Pointless Politicization and Mandated Monopoly: The Case of USDA Checkoff Programs
Government and Business Are Bad Bedfellows.
Government’s power to intervene in the economy motivates companies and industries to advance their business interests through government fiat. This is why government’s coercive powers should be used cautiously, and only when well-founded concerns of public safety are at stake, because each additional intervention increases the likelihood that it will be twisted to serve some special interest.
This phenomenon is called regulatory capture — the counter-intuitive result that regulations often benefit regulated firms by protecting them from competitors. Regulatory capture becomes especially clear when government officials favor one company or industry over another, creating governmentally-granted privilege. The US Department of Agriculture “checkoff programs” are one such example of how business can be politicized to privilege one firm at the expense of another.
What’s a Checkoff Program?
Checkoff programs assess small taxes on agricultural goods, and the revenue is used by industry Research and Promotion Boards to create marketing campaigns to stimulate additional consumer demand. Checkoff programs are responsible for famous taglines like: “Beef, It’s What’s For Dinner”, “Got Milk?”, and “The Incredible, Edible Egg.” The USDA currently operates these programs in 22 industries, ranging from beef to blueberries and milk to mangoes, collecting hundreds of millions of dollars in taxes each year.
Checkoff programs create government-sponsored industry cartels. They are immune to anti-trust law because they are created via the government’s regulatory authority. If private businesses tried to do the same thing they’d be prosecuted pretty quickly — imagine if gas stations like Shell, Speedway, and Sunoco got together and agreed to raise the price of gasoline to fund an “Isn’t Driving Wonderful?” marketing campaign.
Proponents argue these programs are necessary because of free rider problems in advertising for generic goods. Consumers find it difficult to differentiate between agricultural products — it’s tough to tell the difference in the quality of an egg from Farm A from an egg from Farm B — which makes it hard for producers to benefit from advertising their products. The argument is that if one producer advertises the awesomeness of eggs, stimulating extra customer demand, other producers will likely also benefit without paying the cost. The solution to this supposed problem is to use the authority of government to tax all producers to contribute to a common marketing fund that is overseen by an industry board.
So What’s Wrong With Generic Marketing?
The reasoning behind the free rider problem in “generic marketing” completely misses the fact that companies voluntarily pay for brand-specific advertising every day. Establishing a brand is critically important because many consumers make purchasing decisions based on a company’s reputation for quality. Think of the breakfast cereal aisle in your local grocery store. Every name-brand cereal has its own low-cost alternative — Fruit Loops™ has Fruity Hoops™, Rice Krispies™ has Crispy Rice™, and Crispix™ has Crisp6™. This is because different consumers demand different qualities of goods. Some value quality and go for name-brand products, others value low prices and opt for cheaper alternatives. Generic marketing fails to make these differentiations.
Furthermore, checkoff programs advertise to consumers to supposedly benefit farmers. This ignores the fact that in most cases farmers don’t sell directly to consumers. Intermediate producers refine and differentiate farmers’ produce into different brands that cater to a diverse array of consumer tastes. Because intermediate producers control the quality of the final product, they are the ones who should market to consumers, not farmers. Generic marketing ignores all the changes the agricultural product goes through on its way to consumers.
The only circumstance in which it makes sense for a farmer to market directly to the consumer is when the farmer is a monopolist. That is exactly what checkoff programs do — approximate a monopoly.
Economic Politicization Leads to Regulators Picking Winners and Losers
But at least the generic marketing paid for by checkoff programs ensures all agricultural producers are benefited equally. Right?
Not quite.
The characteristics of agricultural producers can vary a lot, even within the same industry. Some are giant, highly-efficient, factory-style farms producing massive amounts of food to feed a hungry world. Others are smaller, less-efficient, family-run operations struggling to compete with the corporate farms or else serving niche markets. The level of support of agricultural producers for checkoff programs is as varied as the different kinds of farms. Yet all are forced to pay, and that’s where problems start.
Before Congress repealed Country of Origin Labeling laws for beef late last year, the beef checkoff program set the interests of small cattle ranchers against large ranchers by using checkoff funds to lobby against the Country of Origin Labeling mandate, presumably on behalf of bigger beef producers who disliked the law. The smaller ranchers favored Country of Origin Labeling requirements because it helped differentiate their products from those sold by larger firms. The taxes that small producers contributed to the checkoff program were used to lobby regulators against the small producers’ interest.
Checkoff conflict is not confined to beef. Our colleague, Chris Koopman, recently discussed how the American Egg Board waged a multi-year propaganda campaign to keep Just Mayo, an egg-free mayonnaise, from grocery store shelves. The Egg Board even lobbied the FDA to maintain its regulations that restrict mayonnaise to be made from eggs. This was a clear attempt to prevent a competitor from entering their market — the very definition of regulatory capture.
How Is This Even Legal?
Since the late 1980s some farmers have challenged checkoff programs, arguing their First Amendment rights are violated by forcing them to associate with competitors and compelling them to fund marketing they don’t agree with. These lawsuits have failed, not because these programs don’t compel speech, but because the Supreme Court decided that advertising done by industry boards should be considered “government speech.”
In the 1997 Glickman v. Wileman Brothers & Elliot decision the Supreme Court overrode the First Amendment challenges of a group of California tree fruit farmers, upholding the checkoff program as an economic regulation deemed necessary by Congress. Justice John Paul Stevens delivering the Court’s opinion wrote:
“The mere fact that one or more producers ‘do not wish to foster’ generic advertising of their product is not a sufficient reason for overriding the judgement of the majority of the market participants, bureaucrats, and legislators who have concluded that such programs are beneficial.”
Justice Antonin Scalia, who in the Glickman v. Wileman Brothers & Elliot case said that the rationale for checkoff programs “sounds like something time-warped out of the 1930's,” nevertheless wrote the majority opinion in the 2004 Johanns v. Livestock Marketing Association, asserting:
“Compelled funding of government speech does not alone raise First Amendment concerns . . . citizens may challenge compelled support of private speech, but have no First Amendment right not to fund government speech.”
Compelled Speech Is a Lucrative Business
Given the relatively small per-unit taxes, the amount of money collected by checkoff programs is astonishing. Over $700 million was collected across the 22 programs in 2014. The United Soybean Board almost topped $110 million by itself. Meanwhile, the Cattlemen’s Beef Board has spent over $2.2 billion during the last three decades. We can understand why soybeans might be a hard sell, but you wouldn’t think that convincing Americans to eat hamburgers and steak would be so hard.
Is There Any Hope of Change?
There have been a few faint glimmers.
· Since 1949, the Raisin Administrative Committee (yes, there is such a thing) has been enforced by a federal marketing order, similar to checkoff programs. In 2015 the Supreme Court ruled in Horne et al. v. Department of Agriculture that the Committee’s attempt to seize 47 percent of farmer Marvin Horne’s produce was an unconstitutional taking of property.
· This follows the 2011 termination of the California Tree Fruit Agreement — the same law which was challenged in Glickman v. Wileman Brothers & Elliot. The federal marketing order required regular reauthorizations and failed to win a supermajority vote of producers to remain in effect.
Despite these promising developments, the future remains fairly bleak. There are countless state-level checkoff programs in addition to the 22 federal programs. Furthermore, the USDA regards the outcome of the Horne et al. case to be only applicable to the Raisin Administrative Committee and is proceeding with business as usual — i.e.: institutionalized collusion — for the other programs.
A brief ray of hope appeared in 2012 when Senator Jim DeMint introduced an amendment to the Farm Bill that would make checkoff programs voluntary. This actually would be in the original spirit of checkoff programs, since the term “checkoff” initially referred to voluntary contributions signaled by check-marking a box on a form. But DeMint’s amendment was quickly and vigorously opposed by the agricultural industry boards and subsequently snuffed out.
As it stands, agricultural cartels will continue to distribute government-sponsored privilege to favored companies. Proponents claim that without the checkoff programs free riding will run rampant, but the truth is that checkoff programs create forced riding, dragging other companies along for a ride that doesn’t benefit them. It makes you wonder — if the benefits that industry boards provide are so great, why do they have to force farmers to be part of their club?
About the Authors:
Scott Eastman is Program Coordinator for the Project for the Study of American Capitalism at the Mercatus Center at George Mason University. Michael Farren is a Research Fellow with the same program.
