Economists Fault Agricultural Subsidies as a Sop to Relatively Well-Off Farmers
Wall Street Journal | August 19, 2002 | By Scot Kilman, Staff Reporter of THE WALL STREET JOURNAL
CHICAGO -- A growing number of economists think Washington's agricultural policy, slated to cost taxpayers a near-record $20 billion annually starting this fall, is dumb. They contend the policy will fuel crop gluts while rewarding a fairly well-off bunch: Farmers.
On the issue of subsidies in general, Neil Harl and Luther Tweeten represent opposing schools of thought. Prof. Harl of Iowa State University believes the government should protect farmers from swinging commodity prices. Prof. Tweeten, retired from Ohio State University, thinks most farmers can do just fine with a lot less government intervention. Yet both say the $118 billion, six-year farm bill signed by President Bush in May will cause a lot of problems.
The government's policy is to ensure that farmers reap a targeted price on 15 crops by making up with federal payouts for any shortfall in the market price. The new bill increases the number of protected crops and sweetens subsidies. For example, the effective target price on corn is being raised 8%.
The policy, however, leaves hard-hit farmers high and dry when harvests are poor, as is likely to be the case throughout much of the drought-stricken Midwest this fall. A measly harvest drives up prices, shrinking price-based subsidies on whatever crops are actually sold. Thus, drought-ravaged farmers in Kansas and Nebraska, with little product to sell, will suffer, while the higher market prices will reap fortunes for farmers in states such as Iowa and Minnesota who are on track to reap bumper crops.
Longer term, when the weather is normal, the new subsidies are so rich that they will tend to spur wasteful production, keeping environmentally fragile land under cultivation while depressing world-wide prices at the expense of farmers in poor nations.
"Today's program is very distorting," says Prof. Harl, who is best known for predicting the 1980s farm debt crisis, the result of massive overbuilding across the farm belt in the 1970s.
Prof. Harl worries anew about gluts. Once the current drought passes, he sees the federal policy spurring Midwest farmers to grow subsidized crops on every acre of available land. Protected from market forces, farmers will keep getting better at it year after year, steadily increasing the taxpayer's cost.
He figures Uncle Sam could spend half as much and do a better job at smoothing out bumps in the farm economy by focusing on inventory management, a tactic the government abandoned in the 1990s.
The government no longer requires that farmers idle some land to qualify for subsidies. Critics hooted that Washington paid farmers not to farm, but it saved taxpayer money by countering the tendency of subsidies to create gluts, he says.
Prof. Harl would also have the government return to the role of putting excess crops into federally owned granaries to protect against weather disasters. The food industry, spoiled by a string of big harvests, has allowed U.S. grain reserves to dwindle. As a result, the drought could well lift the grocery bills of U.S. families.
While all this might blunt the cost of crop subsidies, in the past Washington created a lot of problems by trying to manage supplies. Idling land encourages foreign competitors to expand theirs.
Many of Prof. Harl's colleagues think it would be better to simply shelve crop subsidies. Even Mr. Bush's own economists think they are unworkable. "History has shown that supporting prices is self-defeating," said a think paper issued by the Agriculture Department last year. It was ignored by Congress, where farm-state members control farm policy.
Another problem for economists such as Prof. Tweeten is that farmers, as a group, are a lot wealthier nowadays than most of the people whose taxes pay for crop subsidies. "It's hard to defend farm policy on economic grounds anymore," he says.
A lot has changed since the farm program was born during the Great Depression. Subsidies were designed to attack rural poverty. Today, farmers are a small part of the rural sector. As a result, subsidies do little for development in most rural areas, home to roughly 25% of the U.S. population.
Farmers themselves are no longer a financially disadvantaged lot. A USDA study unveiled in July shows that the typical farming family is now financially stronger than the typical U.S. family. In 1999, the most recent year for which data are available, the average net worth of U.S. farm families was $563,600, roughly double that of nonfarm households.
Instead of paying crop subsidies, several economists say the government could ease farmers into the free market by subsidizing their use of risk-management tools such as futures contracts.
But don't expect big reforms anytime soon. Little will change as long as the close balance of power in Congress between Democrats and Republicans keeps both parties eager to please farmers.
Write to Scott Kilman at scott.kilman@wsj.comEconomists Fault Agricultural Subsidies as a Sop to Relatively Well-Off FarmersWall Street Journal:
