All Commentary
Tuesday, May 1, 1956

Flies in the Sugar Bowl

Dr. Poirot is a member of the staff of the Foundation for Economic Education.

If anyone seeks an example of the utter and total failure of government intervention as a substitute for the free-market method of satisfying human wants, let him study the sugar situation in the United States.

In strict confidence, many an American farmer will tell you he doesn’t really believe in all these government farm support programs; he’d rather stand on his own two feet and compete in a free market. But then he’ll go on to explain that one of the big reasons why he has to have some government aid is because nonagricultural businesses enjoy tariff protection. And a great many American voters act as if they see logic and justice in such a claim.

But an American grower of sugar cane or sugar beets can’t very well use such an argument, for he farms behind a substantial wall of tariff protection, or what amounts to the same thing in the form of quota restrictions against imports of sugar.

It’s quite an ancient wall that protects domestic producers of sugar—about as old as the United States. When this nation was young, the wall was primarily a mechanism for collecting revenue on sugar as on many other imported items.

In those days, maple trees provided much of the domestically produced sugar, accounting for up to 40 million pounds a year as recently as a century ago. Thereafter, competition from cane and beet sugar plus more favorable employment opportunities elsewhere, gradually took the joy out of the “sugar bush” business until it has virtually disappeared.

While the maple sugar industry was dying, domestic production of sugar cane and beets increased, though not as fast as the population and its growing appetite for sugar.

In the latter part of the nineteenth century, a number of European governments—aiming to encourage and protect their domestic sugar industries—imposed heavy import duties and paid substantial bounties on exports of sugar. This could have meant quite a break for American consumers—a foreign-subsidized supply of sugar—except that American sugar growers were politically powerful enough to obtain a similar tariff-plus-bounty arrangement in this nation under the McKinley Bill of 1890. From then on, with minor exceptions, the governmental policy relative to sugar has been to protect domestic producers rather than to raise revenue.

For several years prior to World War I, from a fifth to a fourth of the sugar requirements of the United States were saris-fled through the “protected” domestic sources. More than three-fourths of the supply in that period came over a tariff wall amounting to nearly 2 cents a pound.

Interference with ocean shipping during World War I threatened imports of sugar to the United States. Even though the government lowered the tariff wall during the war, sugar was comparatively scarce, and consumers resorted to the old trick of offering more money for the precious sweetener. This might have resulted in substantially increased domestic sugar production, except that the government further intervened with ceiling prices; and potential sugar producers promptly turned to other crops from which they could still reap the consequences of wartime inflation. During the war years of most urgent demand in the United States, domestic production of sugar was a less reliable source of supply than were imports.

When sugar price ceilings were lifted following the war, the price jumped temporarily in 1920 to 22.5 cents a pound. At such prices, the pent-up demand was soon saturated; supplies increased as growers all over the world switched back to sugar production, and by the end of 1921 the price of raw Cuban sugar at New York had fallen as low as 1.82 cents a pound. This, of course, was quite a blow to sugar growers in the United States. But with tariff protection, and some price recovery, they struggled through until the depression when, in 1932, the price of raw sugar fell to less than a penny a pound.

The government intervened in behalf of domestic sugar growers with the Jones-Costigan Act in 1934. This Act enabled the government of the United States to do to American consumers what German U-Boats had threatened during the war: cut off or cut down on imports of sugar. One of the arguments for such action by our own government was that it would help develop and protect a domestic sugar industry. In a roundabout way, that could have been what the Kaiser had in mind for us, too, though our government officials seem to have missed the point until 1934. By World War II, however, we’d forgotten the point again. Ceiling prices were reimposed on sugar, thus discouraging domestic production at the very time when foreign supplies were most likely to be cut off. We’d built up a peacetime industry, presumably as a defense measure, only to destroy it by price control while the crisis of war was upon us. As in World War I, domestic production again proved to be a less dependable source of supply than were imports of sugar.

If taxation without representation were as keenly resented today as at the time of the Boston Tea Party, the inland waters of the United States would be saturated with sugar. The tribute on tea levied by old King George against the colonists was a minor item in contrast to the cost of government intervention which American consumers have been paying on sugar, particularly since the passage of the Jones-Costigan Act. By means of import quotas, tariffs, and sugar processing taxes, the price of sugar in the United States has been boosted above world market levels, involving extra cost to consumers of nearly $6 billion since 1934.

In these days of $65 billion to $70 billion federal budgets, an item so inconspicuous as a sugar tax of roughly 3 cents a pound no longer incites Americans to rebellion. Housewives count the calories rather than the cost—and continue to pay more than 50 per cent above the world market price for sugar. Admittedly, this is a tiny extra cost when measured by the lump or teaspoon; yet it runs to something like $10 a year for a typical family.

And for what? For growers of sugar cane and sugar beets who claim hardship and a need for federal aid if some other occupation seems more attractive than theirs in peacetime—who wave the flags of national defense when the world is at peaceful trade—yet turn as quickly as any other patriotic citizen to a more remunerative occupation, if they can find it, when war is declared!

Before anyone concludes that this is a specific condemnation of the behavior of the sugar growers of the United States, let’s return to the opening point. The point was that tariffs and import quotas and other restraints upon trade are not confined to items of industrial production. Farmers, various professional groups, laborers, and others too have had experience behind tariff walls. But the sugar tariffs and quotas did not save the maple sugar industry, nor have they spelled unmitigated prosperity for sugar cane and sugar beet growers who still compete against one another until the least efficient are obliged to seek other employment. And the same holds for every other “protected” industry or occupation in any nation where individuals are still free to switch from one job or business to another. The political barriers to foreign trade merely mean that American consumers are forced to pay more for the goods or services involved than would be the case in a free market.

The more than 50 per cent premium over world market prices for sugar is funneled through the federal government to help pay the administrative costs of such intervention, to maintain a domestic industry larger than a free market would sustain, and to subsidize the favored few foreign producers who hold quota licenses.

A further point of this story about sugar is that farm price supports cannot be justified by the argument that industry has its tariffs and that labor is organized. The competition behind tariff walls is just as keen as without such barriers. All American consumers, not farmers alone, pay the costs of such intervention. As for the excuse that labor is organized, Dr. Harper has shown in the March 1956 FREEMAN—“Why Wages Rise”[]that there is no causal relation between union membership and the level of wage rates. And even if there were, a man can quit farming and join a union if he likes.

Sugar cane and beet growers, as well as American consumers of sugar, sometime should realize that the government really hasn’t any magic power to improve upon or even come close to matching the unhampered competitive market device for the maximum service of the peaceful interests of everyone concerned.

  • Paul L. Poirot was a long-time member of the staff of the Foundation for Economic Education and editor of its journal, The Freeman, from 1956 to 1987.