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 Yields dropped to 280 pounds per ton by 1950 and 240 pounds by 1974, the year the Act was repealed.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.
READER COMMENTS
TMC
Aug 1 2019 at 12:43pm
“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.”
Certainly odd. Feels like this isn’t the whole story. Couldn’t the producers go right back to whatever got them the 310 pounds? Maybe there are efficiencies in the current number that aren’t reported. (I’m in NO way defending the Sugar Act).
Ahmed Fares
Aug 1 2019 at 2:57pm
What’s funny is that by putting quotas on sugar, more sugar flows into the US in the form of sugar products. Not to mention the jobs lost. This article is from 2002:
mac
Aug 1 2019 at 8:31pm
I had the pleasure some years ago of working as a journeyman with a major sugar grower/refiner deep in the southeastern US. An excellent employer with impressive pay packages, benefits, etc.
What boggled my mind was, given the size of the operation, was the lack of modernization. Of course, I wasn’t very popular with many of my coworkers as I looked around (having come from a much more competitive field) saying 20% of the workforce could be gone tomorrow without a great deal of investment in plant and equipment.
But why should they?
With big brother blocking the door from competition, meanwhile, the American consumer goes along fat, dumb, and happy….paying $1 for his or her candy bar instead of 50 cents. Meanwhile, the chances of a start-up mom and pop bakery or candy shop ever making it dwindle.
Matthias Görgens
Aug 1 2019 at 8:54pm
I visited a sugar beer refinery in Germany once. The technology is really interesting, but I was under the impression the factory only existed because of EU tariffs and subsidies.
Sugar cane can be grown much more efficiently, and the German lands that grow sugar beets can grow potatoes and wheat, too.
Craig
Aug 3 2019 at 9:52am
This article piqued my interest because I reside in Palm Beach County. I believe something like 90% of sugar that is grown in US is grown there and there is a regional tension between the sugar growers and the coast since sugar is blamed for things like red tide.
Nevertheless while I can see how subsidies can hide some warts, wouldn’t a general subsidy to an industry still lead to a situation where the growers compete, at least among themselves?
I still don’t quite grasp how I lose the incentive to become more productive, at least with respect to sugar production.
(I do NOT support sugar subsidies)
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