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Redistribution or Public Good: Which Direction for the New Farm Bill?

Bruce Babcock (babcock@iastate.edu)

Farm Bill programs run the gamut from crop insurance to conservation, from invasive species control to nutrition subsidies, from agricultural research to commodity subsidies. These programs fall into two broad categories. Some, such as the nutrition programs, commodity programs, and the crop insurance program have an objective of redistributing income from taxpayers to specific groups of people. Others, such as agricultural research, conservation, and food inspection programs have an objective of improving economic efficiency by providing goods and services that the private sector under-provides, or by mitigating undesirable market outcomes. The key decision that the Senate and House Agricultural Committees will need to make in the 2018 Farm Bill is how to split up a fixed amount of funds between redistributive programs and those that improve efficiency.

Both types of programs can improve society. Agricultural research and food inspection programs have given us less expensive and safer food. Redistribution under the nutrition programs have a strong record of reducing the negative impacts of poverty on children and adults. However, just because Congress decides to fund a program does not imply that it improves society. For example, USDA’s Conservation Stewardship Program often makes payments to farmers for conservation practices that they are already doing. When this occurs, the only benefit of the program is a private benefit to farmers of more income.

It is easier to garner funding for programs that generate private benefits than public benefits for the simple reason that private beneficiaries have a strong incentive to spend money and exert efforts to push Congress to pass their favored programs. No such push comes when the benefits of a program are widely dispersed among all of us. This truth about how policy is formed is inconvenient for our elected representatives, so advocates of private benefit programs represent their favored program as improving society. Examples abound. Taxi companies and drivers fight for public intervention against Uber in the name of maintaining public safety when their real fight is against increased competition. Domestic manufacturers and unions regularly argue for taxing imports by invoking national security concerns or that foreign suppliers are unfairly subsidized.

Supporters of farm subsidy programs never argue publically that income should be redistributed to farmers based on the fact that farmers are somehow especially deserving. Rather they couch arguments in terms that may have some public appeal. A common justification for farm subsidies made by members of the Ag Committees is that they are needed to ensure an adequate food supply for Americans. A cursory look at this argument reveals its fallacy. According to USDA, only 46 percent of US corn is used to feed US livestock or as a food ingredient. The rest is used to produce ethanol or is exported. Only 29 percent of US grain sorghum is fed to US livestock. About 54 percent of US wheat, 59 percent of US rice, and 45 percent of US soybeans are used domestically. In aggregate, roughly half of US production of the commodities that receive subsidies is used to feed US livestock or produce US food. In addition, a growing amount of the corn, soybeans, wheat, and grain sorghum that is fed to domestic livestock is exported. About 26 percent of US produced pork, 14 percent of US milk solids, and about 16 percent of US broiler meat is exported. Rather than the US food supply being threatened, the United States is likely the most food secure country in the world. There simply is no association between US food security and farm payments.

Another frequent argument made for farm subsidies is that farming is a risky business and all that stands between a farmer and financial ruin are farm subsidies and the crop insurance program. Stam and Dixon (2002) showed that farm bankruptcy rates were only high in the 1930s and the mid-1980s, periods of severe financial stress in the farm sector. The annual rate of bankruptcy in the 1930s peaked at about 0.13 percent. In the mid-1980s the rate of bankruptcies was higher at 0.25 percent. Data on current bankruptcy rates are not readily available, but bankruptcy rates outside these two periods of extreme financial stress are below 0.03 percent. It is tempting to use this statistic to conclude that more than 99.97 percent of farm payments do not prevent bankruptcy, but it cannot be known for certain whether bankruptcy rates would be higher or lower without farm programs, outside periods of severe financial stress. Suffice it to say that outside periods of severe financial distress, the vast majority of farm payments do not prevent bankruptcy.

A desire to protect farmers from financial stress is clearly a motivating factor for some supporters of farm payments. But such protection can be counter-productive because financial stress serves the economic purpose of signaling farmers that they need to change what they are doing. Response to market signals is what makes capitalism work. Current farm payment formulas use either fixed prices or past market prices to determine when payments are made. Some justify these formulas on the basis that farmers need to be protected from long-lasting declines in price; however, low prices signal that the world has abundant supplies. Buffering farmers from this market signal simply prolongs low-price periods.

The crop insurance program offers an alternative way of buffering farmers from financial stress. Although it is easy to identify changes to the program that would make it more efficient, the program’s overall structure has a number of positive attributes. Program guarantees adjust each year to pre-planting time market price levels, so only unexpected declines in market prices or yields trigger payments. A minimum 15 percent deductible means that revenue must decline below expected levels before a payment is received. Lastly, although premiums are heavily subsidized, at least farmers must pay a portion of the cost of the program so years in which they do not receive a crop insurance indemnity, they end up sending their crop insurance company a payment.

The likelihood of Congress tilting their funding decisions away from redistributive commodity programs that benefit a small group of farmers towards programs that serve the public may not be zero, but it is close to it. This low likelihood reflects both the strength of the status quo in determining policy directions as well as the strength of the lobbying efforts that support redistribution. However, the recent House action cutting $840 billion over 10 years from the Medicaid program demonstrates that status quo redistributive programs may not always win out. Whether a willingness to cut a redistributive program that benefits poor people augers a willingness to cut redistribution to relatively wealthy and high-income farmers will soon be seen.