Economic Reality; E.C. Passour, Jr.

ture is too Iittle recognized. As shown in the following analysis, cur rent farm problems are rooted in past government programs. 3 As so often happens when government inter venes, government farm programs not only have failed to achieve their objectives but have created pres sures for further intervention to deal with the unforeseen and unintended consequences of these policies. Despite the fact that U.S. agricul ture is often considered to be a bas tion of free enterprise, farm pro grams today are remarkably similar to the protectionist Roosevelt New Deal policies instituted during the Great Depression of the 1930s. Moreover, it is ironic that govern ment outlays for farm programs have increased greatly during the Reagan Administration. The tax payer cost of farm price support pro325 326 THE FREEMAN June grams alone increased from $4 bi!· lion in 1980 to more than $20 billion in 1983-making these programs the most rapidly growing item in the def1.cit·plaguedfederal budget.

Although agriculture escaped the deregulation movement of the late 1970s and early 1980s that affected transportation, banking, and so on, it appears that major changes are likely to occur in U.S. farm policies within the next decade. The pres sures for change are due to changing economic conditions and to an in creasing public awareness of the ef· fects of past government farm policies. As the U.S. Congress debates a 1985 farm bill, agricultural policy is at a crossroads with only two choices. The choice is either to continue the existing network of costly programs involving government subsidies and government· sanctioned restrictions on competition that now affect about half the output of U.S. farms or, al· t~rnatively, to rely on the competi tive market process to bring about appropriate adjustments in produc tion and resource use. In making this choice, it is important to consider the objectives and results of current and past farm programs.

GovernmentInterventionto Assist Low-IncomeFarmers Price supports, marketing orders, 'and other restrictions on competi tion were instituted to increase farm prices and incomes during the Great Depression when economic condi· tions in agriculture were greatly dif ferent than they are today. While farm incomes, on average, histori cally have been lower than nonfarm incomes, this is no longer the 'case. If the half of the farms that are non commercial rural residences are eliminated from the income statis tics, the farm sector has higher fam ily incomes, on average, than the nonfarm sector.4 Of course, there is no presumption that wages should be equal. And, if public policies are instituted to equalize wages in dif ferent sectors regardless of under lying economic trends, there is little incentive for labor to adjust in response to changing economic conditions. Furthermore, government farm programs make the income distri bution less equal within agriculture since most farm program benefits are related to farm size. Conse quently, when farm product prices are increased by price supports, in comes of small farmers are affected relatively little. Economist William Lesher estimates that just 13 per cent of the farms obtain 45 percent of direct government payments, while 71 percent ofthe farms receive only 22 percent of the payments. 5 The result is that although farm pro grams are justified on the basis of helping low-income farmers, it is owners of large farms with incomes 1985 ECONOMIC REALITY AND FARM PROGRAMS 327 quite high relative to nonfarmers who receive most of the benefits.

Government Intervention to "Stabilize Agriculture" Another goal of farm policy is to "stabilize" farm product prices and income. Despite this often stated goal, there is little doubt that past government policies have contrib uted to the current financial distress being experienced by substantial numbers of farmers. The record sug gests that government attempts to stabilize agricultural markets have been no more successful than simi 1ar attempts by government to "fine tune" the overall level of economic activity during the past 15-20 years. Indeed, much of the current eco nomic distress in U.S. agriculture can be traced directly to inflationary monetary and fiscal policies and to subsidized credit, which induced farmers to overinvest in land and capital facilities during the late 1970s. Economic instability is often in creased by government intervention as Washington political decision makers manipulate agricultural (and other) programs to affect up coming elections. Prior to the 1976 election, for example, the Ford Administration raised the loan rate on wheat from $1.50 to $2.25 per bushel and tripled the tariff on im ported sugar. 6 Similarly, President Carter increased dairy price supports on the eve of the 1980 election.

Again, in September 1984 President Reagan changed the rules of the Farmers HQrne Administration (FmHA) to postpone and reduce farm debt-thereby merely postponing the day of reckoning for many farmers. The subsidized credit programs op erated by the FmHA create an in centive to expand the size of farm op erations through borrowing. The high ratio of capital to labor in U.S. agriculture makes farming particu larly sensitive to changes in interest rates. When the cost ofcapital is sub sidized, farmers are induced to sub stitute capital for labor and land. Thus, easy government credit poli cies undoubtedly have contributed to the recent increase in farm bankruptcies. The importance of the export mar ket for U.S. farm products increased markedly during the early 1970s. Although the United States is the world's largest exporter of agricul tural products, government policies increase uncertainty and insb~bility in export markets. The suspension of grain sales to the Soviet Union in 1980 by President Carter is a prime example. Uncertainty and instabil ity inevitably increase when the de mand and price of farm products hinge on unpredictable political factors.

However, it is not only trade re strictions directly affecting agricul tural exports that are of importance 328 THE FREEMAN June to U.S. farmers. During the recent recession, the Reagan Administra tion tightened import restrictions on a range of products including autos, steel, textile products, and motor cycles. Since buyers of U.S. farm products must obtain dollars to make these purchases, such restrictions on imports, whether "voluntary" or in voluntary, are especially damaging to U.S. agriculture. The conclusion is that much of the market instabil ity for U.S. farm products during the past decade can be traced to govern ment policies. Indirect Effects of Farm Programs Restrictions on competition inev itably reduce the efficiency of re source use. In current wheat, feed grain, and cotton programs, the gov ernment pays U.S. farmers not to till some of the world's most productive farmland. The higher prices for bread, milk, sugar and other prod ucts resulting from price support programs are especially harmful to those with low incomes and create increased pressures for food stamps and other income transfer programs.

There is a cost ofproduction "trap" associated with the operation of all agricultural price support programs. Any effective price support will in crease cost of production as in creases in product prices are capi talized into prices ofland, production rights, and other specialized re sources. Thus, if the price of wheat were doubled or tripled to (say) $10 per bushel, prices of land and other specialized resources in wheat pro duction would be bid up so that the expected cost of production, includ ing the return to entrepreneurship, would tend to equal product price. Since the benefits of farm pro grams are largely capitalized into higher prices of inputs (especially land), it is the owners of these inputs at that time who benefit. Producers who enter production later receive little benefit from such programs un less price support levels are further increased. Later entrants into pro duction receive higher product prices, but they also have higher costs. Moreover, the increased prices of land and other inputs creates a trap that makes it difficult to abolish farm programs. If price support lev els are reduced or abolished, prices of land and other specialized assets decrease-imposing huge losses on current farmers, particularly land owners. The windfall losses would not necessarily be incurred by those who received the gains since many farmers bought land and other farm assets after prices ofthese assets had already increased and, therefore, did not receive the original windfall.

There is a great deal of public con cern about the viability of the small farm. Thus, it is ironic that interest rate subsidies of the FmHA and the CCC (Commodity Credit Corpora tion) promote the trend toward fewer 1985 ECONOMIC REALITY AND FARM PROGRAMS 329 and larger farms by encouraging the substitution of machinery and other capital inputs for labor. When credit is allocated on the basis of oppor tunity cost, credit is used by those producers who best accommodate consumer demands. IT credit is sub sidized, some less productive pro ducers are kept in business, thereby increasing output with lower prod uct prices. Thus, another indirect effect of subsidized credit is to harm those producers not receiving pref erential treatment in capital markets. Schizophrenic Nature of Programs Farm programs are incredibly complex and there is no way to de termine the net impact of the net work of price supports, marketing orders, credit subsidies, conserva tion subsidies, food stamps, and other programs financed through the U.S. Department of Agriculture.

However, the programs are often in consistent, having opposite effects on farm product prices. For example, price support programs for milk, sugar, feed grains, wheat, cotton, and tobacco along with food stamp and other subsidized food assistance pro grams increase product prices. On the other hand, government-fi nanced research activities and credit, land, and water subsidies tend to increase output and decrease farm product prices. Expenditures to "stabilize farm prices and income" by reducing out put totalled about $20 billion in fis cal 1983. During the same period, expenditures that increase output totalled about $15 billion. If the dol lars spent on these programs were equally efficient in achieving their conflicting objectives, some $30 bil lion may have been spent in 1983 on activities having little (or no) net ef fect on food costs, farm prices, or farm incomes. That is, because of their opposite effects on product prices, a substantial part of farm program expenditures merely cancel out each other. However, there are important gainers and losers asso ciated with the operation of farm programs as indicated below even if the expenditures, on average, are self-defeating.

The fundamental problem in ag riculture, as in other areas, is to achieve the most productive pattern of resource use. There are only two ways of securing economic coopera tion-the market system and central direction. There is, in general, a strong case for decentralized com petitive markets as the most effec tive means of coping with constantly changing economic conditions. The competitive entrepreneurial market process is fully as applicable in ag riculture as in other economic sec tors. The market in agricultural pro duction and marketing activities can do what central planning cannot do: it can utilize the detailed informa330 THE FREEMAN June tion in millions of minds that cannot be conveyed to any planning au thority. In view of the record of past government farm programs, the bur den of proof should be on those ad vocating continuation or expansion of progams that prohibit or inhibit the operation of the entrepreneurial market process.

The value of U.S. farm exports jumped from $8 billion in 1972 to about $44 billion in 1981-a dra matic increase in real terms. The in creased dependence of U.S. agricul ture on international trade has important implications for domestic agricultural policies since there is a fundamental incompatibility be tween domestic agricultural price support programs and free interna tional trade. When domestic prices of dairy, tobacco, peanut, sugar, and other products are raised above the world price, imports must be re stricted to prevent domestic consum ers from purchasing lower priced im ports. As the dependence of U.S. agriculture on exports increases, the liberalization of trade becomes in creasingly important. However, the United States cannot be a credible proponent of free trade as long as U.S. farmers operate under an um brella of protectionist domestic ag ricultural policies.

Implications and Conclusions The effect of government-enfor~ed restrictions on competition in agriculture is to increase income to wheat growers, sugar producers, dairy farmers, and other small groups at the expense of the public at large. Consumers and taxpayers bear the major costs of government farm programs. Price support pro grams mean that consumers face higher prices of milk, sugar, pea nuts, tobacco, oranges, and other products. Consumers are hit espe cially hard in the case of sugar and dairy products. In late 1984, the do~ mestic price of sugar was four times the world price. Similarly, U.S. dairy product prices were two to three times the world price. The dairy pro gram is also expensive to the tax payer. In fiscal 1983, the treasury costs were $2.6 billion-or about $13,000 per commercial dairy farmer. 7 The cost of price supports, subsidized credit, and other USDA outlays is now roughly $50 billion per year and increasing rapidly.

Farm programs are not an unmixed blessing to farmers. Farmers who rent or buy land, production rights, or other specialized resources, also face increased production costs. The notion of individual rights, in cluding the ability of people to en gage in voluntary exchange is cen tral to questions concerning the appropriate role of government in agriculture (and in other sectors). In the decentralized market process, maximum scope is provided for in dividual choice. Only through this 1985 ECONOMIC REALITY AND FARM PROGRAMS 331 approach can the nation's agricul tural resources be used most eco nomically serving the interests of farmers, consumers, and taxpayers alike. In agriculture, as in many other areas of economic activity, gov ernment might make its greatest contribution by attempting to do less. In the long run, noninflation ary monetary and fiscal policies plus a more open economy would benefit agriculture far more than the net work of costly action programs now in place. @ -FOOTNOTES1Agricultural Finance: Outlook and Situa tion Report, ERS, AFO-25, U.S. Department of Agriculture, December 1984, p. 7.

2Ibid., p. 3. Reprints . .. 3Many of the points discussed below are elab orated upon in more detail in E. C. Pasour, Jr., "The High Cost of Farm Subsidies," Back grounder No. 388 (Wash., D.C.: Heritage Foun dation, Oct. 22, 1984) and E. C. Pasour, Jr., "The Free Market Answer to U.S. Farm Problems," Backgrounder No. 389 (Wash., D.C.: Heritage Foundation, October 30, 1984). 4David H. Harrington, "Income and Wealth Issues in Commercial Farm and Agricultural Policy," pp. 145-153 in Increasing Understandr ing ofPublic Problems and Policies-1984 (Oak Brook, TIL: Farm Foundation, 1984), p. 147. 5William G. