Is the Sugar Quota JUSTIFIED?

by on January 8, 2014 at 7:24 am in Economics, Television | Permalink

justifiedJustified, one of the best written and most entertaining shows on television, premiered last night. I liked this exchange between two drawling criminals:

Where’s the rest of the money?

That’s all we got from the candy company.

Yeah, what candy company is that Dillie?

The one that bought the sugar.

The joke is that we think the criminals are talking in street code about another white powder but, as we learn later, they actually are part of a sugar smuggling operation. The US sugar quota has increased the US price of sugar well above world levels and this has in fact pushed a number of candy companies to the wall. I suspect that few of them have turned to the black market for their sugar although I wouldn’t put this past some unethical confectioners. Nevertheless, sugar smuggling is not unknown.

In the 1980s when the US price of sugar was pushed as much as four times higher than the world price there were many smuggling schemes if not actual sugar-runners. In our textbook, Modern Principles, Tyler and I discuss one scheme where Canadian entrepreneurs shipped super-sweet iced tea to the United States where the “tea” was then sifted and the sugar resold. And from 2000 here is a great moment for US democracy, namely US Senator Byron Dorgan rising in support of legislation:

…to prevent molasses stuffed with sugar from being allowed into this country.

As others have stated, the molasses in question is stuffed with South American sugar in Canada [those Canadians again, AT], and then transported into the United States. The sugar is then spun out of this concoction and sold in this country while the molasses is sent right back across the border to be stuffed with more sugar–and the smuggling cycle starts over again.

Ironman January 8, 2014 at 8:04 am

“Unethical confectioners”! As if there were any other kind!…

Some of the smuggling sounds much like the development of “heat ball” technology, which came about as certain electrical devices could no longer be lawfully manufactured or imported in the E.U., and now the U.S.

Mark Thorson January 8, 2014 at 11:11 am

Those heatballs will find a ready market among people with chocolate tempering machines. All of the ones for home candymaking and small chocolate shops use lightbulbs for heat. I have an AMCC machine which uses two 100W bulbs, and I stocked up when I heard about the ban.

bluto January 8, 2014 at 11:27 am

That seems like a market that’s just asking to have tempering machines be made with a power resistor as a heating element.

Mark Thorson January 8, 2014 at 11:33 am

Larger machines for medium- to large-scale candymaking operations do use resistive heaters. Countertop machines use lightbulbs. That was a good choice when it seemed like lightbulbs would be available forever. There were no resistive heating elements than can beat the cost of a lightbulb, because the latter were being produced in enormous volume for a consumer application.

JWatts January 8, 2014 at 1:36 pm

You can still get bulbs that are rated for rough service, for roughly $3 a piece.

http://www.newcandescent.com/store/customer/

Frederic Mari January 8, 2014 at 8:05 am

Aaaah, free markets… Ayn Rand would be so proud…

johndburger January 8, 2014 at 9:07 am

??? Government price supports are the opposite of free markets, Rand would have been horrified.

prior_approval January 8, 2014 at 10:17 am

Before or after she went on Social Security and Medicare?

Enrique January 8, 2014 at 10:50 am

+1 … libertarians are generally all talk (“freedom”, rule of law, etc.), no action … but I must say, the sugar quotas make it difficult to distinguish internal revenue agents from thieves

Cliff January 8, 2014 at 11:02 am

Please. And Warren Buffet is an “all talk” hypocrite who should be ignored because he supports higher taxes but does not pay more taxes than he is legally required to. Faulty logic.

bluto January 8, 2014 at 11:28 am

Warren Buffett is all talk because he wants to sell annuities to high income people, and buy businesses on the cheap when the heirs have to sell to pay inheritance taxes.

Jay January 8, 2014 at 11:29 am

She did write many all-time bestsellers, what have you done about your beliefs lately besides posting on blogs?

Jay January 8, 2014 at 11:28 am

Doesn’t everyone, even the principled, or is there a new way to opt-out?

Frederic Mari January 8, 2014 at 1:19 pm

As Enrique said, it’s just that libertarians/most of the right tend to be highly hypocritical on those topics. Corporate welfare/special interests is not necessarily a left-right issue alone but the right is particularly guilty given their supposed support for free markets…

It’s like sexual faithfulness. It’s not that the left has no philandering politicians, far from it. It’s that they don’t make family values and faithfulness a corner stone of their brand/political philosophy…

JWatts January 8, 2014 at 1:42 pm

“As Enrique said, it’s just that libertarians/most of the right tend to be highly hypocritical on those topics.”

