Government Ag Policies: Harvesting Absurdities

0:00Our next speaker, he is our clean-up man today, so that means we've saved the best for last. He's an adjunct scholar with the Mises Institute, kind of grew up at the Mises Institute in many ways. He went to, he got his Bachelor of Arts at Hillsdale College, which many of you may be familiar with, but went to the big city, NYU, for his PhD. for Laffer Associates, he has a portfolio analyst, he has a blog called Free Advice, he's written a number of books, The Politically Incorrect Guide to Capitalism, it is over there on sale, Study Guide to Man, Economy and State, Study Guide to Human Action, Politically Incorrect Guide to the Great Depression and New Deal, I think all those titles are over over there, but he does a lot of great work. You've seen him possibly on Judge Napolitano's show. He's going to talk to you about government ag policy, harvesting absurdities. Robert Murphy.

1:10Well thank you everybody for sticking around. I was remarking to Doug that I seem to have cleared out the table where we were sitting. Everyone there decided to leave. I told a few off-color jokes during lunch but I didn't think I was gonna have that effect. In all honesty it is good to be here and it's particularly true to say that because yesterday Doug and I were sort of running and The Golden Gauntlet, if you will. Maybe you know we had to present to a group of about 51 high school students. And that's actually the hardest crowd. I've done presentations to various crowds. The biggest one was at Fifth Third Arena last year, last HACS day.

1:55There was a tea party event. And I was the number two guy. The headliner was Jonah Goldberg. So that was sort of a surreal experience for me. And so there was a huge crowd and everything. And that was actually very easy because I tell people, no, it's not intimidating because you get out there. And if you say something that you think should be an applause line, you just wait. And if there's 3,000 people in there, someone's going to say, oh, we're supposed to start clapping and then everyone starts clapping. So it's very, in contrast, yesterday, Doug and I, you know, we had a couple of jokes that just didn't quite work because Doug and I have this sort of deadpan delivery and that's not often suitable for a high school crowd because they just don't know when you're kidding or not. They just assume everything. I made a reference to the fact that I was a consultant and I said, so I work for myself

2:36And I said, so my boss is a jerk. And I was waiting for the line. And the kids are just looking at me like, oh, why? What does he do? Does he swear at you? And then I, and then later, and so I thought, okay, I'm going to keep things real. So I'm a man of many talents. And somehow I worked in this anecdote, which is true, that there was a guy at another Mises event in Greenville. I was out after they've been walking around, and this man of the Street, if you will, comes up to me and he's like, hey, hey, how you doing? And I know he's going to hit me up for money and he just say, hey, you ever, you ever see that show Seinfeld? And I'm like, yeah, I know. He goes, do you know you look, I don't mean to offend you. And so I knew where he was going for the George Costanza. So I just, you know, I said, I made it a guy's day.

3:21I just went, George is very angry, like that. And so, you know, it got, it got a little bit of laughter and I was like, okay, I've worked out. So I'm thinking here that I'm, you know, putting on a show, hamming it up for the high school kids and this father comes up to me afterward and says, Dr. Murphy, really?

4:04This is really, so the last thing, I'm sort of mad that the weavers had to leave because I did have a lot of recommendations about popcorn. You know, I don't know if you guys have noticed that when you, the microwaving issue, that if you go a little bit too long, you know, there's burning. If you don't go long enough, then there's extra unpopped kernels. And I really thought we were going to make some headway on that issue, but apparently I'm going to have to just write a letter. Alright, so what am I talking to you guys about today? It is harvesting absurdities with agricultural policy. I'm going to be repeating some of what the other speakers have said here. I guess the sort of theme of my talk is going to be the fact that when it comes to government intervention in general but also in this particular area specifically, the theory is wrong.

4:55So the official justifications they're giving you for why we're going to do what we're They don't make any sense. It's bad economics. Even on a theoretical level, it doesn't make any sense. But then what's worse is that's not really why they're doing it. They're doing it for corrupt reasons. They're doing a bad policy that doesn't make sense on the face of it, and they're doing it for ignoble reasons. Many of you may have heard of this team that makes these documentaries, and they're against the official environmentalist movement. They sort of debunk global warming and things like that. and so their latest documentary is called Not Evil, Just Wrong, so what they're trying to say is we're not saying there's a big conspiracy, we're just saying these scientists warning about global warming and blah blah, they happen to be wrong, we're not saying they're evil or anything, that slogan doesn't really ring true for me, I would say it's not stupid, just liars, in terms of when it comes to politicians in general that these guys, they're not, I'm not here talking just about the environmental stuff, I'm talking about just in general government intervention

