Free Our Markets
Page 19
The Dairy Product Price Support Program “support[s] the price of cheddar cheese, butter and nonfat dry milk through the purchase of such products,” with taxpayers’ money, again.
These programs vary in their effects from year to year as the weather and other market conditions change, but on average, the first two programs are estimated to cost taxpayers about $1.3 billion a year. A lot of that money goes to pay the salaries of the USDA bureaucrats and general expenses of the programs, but the rest, about $900 million annually, goes to dairy companies in payments for milk, cheese, and butter, and as compensation for low milk prices. The third program, which supports prices, costs consumers about $420 million per year while it increases farm income by about $293 million per year.
The total estimated costs to taxpayers and consumers, then, come to about $1.72 billion per year. The total estimated benefits to dairy farmers come to about $1.19 billion per year. Because there are about nine million dairy cows in the country, we can say that each cow is subsidized about $132 on average.
For taxpayers and consumers, these dairy programs are a bad deal. Taxpayers have to foot the bill not only for the payments to dairies, but also for the storage of the excess cheese and nonfat dry milk, as well as the salaries and expenses of the USDA bureaucracy that administers the programs. The payoff of the program for taxpayers is that when we get to the store we pay more than we otherwise would for milk, butter, yogurt, ice cream, and cheese. It really is quite remarkable: taxpayers are taxed so that we will have to pay more for milk at the store.
The programs yield no net benefits; they are as wasteful as they seem. The artificially high prices foul up the operation of the Price Communication Principle, so that dairy farmers invest more scarce resources in milk production than they should. Other goods and services that would have made the public better off go unproduced.
The key question for this chapter is:
How can these programs last in a democracy?
The majority are supposed to rule in democracy. There are about 310 million Americans now, most of whom pay taxes of one kind or another, and a majority of whom consume dairy products. Each of us suffers from this program, which takes money from our pockets and puts it in the pockets of those in the dairy business. But there are fewer than seventy-five thousand dairies in the U.S. now, so across the country, only a few hundred thousand people own or work in dairies. Why don’t the many outvote the few? How could the dairy programs last when they harm two hundred million or more and benefit only a half million or so? If democratic processes are adequate to guide policies toward accomplishing the public good, then certainly these farm programs should never have been started, or, once started, immediately eliminated.
But the dairy programs last and last. Like thousands of other economically damaging public policies that harm far more people than they benefit—like logging in the Tongass and hairdresser licensing—they last because of the special interest effect. The key to the special interest effect is the perverse incentives that arise when Congress is allowed to intervene in the economy: incentives for taxpayer-consumers, for people in the affected industry, and for members of Congress.
In order to clarify the incentives at work, let us imagine a representative taxpayer-consumer and a representative dairy owner. Our taxpayer-consumer we’ll call Vince, a young athlete trying to build up his size, who drinks a lot of milk. Our dairy owner is Mrs. Watson, who owns a medium-sized dairy with 200 cows.
Let’s consider Vince’s incentives first. What does the program cost him? Suppose the price support program increases the retail price of milk by a representative 20 cents a gallon. Suppose further that Vince drinks a lot of milk, a couple of gallons a week. In extra money he pays for milk, the program costs Vince:
20 cents/gallon x 2 gallons/week x 52 weeks/year = $20.80/year.
We estimate what Vince pays in taxes toward the dairy programs at the per person average of $4.19 (about $1.3 billion in total cost to taxpayers, averaged over the approximately 310 million Americans). Hence the dairy programs cost Vince about $25 per year in higher prices and taxes. Note that we have set up the example so that that figure is probably higher than the cost would actually be to most consumers, who drink less milk.
Now the crucial question: how strong an incentive does Vince have to do something about it? Ponder that while we consider Mrs. Watson’s situation.
What is the benefit of the dairy price support program to someone like Mrs. Watson? She has 200 cows at her dairy, and we have seen that the average subsidy per cow over the last decade has been on the order of $132. In extra revenue to her dairy, then, the program pays to Mrs. Watson:
$132/cow/year x 200 cows = $26,400/year.
Note that we have set up the example so that the subsidy is substantially lower than it would be to a larger dairy (large dairies in the U.S. have more than 15,000 cows, and most of the country’s milk is produced on farms with more than 500 cows).
Now the same crucial question: how strong an incentive to do something about it does this $26,400 a year give Mrs. Watson?
Back to Vince’s incentives: how energetically will Vince object to this transfer of $25 a year from “the poor” (him, a college student accumulating debts) to “the rich” (established businesspeople such as Mrs. Watson)? Is it likely that Vince even knows about these programs?
