Monday, February 7, 2011

Gub-Ment Chee

The United States Government used to hand out blocks of orange cheese to the needy and still does, on occasion.

Government Cheese, Gubment Cheese, Gub-ment Chee, call it what you will, it exists, or did exist, until fairly recently.

My late Sister used to get Government Cheese when she ran a day-care program from her home.  She didn't have a lot of money, and she qualified for bricks of this cheese every month, which she described as bright orange and coming in five pound loafs.

She served every cheese dish imaginable, she said, from macaroni and cheese, to toasted cheese sandwiches, to cheese dogs, to whatever else she cold think of.  She was awash in a sea of cheese - a cornucopia of orange.

Why does the government do this (or did this) and is it sound economics?  Dairy price supports have been around for decades.  The idea is to help out the farmers by stabilizing the price of dairy products so they don't go broke.  Of course, this means a lot of people are in the Dairy business - perhaps more than demand would warrant.

And one way of supporting prices was to buy up huge amounts of cheese and butter.  How huge?  Huge.  When I was in Washington, I recall reading about a fire at a government-run warehouse in Maryland (as I recall).  The warehouse was filled with stockpiled butter - tons and tons of it - and when it caught fire, the butter started burning.  The entire warehouse melted down into a twisted wreckage of burnt timbers, bent steel beams and millions of gallons of melted and coagulated butter.

What a mess to clean up, right?  How much would they have to pay to do that?  Nothing, as it turns out.  Companies bid against each other for the right to clean up the coagulated burnt butter- so it could be processed and fed to hogs and put in other animal feeds.  A mountain of government butter represents millions of dollars of protein!

So is there harm in these price support programs?  Perhaps not.  Even hinting that price supports might be bad is a sure way to get lynched in Dairy Country.  But perhaps the support of dairy prices is responsible for our dairy-centric diet in this country, as well as the preponderance of bland dairy products (orange cheese being the worst offender).  If you can crank out a lot of cheese, factory-style, you'll make more in subsidies than if you make artisan cheeses.

But what about giving away the cheese to the poor and needy?  At first, this seems like a swell solution.  You support the farmers on one hand, and hand out cheese to the needy on the other - a win-win for everyone.

But when you hand someone a 5-lb block of cheese for free, that person stops buying cheese.  And thus the demand for cheese drops, of course, and that in turn requires more price subsidies in terms of buying up more surplus cheese, which in turn has to be handed out to more people, such as my late Sister, which in turn depresses prices further.

The net result is that the Government gets into the cheese business in a big way, and eventually becomes the largest single buyer of cheese.  The market for this commodity becomes skewed, in terms of pricing, variety, and quantity.  Cheese - bland orange cheese - becomes a big part of our diet, and people start keeling over of heart attacks.

But of course, Gub-Ment Chee is just an example of the trend of good intentions gone awry.  The idea of government backing of mortgages seemed like a swell way to get more people into their own homes (the American Dream of Granite Counter-tops) and help builders, developers, Realtors, and local tax authorities at the same time.

But before long, the Government ends up the primary mortgage holder - or guarantor - in the country (guaranteeing 90% of mortgages today).  Suddenly, rather than applying to a Bank for a mortgage, we are applying to the FHA - in effect.

And unfortunately, every slice of Gub-Ment Chee has its proponents and its addicts.  If you pull the rug out from under these folks, they will likely starve.  Farmers have invested millions of dollars each in mega-dairy operations that rely on price subsidies to survive.  You cannot simply eliminate price subsidies overnight, without forcing a lot of them out of business.  Some means of phasing out these programs would have to be implemented, over time.  It would be akin to canceling the home mortgage interest deduction overnight - which would result in a lot of people losing their houses.

And that, in a nutshell, is the problem with Government programs that distort market values.  People learn to depend on these distortions when making financial decisions.  Once you create market distortions in pricing, you become a junkie for them - and are reliant on them more and more.  You cannot go "cold turkey" when it comes to price supports or mortgage guarantees.

Perhaps we need a 12-step program.  The first step is admitting we have a problem...

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