THE SMITH CENTER

for Private Enterprise Studies

The Federal Government's War on the Hungry

by

Ninos Malek

Ph.D. student at George Mason

The United States government's agricultural policies hurt consumers, particularly the poor. Low-income recipients of food stamps supposedly are helped by purportedly benevolent government policies, and yet the government keeps food prices higher than they would be in a free-market through interventionist policies. Depression Era philosophy and special-interest money rule the day in Washington D.C. Farmers receive corporate welfare thanks to the USDA and the Congress. This paper discusses the adverse effects of federal government agricultural policies on consumers and taxpayers. Section I assesses general farm policy in the United States. Section II reviews sugar policy and its effects on prices and employment. Section III demonstrates how government dairy policy distorts markets, raises prices, and thus harms consumers. Section IV briefly comments on the peanut program. Section V concludes.

I. Overview and History of Farm Policy

After many years of failed agricultural policy, there was some hope for a new departure when the 1996 Federal Agricultural Improvement and Reform Act was enacted. Supposedly, the market would take a greater role as government intervention declined. However, this proved to be false. A Cato Institute briefing paper issued October 18, 2001 stated that total direct agricultural subsidies were over $20 billion for the prior three years, which was higher than the $9 billion per year in the 1990's (Edwards and DeHaven, 2001). These subsidies do not come from a magic box: They are taxpayers' dollars. Why is the agriculture industry so special? It is not the only risky sector of the economy subject to price swings or other uncertainties. As a class, farmers do not have low incomes; indeed, farm households have higher average incomes than nonfarm households (Edwards and DeHaven, 2001).

The aim of the 1996 act was to reduce subsidies, yet when market prices would fall, the government would bail farmers out. When FAIR was passed, a projected $47 billion would be spent on subsides over the next seven years; however, in reality, $118 billion was spent (Edwards and DeHaven, 2001). In typical bureaucratic doublespeak, legislation to reduce farmer dependence on government handouts accomplished the exact opposite.

Government assistance to farmers is dear to many politicians, Democrats and Republicans alike. And when politicians deliver speeches about how they want to help farmers, they become very emotional. They tell us that farmers have been very special since the founding of the country and that agriculture is the heart and soul of America. Of course, farmers are portrayed as average, hard-working Americans supporting their families. The reality of who gets this government help is interesting. Actually, farm products that receive large subsidies account for just 36 percent of agricultural production. Moreover, 90 percent of the subsidies go to farmers who grow just five crops-wheat, corn, soybeans, rice, and cotton (Edwards and DeHaven, 2001). Two-thirds of all farm subsidies go to just 10 percent of farms, most of which earn over $250,000 annually. Moreover, "emergencies" conveniently defeated the goal of paying out subsidies which resulted in record subsidies in 2000 (Riedl, 2002).

Although not my central focus, it is noteworthy that agricultural organizations have donated $69.6 million dollars to various political candidates since 1999. The result is that these organizations influence politicians to take more taxpayer money and funnel it to agricultural interests.

Daniel T. Griswold correctly characterized U.S. farm policy as an "equal opportunity disaster." For example, production is encouraged even when prices are falling (Griswold, 2003). In a free-market, when prices fall, incentives change, and production is reduced to economize on scarce resources. In contrast, rising prices signal producers to increase production. Government intervention affects these logical responses. One consequence of government subsidies is overproduction, and this overproduction does not just affect the American economy: world prices are depressed as well. The National Bureau of Economic Research found that rising rice prices between 1993 and 1998 reduced child labor and allowed more children to go to school. The unintended consequence of U.S. policy, which leads to falling global prices, actually forces more children out of the schoolroom and into the fields (Griswold, 2003). Mali, the world's only Muslim-majority country that is rated "free" by Freedom House, is adversely affected by U.S. policy. The World Bank calculated that U.S. subsidies cost Mali and its poor neighbors $250 million a year (Griswold, 2003).

Through agricultural subsidies, consumers, many of whom have low incomes, actually subsidize wealthy businessmen. Ted Turner, one of the largest private landholders in the nation, has been made even wealthier by the bison. The American Environmental Working Group calculated that Turner received $176,077 from the government for raising bison. Catherine Overington reported that David Rockefeller received $350,000 and that farm subsidies will cost the taxpayers $170 billion over ten years (Overington, 2002).

The 1996 Farm Bill was, at least in theory, a major reform of U.S. agricultural policy which allowed farmers to decide what crops they would grow and called for the phasing out of subsidies. However, the bill still had some problems. The sugar program was not reformed, which kept U.S. sugar prices at twice the world price. The peanut program was not changed (i.e., quotas were not eliminated) which continued to cost American consumers $300 million dollars annually. Finally, it interfered in the dairy market by creating the Northeast Interstate Dairy Compact, a cartel of six New England states that allowed the establishment of artificially high prices and restricted interstate commerce (Frydenlund, 2002).The effects of this compact are discussed later in the paper.

