Tag Archives: Chris Edwards

Don’t make us drive these cattle over the cliff

First a brief note: I am now blogging at the American Spectator on economic issues. I invite you to visit the inaugural posts. Last week, I covered the fiscal cliff. Like many others, I also marvel at the audacity of the pork contained therein.

Lately the headlines have given me a flashback to 1990 and those first undergrad economics classes. And not just econ but also U.S. history and the American experience with price floors and ceilings. In this post I’ll discuss the floors.

As I note at The Spectacle one of the matters settled by the American Taxpayer Relief Act is the extension of dairy price supports from the 2008 farm bill. Now, Congress won’t be “forced to charge $8 gallon for milk.” To me, nothing screams government price-fixing more than this threat aimed to scare small children and the parents who buy their food.

Chris Edwards explains how America’s dairy subsidy programs work in Milk Madness. Since the 1930’s the federal government  has set the minimum price to be charged for dairy. A misguided idea from the start, the point of the program was to ensure that dairy farmers weren’t hurt by falling prices during the Great Depression. When market prices fall below the government set price the government agrees to buy up any excess butter, dry milk or cheese that is produced. Thusly, dairy prices are kept artificially high which stimulates more demand.

According to Edwards’ study, the OECD found that U.S. dairy policies create a 26 percent “implicit tax” on milk, a regressive tax that affects low-income families in particular. Taxpayers pay to keep food prices artificially high, generate waste, and prevent local farmers from entering a caretlized market.

Now for the cows. The recession revealed that the nation has an oversupply of them. The New York Times reports that rapid expansion in the U.S. dairy market driven by increased global demand for milk products came to a sudden halt in 2008. Farmers were left with cows that needed to be milked regardless of the slump in world prices. The excess dry milk was then sold to the government but only at a price that was set above what the market demanded.

In other words, in a world without price supports, farmers could have sold the milk for less at market and consumers would have enjoyed cheaper butter, cheese and baby formula. Instead, the government stepped in, bought $91 million in milk powder so the farmer could get an above-market price and keep supporting an excess of milk cows. Rather than downsize the dairy based on market signals (and sell part of the herd to other dairy farmers, or the butcher) farmers take the subsidy and keep one too many cows pumping out more milk than is demanded.

It turns out auctioning a herd is not something all farmers are anxious to do. Some may look for additional governmental assistance to keep their cattle fed in spite of dropping prices, increased feed costs, and bad weather. To be sure eliminating farm subsidies would produce a temporary shock (a windfall for farmers and sticker shock for consumers), but in the long run as markets adjust everyone benefits.Dairy cows in the sale ring at the Warragul cattle sales, Victoria, [2]

New Zealand did it. Thirty years later and costs are lower for consumers, farmers are thrivingenvironmental practices have improved, and organic farming is growing. While politicians and the farm lobby may continue pushing for inefficient agricultural policy in spite of the nation’s fiscal path,as Robert Samuelson at Real Clear Politics writes, “If we can’t kill farm subsidies, what can we kill?”


The U.S. Postal Service Lumbers On

The LA Times reports that in spite of 40,000 job cuts and billions in cost-saving measures, the U.S. Postal Service lost $3.8 billion in FY 2009, which is $1 billion more than they lost in FY 2008.  The USPS’ financial health is “sobering” to quote Postmaster General John Potter. Decreased mail volume coupled with “the impossible demands” of pre-funding future health retiree benefits.  The short-term worry, by September 1, 2010, the USPS must make a payment of $5.5 billion for its retirees. The longer-term reality: e-mail or “electronic diversion” have taken a huge bite out of mail volume.

To address the immediate-term, like other “too-big-too fail” entities, the USPS has gotten a reprieve. In October, Congress allowed them to defer contributions to its health care plan.

To address the other matter – technology’s effect on the market for snail mail – there is only one way out of the USPS’s dilemma: “Free the Mail”, as CATO’s Tad DeHaven and Chris Edwards note . But, there’s a big obstacle in the room – public sector unions.

A brewing awareness

People don’t generally think about the governmental framework in which they live. It’s assumed like oxygen.  But change that framework drastically enough, and things learned and forgotten from history textbooks develop a live pulse.

Federalism, as a point of common discussion, is relegated to Constitutional Law, economics and political science journals. It’s the stuff policy people and academics pour over.  But not lately, as Randal Barnett writes at the Wall Street Journal, tea parties and sovereignty amendments speak to a growing awareness of profound structural change in the relationship between the federal government and the states.  The ceding of local and state control to the federal level is not a new story. The debate over this changing relationship dates to the 19th century, but given the size and kinds of spending in the last several years, rounded out by the stimulus and budget of recent weeks, and a threshold is perceived.

For three different policy takes: an interesting solution offered by Greg Mankiw back in October, would have given the governors more discretion in accepting funds – they could elect to pass it on to citizens, rather than expand programs. The Brookings Institute suggests following Germany, a federalist system, in applying transportation funds. Chris Edwards of CATO has done work on how federal aid erodes state budget autonomy.