Saturday, June 2, 2012

Farm Bill 101

Thomas Sowell, the brilliant economist presently working at Stanford University’s Hoover Institution, notes that perhaps the most pervasive economic misunderstanding is the “zero-sum fallacy.”

This fallacy assumes that in any transaction between two parties, one party gains while the other party loses. In other words, the net value of traded items is permanent and never changing. If this assumption were true, and one party got a good deal, the other party would have to get a bad deal.

But economic zero-sum is a fallacy because it’s simply not true. Each party gains from the transaction, else the transaction would never occur (unless half the world’s population were complete idiots, and even then, the phenomenon would be self limiting – the idiots would eventually lose everything and die of starvation).
But values are not fixed and permanent, nor are they measured only in absolute monetary terms. In the real world, each party gains in every two-party transaction, so long as the terms of the transaction are mutually agreeable. Let’s look at a simple agricultural transaction.

I raise beef cattle but no corn, and you raise corn but no beef cattle. I want to purchase corn to feed my calves, while you want to purchase beef to fill your freezer. We approach each other and propose a trade. I will give you a certain amount of cash for your corn, while you give me a certain amount of cash for my beef. We dicker a bit on price. I would of course like to pay the lowest possible amount for your corn, and you would like to pay the lowest possible amount for my beef. Each of us would prefer to pay the other nothing, but we would never be able to agree on terms, because neither of us would gain from the transaction.

Eventually we do agree on terms. We might even dispense with the cash aspect altogether, and trade commodity for commodity. We probably do not do this, however, for in the 21st century, money can be easily exchanged for all other goods we might be interested in. I can't, for instance, take a calf to the local market and exchange it for $700 of groceries. Well, perhaps I could, but I'd surely spend days or even weeks negotiating the trade. Turning calves into money gives me flexibility and saves me time. The same is true for my corn farmer colleague. Money is an extremely useful trading tool, which is why it was invented.
At any rate, the corn farmer and I are each satisfied with the trade, having given up what we could afford in exchange for something we needed but didn’t have.

That’s the way an absolutely free market works. But just as ideal gas laws don’t really exist in nature, neither do absolute free markets exist in free societies. An entity vested with the power to impose an advantageous level of trading fairness must exist, lest the balance of economic power swing to a minority and the sovereign members of society become no more than the property of the wealthy -- the economic "Laird." But emplacing a controlling entity, which we call government, comes at a cost. The laws of thermodynamics rule in nature as well as in human society. There is no free lunch.

When government becomes involved, three parties, rather than two, must agree on terms. This means that fewer terms will be acceptable to all three parties, fewer transactions will occur, and both of the non-government parties will find themselves in a less advantageous position than before. Neither will be able to gain in total the advantage they would have enjoyed in a two-party trade. Still, there is some advantage to each party when government "regularizes" commerce and ensures a reasonably level playing field. Up to a point.

Unfortunately, even the governments of free societies grow in power and authority over time, eventually hindering more than helping. An additional factor is that the number of parties involved in transactions grow as more parties join the transaction. Layers of bureaucracy are added. Groups band together to lobby government for specific advantage. Is our society in such a situation vis-à-vis the government now? We may in fact be, and the farm bill provides a good illustration.

If you read, watch or listen to major media stories about the farm bill, the predominant narrative is about spending federal dollars to prop up farmers. Once they’ve heard the reports, the question that the 98-plus percent of Americans who are not farmers or ranchers ask themselves is this: “Why are we giving money – essentially welfare – to people who own lots of land, nice homes in the country and incredibly expensive equipment and support structures?”

It’s a very good and astute question, and like most substantive questions, it’s one that the major media doesn’t answer objectively or completely. It’s also a question that many consumers, those who have enough to eat and are unconcerned (thus far) about their tax bill, don’t really worry or even care about.  Still, the question is one that farmers and ranchers should be prepared to thoroughly and objectively answer when a non-farmer/rancher asks it. So let’s look at the farm bill. What is it, why is it part of the budget, and why is it necessary?

The farm bill is an omnibus bill – a single piece of legislation covering a wide variety of  food and agricultural programs. These programs are administered and implemented by the United States Department of Agriculture (USDA). Renewed approximately every five years, the multi-year, broad nature of the farm bill gives both agricultural producers and congress the ability to plan for and implement ag policy and activity in the longer term rather than annually through the budgeting process. In theory, this allows a comprehensive approach for policy makers and stability for ag producers.

Although the farm bill is omnibus legislation and sets the USDA budget for five years, these laws are often modified by the Congress during the life of the legislation. Congress can also approve extensions, in whole or in part, of the bill. Sometimes this happens when negotiations for a new farm bill are held up in congress by conflicting interest groups or when the congress cannot reach agreement with the President. The 2008 farm bill, which when it became law was titled “The Food, Conservation, and Energy Act of 2008,” for instance, was actually due in 2007, but was held up by legislative and executive roadblocks.

The 2012 farm bill is already having it’s own share of legislative teething troubles. After being unable to pass a national budget (required annually by law) for more than three years, Congress turned the chore over to a bipartisan deficit-reduction supercommittee in 2011. The supercommittee failed, grid-locked along party lines. As it turns out, their failure was probably a good thing, because they met in secret, and the budget process is supposed to be done in the open. The supercommittee even tried to shoehorn the next farm bill into the mix during their behind-closed-doors negotiations. The farm bill and other budget legislation may have ended up going to the Supreme Court just as the secretly written “Obamacare” legislation has.

