by Christopher Westley
The Ludwig von Mises Institute
There are roughly 35 million cattle slaughtered each year in the United States. This means that, in 2003, one in 35 million U.S. cattle were confirmed to have mad cow disease. Infected cattle comprised three millionths of one percent of all cattle, or 0.000003%.
So why the mad cow scare?
In one sense, the scare is legitimate. It reflects an implicit consensus among the body politic that the federal overseers of the U.S. beef industry are not capable of stopping the spread of mad cow once the slightest hint of the disease shows itself on U.S. soil. Given the State's performance in so many other spheres of life—defending the nation from attack on 9/11, managing the space shuttle program, not to mention delivering the mail—perhaps this perception is not as entirely outlandish as it seems at first glance.
But more likely, the scare was blown way out of proportion by those in and out of the federal government who stand to benefit from the continued socialization of U.S. agriculture. Since the mad cow story knocked Michael Jackson from the front pages, it would appear they did a pretty good job.
But they did so at great costs to the economy. Overnight, the scare collapsed the beef export business, eliminated trade between barns and feed lots, reduced the market value of all forms of slaughtered animals, and devastated meat processing plants which have been forced to facilitate furloughs that were unanticipated as recently as three weeks ago. As a result, $200 million worth of meat and meat products remain in refrigeration purgatory within the U.S. and abroad.
These events resulted from one cow and an easily cowed public that accepts on face value the existence of a crisis that is repeated ad infinitum by the ratings-starved yellow journalists at CNN and Fox.
No one doubts that mad cow disease can be deadly. That 145 people died in Britain over several years from consuming infected beef is well known, a figure that, however tragic for the individuals involved, must be compared to the 60 million who likely consumed infected beef. What is less well known is that the British government offered to reimburse farmers for cattle lost to the disease—thus removing any incentive to deal with mad cow in a responsible manner. The moral hazard problems that resulted caused mad cow to spread well beyond what it otherwise would if market forces were allowed to respond to it.
Moral hazard is the creation of perverse incentives in response to public or private policies. It is, for example, a constant concern of the insurance industry. Since insurance companies know that their costs increase whenever their premiums are too low (such as when cheap automobile insurance increases the incentive to drive recklessly), they constantly monitor their costs and prices to keep moral hazard problems to a minimum. If they don't, the increased costs directly affect their profits.
This result is expected when property rights are well defined. There is a huge difference, however, when moral hazard results from government funding and regulation, which happens in the cattle industry when farmers divert resources from satisfying consumers toward satisfying (and influencing) regulators. When this occurs, property rights are weakened because the State dictates its use, often in exchange for legal protection for those who hold title to the regulated property. (Note that no one has considered the possibility of suing the farm that marketed the beef from the infected cow because it acted in compliance with existing USDA regulations.)
In the public sphere, the costs created can be socialized across the entire economy. The bureaucrats implementing moral hazard-creating policies are rarely held in any way responsible for the adverse affects of the policies, especially in terms of income, quality of life, or employment.
Good work … if you can force others to fund it. Just ask any U.S. Department of Agriculture grant recipient at the nearest land-grant university.
But the moral hazard effects do not end there. The USDA's protected workforce has additional perverse incentives to exacerbate the dangers inherent in everyday life, because spreading the myth of a hazardous world is essential to expanding the power, perks, and prestige that flow with additional funding. When viewed in this light, December's mad cow scare, based on a single cow that apparently was infected in Canada, was a Christmas present to those feeding at the USDA's funding trough. They can rest easily, knowing that the wealth transfers in the next farm bill will continue apace.
<BLOCKQUOTE class="ip-ubbcode-quote"><font size="-1">quote:</font><HR>
Table 1: USDA Budget Authority, 2002-2006 (in billions)
2002 $71.325
2003* 71.753
2004* 76.346
2005* 81.558
2006* 82.573
%+ 2002-2006 15.8
(* Estimate)
Source: Office of Management and Budget, Budget of the U.S. Government, FY 2004.
<HR></BLOCKQUOTE>
Only in the public sector can such schemes persist. If a private regulatory agency performed as badly as the USDA, it would go broke. Producers or consumers who demand regulation so as to allow the long-term success and safety of the market would insist on changes. Such automatic feedback mechanisms are one of the primary reasons why markets perform so much better than public sector bureaucracies. Suppliers of regulation that did not adjust would then be weeded out of the market.
