Daniel Sumner on the Political Economy of Agriculture

Feb 9 2015

Daniel Sumner of the University of California talks with EconTalk host Russ Roberts about agricultural subsidies in the United States, the winners and losers from those subsidies, and how the structure of subsidies has changed from the New Deal to the present. Sumner also explains how American policies have affected foreign farmers.

LISTEN NOW:

Comment

●

READ TRANSCRIPT

●

DELVE DEEPER

DOWNLOAD

Time	Podcast Episode Highlights
0:33	Intro. [Recording date: January 29, 2015.] Russ: Our topic for today is agriculture, and in particular government subsidies and involvement in agriculture, particularly in the United States at the federal level. When did subsidies of a serious kind begin? And what are some of the different variations in how crops are treated, over time? Guest: Yeah, and like every simple question, of course the answer is complicated. In one sense agricultural subsidies go back into the Dark Ages. But here in the United States, the major farm programs, what we identify as farm programs, really started in the New Deal. There were a few things prior to that here and there. But the big farm subsidy program started with the New Deal, and they were part of Roosevelt's effort to deal with the Great Depression. Some of those interestingly enough were declared unconstitutional originally, along with some of the National Recovery Act programs for industries. They came back with the farm programs, tweaked them around the edges, and those are roughly what we've had in place ever since with an evolution of changes. Russ: So, at the time, agriculture was a more important part of the U.S. economy, both in employment and in significance for I think local economy effects. The worry at the time, as far as I understand it was that farmers were broke; prices were low; they couldn't pay back their loans; banks couldn't get the money that they needed to use for other purposes and that this was a very bad situation. And therefore--the Roosevelt Administration was trying to get prices up originally. Wasn't that the goal? Guest: That's right. And in fact, the reason I tied this to the National Recovery Act in manufacturing was that agriculture was roughly the same size as manufacturing. They were both big chunks of the economy. Agricultural incomes were low and at that time farmers tended to be poor people relative to the general urban population. So, agricultural incomes even in normal times so to speak were below average for the average American. And so part of the idea there was we are not only helping an industry that's in trouble, the idea was we'll try to help a number of relatively poor people out on the land. And one way to do that, you'd say, if you were to ask the farmers what was the problem, they'd say the problem is prices are low. Well, so what's the solution to low prices? Pass a law and raise prices. And it wasn't quite that simple, but that was the core idea. Russ: So, one of the more famous things was, they went and killed some pigs and took them off the market so that the price would be higher than the price would be. Was that an extensive program that went for a while? Was that common with other products as a way to get prices high? Guest: Well, that was a small part of it, really. But let me say, there were smart people and good economists working on this, in the sense that they said, All right, we've got the price of corn is too low; we'll pass a law to raise the price of corn; but we know that that will get more corn production. Part of the problem for low prices is, some people said, We've got too much corn. So let's raise the price by law and the government will take some stocks if they have to. But at the same time we'll simultaneously require farmers to leave some land idle. Well, that's the more humane version of killing some baby pigs, I suppose. But the idea is then, for corn, we can leave some land idle. And we'll do that for wheat and soybeans and some other crops as well. For livestock where was pouring out some milk and killing some baby pigs. That was relatively temporary--a season or two at most. And then the rest of it was holding back of production before it ever was produced, through a series of restrictions. All coupled to legislated prices. Russ: And when you said 'legislated prices,' do they just pick a certain price level and set all prices to a minimum? That all corn has to sell at a certain price? Guest: So, Congress said, and this is historically the outdated or outmoded concept of parity, but people said, well, when was the last time farmers were doing pretty well? Well, we won't count WWI because that was an odd time. But if we take the period from 1910-1914, that was sort of normal and farmers were doing fine. We'll call that the 'parity price.' We'll then raise the price of farm products back to where they were during that period, compared to the overall price level of, say, things that farmers buy. So that gave them some notion, and they could say 'Corn ought to be $1 a bushel--that seems like a fair price.' The legislature, advised by USDA (U.S. Department of Agriculture). 'So we'll make the price of corn $1 a bushel.' Now, anybody that thinks about markets for a few seconds says, 'But there's lots of different kinds of corn, and varieties of corn. And corn at different locations.' Corn in the middle of Iowa is a little different product than corn right on the Mississippi, for example. So they had to have a whole configuration of prices. And we still do a bit of this--not so much--a while configuration of prices by grade and quality and type and location. And somebody had to set that grid together, after Congress said, The average price, the national average price of corn has to be $1--to take just a number at random. Russ: So, you said, somebody who thinks about markets for a minute. I think about markets for a minute; that would not have been my first choice, Dan, to worry about. I would have said, maybe, there's two kinds of corn, yellow and white. But I take the point. There are many more kinds than two. But the first thought I have, as an economist, is: It's great to get high prices, but who are you going to sell it to? And of course if the market price of corn is $0.75 and you mandate that it's going to be $1, you have two problems. One is, as you said earlier, farmers are going to try to make a lot more corn than they did before, produce a lot more corn. But also buyers are going to buy less corn. So what good is that price if I can't find a buyer? Guest: Right. Russ: So, I'm sure they figured that out. Guest: Well, and in fact the buyer of last resort was the government. So the government acquired a lot of corn. And then they said, 'Gee,' this took years of evolution off and on, but during the Great Depression they had one thing and another going wrong. But you're right. So the government would acquire a lot of corn. So now there's a lot of corn in government stocks. A trader naturally says, 'Wait a second; there's a whole pile of corn there in the government stocks; that's not sustainable. They're going to be dumping that on the market soon.' So if you have the option, you'll hold off having any storage yourself, if you are a company milling corn. So then the government ends up acquiring even more stocks. That's not sustainable. They require even more land to be idle, to hold back production. Farmers say, 'What am I getting out of this? I'm getting a high price but I'm not allowed to use a third of my fields.' So that evolves; it's interrupted by WWII where you are pulling a lot of resources and all kinds of things, prices go up; so, as in other areas, the Depression era problems were solved by WWII, to some extent. And then, just like the rest of the economy, the forecasters for agriculture, right after the War, said, 'We're heading back to a depression.' We know they were wrong when it comes to the macro economy. They were equally wrong in agriculture, but what they did in agriculture was pass a 1947 Farm Bill and a 1948 Farm Bill and a 1949 Farm Bill, all trying to--and there they sort of institutionalized this array of government stocks, government land-idling requirements, government-set market prices. And various ad hoc programs together with export subsidies saying, Gee, well, there's no market for it here; we'll use government tax revenue to subsidize exports, food aid programs for poor people, and a whole variety of other things.
