Econ 12, Fred Foldvary


 Box of cereal: farmers get 25c.

Increase in productivity: fewer farmers, less than 3 percent of population.

Shifted to urban work: manufacturing, services.

Many agricultural products have many firms, similar products.

Would be very competitive but for government programs: subsidies, restrictions, price supports.

With intervention, taxpayers and consumers pay more.

Similar policies in Europe and Japan.

Who ultimately benefits from farm subsidies? The owners of farmland.

Farm workers just get the usual low wage.

Agricultural prices fluctuate: called the good/bad paradox.

Farmers do worse when harvests are large.

Demand for basic foods is inelastic, not responsive to price.

But farmers can hedge, average.

Can get crop insurance.

 Public choice analysis: concentrated benefits, spread out costs.

"The General Rule of Political Economy".

Small groups are thus more effective in organizing and obtaining privileges and subsidies, and avoiding costs.

Log rolling (vote trading) enables powerful minorities to obtain transfers in the "market for legislation."

Called "transfer seeking" or "rent seeking," seeking economic rents.

 Why does transfer-seeking occur?

Because of the structure of voting: mass democracy.

In small-group voting, the General Rule of Political Economy makes special interests and pressure groups less effective.

 Price support: price floors, higher than market.

Minimum prices, e.g. for milk.

Government buys grains.

Licenses tobacco, peanuts.

US sugar higher than world market prices.

 (a) Price floor (price support) (regulatory measures)

See big graph or small graph

To avoid a surplus, laws restrict output.

Prohibit entry into the industry.

Existing farmers are grandfathered (grandmothered?).

Also, farmers not allowed to put new land into producing the crop.

Imports are also limited.

Triangles C & D in graph are the social costs or losses, the

excess burden or welfare loss or deadweight loss.

The excess burden results whenever the market is prevented from operating freely.

Given the values most folks have - to avoid the welfare loss, then to the vast majority, waste is bad.

 Society would be better off with a direct lump-sum payment to the farmers, with prices left to the market.

Pay the farmers A minus B, and society gains C & D.

So there is a wedge between private and social costs and benefits.

Why not just a direct lump-sum subsidy?

The politics would be too obvious.

The policy is thus due to economic illusion and the structure of democracy (discussed below later).

 (b) Providing incentives to reduce supply.

Paying farmers not to grow.

Rectangle A in graph.

Farmers get money subsidy A, and price subsidy B.

So (b) is more costly than (a).

Existing farmers are grandfathered (grandmothered?).

That's why you can't get money by promising not to grow wheat unless you were previously growing it.

(c) Subsidizing the sale.

Government buys at the price floor and sells at a lower-than-market price, where quanitity supplied crosses demand.

Taxpayers pay the difference.

Consumers receive benefit A. Producers get benefit B.

Taxpayers pay A + B + C.

C is the welfare loss to society, greater than the other options,

since the intervention wedge (price to seller less price to buyer)

is greatest.

This has not been used for US policy.

It would be most costly to taxpayers.

 (d) Buying and storing the crop.

Government buys all the surplus, paying the support price.

Taxpayers pay A. Consumers pay B.

If government gives the food away, it replaces food that the consumers would have bought.

This causes demand to shift in, reducing the market price and increasing the subsidy.

Storing is also an expense, and destroying the crop is a waste.

The US government has given food in foreign aid programs, but except for emergency aid, this also upsets the local markets, reducing prices that local farmers get.

 Price stabilization program: attempt to smooth fluctuations.

Problem: long-term price can rise or fall, which then creates a subsidy or a loss.

Political pressure can be to smooth out above market price, leading to price supports.

 Most of the US subsidy policy has involved reducing the quantity supplied and hidden subsidies in the form of non-recourse loans.

When the market price drops, farmers may default on the loan, so it really becomes a price support.

 1996: US government passed the Freedom to Farm Act, to abolish some price supports.

But in the short run, it increases payments to farmers.

Subsidies will continue.

Loan programs will continue.

Peanut, dairy, and sugar programs not affected.

History of US Farm Programs.

Problems started with World War I.

War shifted demand out.

Farmers expanded production with more land.

Many borrowed money to buy land.

Land prices rose sharply.

 After the war, European farming recovered.

Demand for US farm output fell.

Farmers were stuck with excess land, and loans.

US farming remained depressed during the 1920s.

With the loans, farmers did not cut production.

Demand remained reduced from WWI.

High tariffs made manufactures more expensive.

Also, Europeans sold less to US, hence bought less.

Farmers had economic losses: high expenses, low revenue.

Many left, but entry was not rapid.

The hard times by farmers not caused by pure markets.

 With the public collection of rent:

Land prices would remain low even while crop prices high.

Farmers would not profit from higher land prices.

Loans would be based on future production rather than land.

Loans would be much smaller, since land is cheap.

When demand falls, farmers would sell the land.

Rent would fall. Exit would be much easier.

True free market would include the public collection of the rent.

Would reduce the good/bad paradox.

Plus, no tariffs on manufactures.

1929: government created the Federal Farm Board.

 Parity price: to maintain ratio of prices received and paid by farmers.

Farm programs started before Roosevelt's New Deal.

But intervention began much earlier:

public works - canals, railroads - are capitalized into land value.

Agricultural colleges subsidized, also raising land value.

Land ownership in US concentrated; homesteading only took a small portion of the land.