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March 6, 2009 - There is little good news for free market enthusiasts in President Obama’s first budget, unveiled last week. One of the exceptions is his proposal to rein in farm subsidies by cutting off one type of payment to farms with sales over $500,000 per year. The President actually deserves some credit for following through on this laudable campaign promise, and I certainly hope he succeeds in facing down the opposition.
It will not be easy. Others have tried and failed to pare down agricultural subsidies. Most recently, former President George W. Bush unsuccessfully vetoed last year’s huge farm bill (though he supported another massive farm bill back in 2002). This time again, opposition will be stiff on both sides of the aisle. “Republicans who represent cotton and rice will go down fighting on this,” according to Otto Doering, a Purdue University professor of agricultural economics quoted in the L.A. Times . “ Populist Democrats in the Plains states will also be opposed.” But the Times story was quick to point out that “the subsidy caps have a populist cast that could appeal to farmers with small and medium-size operations, particularly in the corn and soybean growing regions in the Midwest.” In fact, subsidies do tend to go to big agribusiness much more than to smaller farms. This blatant corporate welfare is what the President plans to cut.
But though this is a step in the right direction, it is only a small step. After all, the changes, if they do pass, would cut a mere $9.8 billion over ten years, or about a billion a year. One billion dollars may sound like a lot of money to you and me, but it amounts to a fraction of total farm subsidies (around $10-25 billion a year, depending on what you include), and it pales to insignificance when compared with the gargantuan $3.9-trillion budget and $1.75-trillion deficit for this year alone. Why not make more meaningful cuts? Why not, in fact, eliminate agricultural subsidies altogether?
Farm subsidies total around $10-25 billion a year.
As noted above, most subsidies go to big agribusinesses, not to poor or even middle class farmers. But what effect do subsidies have on poor consumers? Don’t they at least allow agricultural producers to offer their goods at lower prices? Well, sometimes they do. But subsidies can just as easily encourage inefficiency, which does not lead to lower prices. For instance, farmers can be encouraged to use less-productive, marginal lands, which cost more to cultivate, eating away at any savings consumers might see. Some forms of subsidies actually pay farmers not to produce, which restricts supply and thus raises prices. Direct price supports, another form of subsidy, legally set prices above the market rate in order to ensure farmers a healthy return. Backing this all up are trade barriers, shielding domestic producers from foreign competition (which would force them to be more efficient) and keeping consumers from buying cheaper products from abroad. In short, these various farm policies are complex, and often actually end up contradicting each other. But the overall effect of all of these distortions is to raise the cost of food. This disproportionately harms poor consumers, who spend a greater share of their income on food.
Nor are poor American consumers the only ones who suffer. By restricting access to domestic markets, American farm policies reduce the incomes of truly poor farmers in the developing world. Trade barriers make it harder for them to compete in the very area in which their countries enjoy a comparative advantage. If helping the poor at home and abroad is high on your agenda, then agricultural subsidies should be high on your hit list.
Agricultural subsidies can also harm the environment by promoting farming on marginal land. This leads to increased use of pesticides and fertilizers, which can end up polluting nearby rivers. Agricultural subsidies also often encourage overgrazing, soil erosion, and the wasteful use of water, especially in drier parts of the country. A 2007 Reason article points out that “water subsidies alone amount to around $2 billion annually, propping up such uneconomical enterprises as growing cotton in the Arizona desert.” Ending subsidies would promote a more rational allocation of land and water resources.
But maybe farm subsidies are necessary to ensure the health of the agricultural sector and the security of the food supply. The U.S. is hardly the only country whose government makes this argument. The European Union, Japanese, and Canadian governments also maintain byzantine schemes of farm support, as do other countries in the developed and developing world. In recent decades, though, both New Zealand and Australia unilaterally eliminated import barriers and domestic price support subsidies for agriculture. The fears so often repeated by farm lobbies proved to be baseless. Some farms (the least efficient) did go out of business, but far fewer than expected. The rest simply adapted to the newly unfettered market forces.
In fact, New Zealand prospered after reforms cut subsidies practically to zero ( details here ). “Forced to adjust to new economic realities, New Zealand farmers cut costs, diversified their land use, sought non-farm income opportunities and altered production as market signals advised.” Productivity in the sector has since averaged 6 percent annual growth compared with just 1 percent before, and agriculture now accounts for 17 percent of the country’s economic output compared with 14 percent before reforms.
Should a government spend $3.9 trillion of your money trying to do every nice thing it can?
In addition to the experience of other countries, there is the experience of American farmers and ranchers who thrive without subsidies. There is no good reason why producers of crops like wheat, cotton, corn, soybeans, and rice should require ongoing assistance and protection when producers of potatoes, pistachios, pears, poultry, and hundreds of other food items get on just fine without them. Maybe the American landscape is just better suited to certain uses. Or maybe some producers are simply more efficient, not having been coddled for decades by the nanny state. But neither answer provides a good justification for continuing to distort agricultural markets.
Even if agricultural subsidies were a good thing—and the economics shows they are not—a deeper question arises: Should governments do all good things? Should a government spend $3.9 trillion of your money trying to do every nice thing it can? Well, the one main good thing a government really should do is protect individual human rights to life, liberty, property, and the pursuit of happiness. It does this by preventing the initiation of force. But is this consistent with taking your money in order to give it to agribusiness and other special interests? Is it consistent with imposing tariffs or quotas on imports, or manipulating the prices of everyday commodities?
These are all, in fact, perversions of the proper role of government, which is the restraint of the use of force. If someone thinks it would be a good thing for you to give away some of your money to help farmers—or the poor, or the environment—doesn’t justice demand that you be persuaded to do so? What gives someone else the right to force your hand?
Economics tells us that in the long run, freedom makes everyone better off. But the fact that men and women prosper most when allowed to reap the benefits of their own efforts and exchange freely with their fellows is no coincidence. It is rather a reflection of the fact that justice is a principle rooted in reality. The more widely people recognize both that freedom is just and that it has practical benefits, the more prosperous and peaceful our world will be.
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