9:52	Russ: So, long-time EconTalk listeners know I'm skeptical about the idea that WWII solved any economic problems. But let's put that to the side. We're post-war; so we're in the post-1945 period. And obviously the government is trying different things, given the fact that they are stockpiling a lot of corn. But how many--what other products besides corn had this approximate structure of a price floor, government acquiring lots of product, and then trying to figure out what to do with it? Guest: So, all the major field crops--cotton, rice, corn, wheat, soybeans to a lesser extent because it was a less important crop. On the livestock side it was primarily dairy, very little in the way of anything for cattle and hogs. And then, tobacco had a different kind of quota program. Peanuts had a somewhat different kind of program. But, much of kind of standard commodity agriculture. And there were a variety of other things. Let me say about WWII: For farming, lots of labor left agriculture and headed to the war effort. And demand went up because Europe wasn't producing, so there was an expansion of exports of agricultural commodities. So the symptoms of low commodity prices went away. Russ: No, I hear you. Guest: But in fact--and so just like the macro forecasters, the agricultural forecasters perhaps reasonably said, as you're saying, WWII didn't solve any problem; what it did do was relieve the symptoms for a little while. We're going to have the same problem when we come back. And to anticipate, there was a series of sort of limping along with ad hoc measures every few years, trying new things all along with government expenditures going up and down. And one thing that's a little different about farming than the rest of the economy is the weather is so big. So that the corn crop might be 20% higher one year than the next year. And so that occasionally you'll get a drought; and from the government program point of view, 'Oh, gee, that solved our problem.' Prices went up, stocks go down. The next farm bill said, 'Gee, I guess things are okay.' And it doesn't have to be a drought in the United States. You get a drought in Europe or you get a drought in Asia and markets are high or the exchange rate moves and exports boom and that solves the problem. And we have those periodically off and on as the decades proceed, into the 1970s where there was a great furor of food prices. There really was a huge spike in global commodity prices going into the 1980s--there was an attempt--and they went back into the late 1970s, Carter Administration time, raised all the price supports--there was a lot of inflation going on. The 1981 Farm Bill said, This isn't going to work. And tried to stop lowering some of these supports. And we go into what's really a modern era starting in the 1980s of trying to unravel some of these programs. And change their nature. Russ: I want to stick with the post-War to 1980 time, because I never thought about this. Is the USDA running the storage facility? Who is actually implementing the storage of corn before it's, say, exported overseas or given to poor people or whatever they tried to do with it? This is a lot of stuff. And it's a lot of crops. Who ran that program and how was it--what were the costs of it? Guest: There was something called the Commodity Credit Corporation, which was a wholly owned government organization; still exists; sometimes called the CCC, which is a New Deal-sounding acronym, and it was. And that corporation, run by USDA, bought corn. Just went out and acquired corn, through a complicated loan process. They would loan money to a farmer at harvest time, or actually well before harvest, at planting time, based on a price guarantee at harvest. If the farmer decided not to sell or had a price below that loan rate, the farmer had the right to turn that corn over to the government. Which they did. And the government owned warehouses but they also contracted with private people who had warehouses. They did this--in the case of milk, the government didn't buy raw milk from the farm. They promised to buy cheese and butter and dry milk powder, so that we had, outside of Kansas City, caves full of government-owned cheese at one point. As well as piles and piles of dry milk powder. Russ: It's good for the rodent population. Guest: Um, the problem with cheese is that it has such a high fat content that it may well catch on fire. So, we had burning vats of government cheese--if you can picture it. Russ: Fondue. We call it fondue. Don't be negative about it. Guest: Exactly. Russ: Now, I have to say something about milk--and we're not going to get into milk, because we could spend, I'm sure, more than an hour on milk. The way the government treats milk is complicated both in itself and it has regional differences and state differences. I just have to mention that I once saw a hearing on this on TV and I was paying attention, for a while, because I thought this would be good for my class; I'll just get the basic microeconomics of this and it could be a good exercise, analysis, for the class. And I realized very quickly that was impossible. And even after reading about it for a while I couldn't figure it out. And I suppose there is some deliberate aspect to the opacity of the milk order program. But the high point of this, which made it all worthwhile, was one of the Senators asked the milk person why milk was treated so differently from every other product. And there was an awkward silence. And of course the real reason is because of politics; and we're going to get to that in a second. But the person had to say something. He couldn't just say, 'Because I'm politically important.' Or, 'My state is politically important.' Or whatever it was. So, he said,' Well, milk is special.' And the Senator, who was not from a milk state, said,' Why?' And the witness had a problem there. He had to think of something. So he said, 'Well, milk's bulky.' And I thought: I don't even know what that means. Milk is bulkier than what? So, milk is special. If you want to say anything about milk, you may briefly. Guest: I'm going to say 30 seconds about milk. What you are describing is a marketing order system. That still exists. It's been cut back in lots of ways. The price support program for milk was finally eliminated--that is, the government set minimum prices for milk after frankly not being very important for a decade because the government guaranteed price was well below the market price--they finally pulled the plug on that and the export subsidy for milk in the spring of 2014. Russ: Wow. Guest: What they came back with, we can talk about in a few minutes, because it's a part of this overall risk management configuration that the current farm programs-- Russ: Yeah. We're going to get to that at the end. Greg Page, former CEO (Chief Executive Office) of Cargill was our guest on EconTalk recently and talked about the virtues of the Farm Bill from Cargill's perspective, I suspect. And I'll be interested in your take.
