The Inefficiency of Government Intervention in the Context of the 2013 Farm Bill

The Inefficiency of Government Intervention in the Context of the 2013 Farm Bill

Artur Sak

Policy Director, Turning Point USA

Abstract: This paper addresses the issues of poverty and falling prices in the farm industry within the context of the Austrian economic framework. I argue that falling prices are due to technological progress as well as oversaturation of the industry and that manipulating them by the means of the 2013 Farm Bill creates distortions that reverberate through the economy and affect the least fortunate.  The solution to the problem is not intervention but elimination of both farm subsidies and benefits for the poor.

Since the time of the Great Depression the government has played an increasingly active role in the economy. While it is true that present intervention is not as intense as the historically high periods of war socialism(that is the central planning, rationing, and heavy manipulation of the economy that occurred during World War I and World War II), the State has accumulated a myriad of laws, rules, and regulations over the years, and as a result is becoming ever more present in our lives. To this day, some industries remain heavily controlled by government, one of which is the United States farm industry; over the years it has also become more apparent that government does not belong there.  The sheer amount of distortions within the economy that result from the government’s intervention in this industry should make it clear that government should separate from agriculture. In the following paragraphs I will analyze the history of government intervention in the farm industry and specifically focus on why it intervened in the first place. The majority of this paper however, shall be devoted to analyzing the 2013 farm bill (farm subsidies and SNAP) within the context of the Austrian economic framework.

Circa 1860, America, and some European countries, began to industrialize rapidly (second industrial revolution). Innovations made during this time period significantly increased productivity. Savings rates as high as 18%-20% shifted investment towards capital goods (including new technology), which exponentially increased employment and aggregate output (Woods 2013). Eventually this investment put downward pressure on prices vis-à-vis wages, and the value of the national currency rose. Indeed, the late 19th and early 20th century was a period of deflation; it was also a period of great efficiency as less efficient firms began to be weeded out of the economy. Dan McLaughlin from the Mises Institute explains in his piece “Farm Bill Follies”, “Advances in crops, methods, machines and other technology produced a situation where fewer farmers were needed to feed the population. Farm prices should decline as productivity increases, as would be expected in every industry, in every time” (McLaughlin 2007). Smaller farms perceived that larger more efficient firms were putting downward pressure on the prices of their outputs. Economies of scale caused a decrease in the optimal number of producers for any particular commodity therefore the economy looked like it was becoming more monopolized, but in fact it was not. Small agrarians, as a result, sought out antitrust legislation to protect their local markets from lower priced goods. From 1867-1893 twenty-four states (with large agrarian populations) passed antitrust legislation and as a result many of the smaller, less efficient farms were allowed to stay in business (Bordeaux & DiLorenzo 1993). The mistakes made during this time period made agribusiness inefficient thus turning agriculture into an industry that could only survive on government coercion.

It wasn’t until Franklin Delano Roosevelt assumed office that the State began to actively subsidize agribusiness. Despite the inflationary policies and antitrust legislation aimed at pushing farm prices up the economy continued to work against the government’s coercion.

McLaughlin states,

In the 1930s, legislation was enacted to alter the inevitable economic consequences of progress. Politicians wanted to help poor farmers who were being squeezed by the increase in productivity and fall in prices. A whole raft of measures was concocted to keep farm prices high. The correct understanding was that, if       supply can be artificially restricted, prices would be propped up. The various methods included the destruction of massive quantities of crops and millions of head of livestock. While it effectively reduced the supply, it was kind of embarrassing for the government to be seen destroying good food at a time when millions of people were starving in the Great Depression (McLaughlin 2007).

Roosevelt’s price supports further distorted the industry and inefficiency continued to pervade agribusiness; in fact, this same inefficiency continues to this day. It was this very intervention that eventually evolved into the quinquennial farm bill, the most recent of which being passed in 2013. The farm programs entailed in this new bill include: price supports, conservation and credit subsidies, subsidized crop insurance, and food assistance programs (today referred to as the Supplemental Nutrition Assistance Program, or more colloquially, SNAP).

