Mad Cow crisis holds surprising lessons

Hey there, time traveller!
This article was published 1/6/2017 (536 days ago), so information in it may no longer be current.

The BSE crisis teaches us lessons to this day.

For most of us, the year 2003 is of no importance. However, an event occurred then that holds useful lessons in the current political and economic environment.

In May that year, a single cow in Alberta tested positive for bovine spongiform encephalopathy, also known as BSE or Mad Cow Disease. This prompted more than 40 countries, including the United States, to close their borders to imports of Canadian cattle and boxed beef. What triggered the panic is that in England, BSE, a disease believed confined to animals, appeared to have leaped the species barrier. Evidence suggested that with the onset of BSE there occurred a spike in Creutzfeldt-Jakob or brain-wasting disease among humans.

The closing of the U.S. border to Canadian beef triggered a crisis. Beef production requires a continuous flow from farmer to slaughter to retail. As soon as something interrupts that cycle, everything backs up and farmers must continue feeding herds they had expected to sell. Farm losses quickly mounted.

The closure lasted more than three years and the federal and provincial governments spent almost $2 billion in farm assistance. Canadians, for their part, stepped up, encouraged by low retail prices, and domestic consumption of beef sales soared. But binge barbeques could not compensate for the loss in export sales.

Lesson one — Canada’s income and wealth depend critically on exports and we must defend free trade with sophistication. While the Canadian farmer lost, so too did the U.S. consumer, who faced higher prices for beef.

When certain provincial politicians and other bobbleheads on the political dashboard threaten retaliation to U.S. bombast on trade, they are playing with fire and are out of their depth. Pointing out the reciprocal losses that will result for both sides in limiting free trade and waging battles in the courts is painful and slow, but the only way forward.

The BSE crisis persisted well past its best before date. October 2003 came and went. The border started to open to young cows in 2004, but only fully opened in 2007.

What happened? With the U.S. president and Congress behind opening the border, why did it remain closed? Well, it was a federal judge who maintained the border closure, using the same process that has stymied U.S. President Donald Trump’s immigration ban.

R-Calf was a minor cattle producers group in Montana that wanted to keep Canadian beef out of the U.S., so that prices would remain high and they could increase their profits. It persuaded a federal judge to maintain the ban in the face of a president who promised an early reopening.

Two lessons flow from this experience. First, because of the checks and balances in the U.S. political system, economic policy is marked by uncertainty. Second, the judge accepted the ban under the argument that BSE posed a health hazard.

Experts had quickly dismissed the link between very low incidence of BSE in Canada and threats to human health. Threats to health and an "overabundance of caution" are common pretexts for undermining free trade.

China has only just lifted its ban on imported beef originally imposed because of the supposed health hazards of BSE.

Lest we become smug about the superiority of our parliamentary system to make swift decisions and respond to science, consider the typical federal-provincial response on almost any issue.

The very large payout to famers and industry triggered by the BSE crisis required evaluation. And so, some 11 years ago, I visited a dairy farm, one of several cattle operations that was part of a study commissioned by the federal government. I was privileged to view financial statements, showing 30 years of financial ups and downs with the last two years revealing operations on the cusp of collapse.

Not so at this dairy farm. As I listened to the complaints that the border closing had killed their exports of bull semen, the rest of the financial statements revealed year-over-year of galloping profits. The reason was simple — these farmers enjoyed the artificial monopoly created by supply management.

This is a form of what economists call "rent-seeking," which is just one of the many guises of crony-capitalism that mark our economy. For some reason, lost in the mists of history, dairy farmers have convinced governments that they uniquely need protection from imported milk and cheese. Further, only a small number of farmers deserve to be part of the club of eligible producers since this is the only way to assure stable and high-quality production.

This lesson is more a reminder. Whenever one confronts the noun "association," or phrases such as "the Association of…" or the "XYZ Association" it is time for consumers and taxpayers to clutch their wallets. A major, if not sole, purpose of these groups is to persuade government to twist the rules to benefit a small minority at the expense of the large majority.

The events starting in May 2003 are particularly rich with insights into the complexity of economic policy in our times. We ignore these lessons at our peril.

Gregory Mason is an associate professor of economics at the University of Manitoba and a senior consultant at PRA Inc. His views are his own.

gregorymason.ca