How HCFS is the fault of government and not private industry
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OK, time for economics 101. The first thing to keep in mind is that price is king. If you can offer something at a lower price than your competitors then you'll most likely get the business. In any market there is a supply and a demand for a good or service. Where supply meets demand is equilibrium or the point at which the maximum number of people spend the maximum amount of money they care to on a particular good. Equilibrium is also known as price.
You'll note on the accompanying slides that as the price of a good decreases the demand goes up. Additionally as the supply of a good decreases the price goes up. When you take them both together, you find equilibrium or the price at which a majority of people are willing to pay for a good or service. In addition, you learn the optimum quantity of good that will satisfy the need of the largest number of people. In that respect market economics is a pure democracy.
Effects of subsidies on the supply of a good.
So what happens when a government subsidizes a good. Well the first thing that happens is that the price falls. That's good right? Well it depends. The only way a government makes money is through taxation. So in effect you're taking tax money to support one part of the economy against another. They're just shifting money around, not really creating anything new. In the case of HFCS, the government subsidizes the makers of corn and corn syrup against the makers of natural sugar and natural sugar substitutes.
So what, you might be saying. Well let's forget the fact that you're being unfair to the sugar producers and sending them to the poorhouse so you can give money to the more numerous corn growers and corn syrup producers. Last time I checked, government was supposed to protect the minority from the tyranny of the majority. Sugar growers can't get a big enough lobby, so they lose.
In addition since you have allowed the government to meddle in the affairs of the market, the government now becomes vulnerable to pressure from the groups in the various markets in which they intervene. Since HFCS is now at a much lower price than sugar, companies are willing to use it because that increases their profit margin. This might not be the case if the government did not subsidize the HFCS group. Also, the corn producers and corn growers can now pressure the government and more importantly, government agencies, to suppress possible health dangers of additives like HFCS.
Sugar Supply vs HFCS Supply
Although the US is the 9th largest grower of sugar cane in the world, the price of domestic sugar is twice that of the sugar available on the international market. In 1977, the United States imposed tariffs and quotas on the importation of sugar that virtually guaranteed that sugar would be too expensive to be used as a sweetener. It is interesting to note that while soft drink companies like Pepsi use sugar in other countries, they use HFCS in the United States. It's estimated that the average American consumes about 28.4 kg of HFCS a year and 26.7 kg of sucrose (sugar). The EU consumes an average of 40.1 kg of sucrose a year, Brazil 59.7 kg and Australia 56.2 kg. Despite the higher sugar consumption, obesity is not nearly as rampant as that in the US.
So what's the big deal?
HFCS was shown to be linked to insulin resistance, a precursor to diabetes. Of course the corn lobby inundated any dissenters with studies showing that corn syrup did not have the effect the Yale researchers claimed. Yet the original study was both conducted and reproduced in other medical research schools. So, scientifically speaking, the results have been reproduced in other labs, contradiction the mountain of evidence by corn lobby advocates.
Now we have a true dilemma. Evidence is mounting that HFCS is a danger and could be a prime reason for the massive increase of diabetes in this country over the last couple of decades. CAn we rely on the government to save us? Remember that they already threw sugar cane growers under the bus to curry favor with the larger group of corn growers. With this sort of interference in the markets, subsidies are unlikely to stop, regardless of the health consequences. Remember that politics gave us words like "spin control".
Why things won't change.
Remember above when I said price is king? That has everything to do with why we still see HFCS is still an additive in foods sold in the US. Because the price is subsidized and artificially held down, even something like the health hazards of HFCS will not be reflected in the price. Without subsidies the price of HFCS would increase becuase the effects of HFCS would be reflected in the costs of using HFCS. In effect, showing that HFCS causes health problems would cause manufacturers to shy away from using it, if they used it anyway, their customers would find out and leave them for someone who doesn't use HFCS. With subsidies, that self-correcting mechanism is destroyed. It's ironic that a free market is demonized for that sort of manipulation, when in reality it's the "regulation" of those markets that cause something as deadly as HFCS to not only be put into food, but encouraged to be put into food.
Because the government has chosen to invove itself in the economy and exercises a monopoly on force and can compel people to do things, this set of occurances developed and will continue so long as we allow those in power to define markets instead of people freely choosing among themselves what they prefer.
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Comments
Ledefensetech, thanks for answering my question. I am glad this additional information is available, and I think your analysis is essentially correct.
One thing, though, still confuses me, and that is the behavior of consumers. Can consumers not tell the difference in taste between HFCS and sugar? Why do they not boycott products that taste bad?
Take the example of cocaine. The government outlaws cocaine, and the price of cocaine goes up, because people want it so much. People don't stop using cocaine, just because it's expensive. On the contrary, they use it more.
Why are consumers so indifferent to sugar, which is better for them than HFCS? Why do they accept a substitute?
Maven, no problem. Economics really is that easy. It's the macro nonsense that makes it hard. One of the hardest things for a business student to do is understand macroeconomics. You learn one thing in micro, then they turn it around on you in macro. What they won't admit is that macro is wrong.
