A bitter pill from sweeteners 

 

Sugar“Corn syrup, sugar battle in L.A.” read the headline. The story focused on legal wrangling between competing enablers of America’s sweet tooth. The sugar industry accused high fructose corn syrup makers of misleading the public with an ad campaign that it is “nutritionally the same as sugar,” asking for $1.5 billion in damages in a Los Angeles federal courtroom. Corn syrup producers had already filed suit for $530 million in damages, alleging that big sugar falsely depicted corn syrup as less healthy than sugar. And both claimed to be on consumers’ side.

It is instructive, however, that while the story treats sugar and corn syrup as intensely competing “Rock ‘em Sock ‘em” robots, the producers involved back each other’s pet government special interest supports. Corn and corn syrup producers back import quotas on sugar that restrict sugar supplies and increases its price; sugar producers are on board with U.S. methanol mandates that absorb much of the corn crop, increasing the price of corn products. And consumers lose from both.

How can we understand these seemingly inconsistent actions? One fact explains both the false advertising rumble and the political alliances. Sugar and corn syrup are substitutes for one another. That is why advertising tarnishing just one harms one set of producers and benefits the other. But because they are substitutes, anything that artificially boosts the price of one benefits the other by increasing its demand, regardless of adverse effects on other groups.

Consider an analogy to ice cream and frozen yogurt. Assume the products are made by different firms. If some protectionist policy raised the price of ice cream, producers of frozen yogurt, a substitute for ice cream, will benefit, because a higher price of ice cream will increase demand for frozen yogurt. And if some government mandate forced up the price of frozen yogurt, producers of ice cream will benefit, because a higher price of frozen yogurt will increase the demand for ice cream. At the same time, ice cream makers would like to tarnish frozen yogurt’s health effects and frozen yogurt makers would like to tarnish ice cream’s health effects, as long as the stain didn’t extend to their competing products.

Replace ice cream protectionism with import quotas that drive up U.S. sugar prices and frozen yogurt mandates with ethanol mandates, and you have the sweetener marketplace.

Those government intrusions have increased U.S. prices of both sugar and corn syrup, raising profits artificially for both groups at the expense of consumers. But those hikes have also driven many candy makers and the jobs they entail out of the U.S., harming those workers and their communities, with parallel effects for other major sweetener users.

Consequently, if we were interested in consumer well-being, we might pay more attention to policies that benefit both sugar and corn syrup producers, at the expense of consumers who must pay substantially higher prices, rather than their false advertising bickering. After all, whether we are talking about sugar or corn syrup, everyone already knows that too much can harm them.

In this, case, we could benefit from Adam Smith’s insight:

The interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. …But … the interest of the consumer is almost constantly sacrificed to that of the producer … who [has] generally an interest to deceive and even oppress the public … to narrow the competition … can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens.

Gary M. Galles is a professor of economics at Pepperdine University and a research fellow at the  Independent Institute. His books include “Lines of Liberty” (2015), “Faulty Premises, Faulty Policies” (2014) and “Apostle of Peace” (2013).

Should’ve Left Markets Alone

HaggenWho’s to blame for the Haggen grocery disaster?

Haggen last week announced it was pulling out of California, Arizona and Nevada, abandoning most of the 146 Albertsons, Vons and Pavilions groceries it bought early this year. Haggen blames Albertsons and has sued it. Plenty of others blame Haggen, saying the small chain had no business buying all those stores.

But I think most of the blame goes to the Federal Trade Commission. It never should have ordered those stores to be sold in the first place.

The FTC has a weird obsession with what it considers monopolies. Whenever two sizable chains merge, some nameless FTC bureaucrat uses some opaque formula – well, hey, nobody really knows whether they use a formula or just flip coins – to come up with some split-the-baby “solution” to prevent the much feared “monopoly.” So when Albertsons decided to buy the Safeway chain, the unknown FTC bureaucrat got busy playing SimCity with the West Coast grocery market. “You can keep the two stores here but you must sell that one over there. …”

In the end, the FTC said that if Albertsons and Safeway wanted to merge, they had to sell 168 stores. Haggen, an 18-store chain in the Pacific Northwest, agreed to take 146 of them, many in California.

Why did these stores have to be sold? Well, the FTC apparently believes that a single owner could exert some kind of neighborhood monopoly power simply by owning two stores that are close to each other. (And no, I can’t explain why Starbucks apparently is exempt from this rule.)

But exactly what kind of monopoly could two neighborhood stores have, anyway? The FTC fears the two stores could raise their prices. But if they did that, what would you do if you were a customer? You’d decide that you are not stuck with only Vons, Albertsons or Pavilions. You can go to Gelson’s, Ralphs, Sprouts, Trader Joe’s, Whole Foods or a newcomer named Grocery Outlet Bargain Market. You can buy groceries when you make your biweekly trip to Costco or Target. You can stop at any convenience store or in nearly any gasoline station on the way home to get an item or two. You can have Amazon deliver groceries to your door if you want. The grocery market is vibrant, chock-full of choices and competitive – now more than ever. Why is the FTC wringing its bureaucratic hands over this phantom monopoly?

What the FTC doesn’t appreciate is that two stores operating close to each other would enjoy economies of scale and – since they operate in the larger, very competitive universe – would be more inclined to lower their prices, not raise them. It would be a benefit to consumers to let stores operate close to each other.

But alas, because of the FTC’s weird obsession with phantom monopolies, it forced Albertsons to unload the stores earlier this year. Things unraveled quickly. Albertsons sued Haggen for allegedly failing to pay for all the inventory. The new Haggen stores were widely knocked for having high prices, and customers deserted. (Proof of the very competitive grocery market.) Haggen sued for $1 billion, claiming Albertsons gave it misleading pricing information. Haggen filed for Chapter 11 early this month, closed 27 stores and then last week decided to walk away from most of the rest of the stores it bought from Albertsons. It’s a disaster.

Funny, but in announcing the decree to sell the stores in January, FTC Chairwoman Edith Ramirez said: “Absent a remedy, this acquisition would likely lead to higher prices and lower quality for supermarket shoppers in 130 communities. This settlement will ensure that consumers in those communities continue to benefit from competition among their local supermarkets.”

Instead, because of the FTC’s “remedy,” supermarket shoppers got higher prices, closed stores and a loss of competition. Workers lost their jobs.

In the Haggen grocery disaster, the most damaging monopoly power was that wielded by the FTC.

Originally published by Fox and Hounds Daily

ditor of the Los Angeles Business Journal