Vice Squad
Sunday, May 23, 2004
Tobacco buyout controversy

A week ago, Washington Post reported that tobacco farmers and their representatives were angered about President Bush’s statements opposing a buyout for tobacco growers. I couldn’t quite figure out what was going on from the article itself, so I looked elsewhere for details. Here is the story based on the Washington Post article and other sources such as this and this. The US tobacco farmers have been operating under a quota or allotment system since 1930s. The quota, which is adjusted every year, limits the supply, thereby supporting the price of tobacco in the US. However, the decline in cigarette smoking and increasing competition from foreign growers has resulted in the recent downward trend of the allotment. Since 1997 the quota has been cut in half (although admittedly the 1997 quota was apparently unusually high). Moreover, under the current market trends, the quota would decline by another 20-30% in 2005. One proposal that has been discussed at least since 1997 would buy out the farmers who are allowed to grow the leaf under the current allotment system. A recent Republican proposal in the House would pay the quota owners $7 per pound of tobacco and the farmers who actually grow the stuff -- $3 per pound, based on 2002 quota. This would give the farmers more than $15,000 per acre or, reportedly, over $200,000 per average allotment, while allowing them to keep their land. The purpose of the buyout is simply to eliminate the quota system.

As I mentioned, the President has objected to these buyout proposals. He said (as quoted in the Washington Post), “They’ve got the quota system in place – the allotment system – and I don’t think that needs to be changed.” One possible reason for Bush’s reluctance to change the system is the size of the current federal budget deficit. (The immediate cost of the buyout to the budget would be about $12 billion.) If that is indeed the case, then this is one cost of the deficit that I haven’t really appreciated so far. The buyout system may be criticized on distributional grounds, but in terms of efficiency it makes a lot of sense. The quota distorts market prices hurting consumers more than it benefits the farmers, at least if we treat tobacco as any other good. The buyout by itself is a transfer from society at large to the farmers and as such does not affect social wealth (except that in order to pay the farmers, the government need to raise revenues and that is distortionary too). Meanwhile, the elimination of the quota system is going to raise economic efficiency.

I don’t know who advises the President on these matters, but the anti-buyout position looks like one of those bad recommendations, both politically and economically, that he seems to have been getting a lot of over the last year and a half.


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