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A New Example to Use in My Economics Classes

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When I teach Principles of Microeconomics (which I do throughout the year at George Mason University) I include a few hours of discussion of public-choice economics [2] (which was pioneered by my late GMU colleagues Jim Buchanan [3] and Gordon Tullock [4]).  Public-choice economics offers more plausible explanations of government activities than are offered by competing theories of state action.  One of the core propositions of public choice is that policies the benefits of which are concentrated on a relatively small number of people, but the costs of which are shared by large numbers of people, have a disproportionately high chance of being enacted and retained even if the total costs to society of these policies exceed their total benefits.  It’s called the special-interest-group effect [5].

Explanations of (for example) tariffs, of occupational licensing, and of subsidies to businesses make little sense if they do not feature, prominently, recognition of the role of special-interest groups whose members share in the resources stolen for them, through these policies, by politicians from the larger populace.

This new essay, on subsidies to American cotton farmers, by Joe Glauber and Daniel Sumner [6] supplies a perfect example of the special-interest-group effect at work.  It’s an example that I’ll use in my upcoming classes:

USDA finally acquiesced to repeated requests from the cotton industry. The new subsidy will transfer about $300 million or roughly $43 per acre, to cotton farms.

The population of the U.S. today is roughly 323 million.  These 323 million people live in approximately 125 million households [7].  Therefore, the $300 million in subsidies to cotton farmers directly cost each man, woman, and child in America, on average, 93 cents.  Or reckoned on a household basis, these subsidies directly cost each household in America, on average, $2.40.

The subsidies also distort resource allocation beyond the immediate distorting effects of collecting these tax revenues.  I’ve no estimate of the size of that cost, but let’s offer what is almost surely an overestimate of the monetary size of this additional cost as being $700 million.  So the total cost of this subsidy is $1 billion.

On these estimates, these subsidies to cotton farmers cost each man, woman, and child in America, on average, $3.33.  Reckoned on a household basis, these subsidies cost each household in America, on average, $8.00.

There are in the U.S. approximately 18,600 cotton farms [8].  Therefore, each of these farms, on average, receives in subsidies $16,129.  That’s 17,343 times more money than is paid in taxes, on average, by each American to fund these subsidies (or 2,016 times more money than is the total estimated cost that each American household is forced to incur as a result of these subsidies).

So now consider the political realities.  If you’re an average American cotton farmer, you gain $16,129 from this subsidy.  To get this subsidy, or to protect it from a threatened demise, you’ll spend quite a lot of money – mainly by contributing to a fund out of which well-connected, hard-working, and silver-tongued lobbyists are hired to plead your case in Washington [9].  And your fellow cotton farmers will join you in this rent-seeking enterprise.

Let’s say that you and your fellow cotton farmers each pays a mere $2,000 to hire and fund a lobbying effort.  (Better to pay $2,000 to keep $16,129 than to risk losing the subsidy.)  That’s a total of $37,200,000.  With this sum, you and your fellow cotton farmers can hire some excellent, Gucci-loafered and Gucci-pumped talent to plead your case on Capitol Hill and on Independence Ave., NW.

But where’s the voice of the people who pay for this cronyist boondoggle?  How much will each household pay to oppose it?  Even if each household is aware of this boondoggle – and even if each household is so appalled at the inexcusable thievery that it is that each household is willing to pay, to fight this thievery, up to, say, four times more than this thievery costs that household – each household is willing to pay up to (drumroll)…. $32 to fight this thievery.  Therefore, households will not do much, if anything, to oppose this thievery.  Unlike with the beneficiaries of this thievery (the cotton farmers), American households share no huge, dominating interest in opposing this thievery.  Even if they were to succeed in squelching the subsidies, each household would save a mere $8.  This sum is not sufficient to unify households into a subsidy-fighting coalition.  In contrast, the average sum of $16,129 transferred to each and every cotton farmer by the subsidies is sufficient to unify cotton-farmers in to a subsidy-seeking-and-protecting coalition.

Thus, cotton subsidies exist and, as a result, American taxpayers and consumers are fleeced (excuse here the reference to wool [10]).  And even though most Americans don’t cotton to having their money stolen by prosperous producers, the thieving survives and is called by the euphemism “agricultural policy.”

…..

The power of public choice to explain subsidies such as this cotton one grows when rational ignorance [11] and rational irrationality [12] are added to the explanatory mix, as well as when the amounts stolen by the winners and the amounts stolen from the victims are each discounted by the prospects that spending some of those amounts on lobbying will fail.  (The prospects of failure of each cotton-farmer’s $2,000 contribution to the lobbying effort to promote the subsidies are lower than are the prospects of failure of each household’s expenditure of $32 to oppose – say, by taking 90 minutes to compose and to send e-mails to members of Congress – to oppose the subsidies.)

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