President Obama recently issued an executive order encouraging federal regulators to promote competition in the marketplace. The order follows a report by the President’s Council of Economic Advisors illustrating the ways that competition between firms benefits consumers and how collusion/cooperation between businesses to manipulate prices harms consumers. When companies collude, prices rise, quality falls and businesses are protected from the consequences of their poor service.
The executive order instructs federal agencies to eliminate “regulations that restrict competition without corresponding benefits to the American public.” The president and his advisers should be lauded for recognizing that sometimes government policy does more harm than good by playing favorites.
Among the worst offenders in this regard are the “checkoff” programs — agricultural programs that generally benefit large producers and force small farms to go along for the ride.
The Department of Agriculture operates 22 checkoff programs, covering commodities ranging from milk to mangos and pork to popcorn. The programs mandate that farmers pay a production tax on every pound of fruit or head of livestock they sell. The USDA distributes these funds — totaling more than $700 million per year — to industry boards, which use them to create generic marketing campaigns like “The Incredible Edible Egg” and “Beef, It’s What’s for Dinner.”
What’s wrong with this? Generic marketing, unlike brand-specific advertising, doesn’t communicate the quality of a particular product to consumers; it simply tries artificially to stimulate demand. Generic marketing replaces what could have been valuable, consumer-focused, product-specific information — like which eggs come from free-range chickens — with the advertising equivalent of a sideshow barker, drowning out the competition with cries of “Got Milk?”
On top of this, checkoff programs create legally mandated collusion — which goes against the spirit of the recent executive order. They require producers who may not even benefit from generic advertising to pay for it on behalf of their competitors — creating a government-granted privilege for some businesses. And since these programs are implemented with the authority of government, there’s no way for individual farmers to opt out.
Take Joseph and Brenda Cochran. These Pennsylvania dairy farmers paid around $4,000 a year from their razor-thin budget toward generic marketing. But this did nothing to distinguish their traditionally farmed milk from the milk produced by their much larger competitors using more industrial methods. Those benefiting from the “Got Milk?” marketing campaign were bulk producers not interested in differentiating their product, but the checkoff program dragged the Cochrans along for the ride.
This motivated the Institute for Justice to file suit for the Cochrans in 2003. The 3rd U.S. Circuit Court of Appeals sided with the Cochrans, ruling checkoff programs violated their First Amendment protection from being compelled to pay for speech they disagreed with. But in 2005, the Supreme Court threw out this decision in Johanns v. Livestock Mktg. Ass’n, which ruled checkoff programs are permissible because they constitute “government speech.”
The decision was a boon for government-sponsored collusion, which continues to undermine fair competition today. Each year $700 million is taken from farmers — money they would otherwise use to improve product quality or nutrition, or else return to consumers through lower prices. More than $70 million alone goes to encouraging people to eat more beef. You wouldn’t think steak would be such a hard sell.
Luckily, this could be accomplished with only a very simple change — by making USDA checkoff programs voluntary. This would allow large-scale farms producing bulk agricultural products to contribute to generic marketing campaigns, if it makes financial sense for them. However, it would also enable farmers who would rather highlight their own product’s quality to spend their advertising budget as they see fit.
If the Obama administration really wants to eliminate anti-competitive policies in federal regulations, it should start with the low-hanging fruit of USDA checkoff programs.
Michael Farren is a research fellow with the Mercatus Center at George Mason University in its Project for the Study of American Capitalism. Scott Eastman is a program coordinator for the Project for the Study of American Capitalism and the State and Local Policy Project at the center. They wrote this for InsideSources.com.