DesaliNation

Protectionism is trickling down from Washington, and leading the charge is Michigan state Senator Rick Jones, yet another economically undereducated Republican.

At present, Michigan buys road salt on a best price basis. However, our legislators are discussing a 6% tariff (note: this was originally 8%, as some of the articles quoted below state) on salt purchased out of state. There seems to be only one company which would benefit from the tariff.

Road salt bid bill could raise prices for Michigan

In 2017, the state awarded nearly $16 million in contracts for 349,265 tons of salt. Detroit Salt Co. was awarded $4.4 million of that, while Compass Minerals was awarded $9.8 million, according to the DTMB. The remainder went to Morton Salt and Cargill.

More purchases are made by local governments, according to Caleb Buhs, a spokesman for the DTMB. State and local governments spent a combined $48.1 million on road salt in 2017…

Detroit Salt has about $20.1 million worth of contracts with Michigan, about one-fifth of the state’s total, according to a House Fiscal Agency analysis.

This Detroit News article is confusing. If $20 million is one-fifth of the state total it adds up to $100 million – more than the $64 million (16+48) the article otherwise suggests. Or is $48 million the total of “State and local government” salt purchases?

The numbers also don’t square with the statement that Detroit Salt has one-fifth of the state contracts AND $4.4 million of $16 million in state contracts – which is more than a quarter. Either we already pay Detroit Salt above market prices, these are multi-year contracts or something else is going on that the article fails to reconcile. In any case, we can derive some reasonable approximations using other sources.

I looked to a state of Michigan Attorney General’s report on the Winter of 2014-2015. Following are some notes from that report:

It was recently reported that public agencies in Michigan use nearly 2 million tons of salt annually to clear snow and ice.8

The contracts expire on August 31, 2016, with two 1-year options, but prices are rebid every spring. The contracts serve MDOT, and approximately 300 local public entities.

According to MDOT, the 2014-2015 winter season average cost of road salt for the state and local road agencies was $65.81 per ton…

Compass [Minerals] was also the only bidder in 2014-2015 in all of the counties in the top half of the Lower Peninsula, including Missaukee County…

The mine is [2014] currently running at full capacity…

Detroit Salt did not have enough inventory to bid on all of the MiDEAL requests.

What does this tell us?

1- The cost of the 2 million tons of salt used in 2014-2015 was approximately $132 million.

2- Contracts are multi-year, but get repriced.

3- Northern counties in the lower peninsula can be glad they had out of state suppliers.

4- In 2014 Detroit Salt was running at capacity and had depleted inventory. Employment couldn’t be increased.

And if you read pages 20 and 21 of that report, you’ll see some of Detroit Salt’s problems were self-inflicted. Notably, their choice of delivery methods.

To preserve some fraction of Detroit Salt jobs, Senator Jones is asking taxpayers for $8 million in taxes. That’s nearly $113,000 per job/per year, assuming all 70 jobs are at risk. It’s likely, though, that we’re not talking about total layoffs, so the cost per job “saved” would be much higher.

The minimum annual $113,000 cost per job also ignores the cost to distributors, private users of road salt, and truckers. Neither does it consider the negative effect on employment in salt related businesses. It doesn’t contemplate the possible deterioration of roads, or increases in accidents due to more parsimonious use of road salt. It doesn’t recognize lost opportunity costs; every extra dollar spent on salt could have gone to fix potholes. Those things are unseen by Senator Jones.

It’s worth noting that Detroit Salt is a subsidiary of the Kissner Group, a Canadian company.

Detroit Salt’s leading competitor, Compass Minerals, is a US company operating a mine in Canada (Goderich, Ontario), while Detroit Salt is a Canadian company operating a mine in the US. So, the only possible point of this tariff is to “save” a few jobs at a single Michigan company outside of Senator Jones’ district. More from Crain’s: Bill seeks to help Detroit Salt gain edge over Canadian firms

The only Michigan company that sells a mined product to the state is Detroit Salt, which employs about 60 people on Sanders Street in southwest Detroit…

Sen. Rick Jones, a Republican from Grand Ledge who sponsored the bill, says the state should do what it can to protect Michigan workers’ jobs. He said he’s not concerned that the state might grant an incentive to a company with Canadian ownership, in part to offset competition by other Canadian suppliers.

“You call it a Canadian company,” Jones said. “I call it Americans, Michiganders, working here in the state of Michigan, and we need to support them and not workers somewhere else. If it is based here and providing 60 to 80 jobs to people here in Michigan, I consider it a Michigan company.”

I call it a subsidy to the Kissner Group.

Purchases of salt mined in Ohio would also be affected. Ohio already has tariffs on salt similar to the Michigan proposal, but they don’t apply them to Michigan. Senator Jones’ bill would apply our tariff to Ohio. I wonder how long Ohio will continue Michigan’s exemption?

One would have expected this to be a violation of the Commerce Clause in either case. Apparently, “an exception to the U.S. Constitution’s commerce clause applies to states if state government is acting as a participant in the market and not a regulator.” This is semantic gymnastics. It’s regulation by price-fixing.

All this central planning seems to be at cross purposes, with taxpayers caught in the middle by politicians pandering to populist economic ignorance. It’s just too complicated for them to pick winners and losers. One reason for the lower price for Canadian salt is said to be the $CDN/$US exchange rate: Something our president complains is an economic weapon in China’s hands. Simultaneously, he is doing his best to weaken the Canadian dollar by threatening to blow up NAFTA. Meanwhile, Rick Jones is clueless about anything except buying votes with your money.

Squandered

A very short history of US steel making after WWII.

How the U.S. Squandered Its Steel Superiority

In the early 50’s the Europeans were rebuilding their steel industry with new technology:

“The cost of building steel mills using the basic-oxygen furnaces was 40 to 50 percent lower than conventional open-hearth factories; operating costs were 25 percent lower, though some studies suggested even greater cost savings.

But it was the productivity gains associated with the new process that should have really raised eyebrows. One factory that made the shift could produce 40 tons of steel per hour using the open-hearth process, but after installing basic-oxygen equipment, it managed to quadruple that figure.

Unfortunately, Big Steel was too proud to notice Europe gaining ground. In a typical advertisement from the era, U.S. Steel claimed it was a company “where the big idea is innovation.” But this claim — much like so many of the braggadocios claims of today — could not hide a more disturbing reality.

Indeed, throughout the 1950s, as Europe’s steelmakers built new factories around the basic-oxygen process and simultaneously demolished its remaining open-hearth furnaces, Big Steel made endless excuses. Representatives of the Big Three — Bethlehem, U.S. Steel, and Republic — repeatedly claimed that the jury was out on the new method, all evidence to the contrary.”

And by the 60’s little mammals were nipping at the heels of the Big Steel dinosaurs. It’s quite ironic that one of the biggest corporatists now whining for protection is Nucor, whose success was profiled by Clayton Christensen in Innovator’s Dilemma (2011).

Nucor and others started out making re-bar, which is easy. Bethlehem, U.S. Steel, and Republic saw no money in re-bar, and let Nucor have the business. The upstarts climbed the market chain by recycling scrap steel (with “mini-mills,” which don’t use blast furnaces), and eventually achieved continuous strip steel casting; the high margin product. They ate Big Steel’s lunch.

“But there’s a final twist to this tale that highlights the absurdity of Trump’s strategy. In the 1960s, a man named Ken Iverson took over a conglomerate that acquired a stake in the steel business that became Nucor. Iverson then bet the firm’s future on making steel using the electric arc process, building the first American facility in 1969. It began growing at an exponential rate, competing rather effectively with foreign producers, to say nothing of other American producers.

As other steel producers begged for protectionist trade policy, Iverson mocked the idea. In an interview in 1986, Iverson noted that protectionist measures already instituted hadn’t had the desired effect. “As soon as prices began to rise so that the steel companies began to be profitable, they stopped modernizing,” he said. “It’s only under intense competitive pressure — both internally from the mini-mills, and externally from the Japanese and the Koreans — that the big steel companies have been forced to modernize.””

