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Not Exactly Sweet Reason

July 30, 2010

Tags Big GovernmentCorporate WelfareU.S. EconomyInterventionism

One of the hallmarks of many early economists was their opposition to protectionism. They saw that taking away options that both parties to a trade preferred harmed them, eliminating the gains that would otherwise have been created. Yet America (historically the world's largest exporter of free-trade rhetoric), despite widespread recognition among economists of the wealth destruction involved, maintains a plethora of protectionist policies.

One of the United States' most blatant examples of protectionism — so blatant that it is used as an illustration of the idea in some economics texts — is its sugar policy. The United States imposes import quotas that substantially raise domestic sugar prices, harming domestic consumers to benefit politically powerful domestic sugar producers.

So when the difference between US prices and world prices (35.02 versus 19.67 cents per pound) reached its highest level in over a decade this March, I wrote an article in the St. Petersburg Times (FL) about some of the misrepresentation and misdirection used by domestic sugar producers to defend lining their pockets at consumers' expense. The situation reflects William Graham Sumner's insight that "A wants protection; that is, he wants B's money … A talks sentiment and metaphysics finely, and, after all, all there is in it is that he wants B's money."

My article discussed several of Big Sugar's misrepresentations in defense of sugar import quotas. These included the claim that since there was no sugar shortage, there was no problem created (even though quotas raise domestic prices rather than artificially holding them down, which is the only way shortages would be created); the claim that easing or eliminating quotas would merely increase food processors' profits (ignoring that it is higher profits to processors that lead to increased output, which creates the consumer gains); the claim that import quotas save taxpayers money (because the increased prices mean that the government won't buy up sugar to support its price this year, reducing one of its other interventions in the sugar market) while ignoring the costs higher prices impose on consumers; and the claim that since producers pay the costs of administering the sugar program, it costs Americans nothing (ignoring the costs of the higher prices themselves).

My article against sugar protectionism had the usual effect on special-interest policies — nothing changed — so that was the last I thought about it for a while. But then a former student asked me what I thought about the letter to the editor published in response to my article. So I dug it up online. Since it further illustrates the lengths to which protected domestic sugar producers will go to maintain their government-created gravy train by piling misrepresentations upon misdirection, I thought it merited sharing.

"U.S. Sugar policy has served us well."

One can almost admire the artistry of this title, which avoids being blatantly false due to the vagueness of the word "us." If it refers to the citizens of the United States, as the title clearly implies, it is false, since the vast majority of Americans are affected as consumers harmed by higher prices. But if "us" refers to the domestic sugar industry, the title is true.

"College professors are paid to theorize, not run successful businesses. A Pepperdine University professor, Gary M. Galles, proves this point in a March 23 op-ed bashing one of Florida's most important industries."

Given the amount of damage done to society by academic theorizing, often restrained by little more than whether other similar-minded academics like the conclusions, I have far more confidence that businesses that must meet the profit test by improving buyers' options actually benefit society than that such academic theorizing generally benefits society. However, the theorizing involved here is hardly of the impractical, ivory-tower variety. It is essentially the assertion that people will only make voluntary arrangements that they believe will make them better off, given their circumstances.

By contrast, Big Sugar's arguments for how violating people's ability to choose for themselves actually benefits them is precisely the kind of theorizing that can justly be criticized as false and misleading. Further, its success comes not from benefitting consumers with lower prices, but from taking away options consumers find superior. That does not improve social cooperation or well-being. I am reminded of Adam Smith's warning not to heed the special pleading of businesses unless they coincide with the interests of consumers (when they are given more options as a result, as when lower-cost foreign producers lobby to reduce trade barriers). Finally, when an industry is important because government bars lower-cost competition, this says nothing about whether the rationale is valid or whether it represents an efficient use of local resources.

"He suggests eliminating the U.S. sugar policy — which operates at no cost to America's taxpayers — and making the country dependent on subsidized foreign producers. His theory has failed in practice numerous times."