Perhaps the bigger question now is ‘what exactly is wrong with these programs if they are helping farmers?’ The answer to that lies in Austrian economic theory. It is generally understood in the field of economics that subsidies are placed on activities which society deems beneficial. In the farm industry that means supporting firms that produce food & natural non-food products. However, by its very nature, a subsidy is a distortion in the economy. Friedrich Hayek said in his essay, “Economics of Abundance,” (1960) “Now if there is a well-established fact which dominates economic life, it is the incessant, even hourly, variation in the prices of most of the important raw materials and the wholesale prices of nearly all food stuffs” (Hayek 1960). What this means is that when the government subsidizes either the supply or demand of a product it distorts natural price fluctuations in producer markets and as a result prevents prices from reaching market-clearing level (most efficient price) in consumer markets. Austrian economist Murray Rothbard further expanded on this view in his treatise Man, Economy, and State:

Transfer spending or subsidies distort the market by coercively penalizing the  efficient for the benefit of the inefficient. (And it does so even if the firm or individual is efficient without a subsidy, for its activities are then being encouraged beyond their most economic point.) Subsidies prolong the life of  inefficient firms and prevent the flexibility of the market from fully satisfying consumer wants. The greater the extent of government subsidy the more resources are frozen in inefficient ways, and the lower will be the standard of living for          everyone (Rothbard 1962).

 

If there is one thing that should be taken away from what Rothbard said, it is that the existence of inefficient firms prevents the market from fully satisfying consumer wants and furthermore freezes resources, which consequentially lowers the standard of living for everyone. His argument is certainly supported historically; McLaughlin mentioned in his piece, “Before the age of efficient transportation and refrigeration, computers, and advanced technology, prices were relatively high, and local family-owned stores could make an adequate profit. Those high prices that gave the small shops the ability to thrive, however, were the same high prices that burdened every other family in the economy and kept standards of living relatively low” (McLaughlin 2007). In other words, inefficient firms squandered resources, which thereby drove up prices and made it more difficult for consumers to obtain farm products.

Likewise, there is also something to be said about scarcity. The study of economics is, by definition, the study of scarcity and choice. In absolute abundance, prices would not exist; everything would be free because every individual’s wants would be satisfied. Economists refer to this as the Garden of Eden model. High prices indicate that a given product is scarcer vis-à-vis others. In the late 19th century, due to new technology, prices were dropping because products were becoming more abundant. E.C. Pasour, an economics professor at North Carolina State University, and agricultural policy expert, argues that, “Falling prices of farm products is not a new phenomenon. Through the years mechanization, improved seeds, the development of new pesticides and herbicides, and other increases in technology have resulted in the substitution of capital for labor” (Pasour 1987). This appears to raise the question, what happens to the disemployed? In absolute abundance, jobs would also be redundant; there would be no need to work because every want would already be satisfied. In regards to 19th century farmers, technology was forcing prices down, which reduced farm incomes. The least efficient farmers came under financial distress, but this was not necessarily indicative of an unhealthy economy; in fact, it was exactly the opposite. This showed that the farm industry was oversaturated and that there were fewer producers necessary to supply the population. Pasour mentions, “For example, the U.S. farm population decreased from 25 per cent of the total population in 1929 to little more than 2 per cent in 1985. During this period however, output per hour of farm work increased more than 15 times” (Pasour 1987). Despite the various legislative measures implemented to keep inefficient farmers operating the progression of technology still displaced a large portion of inefficient farmers.

In 1973, the government’s approach to subsidizing farms completely changed. Earl “Rusty” Butz, President Nixon’s USDA chief, eliminated many of the New Deal price support programs and only kept them in place for commodities, like corn. Today, the prices of most food products are kept below market level, by means of input subsidies. E.C. Pasour states, “An increase in the supply of prices puts downward pressure on consumer prices for food products. The USDA estimates the taxpayer outlay for these input subsidies in 2008 at $7.5 billion. Since input subsidies reduce product prices – domestic taxpayers – not consumers bear the cost” (Pasour 2008). In other words, the burden of price manipulation is simply shifted from consumers to taxpayers (with a smaller diffusion of the cost burden among the two). Moreover, the simple fact that prices are kept high for commodities affects other areas of the economy. Commodities are used in the production of other goods. If prices are kept high in producer markets, they will necessarily be high in consumer markets. Even though prices are kept low for some food products, any benefit to the consumer is negligible simply due to the fact that the cost of subsidizing is shifted from prices to taxes and commodities are still being held above market clearing level.

