Dairy farmers tout a ‘milkle-down’ effect. But it’s all a lot of hot air

The “trickle-down” argument is often used by special interest groups. The basic idea is to make the case that although a certain policy appears to only benefit a certain segment of the economy, everyone ends up better off somehow.
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By Stephen Gordon – The term “trickle-down economics” was made famous when it was used to support former U.S. president Ronald Reagan’s proposal to reduce personal income tax rates on high earners, and is often viewed as a cynical joke. But the effectiveness of the trickle-down strategy is not so easily dismissed, and other interest groups have learned to take it seriously.
Canada’s dairy cartel certainly has. There’s even a website that purports to explain what it calls — without apparent irony — the “Milkle-Down Effect.” (Yes, really.)
Cartels are usually illegal in Canada. Article 45(1) of the Competition Act forbids price fixing, the allocation of production and the restriction of supply; the maximum penalty for this sort of behaviour is 14 years in jail and/or a fine of $25 million. The reason why cartels are illegal is that they act against the public interest: the general public is best served when goods and services are cheap and plentiful. Competitive pressures are typically the most effective way of ensuring the largest supply at the lowest prices.
The dairy industry is an exception in one important respect. Not only is the dairy cartel immune from prosecution under the Competition Act, its restrictions are actually enforced by the government. (Most cartels have to resort to other, extralegal means to maintain discipline.) But in all other respects, the effects of the dairy cartel are what we’d expect. A recent study published in Canadian Public Policy estimates that artificially high costs for dairy and poultry products reduce the incomes of low-income families by 2.3 per cent, while incomes of high-income households are reduced by 0.5 per cent.
Nonetheless, the diary cartel gamely makes the case that all Canadians benefit from the milkle-down effect. As far as I can tell, its argument appears to be based on the assumption that if the cartel is dismantled, all of Canada’s dairy farms will shut down, taking dairy processors down with them. Neither option seems likely.

Artificially high costs for dairy and poultry products reduce the incomes of low-income families by 2.3 per cent

For one thing, the rest of the Canadian agricultural sector survives without the benefit of a government-enforced cartel, and even manages to hold its own in international markets. And if the Australian experience is anything to go by —- and there’s little reason to think that it’s not —- dairy farmers are more than able to adapt to competitive forces. Indeed, a recent study by two University of California at Davis professors suggests that Canada has a comparative advantage in dairy products and that dairy farmers are worse off under the cartel. The increased profits gained from participating in international markets would more than offset the losses incurred by abandoning the cartel in the domestic market.
For another, the idea that Canadian dairy processors somehow depend on a restricted flow of high-cost dairy inputs is a bit of a head-scratcher. High prices and short supply are already forcing Canadian-based processors to shift some of their operations outside Canada. It’s hard to see how lower dairy prices and an increased dairy supply can be anything but a boost for domestic processors.
Then there’s the claim that some 215,000 jobs would be “at risk” if the dairy cartel were dismantled. This too is hard to believe: there are only about 12,000 dairy farms in Canada, plus another 4,000 egg and poultry farms that also benefit from a government-enforced cartel. To be fair, the dairy (and poultry) cartel is not the only lobby group that peddles vastly inflated claims of the “spillovers” that are generated by receiving special treatment.
Estimates for spillovers are invariably generated by Statistics Canada’s input-output tables. These tables track which industries spend how much on goods and services produced by other industries and are useful for understanding the interactions in the economy. When the dairy cartel says that it “sustains hundreds of thousands of jobs,” it means that if you added up all of the people employed in all of the industries that sold goods and services to dairy farms, you’d get a very large number or workers. It doesn’t say anything about what would happen if the dairy cartel were abolished.
To be sure, the dairy cartel is not the only interest group that makes use of dodgy economics to make the case for special treatment. The University of Alberta’s Andrew Leach calls this “trickle-from economics”: arguments in which the costs of according special treatment to an interest group are either ignored or are misrepresented as benefits. Unsurprisingly, these analyses inevitably conclude that special treatment for the interest group in question will make everyone better off.
It’s not always obviously wrong to claim that a given policy measure will work its way through the original target and on to other sectors of the economy. Economies are complicated systems with many interactions and feedbacks, and there many cases where the costs or the benefits of a given measure can be expected to be passed on. (For example, if petroleum refineries were required to pay a new tax on crude oil, we’d expect these extra costs to be ultimately passed on to the consumers of refined oil products.)
Figuring out the effects of a policy measure can be a complicated business and this complexity works to lobbyists’ advantage. Using trickle-from economics means that you don’t have to make the case that a given interest group actually deserves special treatment.
Source: National Post – Stephen Gordon is a professor of economics at Laval University.

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Así lo expresó Domingo Possetto, secretario de la seccional Rafaela, quien además, afirmó que a los productores «habitualmente los ignoran los gobiernos». Además, reconoció la labor de los empresarios de las firmas locales y aseguró que están «esperanzados» con la negociación entre SanCor y Adecoagro.

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