There is a lot to learn from the slow and painful post-hurricane recovery that is going on in Puerto Rico right now.
One of Puerto Rico’s biggest problems is that it is by far, one of poorest areas of the United States. The median household income in Puerto Rico is approximately $18,600. The median household income in the United States, by contrast, is around $57,000. As we’ve recently discussed here at mises.org (see here and here) it is generally far more difficult for low-income areas to weather storms, than it is for high income areas. The amount of capital at hand for repair and recovery is less in poor areas, as is the wealth available for constructing high-quality infrastructure.
Repeating this fact to Puerto Ricans, however, does them little good in the short term. So we must explore ways that Puerto Rico could be helped right now in gaining greater access to badly needed goods and services.
One: Repeal the Jones Act
Unbeknownst to many Americans, shipping in the United States exists under the shadow of highly protectionist and archaic regulations passed as part of the Jones Act. The Jones Act was originally passed in 1920 as part of an effort to increase the number of merchant marine vessels produced by the United States. It restricts trade between American ports to vessels built and owned by Americans, and to vessels whose crew is at least three-quarters American. Unfortunately, as Gary Galles notes, the Act “works against its stated goals, and does so at a steep cost.”
The Jones Act drives up the cost of goods and services by restricting shipping options for merchants. As Galles explains, this can be especially damaging in times of natural disasters:
In the aftermath of Hurricanes Katrina and Sandy, Jones Act restrictions were suspended because they hindered emergency responses. In 2014, New Jersey was not allowed to use a foreign ship to bring rock salt from Maine in time to respond to a snowstorm. A Jones Act-eligible ship required far more time and added $700,000 to the cost. And such problems extend beyond emergencies. Maryland imports rock salt from Chile rather than Louisiana, because shipping it all the way from Chile is three times cheaper than Jones Act domestic transportation.
These issues can be especially damaging to places like Puerto Rico and Hawaii. Galles continues:
In 2014, shipping a forty-foot container from Los Angeles to Honolulu reportedly cost more than ten times shipping it to Singapore. Dependent on Jones Act shipped petroleum for three-quarters of its electricity generation, Hawaii’s electricity prices are almost double the next most expensive state.
A 2012 report found that sending a container of household goods from the east coast to Puerto Rico cost more than double that to nearby Santo Domingo. A GAO study found that some Puerto Rico companies had shifted sourcing from America to Canada, due to cost savings from escaping Jones Act restrictions.
The Jones Act’s effects on cutting resources for places like Puerto Rico are so undeniable that the Act was suspended early in September to allow for Puerto Rico to stock up on fuel and other necessities in preparation for the storm. The waiver expired after September 22, however, greatly diminishing the supply of fuel coming into the island.
Even John McCain, rarely quoted as one of the good guys in these pages, has urged the total repeal of the Jones Act, calling it an “archaic and burdensome act.” McCain is right.
Only after substantial pressure did the Trump administration finally relent, and it granted a new waiver on Wednesday.
Total repeal should be next on the agenda, as it’s absurd to wait for a highly destructive hurricane before allowing Puerto Ricans to access goods and services at lower cost.
Two: Declare Puerto Rico a Free Trade Zone
Why stop with just a repeal of the one protectionist measure that is the Jones Act?
Puerto Rico is subject to American customs and trade laws, and thus importing goods and services into the island is limited by tariffs, quotas, and other protectionist measures — thus driving up the costs of goods and services.
Given Puerto Rico’s desperate need for supplies in the wake of Maria, the humane thing to do would be to grant trade autonomy to Puerto Rico allowing it to engage in total unilateral free trade in order to attract merchants from all over the world.
Unilateral free trade, of course, is beneficial always and everywhere. But in the short term, Congress and the administration can begin small and simply declare Puerto Rico to be an open port in which all goods can be imported duty-free. This would end the need to restrict trade and collect tariffs in Puerto Rico to remain in accordance with US law. A look at US customs policies reveal restrictions fall on a variety of highly-useful products in times of emergency including ethyl alcohol, dried milk, and peanuts.
Other disastrous trade restrictions include the Trump administration’s new tariff slapped on lumber earlier this year. The end effect will be to drive up the cost of construction for everyone, but this will be most felt in hurricane-devastated areas.
Needless to say, this policy of open trade would be most effective if both national and territorial officials allow merchants and importers to charge prices without fear of any restrictions on so-called price-gouging. Such restrictions would act to reduce the total amount of goods and services being brought to the island.
Three: Remove Restrictions on Physical Cash
In times of emergency, when the electricity is out, access to physical cash becomes extremely important in facilitating a functional economy. In the wake of Hurricane Maria, ATMs ceased to function and armored car services had difficulty reaching banks. “Demand for cash [in Puerto Rico] is extraordinarily high right now,” a Federal Reserve spokesman noted on Wednesday.
While it is a good thing that the Fed believes it can soon ensure a working amount of cash in the region, the problem would have been largely avoidable were United States banking regulations not so geared toward restricting the use of physical cash.
Prior to a looming natural disaster, of course, it would be wise to take out a significant amount of cash to make sure one can purchase goods and services even when power is out, and banks are closed.
In the US, however, removing even a few thousand dollars from one’s accounts is likely to raise eyebrows and trigger greater surveillance from banking regulators. Technically, it is legal to withdraw cash amounts up to $10,000, but doing so can trigger government charges of “structuring“ in which it is actually illegal to withdraw cash amounts under $10,000 total. In other words, its unclear as to how much cash one can actually withdraw without asking for trouble from federal banking regulators. Nor is this an especially huge amount, especially when power is expected to be out for months in some areas.
Both banks and their customers, however, are repeatedly discouraged from engaging in sizable cash transactions by federal regulators.
A more reasonable government would seek to facilitate the use of physical cash in large amounts, especially in the lead up to natural disasters, so as to ensure residents need not resort to barter and other types of highly-inefficient transactions.
Moreover, in a post-disaster situation, where communities have become more isolated, and access to resources on the mainland becomes limited, residents will become more dependent on short-terms loans, micro loans, and informal loans during the process of rebuilding. In many cases, these loans will be risky. Policymakers could help ensure that cash and capital reaches those who need it most by reducing banking restrictions and regulations on so-called usury, same-day lending, and other types of short-term and emergency loans.
It’s at times like these that the effects of government interventions, intrusions, and regulations come to be felt most. As resources become scarce, and established institutions may not be present or reliable, it becomes all the more important to facilitate a nimble and inventive marketplace in which solutions can be pursued quickly and in an unrestricted manner.
As with all Americans nationwide, Puerto Ricans are subject to trade restrictions, taxes, and other regulations that cripple markets and impact their standard of living. Much of the time, these effects can be better tolerated because an abundance of goods continues to be available — even if made unnecessarily expensive. In the wake of a natural disaster, however, accessing goods and services becomes much more difficult, and it is at times like these that economic freedom is needed most.
