The federal government continues to envision itself as Saint Michael, whose role is to save failing industries from the horrors of the market's cruel discipline. At least it would seem so from its recent actions.
Government bailouts for investment banks, insurance companies, large banks, small banks and the automobile companies are well known. These bailouts were deemed necessary in order to stave off the dire consequences to the U.S. economy had the federal government not gallantly rescued these industries during the depths of the financial crisis.
Now, it's time for the government to ride to the sugar industry's rescue.
As recently reported by the Wall Street Journal, the federal government is considering purchasing 400,000 tons of sugar. The purchases are intended to support sugar prices and, in so doing, protect the sugar industry from an unendurable 20 percent decline in sugar prices over the past year. At today's discounted prices, the government's sugar purchases are a $150 million gift to the sugar industry, all financed by the taxpayer.
The problem is that one industry's price support is another industry's cost increase. Therefore, the protection offered to the sugar industry comes at the expense of food companies that will be forced to endure lower profits and consumers who will be forced to pay higher prices.
Perhaps the government is trying rationalize a sugar industry bailout based on the same justifications used to bail out the banking and automobile industries in 2008 – if the sugar industry is not rescued, the collapse will reverberate throughout the whole economy leading to massive economic dislocation. Such justifications for the banking and automobile industries were questionable, then. These arguments have even less merit with respect to the sugar industry today.
In total, the operations of the U.S. sugar industry – including farmers and refiners – generate $8 billion in revenue. As a consequence, the sugar industry is simply too small for its troubles to create economy-wide consequences. As for losses, sugar price declines do certainly hurt the industry's profitability. But, this is no different than any other industry experiencing price declines for its products. Profit and losses are the natural order of a market economy; and, without losses there can be no profits.
The natural question thus arises: why does a large and historically profitable industry require the federal government to protect it from price fluctuations? The answer seems to be historical precedent.
Washington, D.C., lavishes the sugar industry with all types of protections and gifts that include import quotas, or restrictions on imported sugar, that has already transferred billions of dollars from U.S. consumers to sugar producers. Then there is the loan-guarantee program, which typically costs taxpayers around $200 million a year. In fact, it is the fear of defaults by sugar processors that borrowed $862 million that is the impetus behind the additional sugar purchases. In other words, the sugar industry requires preferential treatment due to the problems that are arising from the sugar industry's current preferential treatment.
And, the lavish federal support and government-imposed trade barriers against foreign competition are apparently not enough. Recently, the sugar industry has been turning to another branch of government – the courts – to further stifle competition from both artificial sweeteners and other forms of sugar. In 2005, with weight-conscious consumers switching to Splenda, the sugar industry's national trade association sued the maker of the artificial sweetener, claiming false advertising.
Today, the industry is suing another competitor, high-fructose corn syrup, for stating that HFCS is another form of sugar, similar to table sugar.
Whatever one's view is of the merits (or lack thereof) of all of this litigation, it is clear that open communication between companies and their consumers is central to making markets work efficiently. Yet, when it comes to the market for sweeteners, the U.S. sugar industry has done everything in its power to skew the market to its advantage, to the detriment of consumers.
Like the rest of the U.S. economy, government bailouts and preferences need to be replaced by the discipline of the free market. In the industry for sweeteners, rejecting the industry's latest preferential treatment is a good place to start. Markets work only if businesses are free to succeed – and free to fail. In the case of sugar, taxpayers and consumers should not be forced to spend more money that they do not have to save a few sugar companies from a 20 percent price decline in their product.