Topic: Trade and Immigration

The United States of Agriculture?

Every year, Congress spends nearly $20 billion and maintains steep trade barriers to benefit a small group of farmers growing one of about half a dozen “program crops.” A hearing on U.S. farm policy before the full House Agricultural Committee today illustrates the problem beautifully.

All farmers together make up less than 2 percent of the U.S. population, and those receiving federal production subsidies or trade protection are less than 1 percent of the population. Yet our farm programs are designed not to serve the interests of the 99+ percent of us who pay the taxes and consume the food, but the small fraction who grow certain favored crops. In fact, U.S. farm programs benefit a small number of producers at the expense the majority and the nation as a whole.

[In a major Cato study last year, we documented six ways that current U.S. farm programs hurt the average American—through higher food prices, lost jobs, more government spending, environmental damage, stifling of rural development, and the undermining of America’s image abroad. We also hosted a policy forum last month featuring the pro-reform Secretary of Agriculture Michael Johanns.]

So why do these programs persist despite their cost to the general public? Classic interest group politics. Agricultural producers, although small in number, are concentrated, well organized, and highly motivated to save programs that can mean big bucks to their bottom line. Meanwhile the mass of consumers and taxpayers, although an overwhelming majority, are diffused, disorganized and mostly unaware of the cost they pay as individuals for those same programs.

Which brings us to today’s hearing in the House. Who do you think Congress will be hearing from as it begins to rewrite the farm bill? Of the 17 witnesses, not a single one will represent taxpayers, consumers, or non-farm businesses that use those commodities to make their final products. Every witness represents a sector of farm producers. No wonder Congress routinely ignores the interest of the vast majority of its constituents when it writes farm legislation.

Here is the witness list:

Bob Stallman - president, American Farm Bureau Federation

Tom Buis - president, National Farmers Union

Allen B. Helms Jr. - chairman, National Cotton Council, Clarkedale, Ark.

Paul T. Combs - chairman, USA Rice Producers’ Group, Kennett, Mo.

Dale Schuler - president, National Association of Wheat Growers, Carter, Mont.

Gerald Tumbleson - president, National Corn Growers Association, Sherburn, Minn.

John R. Hoffman - first vice president, American Soybean Association, Waterloo, Iowa, also representing National Sunflower Association and U.S. Canola Association

Greg Shelo - president, National Grain Sorghum Producers Association, Minneola, Kan.

Jim Wysocki - president, National Potato Council, Bandcroft, Wis., representing Specialty Crop Farm Bill Alliance and National Potato Council

Jack Roney - director of economics and policy analysis, American Sugar Alliance

Mark Kaiser - board member, Alabama Peanut Producers Association, Seminole, Ala., representing Alabama Peanut Producers Association, Florida Peanut Producers Association, Georgia Peanut Commission and Mississippi Peanut Growers Association

Richard Groven - vice president, National Barley Growers Association, Northwood, N.D.

Jim Evans - chairman, USA Dry Pea and Lentil Council Inc., Genesee, Idaho

Mike John - president, National Cattlemen’s Beef Association, Huntsville, Mo.

Joy Philippi - president, National Pork Producers Council, Bruning, Neb.

Ron Truex - president and general manager, Creighton Brothers, Atwood, Ind., representing United Egg Producers

Paul R. Frischknecht - president, American Sheep Industry, Manti, Utah.

Speak with Forked Tongue; Carry Large 2x4

The next time you meet a Canadian at a cocktail party and consider invoking fuzzy feelings of fraternity by toasting our countries’ recent softwood lumber accord, better to just smile, nod your head, and stare intently at your shoes.  Calling the U.S.-Canada Softwood Lumber Agreement (2006) an “agreement” mocks the fact that the Canadians had no viable alternative but to sign on the dotted line.

One option was to endure the cost and uncertainty of continuous litigation, continued restrictions on their lumber exports, and the specter of never again seeing the $5.3 billion in duties collected illegally by U.S. Customs on previous exports.  The other option was for Canadians to agree to impose export restraints (in the form of export taxes or quotas) on their lumber and see the return of about 80 percent of that $5.3 billion.

The U.S.-Canada softwood lumber dispute dates back many decades, but the most recent spate of protection, rulings, and edicts relates to litigation that began in the early 1980s, evolved into the Softwood Lumber Agreement of 1996, and then produced new trade remedy cases and a string of litigation beginning in 2001, when SLA 1996 expired.  (This paper attempts to present a chronology of events—but the most recent events are not documented therein.)

Make no mistake: the United States is the villain in the lumber dispute. 

