When Republicans Embrace Government Over Markets

In a review of any beginning economics course, one learns about the power of markets.  We are often told that the best economic system is one where markets are run with as little interference as possible from the government.  In a quick examination of the two major political parties, it is often assumed that Republicans always support market-friendly solutions.  They typically frown on government interference and its distortion on market outcomes, but there is one exception to this rule.  As the libertarian, conservative-leaning think tank, Cato Institute, points out, why are Republicans hypocritical in the area of farm subsidies?

A simple answer is a dose of political reality that a large majority of Americans implicitly do not favor a pure market economy, especially when market forces can cause job losses.  In the case of agriculture, developing countries are showing improvement as they accept more market-based fundamentals.  Most of this growth can be attributed to better farming methods and technology, which has resulted in a significant amount of exports throughout the world.  While this is good and minimizing global poverty, there is concern that their advances are coming at the expense of farmers in the U.S. and advanced countries.  In order to counteract this, they are ironically condoning governmental intervention to protect jobs, even if the result is inefficiency and a waste of resources.

Farm subsidies are inefficient because they reward less productive behavior.  It is essentially a price control, more specifically a binding price floor, where farmers receive direct income from the government that range between $15-35 billion a year.  By receiving these subsidies, there are concerns that this can lead to a surplus of food production and possibly lead to warehousing cost to the federal government.  If ended, then industry would shift to more productive uses.  The savings of $15-35 billion could be applied toward paying down the deficit and this can lead to lower interest rates where businesses and consumers can adjust their spending priorities accordingly.

The current farm subsidy system is also not equitable.  It is often assumed that farm subsidies are needed to help the ordinary farmer, but a quick overview shows that their share of the windfall is very small.  Based on the Environmental Working Group study, we see that mostly large corporations rather than the individual farmer are receiving most of the aid.  Even if not eliminated, there are opportunities to restructure the program to cutting funds without impacting low- and middle-income farmers at all.
Another issue is that it can lead to unintended consequences.  For instance, our search for alternative energy sources led to legislation of significant subsidies toward ethanol.  It was once thought that ethanol would be a cheaper form of energy and yield greater benefits to the environment.  However, recent studies show that the opposite is the case.  Greater use of ethanol as an energy source has driven up the cost of food prices and potentially damage the environment more than gasoline.  If that is the case, then our current efforts in subsidizing the ethanol industry to the tune of $7.7 billion last year may need to be reevaluated if we are truly concerned with improving the environment.

Most supporters of farm subsidies point to concerns with national security if the program was ended.  They believe that the U.S. could be vulnerable to global shocks to food supply arising from political instability or regimes supported by terrorists.  However, it is reasonable to suggest that this risk is minimized by the diverse sources of agriculture throughout the world.  Plus, a portion of those savings can be applied to national defense to better address trouble spots throughout the world.  Also, one can say that these artificial price supports from both the U.S. and Europe contribute to global instability and terroristic activities as farmers throughout the world find it more difficult to compete.  If South America, Africa, and Asia reverse their economic gains due to unfair trade practices, shouldn't we be concerned about the implications on national security?

Others point to protection for farmers when market conditions are unfavorable.  They need government assistance to remain viable when poor weather results in low yields.  That is certainly a possibility, but this type of protection distorts incentives for farmers.  Through proper planning and storage, your effective farmers can handle the volatility in farming.  For those that cannot, then maybe they should devote their energies to another occupation.  A capitalist economy regularly punishes inefficient producers, so why should proponents of this system not apply this principle in agriculture.

A transition away from an agriculture to service-based economy could actually generate more economic benefits in the long run.  Certainly, there will be a painful transition with a certain segment of farmers losing their livelihood as market forces favor low-cost producing farms from developing countries over food production in advanced economies, like the U.S.  Economists call this creative destruction where jobs destroyed are replaced with jobs that pay better.  When one thinks about it, we have seen this process take place many times in the U.S.  Does anybody remember the milkman, blacksmith, or elevator operator?  While it was definitely painful for the families that had to adjust to a new livelihood, the U.S. economy and American worker have successfully made the adjustment in the past. 

Even though farm subsidies enjoy broad support across the U.S., that does not make it good economic policy.  Given the broad support that this policy enjoys across both political parties, it is not practical to eliminate it altogether.  However, it can be adjusted by limiting benefits enjoyed by large corporations and high income farmers.  The savings gained from this action can be applied to the deficit, which will lower borrowing costs for firms and consumers.  It can also make it easier to fund needed investment in infrastructure and alternative energy that can lead to higher future economic growth.  Lastly, the national security issue is a dubious claim, particularly when one sees the damage that U.S. and European price supports can do to economic advancement in developing countries.  Surely, our new Republican leaders within the new Congress, who are quick to denigrate government and embrace the market system, will eventually see the light, right?