performing $4.9 billion of contracts last fiscal year.

Firms in the Richmond metro area performed $938.3 million in defense contracts during the last fiscal year, which represents 0.3% of gross domestic product. Almost 7,500 people, or 1.2% of all workers in the region, are dependent on defense contracts when including the multiplier effect.

Looking ahead, President Donald Trump’s budget calls for a 9.6% increase in defense spending from the current fiscal year through the fiscal year that will end Sept. 30, 2024.

That bodes well for Defense Department contractors in the state, where we forecast contracts to rise 10.1% from the 2018 fiscal year to the 2020 fiscal year.

A version of this commentary originally appeared in the July 7 issue of The Richmond Times-Dispatch.

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Virginia Loves Data Centers More Than Chip Makers

Virginia’s Joint Legislative Audit and Review Commission, in its latest analysis of Virginia’s economic development incentives, reports that efforts to capture and nurture microchip manufacturing with grants and tax breaks led to some early success that failed to hold, and the industry here is in decline. The reason may be Virginia loves data centers more.

The 127-page report issued June 17 (here) touches on a number of programs and is similar to a December report in its faint praise for their success. It does point to the rapid growth of Virginia’s data center industry and ties that to exemptions from sales taxes required on their equipment, a result that generated substantial news coverage.

The reports are written by staff, working with the Weldon Cooper Center for Public Service for economic analysis, but once adopted by the panel itself must be viewed as legislative policy. They reflect long-standing skepticism toward “spending” on these incentives, and if accepted as gospel by the rest of the Assembly the whole effort might be in jeopardy. The verb “spending” is used uniformly and applied to both grants and tax reductions alike.

Manufacturing is a key part of Virginia’s economy. The jobs pay well, factories need complex supply chains that also generate jobs and taxes, and local governments suck property tax dollars out of their manufacturing operations like vampires. It is unfortunate that this report mingled manufacturing issues with the data centers, which are a service industry with low employment and minimal supply chains. The data center information grabbed the headlines and the manufacturing sections have been ignored.

This June report also looks at two tax provisions important to manufacturing across the board, the single sales factor apportionment option and the property tax exemption for pollution control equipment. And it looks in depth at how Virginia’s effort to attract semiconductor manufacturing has sputtered, despite various state incentives. This column focuses on that industry’s incentives.

One useful observation that comes from reading the data center analysis and the information on the microchip industry in sequence. The data center exemption focuses on the capital cost of building the facility and filling it with equipment. The semiconductor industry didn’t get that. Should that become the model for manufacturing incentives across the board? (Translation: The machinery and tools tax and other business property taxes are a problem Virginia needs to address.)

A second useful observation: Virginia tried much harder with the data centers, allowing $420 million in tax avoidance over eight years. The grants and tax breaks combined for the chip producers totaled $36 million for the same period, and the income tax breaks under enjoyed by those who took the single-sales factor option totaled only $70 million. Virginia loves data centers more.

Virginia approved $195 million in incentives for five chip manufacturing facilities but paid out only $93.4 million between 1996 and 2017 (most of it before 2010). That sector’s employment in the state has declined precipitously since 2001, at about twice the rate of decline as the nation as a whole has seen. The international competition is winning overall, but other states are also beating out Virginia for remaining domestic production. Production in Virginia continues at Micron and Qimonda.

This was all as of 2017. The report intentionally ignores the planned expansion of Micron in Prince William County fueled by another $70 million grant approval, since it is too soon to know how that works out. Looking at the past, the JLARC staff (well, actually Weldon Cooper under contract) reported that the help given to Micron had more impact than the grants awarded to the other major Virginia entity, Qimonda.

“The return in revenue from both custom grants is also moderate, with Micron again yielding a higher return. The return in revenue for every $1 spent on the Micron custom grants was 97¢ annually, on average, and the return in revenue for the Qimonda custom grants was 49¢. These returns in revenue are similar to the returns (55¢) for all grants collectively per $1 dollar in total grant spending. (See Economic Incentive Grants 2018, JLARC, 2018.)”

We’ve been here before. That 2018 report cited sparked this from me on Bacon’s Rebellion. The result is all about the assumptions, buried in the appendixes of that December report (linked here). Here is a key paragraph from my report when it came out:

“In analyzing the payback on the grants and tax incentives, Weldon Cooper has added another factor seldom mentioned: It estimated and accounted for “reduction in economic activity because of the tax increase to pay for the sales and use tax exemptions (or grants).” This is the kind of dynamic scoring of opportunity cost that is rarely used by the state. In fact, not everybody on the state payroll is willing to admit that raising or lowering taxes has an inverse impact on employment and gross domestic product.”