Aya, thanks for your comment. As for why people us HFCS, basically it's because there is no alternative. Price is king. HFCS is so much more inexpensive than sugar that it is used in everything. Also people like the sweet taste of it. It's not an addiction as much as it is a preference most people have. The sweeter a thing, the more they like it. HFCS is sweeter than table sugar.
The outlaw of cocaine is another topic in economics. There the price goes up because the supply is constrained. Less supply = higher price and more demand. It also has to do with the elasticity of supply and elasticity of demand, something I'll go into in the future. Demand for cocaine is inelastic. What that means is that the price doesn't matter, demand will not be affected very much by supply or price. Elasticity is determined by the number of substitutes a product or service has. Sugar is elastic because there are so many alternatives for it. There aren't really any substitutes for cocaine, that's true of all drugs really.
Just so you know there is a natural sweetener, Stevia, that is all natural and sweeter than HFCS. For many years in the US it was outlawed, due to the lobbying of HFCS manufacturers. There was a time that someone hoarding Sevia would have been treated like someone hoarding cocaine. Fined and jailed. Now you can get it pretty much the same way you can any other type of sweetener. I've even had a soda with Stevia used as the sweetener. I liked it better than even regular soda.
So to answer your question it's a combination of ignorance and the fact that food manufacturers will use HFCS because it lowers their costs as opposed to using sugar. In a way they have no choice, it's use HFCS or lose out to a competitor. The problem is subsidies to HFCS makers and corn growers. Eliminate those and you'd see alternative appear.
Ledefensetech, I appreciate your added explanation concerning elasticity.
However, when it comes to the elasticity of the demand for sugar, I think you'll find it's not nearly that elastic when people are determining by themselves whether to put sugar or something else in their food.
When people decide what to put in their tea, they choose sugar or some artificial sugar substitute -- if they are on a diet. But you don't find people choosing HFCS as a high calorie sweetener of choice that each person applies to his own portion by choice and according to personal preference.
By the same token, when people cook or bake at home, they may use sugar, honey, molasses or an artificial low calorie sweetener. But who bakes with HFCS? Nobody. Nobody says: "Sugar is so expensive, I guess I'll use HFCS, instead."
It's only when people are not paying attention to the ingredients of a product made for them that the demand for sugar becomes so elastic.
Aya,
I have to disagree on the cooking choice, I see many desserts and recipes that call for KARO syrup Rather dark or clear. It has been used for many years as the sweetener of choice.
The reason that it is not a choice for a table sweetener is packaging, price is king here it is not feasible to package it in a covenient manner for such use, the cost would be prohibitive, and it is to sticky and icky, and that is why people choose suger or another crystalline form for a table sweetener. It was tried a few years ago and it didn't fly it was worse than honey as to the mess kids made with it in Restaraunts, who are actually the consumer of the bulk of these types of commodities.
TMG
Aya, it all comes down to convenience. Why do people eat fast food? A lot of people do that, even though it's been shown to be bad for you over time. People want something that is easy. There's nothing wrong with that, except for the fact that in the case of HFCS, the subsidies are keeping prices down artificially.
You also have to keep in mind that we're talking about food manufacturers, not someone baking in their kitchen. That's why people buy processed food, it's cheap and easy. The problem is that government artificially keeps the price of HFCS low so that manufacturers are going to use it rather than some substitute. In a freely fluctuating market, health hazards would increase the cost of using HFCS, or at least turn people off from using it because they don't want to scare away their customers.
The government prevents this not only by subsidization, but also by organizations like the FDA, which give people a false sense of security. At best we're guinea pigs in a giant experiment and at worst, we're at the not so tender mercy of our national socialist masters.
Ledefensetech, I totally agree with you on our national socialist masters and the FDA and subsidies. We are on the same page there!
You've dealt really well in this hub with the supply side of the equation. I am still a little confused about demand, though. This is not meant to be argumentative, but merely an attempt to clarify my own thinking on this issue. So these are honest questions, and I hope you'll bear with me.
The reason I mentioned cocaine earlier is because cocaine used to be an ingredient in Coca-Cola, a long time ago. In fact, the name of Coca-Cola was based on two ingredients that it no longer contains: Cocaine(Coca) and Cola nut (COLA).
When I started drinking Coke, neither ingredient was present, but sugar was still the standard sweetener. When HFCS was substituted for sugar, I noticed and I didn't like it. It wasn't a health concern. It just didn't taste the same.
It seems that the demand for every ingredient -- even cocaine -- is elastic, if it's part of a bigger package. People may have initially bought Coca-Cola for the cocaine/cola combination, but they kept buying it when those ingredients were removed. They accepted almost any substitution and continued to maintain brand name loyalty. That astounds me!
The supply side is the government's fault. But the demand side is still an issue to be dealt with. I don't understand it yet.
Aya, don't worry about the questions it's no problem to answer them. As an economic matter, demand doesn't really factor into my thinking. The only thing that is important as a economist is that people make decisions.
