Arnold Kling  

Rent and Rent-Seeking

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Edward Lotterman talks about Ricardian rent and rent-seeking.


The U.S. government subsidizes cotton production to the tune of some $3 billion per year. Virtually all the subsidy flows to fewer than 30,000 cotton farmers. At some $100,000 per producer, cotton is the most heavily subsidized of the major U.S. agricultural commodities.

...As Ricardo would have predicted, most of the subsidies flowed into higher prices for that farmland especially suited for growing cotton. After paying the high prevailing rental or purchase price for good land, a new cotton farmer would enjoy only moderate income even with the subsidy.


For Discussion. Can you think of examples of industries that once were subsidized that now are thriving subsidy-free?


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CATEGORIES: Public Choice Theory



TRACKBACKS (3 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/93
The author at Houston's Clear Thinkers in a related article titled The addictive nature of governmental subsidies writes:
    Edward Lotterman is a Twin Cities-based economist who writes a column for the Twin Cities Pioneer. In this column, Mr. Lotterman points out that the original good intentions of governmental subsidies have, over the decades, generated obsolescence: News... [Tracked on July 19, 2004 11:50 AM]
COMMENTS (12 to date)
Mathias Bolton writes:

AMTRAK?

NOT!

David Thomson writes:

“Can you think of examples of industries that once were subsidized that now are thriving subsidy-free?”

I prefer rewording the question:

--Can you think of examples where consumers pay less money for their products after industries that once were subsidized are now subsidy-free?--

The answer is that I cannot even begin to think of any exceptions. We should always primarily focus on the consumer, and rarely, if ever, on the impacted American industries.

Walker writes:

Aha, I get it, it's a trick question -- most of the industries that are considered thriving receive plenty of government assistance...

Agribusiness
(as Arnold cites)
Defense
(no explanation needed)
Energy
(direct subsidies, military services, etc.)
Pharmaceuticals
(protection from imports, massive funding of research)
Banking/Financial Services
(multiple government bailouts, tolerance of tax evasion, etc., etc.)
Mining/Logging
(access to public lands on very generous terms)
Media
(access to public airwaves on very generous terms)
Retail
(food stamps and Medicaid for employees)

Bernard Yomtov writes:

I can't answer Arnold's question, so I'll ask one of my own:

Why is it that politicians from areas that benefit heavily from government subsidies are the most vociferous about reducing government spending and getting people off the dole?

Why is self-reliance an important virtue for welfare mothers to acquire, but not cotton or tobacco growers?

Peter Gallagher writes:

Hi Arnold,

Yes -- the Australian dairy industry was among the most subsidized in Australian agriculture from the 1960s until the late 1990s. The support comprised some direct payments, but was mostly in the form of administered prices for drinking milk and an "industry-funded" (really, consumer funded) export subsidy on manufactured dairy products whose real purpose was to 'short' domestic supply of cheese and powders, sustaining the domestic market price.

These support programs (like the continuing US dairy support programs) were made possible only because milk for drinking is not a highly tradeable product and the industry enjoyed much-higher-than-average protection from import competition.

All that changed with the free trade agreement with New Zealand (the world's lowest cost dairy producer) in 1991. NZ manufactured dairy product imports (cheese, powders) made the Australian support systems unsustainable because they directly competed with manufactured product and they 'softened' the overall market price for milk, including drinking milk.

In 1994, most of the import protection was abolished as part of the WTO Uruguay Round agreements. But the industry survived thanks to a combination of resource endowments (Australian dairy production conditions are not very different from those in NZ: although wages are higher, land is more plentiful) and adjustment policies that were less clumsy than most. The industry lost about 60% of the farmers it had in the early 1980s. No cows left the business, however, and farm scale grew quickly (as did output per hour of labor employed, hectare employed etc).

It also helped that from 1986, while the Australian industry was trying to adjust to NZ competition, the EC started, very slowly, to cut back on dairy production by imposing production quotas. This was a dumb (and painful) way to adjust their domestic supply (to reduce the 'butter mountain') but, because the EU was up to then supplying more than 50% of world dairy market demand, it meant that world market prices firmed at just the right time for the Australian industry to find the benefits as well as the pain of trade competition.

The Australian industry is not quite weaned off the 'public teat'. In 2000, all regulated pricing for drinking milk was abolished in an synchronized move by each of the States. The loss of 'entitlement' to supply to the state-government regulated drinking milk market meant the loss of a 'property' that was compensated by a one-off entitlement purchase, paid as an 8-year annuity to all producers. They were encouraged to take up an offer by commercial banks to purchase the annuity in the first year, pay off their debts and (seriously) consider exiting the industry. About 30% did. But again, their cows stayed in the business.

The Australian industry now produces about the same volume of milk as NZ and supplies about 16% of world market demand. The outlook is "robust" (buy a farm if you can afford one). As long as the US industry keeps shooting itself in the foot by adamantly opposing imports/trade adjustment, the Australian industry will continue to share the growth in Pacific Basin demand with NZ, basically safe from US competition.

