Farm Subsidies Make No Sense
New Zealand is four times more dependent on agriculture than the United States, and it once maintained extensive farm subsidies. In 1984, it ended them. What happened? Farm productivity and earnings rose. The Federated Farmers of New Zealand fought just as vigorously as their American counterparts to preserve their subsidies. Yet in hindsight, the same group now says that its experience “thoroughly debunked the myth that the farming sector cannot prosper without government subsidies.” In fact, it thrives.
It’s time to debunk that myth in our own country, but don’t hold your breath. Recently, my amendment to slowly phase out American farm subsidies over the next 12 years got just 34 votes in the 435-member House.
American agriculture is a tangled mess of price supports, insurance subsidies, commodity rules, quotas, bailouts, loan guarantees and other bureaucratic interventions that distort the price signals that are essential to maximize productivity in any market. The result? Higher prices for consumers, higher costs for taxpayers and ironically, lower productivity for farmers.
Prices, if left alone, convey a wealth of information that consumers depend upon to make rational decisions. Those choices, in turn, direct all production to the greatest need and all investment to its highest use.
The price of the cup of coffee that you bought this morning includes information on political conditions in Columbia, weather forecasts in Costa Rica, currency rates of exchange, insect infestations in Brazil, bribery rates in Mexico, inflationary pressures and what the guy down the street is selling it for.
Your response to that price – to drink more coffee, less coffee, or shift to tea – sends signals back to producers of what consumers want them to produce more of or less of.
When government interferes with the pricing structure, it corrupts the data that is necessary to ensure that every dollar in the economy is spent wisely. The cost isn’t just the agricultural subsidies paid by taxpayers, but the misallocation of resources that the subsidies are causing. The sugar support program alone is estimated to cost an average household about $30 in inflated grocery bills annually.
When government plays this game, risks are masked, inefficiencies go undetected and uncorrected, capital flows from productive to non-productive use and perhaps the most dangerous for a free society, producers pay less attention to what consumers want and more attention to what government wants.
When that happens, the productive sector becomes increasingly dependent on, and beholden to, the government. Our political and economic systems become riddled with cronyism, corruption and inefficiency.
In recent years, direct payments have given way to subsidized insurance. What is insurance? It is a way to put a price on the risk of any activity. If insurance is subsidized, the risk is disguised. We encourage behavior that our own common sense, as informed by high insurance rates, would otherwise protect us from.
In the agricultural sector, that risk may be choosing crops that the market is signaling it doesn’t want. In that case, the result of subsidized insurance is a glut of commodities consumers don’t want and shortages of those they do. High insurance premiums may be warning farmers not to plant crops in regions ill-suited to them. Mask that cost and more crop failures result.
Because price signals are no longer being sent by the market’s consumers, but instead by government, it shouldn’t surprise us that those with oversized political influence make out very well. Small farmers who can’t afford lobbyists don’t.
Some argue that because agriculture is at the mercy of the weather or foreign trade barriers, it is inherently more risky than other pursuits and thus requires “a safety net.” Yet 60 percent of American farms receive no subsidies and appear to do just fine. So do New Zealand farms. After all, every human enterprise faces unique risks and challenges which accurate pricing regulates and compensates.
American agriculture is too important to be consigned to the mismanagement of incompetent federal bureaucracies. By ending the subsidies and restoring the accurate pricing signals that a free market provides, the needs and wants of consumers can be better served. Taxpayers can be relieved of $20 billion of counter-productive costs. And producers can be freed from the gross inefficiencies that government command and control systems invariably impose.
Just ask New Zealanders.