History of Government Intervention in Tobacco Markets Essay

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Tobacco industry has seen significant government intervention since at least the New Deal. Tobacco farmers have typically received subsidies for their crops and the benefits of marijuana prohibition but in more decent decades they have also faced increasingly strict controls on the sale of tobacco products. Prior to the era of restrictive cigarette sales, and buoyed by subsidies, tobacco was one of the more lucrative products to farm in the United States, a situation that has changed of late. The most recent move on the part of the government was the Transitional Tobacco Payment Program, which as the name implies was intended to provide incentive for farmers to transition to other crops (Mccord, 2014).

The moves on the part of government have reflected different roles that government has played. The subsidies reflected the role that government plays in promoting agriculture, not just promoting a farming lifestyle but ensuring a certain degree of security in the production of agricultural products. Taxation is more a reflection of fiscal policy, which typically views tobacco products as having a low price elasticity of demand, and therefore a lucrative target for taxation. The government's role in health policy is reflected in restrictions on the sale of tobacco, which have served to drive down demand for cigarettes in the past few decades.

This paper will examine the role that the federal government has played in the tobacco industry, beginning with the New Deal, and through the current situation where tobacco farmers have lost the subsidies that formerly protected their livelihoods.

II. Subsidies for the Tobacco Industry

Government intervention in the tobacco market began in 1933, in the midst of the Great Depression. At the time, major tobacco manufacturers held significant bargaining power over individual farmers, and over small farming groups that were seeking to market their product. As a result of this bargaining power, major manufacturers were able to negotiate prices that were in excess of the cost of production. In basic economics, the long-run effect of this would be to remove some farmers from the market, but of course many farmers felt that there were challenges with exiting the business. The process of reducing supply was going to happen anyway, but it was going to happen slowly and painfully.

Hahn (2011) notes that tobacco farmers were therefore willing to allow for some government intervention in the tobacco industry, in order to guarantee that they would be able to live from the proceeds of their farming (Hahn, 2011). Building on some pre-existing legal structures, the New Deal-era laws finally gave tobacco farmers the price controls they had been seeking since the end of World War One. Hahn (2011) notes that one of the issues farmers faced was the lengthy process of curing and warehousing for tobacco meant that manufacturers were able to insulate themselves somewhat from production variability, and could store product until needed, increasing their bargaining power.

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Producers, needing cash to live on and to pay for the next years' farming, had no such luxury.

So it was that the federal government became involved at the behest of the tobacco farmers. Tobacco was one of the crops in the Agricultural Adjustment Act, and the trade-off was that agricultural production of tobacco would be reduced, in exchange for subsidies that guaranteed a price floor for farmers. The quotas forced some farmers to exit the business, and the reduction in supply would have increased prices anyway, but the price floor offered a guarantee of a certain price to the farmer, regardless of production cost and regardless of bargaining power with the major cigarette manufacturers. It was this system that remained in place for decades.

The end of the subsidies came in 2004, though the Transitional Tobacco Payment Program offered funding for the next ten years thereafter to farmers who were exiting the tobacco business as the result of losing their subsidies. Despite the restrictions on tobacco sales and the high taxation, the business is still lucrative and major cigarette manufacturers still hold substantial bargaining power over tobacco farmers, so many have left the industry with the end of the subsidies, as other crops have proven to be more lucrative (Bomey, 2015).

The end of the subsidies meant the end of the price floor. This deregulation meant that in all likelihood there would be overcapacity in the marketplace. For decades, tobacco farming was incredibly lucrative because of the price floor. As production techniques improved, so did yields, and farmers could produce for a cost well under the floor, ensuring that any farmer in the market would yield a high profit, in particular on large corporate farms with lower marginal costs (Shillinger, 1995). With the end of the subsidies, the manufacturers would have their bargaining power restored, and this was inevitably going to drive down prices paid to farmers. As such, some of the farmers -- particularly those with high cost structures -- would be flushed from the market, able to make more money producing other crops, and that is exactly what has happened.

With no subsidies, the farmers face an uncertain environment where they do not know how much they will be paid for their production, and that uncertainty makes it difficult to plan production levels, investment in the industry, and it makes it difficult for farmers to know whether or not they will be able to earn a living -- many farmers have left the industry because of this uncertainty.

III. Taxing Tobacco

In the past few decades, there has been an increase on restrictions surrounding the sale of tobacco. Some of the restrictions have….....

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Bomey, N. (2015). Thousands of farmers stopped growing tobacco after deregulation payouts. USA Today. Retrieved October 17, 2016 from http://www.usatoday.com/story/money/2015/09/02/thousands-farmers-stopped-growing-tobacco-after-deregulation-payouts/32115163/

Cummings, K. (2002). Programs and policies to discourage the use of tobacco products. Oncogene. Vol 21 (48) 7349-7364.

Hahn, B. (2011) Making Tobacco Bright. Johns Hopkin University Press: Baltimore.

Herzog, L. (2013) Markets. Stanford Encyclopedia of Philosophy. Retrieved October 17, 2016 from http://plato.stanford.edu/entries/markets/#Jusmar

McCord, E. (2014) Tobacco farmers lose longtime safety net. NPR. Retrieved October 17, 2016 from http://www.npr.org/2014/10/24/357947259/tobacco-farmers-lose-longtime-safety-net

Perucic, A. (2012). The demand for cigarettes and other tobacco products. World Health Organization. Retrieved October 17, 2016 from http://www.who.int/tobacco/economics/meetings/dublin_demand_for_tob_feb2012.pdf

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