Farm Price Supports Redux

There's quite an argument going on in the comments after my post yesterday about government crop quotas. Here's what I think those who disagree with me are missing: the government is doing what would be illegal if corporations did it. If oil companies got together and decided to all limit their production to keep the price propped up, that would be collusion and it would be against the law. Why? Because it screws the consumers. It destroys competition that helps keep prices down and results in higher prices than a free market would allow.

But this is exactly what price supports do in the agricultural market - the government orders farmers to do what would be illegal for them to do on their own. And not only does it help keep prices higher than the market would allow, it also destroys the normal functioning of the market that would reduce inefficencies. If the oil companies did this, the same people who are cheering farm supports would be screaming holy hell - and rightly so. And why is this going on? Because those agribusiness interests that control the market want them to continue.

First of all, leave behind this notion that such supports help keep small family farms going, just get it out of your head. 80% of all farm subsidies go to large agribusiness companies, not to family farmers. The price support/crop quota scheme is designed to allow those companies to do what the law in any other situation forbids them from doing, practice collusion to keep prices inflated above market value. The 2002 Farm Security Act committed us to pay $172 billion over ten years, 80% of which will go to companies like Tyson Chicken and Archer Daniels Midland - that's $14 billion a year of our tax dollars going directly into the accounts of these huge agribusiness interests. And more than 1/3 will go to the largest 3% of farms.

This is pure corporate welfare and it came about because those businesses spent tens of millions of dollars lobbying to get those subsidies. The 1996 Freedom to Farm Act was intended to reduce farm subsidies down to less than $4 billion a year, but over the next 5 years these companies spent a fortune in lobbying efforts to get that plan reversed because it's a huge part of their profits. And it worked, resulting in the 2002 bill that ratcheted supports up higher than ever.

That bill is up for reconsideration in 2007 and negotiations are beginning soon in the legislature - and you bet your butt that those corporate interests are spending huge amounts of money wining and dining legislators to keep the gravy train running. Liberals should be the last people who support programs like this. They are bought and paid for by corporate interests seeking to steal as much of our money as they can. Such subsidies, price supports and crop quotas should be done away with completely.

And here's the punchline to the whole thing: 25 years ago when I was in high school and doing debate, we were constantly quoting the Worldwatch Institute and the Club of Rome's Limits to Growth report about how population growth and a reduction in the amount of farmland would result in a vast increase in food prices and shortages. In point of fact, per capita food production is higher than it has ever been. In the past, a farm crisis meant a bad harvest. Now it means we have too much food and we have to pay farmers not to grow food. Farms are producing more food for less money now than they have ever produced in the history of the world. And the logic of our farm subsidy programs seems to be that such success simply can't go unpunished.

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But raisin prices are not oil prices. Raisin prices are still low. Raisin supplies are good. Raisin farmers -- even the small ones -- are doing okay. The system is working.

Yeah, I know. This is contrary to the Hayek-style market where complete laissez-faire economics gets eggs to the Poles, meat to the Russians, and allows India to have the second-largest software company in the world and steal jobs from telephone answerers "waiting for your call" in Ardmore, Oklahoma, and Omaha, Nebraska. So what?

Keynes was right. Governments should not sit by and do nothing as peoples' lives are ruined by dramatic oscillations in markets. Business cycles are not king, not superior to humans.

Sometimes there will be diseconomies, and sometimes there will be need to change the price support systems. Go to Congress; protest to the Department of Agriculture, or get a waiver from the program from Ag. Make a case if one can be made.

But don't sacrifice a well-working system to poorly-evidenced hopes. In some crops, it IS the small farmers who collect (tobacco, for one). Yes, big-business agriculture is aesthetically unpleasing, and we'd prefer to give money to Ma and Pa Kettle over ADM and Conagra. But you know what? The private contract, free-enterprise system that is unregulated -- say in chickens -- doesn't act like King Solomon tempered by Jesus, either. Small chicken farmers are raked over the coals and run out of business by whims of the big producers and fluctuations in the markets. Ending payments to Tyson won't protect small farmers any more, and may leave them much worse off.

I'll have to check the other thread, too, to see whether anyone has responded to the argument about the size of the raisin guys. On one hand, you're complaining about payments to the big farm guys; but on the other hand, this whole thing appears to be your defense of one big guy bucking the system.