18:02	Russ: But let's just summarize the 1950-1980 period: the thing I want to look at is what I would call the political economy. Who are the winners and losers from these programs? And what was the political alignment that sustained these transfers to the farm states and the farmers? Last point--sorry, just important to remember. I think most people when they think about farming think of Grant Wood and American Gothic and a person in overalls with a pitchfork and maybe a scythe. And that's a really romantic view that is not true. So, go ahead. Guest: Yeah, and it really was never true. These farm programs, if you'll remember, were begun for two reasons, I would say. One is farm people on average, people that made a living farming, were on average poorer than the average American. And at the same time, because we are talking about a program that raised the price in an attempt to raise the profitability of farming, if you produced a lot, you got a lot of subsidy out of the deal. And in that sense it was an industrial policy. So, the bigger the farm, the more benefit. And that was on purpose. You were trying to raise the price of corn; it doesn't make much sense to do that for people that produced a little bit. So, that inherently meant that the biggest beneficiaries were the biggest farms. It sort of had to work that way, given the structure of the program. And it was never a part of our relief for the poor programs, whether it was modern food stamps or SNAP (Supplemental Nutrition Assistance Program) programs or whether it was welfare or negative income taxes. The second thing to say is that while farmers were poor in terms of income, they always tended to have wealth, in the sense that they tended to own some land. Most people owned almost nothing. And they tended to have some equity. And so part of this--and that becomes important, because if you think about, I raise the price of corn, there are lots of people that are willing to grow corn, what's the inelastic, to use economics jargon, what's the inelastic resource? It tends to be the land, not the people. Russ: It doesn't respond that easily. You can't get a lot more of it when it gets expensive. Guest: That's right. And so, you can move it across crops, and so if you make the subsidy really high for corn you'll get more corn, less soybeans; or more wheat and less barley. But that depends on relative subsidy rates. And as long as you are subsidizing the whole configuration of crops that say may apply in Iowa or Kansas, you will raise the price of land. Now, that has two effects. One, it makes the people that own that land wealthier. That could be Grandmother. That could be your cousin who lives in Chicago. The farmer who is out there farming the land, say, renting everything he farms, gets essentially nothing out of this. He has higher total revenue and higher land rental costs. It's a wash for him. So, to the extent that these things get turned into rental rates for the resource that's most inelastic, those are the beneficiaries. Now, we know that's a long run solution; we know that's the way it ends up in equilibrium. We also know that there are people that are particularly good at growing corn. Their human capital, their talents are rewarded in that way. And we know that markets don't adjust immediately and costlessly, at least not things like land renewal markets, for example. So, there are some beneficiaries in the transition among current farmers. Russ: Those folks are located in particular states. Guest: That's right. And now, let's say this. Landlords are located everywhere. So in fact one of the favorite pastimes of some advocates who don't like farm programs, they love to find the zip code in Manhattan that's wealthiest and find that in fact wealthy people in Manhattan also own farmland. Or, here in California they find someone that owns a thousand acres of cotton land who lives in San Francisco. So there are plenty of people--I have friends that teach at Iowa State University, their zip code is Ames, Iowa; and they own farmland in Iowa because they realize this is a pretty good investment. So, landlords, no matter where they live, gain. And farmers gain to the extent that they own something that can't be easily reproduced. And land is one of those things. I should be clear--most farmland is owned by active farmers. Or their grandmother. And so most of the beneficiaries of these programs have traditionally been people in the business. Russ: But the dramatic losers of this program are you and me, who pay more--and taxpayers, generally. Guest: Yeah. Taxpayers generally. And to some extent, consumers. Russ: Right. People who eat corn. Guest: People who eat. And that's a mix, because, to the extent that you stimulate extra corn, which is sort of marginal in all of this, people who eat a lot of corn, typically in the form of hamburger or pork chops, benefit, because they may be a little bit cheaper. And in fact one of the controversial things that you know, Russ, is people who think that Americans--some people think Americans are fat because we've subsidized products like corn. It turns out the facts don't fit that story at all. In theory it could be true. If corn makes you fat because you eat it in the form of hamburger and hamburgers make you fat, then making corn cheaper could make hamburgers cheaper, which could make Americans fat. Turns out the facts don't fit that story very well. Russ: Well, but I'm confused about the first thing you said. It seems to me that if--and corn is part of a hamburger because cows eat corn, right? Guest: Yeah. Russ: I'm drawing on my great agricultural background. Which, I'd have to say, you'd have to go back at least to the 19th century in my family, and even then it's probably not true. But anyway. Although my dad did go to Iowa State in 1956, 1957 for a Masters' Degree in statistics, in psychology and statistics. Guest: A wonderful statistics place, particularly in the 1950s. Russ: Correct. So, I would think that--there are different ways to subsidize stuff. The usual way, the standard way does make things cheaper. But the way we did it with agricultural products made it more expensive. So, I would think--my first thought would be that if you put a minimum price on corn, that's going to make corn more expensive, feed for cows and pigs more expensive, pork and hamburger more expensive--not good for anybody, whether you eat corn or its output, products. True or false? Guest: There was a transition, and we'll get to that, where we decided not to set the overall market price but we decided to set the price for farmers. And did that with government tax money, to allow the price to be low.
