It’s been a hectic couple of weeks in Congress. In a historically unprecedented vote, House Speaker Kevin McCarthy (R-CA) was removed from the speakership in a putsch led by Representative Matt Gaetz (R-FL). In the meantime the debt ceiling has yet to be resolved, and the Farm Bill, one of the biggest contributors to the U.S. debt, has recently expired. Curiously, expiration does not affect funding for the Federal Crop Insurance program, one of the Farm Bill’s most expensive programs.
The Federal Crop Insurance Program has cost taxpayers about $90 billion between 2011-2021 and is projected to cost an additional $10 billion a year over the next decade. Given the United States’ current budgetary issues, fiscal responsibility necessitates that these expensive programs be reformed. Policy analysts agree that by lowering premium subsidies and reducing the compensation received by crop insurers, lawmakers can substantially reduce the bill’s costs. However, to overcome resistance from incumbent beneficiaries, lawmakers need a compensation scheme.
The Farm Bill, as numerous commentators have pointed out, is a morass of special interest subsidies, pork-barrel programs, and welfare payments all log-rolled into one unwieldy piece of legislation. All these programs distort the economy, while enriching concentrated interests and contributing to the Federal debt.
The federally subsidized crop insurance program is one of the most wasteful aspects of the Bill. Taxpayers could save as much as $10 billion a year by lowering premium subsidies, and another $324 million by lowering the excessive rate of return guarantees to crop insurance providers. Additionally, it would reduce a host of distortions and lower payouts to wealthy individuals and corporations.
To trim the fat of the crop insurance program, policymakers will need a way to deal with the losers. Few members of Congress are keen on pursuing such reforms as they would require many beneficiaries — many of whom are backed by the political power of the agribusiness and crop insurance lobbies — to take huge losses. Both of these entities have been shown to flex their political muscles in the runup to Farm Bill reauthorizations. By first compensating these individuals and organizations, lawmakers would create the political space needed to enact sensible reforms to the Farm Bill.
When the Federal government sets out to bestow privileges on a favored industry or company, it inadvertently creates a trap for beneficiaries. Regardless of whether these privileges take the form of a subsidy, trade protections, cheap credit, or restrictions upon competition, their monetary value is eventually reflected in the asset-values and earnings of the beneficiaries. This occurs over time as traders, workers, and employers bid up the price of assets and compensation to reflect the inflated returns afforded by government privileges.
The Crop Insurance Program functions as a public-private partnership between the United States Department of Agriculture (USDA) and 14 “Approved Insurance Providers.” Together, they work to provide farmers with crop insurance against yield and revenue losses. The agreements signed between USDA and approved insurance providers have a written-in target rate of return of 14.5%, well above comparable rates of return elsewhere in the insurance industry. Farmers, meanwhile, have on average 62% of their premiums covered by taxpayers. These lucrative privileges are reflected in land values on which insured crops are grown, and in the profits of crop insurers, which are, in turn, reflected in these company’s stock prices, asset values, and the compensation received by executives and insurance agents.
For understandable reasons, the current beneficiaries of the existing crop insurance program are unlikely to accept reforms lying down. Should Congress reduce premium subsidies or insurance company profits, the value of crop land, debt, and company stock would decline. Moreover, the agents who sell these policies, as well as the executives who run these companies will likewise see a reduction in their earnings. To protect themselves from these losses, incumbents will engage in wasteful campaigns of lobbying, political advertising, and making campaign contributions to key politicians.
The best route to achieve reform then would be to simply compensate the losers. The value of premium subsidies, plus the guaranteed rate of return, could be paid out to farmers and insurance companies via a one-time tax or a bond to be amortized over a given period. Given the program’s rather sizable costs, a gradual approach is the best option to reduce the upfront costs to taxpayers, and permit current beneficiaries to adapt to the change. Regardless of its form, compensation protects incumbents from losses, thereby lessening the incentive they face to lobby lawmakers and create an opening to reduce premium subsidies or reduce provider profits.
Farmers would not be left out in the cold by these reforms. Many farmers currently make use of futures, options, and marketing contracts to protect themselves in case of crop price declines. With the government out of the insurance business, the use of these tools would likely pick up the slack. Farmers also have a range of “on-farm” risk management strategies such as diversifying their crop portfolio, varying planting locations, building up cash reserves, or using specialized equipment and structures. As the example of New Zealand illustrates, such strategies have generally been successful in helping farmers adapt to market volatility.
Reducing crop insurance subsidies would not only save taxpayer money, but it would also lessen a host of market distortions, environmentally damaging and discriminatory policies. Getting there, however, requires that we first pay-off the losers.