Streetwise Professor

January 1, 2013

Got Milk? Get Milked, is More Like It

Filed under: Economics,Politics — The Professor @ 7:44 pm

One of the kerfuffles that is adding to the sense of panic in DC is the prospect for a doubling of milk prices if a new farm bill doesn’t pass.

The story is not the most important thing going on, by far, but it does illustrate the bizarro world that is normality, DC style.

Here are the details.  In 1949, Congress passed a law that required the government to support the price of milk at 75 to 90 percent of 1914 parity levels.  That is, farmers would be guaranteed a price equal to as much as .9 times the price of milk in 1914.

By the early 1980s, it became clear that this price was insanely high given the substantial increases in productivity (driven, for instance, by mechanization and by artificial insemination that improved the quality of the dairy herd.*)  There was a very visible sign of how out of line the official price was.  The US government accumulated huge inventories of cheese that it bought and stored to prop up the price of milk.  By 1981, government cheese could have filled a freight train stretching from the tip of Maine to the Florida Keys.

But rather than let the market determine the price of milk, Congress periodically set new support levels.  These levels were above the competitive price, but below the parity price.

Here’s the kicker: the support levels are time-limited, and if Congress doesn’t pass a new support level when the old one expires, the support level reverts to that set by the 1949 bill.

That’s where we are now.  Congress hasn’t passed a new farm bill, and the support levels set in the old bill are about to expire.

This problem is easily solved.  Pass a farm bill that (a) sets no new price support, and (b) repeal the reversion to the 1949 bill. Then milk prices would go down.

Since prices going up is a bad thing, prices going down should be a good thing, right? Right?  It works both ways, right?

But that isn’t even on the table.  Instead we get this shrieking about the return to the 1949 law, as if it’s somehow sacrosanct.

It gets better.  Agriculture Secretary Tom Vilsack gave a 5 hanky interview with Obama shill Candy Crowley in which he lamented the failure to pass a new farm bill as a sad testament to the powerlessness of rural America.

Seriously?

The persistence of price supports, in milk, and in sugar, and in other ag commodities, is in fact a testament to the disproportionate power of the ag lobbies.  These programs transfer billions of dollars from urban and suburban America to farmers.  Much of the impact is felt by poor Americans.  But don’t worry!  We’ll offset that by food stamps-pardon me, SNAP-a program that has metastasized, almost doubling in size in terms of participation, and more than doubling in dollars since Obama took office.

These price supports are an abomination.  They are textbook examples of redistributive government policy creating deadweight losses.

For Vilsack to get all weepy about the political weakness of rural America just adds insult to injury.

I knew Ross Perot was an economic idiot when during the 1992 campaign he expressed bewilderment at how the political power of the agriculture interests increased as the farm population declined.  Basic political economy provides the answer to that: small, concentrated interests exert disproportionate power The benefits are concentrated, the costs are diffuse.  The beneficiaries have a strong incentive to pay pols to advance their program because each individual gets a relatively large amount of money in the bargain, and those who pay the costs don’t have the incentive to organize an opposition because no individual pays a big cost (even though the collective costs are huge).  An individual farmer might make several thousand additional dollars.  An individual consumer pays a few dollars more.  No individual consumer has an incentive to spend to oppose the bill, but individual farmers do.  As the farm population has shrunk, it has become more concentrated and homogenous, and much more powerful as a result.

This is not the biggest policy disaster we face now, but it does demonstrate the dysfunction of our politics.  And no, it’s not the dysfunction that the Vilsacks and the other DC denizens routinely bewail: the inability to get things done.  In fact, getting things done is exactly the problem .

And what gets done is us.  Who gets milked to pay for the milk program? You do, sucker.

The apparent “solution” to the so-called Fiscal Cliff supposedly addresses this issue.  Oh joy.  Just another bolt on that Frankenstein’s neck.

The bill the Senate passed is truly a monstrosity.  It is wrong on every dimension.  It raises marginal tax rates on some, but doesn’t address any of the wasteful, and completely unjustified, inefficiencies in the tax code.  That is, it doesn’t eliminate any of the politically popular but economically inefficient deductions.  It raises taxes on capital (dividends and capital gains), which is horrible because capital taxes are highly inefficient.  It doesn’t cut spending.  It doesn’t address entitlements.  At all.

And to add to the seasonal joy, the IRS today announced rules related to Obamastein, AKA the Affordable Care Act.  Per the IRS, it won’t be so affordable for families.  Although ACA mandates that employers who provide insurance make available reasonably priced policies for employees, it says nothing about family coverage.   The IRS rules don’t either.  Meaning that a likely outcome is that many employers will offer cheap individual policies, and outrageously expensive family coverage.  Thereby driving people to . . . exchanges that many will not be eligible for?  Exchanges that might not even exist?

Obama assured us “you’ll be able to keep the coverage you have.” Hahahahahahahaha.  Joke’s on you, suckas.

So I wish you a Happy 2013, my fellow bovines.  Like all those cows who exist because of the federal government, you are about to spend 2013, and many years to follow, getting screwed then getting milked.

* My dad was president of an AI firm back in the 1970s, Curtiss Breeding Service.  It was a subsidiary of GD Searle.  The business’s bread and butter was a bull named Paclamar Astronaut, who sired upwards of 40,000 offspring.   My parents have a large print of Astronaut in their house.  He paid the rent for quite a while.  Until Don Rumsfeld became CEO of Searle, and disposed of Curtiss.