25:51	Guest: So let me transition quickly to that. Because we occasionally did something called 'deficiency payments.' And in fact that was the last 40 years of the programs, or 30 years anyway, that was the program that we used most. And that was a case where we said, rather than the government mostly building stockpiles, we'll mostly write a government check to farmers. So, the other thing about farm programs was that farmers would go to the mailbox to get a government check. And that was of this form. Rather than the government saying 'I will buy your corn,' the government said, 'I will set the market price for corn, but I will enforce that by making up the difference between the government-set price and whatever the market ends up being. So, Cargill, for example, could buy corn at whatever the market-clearing price was, and the government made up the difference in a direct payment to farmers, or a deficiency payment, it was called, to farms. Russ: So that's more like a traditional subsidy. Guest: That's right. And so that's why you could end up having a low price of corn to consumers and a high price to farmers. And stimulate additional production that way. Russ: The background for all this, of course, is my favorite Hayek quote: The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. So, some of this was, I think, designed to be complicated on purpose, but I'm sure some of it got more complicated just because of all the responses. Guest: And I have to tell you, Russ, my favorite story in all this. Back when I was a kid I was a young professor at North Carolina State. I ran a conference: I brought in luminaries of the agricultural economics world. And I invited some local agricultural commodity people. A man named Northly[?] came--he was the Executive Vice President of the North Carolina Peanut Association. Wonderful guy. He stood up as this conference was ending, and he said, 'Let me tell you about the peanut program. There's only two people in America who understand how the peanut program works. It's my job to keep it that way.' And I took that statement, one, to be true; and two, the fact that he was willing to say it out loud, to us, was a reflection of how irrelevant he thought we were. Now, I don't think he was quite right that we were that irrelevant. Russ: Close. Guest: Close. Russ: In the ballpark, probably. Guest: He would not have said that in testifying in front of the Congress, for example. Russ: No, he wouldn't. Guest: Or the hearing that you heard. Russ: Yeah. In the old days--this was--what year was this, roughly? Guest: This was in the 1980s. Russ: So, there's no video. There's no YouTube of this that went viral and humiliated him and forced him out of his job. Guest: No. Let me tell you--I mentioned this story to an NPR (National Public Radio) reporter, very enterprising young woman, who then Googled him. Found him. I had told her this happened a long time ago. I told her this story maybe 4, 5 years ago. I said he was not a young man then. She found him. He had been in the press recently because he had won an award from his local veterans of WWII, a club. And she asked him, 'Did you say this, at this meeting in Raleigh, North Carolina, in 1983?' And he said, 'No, but it certainly sounds like me.' Russ: Yeah. Guest: Great old guy. He's still a good guy. Russ: I wondered who those two people were who did understand it. He may have been one of them. But didn't have to be. That's the beauty of it. It's a point estimate. It may exaggerate by 2, the number of people who really did understand it. It's just a guess, really. Expression. Guest: And in fact I talked to her about this incredible complexity of these programs in the context of the milk marketing order of program, but also the current crop insurance programs, that are equally opaque, I think. Russ: Well, I'm looking forward to getting at that, at the end.
29:57	Russ: I want to say one other thing about the backdrop in this sort of classical period, 1950-1980, and I assume it also applies in the 1980s to the present, which is the following. While these programs are evolving and adapting and sometimes changing somewhat dramatically, it seems to me there are two things going on in the background in the industry itself. And I'd like you to comment on whether those two things are just going along at the same time, or whether they were caused by these political interventions, government policy interventions; and whether there is this interaction between them. So, the two things that strike me are that agriculture over this time period of, say, 1950 to the present, is getting incredibly more productive, due to the application of technology and just knowledge. So, an acre is producing much more than it did before. There are many, many fewer people necessary to produce our food. And at the same time--and I think these two are related--there's in increasing concentration in the agricultural sector, the economies of scale get exploited and firms get larger and larger. Comment about those underlying economics and how they interacted with the subsidy programs, to the extent you think we understand it. Guest: Yeah. So, one, I don't think there was causation between the two, one or the other. That is, the farm subsidies didn't make farms larger; and farms getting larger didn't make the farm subsidies. I think they were going along at the same time. They interact politically in interesting ways, but I don't think there's a clear and easy causation there. Secondly, you're right--the farms were getting larger. The other thing that was happening and is consistent with that is that farms were getting richer. And one thing I will say that was happening in the United States, and it's partly because we allowed this flexibility here, within the farming sector, is that farmers were also getting better, in the sense that it was often the case that the smarter brother stayed on the farm. And what I mean by that is as the farm went from 100 acres to 200 acres to 300 acres, it wasn't just scale economies and new technologies. Some of it was that. But some of it was that the managerial, the average managerial ability of farmers, was going way up. So that, rather than farmers as poor people because, gee, their next best alternative is to work the factory job, so the guys went off to work the factory job. It was now the case that the next best alternative was to be the school teacher or the college economics professor or the local banker. And the guys who found their ability to make a living even better on the farm--and I don't mean just money: people do things that they love, not just for money. But it was the case that the opportunity to stay on the farm--if you were talented, a good manager and a good farmer--and make a very good living was really there for you. So, a bunch of very talented people stayed on the farm. And the other interaction there was, that that meant that they were capable of operating large, sophisticated farms. And, two, in order to keep those guys on the farm, you had to give them that scope of opportunity. And I contrast that with a place, for example, like Korea, and Japan to some extent, where the U.S. army had imposed some land reform sorts of things--they had laws that said you couldn't operate more than 2 or 3 hectares. And there, for the most part, the smart brothers left the farm. And we had a generation where