Its agencies administered the trade remedy laws illegally and when they were required to make amends, pursuant to the terms of the North American Free Trade Agreement, they refused.

In short, antidumping duties can be imposed if the petitioning industry is materially injured by reason of dumped imports; countervailing duties can be imposed if the petitioning industry is materially injured by reason of subsidized imports.  In 2002, the United States imposed both antidumping and countervailing duties on Canadian softwood, which prompted Canada to challenge those findings under NAFTA’s dispute settlement procedures.  The NAFTA panel found that the U.S. International Trade Commission failed to meet the legal threshold for finding injury, and that the Commerce Department failed to find, legally, dumping or countervailable subsidization.

Second, third, and fourth attempts by those agencies to render affirmative findings within the law were also found wanting by the NAFTA panel, which eventually ordered the agencies to revoke the measures.  The United States refused, and instead insisted that an agreement to limit Canadian lumber sales was the only way to resolve the issue.  By that point, U.S. Customs had collected about $5 billion on softwood imported from Canada pursuant to those illegal antidumping and countervailing duty measures.  The U.S. industry was insistent that those monies be distributed to them, as beneficiaries of the now-repealed Byrd Amendment.  The importers (and the Canadian producers to whom many were related) demanded that those duties be refunded promptly.

Well, an ugly compromise was struck in the form of the Softwood Lumber Agreement (2006).  Under its terms, the importers/producers will be refunded about 80 percent of their rightful $5.3 billion, and despite the illegality of the measures and the fact that the United States completely disregarded its NAFTA obligations, the domestic petitioners will keep about $500 million and the U.S. government (actually, the Bush administration—these funds will be outside the domain of congressional appropriators) will keep about $450 million to be used for “meritorious initiatives.”  Such initiatives will include low-income housing projects, disaster relief, and various other vote-purchasing endeavors.

Meanwhile, the days when you could just pick up the phone, dial your favorite Canadian lumber producer, and place an order for 100 pallets of 2x4s at $344 per thousand board feet are over.  No longer will the purchasing agents at Home Depot, True Value Hardware, Ryan Homes, and elsewhere be able to negotiate lumber volumes and prices based on quaint considerations like supply and demand.  Canadian lumber will be required to sell for a minimum of $345 per thousand board feet.  If prices dip below that level, Canadian exports will be subject to a combination of export taxes (ranging from 5 to 15 percent) and volume restrictions.  So yes, the agreement does allow freedom of lumber trade to reign, as long as the prices are high enough.  Once the benefits of trade go too far and actually provide cost savings for consumers, freedom will be reined in.

On so many different levels, U.S. actions and attitudes in the lumber dispute–and the interventionist outcome it produced–betray an administration that is only rhetorically commited to free trade.  And that can’t possibly ignite the embers of global trade liberalization.

A New Solution to the Trade Deficit ‘Problem’

I’ll be honest with you folks — in Australia we have an expression, “Only in America!” It is used whenever outlandish, seemingly crazy, or especially unusual ideas or events occur over here. It is frequently used by news-readers. Please don’t be offended.

Anyway, I am proposing a new expression, “Only from Congress.” It could be used to describe, well, whenever an outlandish, seemingly crazy, or especially unusual idea is announced by members of Congress. And to kick things off, I would like to introduce the first item for your consideration.

Two Democratic senators, Byron Dorgan of North Dakota and Russ Feingold of Wisconsin, have proposed that any company wishing to import goods into America would need a government-issued certificate. The senators, according to this New York Times article (link requires subscription), view this as a “market-based system to cut the trade deficit to zero within 10 years.”

It would work thus: Any company that exports goods would be issued an import certificate that would allow it to import goods. The “exchange rate” would fall from $1.40 in the first year (i.e., $1 worth of exports would earn $1.40 worth of imports), to $1.30 in the second year, and so on until we achieve “balance.” If a company does not wish to import anything, it can sell the import certificate to someone who does. I guess that’s the “market-based” part.

Sherman Katz of the Carnegie Endowment for International Peace was quoted in the article as saying that “’it looks on the face of it to represent an enormous intrusion of government activity into business totaling trillions of dollars each year.”

“Enormous” doesn’t seem to quite capture it though, does it? How about “insane”?

Can you imagine the type of federal oversight this would require? And how would our trade partners react to the U.S. market being restricted in this way?

And what about oil? Ah, the wise senators have already thought of that. Oil would be given a 10-year phase-in, to allow the economy “time to find and develop alternative energy supplies.”

Imports of goods keep inflation in check and imports of capital keep interest rates down and help finance economic growth. Restricting imports would necessarily restrict capital flows into the economy because of the necessary balance between the current and capital accounts. To bring investment in line with savings, domestic interest rates would need to rise, reducing investment and economic growth. (More here.)

