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Got Milk?
The Washington Post has a great front-page article on the milk cartel and how they crushed a competitor. Titled "Dairy Industry Crushed Innovator who Bested Price-Control System," it lays everything out from the law and its history to how the system really works e.g. campaign contributions, Innovator: $172,900, Dairy Industry: $7,577,409.
In the summer of 2003, shoppers in Southern California began getting a break on the price of milk.
A maverick dairyman named Hein Hettinga started bottling his own milk and selling it for as much as 20 cents a gallon less than the competition, exercising his right to work outside the rigid system that has controlled U.S. milk production for almost 70 years. Soon the effects were rippling through the state, helping to hold down retail prices at supermarkets and warehouse stores.
That was when a coalition of giant milk companies and dairies, along with their congressional allies, decided to crush Hettinga's initiative. For three years, the milk lobby spent millions of dollars on lobbying and campaign contributions and made deals with lawmakers, including incoming Senate Majority Leader Harry M. Reid (D-Nev.).
Last March, Congress passed a law reshaping the Western milk market and essentially ending Hettinga's experiment -- all without a single congressional hearing.
Read the whole thing.
Posted by Alex Tabarrok on December 10, 2006 at 09:46 AM in Economics, Political Science | Permalink
Comments
I love Hettinga's comment: '..this is a great country. In Mexico, they would've just shot me.'
Posted by: Sudha Shenoy at Dec 10, 2006 10:09:56 AM
Is it difficult to stealthily or effectively donate $7 million? If that's all a whole industry needs to contribute to cost consumers $1.5 billion a year, then either our laws are very good, industries are afraid, politicians really aren't that corrupt, or someone is giving wildly inappropriate numbers.
Posted by: Chi at Dec 10, 2006 11:22:37 AM
Don't you have it backwards, Chi? If $7M gets you a law that makes you $1.5B, the supply of willing politicians must be high, right?
I'd say our laws are not very good, our policitians are competing for donations, and the numbers might not be that far off.
Posted by: Anon E. Mouse at Dec 10, 2006 11:47:41 AM
Yet another reason to vote Libertarian.
Posted by: happyjuggler0 at Dec 10, 2006 11:51:36 AM
Anon E Mouse, I think Chi has it right. If the rent-seeking market is efficient, we should expect to see marginal price equal marginal cost. An efficient rent-seeking market should consume most, all, or more than all of the rents. (And if campaign contributions really do get an average return anywhere like 20,000%, shouldn't I be able to get Congress to pay off my student loans for a couple hundred dollars?)
Posted by: ryan at Dec 10, 2006 12:11:32 PM
Anon E. Mouse:
Yes, a low price suggests large supply. But it also suggests a low demand. If laws are so cheap, why aren't more of them bought?
Chi is correct to suggest that there are other costs, such as the cost of knowing how to do it stealthily, the risk of it being in the newspaper (although that doesn't seem like a big cost to me, and I think Chi agrees, that "afraid" means afraid of shadows).
Posted by: Douglas Knight at Dec 10, 2006 12:12:03 PM
Does anyone remember the linkage of dairy contributions and Nixon that came out with Watergate? If I recall there were a few millions being tossed around then.
That said, I'd be unfaithful to my rearing if I didn't say that the high cost of milk is far down the list of things Americans should worry about.
Posted by: Bill Harshaw at Dec 10, 2006 12:37:19 PM
That's great. It reminds me of the story in "Brothers Karamazov" where someone is trying to climb out of hell and rather than let her do so, the others pull her back down. Or maybe it's just a joke about hell I'm remembering. Either way.
Posted by: asg at Dec 10, 2006 1:25:09 PM
Re: Bill Harshaw
We should worry about these things. 1.5 billion dollars or 1,500 million dollars or 1,500,000 thousand dollars; 150,000,000 ten dollar bills or 300,000,000 five dollar bills soon add up. Especially when you consider the number of programs like this the government has. Why should a bunch of dairy farmers get that money? Why should sugar farmers get that money? I guess Mancur was right about your incentives
It is amazing to me that we just brush off this type of waste as if it is nothing.
I guess Mancur was right about your incentives.
Posted by: RWP at Dec 10, 2006 1:45:19 PM
Think about it this way. Minimum wage in this country is 5 dollars an hour. Every poor worker in this nation is enslaved to the dairy industry for an hour a year. How about that?
