Tag: farm subsidies

Should There Be ‘Shared Sacrifice’?

At the Encyclopedia Britannica blog, I take on the argument made, for instance, by President Obama in his Friday news conference:

We should not be asking sacrifices from middle-class folks who are working hard every day, from the most vulnerable in our society – we should not be asking them to make sacrifices if we’re not asking the most fortunate in our society to make some sacrifices as well.

I call that a fundamentally flawed argument:

The main thing our government does these days, despite the lack of any constitutional authority for it, is tax some people and transfer money to other people. …But there is no moral equivalence in the two sides of the transfer system. On the one hand, the government takes money by force from people who have earned it. On the other hand, it gives some of that money to people who have not earned it. Taking yet more money that people have earned is simply not equivalent to reducing the size of a government transfer.

There is, however, one way that we could ask businesses and the rich to join in the deficit-reduction effort:

But here’s a way to satisfy both those who see spending as the problem and those who want the highest-taxed Americans to pay yet more: Start cutting subsidies to businesses and the rich. Let’s cut out the big-business subsidy machine, the Export-Import Bank. Let’s get rid of farm subsidies. Let’s tell affluent people who build houses in coastal flood areas to pay for their own flood insurance at market prices.

Read the whole thing.

$1 Trillion in Phony Spending Cuts?

In the Washington Post Friday, Ezra Klein partly confirmed what I fear the Republican strategy is for the debt-limit bill—get to the $2 trillion in cuts promised through accounting gimmicks. As I have also noted, Klein says that there is about $1 trillion in budget “savings” ($1.4 trillion with interest) to be found simply in the inflated Congressional Budget Office baseline for Iraq and Afghanistan. Klein says, “I’m told that a big chunk of these savings were included in the debt-ceiling deal” that Rep. Eric Cantor (R-VA) and Sen. Jon Kyl (D-AZ) are negotiating with the Democrats.

Republican leaders have promised that spending cuts in the debt-limit deal must be at least as large as the debt-limit increase, which means $2 trillion if the debt-limit is extended to reach the end of 2012. In a Daily Caller op-ed, I noted that you can find $1 trillion in “savings” from this phony war accounting and another $1 trillion by simply pretending that non-security discretionary will stay flat over the next decade.

There is more evidence that few, if any, real spending cuts are being discussed. One clue is that the media keeps quoting Joe Biden essentially saying that it was easy to reach agreement on the first $1 trillion in cuts.

The other suspicious thing is that the media keeps floating trial balloons for specific tax hikes, but I’ve seen very few trial balloons for specific spending cuts. Friday, the Washington Post story on the debt discussions mentions all kinds of ideas for raising taxes on high earners. A few days ago, news stories revealed that negotiators were talking about changing tax bracket indexing to create annual stealth increases in income taxes. The only item I’ve seen being discussed on the spending side is trimming farm subsidies.

If Republican and Democratic lawmakers were really discussing major spending cuts, then the media would be full of stories mentioning particular changes to entitlement laws to reduce benefits and stories about abolishing programs widely regarded as wasteful, such as community development grants.

I hope I’m wrong, but this is starting to look a lot like the phony $100 billion spending cut deal from earlier this year.

Sean, Rush, Greta, Glenn, Bill: When you get Republican leaders on your shows, get them to promise that they won’t use phony baseline accounting like war costs to reach the $2 trillion in cuts. The budget and the nation desperately need real cuts and real government downsizing.

Will the GOP Finally Cut Farm Subsidies?

With trillion dollar deficits and mounting federal debt, will Congress finally get serious about cutting farm subsidies? We’ve been disappointed before, but there are a few hopeful signs—like the front-page story in this morning’s Washington Post—that this Congress may be serious about cutting billions in payments to farmers. As the Post reports:

In their recent budget proposals, House Republicans and House Democrats targeted farm subsidies, a program long protected by members of both parties. The GOP plan includes a $30 billion cut to direct payments over 10 years, which would slash them by more than half. Those terms are being considered in the debt-reduction talks led by Vice President Biden, according to people familiar with the discussions.

The Post story profiles a freshman Republican from Kansas, Tim Huelskamp, a fifth-generation farmer himself, who has been traveling his sprawling district telling his farmer constituents that they can no longer be exempt from budget discipline. Many farmers in his district appear to agree.

