I do not think the farm lobbies alone are nearly strong enough to ensure the continuation of our tragic farm subsidization policies; instead I think the blame rests on ordinary citizens who naively condone subsidization because they like the idea of helping farmers.

If one looks at within country opportunity cost of farming then using the benchmark of world prices for agricultural commodities is debatable. If one looks at comparative advantage of nations, then need for farming subsidies is simply not there.

Let it be understood that the protectionist Bush administration has ramped up these subsidies after Clinton, the most pro-free market President since the end of WW2, reduced them.

Dear Professor Becker,

I have not difficulty understanding why farm subsidies is a bad policy for the United States or other rich country (except maybe in the few cases where there is a positive externality like in Switzerland).

I have, however, more difficulty understanding why farm subsidies hurt poor countries. They can buy cheaper farm products thanks to these subsidies, can't they ? It is true that if Americans are poorer (because of the subsidies) they might not give as much money to poor countries, but the effect does not seem important.

In other words, because of farm subsidies the world will be poorer, the rich countries will be poorer but it is not clear to me that the poor countries will be poorer.

LB
I think the reason poor countries suffer is because in poor countries agriculture constitutes a far greater percentage of the economy. Many of these countries do not have the educated labor pool for more complex industries, so when they are displaced from the world markets for agriculture (at which they have a comparative advantage) they cannot simply move that labor into other industries (where they probably don't have a comparative advantage). Thus, even though technically they can buy cheaper agricultural products, you must remember that a farmer must make money first to buy those goods.

NB: if poor (rural) countries cannot sell their agricultural products to rich (industrialised) countries, they have nothing to trade in for the goods the latter make (consumer goods and capital equipment).
And Harris pointed out, if they cannot buy the cheap (subsidised) farm produce from the rich, because they have nothing to trade in for that, either.

Today's discussion was particularly dismal, as are any discussions which reveal our political system's tendency to opt for the worst alternative.

I wonder if any politician could be successful at triangulating the farm lobby (as suggested by the post's conclusion). And even if it could be done, who's going to take that kind of chance, where's the potential for political gain?

Professor Becker,

Your paragraph on the motivation to preserve a way of life was, to me, particularly to the point of the motivation behind the issue, at least from the perspective of the empathetic voter and those living in more rural areas of our country.

You say: "The argument is sometimes made that farm subsidies are desirable to encourage small farms, and the way of life on these farms. Yet this claim is contradicted by the evidence available for many decades, and confirmed again in the OECD report, that the vast majority of subsidies go to the largest farms. In many cases they are given to people who own but do not farm their land."

As someone who grew up in the 80's and 90's on a corn and soybean farm, I agree with your analysis of the benefactors of much of this funding. It is typically the savvy, already successful, larger farmers (or owners) who "find a way" to benefit from the subsidies. However, isn't the "real" or most difficult question the one that asks "What system CAN we employ to preserve this way of life?" I think (or perhaps "admit") that this is / would be an effort at protecting those amongst us who are least effective at what they do. But what do they do?

My upbringing and my undergraduate education at the U of C have shaped my view on economic policy. While "efficiency" is something that I respect and value, there are those things for which we are (presumably) willing to trade some part of that efficiency. While I believe that your analysis is accurate in some sense, I think you fail to account for some product that is not agricultural in a physical sense. It is that lifestyle, community, way of life, and happiness that is produced in small towns across the United States. (perhaps similar to the reference to tourism on the countrysides of Switzerland) What do farmers do? Yes, they grow crops, raise animals, and feed their neighbors, but farmers of a particular sort (small ones) do something more - they make small communities possible.

My question, then, is this: to the extent that lawmakers, voters, or others with the ability to influence policy VALUE this product, what mechanisms, strategies, or policies CAN they employ (because subsidies in their current form are not working) to protect that which they value? It seems to me that these benefits are realized by more people than those buying American beef.

The asteroid orbit near (close but not too close) to earth on July 3rd is a good reminder about Judge Posner's book called "Catastrophe." The implied probability based on spending to prevent damage according to risk utility is a good reference point. Hopefully, Judge Posner will comment on this phenomenon in light of the current event, if he has not done so already.