Posted by: RWP at Dec 10, 2006 1:47:46 PM
I diagree with the notion that this was a small amount of money with which to bribe elected officials. If it was a new policy that was screwing over consumers, then I'd be (only) a bit surprised they rent seekers got off so cheap. But they were defending an existing policy, and the politicians knew these rent seekers had an awful lot to lose if the challenge to the status quo came undone. If they refused to vote for screwing over children of poor people, then the rent seekers would inundate their competition with campaign contributions in the next election.
The problem quite simply is that we choose to give government scum the power to hurt the little guy at the benefit of the rich whenever we also give government the power to use discretion "for our own good". You can't have one without the other, a sword can point both ways.
Posted by: happyjuggler0 at Dec 10, 2006 2:42:19 PM
The point of this article is not the high cost of milk, its about the corruption taking place in and through our government. If milk companies can do this, then what other companies have power to change our government without any checks and balances in place? What are the implications of what an industry can do to our government?
This is very very bad.
Posted by: John Church at Dec 10, 2006 3:05:26 PM
This is the most depressing article I've read recently. I'm going to go watch football and turn off my brain for a while.
Posted by: Jay at Dec 10, 2006 4:22:33 PM
Hmm: My point was that the dairy industry has long been making political contributions. So have many other industries. Such activity is a part of American politics and has been for centuries. Call it corruption or rent-seeking or whatever, every group seeks to advance its interests. I'm more outraged by the maneuvering among the Coast Guard, Northrup, and Lockheed and Congress as described in the Post this week. At least buyers of milk get a good product; the Coast Guard got ships that can't operate.
As for the "high price" of milk, my tongue was in my cheek. Food takes an ever decreasing percentage of a family's budget.
Posted by: Bill Harshaw at Dec 10, 2006 4:38:09 PM
Pardon my lengthy post. Chi might be right -- but I still don't think so. I can’t quite put my finger on it, but there’s a bunch of confounding factors (otherwise I’d agree with Chi).
-Congress is going to either leave the law alone or close the loophole, or something else altogether. But I think we can assume it is just those two choices.
-But they have to do one or the other, regardless of who bids how much money--even if total bids = $0.
-There are only two bidders -- the solo guy who tossed in $200k, and the rest of the dairy industry that kicked in $7M.
-Congress keeps all of the “donations” to their campaigns no matter what happens to the law.
-Presented with a choice of continuing to receive the $M/year or maybe get another $100k out of the solo guy, Congress folks picked the proven big spenders.
-Closing the loophole puts solo-guy in a position to where he has to severely out-bid the rest of the dairy industry to get the law changed.
-Congress can’t hold the dairy protection out for ransom. They’ve convinced the constituency that it is a necessary program -- to overturn it, they’d need a really good justification.
-If a couple of congressmen decide the loophole needs to be closed, they each spend some amount of political capital (“burn a few chips”), and each gets headlines that say “Congressman Crass protects our local dairy farmers” in the papers back home.
-If those same congressmen decide to do nothing, then maybe the loophole gets closed by other congressmen (and our first two congressmen vote for it in return for later favors), or maybe it doesn’t. Our first two congressmen lose out on future contributions from either side.
-The dairy industry kicks in several $M each year to keep the protection they thought they had all along. The Congressmen keep their “protect local dairy producers” badge of honor. The dairies employ voters that have families of voters. Some of the “extra” profits buy votes directly and indirectly.
-Screwing with the dairy folks might upset other big donation-sources.
Posted by: Anon E. Mouse at Dec 10, 2006 4:48:53 PM
As happyjuggler0 notes the $7M was not a payment for the $1.5B; that extortion already existed due to the 1930's ere legislation. The $7M was payment to close a loophole and get rid of a nuisance who was threatening to cause a small dent in the $1.5B.
At any rate this is just further example (as if another is needed) that Congress is simply a legalized protection racket. That would be bad enough but it literally adds insult to injury to have to endure hearing a member of this crime family lauded for his life in "public service." Any janitor provides far more "public service" than every member of that gang of thieves.
Posted by: Brian Courts at Dec 10, 2006 5:59:17 PM
Current milk processing technology and the food marketing infrastructure have long rendered the function of the Milk Marketing Orders to that of price fixing alone. When first established, the idea was that because milk was a very perishable locally produced commodity, the Orders would protect the local producers from boom and bust cycles and guarantee the local consumers a steady supply of safe milk for the kids. Milk production more naturally follows crop production; high in the spring and low in the winter. Because some areas have very good "cow climates"at different times of the year, they can produce an excess of milk during some seasons compared to those in other areas. Some areas always have tough "cow climates", such as the southeast, hence their local production costs are almost always high and non-competitive with other areas.