That’s just BS. There’s nothing hypocritical about being philosophically against Social Security, but taking the money after being forced to contribute.

If you avoided paying into Social Security, but then felt entitled to SS payments when you retired, that would be hypocritical.

Frederic Mari January 8, 2014 at 3:19 pm

On SS, you have a point. Here, the question is with regards to ‘free markets’ vs. tarriffs, quotas and other barriers to profit slashing competition…

JWatts January 8, 2014 at 3:56 pm

“Here, the question is with regards to ‘free markets’ vs. tarriffs, quotas and other barriers to profit slashing competition… ”

I’m unfamiliar with any Libertarians supporting sugar quotas or any kind of tariffs? Or were you referring to something else?

So Much For Subtlety January 8, 2014 at 5:34 pm

The cliche goes that Right Wing scandals are about sex, Left Wing ones about money. Left Wing politicians may or may not cheat, but they are inclined to steal other people’s money.

I assume it is all about what obsesses us. Everyone, I hope, wants to be better people. Everyone knows they are not. If someone is attracted to the lifestyles of the rich and famous that they cannot reach, they may well act out by trying to hurt the people who do enjoy such lifestyles. And when they are in office, they may well do all they can to be part of such a social circle themselves. If on the other hand someone thinks they are not getting enough sex, or not the sort they like, or they are ashamed of what they like, they may well resent people who are getting what they want. And once they have the means to get what they want, they may get what they want. Even if it is in a men’s bathroom.

And then of course there are people like DSK who likes the money and the women.

We live in interesting times January 8, 2014 at 8:55 am

This is one reason America lost a lot of candy manufacturing jobs. The sugar lobby is very powerful. I also think the restrictions made Cuba very happy and money, especially during The Cold War.

mulp January 9, 2014 at 1:38 am

Its Monsanto and ADM et al that are powerful. They need to create demand for corn and corn refineries, so they need to drive up sugar prices.

Hoover January 8, 2014 at 9:11 am

I dislike Justified for its ethos that to achieve justice you must break the law.

dearieme January 8, 2014 at 9:36 am

Do you think the hypothesis implausible?

Hoover January 8, 2014 at 10:55 am

I don’t think it’s a hypothesis. I imagine it happens frequently in a rough and ready sort of way.

affenkopf January 8, 2014 at 9:47 am

I didn’t get that ethos from Justified. But what do I know? I always cheer for the criminals anyways.

Z January 8, 2014 at 11:16 am

Justice is just what the winners call revenge.

dave smith January 8, 2014 at 9:13 am

The Simpson’s did this…

https://www.youtube.com/watch?v=Ti5AkLup1mI

Bill January 8, 2014 at 9:18 am

So, if the smuggler is successful, your taxes go up.

It’s a system that provides the government will purchase any surplus, so if the confectioner outsources, YOU pay for it in your taxes.

We should get rid of the program, but until we do, taxpayers pay for the confectioners illegal sourcing.

TMC January 8, 2014 at 10:51 am

“So, if the smuggler is successful, your taxes go up.”
Or my prices go down, most likely both.
Given the deadweight losses associated with government, I’d still be ahead of the game.

I guess this would only work if the gov’t would contract because of lack of funds.

Bill January 8, 2014 at 2:53 pm

TMC,

YOUR taxes go up. Period.

The smuggler competes with the compliant company, and keeps the difference. They are not charities and will not lower the price of the finished product to suit your sweet tooth.

You pay for it in taxes and you pay for it in finished goods.

Smuggling works that way, particularly when the government pays for the shortfall.

David C January 8, 2014 at 4:06 pm

>> They are not charities and will not lower the price of the finished product to suit your sweet tooth.

Weird to see someone on an economics blog say this. What happened to the Invisible Hand? The smuggler, *because* of not being a charity, will lower the price of the finished product just enough to attract your sweet tooth away from the compliant company. (And pocket the difference, yes.)

Bill January 8, 2014 at 5:10 pm

David C. Your statement is really weird, if you want to use that term. This should be an economics blog, but apparently your statement proves otherwise.

Let’s start with your statement: “will lower the price of the finished product just enough to attract your sweet tooth away from the compliant company.”

Stop there for a second. If confectionary is a competitive business, then the company that incorporated smuggled sugar into finished product is still a price taker. In competitive industries, firms are price takers. So, you assume the price taker will now lower the price? Why? Set it up as a game and ask will he be better or worse off, if he is in a competitive industry, as a price taker, in lowering his price.

