The American shipping industry is sinking. Fast. Hit hard by environmental mandates and foreign competition, the industry has shrunk rapidly in recent years as older ships have been retired. American shipping firms have chosen not to build replacements for their aging fleets. Instead, they are choosing to run their business on foreign ships, run by foreign crews. The bottom line is not only the loss of one of the country's most important industries, but the loss of American jobs. Can we really afford to stand by and watch this economic disaster and do nothing? Subsidizing the maritime industry is an investment in the U.S. economy that will pay off in more jobs, higher wages, and an economical way for American business to ship its goods. To not financially support this industry would be a short-sighted, penny-wise/pound-foolish policy. We can't afford not to help the maritime industry!

What do you think? (We have to confess that we become suspicious the moment someone tells us that we can't afford not to spend money!) Hopefully you should be able to see past most of the candy-coated fallacies in the previous paragraph. Our task in this chapter, however, is to translate this news story into the framework of our Profit Table. This is an exercise which we will repeat throughout this book.

To do this, we need to know how subsidies to the maritime industry would work. Since we don't know anything more about this issue than what we have read in the excerpt above, we will have to use our imagination. One way the government could choose to help the maritime industry would be to subsidize the cost of new shipbuilding. While the editorial writer did not suggest a specific policy, we note that a subsidy for new shipbuilding is consistent with his concern that the size of the American fleet is shrinking. Let's consider a hypothetical decision by one of the shipping companies--say, American President Lines (APL)--to build another ship, before and after the government subsidy for new shipbuilding. Remember, we want to construct a scenario that will focus our attention on how this subsidy would alter the allocation of resources in the society.

Recalling our three-step procedure for evaluating this policy, we first ask whether this subsidy will cause more or fewer ships to be built. Having determined that the subsidy will cause more ships to be built, the second step consists of concentrating our attention on a "representative ship." Not just any ship. Rather, a ship that wouldn't have been built before the subsidy, but gets built after the subsidy. In terms of our Profit Table, this means that the "representative ship" should show a negative profit in "Before Subsidy" column, and a positive profit in the "After Subsidy" column. The third step consists of entering numbers for Revenue, Cost, and the subsidy that are consistent with these outcomes. One possible Profit Table is given below.

The numbers in the table show that APL would never choose to build a new ship without a subsidy from the government. APL predicts that an additional cargo ship would increase revenues by $17 million. However, the costs of building such a vessel would be $25 million. Thus, the profit-seekers at APL--without a thought to the well-being of American women and children, particularly children--just say no to another ship.

Look how different this proposal appears after the government decides to come to the rescue. If the government targets $10 million to APL to help pay for the new ship--either through a direct subsidy or a special tax exemption, which is essentially the same thing--this ship now becomes profitable. Rather than losing $8 million, APL finds that it can make $2 million. So APL goes ahead and builds the ship. Let's call it the U.S.S. Subsidy. Men and women have been put to work. Profits have been made. Shareholders have been enriched. All because a spanking new ship now sails the oceans blue, a testimony to the far-sighted partnership of government and industry. (All this is starting to make us sea-sick!)

Of course, we're only looking at half of the story here. This ship didn't come out of nowhere. It was built by the employment of resources that had alternative uses. From the perspective of society's happiness, there are only two numbers in the table that matter--$17 million and $25 million. There is no denying that the additional cargo ship made society better off by $17 million. But society lost something when the resources to make that ship--the laborers, the steel, the land on which the ship was built--were taken away from other activities. Society lost $25 million in happiness. Thus, the profit-seekers at APL--without a thought to the well-being of American women and children, particularly children--did precisely the right thing for society's happiness when they first chose not to build a new ship. Society would have preferred the alternative uses of those resources. The subsidy, however, provided an incentive for APL to misallocate these resources to ship building, and society's happiness decreased.

Now let's consider some objections to this analysis. How about the objection that this is too simplistic. All these numbers are made up! We confess--this is true. We haven't done any research on this issue. We have no idea how much a new ship would actually cost. We have no idea how much revenues a new ship might actually generate. In fact, just so there's no doubt about this--we'll just come right out and say that we are completely ignorant about the shipping industry. Before we read this editorial, we thought the Merchant Marines were a new service of the armed forces established to provide crowd control for storeowners during end-of-the-year closeout sales. How embarrassing!

However, the beauty of our simple framework is that we don't have to know anything about the maritime industry. All we have to know is that the subsidy is going to cause more ships to be built. Who can deny this? Increasing production is the whole point of a subsidy. Furthermore, we know that these ships were not profitable without the subsidy, or they would have been built. The particular numbers that we choose aren't important. After all, we're not saying that the subsidy will cause a social loss of exactly $8 million. To be honest, we don't know how much of a social loss will actually result. Our made-up numbers merely illustrate that (i) a ship will be built after the subsidy that wouldn't have been built before (that is, the subsidy will cause a different allocation of resources), and (ii) the transfer of resources represented by the building of this ship will take resources from higher valued uses and direct to them to a lower valued use. That is, the hypothetical numbers in our table illustrate the essence of the problem--subsidies to the maritime industry will decrease society's happiness.

Low revenues signal that there is only a small social benefit from additional shipping services. Note that it really doesn't make a difference why the social benefit of extra shipping services is small. In this particular instance, the reason society is not made much happier from additional shipping services is because foreign firms are already providing a lot of those shipping services for American consumers. As a result, the extra benefit from extra shipping services is small. But, again, we don't have to know. All we have to know is that society will receive relatively little benefit from having additional resources transferred to the shipping industry.

NOTE: The reader might be confused by the difference between this figure and the one used to represent the welfare losses caused by subsidizing Ima Hogg, the watermelon farmer. In Ima Hogg's case, the Profit Table represented the production of 1000 watermelons. So the welfare loss represented the sum of the difference between MR and MC for each of the 1000 units, resulting in the indicated area. However, in this shipbuilding example, the Profit Table represents the production of only one unit, Q*. Thus the welfare loss in this case is the difference between MR and MC only at Q*.