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05/04/2008

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Natalio Ruiz

There is quite a commotion here in Argentina about farm taxes. They reach 45% of the export sale (plus other taxes such as income taxes afterwards).

Ben Friedman

I would like to point out that farmers in many developing countries do receive subsidies of a sort, although inconsistently delivered and of questionable efficacy: official development assistance.

While not redistributive at the country-level, ODA in the form of projects, grants, training, etc. does serve to subsidize farmers at the cost level (seed, fertilizer, capital equipment, human capacity, etc.) as well as purports to increase efficiency and productivity.

I suppose an argument could be made that these subsidies from foreign sources offset at least some of the taxation to farmers in developing countries ...

Vivek T

Taxing of farmers is as true of India as of China, Mexico as well as Argentina, Egypt as well as South Africa, and similarly for the other poorer nations. In all these countries, farmers are a significant fraction of their populations, and they form a majority in many, such as India and China.


Just a small correction on the above quote. While it's true that about 60+% of India's population is directly or indirectly involved with farming, they do not have to pay tax on income earned directly from agriculture. e.g. Selling tomatoes is tax free .. selling ketchup is not. However, it's not all that much of an incentive. Most farms are very small (1-3 acres) and are mainly used for subsistence farming.

Kathryn

One observation about developing countries - political instability in the rural (agricultural) hinterlands does not threaten regime survival in the same way that instability in a large city does. Given distance and dispersal, it is far harder for opposition to solidify into any cohesive protest movement in rural areas, but urban areas are very conducive to all kinds of political organization. So agricultural riots generally threaten only the country side, while urban food riots threaten the government. I don't find it at all surprising which gets the attention of developing world governments, particularly given their frequent lack of effective democracy.

A lot of China's recent domestic politics is driven by this reality: even the central government's attempts to equalize incomes and expand development from the coast in practice enable coastal elites to expropriate farmland (often with little compensation to the farmers due to local corruption) for further industrial expansion. The central government is much more focused on weakening rival urban power centers (e.g.: Shanghai) and keeping the financial sector from melting down than satisfying widespread complaints from the inland peasantry, instead choosing to ignore rural protests until they become organized or widespread enough to be worth clamping down. (Not to single out China, but it is a pretty good recent example.)

Winton Bates

You say every rich country heavily subsidizes their farmers, no matter how small the agricultural sectors. You seem to be forgetting about Australia and some other relatively high income agricultural exporting countries.

Regarding your general point, Mancur Olson's argument that small groups have disproportionate organizational power for collective action is relevant. It seems to me that the transactions costs in organizing collective action are generally likely to be lower in industries that are geographically concentrated.

Political Umpire

Mr Bates mentions Australia; he might also have cited its neighbour New Zealand, which is a wealthy country (at least, one with a high standard of living even if a traditionally low currency might suggest otherwise) which indeed has traditionally had a strong agricultural economy. Until 1984 it was massively subsidised and protected; thereafter a sweeping reform was introduced removing largely both subsidies and quotas and tariffs relating to imports. Contrary to the doom-sayers, the sector has if anything flourished, which should be used as an example to other developed nations. Also in contrast to the US, the farming sector had a much stronger vote due to the way constituencies were arranged.

(I should note there is one area in which reform was not undertaken, which is in producer boards; a state monopoly on export. These are unjustifiable by any economic measure but were the one area in which the rural lobby succeeded).

Here in the UK, by contrast, the subsides grind on thanks to the EU's benighted common agricultural policy. It is, of course, a fiasco, and it is not simply European taxpayers and consumers who suffer but those in African countries who are permitted to supply unrefined goods only, thus denying them the chance of prosperity.

Fresh Air

The political clout of the farmers in the U.S. is largely due to the United States Senate, which gives disproportionate power to low population states in the Plains, Midwest and South. This is leveraged by trading votes with dairy states of Vermont and Wisconsin. The combination of all these states makes derailing farm subsidies nearly impossible. (Think Amtrak.)

