How Regulations Favor Monopolies and Big Government

Before discussing how Big Food operates today, let’s take a moment to look back at how agriculture operated in the US South in the late 19th and early 20th centuries. Viola Goode Liddell, daughter of a cotton salesman, described the system:

When an [Alabama] Black Belt farmer sent his cotton down river to Mobile, he . . . had to take what he was given and be satisfied. . . . The big cotton dealers [had financed him and] the weighing . . . and grading of the cotton was . . . at their discretion. . . . Furthermore, these cotton kings either bought  outright or went into partnership with fertilizer houses, feed and implement stores, and wholesale groceries, so that [the growers] . . . had to buy everything they needed for running their farms and for advancing their tenants from specified concerns. . . . The tenant farmer and sharecropper [were at the bottom of the chain] . . . but . . . the landlord . . . had the same kind of rope around his neck that was about the tenant’s, except it was bigger and stronger and more likely to choke him to death.

As this passage attests, agriculture was a controlled market in the late 19th and early 20th century South, and it remains controlled today, although the system is not the same. Control now lies in the hands of the government and its private, industrial farming and food processing cronies, today’s equivalent of yesterday’s “big dealers.”

These cronies, including Monsanto and other giant food concerns, dominate food and farm policy at the White House, USDA, FDA, and EPA. The regulators seem to prefer big firms because they are easier to manage than thousands of little family farms and businesses. Besides, they provide lucrative jobs, other emoluments, and campaign contributions. The giant food firms in turn like the system because new and small competitors are ill-equipped to handle legal and lobbying expenses and uncertainties, not to mention often hostile regulators intent on preserving monopolies and quasi-monopolies for their friends.

More than in other industries, prices are government controlled, even though economists on both right and left sides of the political spectrum agree that direct price controls are counter-productive. For a quarter century beginning in 1958, the government did not allow Safeway to reduce food prices. That eventually changed, but some retail food prices are still directly controlled, notably milk.

Have dairy farmers benefited from this? It would seem not. Most dairy farmers over the years have been driven out of business, and the pace of dairy farm failure accelerated after 2008. USDA rules and regulations, especially the Pasteurized Milk Ordinance (PMO), have both stifled innovation and concentrated production into huge factory farm dairies, many located in California, whose arid climate makes it easier to pack thousands of animals into a small space. As a direct result, milk is less and less available locally and must be shipped across the country. This is not only costly and wasteful of energy; it also means the milk must be ultra-pasteurized for long shelf life, which makes it less nutritious. It is also illogical to concentrate dairy, which requires prodigious amounts of water, in the waterscarce West.

Over the years, tightening government regulations have shut down most local, small slaughter houses. It is more convenient for USDA inspectors to visit a few giant operations. This and other policies have also encouraged the growth of huge factory farms for chickens, eggs, hogs, and other animal products. These operations, usually called Confined Animal Feeding Operations (CAFOs), squeeze animals into smaller and smaller spaces, creating pitiful conditions, mountains of excrement, and uncontrollable sanitation problems. Contamination and outbreaks of food-borne illnesses are invariably traced to these CAFOs, but when the government responds, it does so by creating new regulations and expenses for small, local operations, which are not the source of the problem, so that even more of them are driven out of business.

The latest government spasm along these lines was the Food Safety Act of 2011, a bill that was passed by legislative legerdemain. A bill passed by the House was taken up by the Senate, the old language excised, the new Senate food safety legislation dropped in, in order that the Senate could pretend to be acting on a House bill, as required by procedure. Both chambers ultimately approved the new language. The Act as initially written called for sizable fees payable to government by even tiny food operations. This did not survive, but for the first time the FDA got direct legal authority over individual family farms. Prior to this legislation, farmers of all sizes had to answer (only!) to the USDA, Defense Department Corps of Engineers, EPA, and state regulators.

The FDA knows little or nothing about farming. But this new authority may eventually put FDA inspectors on the farm, and if so the agency will want farms to be large scale and limited in number. This is the FDA’s pattern. For a time, the Agency banned the import of French cheeses that were not heavily pasteurized, a step inconsistent with making the finest cheese. Then a few very large French cheese makers were allowed to export to the US. Smaller, family, and artisanal cheesemakers were not.

Among the regulations that small farmers already face are Clean Water Act requirements governing waterways and wetlands. The Act exempts agriculture. That sounds simple, but it is not. If a farmer wants to build a pond, he had better get the Corps of Engineer’s permission. This can be enormously costly and time consuming.

There is not even a settled, legal definition of a wetland. One Corps office may advise to file form X; another may say, no, file form Y. What if the farmer later wants to sell fishing rights to the pond? No, that is not farming. The Corps can hit you with massive fines and require both the removal of the pond and restoration of the landscape just as it was. Almost any step a small farmer or rancher takes may be creating serious legal liabilities. Who has the money or legal assistance to sort it all out or the paperwork to prove compliance? Once you have made a mistake, the government can threaten jail.

The US Department of Labor in 2011 decided to ban children working on family farms. Faced with criticism, they said they would exempt “family” farms. But what exactly did they mean by that? They meant, it turned out, farms directly owned by the child’s parents in their own name. Farms held in a family partnership or LLC were not deemed “family” farms. Finally in 2012, USDL backed off, but the secretary said she was disappointed at this outcome and the Agency might return to the issue in the future.

If the US government really wants to protect children, why did it approve pizza as a vegetable under the School Lunch Program? Why does it also dump into school lunches poor quality meat that has been irradiated (nuked) to eliminate bacterial contamination? Why did Congress specifically override efforts to restrict greasy french fries in school lunches? In each case, the reason was that powerful food companies wanted to sell pizza or potatoes, and the government wanted to dump its own surplus meat, and school children were an easy target. Producers of sugar-laden food even pay “rebates” (subsidies) to food service companies supplying school lunches in order to encourage processed over fresh food.

For years the federal government advised people to stop smoking, but subsidized the growers of tobacco. That only ended by paying tobacco allotment holders lump sums to buy them out. Now the government warns people to cut back on sugar consumption, but supports sugar growers with price supports and tariffs against foreign sugar. The Fanjul family of Florida owns much of the domestic sugar production; members of the family are well known political donors who have contributed more than $1.8 million to politicians over the years. The Fanjuls’ sugar, sucrose, which appears on kitchen shelves, is actually far less ubiquitous than the high fructose syrup derived from corn which the government also heavily subsidizes. This is an important product of Archer Daniels Midland (ADM), another largescale source of federal of political campaign funds ($495,000 2011–August 20, 2012).

Government farm subsidies are notoriously skewed toward larger farm operators: $1 dollar of every $2 dollars goes to the top 4%; $ 8 dollars of every $10 to the top 15%. Some of these subsidies even go abroad. In order to avoid trade sanctions under World Trading Organization (WTO) rules, the US government pays $147 million a year to Brazilian cotton producers, so that it can continue to subsidize US cotton producers. There is also the usual toll from fraud or inattention. Over the first ten years of the 2000s, more than $1 billion was paid to deceased farmers, a fifth of them dead for at least seven years.

Payments are not only highly concentrated in terms of recipients. They are also highly concentrated by crop: 90% went to support just five crops: corn, wheat, soybeans, cotton, and rice; 30% to corn alone. US PIRG, a consumer organization, noted about this:

We’re handing out taxpayer subsidies to big agribusinesses to help subsidize junk food. Huge, profitable corporations like Cargill and Monsanto are pocketing tens of billions in taxpayer dollars, and turning subsidized crops into junk food ingredients including high fructose corn syrup . . . at a time when one in three kids is overweight or obese, and obesity-related diseases like diabetes are turning into an epidemic. .

If [federal] agricultural subsidies went directly to [taxpayers] to allow them to purchase food, each of America’s 144 million taxpayers would be given $7.36 to spend on junk food and 11 cents with which to buy apples each year—enough to buy 19 Twinkies but less than a quarter of one Red Delicious apple apiece.

US PIRG’s chose this example because most of the subsidized crops are found in Twinkies, but among fresh produce, the only significant subsidy goes to apples.

In the summer of 2012, severe drought in the US Midwest drove up the cost of corn, and even threatened to create animal feed shortages. But there was no real shortage of feed corn. Because of the government’s ethanol mandate, over 40% of annual corn production is diverted into car fuel. In a normal year, only 36% goes for animal feed, and even less, 24%, for human consumption. Moreover, no one—other than corn producers—likes the ethanol mandate. Environmentalists have long documented that ethanol fuel produces more carbon and smog, not less.

2012 corn animal feed shortages provided the perfect opportunity for the Obama administration to pull the ethanol mandate and subsidy. At the time, this mandate was driving up the cost of corn, the cost of fuel, the cost of animal feed, and would shortly drive up the cost of meat. What did the president actually do? He traveled to Iowa in August of the election year to announce that the federal government would buy up $100 million worth of pork, $50 million of chicken, and $20 million of lamb and catfish. So, an additional federal subsidy was piled on top of all the existing ones, with very little likelihood that it would actually help the meat producers.

Does the government really think it should be interfering with meat prices in order to correct the mess it has made in corn prices? If so, perhaps the old Soviet central planners should be brought in to give us some advice about how to go about it?

Crony-Capitalism-in-America

About the Author: Hunter Lewis is co-founder of AgainstCronyCapitalism.org. He is co-founder and former CEO of global investment firm Cambridge Associates, LLC and author of 8 books on moral philosophy, psychology, and economics, including the widely acclaimed Are the Rich Necessary? (“Highly provocative and highly pleasurable.”—New York Times) He has contributed to the New York Times, the Times of London, the Washing­ton Post, and the Atlantic Monthly, as well as numerous websites such as Forbes.com and RealClearMarkets.com. This post is an excerpt from Chapter 12 of his most recent book, Crony Capitalism in America: 2008–2012.

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