And, then look up a guy named Alfred Marshall. And, then, ask yourself, what does he gain by breaking the law if he lowered the price. First, there is some risk of detection, and there are fines and jail terms. How conspicuous, or foolish, do you think this guy will be if he lowered price and attracted attention both from his previous suppliers and competitors?

Frankly, his best strategy is to smuggle a little, and continue as a price taker, because if all of his supply of ingredients were smuggled, he would risk his business, particularly with a risky and nonsensical strategy of lowering price.

I

mulp January 9, 2014 at 1:41 am

Smuggled sugar would not create much of a “government surplus” because we’re talking corn that is the substitute for sugar.

Jonathan January 8, 2014 at 9:21 am

Careful, Alex! Not so early with potential spoilers! Give me a day or two to watch it.

Alex Tabarrok January 8, 2014 at 9:36 am

You are right, my bad. But I think the economics will add to your enjoyment!

Valentin Ionita January 8, 2014 at 12:03 pm

That dialogue takes place quite early in the episode…

Ed January 8, 2014 at 9:49 am

It actually goes beyond what Tyler has written, These games are the main reason (corn subsidies are another) high fructose corn syrup has replaced sugar in many mass marketed foods and soda, with terrible effects on American health.

brad January 8, 2014 at 10:59 am

HFCS is a mixture of fructose and glucose (either 55% or 42% fructose depending on the variety). Table sugar is sucrose which is a fructose molecule bonded to a glucose molecule. In your duodenum sucrose is broken down into its constituent monosaccharides before being absorbed into the blood stream.

There no logical or empirical reason to believe that equivalent amounts of HFCS are any better or worse for our health than sucrose. It’s a truthy complaint along the lines of other Luddite health claims (“no artificial ingredients!!1!”)

Mark Thorson January 8, 2014 at 11:29 am

Not necessarily. It depends among other things on how quickly the sugar is metabolized. The faster the sugar is metabolized, the more oxidative stress it causes in the endothelium (the one-cell thick lining of the blood vessels) which a growing body of evidence is implicating as the initial event in the development of atherosclerosis, type 2 diabetes, and possibly Alzheimer’s disease.

brad January 8, 2014 at 2:09 pm

Sucrose is broken down before it enters the bloodstream. So what form it enters your mouth has no effect on blood metabolism rates.

It’s plausible, though unlikely, that there could be GI health problems linked to HFCS over sucrose, but not any aliment further downstream than that.

Come to think of it dental problems are the most plausible of all.

Mark Thorson January 8, 2014 at 4:54 pm

Starch is also broken down before entering your bloodstream. Both sucrose and starch result in shallower rise in blood glucose than sugars that are already broken down into simple sugars, such as HFCS. Recent research indicates that spikes in blood sugar have a greater contribution to endothelial dysfunction.

cthulhu January 9, 2014 at 2:00 am

The problem with both sucrose and HFCS is that the fructose gets converted straight to triglycerides in the liver (de novo lipogenesis), which increases the number of VHDL particles needed to transport said triglycerides to the adipose tissue, which increases the number of LDL particles in the bloodstream (the LDL-P), which is the best correlate of LDL to heart disease. See Dr. Peter Attia’s http://www.eatingacademy.com, or Gary Taubes’ “Good Calories, Bad Calories”.

JKB January 9, 2014 at 1:10 am

Interestingly, the “all the rage” sweetener these days is Agave syrup, which is manipulated to have up to 75% fructose. So the anti-HFCS crowd are actually switching to a “worse” product.

mulp January 9, 2014 at 1:55 am

Taste dictates higher calories with HFCS than with cane sugar.

And it still isn’t the same sweetness.

Of course, in such things as candy, sugar can not be substituted without change in taste, mouth feel, etc.

Coke has lost its distinct taste as sugar was replaced over time with HFCS – if they had substituted it all at once, it would have been like the new coke disaster.

JWatts January 8, 2014 at 9:53 am

Without the Sugar subsidies we would swiftly collapse into Anarchy. The price of sugar would collapse, candy would become virtually free and consumption would soar. The Free market would rear it’s ugly head and we’d be just like Somalia, except with sugar-coated obese kids. Please think of the children!

derek January 8, 2014 at 10:11 am

Not much makes me proud of my country, but this story makes me proud to be Canadian.

