PRICE “FLOORS” AND SURPLUSES
Just as a price set below the level that would prevail by supply and demand in a free market tends to cause more to be demanded and less to be supplied, creating a shortage at the imposed price, so a price set above the free market level tends to cause more to be supplied than demanded, creating a surplus.
Among the tragedies of the Great Depression of the 1930s was the fact that many American farmers simply could not make enough money from the sale of their crops to pay their bills. The prices of farm products fell much more drastically than the prices of the things that farmers bought. Farm income fell from just over $6 billion in 1929 to $2 billion in 1932.{76}
As many farmers lost their farms because they could no longer pay the mortgages, and as other farm families suffered privations as they struggled to hang on to their farms and their traditional way of life, the federal government sought to restore what was called “parity” between agriculture and other sectors of the economy by intervening to keep farm prices from falling so sharply.
This intervention took various forms. One approach was to reduce by law the amount of various crops that could be grown and sold, so as to prevent the supply from driving the price below the level that government officials had decided upon. Thus, supplies of peanuts and cotton were restricted by law. Supplies of citrus fruit, nuts and various other farm products were regulated by local cartels of farmers, backed up by the authority of the Secretary of Agriculture to issue “marketing orders” and prosecute those who violated these orders by producing and selling more than they were authorized to produce and sell. Such arrangements continued for decades after the poverty of the Great Depression was replaced by the prosperity of the economic boom following World War II, and many of these restrictions continue to this day.
These indirect methods of keeping prices artificially high were only part of the story. The key factor in keeping farm prices artificially higher than they would have been under free market supply and demand was the government’s willingness to buy up the surpluses created by its control of prices. This they did for such farm products as corn, rice, tobacco, and wheat, among others—and many of these programs continue on to the present as well. Regardless of what group was initially supposed to be helped by these programs, the very existence of such programs benefitted others as well, and these new beneficiaries made it politically difficult to end such programs, even long after the initial conditions had changed and the initial beneficiaries were now a small part of the constituency politically organized and determined to keep these programs going.{vii}
Price control in the form of a “floor” under prices, preventing these prices from falling further, produced surpluses as dramatic as the shortages produced by price control in the form of a “ceiling” preventing prices from rising higher. In some years, the federal government bought more than one-fourth of all the wheat grown in the United States and took it off the market, in order to maintain prices at a pre-determined level.
During the Great Depression of the 1930s, agricultural price support programs led to vast amounts of food being deliberately destroyed, at a time when malnutrition was a serious problem in the United States and hunger marches were taking place in cities across the country. For example, the federal government bought 6 million hogs in 1933 alone and destroyed them.{77} Huge amounts of farm produce were plowed under, in order to keep it off the market and maintain prices at the officially fixed level, while vast amounts of milk were poured down the sewers for the same reason. Meanwhile, many American children were suffering from diseases caused by malnutrition.
Still, there was a food surplus. A surplus, like a shortage, is a price phenomenon. A surplus does not mean that there is some excess relative to the people. There was not “too much” food relative to the population during the Great Depression. The people simply did not have enough money to buy everything that was produced at the artificially high prices set by the government. A very similar situation existed in poverty-stricken India at the beginning of the twenty-first century, where there was a surplus of wheat and rice under government price supports. The Far Eastern Economic Review reported:
India’s public stock of food grains is at an all-time high, and next spring, it will grow still further to a whopping 80 million tonnes, or four times the amount necessary in case of a national emergency. Yet while that wheat and rice sits idle—in some cases for years, to the point of rotting—millions of Indians don’t have enough to eat.{78}
A report from India in the New York Times told a very similar story under the headline, “Poor in India Starve as Surplus Wheat Rots”:
Surplus from this year’s wheat harvest, bought by the government from farmers, sits moldering in muddy fields here in Punjab State. Some of the previous year’s wheat surplus sits untouched, too, and the year’s before that, and the year’s before that.
To the south, in the neighboring state of Rajasthan, villagers ate boiled leaves or discs of bread made from grass seeds in late summer and autumn because they could not afford to buy wheat. One by one, children and adults—as many as 47 in all—wilted away from hunger-related causes, often clutching pained stomachs.{79}
A surplus or “glut” of food in India, where malnutrition is still a serious problem, might seem like a contradiction in terms. But food surpluses under “floor” prices are just as real as the housing shortages under “ceiling” prices. In the United States, the vast amount of storage space required to keep surplus crops off the market once led to such desperate expedients as storing these farm products in unused warships, when all the storage facilities on land had been filled to capacity. Otherwise, American wheat would have had to be left outside to rot, as in India.
A series of bumper crops in the United States could lead to the federal government’s having more wheat in storage than was grown by American farmers all year. In India, it was reported in 2002 that the Indian government was spending more on storage of its surplus produce than on rural development, irrigation and flood control combined.{80} It was a classic example of a misallocation of scare resources which have alternative uses, especially in a poor country.
So long as the market price of the agricultural product covered by price controls stays above the level at which the government is legally obligated to buy it, the product is sold in the market at a price determined by supply and demand. But, when there is either a sufficient increase in the amount supplied or a sufficient reduction in the amount demanded, the resulting lower price can fall to a level at which the government buys what the market is unwilling to buy. For example, when powdered milk was selling in the United States for about $2.20 a pound in 2007, it was sold in the market but, when the price fell to 80 cents a pound in 2008, the U.S. Department of Agriculture found itself legally obligated to buy about 112 million pounds of powdered milk at a total cost exceeding $90 million.{81}
None of this is peculiar to the United States or to India. The countries of the European Union spent $39 billion in direct subsidies in 2002 and their consumers spent twice as much as that in the inflated food prices created by these agricultural programs.{82} Meanwhile, the surplus food has been sold below cost on the world market, driving down the prices that Third World farmers could get for their produce. In all these countries, not only the government but also the consumers are paying for agricultural price-support programs—the government directly in payments to farmers and storage companies, and the consumers in inflated food prices. As of 2001, American consumers were paying $1.9 billion a year in artificially higher prices, just for products containing sugar, while the government was paying $1.4 million per month just to store the surplus sugar. Meanwhile, the New York Times reported that sugar producers were “big donors to both Republicans and Democrats” and that the costly sugar price support program had “bipartisan support.”{83}
Sugar producers are even more heavily subsidized in the European Union countries than in the United States, and the price of sugar in these countri
es is among the highest in the world. In 2009, the New York Times reported that sugar subsidies in the European Union were “so lavish it even prompted cold-weather Finland to start producing more sugar,”{84} even though sugar can be produced from cane grown in the tropics for much lower costs than from sugar beets grown in Europe.
In 2002, the U.S. Congress passed a farm subsidy bill that was estimated to cost the average American family more than $4,000 over the following decade in taxes and inflated food prices.{85} Nor was this a new development. During the mid-1980s, when the price of sugar on the world market was four cents a pound, the wholesale price within the United States was 20 cents a pound.{86} The government was subsidizing the production of something that Americans could have gotten cheaper by not producing it at all, and buying it from countries in the tropics. This has been true of sugar for decades. Moreover, sugar is not unique in this respect, nor is the United States. In the nations of the European Union, the prices of lamb, butter, and sugar are all more than twice as high as their world market prices.{87} As a writer for the Wall Street Journal put it, every cow in the European Union gets more subsidies per day than most sub-Saharan Africans have to live on.{88}
Although the original rationale for the American price-support programs was to save family farms, in practice more of the money went to big agricultural corporations, some of which received millions of dollars each, while the average farm received only a few hundred dollars. Most of the money from the 2002 bipartisan farm bill will likewise go to the wealthiest 10 percent of farmers—including David Rockefeller, Ted Turner, and a dozen companies on the Fortune 500 list.{89} In Mexico as well, 85 percent of agricultural subsidies go to the largest 15 percent of farmers.{90}
What is crucial from the standpoint of understanding the role of prices in the economy is that persistent surpluses are as much a result of keeping prices artificially high as persistent shortages are of keeping prices artificially low. Nor were the losses simply the sums of money extracted from the taxpayers or the consumers for the benefit of agricultural corporations and farmers. These are internal transfers within a nation, which do not directly reduce the total wealth of the country. The real losses to the country as a whole come from the misallocation of scarce resources which have alternative uses.
Scarce resources such as land, labor, fertilizer, and machinery are needlessly used to produce more food than the consumers are willing to consume at the artificially high prices decreed by the government. All the vast resources used to produce sugar in the United States are wasted when sugar can be imported from countries in the tropics, where it is produced much more cheaply in a natural environment more conducive to its growth. Poor people, who spend an especially high percentage of their income on food, are forced to pay far more than necessary to get the amount of food they receive, leaving them with less money for other things. Those on food stamps are able to buy less food with those stamps when food prices are artificially inflated.
From a purely economic standpoint, it is working at cross purposes to subsidize farmers by forcing food prices up and then subsidize some consumers by bringing down their particular costs of food with subsidies—as is done in both India and the United States. However, from a political standpoint, it makes perfect sense to gain the support of two different sets of voters, especially since most of them do not understand the full economic implications of the policies.
Even when agricultural subsidies and price controls originated during hard times as a humanitarian measure, they have persisted long past those times because they developed an organized constituency which threatened to create political trouble if these subsidies and controls were removed or even reduced. Farmers have blocked the streets of Paris with their farm machinery when the French government showed signs of scaling back its agricultural programs or allowing more foreign farm produce to be imported. In Canada, farmers protesting low wheat prices blocked highways and formed a motorcade of tractors to the capital city of Ottawa.