The 2002 Farm Bill (Farm Security and Rural Investment Act of 2002), yet another attempt to reform farm policy, was signed by President Bush on May 13, 2002. Anurahda Mittal, Co-Director of Food First, reported that this legislation, which called for $248.6 billion in spending, raised taxpayer spending on agriculture by more than 80 percent. The 2002 Farm Bill, according to Mittal, will cost taxpayers at least $190 billion over the next ten years (Mittal, 2002).

Mittal's analysis also indicates that the benefits of agricultural policy are concentrated among a few farmers. The top ten percent of subsidy recipients collect two-thirds of the money, and the bottom 80 percent get just one-sixth. And Mittal asserts that the government's agricultural policies hurt poor countries-the same ones to which we send foreign aid. The U.S. exports corn at 20 percent below the cost of production, which hurts Mexican farmers. As a result of the government's interventionist polices, America is the world's largest cotton exporter even though it is a high-cost and inefficient producer of cotton.

Government might have good intentions, and arguments for intervention might even sound plausible. A good example of this line of thought comes from Henry Hazlitt's chapter in Economics in One Lesson entitled "Stabilizing Commodities":

They [bureaucrats] have no wish, they declare, to raise the price of commodity X permanently above its natural level. That, they concede, would be unfair to consumers. But it is now obviously selling far below its natural level. The producers cannot make a living. Unless we act promptly, they will be thrown out of business. Then there will be real scarcity, and consumers will have to pay exorbitant prices for the commodity. The apparent bargains that the consumers are now getting will cost them dear in the end. For the present "temporary" low price cannot last. But we cannot afford to wait for so-called natural market forces, or for the "blind" law of supply and demand, to correct the situation. For by that time the producers will be ruined and a great scarcity will be upon us. The government must act. All that we really want to do is to correct these violent, senseless fluctuations in price. We are not trying to boost the price; we are only trying to stabilize it.

In the end, the good intentions fail. The losers are American taxpayers and consumers who suffer the consequences of surpluses, shortages, and higher prices at the grocery store.

II. Government Intervention in the Sugar Market

Sugar is an excellent example of how consumers are hurt by government policy. Sugar is not sold under free-market conditions. Lobbyists for the sugar industry have successfully obtained government mandates to restrict competition which keeps domestic prices far higher than prices in the world sugar market. The argument, of course, is that the sugar industry needs protection from "unfair" competition.

But why is sugar so special? In any case, this protection harms consumers and makes food more expensive. While possibly saving jobs in one industry, other industries are hurt and consumers must pay higher prices for sugar and for products made with sugar.

A popular argument for government intervention is that other countries protect their sugar industries with tariffs and quotas. However, we cannot benefit ourselves by hurting ourselves. For example, if Italy subsidizes its sugar industry, why should we be upset if Italian sugar is cheaper for us here in the United States? Why should our government retaliate with tariffs or subsidies? The Italian government is doing us a favor at the expense of its own citizens!

The other industries that are hurt are those that use sugar in their final products. Many sugar-intensive firms are forced to leave the United States which creates unemployment in those industries. It is evidence of Henry Hazlitt's fallacy of looking at only one group, not all groups. Mayor Richard M. Daley of Chicago issued a press release in March 2001 which stated that our sugar policy hurts Chicago's food and confectionery manufactures by raising production costs. The Mayor also pointed out that employment in Chicago's confection industry had declined 11 percent since 1991, due to sugar policy. As stated earlier regarding concentrated benefits, the press release noted that only 1 percent of sugar cane growers reap 58 percent of the program's benefits.

It was estimated that the sugar program could cost consumers $1.9 billion annually and result in a welfare loss of nearly $1 billion. Another cost is the buying and storage of excess sugar to maintain high prices (Groomridge, 2001). The U.S. sugar program has two main components. One is price support loans. According to Groomridge:

Under a system of non-recourse loans, processors agree to pay growers the government established minimum price based on loan rates for cane and beet sugar, pledging the sugar as collateral. When the loan matures, processors must decide whether to pay off the loan, plus interest, and sell the pledged sugar on the domestic market, or forfeit the sugar and keep the money paid to them by the U.S. government.

The other intervention comes in the form of the tariff-rate quota. Even though the USDA can alter the quota amount, there is a tariff imposed on excess sugar entering the market. How this benefits consumers is questionable.

Groombridge noted that over the past 20 years, Americans have paid about twice as much for sugar compared to the world price. As of October 2001, Americans paid 22 cents a pound for sugar when the world price was 7 cents. This protection is responsible for 40 percent of the American sugar industry's revenue. According the Australian Bureau of Agriculture and Resource Economics, U.S. consumers could save an estimated $1.6 billion a year (Groomridge, 2001).

