The sugar program makes every family pay more so a few growers earn more

Here is a government program with a beautiful secret: it costs the Treasury almost nothing, and it still costs you money. No line item shows it. No hearing exposes it. It sits inside the price of every cereal box, soda, cookie and candy bar, and it has done so for decades.

The program is federal sugar policy. It is one of the cleanest examples in American law of what economists call concentrated benefits and dispersed costs, and it is an argument conservatives should be making loudly, because it is a case where a farm subsidy hides itself inside a price. Let me define the terms, state the other side's case fairly, and then show why it does not survive contact with the arithmetic.

How the program works

Most farm subsidies are easy to find: the government writes a check. Sugar is different. The government does not pay growers directly. It manipulates supply so that the price stays high, and the consumer writes the check at the register. Three tools do the work.

One: loans. The Department of Agriculture offers nonrecourse loans to sugar processors, who take sugar from beet and cane growers. The loan rate is set in statute, in cents per pound, and it works as a floor. If market prices fall below the loan rate, the processor can hand the sugar to the government in full satisfaction of the loan, keeping the money and surrendering the sugar. "Nonrecourse" means exactly that: the lender has no recourse against the borrower beyond the collateral. So the processor has a guarantee that the market cannot undercut, because the government is the buyer of last resort.

Two: marketing allotments. Since the 2002 farm bill, the law has limited how much sugar processors may sell into the domestic food market each year. The government sets an overall allotment, divides it among beet and cane sectors and then among processors. A processor that produces more than its share cannot sell the excess for food use at the going domestic price. The rule keeps supply tight. It does the work a cartel would do, with the force of law behind it, and no antitrust prosecutor will touch it.

Three: import quotas. The United States allows a set amount of sugar to come in at a low tariff under what is called a tariff-rate quota. Sugar beyond the quota faces a tariff high enough to block almost all of it. So even if a foreign producer can grow sugar cheaper than any American, the producer cannot sell it here in meaningful volume.

Put the three together. The loan sets a floor under the price. The allotment keeps domestic supply from pushing the price down to it. The quota keeps foreign supply from doing so either. The result is a price in the United States that is held above what the open market would set, by design, and renewed by Congress in each farm bill.

The history matters. Sugar quotas were an old idea: the Sugar Act of 1934 set up a quota system, and it expired in 1974. The modern program took shape in the early 1980s and has been extended, with adjustments, in every farm bill since. A program born in the Depression was revived in a different economy and has outlived most of the arguments made for it.

The gap between American and world prices

You do not need to trust me on the central fact. The U.S. price of raw sugar has long run well above the world price, and the Department of Agriculture publishes both in its sugar and sweeteners reports. Check the series yourself. The gap moves from year to year, so I will not hand you a single number and pretend it is permanent. What matters is the direction: for decades, the price American processors receive has sat above the price on the world market, and the whole mechanism above exists to keep it there.

Here is the mechanism in a labelled hypothetical with invented figures. Suppose world sugar sells for 15 cents a pound and the protected U.S. price is 25 cents. A candy maker that uses 10 million pounds of sugar a year pays 2.5 million dollars here and would pay 1.5 million dollars on the world market. That is a million-dollar penalty, paid every year, for the privilege of making candy in America. The firm has three choices: raise prices, absorb the cost, or move the plant to a country where sugar is cheaper. The numbers are made up. The choices are real.

What the government's own investigators found

The Government Accountability Office studied the program and reached a conclusion that should not surprise anyone who understands incentives. In a report published in 2000, GAO estimated that the sugar program cost domestic sweetener users, mostly food manufacturers, about 1.9 billion dollars in 1998 in higher prices (the same figure it gave as the most that final consumers could be paying, if manufacturers passed every cent along), against a benefit to sugar beet and cane producers of about 1 billion dollars. Read the report before you quote me; the exact figures depend on the year and the method. But the shape of the finding has held across a long line of studies: the cost is large, it is spread across tens of millions of households, and the gains are concentrated in a small number of producers.