Here the author repeats a cynical misrepresentation my article had already addressed. Sugar policy currently operates at no direct cost to taxpayers for two reasons — because producers pay the cost of administering the sugar program and because the effects of import quotas have raised the domestic price so far that the government will not use taxpayer money to buy up sugar to support its current price.

However, as Henry George argued long ago, a quota is just like a blockade of foreign trade, and blockades do damage to the domestic economy even when someone else pays the cost of conducting the blockade. Further, taxpayers have historically been forced to fund government purchases of sugar to support its price; it is only because the quotas have increased domestic sugar prices so much lately, increasing the consumer harm imposed, that the government is not now doing so.

The claim of dependence on allegedly subsidized foreign producers also has two glaring problems. First, it ignores the fact that, to the extent that we would be dependent on foreign producers, it is because we would be willingly so, expecting to be better off buying from them. Besides, since current policy makes American consumers more dependent on domestic suppliers whose actions harm them rather than offering them better options, as foreign producers must, it is hard to see how the dependence argument favors import quotas. Second, regardless of whether foreign producers are subsidized (as are American producers), this leaves unchanged the fact that Americans are better off buying from lower-price sellers rather than producing the goods at a higher cost themselves.

"We depended on foreign sugar producers in the 1940s and the result was sugar rationing. And modern-day sugar policy exists because consumers were badly burned by roller-coaster prices in the 1970s and 1980s."

We did not have sugar rationing because of dependence on foreign sugar producers. If we were to allow markets to work, restrictions on sugar supply would raise prices, but would not cause sugar rationing, which can only be imposed by government restrictions. We had sugar rationing because of government policies imposed during World War II, including price controls.

One also cannot logically assert that current sugar quotas and other support policies, which maintain domestic sugar prices substantially above world prices at all times, are a solution to save sugar consumers from prices that were lower, even though they varied as market conditions changed. Consumers do not prefer higher prices than before (although this price stabilization argument is often used to misdirect attention from the higher prices restrictions generate). Domestic sugar producers have always been the promoters of restrictions, while domestic sugar users have strongly opposed them, which you would not find if consumers had been beneficiaries.

"A wants protection; that is, he wants B's money … A talks sentiment and metaphysics finely, and, after all, all there is in it is that he wants B's money."– William Graham Sumner

Finally, to assert that US prices should remain far above world prices for decades because of supposed problems in the 1970s and '80s only demonstrates how long the adverse consequences of such false rationales persist (like infant industries who never stop "needing" protection).

"More recently, the U.S. Department of Agriculture opened the floodgates to foreign producers following Hurricanes Katrina, Rita and Wilma. Much of the refined sugar that arrived had to be re-refined by U.S. companies to remove hunks of burlap, metal shavings, and other impurities."

Rather than opening the floodgates, sugar quotas have in effect actually become more stringent over time because some of the countries with quotas based on production shares from the 1970s no longer ship raw sugar to the United States.

It is not surprising that giving surprise "charity" import permission for countries hit by natural disasters may result in quality-control problems if those countries' domestic sugar standards are not as stringent. However, to the extent that regular sales to the United States are expected, there is no reason to continue to expect quality problems.

And even if there were such problems, it would not justify market restrictions. They would simply be marketing disadvantages that would be overcome only when the cost of fixing the problems was less than the price advantages — that is, when consumers gain. Further, if it is helpful to such countries to sell more sugar to the United States after disasters, doesn't it follow that it would benefit them generally as well, rebutting the claim made later that US policy has the support of other sugar-producing countries?

"McKeany-Flavell, a California-based research firm that is paid to help build successful businesses, had this to say about the theory of eliminating sugar policy: 'Just as we are experiencing problems with our dependence on foreign oil, sugar users would have many obstacles to overcome, including sugar quality, consistency, packaging and (delivery).'"

The website for that firm reveals that they do commissioned reports. So it hardly strains credibility for them to produce a "research" report against eliminating sugar quotas, paid for the companies who oppose it. It reminds me of Henry Hazlitt's reference to how those who gain from government protection hire "the best buyable minds" to so confuse issues that sensible thinking becomes almost impossible and opposition is overwhelmed.