Keeping farmers in business and food on the tables of everygody seem to me to be higher purposes and nobler causes than making a perfect, libertarian-friendly, laissez-faire market that forces small farmers into bankruptcy and leaves others hungry.

It's a tradeoff, but it's a required tradeoff.

By Ed Darrell (not verified) on 05 May 2006 #permalink

If the goal is to prevent overproducing because overproducing caused the Dust Bowl (if I may be allowed an oversimplification), the question becomes whether direct subsidies are the best way to achieve that goal.

Now, I only took one semester of macroeconomics, but, uh, isn't the idea generally to internalize the externalities, and let the market do its job? I'm not a farm expert, so I don't know how best to do that, but just artificially shoving the supply curve in one direction seems a bass-ackwards way to do it. Surely we could implement a land-use tax or runoff tax or pay a credit for appropriate use of sustainable farming techniques, or something more directly related to the stated goal. There must be people who study the, y'know, facts and stuff, who could come up with something?

As someone posted in the other thread, most farmers want to maintain their lands anyway, so you just need a way to bias the market in that direction.

Unless we just want to keep family farmers working as such even when their utility is small, so we can all drive out to th' country and say Hello colorful replica of America's past! When does the exciting-in-its-primitive-splendor harvest take place? In which case let's just set up some National Farmical Parks and charge admission.

By Johnny Vector (not verified) on 05 May 2006 #permalink

No, Hayek was right. He understood that a central planning body could not process the information needed to know what the correct price should be or to know the correct number of participants in the market. Only through the market process can that be determined.

To a large extent government programs tend to exacerbate market oscillations by encouraging/discouraging production that is not in line with market realities.

By BillySixString (not verified) on 05 May 2006 #permalink

The government gets to do lots of things that are illegal for private corporations. Microsoft doesn't have a standing army, and GM doesn't try and execute criminals, for example.

You also have to remember that there are market forces that will keep prices artifically low in the event of a bad growing year. If the price per bushel of wheat gets too high, then 10,000 extra bushels are "created". The farmers in areas that were not affected by the drought (or who paid the extra for irrigation) are prevented from profitting from their good fortune.

Nor is agriculture the only area of the ecconomy that lives with government interference. My local power company has rates capped by government regulation, and they are prohibited from disconnecting customers for non-payment in the winter time.

Try thinking of price supports as a minimum wage for farmers. Yes, the large corporations get the lion's share of the supports, but the correction for that is in changing the support structure, not eliminating supports.

By Fox Laughing (not verified) on 05 May 2006 #permalink

The argument that it would be illegal if companies did is simply not valid, whatever the merits of other arguments. There are many things that the government can do that are illegal for any other entity: execute people, collect money by force if necessary, confiscate property, require labor to the point of death (for example, in the military draft). Governments determine what is legal and what is illegal.

By Mark Paris (not verified) on 05 May 2006 #permalink

"As someone posted in the other thread, most farmers want to maintain their lands anyway, so you just need a way to bias the market in that direction."

Most farmers care, because they want to pass the land on to their children. There is a sense of community and continuity that city people can't understand. I can't say farm managers for large corporations care about the land in the same way -- I don't know any so I can't comment on their motivations.

There is a big debate in rural communities near large cities over the future of the land. The average age of farmers is over 50, as most of the young people have left the farms in search of better pay for less hours of work, and a safer work environment. The older farmers want to sell their land for the largest amount, whether that's for a shopping center or a field of McMansions. The land is the only retirement fund that they have. The younger farmers want to keep the land in farming, because they are concerned about the changes in their lifestyle forced by more traffic, snobby neighbors, increased taxes, increased insurance costs, etc. They are also concerned that they might be forced to quit farming because the new neighbors sue to make them to get rid of their smelly cattle, or to stop plowing the field upwind of their backyard BBQ, or sued for damages because little Bobby went through the fence and got trampled by an angry cow.

By Fox Laughing (not verified) on 05 May 2006 #permalink

I am not an expert in macroeconomics. The basis of my understanding comes from the regulated industries class I took this semester, and a short lifetime of experience on farms. But saying that the small farms are somehow not important is bullshit. The network of small farms act as a safety net. It also protects from urban sprawl and the growing problem of rural gentrification.

I agree something needs to be done to stop the corporate welfare, but simply saying, down with regulation is not it.

There are basically two reasons for regulation, to encourage competition and to protect the integraty of the market. These regulation do both. Because the threat of monopolists within food production is too horrible to imagine.

