May 4, 2008
Farm Subsidies
Farm Subsidies and Farm Taxes-Becker
Posner presents evidence on the sizable subsidies received by American farmers from the federal government of the United States. However, the US is not unique, for every rich country including France, Germany, Great Britain, and Japan, heavily subsidizes their farmers, no matter how small the agricultural sectors. In fact, some of these other countries subsidize farmers more generously than even the United States. On the surface, this universal tendency for rich countries to subsidize farming, no matter how different are the details of their political systems, is a paradox. For since only a small fraction of the populations of these countries work in agriculture, farmers cannot contribute much to any majority voting coalition.
Add to this paradox that pretty much every developing country, no matter whether they have democratic or totalitarian political systems, rather heavily tax farmers in order to subsidize their urban populations. Taxing of farmers is as true of India as of China, Mexico as well as Argentina, Egypt as well as South Africa, and similarly for the other poorer nations. In all these countries, farmers are a significant fraction of their populations, and they form a majority in many, such as India and China.
This different treatment of farmers in rich and poorer nations is dramatically seen in the causes of and the responses to the recent worldwide explosion of food prices. American and European subsides to biofuels are an important factor behind the rise in food prices, for these subsidies directly raised the price of corn to consumers, and indirectly raised the prices of other grains (see our recent discussion on April 13 and 17 of the rise in food prices). Riots broke out in many cities around the world in protest against the increases in the prices of bread and other food stables. To quell these riots and other urban unrest, many countries restricted their exports of agricultural goods in order to lower the prices and increase the supply of these goods to their urban citizens. The effect of these export restrictions was to lower the incomes of the farmers in these countries since they were prevented from selling some of their produce on the world market where prices are higher.
This response to rising food prices by the governments of poorer nations is not explained by any concern about fighting poverty in these nations. The fact is that farmers in developing countries are much poorer on average than are their city residents, which explains the continuing migration from the rural areas to cities in these countries. So by putting restrictions on the exports of farm goods, developing countries are not only making their economies less efficient, but also they are adding to the overall incidence of poverty among their populations. The gap between the incomes of rural and urban families is much smaller in developed countries that subsidize rather than tax farmers. Indeed, with the high prices for cereals and other foods during the past couple of years, average farm incomes are often above those of city residents.
I believe that the explanation for the very opposite treatment of farmers in developing and developed countries is interest group competition (see my "A Theory of Competition Among Pressure Groups for Political Influence", The Quarterly Journal of Economics (Aug., 1983), pp. 371-400. This analysis shows that small groups, like farmers in rich countries, often have much greater political clout than large groups, like farmers in poorer countries. The reason is that even large per capita subsidies to small groups, such as farmers in the US, impose rather little cost (i.e., taxes) on each member of the large groups, like urban and suburban residents of the US. As a result, these large groups do not fight very hard politically against the small per capita taxes used to subsidize farmers.
By contrast, a large subsidy to farmers in developing countries would require imposing high per capita taxes on their relatively small urban populations since farmers are a rather large proportion of the total population in these countries. Instead, the same political pressures as in developed countries lead poorer countries, regardless of the nature of their political systems, to subsidize the smaller urban populations at the expense of the larger farm populations.
Hence a common approach to the political process based on interest group pressures can explain both the taxing of poor farmers in developing nations, and the subsidies to well off farmers in richer nations.
The Outlandish Farm Subsidies--Posner
The President has expressed dissatisfaction with the proposed Farm Bill wending its way through Congress. He wants farmers whose annual incomes exceed $200,000 to be denied subsidies; the present cutoff is $2.6 million and Congress will not go below $950,000. The President's concern with farm subsidies cannot be taken very seriously, since in 2002 the Republican Congress with Administration connivance greatly increased these subsidies and at the same time repealed some of the modest reforms that the Clinton Administration had introduced in 1996. The Administration's current proposals would, if enacted, be a step in the right direction, but they will not be enacted, and, judging from the 2002 legislation, they are intended I suspect merely to embarrass the Democratic Congress.
The deregulation movement passed agriculture by, leaving in place a series of government programs that lack any economic justification and at the same time are regressive. They should offend liberals on the latter score and conservatives on the former; their firm entrenchment in American public policy illustrates the limitations of the American democratic system. A million farmers receive subsidies in a variety of forms (direct crop subsidies, R&D, crop insurance, federal loans, ethanol tariffs, export subsidies, emergency relief, the food-stamp program, and more), which will cost in the aggregate, under the pending Farm Bill, some $50 billion a year, or $50,000 per farmer on average. Farm subsidies account for about a sixth of total farm revenues. So, not surprisingly, the income of the average farmer is actually above the average of all American incomes, and anyway 74 percent of the subsidies go to the 10 percent largest farm enterprises. The subsidies are regressive, especially during a recession coinciding with worldwide food shortages (i.e., high prices).
There is no justification for the Farm Bill in terms of social welfare. The agriculture industry does not exhibit the symptoms, such as large fixed costs, that make unregulated competition problematic in some industries, such as the airline industry, about which Becker and I blogged recently. It is true that crops are vulnerable to disease, drought, floods, and other natural disasters, but the global insurance industry insures against such disasters, and in addition large agricultural enterprises can reduce the risk of such disasters by diversifying crops and by owning farm land in different parts of the nation and the world. If a farm enterprise grows soybeans in different regions, a soybean blight in one region, by reducing the supply of soybeans, will increase the price of soybeans, so the enterprise will be hedged, at least partially, against the risk of disaster. Supply fluctuations due to natural disaster create instability in farm prices, but farmers can hedge against such instability by purchasing future or forward contracts. There is no "market failure" problem that would justify regulating the farm industry. All the subsidies should be repealed.
This of course will not happen, and that is a lesson in the limitations of democracy, at least as practiced in the United States at this time, though I doubt that it is peculiarities of American democracy that explain the farm programs, for their European counterparts are far more generous. The small number of American farmers is, paradoxically, a factor that facilitates their obtaining transfer payments from taxpayers. They are so few that they can organize effectively, and being few the average benefit they derive (the $50,000 a year) creates a strong incentive to contribute time and money to securing the subsidies. The free-rider problem that plagues collective action is minimized when the benefit to the individual member of the collective group is great. Then too many of the members of the farm community and hence recipients of the subsidies are wealthy, and the wealthy have great influence in Congress as a result of the lack of effective limitations on private financing of congressional campaigns and on lobbying generally. In addition, the allocation of two senators to each state regardless of population enhances the political power of sparsely populated states, which tend to be disproportionately agricultural. The key role of Iowa in the presidential electoral process is a further barrier to the abolition of farm subsidies, and the final factor is the alliance of urban with farm interests in support of the food-stamp program, itself inferior to a negative income tax, which would give the poor money but allow them to make their own consumption choices.
A puzzle about the farm programs is the heavy emphasis on money subsidies, since by reducing the cost of farming they encourage greater output, which results in lower prices for farm products, thus offsetting some, perhaps much, of the effect of the subsidies. (The lower prices are not a social benefit, because as the result of subsidization they are below cost.) Acreage restrictions, which used to be the core of federal farm policy, and which correspond to the type of entry-limiting regulations imposed on airlines, railroads, trucking, pipelines, long-distance telecommunications, banking, and the wholesale sale of electricity, before the deregulation movement, are more efficient at raising farmers' incomes by reducing output, in effect cartelizing agriculture. Those restrictions have been reduced, but between them and export subsidies (which reduce the supply of agricultural products to American consumers) farm prices in America are higher than they would be without the farm programs, and this contributes to the regressive effects of the programs.