Supports and Consequences

Rep. Collin Peterson (D, MN) has proposed a Dairy Market Stabilization Program to replace existing Dairy Product Price Support and Milk Income Loss Contract Programs, but the debates surrounding the proposal misses a key point.

“The Dairy Market Stabilization Program [proposed by Peterson] is specifically designed to increase milk prices,” the Consumer Federation of America says.  “As milk and dairy prices increase, low-income consumers are hit especially hard.”  National Taxpayers Union, Americans for Tax Reform, and Citizens Against Government Waste warn of other results.  Artificially propping up milk prices “will ratchet up budgetary pressures on the government’s food and nutrition programs.”  Further, the DMSP, if passed, would empower government to limit how much milk is to be produced given falling profits; this is intended to strengthen a “safety net” for a government-favored group.

While these are valid arguments; they don’t go far enough.  The key point is the long list of unintended consequences of this sort of program and of subsidies in general.  One narrow consequence has to do with this: the CBO estimates that the DMSP would save us taxpayers $167 million over five years.  How much would we save if we didn’t have any of these three subsidies?

Another consequence comes from this effort to “help strengthen a vulnerable dairy sector.”  Dairy wouldn’t be a vulnerable sector except that government subsidies have protected it from the strengthening and hardening that competition produces.  The sector is soft and “vulnerable” as a direct result of its having become dependent on government for its “protected” profits and its protection from the risk of failure.

This stems from another unintended consequence.  The bailouts of 2008 and 2009 have simply fostered an environment wherein everyone feels entitled to a bailout; no one should have to suffer the consequences of their own decision-making, or even of plain bad luck (and note carefully that a hand up is not a bailout).  All of us are entitled, goes the new plaint, to having taxpayers indemnify us from life.  However, something that was a mistake the first time is not made correct by repeating it.  It remains a mistake.

Yet another consequence is that ratcheting up of budgetary pressures on the government’s food and nutrition programs that was warned of above.  The NTU, ATR, and CAGW are right as far as they go, but they miss the larger point, one hinted at by the CFA: the subsidies, including other subsidies that would be cascade victims of particular subsidies’ budget pressure, all drive up—by design—prices that consumers, including poor consumers, must pay.  (And so we have food stamp programs, and other food and nutrition programs, to help those poorer consumers pay those artificially inflated prices….)

There’s another unintended consequence.  Consumers—taxpayers—in return for our tax money being taken away from us to pay these supports, have even more of our money taken away from us by our having to pay those artificially high prices that are the goal of these supports.  We’re forced to pay twice for the same milk.

There’s the unintended consequence of the moral hazard involved.  Industries that are protected from failure, government-favored small businesses that are protected from failure, have no incentive to control their own costs, have no incentive actually to compete.  They get high prices (which we must pay, both through those high prices and through the epicycles of subsidies on top of subsidies to prop up those prices and then to help others pay those propped up prices), and they have high costs with which to “justify” those high prices.  This is related to those original mistakes of the 2008 and 2009 bailouts.  How can a businessman, or an investor in that business, or a lender to that business, assess his risk accurately when there is no downside from risk?  Another aspect of the moral hazard question is this: one justification for the supports is that dairy farmers would go out of business without them.  But if they can’t compete, why should they be in business?  Why does any particular business or industry have an inherent right to exist, regardless of market competition forces?  Who decides which business or industry should be artificially continued?

Finally, here is a consequence almost as bad as the moral hazard one, a consequence with more concrete and immediate impact on our pocketbooks.  Supporters of the DMSP worry that were there a repeat of 2009’s economic dislocation (we’re out of that one?), a repeat of the problem of falling milk prices coupled with abruptly rising input prices, “I fear we could lose half our dairies,” as Congressman Peterson puts it.  But why did those input prices rise?  One (but not the only) reason is ethanol subsidies.  These diverted food corn away from the dairy herds (and other cattle herds, and people): nearly 30% of corn went to fuel production in 2009; that expanded to 35% in 2010.  The effect from seemingly unrelated subsidies on those input prices for milk production is apparent.  This diversion, in cascading unintended consequence, reduced our supply of food, raised the price of that food that we must pay, and drove cost increases in those food stamp subsidies.

2 thoughts on “Supports and Consequences

  1. Another impact is the ripple effect on other food prices, for which dairy is an input, exacerbating the food component of inflation, which disproportionately affects those with lower incomes. Because some folks must be indemnified from all risk.

  2. Wheat is substituted into, as corn is lost or substituted out of due to price, as are soya beans. And the rising prices also affect cooking oils. And pork and chicken. And so on.

    And just to illustrate the Byzantine nature of those ethanol laws generally, lack of actual market demand in the US (ethanol both gets lower mileage, it’s hard on engines) has led to lack of ethanol refineries and so lack of actual ethanol for our fuel blends, never mind that Federal mandates both require those blends and specify minimum quantities that must be on the market. Price controls are interfering, also. As a result, we’re exporting much of the ethanol we produce to better paying foreign economies, and we’re importing refined sugar ethanol from Brazil (“We want to be your best customer.” Oh, wait….) to meet our domestic at-the-pump quotas.

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