Think about how lopsided that is. A family may pay a few dollars a year more for the products it buys because of the program. No family will ever organize around that. A large sugar grower, by contrast, may gain a great deal from the program in a single year. The grower will hire lobbyists, write the checks and show up at every hearing. That is the whole story of why the program survives. Not because it is popular, and not because it works, but because the people who benefit pay attention and the people who pay do not. (The same dynamic runs through tax complexity is a subsidy for lobbyists, and the code shows how it works, which is worth reading alongside this post.)

The jobs that left

Defenders of the program talk about the jobs in sugar growing and processing. Count them, and then count the other side.

Sugar is an input for a good many industries: candy, baked goods, cereal, beverages and the sweets aisle in general. When sugar costs more here than abroad, manufacturers who use a lot of it face a structural disadvantage against competitors elsewhere. The Department of Commerce examined this in a 2006 study of food manufacturing employment and found that for each sugar-growing job saved by high U.S. sugar prices, nearly three confectionery manufacturing jobs were lost. Industry-backed critics dispute the study's sugar-side numbers, so read it yourself, but the logic is what I want you to hold on to: protecting one job upstream can cost several jobs downstream.

Candy makers have said this out loud for years. Some of them moved production abroad, where sugar is cheaper, and the stories are in the trade press and in the local papers of the towns that lost the plants. Life Savers is the example most often cited, a candy brand tied to Holland, Michigan, whose production Kraft announced in 2002 it would move to Canada, with the last Holland candies made in 2003. Kraft said sugar costs were one of several factors, though local officials and press accounts put the sugar gap near the center of the story. When a maker of a classic American candy relocates to take advantage of a cheaper input, the program has not saved American jobs. It has exchanged one set for another and handed the bill to shoppers. A job at a candy plant is no less worthy than a job in a beet field.

This is the point conservatives should press hardest. We talk, correctly, about the importance of making things in America. A sugar policy that pushes confectionery factories offshore is an industrial policy against American manufacturing, and it is the same story I told in The Jones Act, a 1920 shipping law that costs Puerto Rico and Hawaii: a protection for one industry paid for by every customer and by every other industry that uses the protected good.

The best case for the sugar program

A fair argument should hear its opponent at his strongest, so here are the defenders' points as they would put them.

First, food security. Sugar is a staple, and a nation that cannot grow its own sugar could be held hostage by foreign suppliers in a crisis. Domestic production, they say, is insurance, and insurance has a premium.

Second, unfair foreign subsidies. The world sugar market, defenders argue, is not a real market. Many exporting countries subsidize their producers, and the world price is a dumping price, depressed by foreign governments. If the United States opened its market to that sugar, American growers would be undercut by the treasuries of other countries, not by better farming.

Third, the program costs taxpayers nothing. Defenders say it is a no-cost program, because the loans are repaid and the government does not write direct checks. If the budget does not show the cost, they ask, where is the harm?

Fourth, rural economies. Sugar beets and cane are grown in specific regions, and processing plants are major employers in small towns. Remove the program and those places suffer.

These are serious points and the people who make them are not villains. Farmers are among the hardest-working Americans, and a farm town is not a line on a spreadsheet. Now the answer.

Why the argument fails

1. "No cost to taxpayers" is not "no cost." The claim is true only in the narrowest accounting sense, and the narrowness is the trick. A program that costs the Treasury nothing can still cost the public billions, if it works by raising prices. Cost is not the same as budget outlay. When a government forbids you to buy cheaper goods, it has taxed you as surely as if it had sent a bill. The Founders understood that a tax is a tax by whatever name. A program that moves money from every shopper to a few producers is a redistribution, and a hidden one is worse than an open one, because voters cannot judge it.

1. The unfair-subsidy argument proves too much. If foreign subsidies make world sugar cheap, then American consumers are being offered a gift: cheaper sugar than their own market would produce. The usual conservative response to a foreign government that subsidizes exports is that the foreign taxpayer is paying for it, and we should say thank you and buy. If a particular practice is actually unlawful dumping, the United States has trade remedies for that, case by case. Those are targeted. A blanket quota that blocks efficient suppliers along with subsidized ones is a hammer where a scalpel was needed. And the principle at stake is the one in Comparative advantage explained with Ricardo's wine and English cloth: a country gains by buying what others produce cheaply and producing what it does best.

