Should the United States Cut Its Farm Subsidies?

One of the most hotly contested aspects of U.S. trade policy is the program of subsidies the United States provides its farmers. Trade partners object to U.S. farm subsidies, saying they unfairly block out foreign competition — this has been one of the primary sticking points in the stalled Doha round of trade negotiations. The counterargument holds that U.S. farm subsidies are necessary to prop up the U.S. farm industry, particularly given the role President Bush has assigned to corn-based ethanol in his energy security plan.

Daniel T. Griswold, director of the Cato Institute’s Center for Trade Policy Studies, and Bob Young, chief economist for the American Farm Bureau, debate whether the United States should be subsidizing its farmers.

As I argued before, governments are going to be involved in agriculture and a country’s food supply. Even New Zealand — the example Dan keeps coming back to — operated its largest sector, dairy, as a state trading enterprise until the very recent past. And if governments are involved, you as a consumer want them to err on the side of more production, not less.

Estimates of the future cost of subsidies are, exactly as Dan says, estimates. But given the extent to which we have turned to agriculture to provide some of our nation’s energy needs, it is very likely that spending levels will decline significantly from those observed in previous farm programs.

Levels of support have been held constant in nominal dollar terms since the early 1980s. The target price for corn in 1982 was $2.70 per bushel. Today it is $2.63 per bushel. The wheat target price was $4.05 in 1982. Today it is $3.92. This implies significant declines in real terms. Because we have essentially been operating off of fixed-payment yields — some dating back into the early 1980s — the proportion of the crop actually covered by support has also fallen significantly. On average, the target prices carried in the 1996 Farm Bill covered 83 percent of the production costs of the program crops and were provided on 79 percent of production. Assuming the 2007 bill extends those same levels, the target price will cover only 70 percent of production costs on 65 percent of production. In other words, we’re already on a path to reduce the real level of support and have been since the early 1980s. Why jump off now?

The Farm Bureau supports the idea of reduced government support when we are able to get access to foreign markets. We have been a supporter of the administration’s proposals in the Doha trade negotiations. But because of those negotiations, it makes no sense to make a unilateral leap of faith.

Agricultural products entering the United States face an average tariff rate of 12 percent. We have some of the lowest agricultural tariff rates of any country in the world. Our exports, on the other hand, face average tariffs of 62 percent. Even the oft-cited New Zealand charges an average of 7 percent. Consequently, the United States does not have a whole lot of leverage on the tariff front.

Our primary leverage in this round is our domestic support programs. To date, other countries in the negotiations have not been willing to come forward with significant enough reductions in their own tariff rates to provide the potential for enough trade improvement to offset the domestic program reductions they are requesting from the United States. Again, the Farm Bureau is on record as being ready to support an agreement — including the cuts in domestic programs — but only when these objectives are met.

Americans can and do enjoy reliable and affordable access to food without the expensive and distorting programs Bob advocates. We enjoy plentiful supplies of fruits, vegetables, and meats without paying a “premium” through import quotas or production subsidies.

There is no dismissing the New Zealand experience. The government largely dismantled its farm programs and none of the consequences Bob predicts came true. Its citizens did not suffer any shortages or disruptions of food supplies. Productivity of New Zealand farms accelerated after reform and they now compete successfully in global markets, especially as dairy and livestock producers.

In contrast, the output and income of America’s most supported crops have lagged behind the performance of non-supported products that compete in free and open markets. According to the U.S. Department of Agriculture, cash receipts for the most supported crops, including corn, soybeans, wheat, cotton, sugar beats, and sugar cane, rose an unimpressive 14 percent from 1980 to 2005. Meanwhile, cash receipts for non-supported crops, including fruits, vegetables, nuts, and greenhouse products, soared by 186 percent. Subsidized farmers are selling out their future competitiveness in the market for the sake of federal handouts.

Despite Bob’s efforts to trivialize the cost, America’s farm programs are expensive by any measure. Dividing the cost into thinner and thinner slices (what’s next, “per mouthful”?) cannot hide the fact that these programs cost Americans tens of billions of dollars year after year. As the OECD accurately calculates, they cost us not only as taxpayers but as consumers and producers because of tariff barriers that artificially inflate domestic prices.

The $7 billion figure Bob cites for future annual spending represents the kind of wishful thinking that accompanies every budget projection. A fall in global commodity prices would send that number soaring, as it did in the late 1990s.