Leighton

Like everything, small communities will be produced in proportion to their private value and do not require subsidies to survive. Individuals may well be willing to trade income for lifestyle by moving to small communities, and many people do. That is, however, no reason to compell taxpayers to indirectly prop up these communities, for two reasons: a) there is no reason to value the "output" of small communities any more or less than the output from other forms of organization in the economy, or other goods, and b) small communities, like other forms of organization, do not need subsidies to exist.

Your claim that farms make small communities possible is plainly wrong, since many small communities exist without them (e.g. in national parks), and where they do rely on farms, many (most?) farms will continue absent subsidies anyway.

Precisely your argument could be (and is) used to demand public subsidies for anything in the economy: wine, car manufacturing, oil etc. The argument fails because it imposes the values of a few on the many, and is arbitrary in the sense that whatever good is being promoted as special actually isn't - except in the eyes of the few.

leighton,

If living in a small community is as spectacular as you say it is, then surely Farmer's would be willing to give something up (income, say) for the priviledge of their small-town lifestyle.

City-dwellers hardly benefit from the farmers' small town lifestye, so forcing them to chip in for that new tractor seat hardly seems fair. Also, don't forget that city-dwellers already subsidize you country folk through the construction of roads, power lines and water pipes into the middle of nowhere. In my country, (a few blocks north of y'all) our feds have pledged to deliver hi-speed internet to every igloo, teepee and ice-fishing hut in the country even though there are more square miles than people in many of our northern regions.

The distribution of seats in our parliament (congress) also heavily favors rural communities, to the point that my vote is about 1/2 -> 1/5 as significant as Joe Dirt's.

Bottom line, those who prefer tumbleweed and general stores have been getting a free ride from those who don't since man created the two-story building.

We're not bitter though.

Cheers

Prof. Becker's citation of academic analysis of small-group politics as an explanation for rich countries' subsidies to agriculture is painfully obtuse, and helps explain why farm subsidies in this country are so hard to get rid of.

The major support for farm programs in the United States is the most basic and most powerful force in human affairs: inertia. Almost all the major commodity programs (the one for oilseeds in an exception) have been around in one form or another since Franklin Roosevelt's second term. The "permanent law" authorizing farm programs (to which the terms of said programs would have to revert if Congress failed to pass a farm bill on time) is an Act of Congress enacted in 1949. Then, agriculture was the largest segment of the economy, employing vast numbers of people in thousands of rural communities.

We live in a very different country now, but it takes far more effort to end or cut back and existing programs than it does to block a new one. Major comets pass near the earth more often than minor federal programs lose their funding, a fact that applies to much more than just the Agriculture Department. Congress is always sensitive to charges that it is "singling someone out" -- taking away traditional benefits from farmers without cutting other spending, or from one group of farmers more than others. It is much less sensitive to grievances of those farmers who grow apples, say, or raise horses, because these farmers have never received subsidies before. Fundamentally, the stumbling block is not inequity, but change.

In the physical world, great force is required to overcome inertia. It is the same in politics. Ending farm subsidies will only be possible in the event of some great crisis demanding extraordinary measure -- a crippling fiscal imbalance, perhaps, or (this is admittedly now a theoretical possibility only) the conclusion of a global trade agreement from which larger sectors of the American economy would benefit if US farm subsidies were withdrawn. Even then, ending farm subsidies would require the support of a group of legislators and other public figures thoroughly familiar with the terms and costs of farm programs, and also with the reasons they enjoy the support they do -- and, finally, who are committed to cutting government spending.

We don't have any of that today. It's small consolation that the inertia supporting Japanese rice protectionism and the French-driven European farm subsidy structure is even stronger than the inertia here.

I think farm subsidies could be compared to oil inventories for emergencies. Although the US is a poor example, think of Japan. Japan is an island where left with no subsidies, Japan's domestic food production would probably not support 1/10 of its population because of land costs alone. So during the highly unlikely chance that all trade routes become blocked, Japan would starve very quickly.
Just a thought.

Dr. Becker or anyone else,

I'm not an economist by training, but I like to learn about economics. I can understand how import quotas and tariffs allow our domestic producers to raise prices. But I don't understand how subsidies allow our producers to sell at lower (or higher) prices. Can somebody explain in plain english the relationship between subsidies and prices, and the negative economic consequences behind subsidies (higher taxes for the rest of us? Distortion of markets?). I was always hear economists say things like subsidies hurt foreign competitors, but why? It's never really explained.

alvin
I'll try. But I am an economist so plain English doesn't come to me naturally.
Anyway, the basic point is that subsidies are payments from the government to the producer. In this case, the government pays farmers to produce agricultural goods. In this scenario, the producers' income consists of subsidy+market price, market price being the price at which they can sell their products. Now, usually, the problem arises when producers are less efficient than their foreign counterparts, that is, if their cost of producing is higher than the foreign cost of producing the same good. In this case, without subsidies, the domestic producer would stop producing because his costs are higher than the market price he could get. However, with the subsity, he can lower his price below that of foreign competitors. Thus, his foreign competitors are priced out of the market, and the domestic producer stays in business despite his relative inefficiency. This hurts foreign competitors for obvious reasons. It is also bad for domestic consumers: even though they pay a much lower price [the low price domestic consumers select to price out foreign competition] they also have to pay the taxes that pay for the subsidy.
You are also right to note that this leads to market distortion: a producer of a subsidized good, assuming the good has no positive externalities, will produce too much of that good. This is happening in the US now, for example, with corn. Corn is so cheap because of subsidies that corn syrup is used as a sweetener and corn is fed to cattle, both of which have adverse health effects on humans in the long run. Subsidies thus lower the prices and lead to overproduction of certain goods.
I hope this was at least somewhat clear. It's much easier with graphs and terms like "dead-weight loss," but I hope this simplifies it somewhat.

In New Zealand, a country traditionally quite heavily reliant on agriculture, a complex and indulgent set of subsidies were built up until 1984. Those included 'supplementary minimum prices' In 1984, however, a reforming government swept them aside in one fell swoop. A furious response ensued, but farming did not collapse. In fact, more than 20 years on, the local farms are as competitive internationally as ever. US farm policy makers might want to look into the case.

One thing that does remain in NZ from the regulatory and subsidy days is producer boards, which are state entities that control exports. The wisdom of such structures is off the topic, however, since they are not subsidies but rather state control of sales.

Haris,

That was awesome. Thanks.

Alvin

Sir:
Before retiring, I worked for the US Department of Agriculture. In that job, I enjoyed from time to time reading the Congressional hearings for the Agriculture and Related Agencies. I remember reading several times the the primary Federal interest in supporting the food, fibre and forestry industry was to provide cheap, healthy and plentiful products to our urban areas, keeping the urban areas peaceful (no food riots) and productive. Another set of statements revolved around providing plentiful food, fibre and forestry products in support of nationa defense. On a recent visit to a local grocery, I found greens, fruit, and other produce from all over the world. I suggest the first arguement in favor of price supports has been overtaken by modern transportation systems and reduced trade barriers. I suggest the second arguement to still have some validity.

The argument against subsidies by the underdeveloped nations of the world in diplomatic talks is disingenous at best. It's really an attempt to drive up world food costs so that their inefficient and incompetent food production systems are competitive. What they really need to concentrate on is becoming food production self sufficient.

The reason why subsidies are granted, at least in the U.S., is to keep arable farm land in production and lower food costs. If "natural market mechanisms" were allowed to operate, 25 to 35 percent or more of arable farmland would be taken out of production to allow prices to float to new higher levels to cover the cost of production.

The question now becomes, are we willing to allow a loaf of bread to climb from $2 to $6/$8 dollars a loaf? As for the issue of energy independence and ethanol and bio-diesel production, this adds on a whole new dimension to agricultural production pricing.

Interesting debate.

Although deviant in this forum, the response from New Jack seems all too frequent among 'city dwellers': JOE DIRT (his words)farmer apparently is a sad welfare case, sponsored by those hard working honest urbane 'cowboys'. LOL The city folk must subsidize their dirt ball cousins with 'roads, power lines, and water pipes'.

Hee Haw! Pass me the corncob pipe.

Roads? How many miles of road go to supporting urban dwellers? How are those roads used by the farmers? Perhaps a mite, as farm to market roads bringing those delicious salads to the city?

Power Lines? How much power is generated in the metro areas? From all those hydroelectric damns, nuclear plants, and coal plants in the heart of Manhattan I suppose, sending the juice out to Peoria.

