The Outlandish Farm Subsidies--Posner

The President has expressed dissatisfaction with the proposed Farm Bill wending its way through Congress. He wants farmers whose annual incomes exceed $200,000 to be denied subsidies; the present cutoff is $2.6 million and Congress will not go below $950,000. The President's concern with farm subsidies cannot be taken very seriously, since in 2002 the Republican Congress with Administration connivance greatly increased these subsidies and at the same time repealed some of the modest reforms that the Clinton Administration had introduced in 1996. The Administration's current proposals would, if enacted, be a step in the right direction, but they will not be enacted, and, judging from the 2002 legislation, they are intended I suspect merely to embarrass the Democratic Congress. The deregulation movement passed agriculture by, leaving in place a series of government programs that lack any economic justification and at the same time are regressive. They should offend liberals on the latter score and conservatives on the former; their firm entrenchment in American public policy illustrates the limitations of the American democratic system. A million farmers receive subsidies in a variety of forms (direct crop subsidies, R&D, crop insurance, federal loans, ethanol tariffs, export subsidies, emergency relief, the food-stamp program, and more), which will cost in the aggregate, under the pending Farm Bill, some $50 billion a year, or $50,000 per farmer on average. Farm subsidies account for about a sixth of total farm revenues. So, not surprisingly, the income of the average farmer is actually above the average of all American incomes, and anyway 74 percent of the subsidies go to the 10 percent largest farm enterprises. The subsidies are regressive, especially during a recession coinciding with worldwide food shortages (i.e., high prices). There is no justification for the Farm Bill in terms of social welfare. The agriculture industry does not exhibit the symptoms, such as large fixed costs, that make unregulated competition problematic in some industries, such as the airline industry, about which Becker and I blogged recently. It is true that crops are vulnerable to disease, drought, floods, and other natural disasters, but the global insurance industry insures against such disasters, and in addition large agricultural enterprises can reduce the risk of such disasters by diversifying crops and by owning farm land in different parts of the nation and the world. If a farm enterprise grows soybeans in different regions, a soybean blight in one region, by reducing the supply of soybeans, will increase the price of soybeans, so the enterprise will be hedged, at least partially, against the risk of disaster. Supply fluctuations due to natural disaster create instability in farm prices, but farmers can hedge against such instability by purchasing future or forward contracts. There is no "market failure" problem that would justify regulating the farm industry. All the subsidies should be repealed. This of course will not happen, and that is a lesson in the limitations of democracy, at least as practiced in the United States at this time, though I doubt that it is peculiarities of American democracy that explain the farm programs, for their European counterparts are far more generous. The small number of American farmers is, paradoxically, a factor that facilitates their obtaining transfer payments from taxpayers. They are so few that they can organize effectively, and being few the average benefit they derive (the $50,000 a year) creates a strong incentive to contribute time and money to securing the subsidies. The free-rider problem that plagues collective action is minimized when the benefit to the individual member of the collective group is great. Then too many of the members of the farm community and hence recipients of the subsidies are wealthy, and the wealthy have great influence in Congress as a result of the lack of effective limitations on private financing of congressional campaigns and on lobbying generally. In addition, the allocation of two senators to each state regardless of population enhances the political power of sparsely populated states, which tend to be disproportionately agricultural. The key role of Iowa in the presidential electoral process is a further barrier to the abolition of farm subsidies, and the final factor is the alliance of urban with farm interests in support of the food-stamp program, itself inferior to a negative income tax, which would give the poor money but allow them to make their own consumption choices. A puzzle about the farm programs is the heavy emphasis on money subsidies, since by reducing the cost of farming they encourage greater output, which results in lower prices for farm products, thus offsetting some, perhaps much, of the effect of the subsidies. (The lower prices are not a social benefit, because as the result of subsidization they are below cost.) Acreage restrictions, which used to be the core of federal farm policy, and which correspond to the type of entry-limiting regulations imposed on airlines, railroads, trucking, pipelines, long-distance telecommunications, banking, and the wholesale sale of electricity, before the deregulation movement, are more efficient at raising farmers’ incomes by reducing output, in effect cartelizing agriculture. Those restrictions have been reduced, but between them and export subsidies (which reduce the supply of agricultural products to American consumers) farm prices in America are higher than they would be without the farm programs, and this contributes to the regressive effects of the programs.