There's a short history of the Australian dairy industry with relevant data and picutures here: http://www.abs.gov.au/websitedbs/c311215.NSF/0/3a122d848c59d155ca256d4800120762?OpenDocument

Best wishes,

Peter

David Thomson writes:

“Why is it that politicians from areas that benefit heavily from government subsidies are the most vociferous about reducing government spending and getting people off the dole?

Why is self-reliance an important virtue for welfare mothers to acquire, but not cotton or tobacco growers?”

Some people are hypocritical and demand strict behavior from others while they continue to misbehave. We, though, should act consistently---and demand self reliance from both welfare mothers and tobacco growers. Don’t you agree?

Lawrance George Lux writes:

A lot of the postings were quite accurate, in describing the movement away from direct subsidy to other forms of Government welfare for business. One has to ask if it is Cost-effective for Consumers. Take the TeleCommunications industry: We removed regulation and service vastly improved--or did it? It is known that Households spend a greater percentage of their Household Expense account on phones etc. It is known that Business spends twice as much on telecommunications. Is it worth it? People are acknowledged to spend twelve times the amount of time on the phone, to accomplish Productivity increases which do not yet pay for the added phone charges.

My phone repairmen do not even use their own cellplones, as they incur roaming charges in about a third of their own work area. The one and only time they tried it, it cost $160,000 for one month. Household and Business--We all endure this, and We endure this from Government refusal to regulate the industry. Is this not a form of Government welfare? lgl

Sam Jew writes:

The energy market is an even better example.

Bernard Yomtov writes:

Yes, as long as the welfare mothers have available the tools to be self-reliant, beginning, but hardly ending, with a decent education. But I'm not going to spend a lot of effort pushing this so long as the whole moral burden is on them. We are, it seems, about to give tobacco growers $12 billion to become "self-reliant." who knows what it would cost to get other farmers, those sturdy independent yeomen, to be self-reliant also.

Perhaps if we made equivalent funds available to welfare mothers they would be just fine.

David Thomson writes:

“Perhaps if we made equivalent funds available to welfare mothers they would be just fine.”

This is almost certainly false. The problem is that so many of them lack a viable work ethic and would merely squander the money. Decent education? Few of them want to get away from watching stupid TV programs and eating junk food.

There is one rule I encourage all private and public charities to follow: never give unmonitored money to those lacing a mature attitude towards delayed self gratification and hard work! Thank God the Clinton administration agreed with the Republicans and demanded that welfare mothers find employment. Hardly anything else is as important as getting these people off their rear ends. Do I sound harsh and perhaps even a bit judgmental? So be it. The truth often is unpleasant.

DSpears writes:

"It is known that Households spend a greater percentage of their Household Expense account on phones etc. It is known that Business spends twice as much on telecommunications. Is it worth it? People are acknowledged to spend twelve times the amount of time on the phone, to accomplish Productivity increases which do not yet pay for the added phone charges"

What do you mean it is known? Present facts please.

If you are going to compare the regulated monopoly phone system with today, don't forget that the internet didn't exist (Al Gore hadn't invented it yet) in 1984. Any comparison of costs would have to take that into account. That goes for cell phones too. There is an increased utility to be able to make a call from anywhere without finding a pay phone, while driving, etc.

You didn't think that you should get all these things for free did you?

The big falacy of government regulation is the idea that government knows best and a bunch of bureaucrats can predict and manipulate the day to day fluctuations of supply and demand. They can't. What inevitably happens is that the government restricts competition (which is why businesses don't always oppose regulation).

Subsidy of industry is pure pork barrell politics and has been practiced adeptly by all sides of the political spectrum since the founding of the republic. There is no economic justification for it and I will make none.

"We should always primarily focus on the consumer, and rarely, if ever, on the impacted American industries. "

Hopefully what you mean to say is that we should allow the market to determine how much of anything is produced and at what price, right? Why should the government favor "consumers" over "producers"? We are all consumers AND producers. Favoring one over the other is pure nonsense. Is General Motors a consumer or a producer? They are massive consumers of materials, goods and labor. Should the government favor them?

The real problem with subsidy is that every dollar paid in subsidy to one individual or busniess was taken from another individual or business to pay for it. Taking that dollar from somewhere else has an economic impact that is never fractored in. In the best of cases (the mythical example of government taking money from an less productive use and funelling it to a more productive one) the net benefit is at best marginal. That's the most positive spin I can put on subsidization.

The reality is that in the vast majority of cases the government moves money from a productive purpose and does something like pays a farmer to NOT grow corn with it. Everybody (except the farmer paid not to grow corn) is worse off: Consumers pay higher prices and taxpayers are poorer. Farmers, a group more affluent than the average American, gets richer due to artificially manipulated prices. Somebody call Willie Nelson and tell him that the problem is solved!

Subsidy and economic regulation (regulation for reasons of public safety is a different issue) has no economic justification, causes higher prices adn less consumer choice, and only a few dinosaurs in the economics community will still argue for it, usually on a political basis.

Sam Jew writes:
Subsidy and economic regulation (regulation for reasons of public safety is a different issue) has no economic justification, causes higher prices adn less consumer choice, and only a few dinosaurs in the economics community will still argue for it, usually on a political basis.

That's an extreme statement. I believe there's plenty of economic justification for subsidy and regulation in restraining the worst excesses of the market and infinitely more importantly, human nature.

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