It remains an open question whether the Republican freshman class will live up to Tea-Party principles of limited government when it comes to agricultural subsidies, as we have speculated ourselves (here, here, and here) at the trade center.

Farm subsidies have certainly been a weak spot of Republicans in the past. According to our online trade-vote feature, more than half of the GOP House caucus voted in May 2008 to override President Bush’s veto of the previous, subsidy laden farm bill. In July 2007, more than half the GOP caucus voted against any cuts in the sugar program, and more than two-thirds opposed any cuts in cotton subsidies. (Of course, Democrats were just as bad overall on farm subsidies.)

The next farm bill, due to be written by this Congress, will tell us a lot about whether the Republicans really believe what they’ve been saying about limiting government and reducing the debt.

A Fiscal Royal Wedding

The British royal wedding was splendid, and the bride and groom were a great match. As a fiscal wonk, my idea of a royal match-up would be marrying corporate tax cuts and business subsidy cuts. The Obama administration is talking about corporate tax cuts and Republicans are talking about cuts to farm subsidies. Might they get together over a cup of tea and work out nuptials?

The global average corporate tax rate has fallen over the last decade from 32 to 25 percent (KPMG, page 79). We have been stuck with a highly damaging 40% federal-state rate. Canada is chopping its combined federal-provincial rate to 25 percent. The Conservative government just won a parliamentary majority, which promises even more pro-investment changes for our largest trading partner.

Consider a Japanese car company deciding where to build its next North American plant. Should it choose a place with a 25 percent tax and stable government finances, or a place with a 40 percent tax and soaring government debt threatening major tax hikes?

The American economy is sputtering, and today we learned that the unemployment rate is back up to 9 percent. If the Obama administration wants to get the economy booming before next year’s election, it should push for a cut in the federal corporate tax rate from 35 percent to 20 percent or lower. And it should put aside all this stuff about “closing corporate loopholes.” A lot of supposed corporate loopholes aren’t loopholes to begin with, and as soon as you start trying to cut the real loopholes, half the business community lines up against reform and nothing gets done. Furthermore, if we chopped the corporate rate, the economic distortions caused by loopholes would decline.

Anyway, the largest corporate “loopholes” are probably “homemade loopholes,” which start disappearing automatically if we cut the tax rate. With a high tax rate, corporations have fashioned all kinds of financial structures to avoid taxes. Corporate tax experts agree that the mobility of the corporate tax base is high and rising. If we sharply cut our corporate rate, reported income would increase substantially as multinationals shift their profits into the United States. (For more on this, see my book).

A corporate tax cut would spur capital investment and economic growth. In 2005, the Joint Committee on Taxation used two macro models to look at the effects of various fiscal reform packages. By far, the largest positive impacts on GDP came from matching a corporate tax rate cut with federal spending cuts. (See charts 1c and 1d). The JCT found that:

A decrease in the corporate income tax rate primarily affects the economy through increasing the after-tax rate of return on corporate capital, which provides incentives for increased investment in corporate capital. Over time, this increased investment results in more goods and services and higher total output. It also results in higher labor productivity, leading to increased wages and employment.

So, let’s get cracking on a corporate tax rate cut. Forget about the corporate loopholes, and instead match a rate cut with cuts to business subsidies, such as farm handouts.

Let’s also put aside the idea of tying corporate tax reform to individual tax reform, as Ways and Means chairman David Camp has suggested. That’s just a recipe for gridlock. Obama is offering up corporate tax reform — for the sake of jobs and the economy, Republicans should jump on that opportunity right away.

Ryan’s Plan for Farm Subsidies

I thought I would add some detail to the posts my colleagues have already written on Congressman Paul Ryan’s (R-Wisc.) 2012 budget resolution.

Interestingly – and, I would argue, appropriately – the agriculture stuff appears in the “Ending Corporate Welfare” section of the plan, most of  it on page 36. After outlining the ways that farming America is doing well, Ryan’s plan would cut almost $30 billion (or 20 percent of projected outlays) over the next 10 years from farm subsidies (direct payments, currently costing about $5 billion per year) and crop insurance subsidies. Cuts will also reportedly fall on nutrition and conservation programs, but I will let my colleagues weigh in on those.