The fact that the "research" cites foreign dependence as a major problem also raises a red flag. Dependency is virtually only cited as an argument when the purpose is to justify political restrictions on voluntary international arrangements, rather than accurately characterizing circumstances (and with quotas, consumers are forced to be even more dependent on domestic suppliers, whose favored policy intentionally harms them with higher prices).

When people are free to make their own arrangements, any dependency or reliability problems are taken into account in their decision-making, leaving no issue requiring public policy to solve. And surely a firm that sells expertise in commodity markets is aware of the many market arrangements that can be utilized to mitigate dependency or quality-control issues.

"Sugar policy has been a success in this country, which is why it has strong bipartisan support in Congress. It is also popular with most of the 41 countries that already ship sugar to the United States, which is the world's second biggest sugar industry."

As with the title, the first point here artfully avoids outright lying through ambiguity. Sugar policy has been a success for the sugar industry in this country by harming the rest of us, but that is vastly different from saying it is a success for the country.

The strong bipartisan support does not represent benefits to Americans either. It represents a well funded interest group, each of whose members has a great deal at stake, buying the support of politicians. Their political success is made possible only by the ignorance of voters who lose far more in total, but far less individually, which is why sugar policy is often the poster child for public-choice abuses in economics textbooks.

The supposed popularity of American sugar policy among other sugar-producing countries is similarly that of other producers and their political patrons bought at the expense of others. While American import quotas restrict sugar sales here, those foreign sales receive the much higher US price on those sales, making them highly profitable to the producers, and control of who will get those profits a very valuable tool for politicians. But restricting those countries from selling more of what they produce at low cost does not help their citizens.

Finally, while the fact that the United States is the second-largest producer of sugar would mean we are a relatively low-cost producer in a free market, it means nothing of the sort when it has been created only by erecting very high trade barriers. In fact, if the United States were a low-cost producer, we would expect the United States to be an exporter of sugar to other countries, rather than one that needs barricading against many lower-cost producers. Current restrictions force us to give up the gains from comparative advantage, making us poorer, not wealthier.

"As for the price complaints in the op-ed? A pound of sugar still costs about half as much as a candy bar, restaurants still give it away for free, and candy companies are still enjoying huge profits."

The comparison with the price of a candy bar is irrelevant other than as a means to portray candy makers as the "real" problem rather than sugar policy. It is only an attempt to divert attention from the real question — are sugar prices, and the prices of products made with sugar or substitute sweeteners, higher than they would have been otherwise?

The free sugar with coffee at a restaurant is also irrelevant. It only says that the cost of the "free" sugar used by patrons is small enough relative to what is charged for a cup of coffee that it is not worth charging for separately. It is conceivable that sugar could become more expensive still, so that the practice would be stopped, but that does not imply that they aren't elevated substantially above what they otherwise would have been.

The supposedly huge profits of candy makers are asserted to again shift blame away from the American sugar industry. However, "huge profits" are in the eye of the beholder (especially since accounting profits vastly overstate economic profits when large investments are involved). And what about Big Sugar's profits? Further, the increased costs of American sugar policy are made clear by multiple candy producers who have shifted production out of the country because of the far higher domestic price of sugar.

$30 $25

 

The letter's author? "George H. Wedgworth, president & CEO, Sugar Cane Growers Cooperative of Florida, Belle Glade."

The incomes of the writer and those he represents depend hugely on maintaining current policy, so he would be arguing for it whether it were a good policy or not. Honesty and serious analysis would suffice if it were a good policy. However, those with a strong case in reality would not resort to misrepresentation after misrepresentation and misdirection after misdirection, as does the American sugar industry. That is why William Graham Sumner's description that "A wants protection; that is, he wants B's money … A talks sentiment and metaphysics finely, and, after all, all there is in it is that he wants B's money" is so accurate.

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