Public choice analysis shows clearly that rent-seeking, i.e., using the power of government to benefit special interests at the expense of consumers -- takes place in the sugar industry. The two largest sugar producers, Flo-Sun and U.S. Sugar were major political contributors in the 2000 election. Flo-Sun alone contributed $690,750 in "soft money" to Democrats and Republicans (Groomridge, 2001).

In addition to higher prices, government intervention in the sugar industry causes malinvestments. In the confection industry, it forces more money into one of the most important inputs. Also, as previously stated, sugar must be stored. About 9 percent of the 1999-2000 domestic crop was in warehouses paid for by taxpayers. In May 2000, the USDA bought and stored sugar in a warehouse at the cost of $1.4 million per month (Groomridge, 2001).

III. Dairy Program

"Over the past 125 years, a complex pricing system has evolved to deal with milk production, assembly (collection), and distribution (coordinating milk supplies with the demands of milk users, both intermediate and final). The various government and nongovernment institutions making up the system are designed to work together to ensure that the public gets the milk it wants, while dairy farmers get the economic returns need to provide the milk"(Manchester and Blayney, 2001).

One of the most basic food items in the American diet is milk, and the dairy market is not immune from government intervention. The history of the federal dairy program is an example of consumers losing at the expense of special interests. The dairy industry has been regulated since the 1930's mainly through Federal Milk Marketing Orders and price supports. Marketing orders were authorized under the Agricultural Adjustment Act of 1933 and the Agricultural Marketing Agreement Act of 1937. The country was divided into regions, and each region sets milk prices. There were three main goals: 1) create "market order", 2) ensure steady flow of milk, and 3) "stabilize prices" (McNew, 1999).

Even though the dairy farmers might seem to have noble intent, marketing orders are just a price-discrimination device. As Kevin McNew states, "Federal Milk Marketing Orders allowed dairy farmers to impose a monopolistic system that would have been unenforceable in the freer market that existed before the Depression" (McNew, 1999). It is important to note that California is not included in this system. So, do Californians enjoy a free-market mik system? No. California has such a very stringent standard for milk production that it is too costly for dairy farmers in other states to compete. However, this did not go unchallenged. Arizona-based Shamrock Food Company filed a lawsuit to allow its milk to be sold in California. In August 1999, the California Appellate Court gave Shamrock the right to sell milk (McNew, 1999). The question is why does a company have to get special permission to sell a product in another state?

The other result of California's dairy program was to prevent the sale of retail milk at discounted prices. This would supposedly benefit independent grocers over large retail stores, but the result is that there is no real competition in the milk industry among distributors and, thus, consumer prices are higher.

Massachusetts provides another example of how dairy programs affect consumers. In October 2002, Midland Farms, a small chain of grocery stores, was investigated for selling milk too cheaply! Midland was selling it for $1.79 per gallon even though the state average was $2.99, which violated the Massachusetts Milk Control Law (Winter, 2003).

Current legislation assumes that Midwest dairy farmers are too efficient and therefore forced milk prices to be too low. The remnants of New Deal programs exist. For example, the government allows local milk cartels to form in states that are not as efficient as Midwestern states in order to keep Midwestern milk off the market. The further a state in this cartel is from Eau Claire, Wisconsin, the higher the price of milk is set. This is a form of consumer exploitation. The annual cost to consumers is approximately $2.7 million (Riedl, 2002).

Jerry Kozak, the CEO of the National Milk Producers Federation (NMPF), declared to the House Agriculture Committee in April 2001 that the current milk policy, which raises milk prices as much as 20 cents per gallon, is a benefit to consumers. Clearly, the NMPF is a major benefit to some members of Congress because it had donated $120,500 to that point (Riedl, 2002).

Probably the entity that hurt American milk purchasers the most was the Northeast Interstate Dairy Compact, which allowed New England states to charge even higher prices than federal regulations allowed (Riedl, 2002). The retail price of milk in Boston rose almost 31 cents per gallon and even more than 31 cents per gallon in Hartford during the compact period (Bailey, 2001). In effect, the Northeast Compact raised the prices New England dairy farmers received at the expense of New England consumers and producers in other regions (Balagtas and Sumner, 2003). From 1996 until October 2001, the Northeastern Compact cost consumers approximately $400 million in higher prices (Thomas, 2001).

The Northeast Dairy compact was eventually allowed to sunset in October 2001. Of course, this did not sit well with New England dairy farmers. In an effort to appease them, the Senate voted to award $2 billion to aid farmers after the compact period (Riedl, 2002). This is proof illustrates that once government intervenes, it cannot disengage without a high cost. Of course, the government's costs are really American taxpayers' costs.

