While Congress feverishly debates tax cuts, tax extensions and earmarks en leu of actually tackling the national debt, Supply Doesn’t Care About Demand would like to tackle agricultural subsidies’ role in this fiscal hole.
Though this blog has devoted four months to U.S. agricultural subsidies and their harmful effects, the question still remains: Do current agricultural support policies cause more harm than good and if so, should the U.S. get rid of them?
Well, that’s a sticky question. Overall, subsidies help increase farm revenue for large corporations, increase food production and keep market prices low. Each of these positives is a loaded answer because they can be spun both ways. More money for big business means small farms get less and less of the pie, contributing to their disappearance. More food is actually overproduction in many cases, which leads to inefficient production models and market reactions. Low prices help some U.S. consumers while hurting domestic and foreign producers pushed to the periphery of the subsidy trough. Obviously these policies help a few while harming the many.
Even though these policies can harm more parties than they help, would getting rid of them be the solution? Not surprisingly, The CATO Institute says yes. In a completely twisted video full of cherry-picked facts, aptly titled, Downsizing the Federal Government, it argues the US Department of Agriculture should immediately cease all subsidy and price-support programs in an effort to trim the federal budget and reduce market distortion. Now, it is true that reducing incredibly wasteful spending would help us tackle the national debt and help regain optimal market performance, however, the degree to which the CATO Institute claims is highly questionable for two basic reasons.
1. The amount of money the federal government spends on wasteful and/or imperfect agricultural policies dwarfs in comparison to other areas. Defense and social security gobble up 19 percent of federal spending each. Medicare and Medicaid receive a combined 20 percent. Interest on the debt alone takes up a whole 5 percent. The entire USDA gets around $143 billion of the $3.7 trillion budget in 2011. Fifty nine percent of that $143 billion goes to subsidies. That’s .002 percent. Technically speaking, it’s a drop in the bucket.
2. Immediate flight of the very capital propping up the industry would send crippling shock waves through the agricultural community. Companies would crumble, production would come to a halt in some areas and prices would sky-rocket. Libertarians and hardline free market advocates may call this a necessary herd culling to ensure the strongest survive, but Supply Doesn’t Care About Demand would call this a Malthusian Crash. When populations reach their resource limits, they plummet. This would be exactly the same.
America’s agribusiness is an addict and subsidies are its drug. Like any hard addict, it has to be weaned off to survive. Slow subsidy reductions are the methadone. The CATO Institute’s proposed 92 percent reduction in one year is too drastic; too sharp. Cutting food stamps and school lunch programs will not curb agribusiness imperfection and return world markets to equilibrium.
Reduce direct payments, price supports, export-credit guarantees and finally import tariffs–in that order–to let agriculture slip into a freer, more balanced market.
CHECK OUT THE FEDERAL BUDGET AND RELATED ANALYSIS