With UHT (ultrahigh temperature) pasteurization technology and the transportation infrastructure, the reasons that these marketing orders were established are now moot. Refrigerated tanker trucks constantly haul 10,000 gallon loads of milk from surplus areas halfway across the country for uses other than "fluid" (milk for drinking). Compared to normally pasteurized milk that must be under constant refrigeration and has a shelf life of weeks, UHT processed milk has at least 6 month or so shelf life at room temperature. As a result, many other parts of the world have gone to UHT milk. The energy cost of maintaining this cold chain in the US likely far exceedes the additional energy cost of UHT processing. This is likely another example of an old regulatory structure impeding the technology evolution of an industry.
Posted by: nonam at Dec 10, 2006 6:53:21 PM
"We should worry about these things. 1.5 billion dollars or 1,500 million dollars or 1,500,000 thousand dollars; 150,000,000 ten dollar bills or 300,000,000 five dollar bills soon add up. Especially when you consider the number of programs like this the government has. Why should a bunch of dairy farmers get that money? Why should sugar farmers get that money? I guess Mancur was right about your incentives
It is amazing to me that we just brush off this type of waste as if it is nothing. "
We brush it off because the public doesn't pay attention; 20 cents here, a dollar there, the bite is small enough to be tolerated or even ignored ("mordita," is that what they call it down in Mexico? I'm rusty). And it can be tolerated, and unnoticed, because the vast majority of Americans (that vote, anyway) have had 60 years of prosperity, and aren't watching their pennies all that closely.
So there are government-sanctioned inefficiencies in a variety of industries -- telecom, cable TV, food, tariff law, etc., etc. -- that are left in place or worsened because some people have made a lot of money off those billions of morditas and want to keep on making it.
If America ever loses its prosperity, look for Americans to begin to take notice and, eventually, influence some kind government reform (or disengagement) in a number of arenas where the economy is kept intentionally inefficient for the good of the few.
Posted by: Bob Dobbs at Dec 10, 2006 9:21:20 PM
Bob Dobbs,
That is why I refered to Mancur Olson. His book, The Logic of Collective Action, originates the idea of your post.
Posted by: RWP at Dec 11, 2006 12:16:31 AM
Bob Dobbs,
You miss the point -- America DOES lose its prosperity from these rackets -- as well as its legitimacy as a legitimate place to live (note that the US ranks #20 in the recent Transparency International Corruption index)
Posted by: David Zetland at Dec 11, 2006 12:33:47 AM
I don't think Bob misses the point. He's arguing that the aggregate loss of prosperity is not significant enough to capture the attention of most Americans on an individual level. Furthermore, a much smaller minority has a very large stake in maintaining the status quo. When power is concentrated, it's easier for a small minority to wield great influence.
Posted by: David Andersen at Dec 11, 2006 2:32:25 AM
Wasn't it Adam Smith who said there is much ruin in a great nation? Sadly we are rich enough to tolerate still more ruin -- at least until things get really bad or until other countries figure out that it's "easy" to do better than us. Then again, this complacency has crippled rich Europe and rich Japan. And the US seems bent on holding itself back in lockstep.
Or maybe humans just have revealed preference for living in inefficient states.
Posted by: ghost at Dec 11, 2006 4:53:12 AM
This is why Congress can only reform when it has a strong mandate from the public. Deregulation can only happen once in awhile, across the entire swath of American industries. Taken one at a time, industry will almost always prevail. Perhaps some ambitious conservative will seize the moment.
Posted by: Matt at Dec 11, 2006 7:02:46 AM
reason to vote libertarian!?
I think you mean reason to support McCain-Feingold. Ha!
voting libertarian does nothing to help this situation. I think you are confusing or conflating voting libertarian, and doing something that makes government policy perceptively more libertarian.
Posted by: theCoach at Dec 11, 2006 8:59:36 AM
voting libertarian does nothing to help this situation
B-b-b-but I though "voting libertarian" was the answer to EVERY problem!
Because a *truly* libertarian gov't would remove every impediment to the cartels.
Posted by: Anderson at Dec 11, 2006 9:38:11 AM