Farmers are not now, and have never in fact, been well-organized as a group, contra Posner above. In my very first economics class at the U of I, farming were presented as the closest example of "perfect competition" extant.

Jack

Fresh Air sez:

Farmers are not now, and have never in fact, been well-organized as a group, contra Posner above. In my very first economics class at the U of I, farming were presented as the closest example of "perfect competition" extant.

I think you're right about farmers not being well organized; were they well organized they'd be the owners of Archer Daniels and other buyers and have a say in their prices.

But in terms of political clout the farmers wouldn't have to be well organized as their Senators and Reps would be expected to "bring home the pork". It's a bit hard to imagine an Idaho campaign based upon ending subsidies to conform the to "conservative" "principles??" of the region. Much has been sold to us on the romance of "small farmers tilling their land"

"farming were presented as the closest example of "perfect competition" extant."

........... and the "perfect competition" between many sellers and few, but organized buyers accomplished what? Bring prices down to to break even or below? In essence the very failure of capitalism predicted by Marx, which ends with either revolution or a patch job like farm subsidies?

Food for thought? I understand the endowment that created UI came from wealthy potato farmers long ago. Would "perfect competition" have created a group of wealthy farmers?

BTW, last time I was there for the Lionel Hampton Jazz Festival, the town of Pullman was trying to prevent a Walmart from going in and clobbering the local merchants. My advice to them was to simply form a retail clerks union and they'll leave on their own.

Marx would have loved this company, while they deserve kudos for improving retail efficiency; with one of the fattest bottom lines the world has ever seen they've heavy handedly beaten wages down so far that we taxpayers kick in over a billion every year in various forms of welfare to their employees. Are we, again, seeing the meltdown Marx predicted when the capitalists have most of the money and the peasants are going home hungry after working all day? "Let them eat cake?"

Jim

What about the role of commoditiy trading in the price of farm products (same as oil)? Are there more farmers now that subsidies are out of line(you can give but not take away-old political wisdom)? If there are more farmers attracted by the big money, small towns should be flourishing with support economies. Are they? Or are they just bitter, clinging to their religion and guns?

Anonymous

Americans are told it's our own government who is responsible for rising gas costs and this would seem to make sense. We are on a huge mission to "save our planet" and if we were to allow drilling off shore it would be the kiss of death to such a movement. But the oil companies know what we Americans love most and that is our freedom. Freedom to go where we want, do what we want, when we want and how we want. This requires our automobiles, SUVs, RVs, boats, etc. Every aspect of our life is affected by the gas and oil industry, and they are affected by everything we do that prohibits them from exploiting and polluting our earth. So what are their choices? Drive up the price of gas to an exhorbitant amount and it will apply the domino effect to everything in our American way of life. Prices (and unemployment) will rise while spendable income goes down. The gas and oil industry want to get the American people to write them a blank check to do whatever is necessary to drive the gas prices down. And what other choices do the American people have? I can think of one.

If on the 1st and 3rd Monday of every single month, everyone would go on STRIKE for a 24 hour period and not drive or ride in a gas-driven vehicle, our government would soon understand that WE THE PEOPLE are the ones who gave them their job, and THEY ARE ACCOUNTABLE TO US. I can guarantee you that even the gas and oil industry will be quick to rethink their current strategy. We are not going to be paying for their off-shore drilling at the gas pump, nor are we going to have our freedom affected by their greed. It's time for Americans to stand up and say enough is enough.

Jack

Jim: No, the long term trend of fewer and fewer farmers continues, as does the trend of larger and larger crops produced by fewer and fewer farms and farm hands.

No....... farm towns are not thriving and "success" would mean a stable population where the norm is declining population. Unless something changes dramatically the depopulation of farming towns is predictable and unavoidable, with the average age of their populations rising rapidly as they young go forth to seek their livelihoods. Perhaps wind and the ethanol thing could slow the trend in some areas.