Question for the senators: What sort of certificate would you issue to cope with those sorts of macroeconomic effects?

I’m guessing we can expect lots of “Only from Congress” ideas in the coming campaign season. I’m excited.

Don’t Count on China

Following on from the visit last month of United States Trade Representative Susan Schwab, the Director-General of the World Trade Organization, Pascal Lamy, is visiting China this week to drum up Chinese support for reviving the Doha round of multilateral trade negotiations. He appears to have been given the same non-response as the USTR.

The Chinese have put the ball squarely back in the court of the EU and the United States, saying it was up to the major developed countries to take the lead in reviving the talks. (full story here).

China has so far kept very quiet in the trade talks, limiting their participation to argue for a ‘time out’ from trade liberalization for newly-acceded members. Having given major “concessions” to join the club, they figure they’ve paid their dues and should be given time to soak up the atmosphere. And given the often poisonous rhetoric surrounding China’s role in the world economy (not least from certain U.S. Congressmen), one can hardly blame them from keeping their heads below the parapet in the negotiations proper.

It is true, as Ambassador Schwab and DG Lamy have argued, that China has gained a lot from joining the WTO (although many of those gains would have been realized anyway as a result of unilaterally liberalizing their economy) and would stand to lose from a failed WTO. Similarly, China should be held to account for the commitments it made upon joining the WTO. But expecting China to take a more active role in the negotiations, and reverse their stance of the past five or so years, is a bit much. And, as they have proved on the currency issue, the Chinese won’t be bullied.

The “quiet diplomacy” to revive the round will likely continue, including at the IMF and World Bank shindigs later this month. But if a miracle occurs and the Doha round is concluded, it won’t be because of China’s efforts.

Rural Newspaper Calls for the President and the Senate to “Mind Their Business”

The Enid News and Eagle posted an opinion article last week on the new farm bill. Admittedly, it is a rural paper (based in Enid, Oklahoma) catering to a rural readership. Most of you will probably not have seen it. But I was struck by a number of passages.

Take this one, for starters:

“It seems the 2002 farm bill was one of the more popular farm bills to come out in the history of farm bills, according to Frank Lucas. The Third District representative has been traveling the state getting input from agricultural officials and farmers on what should be included in the 2007 version of the farm bill.”

Of course the 2002 Farm Bill was popular, Congressman, at least with the “agricultural officials and farmers” you are talking to. A significant backtrack from previous farm bills, payments to farmers under the 2002 Farm Bill are projected to average over US$20 billion per year from 2005 to 2007. Agriculture officials are hardly going to support huge cuts to the agriculture budget, either.

Or consider this gem:

“…the House committee knows the most about agriculture and has the most contact with the people it will affect…”

The Enid News and Eagle is suggesting that the “people it will affect” are farmers and ranchers. This is undeniably true. But this farm bill, like all the others before it, will also affect every taxpayer and consumer of food in the country, not to mention commodity producers abroad. (more here)

On the one hand, it seems fairly reasonable that as part of the 2007 Farm Bill preparations, the administration and House and Senate Committee Members are holding a series of hearings all over the country. But on the other, who shows up to those hearings? Is it the consumers and taxpayers who, while collectively shelling out billions of dollars every year to agricultural subsidies and paying over-market prices, shoulder relatively little burden as individuals? No. Most of them have jobs to go to and little incentive to harangue Congressmen and officials. Farmers, on the other hand, are relatively well organized and have large incentive to ask for more money (or, in their more modest moments, ‘just’ the status quo).

Finally, for good measure, the Enid News and Eagle proposes letting the House agriculture committee and the farmers have full and exclusive rights over the farm bill:

“While we encourage input from farmers and ranchers, we discourage a lot of input in the bill from the president and the Senate.”

I’m new to this country, but isn’t there supposed to be a system of checks and balances here? Why do these opinion writers assert that there is no role for the administration or the Senate in crafting a new farm bill? While I, too, think there should be “little input” from government in farm policy, I don’t restrict my skepticism to only one chamber and the president.

If you missed our forum today on the farm bill, you can watch it here within the next 24 to 48 hours.

Hat-tip to Keith Good for the tip on the Enid News and Eagle.

More Welfare, More Poverty

News that the poverty rate remained at 12.6 percent last year, statistically unchanged from the year before, has set off a predictable round of calls for increased government spending on social welfare programs.