Douglas Knight January 8, 2014 at 11:36 am

It make Alex proud to be a Canadian, too.

athEIst January 8, 2014 at 10:19 am

My estimation of Bryan Dorgan just took a tumble. One of the reasons the Republicans could keep the tariffs so high between 1880 and 1912 was sugar had a tariff and could attract the votes of Louisiana reps and senators. Louisiana reps and senators being Democrats would not normally have supported higher tariffs but Lousiana being a bigger sugar producer than even cotton tipped the balance.

lxm January 8, 2014 at 11:41 am

What is wrong with the political system that allow programs like this to live?

If people were really interested in reducing the deficit, programs like this would be among the first to go. Admittedly, eliminating this program is not going to make a big impact on the deficit, but even small steps are better than no steps.

As far as I am concerned, those folks who claim they wish to reduce the deficit and who do not go after programs like this are not really interested in reducing the deficit.

So what is it that they are interested in? And why does the deficit count for so little?

Hazel Meade January 8, 2014 at 12:48 pm

It is not difficult to figure out.
The sugar quotas benefit a small narrow interest that has organized to defend it’s “turf”.
The costs are thinly spread throughout society in the form of higher prices. So there is no organized lobby to oppose them.

One might think that candy manufacturers would lobby against this, but if all of the candy manufacturers have already left the country, or switched to HFCS, then there is nobody left to complain.

There are probably thousands of examples like this littering the tax code and the regulatory structure. Small loopsholes and regulations that benefit a particular group of people at the expense of nearly everyone else. But you can’t get rid of them because nobody cares enough about the small costs to themselves to lobby against it.

JWatts January 8, 2014 at 1:45 pm

Distributed costs, concentrated benefits.

Mark Thorson January 8, 2014 at 9:22 pm

Candy manufacturers can’t switch to HFCS because it doesn’t set up into a solid the way sucrose does. Soda manufacturers can switch, which is why they all use HFCS. Because soda manufacturers are the 800 lb. gorilla of sugar buyers, the HFCS carve-out blunts any opposition they may have to the sucrose racket. Candy manufacturers are smaller and much less organized, so they get shafted or leave the country.

Shane M January 8, 2014 at 4:37 pm

My guess is discussion might be brought up to eliminate the bill. Let it be widely known within the industry that congress is going to consider eliminating the tariff. Congressional leaders contact those impacted who benefit from tariff and mention they sure could use some campaign contributions. Money gets raised. Bill vanishes.

But that’s just a guess.

bob January 8, 2014 at 12:39 pm

There is a need for a good history of the influence of sugar dsubsidies on the American politcal system.

It is important in at least two cases:

1. Thh Reagan adminsitration increased subsidies in order to get Congressinal votes from the Louisana delgation for the tax cuts. Louisana Congressman and later Senator John Breaux said afterwards to explain his vote as, to parapharase, I can not be bought but I can be rented.

2. Legislation was passed by a Colorado Senator that required Cuba not be maintained as a colony after the Spanish American war because he was concerned about the impact duty free sugar would have on the Colorado sugar industry.

Hazel Meade January 8, 2014 at 1:01 pm

Once you understand that this sort of thing is endemic throughout the US political system, you will start to understand what is actually going on.

A large slice of the tax code is composed of one-year extensions of loopholes. The dairy program has to be passed to we don’t revert back to the even worse Depression-era dairy program. The “doc fix” gets passed every year to reverse changes to Medicare so that seniors won’t lost their doctors. Etcetera.

Nobody is out there trying to build a rational regulatory system. They are out there trying to funnel money and favors to their political clients, and those clients keep having to come back to the well to get their programs, or tax cuts, or regulatory perks, exended. They HAVE TO, because a politician without a large group of dedicated clients that will keep coming back is one who isn’t going to win the next election.

The only way to stop these programs is to start paying politicians more than the sugar lobby to get rid of it.

Shane M January 8, 2014 at 4:40 pm

+1. The system is self reinforcing. Lawrence Lessig writes about this in Republic Lost

Lonely Libertarian January 8, 2014 at 12:44 pm

Sugar and Ethanol programs should both go – they do more harm than good.

JWatts January 8, 2014 at 1:50 pm

Technically, the Ethanol subsidies were eliminated in 2012 as part of the budget cuts. But the EPA established a Renewable Fuel Standard that mandates 10% of ethanol content in “gasoline”, so it didn’t really matter.

mulp January 9, 2014 at 2:25 am

But ethanol production capacity is well over the quantity that needs 12% to fully use the production.

mavery January 8, 2014 at 1:29 pm

That quote reminds me distinctly of M & M Enterprises from Catch-22.

awp January 8, 2014 at 1:45 pm

“I suspect that few of them have turned to the black market for their sugar although I wouldn’t put this past some unethical confectioners.”

