Give Them a Hand

In response to a students post about agricultural subsidies. I have included the student's original post below.

I think that agriculture subsidies are horrible things. I thought it was interesting how the author of the pro-subsidy section threw in so many incorrect assumptions and declared them to be true with no factual support. Here are my thoughts on the assumptions which underlie his arguments.

1. The agriculture is unusually risky. Many businesses deal with all kinds of risks. Should we subsidize ski resorts? They carry huge risks based on weather. However, weather is not the only risk faced by businesses. Anyone who has run a business can give you a long list of risks that they faced. Likewise, there are many private sector solutions for dealing with such risks, including insurance, futures contracts, options, derivatives, etc. The private sector is very good at dealing with risk.

2. Agriculture is too efficient. This one is just funny. He argues that in other markets the surplus production and low prices would cause production to be cut back, but not here. However, fact is caused by subsidies. Without subsidize there would be fewer farmers and thus large surpluses would not be produced. Despite subsidize the number of farmers needed has continued to drop. Today, less than two percent of the population is employed in agriculture. 200 years ago nearly everyone was employed in agriculture. Increased agricultural efficiency has freed up resources for other uses. If you want to find a poor country, look for a country with a large percentage of its population involved in agriculture.

3. There is a fixed amount of farm land that will always be farmed. There is no basis for this statement at all. In fact, the efficiency of agriculture in North America has actually caused an increase in forest land over the last few decades, as land has been taken out of agriculture and returned to forest. In a market based economy, people will not farm land when they cannot make a profit doing so.

4. People will not eat more because the price drops. Have you hopped on the scale lately? In the US we produce 3600 calories per day for every man, woman and child. Ever wonder why Americans are getting fatter. I do not know of any country in which food is relatively expensive as a share of its income which has a significant problem with people being overweight. In fact, such countries tend to have malnourished populations.

5. Subsidies help other parts of the economy. First, this mistakes money with wealth. Second, this argument forgets about the cost of the subsidies. If economic resources are wasted in the production of more food than we need, that means that those resources are not available to produce other things in the economy. This means that the economy is less efficient. Further, if these lower prices are obtained through higher taxes to pay for the subsidies, the fact that I do not pay the price at the grocery store does not mean that I do not pay the actual price of producing food. It simply means that the price is hidden, and thus the decisions people make about how resources should be allocated are distorted and less efficient because the false price is giving them a false signal.

6. Effect on the developing world. The effect of European, Japanese and American agricultural subsidies has been devastating on the developing world. Developing countries are right in focusing on this point in the Doha round of WTO negotiations. There is a saying "I don't want a handout, I want a hand." There is no way that foreign aid from the developed world can make up for the poverty caused by protectionist agricultural subsidies handed out by the governments of developed countries. If you want to solve poverty in the developing world, give them a hand.

Do you think Farm Subsidies are a good thing?

There is a good summary at
http://en.wikipedia.org/wiki/Agricultural_subsidies:_beneficial_or_counter-productive.

Benefits

Proponents of agricultural subsidies argue that they are necessary because of the unusual nature of the agricultural industry. For one, a big part of crop yield, and therefore price, is based upon the weather both at home and abroad in remote parts of the world. Because of the uncertain nature of the weather, price subsidies are necessary to ensure that farmers receive a livable wage.

Another problem with this market is that it does not behave like a natural market. Today, farms are too efficient, and produce more food in industrial countries than can be eaten. In other markets, this would cause producers to cut back until a new equilibrium was reached. However, in agriculture, this does not happen as land will always be farmed and therefore is fixed. Demand is also inelastic in the case of food. That is, people will not eat more if food is cheap. As the commodity prices lower, farmers work to become more and more efficient in order to minimize their losses. This causes supply to increase and the price to lower further, exacerbating the problem. In economics, this problem is known as the fallacy of composition. It should also be noted that subsidization makes this problem worse.

Farm subsidies have the effect increasing production and therefore lowering the price of food. Today, consumers spend less on food than they ever have before. Food is, of course, a necessity and so every dollar saved on food can be spent elsewhere in the economy. Over the past 70 years, food spending has steadily declined in America. In 1929, before agriculture subsidization,
Americans spent 23.9% of their income on food, by 1997 this had lowered to only 10.7%.

In the 1960's, President Lyndon B. Johnson made food surpluses a weapon in the war on poverty. Since then, food has been donated to poor urban areas in the United States. Also both critics and proponents of the WTO have noted that export subsidies, by driving down the price of commodities, can provide cheap food for consumers in developing countries.

