WHAT DOES the federal government spend $2 billion on every year and have trouble giving away? Give yourself full points if you guessed dairy products. The federal government currently spends $2 billion a year to buy surplus butter, cheese and dry milk--altogether, one-tenth of the nation's entire dairy production. Some 2.3 billion pounds of surplus dairy products are stored in government warehouses--the cache from which the Reagan administration doled out cheese, butter and dried milk for the poor. Despite that program, the govern- ment will put into storage more dairy products than come out.

And, unless something is done, the problem will get worse. Dairy price supports are scheduled to rise, from $13.10 to $13.25 per 100 pounds in October, and to $14 in the next fiscal year. At the same time, there is no incentive for dairy farmers to reduce production.

Why has the government allowed such a mess to develop? One reason is that this is an industry in decline, like autos and steel. The dairy industry hasn't grown as fast over the last 20 years as either the population or the economy, and it seems unlikely to do so over the next 20 years. Milk production in 1980 was 128 billion pounds--only a little more than the 123 billion pounds of 1960. Butter and dried milk production declined sharply over these years, in amounts only barely compensated for by rises in production of cheese and ice cream. Demand for dairy products has declined because there are 4 million fewer children in this country than there were 20 years ago, and because adults have taken to avoiding high cholesterol foods.

So, there has naturally been a demand for government to move in and prop up a declining industry that still has a large number of producers with political clout in many constituencies and the capacity to raise large sums of money. Dairy money was the subject of one of the scandals of the Nixon administration, and dairy money continues to be important in congressional politics today. According to Congress Watch, dairy interests have contributed more than $500,000 to incumbent members of Congress in 1981 and 1982; one dairy political action committee raised $1.1 million in 1981 and the first three months of 1982.

It is a drearily familiar pattern: a small but well- organized group with a great economic stake in one issue, an issue that is of relatively small importance to most voters and consumers, lobbies Congress for large subsidies and contributes generously to congressmen who vote for them.

Fortunately, the Reagan administration has taken the consumers' side on dairy subsidy issues, and won one of its first victories when it prevented a rise in support prices in March 1981. Now the administration is urging Congress to hold the current milk support price to $13.10 after Oct. 1, and has supported a bill giving the secretary of agriculture authority to lower the price in 1983 if supply and use don't come into closer balance. An alternative measure, supported by dairy interests, would limit production, which is a desirable goal, and raise prices for consumers, which is not. We don't believe that the issue here is entirely one-sided: lowering subsidies on a long-protected and declining industry will produce some hardship for individuals. But when, as here, the alternative seems to be an expensive and ever-increasing subsidy, plus rising prices to consumers, there really isn't much choice.