Let us suppose that Vince does know about the programs—perhaps he learned about them in an economics class. How strong an incentive does he have to do something about them, to object, to write or call his congressman, or to organize other victims of the programs into a lobbying group to oppose it? Clearly his incentive is weak because the programs cost him only $25 a year. Vince would not spend much more than $25 worth of time and effort to oppose the program, even if he thought he could defeat it by his efforts. But of course he knows that any effort he personally makes is likely to have a tiny effect on national dairy policy, even if he visits his congressman and both senators. And it might cost him more just to park in Washington, D.C., for a day than the price support program costs him in a year.
Under these circumstances it makes sense for Vince simply to ignore federal dairy policy. And what is true for Vince is true for every other milk-drinker taxpayer in the country. The $1.72 billion total cost is so widely diffused over all consumers and taxpayers that each of us bears only a very small individual cost. Therefore each of us individually has only a very weak incentive to do anything about it. The effort is not worth the $25 it would save a milk-guzzler like Vince, even on the vanishingly small chance that his individual efforts should get the program repealed.
Indeed, the $25 cost to Vince is so small that, like almost every other milk-drinker taxpayer in the country, he probably never learns of the program at all. Most Americans quite reasonably do not even know that the dairy programs exist. Public choice economists call this “rational voter ignorance.” It is rational—it makes sense—for Vince and most taxpayer-consumer-voters to remain ignorant about the federal dairy programs because the value of the time it would take them to learn and keep informed about them is greater than what the programs cost them.
(We should note here that another kind of ignorance surely contributes to the survival and even the flourishing of these destructive dairy programs: plain economic ignorance of the kind this book aims to reduce. Undoubtedly many Americans support measures to “save America’s dairy farmers” because they do not understand how prosperous most of those farmers are or how much harm the programs cause.)
What about Mrs. Watson and other dairy farmers? The program benefits Mrs. Watson to the tune of about $26,400 a year. How strong an incentive does that give her to support it? Is it likely that she knows about the program? What percentage of American dairy farmers, do you suppose, know about the program?
Clearly, all dairy farmers have a strong incentive to keep informed about the program and to support it politically. Offsetting this incentive, for the principled and honorable among them, is t
he incentive to earn income only by free exchange, to refuse this corporate welfare, to oppose these redistributive dairy programs, even though they lose financially by doing so. Unfortunately, in many dairy farmers the former incentive prevails. The second part of the Incentive Principle is in play: They are tempted to use this intervention to benefit themselves at others’ expense. So they write their congressional representatives; they support lobbying efforts; they organize with other dairy owners, generally through some already-established industry group such as the National Milk Producers Federation. Because the program benefits her by $26,400 a year, Mrs. Watson is willing to spend up to nearly that amount in time and money to support the program. Even if she spends $26,000 a year, she will come out ahead. She knows that her contributions will have an impact in Washington, because they will be used by the experienced lobbyists the Dairymen’s Association hire.
Because the number of dairy farmers is small relative to the millions of dollars spent in the program, the benefits of the program are concentrated on a relatively small group. Each dairy farmer therefore receives a substantial benefit from the program. Accordingly, each has a strong incentive to stay informed about the program and to give it substantial political support.
The consequences for dairy policy follow logically from the different levels of lobbying and political activity of taxpayer-consumers and dairy farmers. When it comes time to vote on reauthorizing the dairy programs, whose voices will be heard in Congress? Would you say it is the voices of taxpayer-consumers, who would like to pay less for milk, or the voices of dairy farmers, who would like to keep being subsidized for producing it? Hardly any voices are raised for taxpayer-consumers, while the voices of the dairy farmers are loud, clear, and insistent.
What are the politicians’ incentives? Though they would like to do the right thing (we hope)—support sound policies that respect property rights and keep food prices down for poor families—they definitely want to be reelected. Accordingly we can count on most of them, most of the time, to do what will help them get reelected. In the case of dairy programs, politicians know that supporting the programs is the clear winner. If they back dairy price supports and subsidies, they will lose hardly any votes from the taxpayer-consumers who are harmed: those taxpayer-consumers don’t even know about the programs. At the same time, backing the programs will win them both votes and campaign contributions from the dairy interests. Consequently, the politicians have a strong financial and career incentive to vote for the dairy programs. In most of them, this incentive is stronger than their incentive to do the right thing. In keeping with the Incentive Principle, the politicians’ ability to intervene in dairy markets tempts them to do so, to benefit themselves at the expense of the general public. What is really in the public interest, sadly, has not (yet?) been able to stand up against the special interest incentives generated by government intervention in the dairy industry.
The Special Interest Effect
Let us generalize to the special interest effect that the federal dairy programs illustrate: Bad public policy tends to last and even flourish when the policy concentrates benefits on a special interest group and diffuses costs over the general public. The concentrated and therefore large benefits enjoyed by each individual member of the special interest group give them a strong incentive to support the policy politically. By contrast, the diffused and therefore small costs borne by each taxpayer-consumer give them only a small incentive to oppose the policy politically, or even to find out about it. The consequence of these incentives is lively political pressure on politicians from the special interest group and little to no political pressure from the general public. Accordingly, when it comes time for a legislature to vote on the policy, the politicians tend to support it.
