In an 8-1 decision, the Supreme Court ruled recently that the 1940s-era “Federal Marketing Order” for California raisins as currently implemented violates the Fifth Amendment of the U.S. Constitution.
This is good news for raisin consumers, and I myself buy a lot of them, but it is bad news for raisin producers as a whole — despite it being considered a victory for the farm family that brought the suit.
Make no mistake. The court decision does increase the freedom of producers to conduct their business as they see fit. But this is not a victory for all raisin growers over an oppressive government. Rather, it is the victory of a few growers over the financial interests of the group as a whole. This newly underwritten freedom will result in raisin prices, on average, being lower than they were under the system that has prevailed for nearly 70 years. Raisin farm incomes will fall.
These outcomes are not rocket science. Indeed, they were foreseen by two crusty, pithy economists going back hundreds of years.
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The first was Scottish philosopher Adam Smith, who observed that “people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
The incentive for such collusion exists because the demand for most products is “inelastic.” This means that any given reduction in quantity available for sale, say 10 percent, will result in the market price rising by a greater percentage.
The outcome is not only higher prices but also higher total revenues. The price increase more than makes up for the quantity decrease, and profits rise.
But this requires producers to agree on exactly who is going to reduce output how much. If someone refuses to go along with the deal and tries to continue to sell as much as possible but at the now-higher price, the whole profit-increasing “contrivance” falls apart.
The greater the number of producers, the harder it is to get them all to cooperate. In 1770s Scotland it probably was easy to get all the iron foundry owners, still only a few, to voluntarily collude. It might have been possible with all the bakers in Edinburgh, a larger number. But there were so many sheep raisers that would have been administratively impossible. The same was true for raisin producers in California in the ’40s and probably remains true today.
Farmers suffered terribly from the deflation of the Great Depression. The fault was that of the Federal Reserve, which failed to maintain price stability, the primary task of a central bank. Low prices meant low incomes which meant human suffering for a third of U.S. households still living on farms in that era.
The Roosevelt administration decided that if it could not lift all prices generally back to pre-Depression levels, it could raise the prices of specific products like cotton and hogs. However, that meant laws restricting how much cotton and how many hogs could be produced. These measures had to be mandatory, whether every producer wanted to participate or not. And so the Agricultural Adjustment Act of 1933, which forced already-planted cotton to be plowed under and hundreds of thousands of baby pigs to be slaughtered, was controversial from the start. But it did boost farm prices and incomes.
Yes, it also increased grocery store prices, but against the backdrop of a 20 percent drop in the general price level, this was barely perceptible. As late as 1940, the Consumer Price Index was still down 18 percent from 1929. In 1933 it had hit a low of 24 percent down.
Follow-on legislation fostered producer-run output limitations for individual specialty crops like cherries, onions, peaches and raisins. This ran directly against Smith’s argument that “the law ... ought to do nothing to facilitate such assemblies.” In this case, the law was mandating it.
Farmers would elect members of a “marketing board” or “advisory commission” who would make decisions about quotas and disposition. If a super-majority of producers voted to establish such a “marketing order,” it became mandatory for all, even for those who had voted against the plan.
Orders for perishable fruits might be determine that a certain fraction had to be discarded to maintain prices. Since crop yields are highly dependent on weather, that fraction varied from year to year. Most of the marketing orders also used “price discrimination,” which is the manipulative allocation of output between buyers with different elasticities of demand. This might be between peaches or cherries to be shipped fresh versus those to be canned.
The whole U.S. milk marketing system depends on a series of such marketing orders, on a regional basis, which manipulate the flow of milk for fluid consumption versus that for manufacturing of cheese, ice cream, butter and dried milk.
Advocates of and participants in marketing orders always stressed price “stability” and “orderly markets.” They had a point because again both supply of and demand for food are such that prices fluctuate enormously with changes in weather, animal disease and other output shifters. But they mute the fact that the prices they receive are increased above levels in an unregulated market.
That brings us to Willard Cochrane, an even crustier economist than Smith. Two decades after the end of the Depression, the problem of low farm prices was still a hot political issue. During the Eisenhower administration, the government supported prices by buying up vast quantities of commodities, just as the European Union ended up doing for decades. But storing such “surplus” food or feed was wasteful and expensive to the Treasury. Cochrane, an adviser to President John Kennedy, proposed simply paying farmers to set aside a fraction of their acreage.
As a candidate, Kennedy announced this with great fanfare at the 1960 South Dakota State Plowing Contest. When a reporter asked what this would do to family food prices, JFK deferred to Cochrane, who expostulated: “Well, hell, it’ll raise them, of course.” The sun rises in the east, sewage flows downhill and if government acts to raise prices for food producers, it will raise them for consumers.
The Supreme Court raisin ruling did not declare all marketing orders unconstitutional, only those like raisins, in which the marketing board can take possession of the product if necessary to maintain prices. So don’t expect big drops in food prices as a result.
From the producer side, yes, individual liberty to conduct business was restored. Given the increasing growth in libertarian thinking, greater liberty is good for society as a whole. But raisin growers as a group will pay a price in terms of lower incomes.