The previously obscure law not only slowed delivery of relief supplies to Puerto Rico—it represents a whole category of ‘rent-seeking’ policies that redistribute income upwards.
In the midst of almost unimaginable horror in Puerto Rico, a bright light has shone on one of America’s most unjustifiable and economically backward laws, the previously obscure Jones Act. First created in the aftermath of World War I to buffer the impact of post-war demobilization, the Jones Act requires that all ships that carry cargo within the United States be built in America, with American crews.
The cost to American consumers each year runs in the billions of dollars, with particularly large impacts on places like Hawaii and Puerto Rico that (unlike the mainland) depend almost exclusively on shipping for everything from food to fuel. What in normal times just increased prices on essential goods—bad enough for the poorest island-based Americans—has turned tragic.
The Jones Act is now approaching its centennial. Despite the huge cost to consumers and the puny size of the American ship-building industry—U.S. ships carry only 2 percent of global cargo—the law has proven all but politically bullet-proof. But what the law’s beneficiaries lack in numbers, they make up for in geographic concentration (in and around a few major ports), and the doggedness of their lobbying. In the American political system, these are powerful sources of influence, especially when playing defense in institutions with multiple veto points.
As bad as the Jones Act is, it is just the tip of the iceberg of an oft-neglected form of American economic regulation. When Republicans and their business allies complain about excessive regulation, what they are mainly talking about are laws to protect the environment, workers, and public health. Businesses press for “regulatory relief” from these broad-based laws, and Republican administrations usually at least try to provide it. Conversely, Democrats and their environmental and labor allies defend these forms of regulation as essential to correct basic market failures, or to rectify the imbalance in market power between labor and capital. Economists are typically divided on these sorts of issues, with a large chunk of the profession, though by no means all, agreeing that the overall weight of this sort of regulation is a problem.
But that is not the only face of American regulation. The other face—the one we see most vividly today in the Jones Act—is what in our new book, The Captured Economy, we call “regressive regulation.” Such regulation is a subset of what economists describe as “rent-seeking,” or the pursuit of extra profits through the political process. Most rent-seeking, like the Jones Act, is characterized by what the economist Mancur Olson diagnosed as concentrated benefits and diffuse costs. That is, the people who benefit from the regulation have big economic stakes on the line, while those who pay the costs may not even notice the effect on their individual well-being. This is true even though those costs may add up, across the whole economy, to billions of dollars, well in excess of what the beneficiaries take home.
In our book, we focus on a particularly damaging form of rent-seeking, in which concentrated interests redistribute from the relatively disadvantaged to the relatively wealthy. This sort of regulation does not just misallocate resources, generating economic inefficiency and hampering the introduction of valuable innovations. It also exacerbates the trends in the economy that are skewing the distribution of income in favor of a lucky few at the top.
Examples of this sort of regulation abound. Excessive protections for patents and copyrights create a legal minefield for innovators while padding the profits of Hollywood, Silicon Valley, and Big Pharma. Occupational licensing squelches opportunities for the less skilled while jacking up incomes for high-end professionals. And increasingly restrictive controls over land use, especially in the big coastal cities, create huge windfalls for existing homeowners even as they reduce geographic—and therefore social—mobility.
The interesting feature of this second face of American regulation—much of it at the state and local level—is that the politics are usually quite different from business’s pleas for regulatory relief. While economists are on both sides of issues like the proper level of environmental regulation, they are virtually unanimous on the baleful effects of rent-seeking—especially when its beneficiaries are the already advantaged. That means that the justifications for policies like this—such as the claims by Jones Act advocates that it is an effective tool for protecting American jobs—are easily exploded when they are forced into the public eye. You will find very few disinterested experts—in other words, people not in the pay of concentrated interests—willing to defend these schemes.
The partisan politics of this kind of regulation are also very different. When regulation pits unions against owners, Democrats and Republicans instinctually know into which corner to retreat. But when regulation redistributes from consumers (especially relatively poor consumers) to well-connected businesses, coalitions can get shifted around. Democrats concerned about inequality, and Republicans who believe in free markets, can find themselves on the same side. That was the sort of coalition that brought down protective regulation of the trucking and airline industries in the 1970s, with strange-bedfellows coalitions of Ted Kennedy and Ralph Nader paired with the most conservative free-market Republicans.
That sort of politics has been relatively thin on the ground of late, in large part because increasing party discipline in Congress (and to a degree, in state legislatures) has made it hard to get issues on the agenda that split the parties. When Republicans are in office they want to put issues on the agenda—like regulatory relief—that hold their caucus together, as do Democrats when they are in control.
But that era may be coming to a close. Regressive regulation has always been at least somewhat vulnerable to events, like the hurricane in the Caribbean, that make its costs especially vivid and force the issue onto the public agenda. But we may be approaching a new period in politics, in which the factional conflict in each of the parties makes it harder for party leaders to insist on iron-clad control of what issues legislatures handle. Strange-bedfellows coalitions of egalitarian Democrats and libertarian Republicans may come back into fashion, as legislators insist that their leaders allow them to reach across the aisle to hack away at occupational licensing, excessive intellectual property protection, constraints on development, and a myriad of other forms of regulatory upward redistribution.
The outrage over the Jones Act, in short, may be just the beginning. We could be approaching a new period in American politics in which regressive regulation, long hidden in the shadows of hyper-partisanship, may now be newly vulnerable.