Unsustainable subsidies: Farm bill harm

On May 23rd, I attended a presentation organized by the CATO Institute on the U.S. Farm bill at the Russell Senate Office Building.  The last farm bill was passed in 2002, although interim legislation between then and now inflated it substantially.  The 2007 version is currently wending its way through the Congress.  

The Cato Institute is a libertarian think tank, and as you may expect, they were not in favor of current or existing government-intrusive, top-heavy legislation.  And though I am not a libertarian, I am very much inclined to their view.  The farm bill is, quite frankly, in restraint of trade, and right in the places where we need new market solutions.  It is a  burden on U.S. consumers; it helps few small farms; and it is disastrous for U.S. foreign policy. 

The purpose of any nation’s agricultural policy is three fold.  1. It should encourage, or at the very least, not interfere with the ability for farmers to produce.  2. It should assist, or at the very least, not interfere, with the ability of consumers to access that production.  Both of these two goals involve creating enough supply that farmers have sustainable income and consumers have a payable price for those foodstuffs.  The third portion of the policy is facilitating export, for greater national GDP.  This means selling excess agricultural product on the world market.

Enabling Farm Production?
Farm subsidies are concentrated in the following areas– at a whopping 90%: wheat, cotton, rice, corn, and soybeans.  This means it is a narrow program, ignoring smaller operations or areas such as produce production, an area where American consumers have continued to create demand but also meet high prices.  The point is not that produce growers should also receive subsidies.  Rather, a rational market, without price supports, would cause farmers to diversify and therefore increase supply of the most demanded foodstuffs.  (That was reason Number 5 under Cato’s report Ripe for reform: Six good reasons to reduce US farm subsidies and trade barriers).

There is little doubt that the mechanization of agriculture from the “Green Revolution” brought about many positive changes in the U.S. as the “breadbasket of the world.”  The problem is that we have institutionalized one step in an upward cycle to market productivity.  To make that cycle of production stay perennially on top, we have subsidized it to the point of killing many kinds of innovation, stunting our own growth.  Overall, the farm industry does not need these subsidies.  Furthermore, the recipients of them remain among the top producers, rather than those whom we would generally target for income equalization–which was the purpose of farm subsidies in the first place. 

Enabling Market-Rational Food Consumption?
There’s a real left hand-right hand disconnect in the Federal Government, and it is fueling future gaps in social services.  By subsidizing wheat and corn, we make crackers, chips, and sodapop less expensive to produce (although not to advertise), while fresh foods continue to go up in price.  At the same time, the research dollars and health care costs for weight-related diseases, such as diabetes, continues to climb.  We are accustomed to viewing this disconnect in regard to tobacco, but we also need to consider it crops less striking in their health care consequences. 

Those most likely to subsist on subsidized food products are also those least likely to have comprehensive health insurance.  In turn, this drives the pressures upon health care policy–including the need for universal baseline health care.  Subsidized food crops also permeate our institutional food service, such as in hospitals and school lunchrooms; it is one major root cause for increased rates of child obesity.  In a previous post, I wrote about Mark Pollan’s investigations upon this issue.

It also limits agricultural imports, which affects the cost of sugar and other commodities at the grocery store.  Its whopping price tag adds to our budget deficit: 15 billion dollars. 

Enabling Exports? 
Dr. James at Cato noted that the farm bill is the most market-distorting instrument of U.S. policy.  That means it costs a lot of money–an opportunity cost of USD 1.7 trillion dollars including lost export income.   The farm bill depresses our agricultural exports, which has a direct bearing on US GDP.  It enables us to sell the six subsidized crops to greater advantage, but does not create supply for other crops that are actually grown on the farm and could be traded internationally–everything from fresh flowers to okra to tomato paste.

Farm subsidies are in fact a misnomer–large agribusinesses such as processors, and agricultural concerns which already obtain economies of scale, benefit in outsized manner from this bill, while individual farmers do not.  For instance, Cato reports that in 2003, Riceland foods received USD 68.9 million in subsidies–more than the farm subsidies for Rhode Island, Hawaii, Alaska, New Hampshire, Connecticut, Massahusetts, Maine, Nevada and New Jersey combined.

Such subsidies also have a killing effect on agriculture elsewhere.  The price of subsidized crops on the open market does not reflect actual production costs.  This means that developing nations in Africa, Asia, and Latin America, cannot compete on a price basis with their own agricultural efforts in an non-rational world market.  They become unable to agriculturally sustain themselves, concentrating instead on single cash crops such as cotton in Central Asia, and coffee–or coca–in Latin America.  

As one-note economies, they are tied to the price cycle of their agricultural commodity.  This precarious situation means that periodically, these businesses suffer downturns for which no other industry or production can pick up the slack, hire labor, or increase that state’s GDP.   As these businesses shut down or disinvest in their operations, their citizens begin to face increased poverty with no visible avenues of relief.  As their plight hits disastrous proportions, food aid kicks in.  Ironically, the poverty relief includes delivery of subsidized U.S. grain and other relief subsidized by U.S. tax dollars.

So, to reflect:
We are paying USD 15 billion in direct costs and 1.7 trillion in opportunity cost for our Farm Bill.  This bill makes healthy foods more expensive than unhealthy ones; makes health care costs more expensive for those who can pay and unreachable for those who can’t; subverts child nutrition; and renders the developing world helpless against food dependence and other economic aid.  

On the up side, agribusiness, the manufacturers of  lipitor and insulin and the advertising agencies are doing okay.

Is this what we want?

Further Reading:
USDA Newsroom roundup on the Farm bill–
“End it, don’t mend it” Sallie James of Cato’s Center for Trade Policy Studies on the Farm Bill