farm income stayed low relative to the rest of the population. And it was partly because of government restrictions on farm consolidation. And that didn't happen here; and it meant we now have a group of farmers--there's probably farmers that make a living farming. It's also a very nice part-time activity for people that are retired or do it--I won't say as a hobby because they may make some money at it. But it's a wonderful part-time activity. We probably have a million people in the United States, a million families in the United States, that do that, maybe a million and a half. And then we have a few hundred thousand people that make a living farming. Down from, maybe, 10 million a couple of generations ago. Russ: And I assume, in recent years there's been a little bit of a comeback of smaller farms for people who want to buy local; for artisan kinds of stuff. Guest: Boy, is that marginal. [?] Yeah. That is really marginal. It makes the press a lot because those of us in college towns, or in urban settings, those are of interest to us. But it's really--it remains a tiny part of agricultural production and agriculture. And you say, organic, the significant organic producers are the guy with 1000 acres of lettuce, gross revenue of millions and millions of dollars who may grow 100 acres of organic lettuce. Because there's a market for organic lettuce and he's going to satisfy whatever people want. People that grow cage-free eggs may have three or four million hens; two hundred thousand of them are cage free, for that market. And they sell to Safeway, who has on their shelves both cage-free eggs and conventional eggs. So, most of what you may think of in that way is the same farms that do everything, but it's just part of their division. One division is their organic division. When it gets to local it's a little bit different. And there is a niche market. But relatively few people actually make a living satisfying the market for local, know-your-farmer, etc. And if you think about it, other than the Embarcadero farmer's market in San Francisco and a few other places, it's very hard to make a very good living if you are working retail. Which is what you are if you are at a farmer's market. So, how much does the average retail worker make at Safeway? They do okay. In some settings. But they are not--the guy that's making a living farming that I was describing earlier probably isn't going to work retail. He may hire; he may have a worker making $15 an hour working the farmers' market circuit as one small division of his farm, for example.
37:09	Russ: So, I want to go back to the politics for a minute. A point associated with Mancur Olson, and I heard it applied to farming from Gary Becker; you may have heard it from him as well. And basically the point is that in countries where farmers are common, where they are a large part of the population, they have no political power. Which is surprising, perhaps. In places where farmers are scarce, they have a lot of political power. So, one example would be the United States. We're talking about the post-1950 period. Nineteenth century, a lot of people farming. Didn't get much help from the government. Twentieth century, fewer people farming; their political power becomes more important. Japan, which treats rice very badly for its consumers: the price of rice in Japan is many times the world price. Of course it's justified--Japanese are told that it's necessary to ensure the quality of the Japanese rice plot or the reliability of it. I don't think that's a very good argument, but politically those farmers, those small, the few numbers that there are even with the lack of consolidation you mentioned, they are very powerful politically. So, talk a little bit about that and why--my favorite example we've mentioned before on the program is sugar. It's literally a handful of families in the Dakotas or in Florida that are in the sugar beet or sugar cane business, right? Guest: Yeah. Let's unpack this slightly. Sugar is wonderfully well subsidized. If you like political economy stories through trade barriers, primarily. Russ: Correct. Quotas. Guest: Uh--yeah, mostly it's called a 'tariff rate quota' and now it's got more complicated. But you're right. There are thousands of farms that grow sugar beets scattered across a half a dozen states. Now, it's much easier to organize a thousand people than 10 million. But sugar is a great example where they have a program that is so immensely valuable to them that many of those farms would not be in the sugar business. The sugar business is very lucrative. They limit entry in various ways. But you still have to organize thousands of people, so this isn't a cartel of three steel companies, for example. It really is thousands of people. In the case of dairy farming, used to be 100,000 and now maybe it's 30 or 40,000. It's still quite a lot--there's still an organizational effort. So there's a lot of work to put together farm coalitions of individual farmers who have a common interest. And it has to be a big enough common interest that they are willing to voluntarily participate. Because these are not typically mandatory organizations that do political clout. But let me give you--sugar's a great example, because when you get to cane sugar, many, many fewer farms, very few processing companies. And they have political clout because they are very identifiable. And the famous story of Bill Clinton being on the telephone with the Fanjuls, one of the Fanjuls in Florida, during some interesting days in his administration. There's a case where you have a major political donor, major political player; works both parties: Bob Dole was one of his friends as well as Hubert Humphrey. Those sort of stories. At the same time, across the northern tier of states, you have thousands of sugar beet growers, across dozens of Congressional districts, where it really is--the center for Minnesota [?] could say, I've got thousands of mom-and-pop kind of farmers. Now, these are mom and pop farmers that have equity of several million dollars. But not hundreds of millions of dollars. So there's a difference in scale. These individual farmers aren't making million-dollar campaign contributions. But, in sugar especially, they are all making thousands of dollar political contributions. When I worked in Washington, D.C., I remember flying for 8 hours there and 8 hours back to have lunch in, then, Weber[?], in his Congressional district in Minnesota at the sugar co-op. Because it was important for him, even though he was going to vote against sugar issues because he was a free-market kind of guy, to illustrate to his, an important constituency, that he cared about them. He cared about them enough to have somebody from USDA, where I was working at the time as an economist, to go out and visit with them[?] and explain how all this worked. Russ: I'm impressed because usually he could be a free market guy while maintaining that sugar is different, because it's bulky, or whatever was the excuse he gave. Guest: Yeah. But, you know, and he was about ready to leave the Congress. Russ: Now you're talkin'. Guest: Yeah. So, one of the interesting things here is with respect to applying this idea that small interest groups can be powerful, if they can be well organized. So one thing the Farm Bureau has done, and the National Farmers' Union; but especially