Have you not been out there? They're clinging to all that's left to cling to after banking went nation and mega, small biz was Walmarted and McD'd with little hopes for small mfg.

Jim

Jack:

Yes, I am aware, having owned a small farm in the 80's and 90's. Just wanted to make a point, thank you. So the subsidies are going to agribusiness and doing little to provide either "cultural" security or food security. It is a little bit like subsidizing the middle east for oil, short sighted and ultimately ruinous. In lieu of a real economy, first we had the dot.com bubble, then the real estate bubble, now the energy bubble. Can the food bubble be far behind? We might need religion and guns!!!

Jim

Jack:

In response to your earlier post several above. Marx was a hopeless (hopeful?) idealist. Unfettered capitalism will clearly lead to undesirable social conditions as will unfetteredf socialism. Human nature has a key role in both. I find it fascinating that the early Jews and Christians (almost the same folks) raised the issue of the seven deadly sins as traits to be avoided(transcended) in the cause of personal and social salvation unfortunately cloaked in the mantle of a religious dogma of one sort or another. I will leave it you to look them up should you not remember them all and notice that they are all very much in play in our society today. What is even worse is that our political leaders (and candidates) say nothing concerning social disintegration and moral clarity except to exploit them for vote getting (wrath, pride, envy). I apologize for the pulpitry.

Fresh Air

Jack--

Farm subsidies hardly represent the end of capitalism. They are a deliberate distortion of it by government policy. There is hardly an industry one can name that isn't subject to either supply or demand imbalance caused by government taxes, subsidies or heavy-handed regulation.

Also, you misunderstand the term "perfect competition." It means all farmers are "price-takers," i.e. no individual farmer (or even a group, were it so inclined) can influence the market price no matter how much it increases or reduces its output.

It so happens that the demand side of equation is similarly diffuse. Cargill and Continental Grain, as powerful as they are, really can't name their purchase price.

Hans Bader

This paradox might be explained by the fact that a politician is one who redistributes wealth from the many to benefit the few -- while pretending to redistribute wealth from the few to benefit the many.

Brian Davis

It's May 8th. Congressional leaders say they now have a conference committee agreement on a farm bill. Back to the House and Senate floors next week, up or down. Oh, brother. This cortex-ticking thread has about played itself out. But if anybody's interested, there's a well-written court opinion, Peanut Farmers Multi-District Crop Insurance Litigation, that came down today at the site of the U.S. Court of Appeals for the Fourth Circuit. (Just Google "Fourth Circuit" without the quote marks.) Reading the thing, it hit me: our public policy issue is should we keep massaging agricultural supports into the entitlement model or, wherever possible, reconfigure them to fit an insurance model. I know my answer and I don't think it would be asking too much of U.S. agricultural and allied interests to co-insure a little more of the costs attached to their public benefits.

andy adkins

GLOBAL FARM SUBSIDIZATIONS

I am talking about the ability to distribute benefits by enhancing the farm subsidization program into a global initiative. Leveling the playing field by removing these subsidies does nothing to address the systemic problems of desperateness, it just allows all successful farms to be profitable (Excluding disaster events) and will mean nothing for wage issues or other community development issues. That being the case, why not pay all farmers into profitability so that everything that is produced and sold reduces inflationary harms so as to allow the maximal distribution of goods.
The exploitation of hunger should not be allowed to continue to hinder the social development, and hence innovative capacities, of impoverished communities.

Further, aspects of market stability can be written into subsidy contracts to disincentivize the unexpected.

Jack

Jim, thanks....."In response to your earlier post several above. Marx was a hopeless (hopeful?) idealist. Unfettered capitalism will clearly lead to undesirable social conditions as will unfetteredf socialism."

