Remarks to Heritage Panel on Farm Subsidies

Remarks to Heritage Panel on Farm Subsidies

May 8, 2018

I don't claim to be an expert in the intricacies of the Byzantine web of price supports, insurance subsidies, commodity rules, Agriculture Risk Coverage, Price Loss Coverage, Marketing loans, disaster aid and all the other components of the mess we've made of our agricultural markets.

What I do know is this. Prices, if left alone, convey a wealth of information upon which consumers depend to make rational decisions. Those rational decisions, in turn, direct all production to the greatest need and all investment to its highest possible use.

Imbedded in the price of the cup of coffee that you bought this morning includes information on political conditions in Columbia, weather conditions in Costa Rica, currency rates of exchange, insect infestations in Brazil, bribery rates in Venezuela, inflationary pressures, what the guy down the street is selling it for, to name a few.

Your response to that price – to drink more coffee, drink less coffee, or shift to tea -- sends signals back to producers of what consumers want them to produce more of or less of.

When government interferes in the pricing structure, it corrupts the data that is necessary to assure that every dollar in the economy is spent to its highest and best use. So, it's not just the cost of the agricultural subsidies that are paid by taxpayers and consumers – that's just the tip of the iceberg – it's the misallocation of resources that the subsidies are causing. That is a much more serious drag on our economy. For example, the sugar program alone is estimated to cost an average household about $30 in inflated grocery bills every year.

When government plays this game, risks are masked, inefficiencies go undetected and uncorrected, capital flows from productive to non-productive use and perhaps the most dangerous for a free society, producers pay less attention to what consumers want and more attention to what those in government want.

When that happens, the productive sector becomes more and more dependent on and beholden to government and both our political and economic systems become riddled with cronyism, corruption and inefficiency.

That's what we see in the Farm Bill.

For example, crop insurance is subsidized for certain crops in a manner that is unheard of throughout the rest of the economy. What is insurance? It is the monetization of risk. It is a way to put a price on the risk of any activity.

Buy a home in a forest, your fire insurance costs more. On a flood plain – oh, never mind, we already screwed that up.

Left alone, insurance costs alert us to the dangers we face by pursuing a particular activity. If that insurance is subsidized, the risk is masked, and we encourage behavior that our own common sense would otherwise protect us from.

Normally, if the insurance cost of an activity is too high, we decide to do something else (or in this case, plant something else), where the insurance costs are lower because the risk is lower.

In the agricultural sector, that risk may be choosing crops that the market is signaling it doesn't want – or at least doesn't want as much of. By subsidizing crops or subsidizing the insurance of those crops, we end up with surpluses of one commodity – at the expense of a shortage of other crops that should have and could have and would have been planted – but weren't – because government masked the signals that consumers were sending.

Or high crop insurance costs may be warning against planting crops in a region ill-suited to them. Mask the cost and we end up with more crop failures.

And because these signals are no longer being sent by the market's consumers, but instead are being sent by government – it shouldn't surprise us that those with oversized influence in government make out very well. It has often been pointed out that the small farms do very poorly with subsidies; large farms that can afford lobbying do very well. Well what a surprise.

It is often argued that agriculture is just … different. That, of course, begs two questions.

First, what, exactly makes it different? Fundamentally, it is the same as any other enterprise – human labor is applied to create product. The risks of producing different products may differ, but the principle of risk is the same.

Second, if agriculture is so different, why are so many agricultural products excluded from these market interventions? Only 40 percent of American farms receive any subsidies.

The Farm Bill has traditionally been joined with the SNAP reauthorization for the obvious reason that neither could pass on their own. Only in Congress are two bad ideas easier to pass than one bad idea.

The measure does make some improvements in SNAP, namely limiting categorical eligibility to those receiving benefits in other programs and extending the work requirement to able-bodied adults with school-age dependents. It does nothing, however, to limit SNAP to basic food commodities, opting instead to pay bonuses for fruits and vegetables, while continuing to fund purchases of junk foods. Worst of all, its tangle of exemptions means that the work requirement will only apply to about 20 percent of the able-bodied SNAP recipients. A worthwhile advance in itself, perhaps, but insufficient to justify continuing a vestige of New Deal socialism that costs every American household an average of $160 in taxes in addition to inflated grocery bills.