Ludwig von Mises considered economics a subset of what he called praxeology, or the study of people and their decisions. This could include no only economics; but history, political science, etc. What it does not include is psychology and sociology.
The reason is this. Why people do things doesn't matter. Each of us has a value system. We make decisions according to those value systems. Unless we try to deprive someone of the liberty to make their own choices, we can live however we like. As far as why people do things, that is the only thing of import to an economist. People make decisions according to their own value systems.
I think the thing you keep tripping over is the belief that there are unconscious desires and wants that each of us have. I don't believe that. The BBC did a good documentary on Freud and his daughter, the rise of PR companies, etc. in the Century of the Self. You might want to check it out. They go off on a tangent a bit at the end, but as I've thought about it, they bring up interesting points that I'm still mulling over.
One other thing to consider when looking at demand is how the supply is restricted to only get certain products to people. Look up allopathic doctors versus homeopathic doctors to get an example of this.
Ledefensetech, that was a very good answer. You hit the nail on the head when you wrote: "I think the thing you keep tripping over is the belief that there are unconscious desires and wants that each of us have." That is what I keep tripping over!
But the sad thing about it is that this is true when it comes to the market for a free market, too!
Deep down inside, I assume that everybody would want the benefits of a free market, if they only just understood them. But other people come back with answers like this: "You don't understand, I WANT to be a socialist. I will always be a socialist! There is nothing that you can say that will change my mind."
And even people who were pretty happy with a relatively free market were willing to accept substitutions: a relatively less free market. Which is why we are where we are right now!
I hate to use a cliche, but I have to say "You really tell it like it is." We have to garner new understanding of the backgrouns and motives of what happens around us. Only with correct understanding can we gather a momentum for change.
This wa good read. Thanks for the posting.
Rainshadow
Aya, don't sweat it, I once thought as you did. I was brought up in the public school system and was probably destined for mediocrity and ignorance when I made a simple decision that changed my life forever. I went for some time to a private university. It was like night and day. All my years, I'd heard of what education and scholarship was supposed to be like and only here, in a private institution, did I find it. I unfortunately couldn't finish my degree there and had to go to a public university in order to afford to continue. Again, the difference was night and day. When I went to go work for the state I saw all the weaknesses in the public school system writ large and how the very institutions that were supposed to help us were actually hurting us.
I think the main reason people like socialist ideas is because they're easy. It took me years of study to become a free market proponent. Why? Well it was easier just to believe that government intervention solves all problems. I was intellectually lazy and dishonest with myself. Only because I saw firsthand the failures of socialist policies did I then begin to question my long held beliefs. In short, I found many of them lacking.
Rainshadow, welcome, I'm glad you found my article useful. That's high praise indeed and something every writer wishes to hear. I've long felt that classical economics is one of the foundations of a good education. Along with Reading, Writing, Mathematics and History, these are the necessary perquisites for and educated and enlightened citizenry.
ledefensetech,
This has to be one of the better articles I've read. I too have problems with subsidies in any form. It drives me nuts to know that our govenment buys thousands of tons of wheat, corn, etc. every year only to let it rot. Why? Because it keeps the prices higher. Never mind that people might buy two to three times as much if the price were lower.
You're absolutely right about the corn lobby though. They lobby congress and state governments to require that corn ethanol be added to gasoline, and then turn around and say that there will be a shortage of food corn - which drives the price of corn futures up.
Thanks Barry, one of the best economists ever, a Frenchman of all things, Frederic Bastiat had a saying. An economist looks not only at what is seen, but that which is unseen.
Farmers see benefits from subsidies that they find good and most people not trained in economics find good. However, what is not seen is what other uses that are more productive that money could have been used for.
Government doesn't produce anything, all they can do is redistribute things. Funny how if I try to redistribute wealth by taking something that doesn't belong to me I go to jail, but a politician can do it and not only remain free, but lauded for his "statesmanship".
I wonder why we don't see any of our resident business-bashers? :)
Well I'd like to think that it's because my arguments are so cogent and well crafted that they can't find anything to attack. More likely it's the fact that they can't attack the logic I've constructed so they're off for easier and more emotional targets.
Or it could just be that economics is seen to be so arcane that the common person just doesn't get it.
I'm all for free market capitalism. In fact, I believe in it. I can even understand laws designed to protect capitalism. Instead we have a liberal nanny-state environment. (Yes, I know Republicans are as guilty as Democrats these days.)
Take Maryland for example. About fifteen years ago, the state and federal government, then controlled by Democrats, decided that tobacco was the equivalent of meth. So, they offered subsidies to the tobacco growers in the state. It was a completely voluntary program (meaning that if they farmers didn't take the money and sign the agreements, they would be taxed into poverty). Part of the agreement was that those farmers had to sign agreements which said they could never grow tobacco on that land again. Not many cash crops can be grown in Maryland, so a lot of the farmers sold out to land developers at the end of the subsidy period.
maven101 says:
4 months ago
Another example of social engineering...Wonderful Hub, clearly and concisely written so even an economics challenged knob like me understands the issues presented...Thank you, Larry