Milk Money

Set Bossie free!

Federal regulation of the milk industry is a fine example of madly complex modern bureaucracy. It divides the nation into 32 "marketing areas," with prices and subsidies that vary depending upon the use of the milk (fluid, cheese, butter) and–believe it or not–the distance between the cow and Eau Claire, Wisconsin.

In early November, U.S. District Judge David Doty struck a blow for dairy sanity by declaring aspects of the price control system "arbitrary and capricious." The ruling came in response to a lawsuit by dairy farmers from the upper Midwest, who live close to Eau Claire and resent the higher minimum prices enjoyed by more distant farmers.

Milk price controls and marketing orders, which date back to the New Deal, illustrate what happens when the pragmatic, reform-minded spirit of progressivism hits the trading floor where political favors are exchanged for cash. The logic or ideology behind federal milk policy is expressed only in the vague language of "fair prices." In this context, that means whatever prices keep the greatest number of cartelized farmers solvent.

This concept of fairness implies that every American deserves whatever can be squeezed out of his fellow citizens via the government. As tax consumers, most Americans doubtless believe this; as taxpayers, they don't. But the cost in terms of higher milk prices and bureaucratic payroll is so diffused that it's nobody's prime political concern.

One interest group that should care about this program is the good-government crowd pushing campaign finance reform. In addition to its other flaws, federal milk policy has long been rich loam for political corruption.

In the newly released White House tape transcripts, Richard Nixon and Treasury Secretary John Connally candidly discuss expected contributions from dairy interests. It's hard to distinguish these donations from outright bribery: The farmers gave Nixon big bucks, and Nixon made sure the federal price subsidy went up.

Post-Watergate reforms have not changed the situation much. In 1974, the year the Federal Election Campaign Act passed, dairy interests gave only $100,000 for congressional races; in 1976, they gave $1.4 million. The dairy lobby overwhelmingly prefers incumbents, who are aided by reforms that have made it tougher for challengers to raise money. A December 1997 Money magazine analysis showed that dairy interests gave $2 million during the 1995-96 election cycle, getting $1.3 billion in price supports for their investment.

In a conversation with dairy lobbyists, Nixon bluntly spelled out a point that campaign finance reformers still don't grasp. "I know you are a group that are [sic] politically very conscious," he said. "Not in any partisan sense, but that you realize that what happens in Washington, not only affecting your business, but affecting the economy…affects you….A lot of businessmen…that I get around this table, they'll yammer and talk a lot but they don't do anything about it. And you do, and I appreciate that."

Political corruption follows political power. Dairy interests would be a lot less civic-minded if lucrative payoffs weren't in the offing, because in the long run federal controls and subsidies are bad for the milk market. Government's market manipulations can't hold back the technological and systemic changes that make jobs we get really good at, such as farming, rapidly dwindle. Government-backed regional cartels, for example, are senseless in an era of efficient storage and transportation that could easily allow one productive dairy region to supply the whole nation.

Even with federal protections for milk producers, over the past decade alone their number has dropped by 44 percent. In the face of inevitable economic change, dairy farmers seem unable to cope. Wisconsin's senators, Russell Feingold and Herbert Kohl, recently lamented in the Wisconsin State Journal that other farmers "have tools such as crop insurance, high volume futures markets and, in some cases, revenue insurance to help them manage price and production risk. These tools, if they are available at all to dairy farmers, are still in a fledgling stage." Dairy farmers haven't developed such tools because they haven't had to. Political clout rather than attention to markets has protected their bottom line.

In the wake of Judge Doty's decision, the Department of Agriculture begged for a stay as it scrambled to meet a year-end deadline to reconfigure the milk pricing system. Huge milk cooperatives are merging into even huger ones for economies of scale. And various multi-state cartels are forming, trying to emulate the new Northeast Interstate Dairy Compact in locking out extraregional milk and guaranteeing that even absent the federal rules, regional consumers will pay more for milk than is necessary or sensible.

Dairy price supports will be phased out by 2000, thanks to the 1996 farm bill. But throwing programs that were ill-conceived and illegitimate to begin with out of the federal realm and into regionalized cartels is no improvement. As states and localities step forward to shoulder formerly federal burdens, they need to ask not just who should manage a given program but whether it should exist at all. For now, regional cartels seem prepared to make sure that famous milk moustache continues to hide the sly grin of agribusiness as it milks the public.