1. Food security does not require a price floor. If the goal is a domestic sugar industry that could survive a shock, say so, and buy that insurance directly and transparently. Hold a reserve. Fund a defined capacity. But the present program does not do that. It guarantees a price to producers whether or not the country needs the sugar, and it protects the same producers from the discipline that would make them efficient. A program that is meant to protect a nation from foreign dependence should not make that nation's own factories flee to foreign countries.

1. The costs are regressive. Food takes a larger share of a low-income family's budget than of a wealthy family's, so a hidden tax on what goes into food tends to fall hardest on the households with the least room to absorb it. A conservative who believes in the dignity of work and the family should find that distasteful. It is a transfer from the poor and middle class to a small number of firms, and nobody voted on it.

1. Rural towns deserve better than a guaranteed price. A grower in a sugar region is a neighbor, and the policy answer to a neighbor's difficulty is not to levy a toll on the whole country. If we want to help farm communities, we can do it openly, through a defined transition and a clear end date, so that the cost is visible and the people who bear it are asked to approve it. A permanent, hidden price support is a poor kindness. It keeps the industry dependent on Washington, which is the opposite of the independence farmers prize.

What the Founders would ask

The Constitution gives Congress the power to regulate commerce among the several states and with foreign nations, and to lay duties and imposts (Article I, Section 8). Nothing in that text forbids a tariff, and the First Congress passed one in 1789. The Founders were not free-trade absolutists. But they were suspicious of laws that enrich a faction at the expense of the whole, which is exactly what James Madison meant by the word faction in Federalist No. 10, where he defines it as a number of citizens "united and actuated by some common impulse of passion, or of interest," set against the rights of other citizens or the permanent interests of the community.

A sugar lobby that holds a price above the market for the benefit of a few firms is a faction in Madison's sense. The remedy he proposed was not to ban interests but to arrange the republic so that no single one could take over the machinery. The sugar program is a case where one interest did. The conservative principle is that a government with the power to pick winners will be captured by the people most eager to be picked. I made that case about energy in Solyndra to Amtrak, why government picks losers when it picks winners, and the sugar program shows the same lesson in a field.

What reform could look like

Reform does not have to be a cliff. A conservative reform would phase the program down predictably, so that growers and processors can plan, and so that no one is thrown out of business overnight.

• Freeze, then reduce, the loan rates that set the floor, so the guaranteed price drifts toward the market.
• Widen the import quota in steps, so foreign supply gradually disciplines the domestic price.
• Retire the marketing allotments that limit what processors may sell.
• Pay for any national-security reserve openly, with a defined size and a public cost.

Each step cuts a hidden tax and moves the cost, if there is to be one, into the open. And each step lets Congress say honestly to the people who gain from the program: here is a schedule, here is the end date, plan around it. The farm bill is the vehicle, and the farm bill comes up for renewal regularly. Anyone who wants to learn who stands where can read the actual vote tallies on Congress.gov rather than a press release.

The case in brief

1. The federal sugar program works through loans, marketing allotments and import quotas that hold the domestic price above the world price, so the cost lands on shoppers and manufacturers instead of the Treasury.
2. Government investigators have found that the cost to sugar users is in the billions and that the gains flow to a relatively small number of producers.
3. The program also pushes sugar-using manufacturers, especially candy makers, to move jobs abroad, so it destroys American jobs as well as protecting some.
4. The food-security and foreign-subsidy arguments deserve a hearing, but they call for open, targeted tools, not a hidden tax that falls hardest on low-income households.
5. A phased reform, freezing loan rates, widening quotas and funding any reserve openly, can protect growers from a cliff while ending the transfer.

What you can do: find the sugar and sweetener provisions in the next farm bill on Congress.gov, then write to your member of Congress and ask how they voted on them.