Nucor is now the largest US steel maker. They used to understand the definitions of innovation, capitalism and competition.

Lack of innovation and unwillingness to compete – sustained by protectionism – is what toppled the big guys from overwhelming superiority. Maybe if Reagan hadn’t ordered “voluntary restraint agreements” in 1984 to reduce steel imports, and Dubya hadn’t put steel tariffs in place in 2002, US steel companies would by now have had an epiphany.

Trump’s tax increases

Tariffs are alleged to benefit the US at the expense of foreigners. In fact, they benefit a small coterie of businesses at the expense of everyone else.

The increased cost of houses due to the President’s lumber tariffs doesn’t just mean fewer houses being sold, it also means those who do buy houses have less money to spend on furnishings, or a new automobile. It doesn’t just mean fewer jobs in construction, it means fewer jobs building couches and cars.

The economic argument for tariffs is, therefore, nonsense. Tariffs neither increase US overall employment, nor raise US wages.

But, the President says, for steel it’s not economics, “It’s a national security issue!” Really? While it’s true the US steel and aluminum industries will benefit from forcing consumers to pay more to steel companies and to aluminum producers, the makers of tanks, airplanes and munitions will experience higher costs. How, exactly, does increasing the cost of the things our military uses to defend us increase national security? It does so only if “national security” is defined as “the profits of the steel industry.” Which, by the way, “posted a combined net income of $869 million in Q4 2017,” while “all the charted steel stocks, except for one, showed increases in average share prices.”

But, the President objects, “What if we can’t produce steel in the future because the US industry disappears?” Well, the US is the world’s 16th largest steel exporter. Nearly 60% of those exports go to Canada and over 30% to Mexico, markets our President is endangering by threatening to torpedo NAFTA. We could stop exports to “protect” domestic supply, but that would increase the “trade deficit”.

In 2017 (through September) we exported 7.6 million and imported 26.9 milliion metric tons of steel, for a difference of -19.2 million. For this to be a national security issue we need to assume a few things. 1) We don’t have spare capacity to handle the shortfall. 2) We do not stop exporting steel. 3) Extreme measures (like WWII scrap drives and diversion of steel to military from consumer production) cannot be taken.

Let’s see. According to the Department of Commerce, in 2017 (through December):
&nbsp&nbspUS Steel production “Capacity utilization was estimated at 73.9%.”
&nbsp&nbsp”Total U.S. steel production in 2017 was 81.6 million metric tons.” Which includes
&nbsp&nbsp8 mmt of exports.

&nbsp&nbsp”Total [domestic] steel demand in 2017 amounted to 99.7 million metric tons.”


This leaves us about 18.1 mmt short for the year.

81.6 mmt represents 73.9% of capacity, so another 28.8 mmt could be produced with the remaining 26.1% capacity. Or, comfortably more than we import and without ceasing to export.

Tariffs are taxes. The president is raising them – and threatening trade war.

Here’s 5 minutes of Milton Friedman on this question:

Inconsistent consequences

The United States has recently imposed tariffs on Canadian lumber, Korean washing machines and Chinese solar panel components. The President is itching to slap import duties on steel. All those tax increases offset the income-tax cut, while enriching crony capitalists, fomenting a net reduction in American employment, and curtailing consumer choice.

How do these increased taxes balance out with the recent income-tax reduction?

The income tax cut will give 25 million taxpayers in the middle income quintile (or those with incomes from $49,000 to $86,000) an average of $930 of their own money back, BT (Before Tariffs). That’s about $25 billion.

I pick that quintile because I need a number, calculating the net-net of tax increase/decrease is very complicated, and the absolute dollar amount of all income-tax reduction is (naturally) skewed toward the top quintile.

Washing machines
The effect of a $50 increase is more economically significant than for lower or higher quintiles. The lowest quintile can’t afford a washing machine in the first place, and pays no income tax. Using the second lowest quintile could open my argument to charges of cherry picking. For higher quintiles $50-$100 in disposable income is irrelevant. For the discussion, I take the middle quintile as the exemplar of consumer sensitivity to the effect of increased tariffs.