Just one point: this debate is not about whether it's right or wrong, but what the role of government should be.

Some people believe that certain societal aims are the legitimate subject of government regulation and action. Others disagree. However, once you agree that the government has any role in regulating or acting for societal goals, everything else is a matter of degree. Unfortunately for those arguing against this particular goal, even most of them have to agree that certain societal goals are legitimate subjects for government regulation. For example, the government has made it illegal for a small business owner, like a restaurant owner, to open to the public but deny service to people of a certain race. The government has also decided that land use may be regulated, and auto emissions may be controlled. If you say that the role of government should never include any regulation of societal functions, you have taken a position that is essentially outdated in the US, and far, far out of the mainstream of both left and right. That type of argument is most charitably characterized as academically utopian.

Now this debate ought to be framed in terms of the true question: are there legitimate societal goals involved in regulating the sale of agricultural items? If not, then it should not be done. If so, then the issue becomes determing the best way to achieve those goals.

By Mark Paris (not verified) on 05 May 2006 #permalink

Ed D.- "there is no objection to be raised against the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed between them." - John Maynard Keynes

Please cease suggesting Keynes was a poor enough economist to support price controls. Keynes advocated controlling unemployment via expansionary monetary policy, not distorting agricultural markets to prop up a few farmers. Open your ears and you'll notice that there are quite a few, quite persuasive arguments against agricultural controls and I've yet to hear a serious one for them (by serious I mean something that doesn't contract basic economic reasoning and consist of more than "I like farmers, so I'm going to use the gov't to give them money"). As I said before, the policies result in higher prices for consumers, less efficient land usage, and undermine the agricultural industries of developing countries - I think these are pretty good arguments against them and they're very well grounded both empirically and theoretically. Just because the system hasn't ground the economy to a complete stop doesn't mean it isn't hurting.

Frito - Establishing a monopoly on a single crop, let alone all food production, would be impossible. The barriers to entry are relatively low, there is extensive international trade in food. If anything, these regulations make the food markets more like how they'd be under a monopoly, which would restrict supply to prop up prices if it existed - you're essentially saying we to create monopoly-like outcomes to prevent the highly unlikely establishment of a monopoly. These regulations are explicitly anti-competitive and they distort the market, so I don't see what you're getting at.

Mark Paris - What the hell is "academically utopian" about cutting a corporate welfare program? This is down-to-earth, nuts-and-bolts policy analysis. I may have waxed theoretical about Wickard (talking about the principles of Constitutional interpretation kind of does require one to talk abstractly), but this is pretty concrete stuff here.

Matt, it's ironic that you say Keynes, responsible for price controls in Britain in World War I, was opposed to them. I agree with you that Keynes shouldn't be the bete noiremost conservatives try to make him today. He's much more a realist.

Would Keynes support this particular price control? I don't know. He would support government acting to moderate the more radical effects of business cycles on farmers, I think.

Even, or especially, Alan Greenspan recognized that the dislocations caused by free markets, while "temporary" to workers in the long run, ruin or kill workers, who must live in the short run. Temporary dislocations for workers is still a nasty, unresolved issue, when "temporary" means "for the rest of the current workers' lives."

Same with farmers.

Now, is raisin farming so cut-throat? Are there good tinkerings we should make to make this particular price control function in a more free market way? Probably.

How about we let this little commune of raisin producers go its own way, so long as 100% of their sales are to nations where food is in short supply? That way it won't interfere in our markets, and it will reduce the oversupply effectively, and produce some Good Samaritan side effects.

By Ed Darrell (not verified) on 05 May 2006 #permalink

"Establishing a monopoly on a single crop, let alone all food production, would be impossible. The barriers to entry are relatively low, there is extensive international trade in food."

Please define "relatively low". Farming is very capital intensive, requiring high priced land, high priced equiptment, and specialized knowledge.

By Fox Laughing (not verified) on 05 May 2006 #permalink

How about we let this little commune of raisin producers go its own way, so long as 100% of their sales are to nations where food is in short supply? That way it won't interfere in our markets, and it will reduce the oversupply effectively, and produce some Good Samaritan side effects.

Yes! Because that's what the starving children of Ethiopia need: raisins!

Farming is very capital intensive, requiring high priced land, high priced equiptment, and specialized knowledge.

Polish farmers do mostly without any large investments. It all depends on the market (and the way the government intervenes).

while "temporary" to workers in the long run, ruin or kill workers, who must live in the short run

Keynes: "in the long run, we are dead".

