This week the United States Department of Agriculture (USDA) announced that it had entered into a consent agreement with Aurora Dairy, one the nation’s largest producer of organic milk. Their milk is sold under house brands by Wal-Mart, Costco, Target, Safeway, and other supermarkets.
Aurora was cited for fraudulently selling milk that really wasn’t organic. Aurora’s widespread violation of the organic standards included raising their cows on feedlots instead of providing grazing space. According to the Cornucopia Institute these “were willful and premeditated violations of the law.”
Alright, so what’s the story here? A dairy company broke the rules and was caught. Well, there is more to it than that. The fact that Aurora (along with other big dairies) was breaking the rules for a long-time was well known and documented by the Cornucopia Institute. Given the crime, the punishment imposed—basically probation—was extraordinarily mild.
The Aurora Dairy incident is one example of a general phenomenon—namely, regulators tend to be captured by the corporate interests that they are regulating.
In economics, Gresham’s Law explains why bad money drives out good money. This law is frequently misunderstood. Detractors of free-markets frequently seek to apply Gresham’s Law to products other than money. Their antipathy to free-markets leads them to claim that the market rewards the lowest common dominator.
Yet, a moment’s reflection shows this to be untrue. Nordstrom peacefully coexists with Wal-Mart; and Hyundai with BMW. Good products and “inferior” products coexist. Consumers decide which products best fits their needs given their preferences and income. Thus, some households choose organic products while many others still choose the less expensive, non-organic alternative.
Gresham’s Law only works when the bad money and the good money are both legal tender. For instance, when both silver quarters and non-silver quarters were circulated side-by-side, the public quickly took the more valuable silver quarters out of circulation. Bad money (non-silver quarters) drove out good money (silver quarters), but that was only because shopkeepers were obligated to treat both silver and non-silver quarters as having the same value.
Back to milk. The USDA organic label acts as a sort of legal tender. If you go to the supermarket and there are two brands of milk both labeled as USDA organic, there would be no apparent reason to pay four dollars a half gallon for one brand when the second brand is only three dollars a half gallon. In your mind, the organic seal would give the impression that both the higher priced milk and the lower priced milk were equivalent products.
Thus, when the USDA awards the organic symbol to dairy companies that are not following the rules, they create the circumstances for bad milk to drive out good milk. The producer who is not cheating finds it very difficult to compete. Good milk producers cannot differentiate themselves by claiming to be “super-organic” since government regulations prohibit such non-sanctioned claims.
I have been a consumer of organic food for almost thirty years. Before there were USDA organic standards, there were private certifying bodies establishing reliable standards for organic food. As a consumer, I know I trusted those private certifying bodies far more than the government’s standard.
Unlike the USDA, these private certifying bodies had simply no incentive to be captured by corporate interests. Why? Simple. Their own credibility was on the line. One scandal like Aurora Dairy and the certifying body would be out of business.
In contrast, no matter how badly the USDA screws up, we can be sure of one thing: The USDA budget will be bigger next year and the taxpayer will pay more.