......It's risky to mention Marx as "Marxism" raises so many emotions. As you know Marx lived during the very early beginnings of capitalism, but seems to have gotten it right in regard to capitalism being a machine, that as you say, unfettered, will destroy itself. Had he lived longer he'd have seen at least one meltdown and he died knowing nothing of the collective bargaining by labor, "government" (the people?) mandated work rules, min wage and SS that patched it up and put it on the rails again.

I don't subscribe to his idealistic alternative to a, fettered, capitalism, but having just visited someone in the hospital, I'm reminded that many do work in areas which they find noble and satisfying rather than areas where they'd be more likely to maximize profits/income.

Having lived in Alaska a long time, it's a bit interesting that natives there, as many pre-ag societies, seemed to hunt and fish for themselves and their families in normal times, but survived in the leanest times by turning to the "communism" of what little they could get. Also of interest to me, the fact that they'd no means of storing food for a long time meant that there was little reason for greed, and that the concept of one individual "earning" 500 times that of another would be unimaginable, as, absent a major invention or tremendous contribution, perhaps it should be.

But, I'm fairly sure that were Marx here today, even without computers and fancy econometric models he'd point out that we're again on the cusp of a meltdown. Only with clear logic and absolute honesty at the highest ranks can we avoid re-living the 30's.

I don't think farm subsidies are the "end" of capitalism but that they are signs that there are many areas in which unfettered capitalism does not work, or might "work" only in the sense of a perpetual cycle of meltdown and starting over.

I don't think I misunderstand "perfect competition" and being a "price taker" in the production of perishables such as fish and most farm products, the outcome is predictably that of there being nothing left, on average, that could be called a profit.

That's why nearly every advanced nation has some form of price support or subsidy, and why the issue is more complex than simple "free marketeers" understand. ie. We very well may be getting cheaper food by ensuring farmers they'll make something most years, than we would if they were left to weather all the risks, only to find that "perfect competition" resulted in a price lower than their costs.

Shall we turn our attentions to why nothing akin to "perfect competition" exists in the oil business and why Exxon and others find "investing" in repurchasing their stock wiser than producing more oil or alternatives, and what we're going to do about it before the US economy fails completely?

Jack

Jim: What do you think about the farm bill that looks as though it will be passed? Perhaps the caps will help in some instances while in others they'll be avoided by splitting income over family members of by creative work of fleet-footed accountants?

Jim

Jack:

I have not read all 1000 pages but will try to cover one or two points.

73% of the 275B is for food stamps and nutrition programs. Some of the remainder is for conservation and rural development in both town and country. Vegetables and fruits get a healthy subsidy to encourge a better nutritional balance and organic farming but most of that will go to the big guys in Florida and California. The smaller fruit and vegetable growers in the midwest will get something but not much for fear of offending the big guys desire for no competition. I suppose farming is high risk and subject to all kinds of unforseen downsides and that subsidies play a significant role in keeping the food coming and not putting ourselves in the "oil-like muddle". I do find it interesting that most of the subsidy goes to "industrial commodities (rice, soybeans, corn, wheat, etc.) and that we are still the biggest exporter of grains in the world by a factor of 4. Having said that, the caps are a distinction without a difference. It looks to me that the farming farmer will be limited for subsidies at an income of $200,000 and a non-farming farmer will be limmited by $500,00 non farm income and $2,500,000 total income. How about writing in a provision to stipulate the wages and benefits for FARM WORKERS.
The folks in Congress who had the most to do with this legislationh all seem fairly reasonable (Chambliss, Harkin, Grassley, Conrad). And, as Becker, says in his blog, the American people don't seem to mind a small tax to pay a few people as long as there is food to eat. Prices are another matter and I suspect that no one understands the present spike fully.

Several modern revolutions were started by issues over land use and/or agricultural issuse: Chavez, Mugabe,Lenin,Khomeni and to some extent the American revolution.