By Roman Werpachowski (not verified) on 05 May 2006 #permalink

There are any number of things that a government does that would be illegal if a corporation did it. How about arrest, try, convict and imprison criminals? How about exercise eminent domain for the construction of a road? Would that really be okay if a corporation did it? Or are you arguing that corporations should be allowed to do it? Or that it should not be done?

Ed D. - Your seriously misunderstand Keynes - he believed that the government should moderate business cycles at the economy-wide level via changes in taxes and spending. DURING A RECESSION (this is an important caveat - it's the opposite during a boom), Keynes be more likely to advocate running a deficit to push more money into the economy via tax cuts (he took Hoover to task for raising taxes going into the depression to try to balance the budget) and spending. This is intended to stimulate agregate demand, which would increase consumption and thus increase the utilization of the glut of underutilized capital, from farmland to factories, and labor at the expense of short-run inflation. Essentially, the idea is to manipulate gov't spending to keep the economy at a good position on the Philips curve. Smarter and more knowledgeable people than me have argued extensively over whether this works or not.

If you can give me an example of Keynes arguing for price controls of commodities, particularly outside of an economy-wide recession, please do. It'd definitely be interested in his arguments, as raising prices would decrease agregate demand. Keynes might have supported subsidies as a means of gov't spending stimulation, but based on his macro theories, anything that put more money in consumers' hands would work.

And I know it's a hackneyed response, but did all those dislocated buggy whip makers just die off? Transitional unemployment is a different topic - the short answer is liberal economist support job training and state-provided unemployment benefits while conservative/libertarian economist say that job training is inefficient and unemployment benefits encourage people to prolong their transition time. It really comes down to a value judgement of whether a social safety net for the unlucky or high efficiency is better. Neither side would propose that attempts to prevent transitions are a good idea, since it locks in an increasingly inefficent usage of labor and capital.

As the article stated, the raisins can already be sold on the international market without restriction. The cartel's behavior suggest that raisins are undersupplied domestically. They're causing less than the free market supply to be available in the area they have a cartel because it allows them to raise the price. I wish I could draw you a graph, because it makes it a lot easier to explain what's going on.

Fox Laughing - In order to establish an monopoly, a company would have to own all the farmland in the world. While starting a farm takes more capital than starting a gas station, it doesn't require the kind of major infrastructural elements that it would be difficult for an individual or venture capitalist to raise enough investment capital to buy, like transatlantic fiber optic cables or communications satilites, or require dealing with major regulatory or political restrictions to get into the business, like starting a nuclear power plant.

Roman - Some American farmers do fairly well without major investments by keeping their costs relatively low. They farm marginal land, which keeps the land costs down, and rely on horses to supply all of the necessary power. Their farms are very small by American standards.

Matt - A functional monopoly could be achieved not by owning all of the farm land, but by controlling the supplies that the farmers depend on (seeds) and the markets that they sell to. Those are agriculture's infrastructure, and I wouldn't be certain that Pioneer's seed lines were less costly to develop than a communication satelite is to launch.

If it costs more to produce a bushel of corn than you can sell the corn for, no sane venture capitalist is going to loan you money to produce corn. It doesn't matter how much the farmer is asking to borrow.

Or, as my sister grouses, "Farming is the only business where you buy retail and sell wholesale."

By Fox Laughing (not verified) on 05 May 2006 #permalink

Fox - You're right about the impact of a monopolistic middleman (didn't think of that one). Supplies are a little more complicated since the farmers still have an incentive to increase yields until the marginal cost equals the market price, but the supply monopoly can manipulate the supply curve to some extent based on the production function, so determining the outcome isn't straight forward.

There is one thing with farming: once you get rid of the farmers, it takes a long time to restore farming. Russia and Ukraine should be farming kings. They are not, because the communism destroyed their agriculture. 15 years from the end of it, their agriculture hasn't rebounced yet.

Because of this fact, many countries support farmers so that they are, to some extent, self-sufficient in food production. Let's suppose the world decided that the Argentinians produce best wheat and we are all going to buy our wheat from them. And let's now imagine there is a catastrophic draught in Argentine, a war breaks out or some wheat disease. Can we afford a drastic hike in food prices? Some people will simple have too little to eat, then.

By Roman Werpachowski (not verified) on 06 May 2006 #permalink