The Free Market 7, no. 11 (November 1989)
American agricultural policy offers many instructive lessons on how to cripple a major sector of the economy. For 60 years, the U.S. government has waged a war against the market. And for 60 years, American taxpayers and consumers have been the biggest losers.
Farm subsidies—roughly $20 billion a year in federal handouts and $10 billion more in higher food prices—are the equivalent of giving every full-time farmer two new Mercedes each year. Annual subsidies for each dairy cow in the United States exceed the per capita income of half the population of the world. With the $260 billion that government and consumers have spent on farm subsidies since 1980, the government could have bought every farm, barn, and tractor in 33 states. The average American head of household worked almost one week a year in 1986 and 1987 simply to pay for welfare for fewer than a million farmers.
The fundamental tool of agricultural policy is the price support. The government sets a price per bushel or pound it will pay for a commodity. Since government guarantees to buy unlimited quantities of a crop at the price support level, farmers will not sell the crop on the market at a price lower than they can sell to the government, and the support price thereby becomes the minimum price for any sales of the crop in the United States.
These programs lead the government to pay farmers more than market value for their crops. Farmers respond by producing surpluses, which Congress then creates other programs to dump, distribute, or repress. This is American agricultural policy in a nutshell.
Federal farm policy is a maze of contradictions. By late 1985, the U.S. wheat surplus was large enough to provide 27 loaves of bread to every person in the world. Yet, in the 1985 five-year farm bill, Congress encouraged farmers to produce even larger wheat surpluses by promising farmers crop subsidies far higher than market prices. At the same time the U.S. Department of Agriculture (USDA) paid farmers in 1986-87 to kill almost two million cows to reduce milk supplies, Congress lavishly rewarded other farmers for producing more surplus milk. The result: no decrease in milk production and continued government purchases of over five billion pounds of surplus milk a year.
“Prosperity through organized scarcity” is the core of American farm policy. In 1933, USDA began a temporary emergency program of paying farmers to slash production in order to balance production. In 33 of the last 35 years, the government has paid farmers not to work. In 1988, USDA rewarded farmers for not planting 78 million acres of farmland—equivalent to the entire states of Indiana, Ohio, and much of Illinois. Government shut down some of the best American farmland in an effort to drive up world wheat and corn prices. Set-asides—programs to pay farmers not to work by “setting aside” or idling their cropland-are the opium of American farm policymakers, the annual tribute to the bureaucratic and political delusion that America somehow controls world grain markets.
Supply controls are introduced only after politicians and bureaucrats have mismanaged price controls. Government first artificially raises the price and then artificially restricts production. The higher Congress drives up the price, the greater the need for government controls on the amount produced.
USDA marketing orders annually force farmers to abandon or squander roughly 50 million lemons, one billion oranges, 100 million pounds of raisins, 70 million pounds of almonds, 7 million pounds of filberts, millions of plums and nectarines, etc. USDA announces each season how much of certain fruits and nuts will be allowed to be sold and how much must be held off the market in order to boost prices. USDA endows cooperatives with the power to effectively outlaw competition and to force farmers to let much of their crop rot or be fed to animals. To preserve federal control of the lemon business, USDA effectively bans new technology that would boost fruit sales and benefit both growers and consumers.
Congress responded to the agricultural recession of the early 1980s with a flood of subsidized capital. In 1985 alone, the government loaned almost a billion dollars to farmers who were already technically bankrupt. The injection ofcapital into agriculture has aggravated the problem of surplus production and driven up rental costs and land values in many areas. When the government announced a major debt forgiveness program in 1988, there was a fierce backlash from unsubsidized farmers.
Robert A. Dreyep, a farmer in Fenton, Iowa, complained that the government was “rewarding the poor managers who are also very inefficient farmers.” Jerome Berg, another Iowa farmer, complained, “Many of those with debt write-downs are again buying more land and expensive equipment, cars, trucks, and living it up while the rest of us who paid our bills and lived within our means are now expected to help bail them out.” The General Accounting Office reported in late 1988 that the Farmers’ Home Administration, the agricultural credit agency, has lost $33 billion.
The federal government attempts to hide some of the damage with lavish export subsidies. In 1986, it paid four times the world price to dump sugar and rice on the world market, and three times the world price to dump butter. In 1987, the United States paid export subsidies equal to 150% ofthe cow’s value in order to dump American dairy cows on world markets. It would have been cheaper simply to shove the cows off the Brooklyn Bridge..The government paid farmers $4.35 a bushel for wheat in 1986 that was sold to the Soviets for less than $2 a bushel. In 1988, the United States provided almost a billion dollars in credit to Iraq, thereby making American taxpayers underwrite the Iraqi war machine.
Farm program costs routinely far exceed the farmers’ entire profits. For 1986 the wheat program and wheat export subsidies cost $4 billion; wheat producers’ total net cash income was only $2 billion. In 1986, the rice program cost taxpayers $2.7 billion while rice producers received only $236 million in income; the cotton program cost $2.1 billion while cotton producers net cash income was only $1. 3 billion. The wool program cost taxpayers $99 million while sheep producers realized only $13 million in profits from their operations.
The clearest effect of the USDA in the 1980s is to decrease the productivity of American agriculture. USDA does not reward farmers for improving their efficiency but for playing by the government’s rules. Every farm bailout has discouraged farmers from maximizing their productivity and efficiency. Costs of production always tend to rise to the government guaranteed price, thereby making American agriculture appear less competitive internationally than it otherwise would be. And politicians respond with more subsidies and protective barriers.
The history of modern agricultural policy, both in the United States and elsewhere, is largely the history of a political struggle against changes in relative prices. Wheat, corn, oats, and cotton prices have been gradually declining in real terms for over 200 years, and have nosedived in comparison to units of labor required to purchase them. Prices have declined largely because of the invention of tractors, new seed varieties, powerful fertilizers, etc. Yet politicians perennially proclaim that because wheat prices are lower now than they were 10,20, or 30 years ago, this proves that society is treating farmers unfairly and that farmers deserve recompense. Each decade, as prices trend downwards, politicians and farm lobbyists have warned that farm production is no longer profitable and that society will soon have a severe food shortage unless immediate action is taken to raise prices. Yet, in every decade farmers have produced more.
The key to understanding American agricultural policy is to realize that the vast majority of the 400 farm products produced in America receive no federal handouts. There is no fundamental difference between subsidized and unsubsidized crops—only a difference in campaign contributions to congressmen by different farm lobbies. (Not that congressmen are the only problem. President Reagan went from preaching about the “miracle of the marketplace” in 1981 to bragging in 1986 that his administration had given more handouts to farmers than any in history.)
The only solution to the “farm problem” is to abolish federal farm programs. It is a crime for government to provide any handout to any businessman, and for politicians to molest the economy for their own personal profit.
