December, 1995

Fruits of Thought

Sense And Sensibility Of The PACA

Over the past several months, as the debate over the PACA continued, I have occasionally weighed in with some analysis. Yet, on what is in many ways the most important component of PACA, namely, the PACA trust, I have been basically silent. Silence does not come naturally to me, and the decision to hold my tongue was motivated by a sense that the role of the trade magazine has to be, at least in part, to serve as an advocate for the interests of that trade. After all, there are many other interests that will speak loudly before the councils of government to obtain special privileges. For the produce industry not to do the same is really unilateral disarmament.

Now that the new PACA bill is the law of the land, however, I think it important for all of us to understand that, even though we may benefit, the PACA trust exemplifies a way of using government that is often used against the produce industry and is part and parcel of a system that truly impoverishes us all.

PACA itself is, in theory, at least, unobjectionable to most thinking people. It is nothing more than a series of rules by which the produce industry conducts business and a related dispute resolution facility to settle the problems that arise in the conduct of the trade. One can argue, and many have, that the particular rules of PACA – good delivery standards, prompt payment, re-consignment policy, etc. – lean a little too much one way or the other.

In thinking about the implications for good government, it is important to understand that the basic rules of PACA, unlike the trust provisions, affect only those conducting trade in produce, and all these people are able to lobby to insure their needs are addressed.

The PACA trust, though, is a different story. Thinking only of ourselves, it is easy to think of the PACA trust as simple fairness. If a produce vendor sells some fruit to a receiver, isn’t it only right that if money is available, the receiver should pay?

Yet, the truth is that the PACA trust is more than problematic. Remember that the PACA trust has no impact unless the buyer does not have enough money to pay all his debts. Then one realizes the problem: Which of the buyer’s other vendors will not get paid because of the PACA trust? Think about the situation without the PACA trust: Imagine a buyer opens for business and purchases, on credit, a thousand dollars worth of produce and a thousand dollars worth of bakery products. Unfortunately, business goes poorly and this buyer realizes only $1,000 worth of cash from selling the products and decides to liquidate. For the sake of simplicity, assume that the business has no other expenses.

In the absence of the PACA trust, the law would stand this way: Two vendors both have unsecured, but legitimate, claims against the business. The claims total $2,000, one thousand each for the produce vendor and the bakery vendor, but since the available cash totals only $1,000, each vendor will get paid $500 or 50 cents on the dollar.

Now under the PACA trust, the produce vendor’s bill will get paid in full and the bakery vendor will get nothing. I think it fair to say that no sensible business person can think of any reason why this is just.

How is it that our political system brings us to this end? Well, if in real life, the story was just as I detailed, it wouldn’t exist. The association that represents baked good manufacturers would rise up and oppose PACA bitterly and either the PACA trust would be eliminated or baked goods would come to be covered by a similar legal arrangement.

In the real world, however, the example plays out differently. Perhaps 10 percent of a given store’s purchases for resale may be produce and, perhaps a third of the store’s total purchases might be products for resale, with the rest being things like rent, wages, advertising, office supplies, legal bills, garbage pick-up, etc. So, if a retail store, for example, goes under, in all likelihood, maybe three percent of unsecured debt might be owed to produce vendors.

What this all means is that when the produce vendors get paid in full, the payment will come not at the expense of one identifiable interest – as in the example with the baked goods – but rather, in very small amounts, from thousands of tiny interests. So, for example, the fellow who sells photocopy paper to the store, who would have gotten back 47 cents on the dollar, instead gets back 46 cents on the dollar.

In other words, the PACA trust is an example of a program that provides concentrated benefits – in this case, for the produce vendor – and diffuse costs – in this case, to baked goods manufacturers, photocopy paper vendors and others. Note, though, that it does not, on the whole, increase our national wealth. Note also that creating programs with concentrated benefits and diffuse costs is common in our system and costs everyone money.

Every time you buy milk, for example, you are overpaying for it because of federal milk price supports. Yet, as the election campaign progresses, it is a good bet that someone running for office will propose or promise to raise the cost of milk just before the election.

You might think that, in a democracy, this would be bad politics. After all there are only a few thousand milk producers and hundreds of millions of milk consumers. Yet, because the benefits of higher milk prices are so concentrated – it makes a big difference to the income of every dairy farmer – the promise will be noted. On the other hand, milk is so insignificant a portion of a typical consumer’s budget that it is highly unlikely that many consumers will even notice such a pledge.

Business people today face a dilemma in relation to the federal government. Many federal programs are not mechanisms to improve the general welfare. They are little more than methods by which particular industries take a little money from the pockets of other industries.

The new PACA bill is the law now. As an industry we celebrate. Yet we should remind ourselves that we have won a great victory but in a war which impoverishes our nation and diminishes us all.  pb