Criticism

One criticism of subsidy comes from conservatives and libertarians arguing that subsidies is against the will of the free market. For example, poor store owners don't receive relief from the market and therefore neither should poor farmers. Furthermore, justification of subsidies from the
uncertain nature of the weather can be countered by considering that many other areas of economy experience equivalent risks for which the free market can provide solutions e.g. insurance.

Critics of agricultural subsidies argue that they promote poverty in developing countries, by artificially driving down world crop prices. Agriculture is one of the few areas where developing countries have a competitive advantage. This makes developing countries into dependent buyers
of food from wealthy countries, causing local farmers to lose their land rather than allowing them to develop their own agriculture and therefore self-sufficiency. Agricultural subsidies often are a common stumbling block in trade negotiations. In 2006, talks at the Doha round of WTO trade
negotiations stalled because America refused to cut subsidies to the other countries' desired level.

In America, critics also argue that agricultural subsidies go mostly to the biggest farms who need subsidization the least. Research from Brian M. Riedl the Heritage Foundation showed that nearly three quarters of subsidy money goes to the top 10% of recipients. Thus, the large farms, which are the most profitable because they have economies of scale, receive the most money. The
discrepancy is only widening. Since 1990, payments to large farms have nearly tripled, while payments to small farms have remained constant. Brian M. Riedl argues that the subsidy money is helping large farms buy out small farms. "Specifically, large farms are using their massive federal subsidies to purchase small farms and consolidate the agriculture industry. As they buy up smaller farms, not only are these large farms able to capitalize further on economies of scale and become more profitable, but they also become eligible for even more federal subsidies--which they can use to buy even more small farms." Critics also note that, in America, over 90% of money goes to staple crops of corn, wheat, soybeans and rice while growers of other crops get shut out completely. In Europe, for instance the Common Agricultural Policy has provisions encourage local varieties and pays out subsidies based upon total acreage and not production. Although, in
fairness, research has shown that small farms receive more payments in relation to value of their crops than big farms.

Agricultural subsidies also can harm the environment. Indeed, in order to produce more, farmers convert wetlands to agriculture and intensify the use of pesticides, fertilizers and phosphates which run into the groundwater. Agriculture uses 75% of the world's available fresh water, and it is argued
that, given the seriousness of the world's crisis in fresh water, incentives should be reversed to encourage less use of water.