What does this mean in the context of the 2013 Farm Bill? Pasour argues, “The more product prices decrease, the higher the taxpayer cost of supporting agricultural prices at any given level” (Pasour 1987). As technology continues to progress the economy will naturally continue to push prices down. No matter how many government programs are implemented to keep prices high, prices will continue to trend downward and as a result more money will need to be spent to keep inefficient farmers operating.  Pasour mentioned in his article that,  “Government programs have not solved the farm problem. Indeed, the level of financial stress on U.S farms is the highest since the Great Depression of the 1930s even though federal outlays on farm programs in 1986 were at record high levels” (Pasour 1987). This, of course, was in 1986 and has only been increasing since (even though many farmers are now well off); the most recent farm bill was estimated to have a price tag of half a trillion dollars (Nathaniel 2013). Congress members decided that the cost of this bill is too high and as a result have agreed to cut certain programs; the only question is by how much? Veronique De Rugy, a senior research fellow at the Mercatus Center at George Mason University says, “When you are talking $4 billion in reductions out of $800 billion in the next decade, I wouldn’t really say that is a big act of fiscal responsibility, even $20 billion out of more than $800 billion is really minor. That is a 2.5 percent reduction. That is nothing” (Fox 2013). Unfortunately it has gotten to the point where any sort of cut seems like a massive reduction in benefits to farmers, and in effect should (theoretically) be a rather substantial blow to the economy. The bill that the Senate finally passed in June of 2013 is said to cut spending $24 billion over 10 years with a $4 billion cut to SNAP but will cost nearly $955 billion.

All of this is not to mention the efficiency of the American bureaucracy in implementing this bill. As is true with all government action, there is a stark contrast between intent and result. Special interests, especially for Big Ag, have already influenced this bill. Lauren Fox from U.S. News declares in her op-ed “The Farm Bill Food Fight Over Food Stamps,” “There should be no scenario where 10% of subsidized farms receive 74% of all subsidy payments” (Fox 2013). Due to the fact that the government subsidizes per unit, that is subsidies are tied into the volume of farm sales, larger farmers get the majority of subsidy payments. Therefore the top 10% of farms receive 74% of subsidy payments.

As it can be seen, farm programs are not only harmful to consumers but they promote inefficiency within the economy. There is, however, another portion of the Farm Bill dedicated to the issue of poverty, another highly contentious issue that is not as easily addressed from an Austrian perspective. Due to the emotional nature of the debate, it is difficult to argue for cuts in the Supplemental Nutrition Assistance Program (SNAP) or for a complete elimination of it, for that matter. Economics, however, is not an emotional science. Even though the behaviorist will disagree, any sort of incorporation of emotion into economic arguments or economic analysis necessarily leads to the wrong conclusions and in effect, the wrong decisions.

It is perhaps best to look at SNAP in the context of something as simple as incentives. One of the first rules of economics is that humans are motivated by incentives. As mentioned before, subsidies and benefits promote certain behavior, which means that they are incentives by their very nature. It appears that taxing and subsidizing are more or less the government’s only methods to addressing issues. Indeed SNAP is based on the same premise; they only problem is the actions that are being incentivized are not socially beneficial. Lawrence Reed, argues in his article “Incentives and Disincentives: They Really Do Matter!” (2000), “A half century of welfarism produced substantial “behavioral poverty” because it subsidized illegitimacy, divorce, and idleness” (Reed 2000). That is not to say that people want to be poor because the benefits are so great, that simply isn’t the case. In fact, many claim that what the government provides is not much, certainly not enough to live comfortably. However, it cannot be said that it is easy to get off government benefits once one is on them. For example, Reed mentions in his article, “We also discovered how counterproductive it was to cut a dollar of welfare benefits for each dollar of earned income in effect imposing a 100 percent marginal tax rate on welfare recipients who found jobs. Clearly, we had to stop penalizing work and rewarding nonwork!” (Reed 2000). Obviously, Reed is talking about welfare benefits and not SNAP, however the same principle applies. Forrest Laws, a writer for DeltaFarmPress.com says, “Proponents of nearly $40 billion in cuts in the SNAP and other nutrition programs claim that something’s wrong with the program because the number of recipients has risen to 48 million people. That the number of recipients has steadily increased during one of the worst recessions since the 1930s surely shouldn’t be a surprise to anyone” (Laws 2013). Laws, however, makes two mistakes. He claims that the increase in individuals on SNAP is due to the recession, which prima facie seems logical, however if we are to believe what most economists have been claiming since 2009, that is that we are now in a recovery period, that number should be decreasing, not increasing. Indeed many individuals are still paid less than before the recession but that is partially due to minimum wage laws preventing the optimal distribution of wage payments. The second mistake Laws makes is he ignores the fact that 48 million people are on SNAP. There is absolutely no reason why 48 million individuals living in a country as expansive as the United States, with some of the most productive soil on the planet should have trouble affording food. Perhaps if the government stopped manipulating food prices, SNAP would become redundant.

