Wednesday, May 8, 2013

Three Protections You Didn't Know

This past weekend a discussion brought to mind some of the more unusual protection mechanisms the government uses for certain products.  Everyone knows about agricultural subsidies, but were you aware of some of these lesser known market distortions?

You must possess a federal license to grow and sell peanuts.

During the depression peanut prices began a rapid downward spiral. The federal government wanted to support the peanut farmers without having to spend a great deal of already scarce funds.  In order to stabilize a falling price you must either increase demand (buy the peanuts) or decrease supply. The government opted to decrease supply and began a quota program which still persists. Therefore in order to grow and sell peanuts in the United States you must have a portion of the allocated quota which essentially amounts to a license.

Many of those who possess the licenses do not grow peanuts themselves but instead rent them out to farmers for risk free profits. For decades the license rentals were quite lucrative as peanut farmers in America enjoyed prices as high as 50% more than farmers abroad.  However, as NAFTA was formed Canadian and Mexican peanuts began to cheaply enter the dometic market and drive US peanut prices down.  This peanut price crisis was of course met with additional subsidies for the peanut farmers of America.

The government is a raisin thief.

In 1949 the Raisin Administrative Committee was established in order to regulate the supply and price of raisins. Each year raisin farmers are required to set aside a portion of their crop for the RAC. The RAC then determines based upon what they expect domestic production and demand to be how much of that portion the farmers may sell.  All raisins above what they deem the market can bear are seized and given away or sold by them in non-competitive markets (meaning internationally for the most part). The proceeds of these sales (which are generally far below what domestic sales would bring at the artificially inflated price) are used to fund the RAC with the excess being returned to farmers.

What happens if you don't set aside your raisin tithe? The government fines you for the money you've gained from your illicit raisin sales as well as compliance penalties.

To be fair, the RAC is an organization run by raisin farmers making decisions for raisin farmers. As far as I am able to determine it's a program with generally wide support from those it regulates.  The outcry over it's methods seems to come from a minority of farmers who want to buck the system to make extra cash (which would be substantially less if raisin prices weren't inflated) and non-raisin farmers like myself who enjoy pointing out ridiculous regulations.

American cotton is cheaper because our taxes go to Brazilian cotton farmers.

Like nearly every other agricultural product cotton draws some hefty federal subsidies.  However, unlike many other products another nation took umbrage with our protection of domestic cotton markets.  In particular Brazil brought suit against the United States with the World Trade Organization and won.  The WTO granted Brazil the right of retaliation, which had it been exercised would have been quite interesting.  Brazil could have lawfully chosen to ignore such things as pharmaceutical patents or increased tariffs on many products to protect their own markets from US imports.

Instead the US and Brazil came to a temporary agreement.  While the US attempted to phase out unfair subsidies they would subsidize the Brazilian cotton farmer as well as the American.  Of course ending an agricultural subsidy seems a near impossibility on capitol hill so the agreement is extended every few years with the end result that tax dollars keep flowing towards Brazil.

It seems like it's difficult to find a plant you can grow in America without the governments help.

More economics next week. Until then stay safe and rational.

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