Price Fixing: Feds to Issue 38 Million Dollar Sugar Bailout
June 24th, 2013
Of all the misguided economic policies that interventionists promote in failed efforts to manipulate the market, none are more foolish than price-fixing schemes. Prices are signals sent by consumers that indicate the level of demand for a specific product. When governments subsidize or bail out certain industries in an effort to pump up prices, those signals get distorted, confusing investors as to the legitimate level of consumer demand for the products in question.
The Minneapolis Star Tribune is reporting that the US Department of Agriculture is about to issue a $38 million bailout to the sugar industry in an effort to boost sugar prices. The government claims this is necessary because it made the mistake of loaning somewhere north of $800 billion in taxpayer funds to sugar producers, who will default on these bad loans if the sugar price isn’t driven up to unnatural levels. Throwing good money after bad won’t save the sugar industry, but it will make the inevitable crash more extreme when it finally happens. Why is the government pushing up food costs when families are already struggling to afford rising grocery prices?
One Bad Bailout to Fix Another
Sugar is a widely-used product with enormous demand. Most investors are aware of its commercial utility. As such, it defies logic for the government to issue loans to sugar producers. However, the policy has been to do so, and, as such, farmers produced more of it than the market dictated, which pushed the price down unnaturally. Now that the price has dropped, sugar producers’ are struggling to pay back their loans.
This is to be expected. When the government issues loans with no concern about the profitability of the investment, the result is an unnatural shift in price. Producers boost production accordingly, causing the price to drop to a level that no longer jives with the terms of the original loan. If the loans had never been issued, the bailout would be unnecessary.
A Near-Billion Dollar Boondoggle
The government loaned out hundreds of millions of dollars to sugar producers, who predictably used it to produce more sugar. Any economist should have realized that this would put downward pressure on sugar prices. Now, in an attempt to “fix” this problem, the USDA is going to purchase sugar directly, hoping to force prices upward.
Instead, the same outcome could have been accomplished by never issuing the loans in the first place. Rather than spending nearly a billion dollars in an effort to push sugar prices down and then right back up to the same level, the feds could have simply stayed out of the market and allowed it to achieve the right price on its own, for free.
In fact, any time a loan is issued by the government in an effort to push prices down in an unnatural way, the loans will necessarily become impossible to pay back when the price drops, barring some fluke event like a total supply collapse emerging in another country. Price fixing policies can’t work from a mathematical standpoint. No individual human understands and thus can successfully manage the pricing mechanism of the marketplace — it is a sophisticated, real-time reading of the wants and needs of all the world’s consumers.
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