		February 5, 2007 *Instead of a handout, give them a hand.*
	In response to a students post about agricultural subsidies. I have included the student's original post below. I think that agriculture subsidies are horrible things. I thought it was interesting how the author of the pro-subsidy section threw in so many incorrect assumptions and declared them to be true with no factual support. Here are my thoughts on the assumptions which underlie his arguments. 1. The agriculture is unusually risky. Many businesses deal with all kinds of risks. Should we subsidize ski resorts? They carry huge risks based on weather. However, weather is not the only risk faced by businesses. Anyone who has run a business can give you a long list of risks that they faced. Likewise, there are many private sector solutions for dealing with such risks, including insurance, futures contracts, options, derivatives, etc. The private sector is very good at dealing with risk. 2. Agriculture is too efficient. This one is just funny. He argues that in other markets the surplus production and low prices would cause production to be cut back, but not here. However, fact is caused by subsidies. Without subsidize there would be fewer farmers and thus large surpluses would not be produced. Despite subsidize the number of farmers needed has continued to drop. Today, less than two percent of the population is employed in agriculture. 200 years ago nearly everyone was employed in agriculture. Increased agricultural efficiency has freed up resources for other uses. If you want to find a poor country, look for a country with a large percentage of its population involved in agriculture. 3. There is a fixed amount of farm land that will always be farmed. There is no basis for this statement at all. In fact, the efficiency of agriculture in North America has actually caused an increase in forest land over the last few decades, as land has been taken out of agriculture and returned to forest. In a market based economy, people will not farm land when they cannot make a profit doing so. 4. People will not eat more because the price drops. Have you hopped on the scale lately? In the US we produce 3600 calories per day for every man, woman and child. Ever wonder why Americans are getting fatter. I do not know of any country in which food is relatively expensive as a share of its income which has a significant problem with people being overweight. In fact, such countries tend to have malnourished populations. 5. Subsidies help other parts of the economy. First, this mistakes money with wealth. Second, this argument forgets about the cost of the subsidies. If economic resources are wasted in the production of more food than we need, that means that those resources are not available to produce other things in the economy. This means that the economy is less efficient. Further, if these lower prices are obtained through higher taxes to pay for the subsidies, the fact that I do not pay the price at the grocery store does not mean that I do not pay the actual price of producing food. It simply means that the price is hidden, and thus the decisions people make about how resources should be allocated are distorted and less efficient because the false price is giving them a false signal. 6. Effect on the developing world. The effect of European, Japanese and American agricultural subsidies has been devastating on the developing world. Developing countries are right in focusing on this point in the Doha round of WTO negotiations. There is a saying "I don't want a handout, I want a hand." There is no way that foreign aid from the developed world can make up for the poverty caused by protectionist agricultural subsidies handed out by the governments of developed countries. If you want to solve poverty in the developing world, give them a hand. Do you think Farm Subsidies are a good thing? There is a good summary at http://en.wikipedia.org/wiki/Agricultural_subsidies:_beneficial_or_counter-productive. Benefits Proponents of agricultural subsidies argue that they are necessary because of the unusual nature of the agricultural industry. For one, a big part of crop yield, and therefore price, is based upon the weather both at home and abroad in remote parts of the world. Because of the uncertain nature of the weather, price subsidies are necessary to ensure that farmers receive a livable wage. Another problem with this market is that it does not behave like a natural market. Today, farms are too efficient, and produce more food in industrial countries than can be eaten. In other markets, this would cause producers to cut back until a new equilibrium was reached. However, in agriculture, this does not happen as land will always be farmed and therefore is fixed. Demand is also inelastic in the case of food. That is, people will not eat more if food is cheap. As the commodity prices lower, farmers work to become more and more efficient in order to minimize their losses. This causes supply to increase and the price to lower further, exacerbating the problem. In economics, this problem is known as the fallacy of composition. It should also be noted that subsidization makes this problem worse. Farm subsidies have the effect increasing production and therefore lowering the price of food. Today, consumers spend less on food than they ever have before. Food is, of course, a necessity and so every dollar saved on food can be spent elsewhere in the economy. Over the past 70 years, food spending has steadily declined in America. In 1929, before agriculture subsidization, Americans spent 23.9% of their income on food, by 1997 this had lowered to only 10.7%. In the 1960's, President Lyndon B. Johnson made food surpluses a weapon in the war on poverty. Since then, food has been donated to poor urban areas in the United States. Also both critics and proponents of the WTO have noted that export subsidies, by driving down the price of commodities, can provide cheap food for consumers in developing countries. Criticism One criticism of subsidy comes from conservatives and libertarians arguing that subsidies is against the will of the free market. For example, poor store owners don't receive relief from the market and therefore neither should poor farmers. Furthermore, justification of subsidies from the uncertain nature of the weather can be countered by considering that many other areas of economy experience equivalent risks for which the free market can provide solutions e.g. insurance. Critics of agricultural subsidies argue that they promote poverty in developing countries, by artificially driving down world crop prices. Agriculture is one of the few areas where developing countries have a competitive advantage. This makes developing countries into dependent buyers of food from wealthy countries, causing local farmers to lose their land rather than allowing them to develop their own agriculture and therefore self-sufficiency. Agricultural subsidies often are a common stumbling block in trade negotiations. In 2006, talks at the Doha round of WTO trade negotiations stalled because America refused to cut subsidies to the other countries' desired level. In America, critics also argue that agricultural subsidies go mostly to the biggest farms who need subsidization the least. Research from Brian M. Riedl the Heritage Foundation showed that nearly three quarters of subsidy money goes to the top 10% of recipients. Thus, the large farms, which are the most profitable because they have economies of scale, receive the most money. The discrepancy is only widening. Since 1990, payments to large farms have nearly tripled, while payments to small farms have remained constant. Brian M. Riedl argues that the subsidy money is helping large farms buy out small farms. "Specifically, large farms are using their massive federal subsidies to purchase small farms and consolidate the agriculture industry. As they buy up smaller farms, not only are these large farms able to capitalize further on economies of scale and become more profitable, but they also become eligible for even more federal subsidies--which they can use to buy even more small farms." Critics also note that, in America, over 90% of money goes to staple crops of corn, wheat, soybeans and rice while growers of other crops get shut out completely. In Europe, for instance the Common Agricultural Policy has provisions encourage local varieties and pays out subsidies based upon total acreage and not production. Although, in fairness, research has shown that small farms receive more payments in relation to value of their crops than big farms. Agricultural subsidies also can harm the environment. Indeed, in order to produce more, farmers convert wetlands to agriculture and intensify the use of pesticides, fertilizers and phosphates which run into the groundwater. Agriculture uses 75% of the world's available fresh water, and it is argued that, given the seriousness of the world's crisis in fresh water, incentives should be reversed to encourage less use of water.