During the past twenty years, farm programs have cost America’s non-farm households a cumulative $1.7 trillion. That is how much non-farm households would have in the bank today if they had been allowed to save and invest what they have been forced to surrender to favored farmers through our never-ending farm programs. We need to insure that Americans are not on the hook for another $1.7 trillion during the next 20 years.

Bob implies that ranchers and fruit and vegetable farmers are less responsible stewards of the land because they do not receive production subsidies. In fact, subsidies actually hurt the environment for the many reasons I outlined earlier. If we want to encourage better stewardship, we can achieve it through direct, non-distorting incentives without subsidies for over production.

Farm programs survive year after year because they benefit a small but concentrated and politically active group of farmers. Bearing the cost of those programs are tens of millions of American households who pay through higher taxes, higher prices at the grocery store, and lost opportunities for future growth. It is time for Congress to pass a farm bill that serves all Americans, not just a favored few.

In some respects, Dan’s concerns regarding our farm program reflect thinking based on the way things used to be. Spending on farm programs has already begun a precipitous drop and is expected to average only $7 billion per year over the life of the next farm bill. That works out to $23 per capita on an annual basis, six cents per day, or two cents per meal.

This takes me back to an earlier point. When I listed reasons for farm programs, I said governments will be involved in agriculture and the nation’s food supply. If they are going to be involved, you as a consumer want the government to make sure there is too much food, or more than a free market would ordinarily supply. This is not a surplus or scarcity argument, it is a statement of fact. Because we want this insurance policy we should be willing to pay the two cent per meal premium.

One of Dan’s other points is that these farmers somehow aren’t “deserving.” Farmers operate and participate in these programs based on the rules provided by Congress and implemented by the administration. These programs are based on production. The 38 percent of producers who provide 92 percent of our food receive 87 percent of all farm program payments. That seems pretty much in balance to me. Europe provides their farm program supports based on social criteria as opposed to production base. They spend about three times as much on their farm supports as we do — and that’s based on our spending levels of a few years ago, not today.

The New Zealand and Australia cases are held up to us on a fairly regular basis. Australia has had, and continues to have, support programs for their producers. They are now in the middle of providing disaster assistance to their producers — assistance their producers certainly need. They also operated their wheat market under a single-buyer/single-seller framework up until the very recent past. New Zealand made the jump they did when their entire economy and government were on the brink of bankruptcy. They undertook massive government reforms that cut across literally every agency. Dan might be willing to entertain such an idea, but I’m not so sure that we as a nation are ready to make that leap.

Finally, Dan talks about the farm programs as producing environmental degradation. In part because of the rules a producer must operate under to be eligible to participate in farm programs, and in part because farmers are the best day-to-day environmental stewards in this country, the average erosion rate from an acre of farmland has dropped from 7.2 tons in 1982 to 4.7 tons in 2001. Wetland protection has increased sharply and wildlife habitat has expanded significantly. Even on those disgusting corn acres — the acres that provide the feed for our livestock and are helping with our nation’s energy supply — the nitrogen used to produce a bushel of corn fell from 1.3 pounds in 1983 to 0.94 pounds in 2006.

Bob Young presents the false choice of scarcity or surplus when it comes to farm policy. Here’s a radical alternative: How about relying on market prices to match supply and demand the way we do in virtually every other sector of the U.S. economy? The government doesn’t micromanage the price and production of housing, cars, clothing, or energy — and thank goodness for that. Of course, government can play a role in promoting food safety and other public goods, but that doesn’t require centralized controls on production, imports, and distribution.

Bob and I agree that America is not alone in protecting and subsidizing farmers. But just because other nations engage in self-damaging policies does not obligate us to do the same. Almost all Americans would be better off if we dismantled our farm programs, whether or not other countries followed our lead.

You don’t need to take my word for it. Bob’s arguments are refuted every day by the experience of Australia and New Zealand. These two advanced economies have largely dismantled their farm programs. Whereas U.S. farmers receive 16 percent of their income from government support (according to the OECD), the comparable figure in Australia is 5 percent and in New Zealand 3 percent.

None of the fears that Bob raises has come true in either of those countries. Their citizens have suffered no disruption or shortages in food supplies. Their farmers have realized impressive efficiency gains and now produce competitively for global markets rather than for the government. Sensitive lands have been freed for reforestation and other conservation uses.