Water pipes? Again, I must be missing all those wells, reservoirs, and aqueducts emanating from a city like Los Angeles to Sierra Nevada. Isn't that the way it works water FROM LA to the Sierra Nevada?

Seems to me that the pipelines for water, power, and food is directional from rural to city. The country could survive just fine without the city; the inverse in not true.

As mentioned in the Becker post above, farm subsidies go to the richest 'farmers'. Of the 12-30B of subsidies going to farms, 66% goes to the richest 10% of farmers.

110M of subsidies to Riceland Foods is more than farmers in 12 states combined receive. John Hancock, Chevron, and Caterpillar all receive farm subsidies.

The issue of farm subsidies is a complex and important issue. However, please understand that these monies are not generally going to support Mr Haney and Fred Ziffel out there in Hooterville.

(and boy howdy, I wanna see fellas like New Jack go out and kill and dress their own meat, and grow their own tators...might be slim pickins...pass the possum pie!)

Though barely related to the topic of farm subsidies, a subject on which I find myself in basic agreement with both Judge Posner and yourself, I wonder if I could beg you to comment on "checkoff" programs such as the pork industry currently has. I live on a farm and even the generally conservative farmers (surprisingly, they would agree with you on subsidies and ethanol) love the pork checkoff program. Pork prducers currently (through some legislative act or another) pay .4% to this program whether they want to or not, for marketing and lobbying purposes. Even if it's benefits are great, I'm uncomfortable with the compulsivity involved.

N.E.
I won't argue the numbers, thougt I think they're exaggerated. But:
The developing world, while inefficient at agriculture in absolute terms, they still have a comparative advantage in food production because their costs are so low. While it is probably true that a removal of subsidies here would increase prices [though probably not triple them], prices would increase until food was bought at the world price while our tax bill that pays for the subsidies would become much smaller. [That's not actually true: the tax money would just go to something else. But if we had competent government...]

GRG: The LA is example is a good one, and another good reason for us to get rid of LA altogether. But the city does subsidize much of the infrastructure in the country. Imagine how many people a mile of road connects in a big city vs. how few it covers in a rural area, and yet the costs are shared between the two. Urban taxpayers end up paying a big share of rural roads. This is not a bad thing, necessarily, but it happens.

I disagree with N.E. Hatfield's comment on a number of levels.

The argument against subsidies by the underdeveloped nations of the world in diplomatic talks is disingenous at best. It's really an attempt to drive up world food costs so that their inefficient and incompetent food production systems are competitive. What they really need to concentrate on is becoming food production self sufficient.

This is wrongheaded from start to finish. Have you not heard of comparitive advantage? If the comparative advantage of developing countries is not in labor-intensive production like agriculture, then where is it? Self-sufficiency not only guarantees low or zero growth among developing nations, or indeed any country that takes that path, it is a receipe for famine.

The reason why subsidies are granted, at least in the U.S., is to keep arable farm land in production and lower food costs. If "natural market mechanisms" were allowed to operate, 25 to 35 percent or more of arable farmland would be taken out of production to allow prices to float to new higher levels to cover the cost of production.

Again, wrong. Subsidies raise the cost of production by bringing high-cost land into use that would otherwise be used for other unsubsidised activities. The 25-35% figure is certainly wrong based on examples where subsidies have been removed: farming continues, although the mix is different.

The question now becomes, are we willing to allow a loaf of bread to climb from $2 to $6/$8 dollars a loaf?

The implicit argument here is that N.E. would rather pay $2 a loaf and see developing countries denied a chance to develop than to pay more and give them a chance. How repugnant. Even if you accept the exaggerated figures he provides, the argument doesn't stack up, because the majority of first world consumers can afford higher food costs, and there are less damaging means of supporting those who can't than to artifically lower world prices and prevent development in the third world.

To All, "Subsidies raise the cost of product." Do they now? We own the land, we control the lands use. If we so desire, we take it out of production, create scarcity and drive up costs. It's all about money in our pockets, such is the natural market mechanism at work. Until someone figures out that it's really all about "Bread and Circus'es" ;)

"The beautiful views of cows and sheep on the very green Swiss mountains are courtesy of the Swiss government that pays farmers generously to keep these animals grazing on the mountains."

Let's try to be as precise as possible: the courtesy is from taxpayers who pay the government who pays farmers to maintain those pricey farms. Taxpayers/voters have choices to make each election: fund expensive (and seemingly nostalgic?) farms or fund something else. Too bad those choices seem unduly influenced by small groups who might lose a lot.