The greater ease of organizing a smaller group helps special interests pass legislation that benefits them at others’ expense. Whereas large groups of consumer-taxpayers are difficult to identify and contact, concentrated special interest group members are relatively easy to identify and contact. Indeed, as in the case of the Dairymen’s Association, many special interest groups are already organized in industry associations formed initially for non-political purposes such as networking and sharing information.
We can see in Figure 7.1 the operation of the special interest effect in five of the examples we have considered in these first seven chapters.
The special interest effect goes a long way toward explaining why democratic political processes often cannot improve bad economic policy. Because of the special interest effect, the incentives that drive political processes tend to perpetuate bad policy. The public cannot vote out of office those who support economically destructive legislation when the public does not and will not know such legislation exists. Indeed, there is so much special interest policy on the books that even professional policy analysts cannot keep track of it all. No average citizen can be expected to do so while holding down a job.
The Bluntness of the Ballot Box
Another reason why democratic political processes cannot be relied on to protect the public from bad policy is that control through the ballot box is far too indirect and imprecise to be effective. How well are you able, reader,
Figure 7.1 The Special Interest Effect: Concentration of Benefits and Diffusion of Costs
Institution
Recipients of
Concentrated
Benefits
Those Bearing
Diffused Costs
Forest Service’s logging
program in the Tongass
Loggers and logging
companies
Taxpayers and
wilderness lovers
Hairdresser
licensing
Established
hairdressers
and salons
Consumers
Minimum wage laws
Unions and other higher-skilled
workers
Low-skilled workers; consumers (who pay higher prices)
Scrubber requirement
on coal-fired electricity-generating plants
Eastern coal interests; United Mine Workers
Consumers of
electricity;
(some) breathers of air
FDA’s excessive caution
FDA employees
Drug
consumers
to register your objection to, say, the logging program in the Tongass or to the hairdresser licensing in your state by your votes for your representatives in Congress and your state legislature? Not very. In the first place, all available candidates might support the policies you object to. More important, when one votes for a representative, one votes for a package—all the various policy positions that politician takes. When we agree with some and disagree with other policy positions a representative takes, there is no way for us to communicate that when we vote. Still another problem is that we have no guarantee or even much likelihood that politicians will do what they have promised. And how, by voting for one candidate or another, might a voter register her discontent with the details of a particular policy? If, for example, she supports hairdresser licensing in principle, but believes the requirements are far too strict and expensive, can she express that preference by voting? No.
The democratic process cannot be relied on to regulate economic intervention in the public interest. Special interest groups can and will control that intervention in large measure. Politicians and bureaucrats will act largely in their own private interest, even when doing so hurts the public interest. The citizens, as voters, can do little to prevent them.
The idea that intervention will serve the public interest if we get “the right people” into office is an illusion. People are people, whether Republicans or Democrats. In Lord Acton’s famous words, “All power tends to corrupt.” The solution is not to get “the right people” into power, but to do away with the power. There should be no power to interfere in the peaceful, rights-respecting interactio
ns of competent adults. Nobody can handle that power well. Nobody.
Part II
Conclusion
The solution to the problem of special interests is to limit government to the role Jefferson identifies in his first inaugural address, quoted in this book’s introduction. Governments should “restrain men from injuring one another” and nothing more. Policy should “leave them otherwise free to regulate their own pursuits of industry and improvement.” Take away the governmental power for some to impose their wishes on peaceful others, and the problem of special interests will evaporate.
Imagine American society supporting freedom of exchange as strongly as we support freedom of speech and freedom of religion. No lobbyist for a newspaper chain or a religion goes to Washington today to insist that any new newspaper or religion first get a license assuring the quality of their news or doctrine. If members of Congress were asked to institute such licensing, they would shrug, bemused, and say, “Well, I’m sorry, but the Constitution does not permit us to interfere with the press or religion.”
That’s the way it should be with the rest of the economy as well! No special interest group, such as loggers or hairdressers or dairy farmers, should even think of going to Washington—or state capitals—for licensing, subsidies, tariffs, bailouts, or other special treatment. They should know that their legislators would have to say, “Well, I’m sorry, but the Constitution does not permit us to subsidize businesses or interfere with commerce.” If politicians had no favors to hand out, special interests would seek no favors from politicians.
Government regulation tempts special interests to use government power to benefit themselves at others’ expense. The special interests regularly fall into temptation. The economy works for the benefit of all to the extent that resources are privately owned, exchange is free, and regulation is by market forces.