SOME OF the most inflationary government programs are minor items in the federal budget. Take the sugar loan program passed by the Senate last month but rejected by the House in a close vote last Thursday. Programs like this don't add much to the budget because most of their huge costs is passed on directly to the consumer.
The "sugar caper," as David Stockman once called it, works like this. Domestic producers and processors can use their sugar holdings as collateral for government loans. In the Senate bill, the sugar would be valued initially at 18 cents a pound for the transaction, with a yearly one-half-cent increase. If the market price isn't high enough at the end of the year to make redeeming the sugar worthwhile, the sugar owners can simply keep their money and leave the government holding an expensive bag of unwanted sugar. To keep this from happening, the government would have to use its authority to impose tariffs and fees on foreign sugar imports to keep the domestic price high enough to discourage loan defaults. Since it costs processors about 6 cents for interest and transportation costs, a supported price of about 24 cents would be necessary--about twice the world market price.
Inflating sugar prices also allows producers of competitive sweeteners, like corn syrup, to raise their prices. This expands the lobby that supports the loan program, but it also means that the total cost to the consumer is even larger--the Senate bill is likely to raise food prices by upward of $2 billion a year. The costs don't stop here. To finance the loans the Treasury would have to borrow perhaps $1 billion a year. This adds pressure to the already tight credit market, another push to inflation. It is also likely that, despite inflated prices, some sugar would be forfeited, adding millions to government commodity storage costs.
Why, you may wonder, would a majority of senators and a large minority of congressmen vote for a program like this? Obviously not because they are concerned about the 22 large sugar conglomerates that stand to make several million dollars each from the program--to add to their near-record profits of last year. No, they say they're doing it to protect small sugar farmers from a life on welfare--have you no heart?--and to prevent the formation of a foreign sugar cartel.
The fact is that few jobs would be lost by allowing the market to set sugar prices--most sugar land is readily converted to other crops--and the cost of preserving these is simply too high. Nor is sugar the stuff of which OPEC-like cartels are made--it's produced in too many countries and holding it off the market to get a higher price is too costly. Some inefficient producers and processors may, indeed, go out of business, but companies have no right to have their profitability preserved by costly government programs.