Socialism For the Rich Free Enterprise For the Poor – Why Trickle Down Does Not Work

[farmers_son]

The Alberta Government announced today what amounts to subsidies for the provinces oil and gas companies expected to amount to $172 million in 2009 rising to $512 million in 2013.

See:
http://alberta.ca/home/NewsFrame.cfm?ReleaseID=/acn/200811/24794B6951691-B6CE-E573-6C373FBC2DE15150.html

The rationale is that these royalty breaks or transfer of wealth from taxpayers to the oil/gas sector and private industry will trickle down the economy. Whether we are talking oil/gas companies, banks, packing plants, feedlots or the automobile sector the fact is trickle down does not work. For instance the oil and gas sector has just come off a period of unprecedented profitability. They already have the money to reinvest in the economy. A lack of cash flow and another ½ billion is not the problem.

Investment decisions are based on the expectation of future profits and not on past performance. Money flows or does not flow evenly through the economy but instead is directed or diverted by competitiveness. Competitiveness is how a company like Cargill can be profitable even in a supply or value chain where other participants are losing money. Competitiveness is a means where Cargill and organizations such as Cargill whether we are talking Esso, CIBC or Toyota are able to maintain a profit instead of having all the profit trickle down the value chain to the other sector participants like employees, suppliers, consumers.

The fact is that subsidizing the corporate sector may benefit shareholders but few others. Corporations will continue to make investment decisions based on profit maximization (not a dirty word by the way) and not on what is best for the larger economy or other industry stakeholders.

For instance within 1½ months the larger players in the feedlot sector (including the packing plants) will receive a another government cheque in excess of $1 million dollars. That cheque may not and probably will not trickle down to the cow calf producer but will go to where it can profit the feedlot the most. That may be more land, pay down debt, or divert that million to other divisions within the feedlot like the grain operation and a new combine, silage cutter or trucks. That money may even be directed out of Canada. It will only be used to buy Canadian calves if buying those calves is the most profitable use of the money and buying calves will only be the most profitable use of the money if the price of calves is low enough.

Otherwise the government support dollars will be directed towards other more profitable uses such as paying down debt, possibly buying calves in the U.S. or investing off farm or increasing dividends. All organizations will use what competitive advantage they enjoy to keep money within their organization to fuel further profits or to benefit shareholders rather than trickle down the value chain beyond the organization.

There is a discussion of trickle down at:
http://en.wikipedia.org/wiki/Trickle-down_economics

There is a good discussion of competitiveness at:
http://www.ces.purdue.edu/extmedia/ec/ec-722.pdf

[Sawbones]

Well said but what is your response to the situation rather than point it out to the rest of us
A resolution has been passed at our local ABP meeting to look into the feasibility of re-opening the Balzac plant. There are investors (Koreans, Chinese, Europeans etc) who may look at the plan and bring investment dollars. We have a number of producer groups (value chains) who could use this facility (Canada Gold, Canadian Legacy Partners, Border Beef)to develop markets. There have been 1000 producers in this province who have invested in excess of $40,000,000 dollars to try and get control of their marketing options. There are also over 22,000 producers who have sat on their wallet and complained. I totally agree that there is no "TRICKLE DOWN AFFECT" and hopefully supporting another marketing alternative will be a positive response that both you and GRASSFARMER can agree upon

[kato]

Trickle down effect does not exist.

Of the people I've ever known, poor or rich, I've found that the rich ones will lose much more sleep over losing a bit of money than the poor ones ever will over money they never had. The very reason the rich are rich is because accumulation of wealth is their priority. Allowing that wealth to 'trickle down' goes against their very nature. It's not going to happen.

Now, the trickle up effect is very real. Give a poor man some money, and he will use it to better his quality of life, which is another way of saying he'll spend it. That's what drives an economy. (No comments on spending it on beer please.... that's not my point.)

Waiting for wealthy people or corporations to share is a waste of time.

[grassfarmer]

Farmers_son, I would not agree that trickle down doesn't work. It does in some situations - a good example being Governments giving handouts to farmers/ranchers. This money usually finds it's way through the farmers hands pretty quick into the pockets of his local truck/ machinery dealership. The trickle down from the oil sector contributes greatly to the truck dealerships sales in my local town.
Trickle down of profits from most agricultural processors and retailers certainly does not appear to trickle back to primary producers.
The huge profits made by the likes of Cargill comes more from monopoly control of the marketplace than through competitiveness. When you are so big, control so much and can bully nearly everyone you don't need to be that competitive to be successful - who after all would you fear as a competitor?
Why grudge the feedlots money and complain it won't trickle down to cow/calf producers? cow-calf producers will get their own proportionate checks if they comply.

Sawbones,I hope your resolution on the Balzac plant goes somewhere. It certainly would be good if there were this extra element of packing capacity, preferably producer controlled. We need competition in the packing sector that is the only thing that will increase live cattle prices but I think that it will take Government will and intervention to bring about the situation where the Balzac plant can survive. The goldfish won't swim for long in a tank with 2 hungry sharks!

[Sawbones]

I am concerned about the support for the proposal of developing an "incubator" for value chains so that we can control slaughter price and guarantee access. There was no appetite from our delegates but there certainly was a positive response from people attending the meeting. Border Beef has 288 shareholders with over 100,000 mother cows so a check-off in excess of $300,000. It has been approached by Beef Industry Alliance but at the present time will try to work with ABP. They've spent over $3,000,000 over the past 5 years trying to swim with the sharks but unless you can guarantee delivery and price, there is no retailer that will take you seriously. We need producers to talk to their ABP reps to support finding an alternative slaughter solution. Otherwise, the only Canadian products that will be sitting on the American shelves will be XL or Cargill with no premium given to producers. COOL can be used to our advantage but only if we as producers receive some of the revenue. Plants in the US may not want to sort but in Canada they are already sorted and we should share in the premium

[rkaiser]

Was thinking today about the twist that the dropping loonie has had on the eastern Canadian beef trade. Up until about a month ago, beef imports from the US to eastern Canada were at or near record levels. Wonder who is making that extra 20% now. Beef from US had to be priced fairly close to landed price from Cargill in High River and now that price has to be significantly less.

There is money to be made in this industry if we can get away from the current system.

I agree that trickle down is an illusion, except for a bit of trickle caused by income tax implications.

Should the plant at Balzac be opened as a custom kill plant for those of us who have invested in non conventional marketing, everyone would eventually gain.

The only groups that will intentionally attempt to drive UP the price of beef are the independents with who are connected to the primary producer.

[grassfarmer]

Sawbones, I'm not surprised your delegates had little appetite for your suggestion - they are part of an organisation that is steeped in the status quo with no interest in change. They had the audacity in our zone to vigorously defend packer ownership of fed cattle despite it's detrimental effect on cattle prices - this appears to be a policy ABP supports.
I think Border Beef is wasting time on ABP, they will not help you and you are fooling yourself if you think they will change their spots. An example of wasting time would be talking to your ABP rep and expecting them to support alternative slaughter solution. This has been an issue for 5 years now and if ABP delegates aren't aware of it already they shouldn't be in the positions they occupy. They do know about it but prefer the status quo - 2 packers, the US market and bankrupt Canadian beef producers. The Fall producer meetings are past for another year - producers now have no opportunity to call for change for another year. Even then if you take a resolution along to next years meetings goodness knows when or if it will be supported by the directors - this is the democratic process of ABP - a rotten, broken system. Unfortunately producer complacency has re-elected this lot as our representatives by default for another year. More's the pity.