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Opinion- Let the Market Run Its Course

November 6, 2018

In response to the Wall Street Journal Article “Thousands of Southerners Planted Trees for Retirement. It Didn’t Work” by Ryan Dezember on October 9, 2018.

 

The article is about two things: 1) supply and demand and 2) unintended consequences. The main point is clear: An excess supply of pine trees created a glut in the market that is now depressing pine tree prices thus hurting investments. How did this excess supply originate? From a government program during the Reagan Administration.

President Reagan and his administration enacted the Conservation Reserve Program in 1986. This program was intended to ease the burden of low prices for farmers during the farm crisis in the 1980’s.

 

As bad as the crisis may have been, it was a natural market process. The boom and bust cycle is always at work in helping maintain a healthy market economy. However, the government decided to interfere in this process.

 

The Reagan administration decided to pay annual payments to farmers for every acre they  planted with trees or grasses. Doing so shifted production away from low price yielding crops towards pine trees in favor of artificially priced payments from the government. These artificial prices propped up the agriculture industry on a faulty foundation. That faulty foundation being artificial prices, not market determined prices. Artificial prices don’t last forever.

 

What people don’t seem to realize is that in the long run, the market will prevail. The market will correct. I believe that the effects of a market correction are somewhat dependent on the amount of interference and artificial pricing imposed by the government. The more the interference, the uglier the correction. Just look at the 2008 crisis whose big culprit was the Clinton Administration’s Community Reinvestment Act. The Conservation Reserve Program confused market signals and today farmers are paying the price.

 

Thirty years later, we are now feeling the effects of the Conservation Reserve Program. People have lost retirement savings, investments are down as much as 45% since 2007, and the largest pension fund in America (California Public Employees’ Retirement System) has lost on a $2bn investment. Amid the losses, it’s worth mentioning that sawmills have been helped with the lower prices.

 

The Conservation Reserve Program was designed to deliver short term aid to farmers. I am not sure whether Reagan economists forecasted the future supply spike that planting 2.2mm acres of pine trees would cause. This situation is a perfect example of why government intervention in markets can be negative. Some government programs are enacted to deliver short term benefits. Often times administrations act with a short time preference. They’ll to put into effect policy that makes them look good and then they’ll leave it to the next administration to clean up the mess.

 

The free market needs to be left alone in order to work properly. Generally, when the government is quick to fix a market slump, more harm than good comes from it. Too often policy makers view the market in the short term. We need to view the market in the long run and consider unintended consequences of our actions today.

 

Basic economics pervades everyday life.

 

 

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