commodity by commodity--National Corn Growers' Association, the National Federation of Milk Producers. National--NMPF (National Milk Producers' Federation), national council of milk producers or something like that. Those groups really work hard to elicit input from thousands of individual farmers and work together. And the ones that are most successful are the ones that sort of keep it all together so to speak. So, the National Cotton Council includes cotton millers and cotton buyers and cotton ginners and cotton warehousemen as well as cotton growers. Once you get all of those together, the Washington lingo is: We speak with one voice as an industry. Whatever they differ about, disagree about, they settle that within the group. And the ones that had less political clout, surprisingly given the size of their industries, are people like the cattle industry, where they've never figured out a way across regions and across the various groups--the cowboys and the guys that run feedlots and the meatpackers. They haven't really figured out a way to paper over their differences, to sort of speak with one voice. So in that sense that's one rational for why we've never had the cattle program, where the government bought a bunch of meat. Even the pork industry hasn't been able to keep that kind of coalition together. Now, those farmers that say, Well, we don't want subsidies, we've seen what it does. And let me speak to that very quickly. Vegetable folks don't have much of a subsidy program; out here in California if you talk to those people they say, Look, we do okay; we don't see that corn growers are unusually wealthy people compared to lettuce growers. We don't see that cotton farmers have done a whole lot better than almond farmers, for example. And their argument is the kind of complications and impediments that these programs place in the way of organization and innovation and other things, essentially cost enough that the programs aren't worth doing. That's a debatable point; and they may suit certain industries and not others. And I gave an illustration where, if you want a successful industry that under these subsidy programs they've got to be pretty well streamlined, at least they don't complicate the life of the guys that are trying to innovate. And most U.S. programs have gotten out of the way of farm innovation. And where they haven't done that--say, where they've targeted all of the subsidies to the smallest farms--those haven't really lasted very long or been very successful.
46:00	Russ: Let's talk about the international impact of these programs. There's two parts to it, of course. Some products that we're talking about have worldwide markets, and the U.S. output would have an impact indirectly no matter what; but there's also direct effects, where the U.S. government has used the surpluses as you mentioned earlier in the 1950 to the 1980s period, post WWII, where they would I think sell stuff abroad, making it harder for local farmers in foreign countries to make a living. And in particular in recent years the claim has been made that the U.S. ethanol requirements have pushed up the price of corn, some soybeans--because land for soybeans and corn compete. And--I don't know. Some are up, some are down, some are higher prices abroad, some are lower prices. Guest: So let's leave ethanol to the side for the second, partly because it's a whole 'nother set of complex. But you're exactly right: for a number of companies the United States is big enough to matter in the world market. And so both farmers and consumers can be affected elsewhere. And to the extent that we, say, subsidize some use like ethanol in the United States for corn, that raises the price of corn; that will affect the world market. And so people who consume corn directly or through animal products, consumption will have a higher price. And that part of the program could help farmers in some other place. Let's talk about the farm subsidies directly; and let's talk about the more modern era, where we do this through payments to farmers or other guarantees that go to farmers and allow the market price to sort of reach its own level--or where we kept prices in the United States high but subsidize exports. We had explicit export programs--the Export Enhancement Program, the Dairy Export Incentive Program. Those are mostly gone now. But what we have kept is things that subsidize farmers here. And there are sort of--the key parameter is: Is the United States big in the world market? Well, we are for corn. We are for soybeans. We are for cotton. Not so much for rice, where most of the rice is produced in Asia, for example. The case of cotton is an important one. In full disclosure, I spent years, it's over now, as a consultant to a U.S. law firm that worked for the Brazilian cotton farmers and the Brazilian government's suing the United States in the WTO (World Trade Organization), over precisely what you're talking about, Russ, which was the claim that U.S. cotton subsidies were big enough, they stimulated U.S. cotton production enough, to drive down world cotton prices enough that it reduced the revenue opportunities for Brazilian cotton farmers. The U.S. government lost that case. They lost on appeal. They lost the second time. They lost that one on appeal. Finally the U.S. government said, Gee, we want to keep our cotton program. So, for about 5 years, you and I as taxpayers paid Brazilian cotton farmers about $150 million dollars a year just to keep quiet. A sort of WTO hush money. And finally we settled that case here, earlier this year, this fall, where Brazil said for a final payment we'll not bring another case. Russ: We all remember-- Guest: There's a case that was actually adjudicated and at least various panels of WTO, what were considered impartial judges, said the U.S. subsidies really worked. Now, cotton was a bit special because the United States won; when that case started, cotton farmers in the United States were getting half their revenue in the form of checks from the Federal government. So, they were guaranteed prices--if you put it on a price guarantee basis, the world price was at $0.35 and U.S. farmers were getting the equivalent of $0.70. Which was enough to keep a lot of land in cotton that might not otherwise have grown cotton. And secondly, the United States was, at that time, by far the biggest exporter of cotton into the world market. And cotton was a pretty--the kind of cotton we are talking about here is a pretty homogeneous product. So it was a pretty good argument to say that it drove down the world price. And people could dispute that and there were lots of economists that got involved--including me. So, I don't want to--you know--the U.S. cotton people were mad at me for working for foreigners, for example. I was trying to claim I was trying to work for U.S. taxpayers indirectly. But, that was not a satisfying argument to them. Russ: Let's turn--I just want to mention, I want to interject there, that we of course all remember the special edition of the NY Times Sunday Magazine devoted to the Brazilian/U.S. conflict. That of course was never published. Most people listening to this program--I do have some listeners in Brazil, but I suspect most people had no idea that that kind of thing happened. And it's good to understand it a little bit. It's a little bit depressing, but good to know about.
