2005-07-25

Farm subsidies - an opportunity beckons

The July 25 Washington Post editorial (entitled "Hungry Kids, Greedy Farmers") addresses an interesting problem facing legislators and their relationship with American farmers. It is an examination of the US government's attempts to cut back on both farm subsidies and related welfare spending - Food Stamps.

The issue is an interesting one because the beneficiaries of government spending fall directly into two catgeories of political support. On the one hand, Farm subsidies are a direct cash inflow into areas that are solidly Conservative and would probably vote for the Republican party. On the other hand, Food Stamps are a direct cash inflow into areas that would probably vote for the Democratic party - welfare recipients and those who are generally poorer than the average.

Obviously, both sides wish to increase spending in their allotted areas for political gain. The problem, at least for the Republican Party, is that they are firmly committed to the philosophy of small government. In practice, this means that there is continual effort on their part to pare back on government spending in order to keep tax burdens low and allow the marketplace - as well as ordinary people - to buy and sell without government interference.

The problem with this issue is, essentially, political. If the Republican party is to be loyal to its faithful voters, then they must continue to be seen supporting them. The historically high value of the US dollar has meant that importing goods from overseas becomes cheaper than buying them from local producers. American farmers have suffered from this situation, with food being more expensive to produce in the US than in many of their trading partners. Normal market rules would have punished these farmers for their inability to compete by forcing many into bankruptcy or alternative forms of employment. The US farming sector is an important part of the economy, and would have suffered a painful recession the more the US dollar appreciated.

But they didn't. Why? Because they have been given subsidies by the government - subsidies that go back decades. A recession was therefore averted and the conservative, hard-working country folk, remained loyal to their Republican leaders.

It all sounds good except for one thing - subsidising sectors of the economy promotes inefficiency and distorts ordinary market behaviour. By not allowing fair competition with overseas producers, taxes are essentially taken from the economy as a whole to support one small part, with the overall result being higher total costs. For those who adhere to a form of economic neoliberalism, the US farming sector is in need of Microeconomic Reform.

And who are these people who demand that markets be reformed and that the government needs to keep its hands off? Those who bankroll the Republican party. These experts and lobbyists, who are adherents to Monetarism and the Austrian School of economic thought, and are funded by pro-business and pro-market think tanks, are some of the most influential people in the G.O.P.

So the Republicans have a dilemma - on the one hand they need the voting support of ordinary country folk, but on the other hand they need the funding supplied by these business-friendly organisations. What to do?

There is, in actuality, a solution that will result in the party smelling like roses - and not just to the farmers and think-tanks, but also to those who rely on food stamps. Moreover, this solution could be considered politically neutral, so it could be initiated by the Democrats as well as the Republicans.

Before I discuss this solution, I need to point out the market distorting effects of subsidies a bit further. The farm subsidies in the US are specifically geared to support certain types of produce - wheat, corn, barley and so on. There are very little subsidies (if any) available to those who might want to produce more exotic goods, like organic meat and vegetables, Emus, medicinal herbs or low-THC industrial Hemp. The result of these subsidies is that farmers are rewarded for producing more than what the market desires. This depresses market prices and often leads to dumping, which hurts and alienates international competitors - many of whom are from poorer nations and suffer greatly when the market does not go their way.

Two western nations have, over the past 15-20 years, pared their agricultural subsidies back to almost nothing. Both Australia and New Zealand have forced their farmers to no longer depend upon government subsidies. The result has been astounding. Driven now by market forces, many farmers have become entrepreneurs, seeking out new opportunities and no longer bound by one or two particular crops. As a result, Farmers have become more self-motivated, more flexible in the face of market changes, and more able to survive disasters like drought or floods.

But there is a down-side. Many farmers could not handle the changes - so dependent were they upon government intervention that they were forced to sell up and move to the city to find employment. But their old farms are not overgrown with weeds - they were purchased by more flexible farmers who were eventually able to make money producing something else.

Agribusiness in Australia and New Zealand has boomed as a result of removing subsidies. The problem was that it took a long time, and a lot of social pain, to achieve.

It is in the interests of the American government to remove farm subsidies completely. Farming is an important part of the economy, but it needs to respond to clear market signals and not to government handouts for producing certain amounts of corn. But how can social dislocation and economic hardship be minimised? Here is the solution.

The first step is to announce a date when all Farm subsidies will end. The date needs to be at least five years into the future to allow farmers time to plan the rest of their lives. Some will be excited by the new possibilities that the new situation will bring. Others will know that the writing is on the wall, and will act accordingly. But there is still time - and still money from the government that is coming in. This money can be used by the market-driven agribusinessmen to invest in new capital, or it could be used by the failing farmer to retrain himself or herself at night school or college, to set up an alternative source of employment income once the farm is gone.

The second step is to release all ties that these subsidies have to certain crop types or amount produced. In fact, the subsidy should remain even if the farmer decides to stop producing altogether. What this will do is give permission to all farmers that they can grow what they darn well like. Although the subsidy is still in place, and although it is still distorting the marketplace, farmers are no longer restricted in what they can grow. By no longer tying subsidies to crop types, farmers can then respond to market demands - if wheat prices are too low, maybe they should grow something else instead. Once the subsidies end, the farmers have already had a number of years of exposure to a relatively unrestrictive marketplace, and are more likely to survive without any goverment help.

The third step is to change the subsidies to ensure that more money goes to individual farmers rather than agricultural business. Many people do not realise that farm subsidies are a form of corporate welfare. Although Joe Farmer gets his cheque from Washington that helps him keep food on the table and a roof over his head, a large proportion of subsidies end up in the hands of agribusinesses. Although these businesses will suffer as well from the ending of subsidies, there is not the same social dislocation compared to when a family farm closes. While subsidies are linked to the amount produced, some component should take into account the welfare of individual farmers. Politically, this will keep the farmers happy.

The final step is to increase the amount of money spent on food stamps. This may seem a strange (and rather socialist) final step, but we need to remember that the amount of welfare money spent on food stamps is quite small compared to the amount spent of agricultural subsidies (that is, according to the Washington Post Editorial). Once the subsidies have stopped, billions of dollars of tax payers money are no longer being spent. Increasing funds for the food stamp program will not undo the massive savings that have been achieved by removing agricultural subsidies. The effect of raising food stamp availability will be poor people who have more food - a moral victory that no political party should ignore.

It is strange that the United States, the most flexible and market-driven economy in the world, should have a government funded agricultural system that is not allowed to listen to market signals. It is the result of an outdated economic policy that has become increasingly political in nature, and fails to serve the people of the United States, nor its trading partners. The removal of subsidies and tarriffs on agricultural goods is a process that is increasingly prevalent throughout the world. The EU, whose subsidies are even worse than those used in the US, is likely to begin reforming itself within the next ten years. If nothing is done to reform the current system in the US, it will not just be the farmers who suffer, but ordinary citizens. America's political parties need to take note.




From the Osostrian School Department


© 2005 Neil McKenzie Cameron, http://one-salient-oversight.blogspot.com/




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1 comment:

Atticus said...

Neil, you get it mostly right, with one important factual oversight: as a rule, farming in America is no longer a family business. In fact, the bulk of the subsidized commodities grown in this country are grown on corporately-owned. The small-acreage farmer is going the way of the dodo. Therefore, the folks being protected from free-market forces are not just mom-n-pop farms, but giant, multi-national corporations.

Repugnant behaviour, no?