EGLZFAN.com - Random Neural Firings

The Christian Science Monitor and the Cato Institute have recently run op-eds that have prompted me to write about something that has often occurred to me in the past about agricultural subsidies. Without belaboring the details, the government pays huge subsidies to farmers, who then grow less than what they are capable of growing, which in turn raises the commodity prices of various agricultural goods. The fact these programs are effective demonstrates a basic economic truth about agricultural markets - if allowed to be purely competitive markets, the equilibrium price for the otherwise-subsidized goods would be much lower, to the point that many farmers would likely face poverty. However, I submit the subsidy programs are a bad idea.

The basic idea is this: if you put buyers and sellers together, they will - on their own - trade a certain quantity of goods at a certain price. This is “equilibrium” in its most basic form. Now, if a “price floor” is enforced which is higher than equilibrium would otherwise dictate, then there would be a higher quantity supplied (higher price means greater profit opportunities) but a lower quantity demanded (higher price means fewer buyers), creating a surplus. With a surplus, suppliers are induced to curtail production to avoid having inventories pile up.

So the effect of a price floor - which a subsidy creates - would be to artificially limit production such that total production is lower than would otherwise be dictated in a competitive market. The reasons governments do this are inherently non-economic - for instance, in this case, there is a perceived social benefit in protecting farmers from competitively-determined priced, which would put many of them into poverty. The Cato article advocates the subsidy programs are bad and suggests they should be killed with a buyout, effectively removing some farmers from the supply side entirely. The author acknowledges there would be a significant cost to doing this but points out that the cost to the taxpayers from the current programs over the last 20 years has been an order of magnitude higher. Although this is similar to my suggestions on ending Social Security, I don’t agree with that approach in this case because I think the government would be missing out on a golden opportunity.

Keep in mind that the government can, if it so chooses, participate in any market as any other buyer (although one with much deeper pockets). So in my opinion, the government should abandon the subsidy programs and voluntarily choose to purchase agricultural goods at substantially higher prices. Higher prices means higher profit opportunities, i.e., farmers would choose to produce more, which the government can continue to buy. Bottom line: the government would be paying farmers to grow instead of paying farmers not to grow.

So what does the government do with a gazillion tons of corn and barley and whatever else? Simple: give it all away, or sell it for next-to-nothing. The latter would reinforce the whole teach-a-man-to-fish-instead-of-give-a-man-a-fish mentality, but I like the notion of being able to feed an entire country just because we feel like it. Imagine what would happen in Iraq if all of a sudden everyone had plenty to eat, or if the neighboring countries could get as much food as they needed, no questions asked. Imagine what would happen to world opinion of the U.S. if we started simply feeding a different country every month. What would happen to immigration if we fed countries where refugees come here from seeking “a better life”, or if farmers could suddenly afford to hire American workers instead of being forced to rely on ultra-cheap illegal immigrant labor?

A pipe dream, but an interesting thought exercise, I think.