51:37	Russ: I want to turn, in the last part of our conversation, to this issue that came up with Greg Page of Cargill, a recent guest, that the Farm Bill that recently passed--I think it was last year, correct me if I'm wrong--but it really changed the nature of how we are giving money to farmers. Talk about what's important about that, if there is a change. And what you think of the economics of what was put into that bill. Guest: Yeah. So, let me mention a couple of things there. One, Cargill, for years, and to their credit, opposed U.S. subsidies in general, even though there were arguments that it stimulated additional production; and Cargill was in a position--one of their main businesses is moving commodities around the world. Secondly, they even opposed U.S. export subsidies. And their argument was, Yeah, in the short run it may look like it may benefit us, but as a matter of fact, we're a global company; and we think subsidies frankly aren't good for agriculture in general in the world. And so they took--what I think--and it's because they are not a publicly traded company they can--it's easier, some people argue it's easier for them to look at the long haul without worrying about quarterly reports or anything. And they've done that. And so I think they've been, frankly, intellectual leaders among companies when it came to farm subsidies. But the big change--there were some changes in the 1990s. Some of your listeners may even remember the term 'freedom to farm' that was the nickname of a farm bill in the late 1990s. And the idea was, well, we are going to wean agriculture from these subsidies by no longer trying to support prices, no longer trying to do all that stuff; but as a transition, we'll make direct payments to farmers. So, if they used to get $100,000 a year, we'll just write them a check for $50,000 a year and you can grown whatever you want. You used to grow corn; the government wrote you a check of $100,000 a year, through all this complicated baloney, we'll write you a check for $75,000 during this transition period every year. That--and that program evolved into something, changed its name from 'transition payments' to 'direct payments.' That should tell you something. And then it became a $5 billion dollar account within USDA where checks were written to people who used to grow particular commodities in particular places, to say, 'Yeah, this was tied to your history; we don't want to mess up markets.' I like to describe it as a program only an economist could love. The idea was it tried to be a lump-sum program. It said, Gee, we've got a box of money--we'll pass it out to people based on your history. Well, it was never, for lots of reasons, didn't work that way, quite. But it had the disadvantage from [?] point of view that it was immensely transparent. And it's remarkable to me that it lasted almost 20 years in Washington. So, it was eliminated with the 2014 Farm Bill, where just about every Senator and Congressman said--urban Congressman, Senators--said, 'Why are we wasting money giving these farmers money for nothing? Let's require that we distort incentives to give them money.' I'm being facetious, obviously, but that's the way--anybody with economist ears heard it that way. And what we've transitioned to is a set of programs under the rubric of risk management. Some people called the price supports 'risk management.' It's guaranteeing that you get a fair price and saving you from the risk of having low market prices. But here what we do is we say, on the basis of revenue, prices times quantities, and in some cases even net revenues, we will either buy insurance policies for you from private companies or we will have the government do this through what's called 'shallow loss programs'--you sign up; we have a program that says if you're a corn farmer we'll look at the futures markets in February. That tells us what revenue is likely to be. And we'll let you lock in that revenue through a government program. With a deductible, like a normal insurance policy. Let me turn quickly to the crop insurance parts of these. Which is: crop insurance goes back to the New Deal, but it was sort of a footnote, mostly irrelevant, partly for familiar reasons of moral hazard: you insure somebody and they don't take care of their crop that well. Or adverse selection: I happen to know the back 40 gets lousy yield so I insure the back 40. Both of those, adverse selection and moral hazard reasons make it complicated to do agricultural insurance, crop insurance. So, premiums were high; nobody tended to buy them. In the 1990s we transitioned to much higher subsidy rates, with the idea--should be familiar to people thinking about health insurance--that, gee, if we really subsidize the insurance, that will draw in more people, so we won't have as much problem with adverse selection, moral hazard. And then we'll create an agency, the Risk Management Agency and the Crop Insurance Corporation, government owned corporation, to run this program, but because we like privatization we'll have private companies actually sell the insurance. So, the government sets the rates; the government sets all the policy parameters; but you have to buy it through a private company. And then the government pays the operations costs to the private companies to make sure that they are out there talking to every farmer, not just selling it to a few farmers that are easy to sell to. What that has meant is now $10, 12, 15 billion dollars, depending on the year, of losses to the taxpayer for insurance, both in the form of premium subsidies to farmers--farmers have to pay maybe 40% of the premiums, in some cases less, in other cases. So the farmers have some skin in the game, but it's mostly taxpayers. And the taxpayers subsidize the insurance companies. And then in the case of widespread losses, the taxpayers pick up any losses that the insurance companies have. So, we had a big drought in 2012 in the mid-West; the insurance companies would have lost a bunch of money; the taxpayer provided what in the jargon is 're-insurance.' So, the taxpayer is the reinsurance corporation. Russ: Yeah. We're the insurer of the insurers. Guest: That's right. As opposed to some Swiss company or AIG or somebody else. Russ: 'Making a mistake,' would be the other alternative. Not being able to keep the promises. Guest: So, it in one sense, farmers are paying something for their insurance and there are lots of wrinkles that make this lucrative. Most farmers buy it. They buy it on the basis of revenue, not on the basis of yield, so they are insuring a price/quantity combination. And how much additional production does this stimulate? In some cases probably quite a bit. Some cases, not so much. Maybe in central Iowa where everybody's going to grow corn, soybeans anyway, the effect is around the margins: since corn and soybeans are both insurable crops, they both have subsidies for the insurance, maybe you don't change the mix of corn and soybeans so much. That, because they are both covered. If you go to places where there is good insurance for wheat but not so good for barley, you encourage farmers to grow more wheat. You also still encourage farmers to grow these crops in outlying areas that aren't so well-suited. So, I provide wheat in the Dakotas and maybe I might not have grown wheat: maybe that land would have stayed in pasture, but now I've got subsidized insurance, very highly subsidized insurance. So I grow additional wheat out in the Dakotas, for example. So that's what we've got now--a variety of so-called shallow loss programs. Still some direct payments based on market prices and then lots of various insurance programs. I promised you I'd tell you something about dairy. What we do for dairy is we don't run our program through a Federally own corporation. We don't have private insurance companies. The government itself has something called milk revenue insurance that protects the farmers against the margin. So, it's margin protection. And what we do is we calculate the index of feed cost for dairy farms; we calculate an index of milk prices; and what the farmer does, if he wants to, is buy insurance for the difference between the two at very highly subsidized rates. Turns out, half or two-thirds of the costs of your dairy farm is feed, and so we offer farmers a very large subsidy on insuring the difference between those two, rather than a price support and an export subsidy and a bunch of other stuff. Is that progress? I don't know.