5:58especially the politicians, they're not dumb and I know that that's it's kind of fun and I do it too you know we make jokes about Ben Bernanke being an idiot and stuff but they're only idiots if you actually thought they were telling you the truth and if they believed the stuff they were saying then yes they would have to be stupid that'd be the only explanation but if you entertain just for one minute well gee maybe these politicians are lying through their teeth all the time well then you know you said well it doesn't need to be the case that they're dumb and of course how could some of the most powerful people in the world just be bumbling fools One example of that, just to show you the contrast, is I remember when I was younger that I thought, a great example of how the government is just stupid is to say, oh, on the one hand, the government subsidizes tobacco farmers, and on the other hand, they spend

6:51all this money on public service announcements for people to quit smoking. And so people say, oh, this is stupid, the government doesn't know what the right hand left-hands doing that kind of thing. But no, that only is crazy and idiotic and counterproductive if you actually thought there's this single thing called the U.S. government that has objectives and that it really wants people to not smoke, right? That's the only, it really cares about public health. If you thought that, then yeah, what the government does is crazy and yeah, Washington's just a bunch of idiots. But that's of course not really what's going on. And so Bob Higgs alluded to this with his analysis and a lot of stuff that Tom DiLorenzo was saying too that what's called the public choice approach to government says well no, if you look at the actual policies and the incentives facing the individual people involved and stop analyzing in terms of what does the government want to do here and you

7:42look at it more realistically and say what does this particular senator get out of it and so forth, then it all makes perfect sense so that the senators and congress people from states that have a lot of tobacco farmers, obviously they're going to vote for those of the Subsidies, and their colleagues will go along with those votes if in turn they reciprocate and vote for the stuff that their colleagues want on some future vote, so that makes total sense why they would do that. And then in terms of the smoking campaigns, there's various people who benefit from that, and so that's why they vote for those things. So again, it's not... So what I'm saying is even though it's kind of fun to make fun of those idiot politicians or whatever, that it's... I think that's actually naive and you won't really understand government policy and especially won't be able to predict future policies that haven't yet been determined if you actually think you know they're a bunch of bumbling idiots sort of like you know the Chevy Chase's

8:34portrayal of Gerald Ford that's you know it's funny to do that and to think that but it really is not accurate that there's reasons for why the government does certain things that on the face of it seem crazy. Another example that's relevant for today is I don't know how many of you know this but President Obama recently went to Brazil and there was a big, a lot of people in the energy who are interested in energy issues were really upset because as you may know, especially since the spill in the Gulf that there's been a lot of stuff with Washington, you know, there was like a moratorium on offshore drilling and then they lifted it officially but it's hard for people to get permits. So there's a lot of companies in the United The United States who want to develop offshore oil and natural gas, and they're having difficulty getting permits and so forth to do, they're getting official permission, and yet President Obama went to Brazil and he's given a talk about how we're going to work, the US government

9:30is going to help you to develop your offshore oil resources, and we know that that's the way to bring more supplies in the future and bring down oil prices, so people were upset that Obama was, you know, while they were fighting the U.S. government to develop American offshore oil resources that he's promising taxpayer aid for Brazil so that they can develop their offshore resources. But another part of that speech that made no sense is he, so obviously he had to be careful with what he was doing there because he left himself open to objection from the environmentalists left because they hate oil and why would you want to develop offshore oil resources here or in Brazil? And so he said, but at the same time, that's just a temporary thing, at the same time we have to work with the Brazilian government and you have to develop your biofuel industry and da-da-da-da-da, lots of nice rhetoric about that.

10:17But the biofuel farmers in Brazil would of course, if they knew the situation, could be understandably upset and know that he's lying there because the U.S. government has a tariff on ethanol that's produced in Brazil. So there's a 45-cent tax credit that the U.S. government gives to domestic refiners who blend ethanol into their gasoline products, which Bob was talking about, and then at the same time there's a 54-cent tariff on Brazilian ethanol because what happens is in Brazil they use sugar cane, it's actually they are more efficient at making ethanol than American corn farmers would be. So if you had an open market in ethanol, then, yeah, the government could buy with the tax credit and with the mandates and so forth, could convince or cajole US refiners to mix ethanol into gasoline that then, you know, consumers get motorists get when they go to the pump.

