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Sugar Subsidies Are a Bitter Deal for American Consumers

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Sugar Subsidies Are a Bitter Deal for American Consumers

June 23, 2014

On Tuesday Mississippi voters will go to the polls for the second time this month to decide whether to nominate incumbent Senator Thad Cochran or challenger Chris McDaniel as the Republican candidate for this fall’s Senate election. 

The race has become a referendum on politicians procuring federal dollars for their constituents, with Cochran and his supporters commonly touting the millions of federal dollars in projects and programs he brought to Mississippi. McDaniel has gained the support of many limited-government groups that decry the “pork barrel” spending often necessary to reach political agreement in Washington. 

Perhaps no industry has received as much bipartisan federal support as Big Sugar. Cochran, a supporter of pro-sugar agricultural policy, has received a total of $40,500 from the sugar industry this year, and his position is hardly unique. American Crystal Sugar Company has donated over $1.3 million to 221 members of Congress this election cycle, following $1.4 million spent on lobbying in 2013. 

Lawmakers across the political spectrum, from Senator Barbara Mikulski (D-MD) to Senator Marco Rubio (R-FL), support using taxpayer dollars to subsidize the American sugar industry. In the House, 46 percent of members—109 Democrats and 92 Republicans—received money from American Crystal Sugar in this election cycle.

The program that supports the American sugar industry has many facets. Most infamous is a subsidy program in which the U.S. Department of Agriculture gives loans to sugar farmers and allows them to repay those loans with raw sugar if sugar prices fall below 20.9 cents per pound. This program functions as an effective mass purchase of sugar, which drives up prices for consumers and thus doubly subsidizes the industry. The USDA then sells this sugar at a steeply discounted price to ethanol producers. Last year the USDA spent $53.3 million on the program. Including the loans that could not be repaid, the government spent $171.5 million.

The government also enforces a system of tariffs and quotas on imported sugar, limiting the supply of cheaper sugar that can be imported from abroad. This results in wide spreads between global and domestic sugar prices. In the absence of protection, consumers and sugar-using producers alike could save several cents a pound on sugar bought from other countries.

Such savings would have positive consequences for America’s growth. An Iowa State University study by John Beghin and Amani Elobeid concluded that if the sugar program were abolished, U.S. sugar prices would fall by roughly a third, saving consumers $2.9 billion to $3.5 billion.

The study also found that employment in industries that depend on sugar as an input, such as confectioners, would add 17,000 to 20,000 new jobs in the absence of the sugar program. Already, confectioners are moving production abroad to take advantage of lower foreign sugar prices. Eliminating the sugar program could reverse this trend.

Surprisingly, repealing the sugar program would increase employment in the sugar industry itself. In absence of federal meddling, American sugar refineries would be able to use cheap sugar from abroad rather than expensive, protected domestic sugar for their operations. The Iowa State University study estimates that domestic sugar refineries would expand output by 24 percent in the absence of the sugar program.

The sugar program also incentivizes sugar cultivation in environmentally-sensitive areas. Chemicals from fertilizers used in sugarcane production in Florida are seeping into the Everglades, causing contamination of groundwater and habitat loss for native wildlife. The majority of the world’s sugarcane is produced in equatorial countries such as Brazil and Mauritius, and it makes little sense to grow the crop en masse here in the United States. Removing distortions caused by the sugar program would make such environmental damage much less economically desirable.

Why do federal sugar programs still exist? They cost consumers and producers money, decrease employment and economic growth, harm the environment, and only benefit a few farmers. 

Even though these policies force consumers to pay more for sugar, the total savings from eliminating sugar subsidies would only be around $10 per American consumer. On the other hand, 20,000 sugar farmers gained $1.7 billion in transfers last year. That means each sugar farmer effectively received $85,000 in other taxpayers’ money. 

It would be economically irrational for everyday Americans to even spend enough time worrying about sugar subsidies to read a few articles on the topic. The time they spent doing so could be more efficiently used in other ways by working or enjoying leisure time. Alternatively, it makes sense for sugar farmers to spend most of their time and energy fighting tooth-and-nail to protect their preferred treatment, as their livelihoods depend on this.

While $10 may not seem to be a lot of money, when the political process becomes too beholden to special interests the consumer costs of preferred treatment slowly start to increase. Everything from biofuel mandates, to dairy subsidies, to wind and solar power tax breaks have strong, concentrated benefits and dispersed costs—adding up to thousands of dollars in extra, government-imposed costs for American consumers. 

Congress should abolish the sugar program once and for all. An economy where the politically-connected are able to exert undue influence over government is unfair and harms economic growth. What America produces ought to be determined by what makes sense for consumers and the economy, not by arbitrary and distortionary government intervention.

 

Jared Meyer is a policy analyst at Economics21 at the Manhattan Institute for Policy Research. You can follow him on Twitter here. Preston Cooper is a rising senior at Swarthmore College and a contributor to Economics21. You can follow him on Twitter here.

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