1:01:58	Russ: So, here's I guess the question to ask about all that--and put a lot of what we're talking about in perspective: How much money are we talking about here? Obviously for an individual farmer, as you said earlier on, in the post-War period, it depended whether you were big or small. But there is a bottom-line kind of figure, at least in theory, of how much money non-farmers are transferring to farmers. It's the budget of these programs. Have they gone up? Down? Per capita--do we know anything about them? Per recipient? Guest: Yeah. Because of the way these--well, one is farming; because there's weather and world market prices go up and down, so subsidy rates go up and down. We're now at a steady state between $15 and $20 billion dollars. That covers about $300 billion worth of agriculture. That's less than all of agriculture, but most vegetables and other crops, cattle for example, aren't a part of these programs. So we've probably got about $300 billion. Russ: What's $300 billion? $300 billion of what? Guest: The revenue that's being covered by these programs. So, as a share of farm revenue, we are probably talking 6-10% of farm revenue. Higher for some crops than others. Still higher for cotton. Probably still higher for corn and wheat. Lower for soybeans, for example--it has traditionally been lower for soybeans. Now, is that a lot or a little? And here's one perspective to put on it, is to say, if you thought of farmers with a 1920s mentality, gee, the farmer is the equivalent of a factory worker. He's just a guy out there workin'. The only thing he's got is his labor. Well, we've got, whether you like it or not, unemployment insurance and various other insurances for the average worker. So, farmers have that. Except, remember, these are businesses. These are businesses with equities. The people that are getting this $20 billion are a set of businesses with equities of millions of dollars, each, on average. Some of them have $100 million dollars' worth of equity. Some of them have a billion dollars' worth of equity. They are eligible for these programs. And we are transferring $20 billion dollars to this industry, on average, every year, for a kind of a business insurance. What's another rationale? Gee, I don't know. I've written a paper where I said, What are the dozen rationales for farm programs? And what I've gotten to is the bakers' dozen number of 13. Which says: We subsidize agriculture because we've always subsidized agriculture. And that's not as facetious as it sounds. That is to say there's lots of inertia. And for a guy--say you're in the cotton business. It is fair to say that, it's probably the case that your father was in the cotton business, because a lot of these farms are handed on--I was claiming earlier to the smarter son. These days it may as well be the smarter daughter. And your grandfather was probably in the cotton business. And all of--you've never met anybody that wasn't[?] in the cotton business, that didn't have government programs. And now Sumner and Russ Roberts say, 'Trust me, the market works. These programs don't make any sense. Let's farm without these programs.' Russ: And I have to say, Dan, a lot of these people have already hung--they've already stopped listening. Guest: Yeah. Russ: But I'm sure I have some listeners out there listening, saying, you don't know anything about the farm business. You don't know what it's like when a drought comes. You don't know what it's like to try to make your payments on your machinery when you have a bad, some kind of investment issue-- Guest: All that. Russ: And they are going to send me an angry comment or an angry email saying I don't know anything about a firm--even though I haven't said a thing yet. I'm just--you told that listener that I'm on your side. Of course, I am. Go ahead. Guest: So, let me say this. If you are in the cotton business, you have never known anybody that was in the cotton business in the United States that didn't have some configuration of government programs. So, for you and me, Russ, to say, 'It'll be fine,' he's going to say, 'I don't know what you're talking about.' You know--we've never tried that. You're talking about trying about something, with my living, that we've never done before. Russ: And people's lives, who [?] Guest: That's right. Russ: are soybeans and corn or whatever it is, that feed America. And we're playing with fire. Guest: And so that's the argument. Now, I will get--you can frankly, we can go one by one if we had another 2 hours--and say, gee, it's not food security. It's not this and it's not that. Those I think are easy arguments to make. The number 13, the reason I say we've always had it, it is a hard argument, and I think one of the arguments that is successful politically. I personally think it probably shouldn't be, but is that, we've had these things so long, people are really uneasy turning them off. Now, my friends in the vegetable business say, 'Gee, I'm glad we've never had 'em because they'd be so hard to turn them off.' So, I think, going across, even within agriculture, we can go across countries. And we can go across commodities. And find that there is no record of success that is higher in the cotton business than in the corn business, relative to, say, the cattle business or the lettuce business or broccoli. So, I think there are compelling arguments to say that these programs probably don't have a compelling economic argument. They have, continue to have, a compelling political argument. And there I think Mancur Olson's arguments do apply. But I must say they do, they work very hard to keep their political coalitions alive.

Time

Podcast Episode Highlights