On another topic, let's look at unemployment rates and incomes (rural, urban and total) after subsidies have been cut (or imposed). We would want to find a way of measuring the loss after subsidies have been cut that special interest groups claim would be devastating, and a way of measuring the gains from market based activity.

Harris, If you take a look at UDNations acreage yield vs. manpower input they have no comparative advantage. Where their advantage lies is in their methods devoid of herbicides, pesticides, fertilizers, and lower yielding seeds. No cost inputs here. This places their acreage yields far below the U.S. and most other developed nations. In fact, it makes most of them into subsistence farmers.

So where is the excess product coming from? Out of their mouths, taken by their governments to cover their debt to the international banking community. UDN's definitley require a radical rethink of their basic agronomy policies.

In response to Ben and Jack, thank you for the remarks. I'll reply in order to the remarks made above.

to the issue of whether farmers are and would be willing to "give something up" - surely they do, to the extent that they have other options in employment. I think here, though, it's not a matter of giving something up that is discretionary in light of the fact that many farmers are facing bankrupcy (more than they can give up and continue to eat, etc.). If they had some vehicle by which to survive when operating a "failing" business, perhaps they might.

as to whether farms make small communities possible - I should have been more clear. Certainly, I don't mean to suggest that only farms make all small communities possible, but I do think that it is fair to say that the small communities of which they are a part (which is a majority of the midwest in this country) rely upon them. for example, where I grew up, towns previously populated at rates of 2 to 5 thousand are struggling to keep their own schools, etc.

As to the issue of whether small towns do "produce" some sort of "output" for which the end consumer does not pay, I disagree that the answer is clearly "no." I know that as a "midwestern boy" who grew up "on the farm," employers (for one) deeply value the "work ethic" that is so common in small towns. With that said, I do not have such a clear view on the issue myself. As a young person studying economics, I often found myself arguing to my father that what happened to shoe makers, barbers, restaurants and grocery stores in these same places "must" at some point happen to farmers. To my mind, though, this goes to the question of valuing whatever is "produced" in these situations, which the end consumer or "market" may not be able to do. To take my above example, if law firms want to continue to be able to hire persons of a certain "sort" (midwesterners from small towns), in what way could they indicate as much? Further, couldn't it be the case that imperfect information prevents the end user of this "product" from appropriately valuing it (even by their own terms)?

and, as for the suggestion that rural areas benefit more from roads and traintracks laid down through them, you may be right. It seems to me, though, that you are receiving some benefit from the products leaving Iowa through those same roads and tracks.

As I had tried to indicate earlier, I am sympathetic to the notion that the market can be trusted. Explanations for why not in specific instances need not fall outside of free-market terms. Although my suggestions may seem tenuous, is it not possible that unaccounted-for costs and benefits exist here? More to the point, if we were to assume that this was the case (as some people do), what mechanisms would YOU suggest policy makers use to account for these benefits?

L

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NE:
I'll agree that most countries' agriculture policies probably need some adjustment. And I think everyone will agree that most developing countries' agricultural industries are less productive, on a per acre basis, than their American and European counterparts. However, the developing countries are much, much less efficient when it comes to building hybrid engines and putting together airplanes. This difference in productivity is what gives them a comparative advantage. [Not an absolute advantage: a country can be less efficient at producing every good and still have a comparative advantage in at least one.] The reason that many of these countries don't produce a surplus is because they cannot sell it. The world is flooded with cheap subsidized Western agricultural products because, thanks to subsidies, producers can sell below cost. Remove the subsidies and let developing countries compete fairly, and their production will rise because the price they receive on the world market will rise.

Leighton:
You are right, there are probably many uncaptured costs and benefits here. On the costs side, subsidizing agriculture reduces the labor pool available for places where it would be more beneficial in the long run, it increases pollution from farm runoffs, skews dietary preferences to match prices rather than nutritional requirements, not to mention costs the West billions in foreign loans and grants to countries that would be able to survive without them if there were no subsidies. On the benefits side, as you said, agricultural work fosters work ethic, reduces unemployment and probably crime in rural areas, makes the nation more self-sufficient, and, last but not least, provides some sort of psychic rewards in preserving tradition.
As you can see, the uncaptured costs and benefits are many and complex, and it is by no means clear that there should be a subsidy or a tax, or what its magnitude should be. While a subsidy would be a good way to encourage more of the product to capture its positive externalities, in the absence of clear evidence that this is the case I say let the market do its thing.

