Farm Bills

12/26/2012 03:45:00 PM
Suzy Khim points out something that a lot of people missed--in addition to the fiscal cliff, Congress is facing a deadline on farm legislation to prevent us from reverting to the 1949 price-fixing scheme. This is, I think, a teachable moment about the economics of farm subsidies.
The law in question would cause the price of milk to automatically revert to about $8 per gallon by requiring the government to restrict the supply of milk by buying up the "excess" from dairy farmers. This is a perfect example because it shows very clearly what's wrong with all of our agricultural policies. The fallacy is this: every policy proposed to deal with agriculture is based on the premise that we need to solve the problem that food prices are too low for farmers to be able to make a living. Having no first-hand experience trying to make a living as a farmer, I won't comment on whether this actually is true. But the question we must ask is this: if food prices are too low for farmers to make a living, why are so many people trying to make a living that way? If the price is too low, find a different career. I don't see any reason for us to romanticize the agrarian lifestyle the way we seem to--I have as much respect for school teachers, steel workers, and walmart greeters, as I do for farmers. And I think everyone else should too.

In reality, there aren't that many people trying to make a living by farming. It turns out that fewer than one million Americans, less than 0.3% of the population, are full-time farmers. They are the ones that produce pretty much all of the food we eat. There are a lot more farming hobbyists: people who work full-time jobs outside the agricultural sector and spend their free time growing crops on small plots of land of just dozen acres or so.

So is there any role for public policy in this environment? I can think of a few. First, there is the issue of crop insurance. I don't have any problem supporting an actuarially fair crop insurance program for farmers to help reduce the risks they face. If it is run correctly, it shouldn't affect the taxpayers at all--the farmers will, on average, pay as much in premiums as they receive in benefits. In theory, this shouldn't require government action--insurance companies exist in the private market. But the problem is that in reality insurance companies are terribly inefficient compared to government insurance programs like Medicare. Whether through imperfect competition or whatever, the reality is that private insurance companies are never actuarially fair--they typically charge premiums that are 15 to 20 percent higher than the benefits they pay. These days, however, there are extensive derivatives markets on most agricultural products, so I suspect that farmers could, with the right investments, perfectly insure their crops without the the government.

Second, it is possible that agricultural hobbyists--the ones who work full-time jobs and just farm on the side--are engaging in a significant amount of cross-subsidization wherein they invest money earned in their day job into the farm, but don't charge a high enough price to recoup their investments. Because they have significant income elsewhere, they can undercut food prices by regularly accepting net losses on their product. From a macro perspective, this isn't likely to be economically inefficient--the losses to farmers are made up for in benefits to consumers. But, I can see why policy would be concerned with the fact that this arrangement is unfair to full-time farmers. What's not clear, however, is what to do about this. One solution might be to charge a large deductible for crop insurance--this would have the effect of making small, part-time farming much risker (in relative terms) than large scale full-time farming, and therefore discourage part-time farmers from cross-subsidization. This might be decried as a subsidy to agribusiness, though as I mentioned, if done right it isn't a subsidy at all.

The third concern is that perhaps the reason there are so many people trying to farm is because that is the only profession for which they have skills. Much of the rhetoric surrounding farm bills involves the stereotypical family farm where parents are toiling harder than ever to wring from the soil the same standard of living for their children that their fathers wrought for them. I will leave the poetry to the poets and simply comment on the economics--the economically efficient thing to do is retrain many of these farmers to get a job as a computer technician. So, a final policy proposal is this: provide taxpayer-funded transition insurance to allow farmers to acquire human capital and find a new career outside of agriculture.