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8 Comments »

  1. The US really needs to adopt a sensible, simple, and non-price distorting agricultural subsidy system like the EU has, i.e. the CAP.

    Okay, sarcasm now off. It does appear that the EU and US are trying to outdo each other in implementing policies of monumental stupidity when it comes to agricultural subsidies.

    Also, great anecdote about Paclamar Astronaut. I wonder what happened to him? He’ll be beaming with pride somewhere in cow heaven.

    Comment by Tim Newman — January 1, 2013 @ 11:33 pm

  2. […] more fiscal cliff analysis, along with subsidy […]

    Pingback by Breakfast Links-Welcome to the Mitch McConnell Tax Hike - Points and Figures | Points and Figures — January 2, 2013 @ 4:33 am

  3. @Tim-I did a spit take when I read the slug of your comment-the first sentence-on the WordPress dashboard. I thought you knew something about CAP that I didn’t, LOL.

    Yes, the stupidity is indeed monumental.

    Re Astronaut. 1. Thanks. 2. I can tell you what happened to a piece of him. The most important piece, given his line of work. And perhaps because of this, he isn’t beaming with pride. Upon his departure from this earth, his, er, equipment was removed, shellacked (or something like that) and turned into a cane, which was given to his owner as a momento. These things are about a meter long, you see. So if American Plains Indian lore is correct, and you go to the afterlife with a body in the condition at death here on earth, Astronaut is one pissed stud.

    The ProfessorComment by The Professor — January 2, 2013 @ 7:01 am

  4. You should have put some of Astronuts seed away for a rainy day. Top end is probably $1.5 MM/gallon now.

    Could this be the source of the enormous amount of BS that Chicago politicians produce. Could some have gotten into the water supply.

    Comment by pahoben — January 2, 2013 @ 7:51 pm

  5. @pahoben. There were 300 bulls in the Curtiss Breeding Service barns. But they produced nothing like the bullshit that Chicago pols did/do.

    The ProfessorComment by The Professor — January 2, 2013 @ 8:06 pm

  6. The story about milk reminds me that that other panacea of stupid pols, position limits, which are supposedly just the ticket for keeping oil prices low, were introduced originally to keep the price of wheat high!

    Clever, aren’t they? Some silver bullet.

    Apparently the price of wheat rocketed late in WW1 then collapsed. Speculators were blamed. Which seems a bit odd. Let’s see, what happened in about 1917 that might have had a fundamental bullish effect on wheat prices – German capture of the Ukraine maybe? Defeat and overthrow of Tsarist Russian? U-boat campaign against American seaports and sea trade?

    And what happened – or rather what ended – in 1918 that might have undone those bullish effects? A major war didn’t end or anything, did it?

    Clever things, position limits. Governments interfering in these markets always works so well.

    Comment by Green as Grass — January 3, 2013 @ 9:09 am

  7. @Green. Totally. Regulators/legislators are like Goldilocks. The price is never just right. All of the original efforts to control futures, dating back to the 19th century (e.g., the Butterworth Bill) occurred during agricultural depressions/deflationary periods. Now it is during price increases. This demonstrates the purely political nature of these efforts. Ag producers much bigger fraction of population in the 1890s-1930s. Now it is commodity consumers that represent the bulk of the electorate. So limits are always a response to political pressure to “do something” about prices; when farmers represented the bulk of the population it was necessary to “do something” about low prices, and now that most are consumers of commodities, it is necessary to “do something” about high prices.

    Not that limits will do anything to prices one way or the other. The political amoebae responding to the stimulus don’t know and don’t care.

    The ProfessorComment by The Professor — January 3, 2013 @ 2:32 pm

  8. An interesting statistic I once came across was that in 1982, 250,000 vehicles entered central London during the rush hour, and the average traffic speed was 12mph. 20 or 25 years later, 110,000 vehicles entered London and the traffic speed was 11mph. This was construed as evidence that cars were causing traffic congestion, that there needed to be fewer of them, and that people should be charged £10 a day to drive into London.

    Many inferences could be drawn from those data points, but not those.

    In fact, besides the collapse in car journeys, at least two or three other factors bore on road speeds. There were more bus journeys, more bicycle journeys, more road space given over to both, and more traffic planning generally. Buses and taxes are slow-moving and / or bulky road-blocking modes of transport, so it seems likely that they are the main drivers of congestion. The bizarre opposite assumption, along with the obsession with prioritising them as “better” than cars, has caused a vicious cycle, whereby more buses and bikes slow down traffic, and the answer is presumed to be even more buses and bikes. Like socialism, when it doesn’t work, the answer is always that there isn’t enough of it and we need more.

    The decline in car journeys has continued since the London congestion charge came in, and so has the decline in road speeds.

    In other words, there is a very good chance that public policy is exactly wrong.

    We have seen the same with position limits. The most volatile commodities are those in which there are no futures at all (i.e. functionally equivalent to an all-month futures position limit regime of 0 lots), followed by those where there are futures but with limits, followed by those where there are futures without limits. The awkward data around this is disregarded because it doesn’t fit the pols’ theory. This always calls for more limits, and if the volatility (or the low price, or the high price) bafflingly persists, well, it’s always because there still aren’t enough limits.

    Comment by Green as Grass — January 4, 2013 @ 7:02 am

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