“Parity” Prices   1 comment

The art of economics consists in looking not merely at the immediate, but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group, but for all groups.

This is an ongoing series of posts on Henry Hazlitt’s Economics in One Lesson. You can access the Table of Contents here. Although written in 1946, it still touches on many of the issues we face in 2017, particularly the fallacies government economic programs are built upon.

 

The history of tariffs reminds us that special interests can think of the most ingenious reasons why they should be the objects of special protection. Their lobbyists present a plan in their favor that may not survive the first cut, but the special interests keep at it. They hire public relations experts and economists who will promote it on their behalf. The public may not be sold on it initially, but they hear it repeated so often, accompanied by statistics and impressing looking charts and graphs, that soon they are taken in. Often, those who would oppose it don’t realize the danger of these arguments until it is already too late. They’re coming late to the  party, so that they are accused of being misinformed, disputing “settled science.”

Image result for image of farm subsidiesHazlitt wrote 20 years before the environmental movement became a force to be reckoned with and 50 years before global warming would even be mentioned, but he foresaw the power of special interests in 1946. For him, the principle examples was “parity” pricing for agricultural products, which started quietly a long time before the New Deal in 1933 when it had already become an established principle, enacted into law with absurd corollaries that grew from it.

The argument for parity pricing went like this:

Agriculture is the most basic and important of all industries. It must be preserved at all costs. The prosperity of the whole nation depends on the prosperity of the farmer. If his purchasing power languishes, industry languages. This caused the collapse of 1929 … or at least the prolonged recovery from it. The price of farm products dropped violently while the price of industrial products hardly budged. City workers were laid off and couldn’t afford to buy farm products and the Depression spread from there.

The only cure?

Restore the prices of farmers’ products to a parity with the prices of things the farmers buy and then preserve that balance perpetually.

It was an absurd idea because how do we know that any one year’s prices were “normal” and therefore should be the prices preserved for eternity.

If there had been any sincerity or logic in the idea, it would have been universally extended. If the price relationships between agricultural and industrial products that prevailed from August, 1909 to July, 1914 ought to be preserved perpetually, why not preserve perpetually the price relationship of every commodity at that time to every other? A Chevrolet six-cylinder touring car cost $2,150 in 1912; an incomparably improved six-cylinder Chevrolet sedan cost $907 in 1942: adjusted for “parity” on the same basis as farm products, however, it would have cost $3,270 in 1942. A pound of aluminum from 1909 to 1913 inclusive averaged 221¼2 cents; its price early in 1946 was 14 cents; but at “parity” it would then have cost, instead, 41 cents.

Of course, cars had improved a lot from 1912 to 1946, but the cost of production had fallen substantially. In the five-year period 1939 to 1943 an average of 260 pounds of cotton was raised per acre in the United States as compared with an average of 188 pounds in the five-year period 1909 to 1913. Costs of production have been substantially lowered for farm products by better applications of chemical fertilizer, improved strains of seed, and increasing mechanization— by the gasoline tractor, the corn husker, the cotton picker. Some large farms had been completely mechanized to operate along mass production lines, requiring only one-third to one-fifth of the labor it had cost to produce the same yields a few years before.
The “apostles of parity prices” didn’t call for such universalization, nor did they call for Congress to reduce farm prices to the “parity” when they rose above this mythical level.  Parity pricing was and remains a rule that works only one way.

Of course, there’s a fallacy hiding in here. The argument goes that the farmer who gets higher prices for his products can buy more goods from industry, which makes industry more prosperous, bringing about “full employment”.

This ignores how these “parity prices” are brought about. If higher farm prices come about by a generally healthy economy, then there are increases in the prosperity of business with increased industrial production, which leads to increased non-inflationary purchasing power for city workers. Prosperity increases for everyone, not just the farmers.
But a rise in farm prices brought about by government intervention is not the same as that brought about by a naturally healthy economy. It’s brought about in one of several ways:

  • The higher price can be forced by mere edict, which is the least workable method. Roosevelt and Nixon both tried this. Remember Stagflation?
  • It can be brought about by the government’s standing ready to buy all the farm products offered to it at the “parity” price. This exists in the United States today.
  • It can be brought about by the government’s lending to farmers enough money on their crops to enable them to hold the crops off the market until “parity” or a higher price is realized. This exists in the United States today.
  • It can be brought about by the government’s enforcing restrictions in the size of crops. This exists in the United States today.
  • It can be brought about, as it often is in practice, by a combination of these methods. This is the prevalent practice in the United States today (2017)

Whatever method, the farmers get higher prices for their crops and their “purchasing power” is increased. They are for the time being more prosperous themselves, and they buy more of the products of industry. All this is what is seen by those who look merely at
the immediate consequences of policies to the groups directly involved.

But then there are the consequences that are harder to see. Suppose the wheat which would otherwise sell at $1 a bushel is pushed up by this policy to $1.50. The farmer gets 50 cents a bushel more for wheat. YAY! But …

The city worker, by precisely the same change, pays 50 cents a bushel more for wheat in an increased price of bread. It works the same for all farm produces. If the farmer gets paid more, the purchaser must pay more to buy whatever is made from those farm products, which means there is less money in that sector of the economy to spend on other things.

No doubt the agricultural-implement makers and the mail-order houses do a better business. But the city department stores do a smaller business.

But, as we’ve seen with all other examples, it doesn’t stop there. The policy results in a net loss, if followed to its logical conclusion. It isn’t just a transfer of purchasing power from city consumers or general taxpayers to farmers. It forces a cut in the production of farm commodities to bring up the price. That represents a destruction of wealth. There is now less food to be consumed.

In Hazlitt’s time, they were actually burning coffee crops in Brazil to force up the price of coffee. In the United States, we follow a subsidy system that pays farmers not to grow as much.

Image result for image of farm subsidiesWhen the farmer reduces the production of wheat to get “parity”, he might get a higher price per bushel, but it doesn’t result in a longer term increase in income because he produces and sells fewer bushels. So, then the government proposes a subsidy at the direct expense of the taxpayers, thereby reducing the purchasing power of the entire nation.

The farmer’s parity-price system is equivalent to the industrial tariff. Often such tariffs harm farmers because, by reducing industrial imports, it also reduces American farm exports as it provokes retaliatory tariffs in other countries. Some ardent supporters of parity pricing will insist that it’s needed for just this reason.

Of course, we need to recognize that there is no general tariff on all industrial products. Many imports are not subject to tariff protection. If a city worker must pay a higher price of blankets or overcoats because of a tariff, he isn’t compensated for having to pay higher prices. By compensating the farmer for this supposed disadvantage, we are basically robbing the factory worker twice.

There are those who say we should even it all out, give “equal” protection to everybody. That’s impossible, Hazlitt explained. The system would be far too complicated.

We should merely have added an army of needless bureaucrats to carry out the program, with all of them lost to production.

Remember. Government workers produce nothing. They merely use tax dollars extorted from the producing class to redistribute it somewhere else.

Hazlitt suggested a much simpler solution. End both the parity-price and protective-tariff systems.

The alleged benefits of still another scheme evaporate as soon  as we trace not only its immediate effects on a special group but its long-run effects on everyone.

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Posted January 27, 2017 by aurorawatcherak in economics

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  1. Pingback: Introduction to “Economics in One Lesson” | aurorawatcherak

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