Due to the government promoting inefficiency and making the less fortunate worse off, it should be clear that both subsidies to farmers and the poor should be eliminated. Most individuals, and even some economists however are hesitant to cut subsidies. Mark Bittman from The New York Times says, “Yet-like so many government programs-what subsidies need is not the ax, but reform that moves them forward” (Bittman 2011). While that may sound fair and pragmatic, it is not addressing the issue. Through reform the government will still be promoting inefficiency, just to a lesser extent. That is, if the reforms actually do what they are meant to do. Reed clearly articulates, “As long as government is taking from some and giving to others, “reforming” the system in any fashion still leaves a relatively indifferent and unaccountable public bureaucracy spending other people’s money on behalf of people who need something much more fulfilling than a government check. They need the uplifting effects of thoughtful and efficient private initiative-either their own or others who really care about them” (Reed 2000). Reed makes an interesting point here. Whatever happened to helping thy neighbor? It appears most people have turned their back on charity because they feel that the government will do it for them. Even if people wanted to help the less fortunate the State has taken resources away from charities, churches, and private individuals under the guise of altruism, and squandered them through its own inefficiency. It is true that charities receive tax breaks depending on their 501(c) status, but the amount of work it takes to get approval from the IRS, and the amount of taxes individuals themselves must pay, not only makes it difficult for charities to thrive, but be created in the first place.

It appears that today most people have an instinctive response to look towards government whenever there is a problem that cannot be solved on the individual level. More likely than not, the government will only perpetuate the problem, if it didn’t create it in the first place. This has certainly been the case in the American farm industry. The government stepped in during a period of great efficiency in the economy and promoted inefficiency within agribusiness. As a result, the distortions it created within the economy warranted more and more intervention. Today, the government takes resources from the private sector in order to keep promoting inefficiency within it. Due to this, the most logical course of action would be for the government to stop intervening in the economy, especially in the farm industry.

 

 

References

Bittman, M. (2011). Don’t End Agricultural Subsidies Fix Them. The New York Times.

 

Boudreaux, D., DiLorenzo, T. (1993).The Review of Austrian Economics, Volume 6,        Number 2

 

Fox, L. (2013). The Farm Bill Food Fight Over Food Stamps. U.S. News.

Hayek, FA. (1960). The Economics of Abundance. Mises Daily. Ludwig von Mises         Institute.

 

Laws, F. (2013). If farm bill doesn’t address hunger, what’s it for?. Southeast Farm            Press, 40(23), 4.

 

McLaughlin, D. (2007). Farm Bill Follies. Mises Daily. Ludwig von Mises Institute.

 

Nathaniel, J. (2013). Farm Bill 2013: An Inside Look at the Most Important Bill You’ve   Never Heard of. Policy Mic.

 

Pasour, E.C. (1987) The Farm Problem and Government Farm Programs. Foundation for Economic Education.

 

Pasour, E.C. (2008). U.S. Agricultural Programs: Who Pays?. The Independent Institute.

 

Reed, L. (2000). Incentives and Disincentives: They Really Do Matter!. Foundation for                Economic Education.

 

Rothbard, M. (1962). Man, Economy, and State. Auburn, AL. Mises Institute.

 

Woods, T. Episodes in Labor History. (2013). Lecture presented on                                   libertyclassroom.com.

 

 

Biography

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