11:18But the point is that wouldn't be helping US corn farmers, it would be helping Brazilian farmers who grow sugar cane. And so to avoid that, what they do is they slap on the 54 cent tariff. And what's funny is that's not just speculation like back when those issues were being debated some I forget who it was I didn't I should have saved it but a US politician literally just came out and said that words to the effect I don't remember the exact quote but said well no we have to keep the Brazilian tariff in place because otherwise the domestic tax credit would go to Brazilian sugarcane farmers and it wouldn't go to American corn farmers so why would we do that you know in his mind he thought I'm showing I'm keeping the jobs

12:25I think you're saying that you want to promote more ethanol use and yet you're putting up a tariff against Brazilian ethanol when that would be a cheaper way. In other words, U.S. motorists could use more ethanol if you allowed in the cheaper Brazilian product, but they don't do that. So that's just another example of that. Now, I want to come back a little bit to something that Tom DiLorenzo brought up about tariffs, in Paris, because there is this relationship between the U.S. government supporting farmers on the one hand, and saying that we're helping the farmers, but then on the other hand, by having tariffs in place on manufactured goods from other countries, that implicitly hurts American farmers, right? So Tom mentioned this, but it's sort of a subtle point, so I think it's okay to repeat it. So the one way to think about it, just in the grand scheme In the long run, a country pays for its imports with its exports.

13:21In terms of an individual household, you could get by for a while if you spent more than your income. If your expenditures were higher, you could get by for a little while because you could run up debts and so forth. If you had assets, you could sell them off. But the point is ultimately the way you pay for your purchases is you work and you earn an income in terms of the individual household level. And the same thing analogously holds for a country as a whole, the way they do the trade statistics is that in one sense, broadly speaking, the way a country pays for its imports is by exporting stuff that countries around the world aren't going to just keep sending us cars and TVs and so forth if we never send them anything in return that we produce in the United States. Okay, so again, there's caveats to all that, but for our purposes, that's a good benchmark to think about, way to think about it.

14:10So what happens then if the US government puts in place tariff barriers on stuff produced abroad like let's say Japanese cars, makes it more expensive for Japanese cars to come into the United States, then obviously that hurts American consumers, people who were going to buy automobiles, now the price is higher, but at the same time, which a lot of people don't see the implications because it's sort of an indirect effect, is it hurts and of course U.S. based exporters who traditionally have been farmers, right, because we export stuff around the world in terms of agriculture. So and David Friedman actually was one who came up with a pretty clever way of illustrating that. So David Friedman, the son of Milton Friedman, so it's kind of ironic that Tom read quotes from Milton Friedman and I had in mind this anecdote from his son David Friedman to make the same basic point.

15:03I guess the Freedmen sat around talking about exports and imports all day at the dinner table. So he said, look, one way to think about this, again the point being when the U.S. government puts up a tariff keeping out manufactured goods from abroad that actually hurts U.S.-based exporters, including farmers, is he said one way to think about it is just imagine that international trade is just like a type of technology. And he said, so we actually have two ways in the United States of producing cars. One way is we ship steel and rubber and so forth to factories in Detroit and then people go into the factories and assemble it and the cars come out the other end of the factory. That's one technological recipe we have. But another way we've discovered of turning resources into finished cars is we take a bunch of wheat from American farms, we put it on a ship, we ship it across the ocean And then a couple of months later, the ship comes back and the wheat's turned into cars.

16:00And so what he means, of course, is that we sell the wheat to Japan and then they ship us cars in exchange. And he said, so it's not an issue of help of creating jobs on net if you put up a tariff barrier and say, no, we don't want cars coming in from Japan anymore. He said, all that does is it puts the car producing farmers out of business, or it hurts their business. All you're doing is clamping down on that particular way of making cars and instead you're saying we want to favor the way of assembling them in Detroit rather than putting the wheat on a ship that magically turns into cars. That's one way maybe of getting it to click if you get lost in the currency exchanges and things is to see that you're not promoting jobs per se with tariff barriers.

16:46The tie-in historically there is Herbert Hoover, again this myth that Herbert Hoover was a do-nothing reactionary who just sat back and twiddled his thumbs while the country fell into the Great Depression. Robert Hoover was the most interventionist person in terms of peacetime interventions to help the economy up to that point, so one of his big things was even before he got elected he was campaigning to be a friend to the U.S. farmer and he did put in place various subsidies and so forth, but another big thing he did of course famously or infamously was signing in the Smoot-Hawley Tariff.