This process explains the vast majority of the economic development of the United States. To argue otherwise is to ignore the spontaneous evolution of private regulation that enables trades in venues such as eBay or Amazon.com. To argue otherwise is to be blinded by the role played by Underwriters Laboratories in the electronics industry for over 100 years. Indeed, to argue otherwise is to assume that it was purely by chance that the industrial revolution occurred during an era when most of D.C.'s real estate was marshland.
One might think that the existence of such scares would serve as a reminder that many industries are perfectly capable of regulating themselves, and that those that do minimize moral hazard problems. Instead, they always are manipulated to expand federal control over private property, based on the ridiculous assumption that the cattle industry believes that it is in its long-term interests to market cattle in any condition if it can make a buck from it. Such a process, perhaps more than anything, explains the USDA's socializing effect on the agricultural industry.
This process played itself out again during the mad cow scare when Agriculture Secretary Ann Veneman issued a new edict stating that farmers cannot slaughter for market "downer" cows (those that can't walk), a rule that the Wall Street Journal's Holman Jenkins noted will do nothing to reduce the incidence of mad cow disease. "A lame cow, in almost every instance, will not be one with mad cow," wrote Jenkins. "Likewise, the appearance of health is no proof that a cow hasn't come down with [mad cow disease]."
Nonetheless, Commissar Veneman's Soviet-like decree will serve other purposes. It will provide the false sense of security demanded by masses trained to look to government for such assurances. It will force smaller cattle operations out of the market, thus making the market less competitive and rewarding the political investments of the corporate farm lobby. It will also go far to advance the weakening of property rights of farmers that are crucial to the establishment of a free, functioning, and safe beef industry.
But it will do little to prevent future moral hazard problems from growing into crises, which is the expected result of any social system that weakens property rights over time. Until farmers in particular, and society in general, realize the cruelty of a faceless bureaucracy that claims the right to dictate the use of private assets (which, after all, is the basis of fascism), mad cow scares will continue to be one of the many side effects of a far larger disease.
Until then, mad socialism disease will prove a bigger threat to prosperity and peace, causing many more costs than those associated with mad cow, because property that is used in ways dictated by anyone but private owners is never used in ways that maximize its long-term or social value. Ignorance of this relationship explains many of the crises du jour that dominate the news and allows the disease to spread. A sound economic defense and application of property rights theory is the only proven antidote.
The Ludwig von Mises Institute
There are roughly 35 million cattle slaughtered each year in the United States. This means that, in 2003, one in 35 million U.S. cattle were confirmed to have mad cow disease. Infected cattle comprised three millionths of one percent of all cattle, or 0.000003%.
So why the mad cow scare?
In one sense, the scare is legitimate. It reflects an implicit consensus among the body politic that the federal overseers of the U.S. beef industry are not capable of stopping the spread of mad cow once the slightest hint of the disease shows itself on U.S. soil. Given the State's performance in so many other spheres of life—defending the nation from attack on 9/11, managing the space shuttle program, not to mention delivering the mail—perhaps this perception is not as entirely outlandish as it seems at first glance.
But more likely, the scare was blown way out of proportion by those in and out of the federal government who stand to benefit from the continued socialization of U.S. agriculture. Since the mad cow story knocked Michael Jackson from the front pages, it would appear they did a pretty good job.
But they did so at great costs to the economy. Overnight, the scare collapsed the beef export business, eliminated trade between barns and feed lots, reduced the market value of all forms of slaughtered animals, and devastated meat processing plants which have been forced to facilitate furloughs that were unanticipated as recently as three weeks ago. As a result, $200 million worth of meat and meat products remain in refrigeration purgatory within the U.S. and abroad.
These events resulted from one cow and an easily cowed public that accepts on face value the existence of a crisis that is repeated ad infinitum by the ratings-starved yellow journalists at CNN and Fox.
No one doubts that mad cow disease can be deadly. That 145 people died in Britain over several years from consuming infected beef is well known, a figure that, however tragic for the individuals involved, must be compared to the 60 million who likely consumed infected beef. What is less well known is that the British government offered to reimburse farmers for cattle lost to the disease—thus removing any incentive to deal with mad cow in a responsible manner. The moral hazard problems that resulted caused mad cow to spread well beyond what it otherwise would if market forces were allowed to respond to it.
Moral hazard is the creation of perverse incentives in response to public or private policies. It is, for example, a constant concern of the insurance industry. Since insurance companies know that their costs increase whenever their premiums are too low (such as when cheap automobile insurance increases the incentive to drive recklessly), they constantly monitor their costs and prices to keep moral hazard problems to a minimum. If they don't, the increased costs directly affect their profits.
This result is expected when property rights are well defined. There is a huge difference, however, when moral hazard results from government funding and regulation, which happens in the cattle industry when farmers divert resources from satisfying consumers toward satisfying (and influencing) regulators. When this occurs, property rights are weakened because the State dictates its use, often in exchange for legal protection for those who hold title to the regulated property. (Note that no one has considered the possibility of suing the farm that marketed the beef from the infected cow because it acted in compliance with existing USDA regulations.)
In the public sphere, the costs created can be socialized across the entire economy. The bureaucrats implementing moral hazard-creating policies are rarely held in any way responsible for the adverse affects of the policies, especially in terms of income, quality of life, or employment.
Good work … if you can force others to fund it. Just ask any U.S. Department of Agriculture grant recipient at the nearest land-grant university.
But the moral hazard effects do not end there. The USDA's protected workforce has additional perverse incentives to exacerbate the dangers inherent in everyday life, because spreading the myth of a hazardous world is essential to expanding the power, perks, and prestige that flow with additional funding. When viewed in this light, December's mad cow scare, based on a single cow that apparently was infected in Canada, was a Christmas present to those feeding at the USDA's funding trough. They can rest easily, knowing that the wealth transfers in the next farm bill will continue apace.
<BLOCKQUOTE class="ip-ubbcode-quote"><font size="-1">quote:</font><HR>
Table 1: USDA Budget Authority, 2002-2006 (in billions)
2002 $71.325
2003* 71.753
2004* 76.346
2005* 81.558
2006* 82.573
%+ 2002-2006 15.8
(* Estimate)
Source: Office of Management and Budget, Budget of the U.S. Government, FY 2004.
<HR></BLOCKQUOTE>
Only in the public sector can such schemes persist. If a private regulatory agency performed as badly as the USDA, it would go broke. Producers or consumers who demand regulation so as to allow the long-term success and safety of the market would insist on changes. Such automatic feedback mechanisms are one of the primary reasons why markets perform so much better than public sector bureaucracies. Suppliers of regulation that did not adjust would then be weeded out of the market.
This process explains the vast majority of the economic development of the United States. To argue otherwise is to ignore the spontaneous evolution of private regulation that enables trades in venues such as eBay or Amazon.com. To argue otherwise is to be blinded by the role played by Underwriters Laboratories in the electronics industry for over 100 years. Indeed, to argue otherwise is to assume that it was purely by chance that the industrial revolution occurred during an era when most of D.C.'s real estate was marshland.
One might think that the existence of such scares would serve as a reminder that many industries are perfectly capable of regulating themselves, and that those that do minimize moral hazard problems. Instead, they always are manipulated to expand federal control over private property, based on the ridiculous assumption that the cattle industry believes that it is in its long-term interests to market cattle in any condition if it can make a buck from it. Such a process, perhaps more than anything, explains the USDA's socializing effect on the agricultural industry.
This process played itself out again during the mad cow scare when Agriculture Secretary Ann Veneman issued a new edict stating that farmers cannot slaughter for market "downer" cows (those that can't walk), a rule that the Wall Street Journal's Holman Jenkins noted will do nothing to reduce the incidence of mad cow disease. "A lame cow, in almost every instance, will not be one with mad cow," wrote Jenkins. "Likewise, the appearance of health is no proof that a cow hasn't come down with [mad cow disease]."
Nonetheless, Commissar Veneman's Soviet-like decree will serve other purposes. It will provide the false sense of security demanded by masses trained to look to government for such assurances. It will force smaller cattle operations out of the market, thus making the market less competitive and rewarding the political investments of the corporate farm lobby. It will also go far to advance the weakening of property rights of farmers that are crucial to the establishment of a free, functioning, and safe beef industry.
But it will do little to prevent future moral hazard problems from growing into crises, which is the expected result of any social system that weakens property rights over time. Until farmers in particular, and society in general, realize the cruelty of a faceless bureaucracy that claims the right to dictate the use of private assets (which, after all, is the basis of fascism), mad cow scares will continue to be one of the many side effects of a far larger disease.
Until then, mad socialism disease will prove a bigger threat to prosperity and peace, causing many more costs than those associated with mad cow, because property that is used in ways dictated by anyone but private owners is never used in ways that maximize its long-term or social value. Ignorance of this relationship explains many of the crises du jour that dominate the news and allows the disease to spread. A sound economic defense and application of property rights theory is the only proven antidote.
