Friday, March 16, 2007

Children of the Corn Subsidies: Maybe Bush Has a Good Solution

The New York Times has editorialized that Bush's proposal for reforming our farm policies is A Bill Democrats Should Like. On the surface, it seems like they are correct that this is "one of the more sensible pieces of legislation to emerge from this administration in quite a while."

It proposes a strict cap on payments to individual farmers as part of a larger effort to hold down traditional subsidies. It seeks to help smaller and younger farmers and poor rural communities.

And it includes the most generous conservation program ever offered by this administration: increasing spending by $7.8 billion over 10 years on land conservation and investing an additional $1 billion a year in a bold new program to develop renewable fuels other than corn ethanol from farm crops.

Oxfam, long a critic of US farming subsidies, calls the proposal "encouraging." Oxfam nearly correctly notes that, "subsidies encourage overproduction, with the surplus dumped on the international market, in turn lowering prices and undercutting the livelihoods of millions of poor farmers around the world."

It's also worth noting in our current political debate that those "farmers around the world" include Mexican farmers. With cheap subsidized corn, now no longer tariffed thanks to NAFTA, flooding the Mexican economy, Mexican agriculture workers flooded our borders looking for work.

I say "nearly" above because Oxfam misunderstood the nature of the subsidy program and the problem it was meant to address. Tom Phillpot at Grist, an enviro web site, gets to the core of the issue.

For about a century, the main problem facing U.S. agriculture has been abundance. Powered by the great 20th-century agricultural innovations -- hybridized and later genetically modified seed varieties, synthetic fertilizers and pesticides, and petroleum-powered machines -- farmers consistently churned out much more food than people could eat, causing prices to drop.

According to classical economics, farmers should respond to the "signal" of lower prices by cutting production, which would cause prices to stabilize. Instead, they've tended to respond by scaling up -- investing in land and technology to boost production. They hoped to make up in volume what they were losing in price -- creating a vicious circle of rising productivity, lower prices, and recurring farm crises.

If this seems counterintuitive, it's important to consider that farming is has a long production cycle - a year from beginning to end. Unlike, say VCR manufacturers, they cannot react rapidly to market forces. They have one shot every year to plan that year's production. If they cut production in an effort to raise prices, but no one else does, then they won't accomplish the goal of raising prices and will have to suffer through a year with lower prices and lower yield. It's a version of the classic problem in economics, The Prisoner's Dilemma.

Subsidies started as a means to correct this problem not by lowering the cost of production to the farmer, but rather by lowering the output of the farmer. And then in the 70s they morphed. The new idea was to sell as much of our agriculture product overseas as possible, even if (as in the case of the USSR) we had to subsidize that. And subsidies became a way to support farmers with direct payments when prices dipped below the cost of production.

So reducing the subsidies (which nearly everyone agrees is correct at least for big agri-business which receives the lion's share of the subsidies) limits an ineffective solution to the problem. And that's good. But it still leaves the base problem. Everyone will still overproduce and prices won't rise. Oxfam won't get it's desired outcome.

One obvious portion of the solution would be to feed our own people. The federal government has paid farmers $164.7 billion in subsidies between 1995 and 2005. Even Bush's new scaled back bill will cost $87.8 billion over the next five years. At the same time, eleven percent of American families are "food insecure", in the new Bush adminstration euphamistic way of saying "hungry". All of those billions could feed a lot of people and still help farmers by creating legitimate demand.

The Farm and Food Policy Project has proposed a somewhat vague but still innovative and reasonably comprehensive set of proposals. (PDF link) The proposals are largely market based and so should get support from the Right. These include revenue based risk management schemes and savings programs for farmers to give them a greater sense of stability.

It includes programs to encourage farmers to switch away from the heavily subsidized corn to alternate crops with emerging domestic markets, like organic produce. They advise, instead of subsidies, targeted investments in farmers willing to make the adjustment so that they can afford to transition.

Diversifying production would also reduce competitive pressures. If a farmer isn't producing the same crop as everyone else, there's less of a need to overproduce to hedge against price drops. But farmers will need assistance in setting up distribution networks to transition away from corn and soybeans.

So credit where credit is due, Bush's proposal seems like a small step in the right direction and is probably the most our Congress will be able to produce. But it still falls far short of what is needed.

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