Sweetness and Light: A Tale of Sugar Regulation
Tales of Weird Regulation, from Chad Syerson’s “What Determines Productivity?” (Journal of Economic Literature, 2011):
Benjamin Bridgman, Shi Qi, and Schmitz (2009) show how regulations in place for decades in the U.S. sugar market destroyed incentives to raise productivity. The U.S. Sugar Act, passed in 1934 as part of the Depression-era restructuring of agricultural law, funded a subsidy to sugar beet farmers with a tax on downstream sugar refining. Refiners were compensated for this tax by quota protection from imports and government- imposed limits on domestic competition (antitrust law was often thrown to the wind in the construction of New Deal programs). This transfer scheme led to the standard quantity distortions, but it also distorted incentives for efficient production. Farmers received a flat payment per ton of sugar contained in their beets, so their optimal response was to simply grow the largest beets possible. The problem is that refining larger beets into sugar is less efficient. As beets grow larger, their sugar-to-pulp ratio falls, requiring more time and energy to extract a given amount of sugar from them. At the same time, given the restraints on competition in the refined sugar market, refiners had little incentive to improve sugar extraction on the margin. The combined result of these incentives is readily apparent in the data. When the Sugar Act was passed, a ton of beets yielded an average of 310 pounds of refined sugar, a figure that had been steadily rising from 215 pounds per ton in 1900. But this trend suddenly reversed after 1934. Yields dropped to 280 pounds per ton by 1950 and 240 pounds by 1974, the year the Act was repealed. Not surprisingly, yields began to climb again immediately after repeal, to about 295 pounds per ton by 2004. It is a sad testimony to the Act’s productivity distortions that yields seventy years after the act were still lower than when it was passed.