Uncle Sam Will Help Buy You an Alpaca

How the government produces negative unintended consequences

I often bash government. I say it can't do anything better than people in a free market.

But the government is unequalled in producing one thing: negative unintended consequences. Show me a government activity, and I will show you bad results that even the program's advocates probably don't like. Here's one example.

Congressmen say our government should "support and strengthen family-based agriculture."

Abstractly, supporting family-based agriculture sounds good. Government policies often harm small farms by favoring corporate agribusinesses. Government could help family farms by ending the subsidies that mostly go to the big guys. But that doesn't interest the politicians. They prefer to do things like creating tax breaks to encourage livestock breeding.

The tax breaks have led to a boom in alpaca breeding. Twenty-five years ago, there were 150 alpacas in America. Now, there are 150,000.

One website even advertises: "Have Uncle Sam Help You Buy Your Alpacas."

Rose Mogerman raises alpacas in New Jersey, the most densely populated state. "I fell in love with them," she said.

But she fell in love with the tax break first.

"Yes. I have to be honest," she said. "I might have had two. I wouldn't have had 100. … I was looking for a tax shelter."

The Alpaca Breeders Association asked its members, on a scale of 1 to 10, what motivated them to get into alpaca breeding. More than half rated "tax benefits" a 10.

Yes, alpacas are cute. They are also valued for the fiber made from their fleece. But selling the fleece doesn't explain the growth in alpaca raising. At auctions, prices have gotten absurdly high. Half-ownership of one male alpaca sold for $750,000.

This is not necessarily a good thing. Economists at the University of California, Davis warn that the industry is in a speculative bubble. "Alpacas sold today as breeding stock have values wildly in excess of even the most optimistic scenarios based upon current fiber prices and production costs," Tina L. Saitone and Richard J. Sexton write.

"(C)urrent prices are not supportable by economic fundamentals and, thus, are not sustainable," the UC Davis economists write. Their paper was originally published in the Review of Agricultural Economics in 2007 with the great title "Alpaca Lies? Speculative Bubbles in Agriculture."

In other words, people have over-invested, bid up input prices, and produced too many animals given expected future demand for their fleece. As a result, I bet lots of people will lose money. Tax policy is surely a big reason for the over-investment, and an unintended consequence will be bankruptcy for some alpaca breeders.

I'm using "bubble" in a nontechnical sense because, strictly speaking, a bubble is an unsustainable inflation of asset prices inconsistent with economic reality. However, even a wrongheaded tax preference is real and sustainable. So if the tax break is the reason for the alpaca boom, there's really no bubble.

The Alpaca Owners and Breeders Association says the UC Davis study is "seriously flawed (and) full of misinformation," but offered no evidence for that bald assertion. The authors stand by their study, saying that no conflicting studies have been published and that their research is confirmed by a recent price decline.

Government is good at inflating bubbles. The housing bubble was fueled by low interest rates, tax breaks, and subsidies.

Last year, I reported how Congress' ridiculous tax credits stimulated demand for electric golf-carts. Electric vehicles are touted these days as "green" technology and so were given special tax treatment. Unfortunately, the plug-in carts are ultimately connected to coal-fired plants. The National Research Council says electric cars may be worse for the environment than gas-powered cars. That didn't matter to the policy-makers.

As a result of the tax benefit, golf-cart dealers had a field day. One advertised that his $6,000 carts were "free" because of the $6,000 tax credit. Gov. Mike Huckabee got one. His friend got seven. I got one, too.

The deal sure helped the golf-cart industry. My dealer sold 10,000 of them.

At least the golf-cart credit expired. Most government giveaways never go away.

Get ready for the bust of the alpaca bubble. Sadly, Congress will then probably bail out bankrupt alpaca farmers.

John Stossel is host of Stossel on the Fox Business Network. He's the author of Give Me a Break and of Myth, Lies, and Downright Stupidity. To find out more about John Stossel, visit his site at johnstossel.com.

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