While only about one-tenth of farm income in the United States comes from government subsidies, about half of farm income in South Korea comes from such subsidies, as does 60 percent in Norway.{91}
THE POLITICS OF PRICE CONTROLS
Simple as basic economic principles may be, their ramifications can be quite complex, as we have seen with the various effects of rent control laws and agricultural price support laws. However, even this basic level of economics is seldom understood by the public, which often demands political “solutions” that turn out to make matters worse. Nor is this a new phenomenon of modern times in democratic countries.
When a Spanish blockade in the sixteenth century tried to starve Spain’s rebellious subjects in Antwerp into surrender, the resulting high prices of food within Antwerp caused others to smuggle food into the city, even through the blockade, enabling the inhabitants to continue to hold out. However, the authorities within Antwerp decided to solve the problem of high food prices by laws fixing the maximum price to be allowed to be charged for given food items and providing severe penalties for anyone violating those laws.
There followed the classic consequences of price control—a larger consumption of the artificially lower-priced goods and a reduction in the supply of such goods, since suppliers were less willing to run the risk of sending food through the Spanish blockade without the additional incentive of higher prices. Therefore, the net effect of price control was that “the city lived in high spirits until all at once provisions gave out” and Antwerp had no choice but to surrender to the Spaniards.{92}
Halfway around the world, in eighteenth-century India, a local famine in Bengal brought a government crackdown on food dealers and speculators, imposing price controls on rice. Here the resulting shortages led to widespread deaths by starvation. However, when another famine struck India in the nineteenth century, now under the colonial rule of British officials and during the heyday of free market economics, opposite policies were followed, with opposite results:
In the earlier famine one could hardly engage in the grain trade without becoming amenable to the law. In 1866 respectable men in vast numbers went into the trade; for the Government, by publishing weekly returns of the rates in every district, rendered the traffic both easy and safe. Everyone knew where to buy grain cheapest and where to sell it dearest and food was accordingly bought from the districts which could best spare it and carried to those which most urgently needed it.{93}
As elementary as all this may seem, in terms of economic principles, it was made possible politically only because the British colonial government was not accountable to local public opinion. In an era of democratic politics, the same actions would require either a public familiar with basic economics or political leaders willing to risk their careers to do what needed to be done. It is hard to know which is less likely.
Politically, price controls are always a tempting “quick fix” for inflation, and certainly easier than getting the government to cut back on its own spending that is often behind the inflation. It may be considered especially important to keep the prices of food from rising. Accordingly, Argentina put price controls on wheat in the early twenty-first century. Predictably, Argentine farmers reduced the amount of land that they planted with wheat, from 15 million acres in 2000 to 9 million acres in 2012.{94} Since there is a large international market for wheat, where the price is higher than the price permitted domestically in Argentina, the government also found it necessary to block wheat exports that would have made the domestic wheat shortage worse.
The greater the difference between free market prices and the prices decreed by price control laws, the more severe the consequences of price control. In 2007, Zimbabwe’s government responded to runaway inflation by ordering sellers to cut prices in half or more. Just a month later, the New York Times reported, “Zimbabwe’s economy is at a halt.” It detailed some specifics:
Bread, sugar and cornmeal, staples of every Zimbabwean’s diet, have vanished, seized by mobs who d
enuded stores like locusts in wheat fields. Meat is virtually nonexistent, even for members of the middle class who have money to buy it on the black market. Gasoline is nearly unobtainable. Hospital patients are dying for lack of basic medical supplies. Power blackouts and water cutoffs are endemic.{95}
As with price controls in other times and places, price controls were viewed favorably by the public when they were first imposed in Zimbabwe. “Ordinary citizens initially greeted the price cuts with a euphoric—and short-lived—shopping spree,” according to the New York Times.{96} Both the initial reactions and the later consequences were much as they had been in Antwerp, centuries earlier.
When a local area is devastated by a hurricane or some other natural disaster, many people consider it unconscionable if businesses in that area suddenly raise the prices of such things as bottled water, flashlights or gasoline—or if local hotels double or triple the prices of their rooms when there are many local people suddenly made homeless who are seeking temporary shelter. Often price controls are regarded as a necessary quick fix in this situation.
The political response has often been to pass laws against “price gouging” to stop such unpopular practices. Yet the role of prices in allocating scarce resources is even more urgently needed when local resources have suddenly become more scarce than usual, relative to the increased demand from people suddenly deprived of the resources normally available to them, as a result of the destruction created by storms or wildfires or some other natural disaster.
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