Farm Bill: Skewed Perspectives?
You gotta wonder what the folks in Congress are up to, besides up to their eyeballs in special interest money! I’m a regular reader of Greg Mankiw’s Blog. Greg used to be the top Bush econ dog, but he quit a few years ago and went back to teach at Harvard. (It’s a terrible life!) He regularly posts emails and other correspondence he gets from Bush advisers. This is one of those:
A few of us have been debating the question “Which is the most important reason for the President’s veto of this bill?” Candidates include:
Too much spending: The bill increases spending by almost $20 billion over the next ten years, at a time when net farm income is at an all-time high. Much of this additional spending is disguised by budget gimmicks that take advantage of formal scoring rules to hide real spending increases.
New sugar program: The bill would make the government buy sugar for 2X the world price, store it, then resell it at about an 80% loss to the taxpayer. Sugar sells for about 11¢/lb on the world market. The US government would have to buy sugar for about 22¢/lb, store it, and then auction off the excess to ethanol plants. We estimate that such an auction would net the government about 4¢/lb. In addition, this new provision would require the government to guarantee that domestic sugar producers get 85 percent of the domestic sugar market.
Subsidies for rich farmers: Farmers would be eligible for government subsidy payments if their incomes were as high as $1.5 million if married, and up to $750,000 if single. We had a big fight with Congress last year over whether families with income of 3 times the poverty level should receive taxpayer-subsidized health insurance. This bill would subsidize amarried farming couple with income more than 107 times the poverty level (which is $14,000 for a couple). Put another way, such a couple would be in the top 0.2% of the income distribution. You would be subsidizing their business with your income taxes.
Getting the best of both worlds: “Beneficial interest” is a provision of current law which allows you to lock in a government subsidy payment when the market price for your good is low, and then hold the actual good and sell it when the market price is high. You thus get the best of both worlds – subsidy payments as if crop prices were low, but profits from selling your good at a higher price. The President proposed a “pick-your-price” reform, in which you lock in the subsidy at the same time that you lock in the sale price, so you can’t play timing games. The conference report does not include this reform, and continues the practice of current law.
Using food aid $ inefficiently: Under current law, US food assistance for hungry people around the world must be spent purchasing US crops. The President proposed to allow up to 25 percent of US global food assistance to be spent purchasing food from local farmers (in the country where the people are starving). This allows US dollars to be spent purchasing food, rather than paying transportation costs. It also encourages the development of farming infrastructure in these countries. Congress failed to include this forward-looking policy that will help save lives overseas. This means fewer starving people will get food, and these countries’ farming infrastructures will be less well developed.
It’s amazing to me, from a purely economic standpoint, that we still have farm subsidies. There aren’t many “small” farmers left, mostly huge conglomerates who set the prices and get subsidies all at the same time. Farm subsidies have been outmoded. They’re no longer necessary. In fact, they’re counterproductive.
One more thing: Ethanol from corn and sugar, as a viable alternative to oil as an energy source, is the biggest hoax on the planet. Government mandates to increase ethanol production from crops has caused, and will cause more, food shortages and sharply increased food costs, while at the same time has not, and will not, provided any energy benefits.