It would be illegal, but is illegal necessarily the same as unethical?

Shane M January 8, 2014 at 4:46 pm

“It would be illegal, but is illegal necessarily the same as unethical?”

Good question. I think the same thing when some U.S. companies are indicted on bribery charges in foreign countries where it is widely known that corruption is “the” way to do business there. Again, it’s illegal – but if corruption is the water you must swim in and included in the price of admission, is it unethical?

Mark Thorson January 8, 2014 at 9:26 pm

It’s as unethical as buying Canadian whiskey during Prohibition. In my book, not unethical at all. Smuggling cigarettes would be slightly worse, but not by much. Maybe I’m in the wrong business.

AugeanDC January 8, 2014 at 2:18 pm

http://www.nytimes.com/2003/11/29/opinion/america-s-sugar-daddies.html
One of the sugar barons that personally benefits from this policy is so politically powerful that he appears in the Starr Report where Clinton stops a tryst to take his phone call!

Bill January 8, 2014 at 6:02 pm

The Ag bill is going to expand subsidies through subsidized insurance:

“Now, however, federal agricultural policy is careening in the other direction. In recent years, Congress has placed a much heavier emphasis on subsidizing crop insurance, which in turn has shielded agribusiness interests from the kind of foolhardy decisions that would get punished in a free market. As my colleague Andrew Moylan of the R Street Institute has observed, the beneficiaries of these subsidies tend to be large, lucrative agribusiness firms. During the debate over the farm bill, Reps. Jason Chaffetz (R-UT) and Earl Blumenauer (D-OR) proposed phasing out premium subsidies for crop insurance for farms earning $250,000 or more. Other proposals aimed at capping premium subsidies at $50,000 per beneficiary and ensuring greater transparency in the program. Yet these and other perfectly sensible amendments were ruled out of order by the House leadership, and so the House never had an opportunity to vote on them.

One gets the impression that a majority of Republican lawmakers are utterly unperturbed by the fact that the farm bill represents corporate welfare at its worst. A cynic might suggest that for all its vaunted ideological purity, the House GOP caucus is simply looking out for its core constituents, namely the agribusiness interests that play an outsized role in the economic and political life of Rural America. And in a democracy, it is perfectly fair that a party will be responsive to the interests of its members. But why, you have to wonder, would the party devote so much effort to giving agribusiness interests such a big leg up while neglecting the middle-income parents and retirees who represent the bulk of the Republican rank-and-file? If ideological purity is why some conservatives oppose GOP efforts to craft a substantive, coverage-expanding alternative to President Obama’s Affordable Care Act, why wouldn’t this farm bill also be a bridge too far?”

http://blogs.reuters.com/reihan-salam/2013/07/12/republicans-back-agribusiness-with-the-farm-bill/

mwbugg January 8, 2014 at 11:11 pm

Of course it’s not JUSTIFIED. It’s interesting that you chose a Democratic Senator from a sugar beet region to highlight. You could have just as easily chosen a Senator from Florida or Louisiana with all their sugar cane acres. Keep pretending you are fair and balanced.

Jay January 9, 2014 at 12:22 pm

No it really isn’t interesting, it’s a coin flip. You can’t be fair and balanced with a single data point though thanks for trying.

JKB January 9, 2014 at 1:23 am

SPOILERS ALERT

Seriously, how ignorant do you have to be these days to write TV shows? One presumes the writers matriculated at some of our more famous universities. State school kids can’t afford to be this ignorant of the world.

The sugar smuggling is for knock-off candy makers who sell through the dollar stores? Oh, yeah, got some of the low quality sugar smuggled in for cheap candy.
And they are smuggling from Cuba? You know the country we’ve embargoed all transactions with for 40 years. It’s not like there is routine trade between Cuba and the US to cover the smuggling. Have the writers never heard of global trade in commodities?
And the Cuban guy stealing a dingy in Miami to make a run for Cuba? Really, someone buy a map for the writers room.
And even minor points. The Florida Coast Guard?

I suspect Justified has peaked. That many lame story details in the season premiere. It’s sad.

It was sad, especially after the tribute to Elmore Leonard before the show started.

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