Bitter Harvest For The Taxpayer

Volume VIII, Number 2 March 25, 2002

The Senate and House, with a nod from the Administration, are nearing agreement on a ten-year farm bill that will pile an extra $49 billion in commodity support subsidies on top of the $70 billion authorized in current law.

The bill completes Congress's costly retreat from the 1996 Freedom to Farm Act, which was supposed to phase out a Depression-era entitlement that distorts markets, burdens taxpayers, and harms the environment. Its march through Congress --- despite resurgent deficits and pressing new priorities --- should be a warning to other would-be entitlement reformers who are ready to pass out near-term benefit favors in exchange for the promise of long-term cost savings.

A Textbook Case

The farm bill perpetuates a welter of subsidies for major crops like wheat, corn, rice, and cotton. It extends special deals for dairy, honey, sugar, and wool producers. It even creates an entirely new price support program for peanuts, an initiative that Representative Terry Everett says “strengthens national security.”

Virtually every economist agrees that the system is not just costly but perverse --- a textbook case of an entitlement that survives because it is politically attractive, not because it is good policy. *

The system is arbitrary. A minority of farmers growing favored crops receive the lion's share of the subsidies, while the majority of farmers --- roughly three-fifths --- receive nothing at all. The system distributes benefits without regard to need. The average farm household, earning $61,307 in 2000, is better off than the average U.S. household. And the richest farmers receive the biggest subsidies. In 1999, the 7 percent of farms with sales over $250,000 received 45 percent of all benefits.

The system hurts small farmers --- those it is ostensibly designed to help --- by subsidizing agribusiness, encouraging overproduction, and driving down commodity prices. Even those subsidies that do go to small farmers are soon capitalized into the price of their land --- and so into the size of the rent or mortgage they must pay, leaving them little better off than before.

But that isn't all. The overall farm aid system hurts the general public ---not just through higher taxes, but, in the case of products subject to tariffs and quotas, through higher prices at the grocery store. All of this undermines America's global credibility as a champion of free trade. It also harms the environment by encouraging farmers to over plough and over plant.

A Moratorium

The 1996 Freedom to Farm Act offered farmers a deal. Government agreed to abolish onerous restrictions on farm production, which it employed to keep the total cost of farm aid in check. In exchange, farmers agreed to give up commodity price supports. To sweeten the deal --- and cushion the loss of benefits --- the Act provided for special “market transition” payments that were scheduled to decline over seven years.

At the time, some were skeptical about a deal in which all of the pain was back-ended. And indeed, when grain prices fell just as the transition payments began declining, Congress rushed in with four consecutive “emergency” aid packages that kept the benefits flowing even faster than before. The current farm bill ends the farce. It again regularizes the subsidies --- without, however, reinstating the supply controls. Henceforth, it will be both feet on the accelerator.

The fate of Freedom to Farm should be a warning to those eager to strike the next grand bargain on entitlement reform, whether it's Medicare prescription drugs in exchange for long-term cost control or Social Security benefit “guarantees” for older workers in exchange for personal accounts for younger workers. Such deals are always renegotiated--and never to the benefit of the taxpayer. It's time to call a moratorium on grand bargains that front-end the gain and back-end the pain.

* For a more extended discussion of farm aid, see our earlier alert, “Farming the Government" (December 9, 1999).