If We Can't Kill Farm Subsidies, What Can We?
Symbolic of the debate we're not having about government's size and role - the essence of the deficit problem - is the future of farm subsidies. Running $10 billion to $15 billion annually, they don't do much good. For starters, they haven't saved small farms. Since the 1930s, when subsidies began, the number of farms is down 70 percent. Nor do farmers need subsidies to stay profitable. Farmers' income for 2011 and 2012 ($135 billion and $133 billion, respectively) were the highest and second-highest ever and would have been without subsidies.
Once upon a time, subsidies could be cast as an antidote for above-average instability. Farmers faced floods, droughts, insects and wild price swings. Subsidies smoothed their incomes. Other sectors were more stable. This is no longer true. Technological upheaval and foreign competition have convulsed countless industries and their workers: autos, steel, entertainment, newspapers and many more. Farmers aren't unique.
Government support for agricultural research and food safety can be justified. But direct subsidies to farmers can't. If subsidies ended tomorrow, wheat would still be grown in Kansas. Subsidies qualify as "low hanging fruit" in cutting federal spending. What's instructive is that no one is doing it.
Over the years, Congress has played a shell game. When one subsidy appears unwarranted, it's erased and replaced with another. Thus, we've had set-asides, price supports, direct payments, counter-cyclical payments and more. The shell game continues. The Senate Agriculture Committee eliminated "direct payments" and diverted most savings into a new subsidy ("agriculture risk coverage") and expanded crop insurance.
Crop insurance sounds sensible; it cushioned the effect of last year's drought. But as economist Bruce Babcock of Iowa State University shows, it's mainly another arcane way to funnel money to farmers. It protects not only against natural disasters but also against normal price fluctuations that could be hedged in futures markets. Premiums are heavily subsidized, as are the expenses of insurance companies. With subsidized premiums, farmers buy lavish protection. Even before the drought, federal spending on crop insurance went from $1.5 billion in 2002 to $7.4 billion in 2011, Babcock reports.
In Congress, ending subsidies is unthinkable. The Senate's legislation would trim existing levels. Still, the combined cost of direct subsidies and crop insurance under the new legislation would average $14 billion annually from 2013 to 2022, estimates the Congressional Budget Office.
Hardly anyone asks basic questions. Would we create these programs today? Why subsidize farming if it would do fine without subsidies? Indeed, meat and vegetable production is largely unsubsidized; subsidies apply mainly to grains.
Politics fosters inertia. People feel entitled. Farmers like their payments. Subsidies raise agricultural land values and, for absentee landlords, the rents that can be charged. Farm groups protect these benefits with lobbyists and campaign contributions. Congressional farm committees' power rests on their control of subsidies.
Farm subsidies are a metaphor for our larger predicament. We no longer have the luxury - as we did for decades - of carrying marginal, ineffectual or wasteful programs. We can no longer afford subsidies for those who don't need them or, at least, don't need so many of them (including affluent Social Security and Medicare recipients). If we can't eliminate the least valuable spending, then we will be condemned to perpetually large deficits, huge tax increases or indiscriminate cuts in many federal programs, the good as well as the bad.
Despite a deficit obsession, Americans still seem ill-informed about the magnitude of the gaps. A recent CBO report is illuminating. Even with a full economic recovery, current policies imply annual deficits over the next decade averaging 5 percent of the economy (gross domestic product); by 2022, federal debt to GDP would hit 90 percent (the 2007 figure: 36 percent). Balancing the budget in 2020 would require $1 trillion of spending cuts or tax increases. The recent "fiscal cliff" agreement hardly alters these forecasts because it closes only about 8 percent of the next decade's projected deficits, estimates the Committee for a Responsible Federal Budget.
Government needs reappraisal. Programs shouldn't be immortal in the face of changing economic and social conditions. What's no longer justified should be discarded. Unfortunately, President Obama has evaded and discouraged this discipline. Republicans emphasize spending control but are often hypocritical on specifics.
Politics favors the status quo; economics calls for change. Farm subsidies are but one example. As the CBO observes: "Very few policy changes, taken individually, can shrink the deficit [sharply]. . . . Significant deficit reduction is likely to require a combination of policies, many of which may stand in stark contrast to policies now in place." Still, agriculture would be a good starting point. In 2013, Congress will continue debating a farm bill. It would be refreshing, if surprising, to see subsidies phased out because - whatever their historical justification - they're no longer needed.