Farming is not so different from other sectors of the economy that we need to maintain an elaborate, expensive web of government controls and import barriers. Futures markets can hedge against price fluctuations and private-sector insurance can protect against unforeseen events. Food consumption and production adjust to price changes as in any other sector. My local grocery store maintains a steady stock of fruits, vegetables and meat without the subsidies and protections we lavish on the five favored program crops.

Granted, our government has imposed barriers against steel, textiles and other imports, but those are the exceptions, not the rule. Those protections don’t make any economic sense either.

Our farm programs are not an asset to be guarded but a ball and chain around our national neck. If the past seventy-five years have taught us anything, it should be that open markets work much better than closed and planned economies.

I thought I’d give my reasons for farm programs before we get into the point/counterpoint that will unfold later this week. There are at least three reasons one can develop to justify farm programs.

First, it is difficult to imagine a world where governments will not be involved in something as basic as the nation’s food supply. Rich countries do it by providing direct financial support to their producers. Poor countries tend to do it by providing high tariff protections. As a consumer, do you want the government to make sure we have a bushel too much or a bushel too little? That’s a dumb question. So if we want to make sure there is a bushel too much, the inelastic nature of food markets will make prices be lower than they otherwise would be. It is an insurance policy. Pay the premium.

Second, as a society, we want to ensure our soil resource is just as productive twenty, fifty, even one hundred years from now as it is today. Farmers are far and away some of the best day in, day out environmental stewards in the country. But the production practices they need to undertake to protect that soil resource will require them to be less than profit maximizing, at least in the short run. It is an investment in society’s long-run benefit. Make it.

Third, it would be one thing if it were farmer competing against farmer in international markets, but that’s clearly not the case. Agricultural markets in the United States tend to be fairly open. The average tariff faced by countries trying to land agricultural products here is around 12 percent. The average tariff faced by our farmers is around 62 percent. Our farmers work in a very different regulatory environment than exists in several other countries, and as consumers we’re glad of it. It is compensation to help level the playing field. We provide protection to other sectors of the economy when they face unfair competition. Why should agriculture be any different?

Agriculture in the United States over the last fifty years has been an amazing success story. We have provided critical input for society as a whole at an almost continuously decreasing real cost. We are making better use of inputs today than at any time in the past and are almost constantly improving our environmental footprint. Now we are being looked at to provide the feedstock for renewable fuels, a task that will require substantial investments on the part of producers. They will respond.

We have a lot to talk about this week. Let the games begin.

America’s farm programs are relics of a bygone era, a drag on our twenty-first century economy, and a blemish on America’s image in the world. Subsidies and tariffs enacted in the 1930s as temporary “emergency” measures remain largely intact today, despite the profound changes in our economy and world.

According to the Organisation for Economic Cooperation and Development (OECD), America’s farm programs transfer about $40 billion a year from consumers, firms, and taxpayers to a small group of farmers. Tariffs and quotas on imported sugar, rice, and dairy products force American families to pay about $10 billion a year above what they would pay at world prices. This tax hits poor families especially hard because they spend a higher share of their budget on food. Artificially high prices also punish food-processing industries, forcing confectioners and others to relocate abroad.

Farm support programs cost taxpayers nearly $20 billion a year, real money even in Washington. Ninety percent of those subsidies go to producers of only five program crops — corn, soybeans, wheat, cotton, and rice. According to the Environmental Working Group, the top 10 percent of recipients collected two-thirds of subsidies.

That money is not supporting poor, struggling “family farmers.” Average household income for family farms is now 10 percent above the average income for non-farm households. During 2004-2006, net farm income averaged a record $72.7 billion annually. Meanwhile, the net worth of U.S. farmers grew $90 billion a year during that same time and farm equity has now reached $1.6 trillion. The debt-to-asset ratio for U.S. farmers is the lowest in forty-five years.

While farm programs have enriched certain farmers, they have failed to deliver long-promised “rural development.” Commodity supports actually reduce economic diversity and dynamism in rural communities. A study by the Kansas City Federal Reserve Bank found that counties that received the most farm payments per capita suffered subpar population and employment growth.

Farm supports damage the environment by promoting overuse of fertilizers and pesticides. Inflated land prices crowd out conservation, reforestation and other alternative uses. Domestic supports also depress global prices, hurting poor people abroad and complicating efforts to open markets for U.S. exporters.

There is nothing inherent to farming that makes it worthy of such largesse. Farming would thrive without farm programs. America’s abundant and fertile land and technology guarantee we will continue to be a competitive food producer. Two-thirds of American farmers currently produce for the market without government support.