Saturday, December 29, 2012

The Annual Dairy Cliff

"Orderly" Price Gouging

Pushed Nation Over the Dairy Cliff in 1934

With many fixated on the so-called "fiscal cliff," some fear that the nation will soon fall off the "dairy cliff."  In particular, current legislation setting milk prices higher than the competitive level (see below) is due to expire on December 31.   If such legislation does expire, then federal law will revert to that contained in a 1949 statute.  That statute, in turn, will require the Department of Agriculture to begin purchasing milk and other dairy products in an effort to drive milk prices even higher than they already are.  According to a recent essay in the Economist magazine:

 "[I]f there is no farm bill by the start of the next agricultural year, the government’s price-support scheme will automatically revert to what it was in 1949. Most crops have until the spring or summer, but the deadline for milk and other dairy products comes at the end of December. Applying the old formulas today would require the federal government to buy up enough milk to establish a minimum wholesale price more than double its current level."

As explained elsewhere, these "old formulas" set milk prices "based on what dairy farm production costs were in 1949, when milk production was almost all done by hand." Presumably the government would hold milk, cheese and other products off the market indefinitely, allowing them to spoil while some Americans go hungry. 

So far as this blogger is aware, no public official or pundit wants the nation to revert to the 1949 legislation, and the current Administration and some in Congress have proposed various solutions. If, however, the nation does fall off the "dairy cliff," the result will simply be the most extreme manifestation of welfare-reducing federal intervention in dairy markets.  Even under current law, the national government issues annual "milk marketing orders" that set minimum prices that dairy processors must pay  milk producers, "to assure dairy farmers a reasonable minimum price for their milk through the year." (See this articulation of the policy by the United States Department of Agriculture.)  These prices vary, sometimes by almost a factor of four, county by county (compare the price set for most of Montana with that for parts of Florida, for instance).  Prices also vary according to the use the purchaser plans to make of the milk.  Processors must pay the highest prices for Class I or "beverage" milk and lower prices for milk used in yogurt and cheese, for instance.  The image posted above, from a USDA website, shows only Class I prices.   Such marketing orders, the government claims, "make the buying and selling of fluid milk an orderly process."

These regulations result in two obvious and inter-related harms. First, they protect inefficient producers, by preventing more efficient producers from gaining market share by pricing below the coercively-established price.    Second, they injure milk purchasers by pricing some out of the market and forcing others to pay higher prices for the same product than they would pay in a competitive market.  Those consumers forced out of the market will, of course, purchase other, perhaps less nutritious, products.  In short, current federal law enriches producers at the expense of consumers and ensures that the milk industry employs more scarce resources than are necessary to produce its output, depriving other industries of such resources and making them less competitive vis a vis foreign rivals.

Of course, such price-fixing by the nation's dairy farmers would be a felony under the Sherman Act and analogous state antitrust laws.  These statutes reflect the nation's faith that competition, not collusion, should determine prices, output and thus the allocation of resources.  Unfortunately, both Congress and the states repeatedly displaced competition with government planning or authorization of private cartels during the 1930s, ostensibly to combat the Great Depression.  Wages, trucking, airlines, insurance, and agriculture --- all fell prey to anticompetitive governmental intrusion that enriched producers and injured consumers. The Supreme Court stood idly by, validating such legislation, including milk price controls.   Thus, in Nebbia v. New York, 291 U.S. 502 (1934), for instance, the Court, in a 5-4 decision, sustained a New York statute that set minimum resale prices for milk during the depths of the Depression, while many  of the state's families were struggling to put food on the table.  The majority opinion, by Justice Owen Roberts (pictured above) rejected or mischaracterized relevant precedents, many of which had invalidated such coercive state price fixing.  The Court also claimed that the legislation served a valid public purpose, without identifying any such purpose.   As Justice McReynolds observed in dissent, the state may as well have enacted legislation that "required householders to pour oil on their roofs as a means of curbing the spread of fire when discovered in the neighborhood."  Instead, he observed, there was a "superabundance" of milk, "which no child can purchase from a willing storekeeper below the figure appointed by three men at headquarters."  A few years later, Congress enshrined New York's anti-consumer policy into Federal Law in the Agricultural Adjustment  Act of 1937.  As previously explained on this blog, these Depression-era measures, including the cartelization of labor, both deepened and lengthened the Great Depression, as John Maynard Keynes had predicted in an open letter to President Roosevelt in 1933.

In short, the nation has been falling off the dairy cliff each year since the New Deal.  Unless Congress abolishes federal (and state) regulation of milk prices, such intervention in the free market will continue to gouge consumers, foster inefficiency and destroy economic welfare.  Perhaps the severity of the pending 1949 cliff will jar Congress into action.  We can only hope.