17:42It didn't cause the Great Depression, but it certainly kicked the economy when it was down. It was an awful piece of legislation that drastically raised tariff rates across the board, and a lot of people would argue foreign countries then reciprocated because of that and had an international trade war. So that, ironically, certainly undid whatever alleged benefits he was giving to the farmers directly was by putting up this huge tariff barrier. So that's just one example of when the government says, we're here to help you, And we're going to help farmers that, you know, you should be afraid of that. Now what, I think Tom also read a little bit about this, so I'm going to cover some of the same material, but give you different examples of it. So what was happening is, originally in the Hoover administration, they wanted to, let me just check on the time here, okay, they wanted to, the Hoover administration wanted to help farmers, and so what do you do?

18:35Well, raise farm prices, duh, that's the way you help them. And so originally, they were going to take government money and just start buying stuff. So they put a floor price under it. And so the idea was if the price of a certain, whatever it was, wheat or soybeans or whatever goes below, if the market price would be below the target floor that the government set, they would use tax dollars to buy the surplus and they'd put it in silos. And Murray Rothbard goes through and explains all these programs and how they had sort of of Unanticipated Results

19:32Now, they knew that was coming because they were lobbying for it and that's how he got elected or one of his things. So they saw that coming and so they planted more knowing that this was in the offing. So again, it's not clear that even on its own terms, it was making the price higher than it otherwise would have been because now you had more land going into the production of those particular crops that were being subsidized. And then Rothbard just goes through a lot of statistical evidence to show that he had these crazy boom-bust cycles in these various crops because the government, what were they going to do with it? They bought it, so they put it in silos because they were still of the mentality that food is a good thing, you don't want to destroy it, right, so they put it in the silos.

20:18But then as it started building up, speculators would see those inventory levels and if they started getting really high, eventually speculators would start shortening those products because Because they would know, well, the government's going to dump that stuff in the market, it's going to kill the price. And so it actually, it made, because in effect, the government was, you know, doing the opposite of what a successful speculator would do. The government was not in the business of trying to make money. They were almost, in a sense, trying to lose money. And so it was doing the opposite of what successful speculators would do, and so it was screwing up the market. So you had these wild, volatile swings in the prices because of the government getting

21:26I got this from a Heritage Foundation study. I think this was true as of about 1999 or so. I don't know what the numbers would be today, but as of then, he was saying, this analyst had looked into it, and he said of all the agricultural subsidies going out the door from Washington, the majority of them go to certain commercial farmers, as opposed to just the Ma and Pa raising Clark Kent or something. So these commercial farmers, huge agricultural businesses, and he said, restrict this now, these commercial farmers who get the majority of the subsidies in terms of the dollar amounts, their average income is over $200,000 a year and their average net worth is over $2 million.

22:13So again, that just makes sense. If the government is going to start handing out money to people, they're not going to give it to real poor people who don't have a lot of political clout. Why would they do that? What's the point of, you might pick up a few votes that's much So that's one example, illustration of this. So back to Herbert Hoover's time, that's what was happening. It was causing more volatility. And then, of course, coming into FDR's administration, so what happened is, there was a... the planners, they realized, they realized that they had a lot of money. They realized that they had a lot of money. They realized that they had a lot of money. They realized that they had a lot of money. They realized that they had a lot of money. So they could see what was happening, you know, even in the Hoover administration, they could see, okay, this isn't working, we can't just go out in the market and buy up the product, because then we're just exacerbating the problem, we're just making farmers put more land under cultivation, which is what we don't want to have happen if the problem is there's a glut and it's pushing down the price, we don't want them to plant even more. So that's how they then switched to the tactic of paying farmers not to grow the stuff.

23:25in the weird world of Washington and politics, that actually made more sense than buying up the stuff and letting it rot in the silos or giving it away and then causing the price to crash and so on. And so that was the objective there, because in their mind that was a tweak, that was an improvement. We learned from the past, we don't do that silly thing anymore and put it in silos. We're now paying them to not grow it in the first place, but there was a lag period where the farmers had already planted this stuff. So let me just read you two things. So this is coming from The Grapes of Wrath, Steinbeck's famous novel. And so the part of that novel where that phrase comes from is like the most horrifying thing in terms of an indictment of free market capitalism.