The federal farm bill had it’s beginnings in the “Federal Farm Loan Act of 1916.” Congress introduced additional ag policy legislation and spending during the depression, and passed six additional agricultural acts between 1938 and 1971. The first true omnibus farm bill was the “Food and Agricultural Act of 1965.” Through 2008 there have been 10 such bills. The next farm bill is scheduled to be enacted this year.

In broadest terms, the farm bill is intended to be a national food security measure. The agricultural policies it sets forth are designed to ensure that U.S. consumers have ready access to the most abundant, safest, and most affordable food supply in the world. Since the country does in fact have the best food supply in the world, the farm bill has contributed significantly, though not without controversy.

As with most federal programs, the farm bill has grown significantly over the years in both policy and spending, and these increases have often been hotly debated. Many question the overall effectiveness of farm support programs and their cost. Other arguments question whether farm support continues to be necessary for either agricultural producers or food security. Many permanent fixtures of the farm bill are decades old features and no longer necessarily support modern food production, U.S. economic plans, common global trading rules, or federal regulatory and budgetary policies. Although there are many opponents of the farm bill, there are just as many proponents.

In recent years, the farm bill has been expanded to include, in addition to farm support systems, conservation, nutrition, bioenergy and other programs. The 2008 farm bill process saw a very large expansion in the number and type of extra-legislative proposals coming from state organizations, national farm groups, commodity associations, conservation, recreational and rural development organizations, faith-based groups, and many other nontraditional interest groups.

As enacted, the 2008 farm bill includes 15 titles encompassing commodity price and income supports (including crop insurance), farm credit, trade, agricultural conservation, research, rural development, energy, and foreign and domestic food assistance programs, to name but a few.

Though broad in scope and expensive, the Farm Bill makes up only a fraction of federal spending, totaling about $128.4 billion in 2011, or about 3.5 percent of total federal spending for the year, which came in at more than  $3.6 trillion. For comparison, the federal government spent $793 billion (22 percent) on pensions, $882 billion (24 percent) on health care, $130 billion (4 percent) on education,  $482 billion (13 percent) on welfare, and $903 billion (25 percent) on defense.

The media narrative emphasizes welfare payments to rich farmers who don’t need or deserve federal cash, but the farm bill is much more complex than that. Not that there isn’t some truth to those assertions – some wealthy land owners do needlessly benefit from farm subsidy payments. According to one database, 5,220 land owners living in cities with populations larger than 100,000 received $394 million in subsidy payments this year. Some of these people were undoubtedly actively engaged in farming and spent the money to produce food, though one can argue that those wealthy enough to live in big cities while at the same time owning farms and ranches in the country probably don’t need federal cash to keep their ag operations afloat. Many others are land speculators, who receive a subsidy bonus when they purchase land already enrolled in one or more farm programs.

In addition, between 1995 and 2009, 23 members of Congress received $5.8 million in subsidy payments.

The vast majority of farmers, however, have come to rely on the annual payments to keep their food growing operations in business. This isn’t necessarily because they demand federal cash or because they enjoy filling out stacks of USDA paperwork. Most farmers would probably prefer to be free agents in a free market. But after nearly a century of ag policy designed to keep U.S. food supplies inexpensive and abundant, there is simply no quick-fix scheme – or even any proposal – to significantly modify government influence and return food production and consumption to a two party transaction.

Keep in mind that while $394 million probably shouldn’t have been paid to undeserving parties, it represents only three percent of farm income stabilization payments authorized by the farm bill in for 2011. The other 97 percent not only kept farmers producing an incredible array of safe and nutritious food, it also helped keep food costs down for consumers.

Speaking of costs, the media rarely if ever reports completely on how the money allocated through the farm bill is actually spent. Of the $128.4 billion spent in 2011, 81 percent, or $104.1 billion, went to food assistance programs such as SNAP (Supplemental Nutrition Assistance Program, formerly food stamps), WIC (Women and Infant Children), school meal programs, and other programs that provide food to needy people for free or at reduced prices.

There is a good and strong argument to be made that food assistance programs are necessary and beneficial to our society, particularly when the nation’s farmers provide such abundant and inexpensive food. Among all welfare programs, food assistance provides the by far the most help at the least cost – the most “bang for the buck.” Nevertheless, one has to wonder why food assistance spending is part of the farm bill, which was designed to produce food rather than succor the needy, and why such spending is not adequately addressed in the farm bill spending narrative.

Of the remaining 19 percent of 2011 farm bill spending, $11.8 billion (just over nine percent) went to farm income stabilization programs including direct and countercyclical payments (farm subsidies) and the federal crop insurance program. $7.2 billion went to conservation, and $5.4 billion went to agricultural research and services (including the incomes of USDA employees).

The federal dollars that go to conservation and research are monies well spent, or as well-spent as any government can manage. They not only help maintain a healthy environment, they increase crop yields and reduce the quantity of fertilizer and pesticides used to grow food.

And as we’ve established, most of the direct farm subsidy and crop insurance payments are necessary, at least at the present time, to maintain food security and to keep food prices as low as possible for consumers.

From a taxpayer standpoint, it would be nice to sharply reduce farm bill expenditures, and over time this is theoretically possible. But slashing ag programs is a two-edged sword. In this country, only 1-2 percent of the population are farmers and ranchers, and they feed the entire population, including themselves. Were they to be driven out of business by overzealous and badly implemented spending cuts, U.S. food security would disappear, food prices would skyrocket, and famine would rear its ugly head for the first time in our nation’s history. These are things to keep in mind as legislative preparations for the 2012 farm bill are reported over the next year or so.

No comments:

Post a Comment