In any case, what’s the amount of the offsetting tax increases? Well, washing machines, on average, will each cost $50 to $90 more. Ten million are bought every year. Consumers will pay at least an additional half billion dollars annually; not counting the as yet unknown additional consumer cost of the threatened steel tariffs.

I’ll call the mid-quintile share of that 50%, or $250 million.

Solar panels
Costs for residential solar panel installation will increase by an average of $650.

In 2017 there were only about 2,500 residential installations, so the residential cost increase would total a bit more than $1,500,000. Peanuts. It won’t make much difference for the mid-quintile.

Note, though, that commercial/utility scale installations would have a much higher value, and do have an effect.

This is because of the inherent contradiction of Fed solar panel policies. The Feds give a 30% tax credit for installing solar, while raising the price through tariffs. Taxpayers in all quintiles are subsidizing all solar projects, so there’s a tax of 6.5% (the tariff’s contribution to increased gross install costs) times the 30% subsidy on taxpayers in all quintiles. Taking $210 million as the revenue of the solar power industry in 2017, that would be about $40 million (6.5% x 30% x $210,000,000). This is a rough approximation, because I don’t know the breakdown of that revenue. What it does show is that the solar industry is not very big, and the clout to have a tariff imposed can’t come from its industrial importance. Must be “climate change” hype.

Of that total, let’s call the mid-quintile cost 15%, or $600 thousand.

New housing
The lumber tariffs added about $1,000 to the cost of a new house, pricing some 300,000 families out of the housing market. An estimated 1,202,100 housing units were started in 2017. That’s over a billion dollars, a disproportionate amount of which falls on the mid-level quintiles.

If one-third of that total falls on the mid-quintile, it’s a third of a billion.

Total cost
Now the total is approaching $600 million. Not much compared to the income tax decrease. But the real burden falls on the consumers who actually pay the extra $50 on their washing machine, the extra $650 on their solar installation, and the extra $1,000 on their house. They didn’t get a tax cut. They had their wealth redistributed to corporatists.

But, it’s more than just the increase in consumer costs: It’s also loss of jobs in retail, because fewer washing machines will be sold; the job reduction in construction of new houses; and the requirement for fewer installers of solar panels.

When steel tariffs are finalized, the job destruction in steel-using industries will be additive to washing machine manufacturing and solar panel installation. It will also affect car makers, pipeline building, skyscraper construction, tractor manufacture, ship building, etc.. Consumers will pay this tax, too.

There’s no doubt tariffs on steel will cost jobs in steel-using industries. It’s happened many times before. If Trump’s tariff accomplishments are anything like George Bush’s, we will see a cost to American consumers of $400,000 per “saved” steel job and the loss of more jobs in steel-using industries than all employment in steel manufacturing: The Perils of Protectionism

All these effects have been known since at least Adam Smith, and are documented by analysis of US tariff experimentation back to at least 1984.

Public/Pirate partnerships

Friday, I noted Michigan’s private marketing bureau rip-off. It just gets worse.

Michigan Senate Bill 97. Emphasis mine:

To give state and local government agencies the power to enter into joint operating arrangements with a particular business for purposes of building a hospital or transportation facilities. The private operator would benefit from tax exemptions and its governmental partner’s power to impose property taxes, borrow, take private property using eminent domain and more. The government agency involved could choose the private sector actor without necessarily having to accept the lowest bid. The projects could be proposals from a private developer.

This is just a corporate version of the SEIU dues scam and is no less reprehensible simply because there’s a different set of government approved thieves. The Granholm Democrats licensed a union to steal Medicaid dollars from taxpayers. The Snyder Republicans are getting ready to legalize similar looting by Blue Cross Blue Shield, the Michigan Infrastructure & Transportation Association, and Matty Maroun (owner of the Ambassador Bridge). Of course, it’s endorsed by the Chamber of Cronyism.

H/T Right Michigan where you can find out who to call to kill this assault on Michigan taxpayers.