The focus on crop insurance is encouraging, because crop insurance is an increasingly important part of U.S. farm policy, especially in recent years when commodity prices have been high: high prices reduce the amount of money taxpayers spend on commodity payments, but increases crop insurance premiums, which we all subsidize. They now cost about $6 billion, or more than commodity payments.  And, as the blueprint points out, surely farmers “should assume the same kind of responsibility for assuming risk that other businesses do.” Well played, Congressman.

One point on where the cuts fall on the commodity payments side: As a free-marketeer, I acknowledge that direct payments are less market-distorting than price-linked payments, and they are less (although not fully) questionable under World Trade Organization rules.  If we are going to shovel money to farmers, in other words, sending unconditional welfare checks is the least distorting way to do it. But there is no money to raid from the price-linked programs because of high prices, so if savings are to be found, we need to raid the direct payment cookie jar. And, really, with $7 corn and red ink from here to eternity, surely this is an ideal time to wean farmers off of the government teat.

Reactions from the farmers’ friends, by the way? Predictable. The Chairman of the House Agriculture Committee dismissed the blueprint’s plans for agriculture as “simply suggestions” and that the Agriculture Committee will write the 2012 Farm Bill, thankyouverymuch. (Ryan himself said that the cuts should start in 2012, implying that the Farm Bill schedule should go ahead as planned).

The National Farmers Union spoke the usual blather about Americans spending less of their income on food than in other nations (perhaps because we are, you know, richer?) for the “safest, most abundant, most affordable food supply in the world,” which has been the favorite line of the farm lobby for years now.  The Corn Growers and the National Cotton Council joined them in trotting out variations of the new favorite talking point, about how agriculture has already taken a hit from cuts to crop insurance and that cuts to agriculture’s budget should be no larger than cuts to other areas. 

The blueprint is not my ideal plan, to be sure. That plan would have a line in it about removing the federal government once and for all from all aspects of the agricultural market, including by disbanding the U.S. Department of Agriculture.  It would at least include something about disbanding the production- and price-determined subsidies, so we’re not all on the hook again if prices fall. But it is a good start.

Federal Spending: Ryan vs. Obama

House Budget Committee Chairman, Paul Ryan, introduced his budget resolution for fiscal 2012 and beyond today entitled “The Path to Prosperity.” The plan would cut some spending programs, reduce top income tax rates, and reform Medicare and Medicaid. The following two charts compare spending levels under Chairman Ryan’s plan and President Obama’s recent budget (as scored by the Congressional Budget Office).

Figure 1 shows that spending rises more slowly over the next decade under Ryan’s plan than Obama’s plan. But spending rises substantially under both plans—between 2012 and 2021, spending rises 34 percent under Ryan and 55 percent under Obama.

Figure 2 compares Ryan’s and Obama’s proposed spending levels at the end of the 10-year budget window in 2021. The figure indicates where Ryan finds his budget savings. Going from the largest spending category to the smallest:

  • Ryan doesn’t provide specific Social Security cuts, instead proposing a budget mechanism to force Congress to take action on the program. It is disappointing that his plan doesn’t include common sense reforms such raising the retirement age.
  • Ryan finds modest Medicare savings in the short term, but the big savings occur beyond 10 years when his “premium support” reform is fully implemented. I would rather see Ryan’s Medicare reforms kick in sooner, which after all are designed to improve quality and efficiency in the health care system.
  • Ryan adopts Obama’s proposed defense (security) savings, but larger cuts are called for. After all, defense spending has doubled over the last decade, even excluding the costs of wars in Iraq and Afghanistan.
  • Ryan includes modest cuts to nonsecurity discretionary spending. Larger cuts are needed, including termination of entire agencies. See DownsizingGovernment.org.
  • Ryan makes substantial cuts to other entitlements, such as farm subsidies. Bravo!
  • Ryan would turn Medicaid and food stamps into block grants. That is an excellent direction for reform, and it would allow Congress to steadily reduce spending and ultimately devolve these programs to the states.
  • Ryan would repeal the costly 2010 health care law. Bravo!

To summarize, Ryan’s budget plan would make crucial reforms to federal health care programs, and it would limit the size of the federal government over the long term. However, his plan would be improved by adopting more cuts and eliminations of agencies in short term, such as those proposed by Senator Rand Paul.

This Week in Government Failure

Over at Downsizing the Federal Government, we focused on the following issues this week:

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