To All, "Subsidies raise the cost of product." Do they now?

Yes. Lost-cost means of production don't need a subsidy to be employed. Production must be increased in ways that are especially costly, otherwise that means of production would have employed without the subsidy.

Because subsidy increases output, it reduces market price - but price is not the same as cost.

Haris

Good response to Leighton.

Leighton

In contrast to Haris, I'm not convinced anything you mentioned qualifies as an externality, and that is what you need in economics to justify a subsidy (the political threshold for subsidies is different and lower). My reading of your list of small town benefits is that they are privately enjoyed, leaving no room for government to improve things.

Harris, Once again we are up against the hard wall of cheap bread and circuses. The fact is we live in a world of hard economic and political realities that colors all thought and action at every level; which will not change. ;)

As a Farm Bureau county board member in Minnesota, I find the usual supply of myths -- e.g. near poverty of smaller farm operators -- and other forms of under-information not to be surprising.

I was surprised by Prof. B's comment:

"For example, subsidies to irrigation and other water use by farmers is one of the major ways that fresh water is wasted."

This unfelicitous expression -- he could have said "inefficiently allocated" -- implies that the user of the water is callously disregarding all sorts of social values. (Certainly the Israelis' irrigation is socially monitored, for example.) I will not argue that ethanol tariffs or sugar quotas are anything but protection. I will argue that city folk do benefit from the children of agricultural towns who arrive in the urban workforce with decent educations are underappreciated.

I admire the reforms in ag policy in New Zealand and Australia that have succeeded.

The welfare and inherent efficiency costs of protection are huge: not only for the 'protected' country itself, but for the world at large. However, it is likely that the marginal political cost of moving towards freer trade and policy heavily outweights the benefit.

Take sugar as an example: A proposed aspect of the Australian-USA FTA was the 'opening up' of the protected American sugar market to Australian producers of sugar. Ultimately, this proposition failed (undoubtebly due to the political influence wielded by those who receive protection in the sugar-farming states).

However, this example allows us to illustrate the economic cost due to the restrictions or 'protection' on trade. The USA suffers from:

(1) A higher price for sugar (estimated to be almost 4 times higher than the market price); estimated to cost over $2billion anually for US consumers.
(2) An estimated 7,500 to 10,000 jobs lost since 1997 because of artificially high sugar prices.

The gains in moving towards a freerer agricultural policy are self evident in this instance. Abolition of the sugar program would result in a net annual welfare gain to the US economy of more than $1 billion (US International Trade Commission, June 2002).

The US sugar program is almost a textbook case of concentrated benefits and diffused costs. A very small number of sugar growers receive enormous benefits, while the costs of this protection and subsidies are spread across the entire economy (thus it can be said that the MPB exceeds the MPC and it is likely that protection will remain until they are equal, or the MPC of removing the trade distortion becomes less than the MPB accrued in keeping it).

Consequently, US sugar producers have a very strong incentive to lobby and fund campaigns of US policymakers who in turn support their industry. Thus, whilst the economically rational solution would appear to be a simple one (remove the protection), many difficulties are encountered in the political sphere.

Sugar stands as a good example of the inherent inefficiences of high marginal political costs and their conflict with minimising opportunity cost. The sugar industry is indicative of more widespread problems with freeing up agricultural policy within rich nations.

It is unlikely (in the short to mid-term, at least) that much progress will be made. However, as pressure continues to mount, perhaps breakthoughs on a bilateral level may presage a wider multilateral policy push (something of the Doha-round ilk, but hopefully more succesful). This remains to be seen.

So much discussion - with so little impact in the real world.

It is basic microeconomics which points out that subsidies are almost always inefficient. But since subsidies (like earmarks) are based on politics, the fact that the subsidies hurt farmers in 3rd world countries in rarely on the minds of the congressmen of the worlds lone superpower.



3rd world countries would be stupid if they buy the 'free markets' story and open up their markets. What is good in theory (or at U-Chicago) is rarely what happens in real life due to real world factors like politics.