From an overall perspective, the government has evolved so that we are now subsidizing all kinds of constituents and interest groups; medicine and Medicare recipients, public education, higher education, public safety, banks(bailout) and on and on. My greatest concern is that the government will fail(bankrupt).

One more point: Perhaps Becker's theory of small groups with more power can be explained in reverse by the phenomenon of politicians handing out large amounts of money to voters so that the politicians can stay in office for the power, adulation and "moderate" money and benefits.

Jack

Jim, Ha! Agreement, and I enjoyed your wry sense of appreciation and understanding of the theater of the absurd.

Money for farm WORKERS??? Do you mean to try "trickle UP" for a change?

I think I'm more concerned about costly distortions of the system as compared to the government going broke. ie. It's OK with me that Medicare pays the medical costs for older folk, but they also call the tune in terms of what is "allowed" and that the reimbursement for "procedures" is far higher than that of GP's etc. As the tech of imaging etc becomes more common is its price falling as we'd expect in computers, telcom etc? I doubt it.

Pols seem to know who to favor and with median wages flat to down for 25 years, and probably worse in the "red" states where voting against their own economic interests seems to be a long held tradition, the fears that the average citizen of a democracy will vote themselves into bankruptcy appear to be unwarranted.

Aah, revolution? we probably have have far too few "on the land" for it to be farm based. My guess is with flat wages for half the nation while fuel gouging and other forms of inflation nibble away at what little they have and tone deaf academics and "leaders" do nothing that it will eventually come from there. Soon, about all it would take is a charismatic leader who knows how to use the free access to the net.

hekim group

Argentina, Egypt as well as South Africa, and similarly for the other poorer nations. In all these countries, farmers are a significant fraction of their populations, and they form a majority in many, such as India and China.

Fresh Air

Andy--

Leveling the playing field by removing these subsidies does nothing to address the systemic problems of desperateness, it just allows all successful farms to be profitable (Excluding disaster events) and will mean nothing for wage issues or other community development issues. That being the case, why not pay all farmers into profitability so that everything that is produced and sold reduces inflationary harms so as to allow the maximal distribution of goods.

This is a preposterous idea. First off, you will not end inflation, but create it. I'm sure Prof. Becker can draw up an equation to show this effect in action. But moreover, do you understand why it is better to have farmers in Idaho grow potatoes and farmers in Iowa growing corn? You can grow potatoes in Iowa, too. Would you subsidize such stupidity? Apparently so, for the sake of "community development issues," whatever those are. Study the concept of "competitive advantage" and see where that leads.

The greatest benefit of modernity for farmers is the advanced system of distribution. Most grains are not perishable and feed people and livestock all over the world. The most efficient system is one free of government intervention entirely, allowing farmers who operate under optimal conditions to thrive and those under suboptimal conditions to fail.

We're not talking about saving Electric Boat so the Pentagon can keep the last submarine maker in business. A farmer who doesn't know what he's doing deserves to fail, just as a restaurant owner or shopkeeper does. What you are suggesting is communism, pure and simple. It doesn't work. See "Ukraine, 1932" for more examples.

Michael

This analysis shows that small groups, like farmers in rich countries, often have much greater political clout than large groups, like farmers in poorer countries. Small groups like the owners of the 'Big Three' auto companies didn't seem to have much luck against the many poor auto workers in New Deal union law. I can recall an old farmer relative talking about the fact that the farmers needed to get together (but couldn't) and restrict production to achieve a price target. The farm law strikes me as a relic of compensation for this 'Marxist social injustice.' The extended farm families, even if no longer farmers, would vote from that view.

Winton Bates

Thinking further about this, it seems to me that some political outcomes are outlandish even though they can be explained in terms of democratic politics e.g. in terms of the relative power of different pressure groups associated with differential rational ignorance and free-rider problems.

The interesting question is whether better outcomes could be achieved through institutional changes e.g. through procedures to promote greater transparency and thus reduce rational ignorance problems.

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