In the December 2018 report, Weldon Cooper assumed that some economic decisions were due only 10 percent to the incentives, and 90 percent to other factors. In the case of the data centers, however, that was flipped, and the incentives given 90 percent credit for bring them to Virginia. The assumptions matter.

The money paid to Micron and Qimonda has been in form of post-performance grants, tied to job creation and capital investment. For Weldon Cooper and JLARC to treat that as “spending” is legitimate. It is not clear in this report if the 97 cents of revenue it claims the state and localities have received is the combined benefit from each $1 in grants, or an annual return on that $1. If annual and recurring, that is a fantastic return by anybody’s standards.

The report also looks at two tax exemptions tied to that industry, which combined produced less than $9 million in tax savings over eight years. Teasing out the impact of those versus the grant programs can’t have been easy, but JLARC credits them with creating 43 additional jobs, $7 million in state GDP and $4.3 million in annual personal income ($100,000 per job.)

Here’s an ominous note buried in the report on these provisions, perhaps a sign of things to come. “One factor likely limiting the economic benefits of the sales tax exemptions for semiconductors is that, unlike the data center exemption and many incentive grants, eligibility is not contingent on the companies achieving certain levels of job creation and capital investment.” That is classic planned economy apparatchik thinking: We need to add more mandates.

Everybody interested in the state’s economic development incentives and related tax policy needs to dig into this report and the assumptions behind the scorecard. If this is how a Republican-dominated JLARC views things, wait until the other team has its hands on the reins.


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Reparations Not the Answer

Editor’s note: Coleman Hughes, a columnist at the online magazine Quillette, delivered the following testimony at a United States House Judiciary subcommittee hearing on Bill H.R. 40 on June 21, 2019. If passed, the bill would establish a commission for reparations.

While his testimony is not specific to Virginia, this is a state that once held as many as a half-million slaves, a legacy that hangs over public policy discussions to this day. Mr. Coleman’s testimony is, we think, an important contribution to those discussions.

Thank you Chairman Cohen, ranking member Johnson, and members of the committee. It’s an honor to testify on a topic as important as this one.

Nothing I’m about to say is meant to minimize the horror and brutality of slavery and Jim Crow. Racism is a bloody stain on this country’s history, and I consider our failure to pay reparations directly to freed slaves after the Civil War to be one of the greatest injustices ever perpetrated by the U.S. government.

But I worry that our desire to fix the past compromises our ability to fix the present. Think about what we’re doing today. We’re spending our time debating a bill that mentions slavery 25 times but incarceration only once, in an era with zero black slaves but nearly a million black prisoners—a bill that doesn’t mention homicide once, at a time when the Center for Disease Control reports homicide as the number one cause of death for young black men. I’m not saying that acknowledging history doesn’t matter. It does. I’m saying there’s a difference between acknowledging history and allowing history to distract us from the problems we face today.

In 2008, the House of Representatives formally apologized for slavery and Jim Crow. In 2009, the Senate did the same. Black people don’t need another apology. We need safer neighborhoods and better schools. We need a less punitive criminal justice system. We need affordable health care. And none of these things can be achieved through reparations for slavery.

Nearly everyone close to me told me not to testify today. They said that even though I’ve only ever voted for Democrats, I’d be perceived as a Republican—and therefore hated by half the country. Others told me that distancing myself from Republicans would end up angering the other half of the country. And the sad truth is that they were both right. That’s how suspicious we’ve become of one another. That’s how divided we are as a nation.

If we were to pay reparations today, we would only divide the country further, making it harder to build the political coalitions required to solve the problems facing black people today; we would insult many black Americans by putting a price on the suffering of their ancestors; and we would turn the relationship between black Americans and white Americans from a coalition into a transaction—from a union between citizens into a lawsuit between plaintiffs and defendants.

What we should do is pay reparations to black Americans who actually grew up under Jim Crow and were directly harmed by second-class citizenship—people like my Grandparents.

But paying reparations to all descendants of slaves is a mistake. Take me for example. I was born three decades after Jim Crow ended into a privileged household in the suburbs. I attend an Ivy League school. Yet I’m also descended from slaves who worked on Thomas Jefferson’s Monticello plantation. So reparations for slavery would allocate federal resources to me but not to an American with the wrong ancestry—even if that person is living paycheck to paycheck and working multiple jobs to support a family. You might call that justice. I call it justice for the dead at the price of justice for the living.