The US sugar program is almost a textbook case of concentrated benefits and diffused costs. A very small number of sugar growers receive enormous benefits

This comment got me thinking. If subsidies are available to any sugar producer, then won't subsidies, which temporarily raise profits, induce entry until profits are returned to zero? If so, the net effect is: sugar farmers achieve no long term benefit from subsidy, you just get more sugar producers, and a vested interest in maintaining or raising protection. The many costs of subsidies are not, of course, dissipated over time.

Given free entry and access to subsidies by all producers, subsidies cannot assist farmers - though marginal farmers need them to survive!

Two comments:
1. US sugar producers are actually protected by import quotas rather than direct transfers, so once the import quotas are filled, the price rises because high cost domestic producers make up the difference between import quota and demand.

2. If my knowledge of econ serves me correctly, subsidies do in fact encourage entry [to the extent that agriculture allows for that - there is only so much arable land], and profits do return to zero. However, zero in this context includes industry-normal accounting profits, which are significantly higher than they would be without the subsidy. In fact, many of these businesses would lose money and shut down without subsidies. With subsidies, they live, and the taxpayer pays for it. This does result, as you pointed out, in a vested interest in maintaining protection.

ben,
You are right in that subsidies do distort the market. They act to alter the way in which the 'invisible hand' of the market operates, leading to overproduction beyond what the market warrants (which in some instances: e.g. positive externalites - think, education. Can be beneficial).

The problems with subsidies (or import quotas or tariffs or any other market-distorting policy) is both this inefficiency cost, and the cost of rent-seeking involved: a cost, which is often hidden to the economy.

The rent-seeking costs (i.e. the costs involved in gaining tariff/quota/restriction, or the maintenance thereof) which includes things such as lobbying costs, political payments, etc. have been found (especially in the case of monopolies) to entirely dissapate the supposed benefit (and in extreme cases, to exceed it).

Secondly, as Haris responded, the effects of subsidies boost uncompetitive suppliers in the domestic market, who operate less efficiently than those internationally. Similarly, there are significant barriers to entry (both natural and legal), meaning that new sellers are less able to be induced to enter the market (and the subsidies tend to go to the established, larger agricultural projects).

The results of this are not just the domestic costs, but have wider global implications: producers of agriculture in poor nations are, due to the subsidy, unable to sell their own goods (this is most pertinent in the case of staple goods such as rice, maize and other crops) on the world market (as the subsidy-induced cost in a large economy such as the US lowers the world price).

As a result, poor farmers not only cannot sell their produce, but often find it cheaper (in dollar terms) for them to purchase what they would otherwise have produced from the more inefficient US producers, who are bolstered by subsidies.

Haris

However, zero in this context includes industry-normal accounting profits, which are significantly higher than they would be without the subsidy.

If there is entry, I don't see how this can be true. If with-subsidy normal profits are higher in sugar than they are in, say, wheat production, then won't wheat farmers switch to sugar until returns across different crops are equalized?

Indeed, won't producers in unsubsidised industries switch to farming until returns across industries are equalized?

This all turns on free entry, and Drossos has indicated there are barriers to entry, which desn't surprise me. In the case of farming subsidies, it may be the case that these barriers are actually welfare-enhancing, by limiting over-production, and creating competition among farmers for rents. To the extent this competition favors the most efficient producer, rather than the most effective lobbier, these barriers may be efficient. A case of one distortion partly offsetting another.

ben
while you're right that with free entry, the hypothetical wheat farmers would switch to sugar until profits equalized across those two industries. But even the equalized profits are higher than they would be without the subsidy, since with the subsidy the price producers receive [price they sell for plus the subsidy] is higher than they could get without subsidies and the world market price. The more important distortion, however, is that the subsidized good is overproduced and crowds out other goods that might be more useful but aren't produced.

Although what Haris says above is true, keep in mind, first, that both sugar and wheat are subsidized, by programs that work very differently, so comparing them is difficult. As well, an important consideration for farmers able to grow both wheat and sugar (that is, sugar beets) is not just the expected price of these two commodities but their expected price volatility. Largely because of the way the sugar progam works to control the supply of sugar to the domestic market, sugar has much less price volatility than wheat. Farmers requiring steady income to service debt will place greater value on commodities the price of which they can predict accurately well in advance.