Wasted production is a consequence of our dairy program. Our dairy program certainly wastes produced milk. There is a huge surplus of powdered milk. The dry-milk stockpile reached 1.28 billion pounds as of August 2003. Every pound of dry milk stored costs taxpayers 80 cents, which was about $1 billion at that point in time (Webb, 2003).

IV. Peanut Program

The peanut is also a special crop in our agricultural policy, and the peanut industry has focused on taxpayer subsidies. Reidl reported in April 2002 that peanut producers kept prices high by shortages created by quotas.

Many households, including people at the poverty level, eat basic foods like bread and peanut butter. So, while they obtain Food Stamps to buy food, the government raises the price of peanut butter indirectly. The cost to American consumers with respect to the peanut program was over $400 million annually (Riedl, 2002).

V. Conclusion

The government's actions in agricultural policy can be seen from two perspectives. On the one hand, it might be argued that the government is trying to help Americans by protecting them from foreign competition which saves American jobs. However, this intention is clearly fallacious when we consider all groups, not just one. It is not the United States versus Italy or some other nation; rather, it is individuals in the United States and individuals in other countries. And while some Americans might receive benefits (producers and inefficient ones at that), other Americans (consumers) also lose by paying higher prices. Moreover, consumers have less purchasing power to buy other products which can lead to unemployment elsewhere in the economy. On the other hand, a more pessimistic (and realistic) view admits that some industries seek special favors from government and knowingly want to gain at the expense of taxpayers and consumers. When the benefits are concentrated and the costs are diffused, industries can gain because consumers do not find it in their interest to oppose government intervention on behalf of special interests (sugar, dairy, etc.).

The irony of government intervention is that while there are social welfare programs to help people buy food, government intervention inflates food prices by restricting supply. Not only are taxpayers forced to subsidize other taxpayers which can be considered an immoral, involuntary transaction, but their "help" is eroded because the recipients pay higher prices for their most basic need: food products.

References

1. Mark A. Groombridge, "America's Bittersweet Sugar Policy," Cato Institute Trade Briefing Paper. December 4, 2001.

2. Richard M. Daley, Press Release. March 28, 2001.

3. Brian M. Riedl, "Agriculture Lobby Wins Big in New Farm Bill," The Heritage Foundation Backgrounder No. 1534 April 9, 2002.

4. Brian M. Riedl, "The Cost of America's Farm Subsidy Binge: An Average of $1 Million Per Farm," The Heritage Foundation Backgrounder No. 1510. December 10, 2001.

5. John E. Frydenlund, "The Erosion of Freedom to Farm," The Heritage Foundation Backgrounder No. 1523. March 8, 2002.

6. Caroline Overington, "US Taxpayers Count Cost of Farm Bill," www.theage.com.au/articles/2002/05/15/1021415011858.html

7. Daniel T. Griswold, "U.S. Farm Policy: An Equal Opportunity Disaster," Cato Speeches and Transcripts. May 2, 2003.

8. Chris Edwards and Tad DeHaven, "Farm Subsidies at Record Levels As Congress Considers New Farm Bill," Cato Institute Briefing Papers No. 70. October 18, 2001.

9. Anuradha Mittal, Giving Away the Farm: The 2002 Farm Bill," Backgrounder. Food First. Summer 2002.

10. Tom Webb, "Growing Powdered-Milk Surplus Is Blamed on Price Support Policy," Washington Post. August 20, 2003.

11. Jason M. Thomas, "Organization of Milk Exporting States," Citizens for a Sound Economy. December 17, 2001.

12. Joseph V. Balagtas and Daniel A. Sumner, "The Effect of the Northeast Dairy Compact on Producers and Consumers, with Implications of Compact Contagion," FORTHCOMING IN THE REVIEW OF AGRICULTURAL ECONOMICS. JANUARY 2003.

13. Kenneth W. Bailey, "Impact of the Northeast Interstate Dairy Compact on Consumer Prices for Fluid Milk," Staff Paper #341 Department of Agricultural Economics and Rural Sociology, The Pennsylvania State University. June 1, 2001.

14. Kevin McNew, "Milking the Sacred Cow: A Case for Eliminating the Federal Dairy Program." Policy Analysis No. 362. The Cato Institute. December 1, 1999.

15. Bill Winter, "Libertarian Solutions: What the Federal Government Did to the Dairy Industry (And How We Can Fix It). LP News Online. March 2003.

16. Alden C. Manchester and Don P. Blayney, "Milk Pricing in the United States." Economic Research Service, Agriculture Information Bulletin No. 761. United Stated Department of Agriculture. February 2001.

17. Henry Hazlitt, Economics in One Lesson, Fox & Wilkes, San Francisco, 1996.