24:10So he's talking about all these starving people who are outside looking at these farm operations. And he said, and they stand still and watch the potatoes float by, listen to the screaming pigs being killed in a ditch and covered with liquid line, watch the mountains of oranges slopped down to a putrefying ooze, and in the eyes of the people there is a failure, and in the eyes of the hungry there is a growing wrath, in the souls of the people the grapes of wrath are filling and growing heavy, growing heavy for the vintage. Okay, so that, what Steinbeck thought he was seeing was free market capitalism, that well yeah, if you've got land held privately, And that's the way you make your money as you sell food in exchange for money. Well, duh, the way you make more money is you destroy your product. And even if people are starving on the streets, you don't care, because that's this crazy laissez-faire world that we're living in.

24:59And so Steinbeck thought this was the operation of free market capitalism. But of course, no, that's not the way free market capitalism works, because if you have a bunch of farmers spread around the country, yeah, and one particular orange farmer douses his crop with gasoline and destroys half of it, that raises orange prices slightly, but it also means he gets to sell 50% as much product if you destroy half of his yield, so he's bearing the brunt of it, whereas the high prices get enjoyed by all his colleagues. Okay, so the only way it makes sense to deliberately destroy huge amounts of the product to raise the market price is if you get everybody to do it, or at least all the major players, and for that you need the government. So that's why you needed the government to come in and do this stuff. So this was not a market-based outcome. Steinbeck was just wrong in thinking that.

25:47This was because of a government-enforced cartel. So the producers, in this narrow sense, did benefit from the operations, but the point was they couldn't have done it unilaterally. They needed the government to come in and make sure everyone did it, because otherwise people would cheat. So historian Jim Powell talks about this, and some of this is going to be overlapping with what Tom said. So he said by the time the Agricultural Adjustment Act became law and key people were recruited, corn, cotton, tobacco and wheat were already planted and livestock operations were moving along. The contemplated output restrictions wouldn't take effect until the following year. So some of the new dealers began to think their only option if they wanted to force up farm prices soon was to destroy crops already planted. Agricultural Department officials signed up about a million cotton farmers and they were paid $100 million to plow under some 10 million acres as a Farmland, hog farmers were paid to slaughter some six million baby pigs, and economic

26:42historian Broadus Mitchell noted that most of this pork, under agreement of the government with the Packers, became fertilizer, less than a tenth was saved as food and distributed in relief. Okay? And they go on to say a few other things, and so John T. Flynn, who was a critic of the New Deal, pointed out the hypocrisy of this, and he said, while the agriculture secretary Murray Wallace was paying out hundreds of millions to kill millions of hogs, burn oats, plow under cotton. The Department of Agriculture at the same time issued a bulletin telling the nation the great problem of our time was our failure to produce enough food. Okay, so again, just showing you the absurdity and the craziness of what the government was doing there. So again, in light of that, it was an improvement now to get through that transition period where they had to pay people to destroy pigs and so forth and deliberately

27:59I just want to read you one last thing, because I remembered this idea of the government paying people not to grow food. It's hilarious in its implications, and I think the funniest take on that I heard was something you may be familiar with, the novel Catch-22 by Joseph Heller. One of the characters in there, so he's in the military, and his official name is Major, Major, Major, Major, because his first and last name are Major, Major was a sober, God-fearing man whose idea of a good joke was to lie about his age. He was a long-limbed farmer, a God-fearing, freedom-loving, law-abiding, rugged individualist who held that federal aid to anyone but farmers was creeping socialism.

28:51He advocated thrift and hard work and disapproved of loose women who turned him down. His specialty was alfalfa and he made a good thing out of not growing any. The government paid him well for every bushel of alfalfa he did not grow. The more alfalfa he did not grow, the more money the government gave him and he spent every penny he didn't earn on new land to increase the amount of alfalfa he did not produce. Major Major's father worked without rest at not growing alfalfa. On long winter evenings, he remained indoors and did not mend harness, and he sprang out of bed at the crack of noon every day just to make certain that the chores would not be done. He invested in land wisely and soon was not growing more alfalfa than any other man in the county. Neighbors sought him out for advice on all subjects, for he had made much money and was therefore wise.

29:41As ye sow, so shall ye reap, he counseled one and all, and everyone said amen. Major Major's father was an outspoken champion of economy and government provided he did not interfere with the sacred duty of government to pay farmers as much as they could get for all the alfalfa they produced that no one else wanted or for not producing any alfalfa at all. He was a proud and independent man who was opposed to unemployment insurance and never hesitated to whine, whimper, wheedle, and extort for as much as he could get from whomever he could. He was a devout man whose pulpit was everywhere. The Lord gave us good farmers two strong hands so that we could take as much as we could grab with both of So with that, I will turn it over back to Doug.