Monday economics roundup

| September 28, 2009
Not just another trip back to the barn.

Not just another trip back to the barn.

ITEM: Milk prices have plummeted here in Denver over the past year. I used to spend close to $3/gallon for my favorite milk (Lucerne Skim Supreme Fat Free milk); now the price is around $1.60/gallon. It’s hurt the dairy farmers here in Colorado, and their response is to kill cows in order to reduce milk production. The problem is — as the article notes — this will only work all the dairy farmers participate (emphasis mine):

Others say the herd-retirement program combined with other price supports still can’t sustain dairy farms in the long run. Before the U.S. Department of Agriculture agreed in August to increase dairy price supports, the price of milk was expected to fall to its lowest annual average in 20 years.

Consumers pay about $1.50 per gallon of milk, about the same as they paid in the 1970s, said Bill Wailes, head of the department of animal sciences at Colorado State University.

The problem is that dairy farmers are able to produce so many cows and so much milk that the market has been flooded, Wailes said.

“We now have too many dairy cows who produce a lot of milk with ease,” he said.

Herd retirements, he said, will work only if 100 percent of the nation’s dairy farmers agree to participate.

“Right now, only about 70 percent take part, and you need full participation to get the benefits in higher prices,” Wailes said.

The departure of the herd at the Bernhardt spread tore at the family, which began farming in northern Colorado in 1920. But a March meeting with their bankers convinced the Bernhardts that their Weld County dairy was no longer viable.

I got double the prices in the program than what I would have if I sold the cows at market,” Tim Bernhardt said.

At first, I thought this might be a government-funded program, but not, it’s not: it’s funded by a private nation-wide dairy production organization, Cooperatives Working Together (CWT). The basic idea is to create artificial scarcity by selling off large portions of the nation’s dairy herds for other uses (e.g., meat). I’m unclear how CWT is able to pay “double the [market] prices” for the retired cows; it seems to me that the overall numbers just wouldn’t add up, unless this is a short-term wealth transfer from CWT members who aren’t selling off herds to those who are in anticipation of being able to get it back (via higher milk prices) in the long run.  I also remain skeptical of the artificial scarcity approach per se; it didn’t work when FDR mandated that farmers cease production or destroy crops and goods, and I don’t think it will work now.

ITEM: You know what’s so scary about this tongue-in-cheek item from the Onion?

PURCHASE, NY—PepsiCo sent shockwaves through the carbonated beverage industry Monday when the multibillion dollar corporation announced that it would cease all advertising of its popular soda product, effective immediately.

“We know it’s good, and everyone’s pretty happy with the overall taste, so why spend all our time worrying about what other people think?” PepsiCo CEO Indra K. Nooyi told reporters during a press conference at the company’s corporate headquarters. “Frankly, it just feels sort of weird and desperate to put all this energy into telling people what to drink. If they don’t like it, then they don’t like it.”

It’s that I find myself wondering: just what would be the impact on Pepsi sales and market share if they simply ceased all advertising? And might any lost sales be offset by the savings in advertising?

ITEM: Speaking of losing market share, it’s a bit startling to read that the largest trial lawyers lobbying firm is in debt and losing members:

The trial lawyers lobby has been awash in debt and bleeding members – just as it embarks on a national campaign to block any clampdown on medical malpractice lawsuits as part of President Obama’s health care overhaul.

The American Association for Justice, the most prominent group representing plaintiffs’ attorneys, has seen a shake-up in its executive suite and has struggled to deal with what appears to be a mounting budget shortfall. To help it fight congressional efforts to make it harder for patients to sue doctors and lawyers, it recently sent out an extra solicitation to its members, asking them to fork over money for a lobbying campaign. . . .

The biggest hit to its books was in membership dues, which dropped from $28.6 million in 2005 to $19.2 million in 2008, according to the annual AAJ financial report for that fiscal year filed with the Internal Revenue Service.

I have to wonder how much of the AAJ’s drop in membership and income is due to the overall economic struggles of the legal profession, which has seen many law firms freezing or cutting salaries, while other law firms simply close their doors.

ITEM: Bill Frezza argues that Uncle Sam is supplanting the venture capital (VC) community and by so doing is distorting market realities (emphasis mine):

Sure, Uncle Sam has financed Big Science ever since the Second World War. But selecting which science is ready to be turned into technology to power what new products, and which of these products are ready to be produced at scale to support what emerging market, has always been the job of private industry. Under the rubric of “crisis,” be it climate change or energy independence or green job creation, this painstaking trial and error process is being replaced by technology czarism.

Technologies that are a decade away from feasibility are being rushed directly into production. The discipline of venture financing and the winnowing process of early stage failure are being skipped as politically favored projects go directly to large scale project financing. New constituencies whose survival depends on the uninterrupted flow of federal largess are sprouting up like weeds, funneling a percentage of that money back to the Congressmen who keep the whole thing going. The antiquated theory that in order for a business or industry to be sustainable it must create more wealth than it consumes is being discarded in favor of the belief that if you fervently hope for something good to come true, then it will.

That last statement sums up much of what I think is wrong with the Left’s approach to health care, alternative energy, and most of its other ardent causes. Be sure to read the whole article.

ITEM: Speaking of health care reform, Robert Samuelson — on point as always — argues that the current efforts of Congress and President Obama are driven far more by ego than by either popular demand or economic necessity (emphasis mine):

If only all this were irrefutable. But Baucus’ claims are shaky. It’s questionable whether more insurance would save 45,000 lives a year. Unfortunately, just having insurance doesn’t automatically improve people’s health. Sometimes more medical care doesn’t really help. Sometimes people don’t go to doctors when they should or follow instructions (take medicine, alter lifestyles). Indeed, many people don’t even sign up for insurance to which they’re entitled. An Urban Institute study estimated that 10.9 million people eligible for Medicaid or CHIP in 2007 didn’t enroll.

The 45,000 figure cited by Baucus is itself an unreliable statistical construct built on many assumptions. It’s based on a study of 9,004 people aged 17 to 64 who were examined between 1988 and 1994. By 2000, 351 had died; of these, 60 were uninsured. The crude death rates among the insured (3 percent of whom died) and uninsured (3.3 percent) were within the statistical margin of error. After adjustments for age, income and other factors, the authors concluded that being uninsured raises the risk of death by 40 percent. They then extrapolated this to the entire population by two techniques, one producing an estimate of 35,327 premature deaths and another of 44,789.

This whole elaborate statistical edifice rests on a flimsy factual foundation. The point is not to deny that the uninsured are more vulnerable (they are) or that extra insurance wouldn’t help (it would). The point is that estimating how much is extremely difficult. Advocates exaggerate the benefits. Remember: Today’s uninsured do receive care.

Again, read the whole thing.  Happy Monday!  ..bruce w..

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Category: Colorado, Creeping socialism, Economics, Food, Healthcare Reform, Idiot Congresspersons, Links roundup, Litigation, Main, Obama Administration, US Politics

About the Author ()

Webster is Principal and Founder at Bruce F. Webster & Associates, as well as an Adjunct Professor of Computer Science at Brigham Young University. He works with organizations to help them with troubled or failed information technology (IT) projects. He has also worked in several dozen legal cases as a consultant and as a testifying expert, both in the United States and Japan. He can be reached at, or you can follow him on Twitter as @bfwebster.

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  1. brucehoult says:

    Why aren’t they reaping profits by selling the milk production that is surplus to local requirements into the world market?