Imagine you have a business and I’ve guaranteed that you receive a higher price than you’d otherwise be able to obtain from your customers, shielding you from competition. Then I lend you money, directly or indirectly. But even with these privileges, you are still struggling to make a profit and may end up defaulting on your loans.
What should I do? If I’m using my own money, I suspect I would take losses on my loans and get out of the business of supporting you. But if I am using someone else’s money, I may think that it’s a good idea to buy some of your stuff, to artificially increase the demand for your product. I would then resell the goods (at a loss, to give the buyer an incentive to buy from me) and then I would restrict the buyer’s ability to buy the same good from a foreign suppliers in the hopes that it would force prices up even further, allowing you to pay me back. While that sounds crazy to me, that’s exactly what the federal government is doing for sugar producers in the U.S. The Wall Street Journal reports:
The U.S. Department of Agriculture plans to buy sugar from domestic growers, the government’s first direct intervention in the nation’s sugar market in 13 years.
The move is aimed at helping to whittle down a surplus that has driven prices to four-year lows and is threatening to spark a wave of defaults on almost $700 million of government loans.
The USDA plans to sell the sugar it buys to refiners, companies that take raw cane sugar and process it into the white table sugar found on supermarket shelves. But the USDA isn’t going to demand cash. Instead, it will ask refiners to hand over import credits.
USDA officials hope that fewer available credits would help reduce the supply of the sweetener.
Under a little-known program, licensed sugar refiners are allowed to circumvent U.S. regulations on sugar imports using these credits, which also require that the equivalent amount of sugar is exported, typically in the form of candy or refined sugar.
The interesting part is that these policies are presented as a way to save taxpayers’ money.
In a statement, the USDA said it could spend about $38 million on sugar purchases. As a result of the purchases and subsequent sales to refiners, the agency estimates that some 300,000 short tons of the sweetener will be removed from the U.S. market.
“It is a less costly option than loan forfeitures,” the USDA said.
Falling sugar prices have complicated the USDA’s efforts to keep the U.S. sugar program—a collection of loan programs, price supports and import restrictions—from imposing a burden on taxpayers.
But you know what would save taxpayers’ money? Ending all of America’s sugar policies. First, they cost consumers $3 billion annually via higher sugar prices. According to economist Mark Perry, as a result of these government actions, U.S. consumers and businesses have had to pay twice the world price of sugar, on average, since 1982. As Professors Michael Wohlgenant and Vincent H. Smith (who just recently released a new study on farm subsidies this week for Mercatus) argued last year, the deadweight loss for the economy is quite significant — but it looks quite good for the sugar-producer interest group:
Over the 30-year period from 1980 through 2009, the sugar program effectively doubled the price U.S. consumers paid for sugar and increased annual food costs by about $9 per person. That may not sound like a big price tag, but it resulted in a $1.3 billion deadweight loss for the U.S. economy (think of all the extra money that could’ve been spent on red roses and high-end confectionary!). And how did the sugar farmers, who are fewer than 20,000 in number and relatively wealthy, fare? They received a $1.7 billion net gain.
In addition, Smith adds, higher prices reduce ”the ability of US food processors to compete in world markets. The program costs the US economy thousands of manufacturing jobs and, in a world of record prices for other major crops like corn and wheat, is scarcely an essential tool for maintaining a viable US agricultural sector.”
The bottom line is that, rather than find new ways to restrict sugar supply and artificially prop up sugar prices, we should put an end to these policies.