Yet, last year, the federal government spent more than $477 billion on some 50 different programs to fight poverty.  That amounts to $12,892 for every poor man, woman, and child in this country.  And, it does not even begin to count welfare spending by state and local governments.  For all the talk about Republican budget cuts, spending on these social programs has increased an inflation-adjusted 22 percent since President Bush took office.

Despite this government largesse, 37 million Americans continue to live in poverty.  In fact, despite nearly $9 trillion in total welfare spending since Lyndon Johnson declared War on Poverty in 1964, the poverty rate is perilously close to where we began more than 40 years ago.

One definition of insanity is doing the same thing over and over again and expecting different results.  What does that say about our welfare policy?

Boudreaux’s Time Machine

Over at Cafe Hayek, George Mason economics chair and Cato adjunct scholar Don Boudreaux has come up with a wonderful thought experiment to illustrate just how absurdly inaccurate the government’s methods for calculating real wages are. Don looks at the Census Bureau report (from the depths of which the New York Times editorial page draws forth the blackest despair) and finds that real median family income has increased an unimpressive 31 percent in the 37 years from 1967 to 2004. In 1967 it was $35,379 (in 2004 dollars), and in 2004 it was $46,326.

Are we really only 31 percent–less the 1 percent a year–better off? Don’s thought experiment asks us to imagine that the incomes and years are swapped, and then see how we feel. Would you rather live in 1967 on $46,000 a year (the 2004 median), or in 2004 on $35,000 (the 1967 median).

Let’s take it up a notch. So, it’s 2004 and you make $35,000 (let’s pretend it’s individual, instead of family income). A gangly professor with crazy hair drives up in a time-traveling Delorean and offers you the 1967 equivalent of $46,000 (that’s a 31 percent raise!) if you’ll let him drop you off in 1967, where you’ll live for one year. You say, “Right on!” and take a lift to yesterday.

So now you’re in 1967 with about $8,500 in your pocket, and you’re ready to roll. Have you become wealthier?

Well, as Don notes, housing is smaller and more expensive. Central air conditioning, I should add, is a luxury. Your expensive and ridiculously large (but not the screen) TV gets three channels with fuzzy reception. No Deadwood (or the Wire, or Weeds, or Sports Center, or Project Runway, or Good Eats, etc.) for you! It’s a darn fine year for rock & roll, but you’d like to be able to listen to Dylan on your iPod (you used to download anything you wanted to listen to on demand) or in your car. Your car! It costs almost exactly the same as a 2004 car, but is less comfortable, has no auto anything, gets horrifying gas mileage, and is a death trap without a shoulder belt, airbags, or anti-lock brakes. It handles like a whale. You start to think your Jetta back in 2004 has rather more than an $11,000 edge on this bucket. That makes you a little depressed. Which is a problem, because your Prozac prescription ran out and there’s no recourse but a Freudian therapist who tells you your malaise has something to do with your mother. Trying to look on the bright side, you attempt to be grateful that you don’t need Cialis, or chemotheraphy. The food is terrible. You can’t get a cup of coffee that doesn’t taste like cardboard. The book stores seem to have nothing. A simple calculator costs about the same as your Blackberry. You lose a contact lens, and end up with Coke bottle “birth control” glasses. You want to go home.

The professor materializes again and tells you that he lied. Ha! You’re not staying for a year. You’re staying for the rest of your life. But he guarantees your salary each year will be that year’s inflation-adjusted equivalent of the salary that you have in the “stayed-in-2004” timeline. (In 1973, you’ll get your 2010 wages, etc.) You start to cry (no Prozac!). The professor exclaims, “What’s the problem, kid? You’ll always be wealthier than you would have been. And besides, it’s a simpler time. People bowl together!”
You get the idea. Don has a bunch of great examples of things you can’t get in 1967, only some of which I stole.

How much would you have to be paid each year to agree to live the rest of your life from 1967 on? Maybe I’m weird, since my entire life would be different–and almost certainly worse–if it wasn’t for the Internet. (I almost certainly wouldn’t have most of my friends, my very cool job, and more.) There are so many things I rely upon that you couldn’t buy at any price in 1967 that it’s pretty hard to think of a number that’s high enough to compensate for the loss. Personally, I don’t care that much about improvements in TV picture quality, or even how comfortable, safe, and gadget-laden cars are now. It’s the things that just didn’t exist in 1967 that do it for me.

Here’s another thought experiment: Suppose you get a medical procedure with new technology that saves your life. It didn’t exist last year, but now it does. If you had been sick like this last year, you’d be gone. So, in a year, you went from a condition in which no amount of money would have been able to save you from death, to one in which a mere $10,000 buys you the ability to see your daughter’s wedding. How much wealthier did you become in the space of that year? Is it more than 31 percent?