I understand that reparations are about what people are owed, regardless of how well they’re doing. But the people who were owed for slavery are no longer here, and we’re not entitled to collect on their debts. Reparations, by definition, are only given to victims. So the moment you give me reparations, you’ve made me into a victim without my consent. Not just that: you’ve made one-third of black Americans—who consistently poll against reparations—into victims without their consent, and black Americans have fought too long for the right to define themselves to be spoken for in such a condescending manner.

The question is not what America owes me by virtue of my ancestry; the question is what all Americans owe each other by virtue of being citizens of the same nation. And the obligation of citizenship is not transactional. It’s not contingent on ancestry, it never expires, and it can’t be paid off. For all these reasons bill H.R. 40 is a moral and political mistake. Thank you.

Coleman Hughes is a Quillette columnist and an undergraduate philosophy major at Columbia University. His writing has also appeared in the New York Times, Wall Street Journal, Spectator, City Journal, and the Heterodox Academy blog. You can follow him on Twitter @coldxman

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As Arlington Housing Prices Soar, Supply is Unresponsive

The worst fears of Amazon critics are coming true. Housing prices are becoming increasingly unaffordable — even before Amazon sets up shop at its HQ2 facility in Arlington and floods the region with 25,000 employees.

The average home price in Arlington County jumped 7% in the past year to $713,000, as investors poured into the market in anticipation of Amazon’s arrival, reports the Washington Post. Inventories are so sparse that some popular Zip codes in Arlington and Alexandria show no homes for sale at all.

Alexandria saw a comparable increase in average home prices, while Fairfax County saw a year-over-year gain of 6%. Said Terry Clower, director of George Mason University’s Center for Regional Analysis: “This is a market response to the Amazon HQ2 announcement, with investors competing with residents for a shrinking number of homes for sale.” 

In a functioning real estate market, prices act as a signal for the allocation of capital. A surge in home prices would be matched by a surge in home building as developers and builders. But, as seen in the table above, based on Arlington County permit statistics, the supply of housing is increasing negligibly. In 2016 the county’s housing stock stood at 111,549 units. According to Arlington County permitting data, the increase in housing units (completions minus demolitions) was only 810 units in 2017 and a negligible 220 units in 2018 — roughly a 1% increase in the housing stock over two years.

What’s going on here? Are developers and home builders insensate to the growing gap between the supply and demand of housing? Or could we be looking at the wrong numbers? After all, it takes time after building permits are issued to actually complete construction of a dwelling. Perhaps there is a flurry of housing construction in the pipeline.

Let’s see. Here are the numbers for housing “starts” and “approvals” for the past two years.

There has been a fairly significant increase in the number of housing “starts” — nearly 5,500 units over the past two years. However, those “starts” have not translated into a remotely comparable number of completions. I cannot explain the discrepancy. If the Washington Post wants to dig deeper into the dynamics of Northern Virginia’s housing market, it might seek to understand these statistics.

What does seem reasonably clear, however, is that the number of new residential housing “approvals” was meager in 2017, even weaker in 2018, and came to complete halt in the second half of 2018. What does this mean? Did developers simply submit very few proposals in 2018? Was the zoning board hostile to new projects? Is there some other explanation entirely? 

As I have said repeatedly, the phenomenon of sky-rocketing housing prices in Arlington, Alexandria, and Fairfax County is readily understood in terms of supply and demand. Thanks to the region’s dynamic economy, demand is increasing faster than a lagging supply. Indeed, the gap is the greatest in Northern Virginia’s urban core, where demand is strongest. 

For whatever reason, the supply of housing in Arlington County is inelastic — unresponsive to surges in demand. A simplistic explanation would point to the lack of undeveloped land to build upon. But that doesn’t explain why developers are unwilling or unable to recycle land of marginal value (used car lots, aging malls and shopping centers, outdated office parks, long-in-the-tooth neighborhoods of tract housing) into higher density, mixed-use projects of the type that are currently in vogue.

Trying to solve the emerging housing crisis through direct public and private subsidies for low-income households is a fool’s errand. Public authorities can’t possibly build enough workforce housing at $350,000 per unit to make a difference. Arlington, Alexandria and other inside-the-Beltway localities need to increase the supply of housing. If they fail, Arlington will displace the middle class and create armies of homeless like San Francisco and Los Angeles, with all the attendant social ills those cities seem so helpless to solve.

A version of this commentary originally appeared on June 14, 2019 in the online Bacon’s Rebellion.

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