Comments

[John]

I can't believe how much the companies have benefited from these practices. I still believe that as long as we have active PACs and no term limits, there will be a challenge for a politician to be a man or woman, and not a politician in congress. Career politician = undue influences

[David Heigham]

Brian

Thanks. So if Wickard v. Filburn is right, Congress could have introduced Prohibition with a simple Act. No Constitutional Amendment was necessary. More and more intertesting.

Nate

You will see more of that in future years. Global warming entails more variable weather. More variable weather almost certainly entails more and more unseasonable weather. More unseasonable weather will depress crop yields below expectations until expectations catch up with the climate.

There will be a possibly valid case for subsidising crop weather insurance to overcome that failure of market expectations; but still no case for the subsidies we have got now.

[David Heigham]

Brian

Thanks. So if Wickard v. Filburn is right, Congress could have introduced Prohibition with a simple Act. No Constitutional Amendment was necessary. More and more intertesting.

Nate

You will see more of that in future years. Global warming entails more variable weather. More variable weather almost certainly entails more and more unseasonable weather. More unseasonable weather will depress crop yields below expectations until expectations catch up with the climate.

There will be a possibly valid case for subsidising crop weather insurance to overcome that failure of market expectations; but still no case for the subsidies we have got now.

[Brian Davis]

Yes, an expanded premium-generating insurance model would be my preference, structured similarly to crop insurance or flood insurance. The White House announced last night that the President intends to veto the conference report if it reaches his desk. I wish somebody who has his ear for more than a few seconds would explain the concept to him in words he could use to bargain with Congress for a better bill.

[Jack]

John We looked into term limits closely. NO hope there. Consider: the term limited and powerful incumbent "wills" his list of PACS and contributors to the heir-apparent of his party in what is typically a "safe seat" by design. The ex-incumbent? if a Rep he goes to the Senate.

Who wins? Bureaucrats who can then say "Stick it.......... you're outta here next year and I'm here for the duration."

Nope, no way to put democracy on auto-pilot, WE have to throw out the bums and retain those of worth.

[Rand]

I think a lot of the extraordinary subsudies farmers get in rich countries is due to their nostalgic value to rich societies where the majority aren't farmers. Farming still has a lot of romanticism to it, and so it is hard to rile people up against it. Since it's hard to get a passionate anti-farming crowd, and since farmers provide a passionate pro-farming crowd (especially since many of them are romantic about farming), it's difficult to get farm subsudies cut unless their advocates start making some smart political alliances. Most of the more determined farm reform advocates tend to be intellectuals rather than politicians so the immediate outlook is not great.

[logistyka]

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[Jack]

Rand that's it exactly "everyone loves the farmer and hates a landlord" though their businesses are much the same.

I get a, wry, chuckle out of pols pandering to the heirs of the Walmart family and others, using the passing on of farms as their battering ram to end the inheritance tax or, at min, work the exemption up to $5 million or so. There seems little concern for those whose "inheritance" will be shouldering their share of our enormous federal D E B T of $40,000 each or so.

I've some hopes that the alliances you mention MIGHT evolve out of the net and blogs such as this one. After the end of small town cafes, grange, precinct and other places to commune we've been just about isolated from forums in which to critique our government and its curious policies until the net came along.

Could we go from idle hit-chat on blogs to public interest groups that are not comprised of rent-seeking special interests but like tax reform and other interest groups of the past who just want to play a part in seeing that the right thing is done? Barack has had a million donors so far, suppose the candidates of the next primary had ten million, well informed, small donors?

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