Why do we treat sugar differently than oil?
In our nation we often follow radically different policies with regard to products that aren’t all that different from an economic perspective. Why we do so often isn’t clear, but these anomalies can really make one think.
Take petroleum, for example. My wife and I are traveling on the Gulf Coast, and everything I see shows the joint is jumping, oil-wise.
A column of 15 semis laden with parts for a drilling rig lines up at an Interstate 10 weigh station near Baton Rouge, La.; the “contractors only” parking lot at an already enormous Chevron refinery near Pascagoula, Miss., has at least 200 shiny pickups; two tugboats maneuver a gigantic barge with a stiff-leg derrick near a drilling ship in the Mobile, Ala., harbor; a huge semi-submersible offshore rig at Pascagoula has dozens of shipyard workers swarming over it making repairs; a rail yard near Biloxi, Miss., has stack after stack of coated pipe — and so on and so on.
It is obvious that sustained high prices are fueling prosperity in the petroleum sector. But think of how much more prosperity there might be if we took a few simple steps. What if we restricted imports of crude oil? We could set a minimum price for gasoline 10 percent or 20 percent above the world price, and the government could offer to buy up any amount that refineries could not sell at that price. Think of how many more jobs there would be and how much spending — both by producer firms and their well-compensated employees.
Somehow, I don’t think this idea is going to fly. The argument that the nation is better off by increasing the price of gasoline never is a winner among the general public or, by extension, politicians. So why does no one complain when we do the same thing for sugar?
The question is relevant because the U.S. Treasury is paying out about $53 million to compensate sugar companies, including our own regionally based American Crystal, for selling sugar at a loss to ethanol plants to convert into fuel alcohol. That seems crazy. Yet neither voters nor taxpayers ever get upset about the situation.
One might rephrase an old adage so that it goes: “Oh what a tangled mess can arise when first we practice to subsidize.” For that is what we are doing, using the power of government to raise the income of a target group, in this case sugar beet and cane farmers, above what it would be in a free market. We avoid making the sort of direct payments from the U.S. Treasury to sugar producers that we commonly do to growers of wheat, corn and other field crops. Thus, the sugar subsidies are indirect, but they remain subsidies, nevertheless.
The most basic step is that we restrict imports of sugar. We do this via a “tariff-rate quota” that levies a tax on them. But it is not a flat tax across the board on all sugar imports. Instead, many countries are each given a slice of an overall quota that can be brought in paying a low tariff. Each country’s share of the quota depends on its share of U.S. imports about 40 years ago.
Above that specified amount, sugar imports are subject to a higher tariff. These two restrictions, a relatively low tax on one tier of imports plus a higher tax on additional ones, has the intended effect of raising the prices that U.S. sugar producers get above world levels. Of course, that also means U.S. consumers pay more for sweeteners, just as they would if we tried to increase the income of U.S. domestic oil producers by taxing imports of petroleum.
Just how much extra they pay is not clear. Much of the world’s sugar trade involves preferential deals between countries that are far from free-market. Many countries subsidize their sugar industries to some extent. The “world price” is a residual for whatever does not fall into non-market trade deals. The same price would not prevail if the United States, the world’s largest sugar importer in absolute terms, did away with all remaining import restrictions.
But these restrictions do have some effect and probably result in a retail sugar price that is 3 to 10 cents per pound higher than it would be if we treated sugar like crude oil and allowed its free importation.
Because we consume about 45 pounds per person per year, this means a family of four might pay an extra $5 to $18 per year. Compared to common gasoline price fluctuations, this is peanuts. On a national basis, it implies a transfer of $400 million to $1.4 billion from the pockets of consumers to those of producers. Perhaps that is infuriating, but it’s not large compared to other “rent-seeking” activities.
But there are further complications. Sugar consumption has dropped considerably in recent decades, but that of sweeteners has not. Higher sugar prices resulting from U.S. policies make high-fructose corn sweetener a more viable alternative to sugar in beverages and other processed foods. U.S. consumers don’t just pay more for sugar itself or for foods containing it, they pay more for all sweetened foods, even those containing sugar substitutes. And the sugar substitutes are about as large in usage as sugar itself.
Thus the policies that raise the price of sugar make high-fructose corn sweetener a more viable alternative and, at the margin, raise the price of corn. So it is not just a few thousand sugar farmers who benefit, but a few hundred thousand corn producers.
This effect, along with the effects of the ethanol mandate and direct government subsidies to corn producers, initially raises profits for corn growers. But those higher profits soon lead to higher rents paid to landowners and to higher prices for farmland. So absentee farm landlords like me end up capturing some of the benefits from consumers in general being forced to pay more for sweeteners.
One could go on and on. The effects of the Canadian-U.S. Trade Agreement and its successor North American Free Trade Agreement are a further complication. Canada does not restrict sugar imports from the rest of the world and it does export sugar-containing foods to the U.S. Mexico produces a lot of sugar and subsidizes it to an extent. The mess gets more and more tangled the further you get into it. And no one except for the libertarian wing of the Tea Party pays much attention to it.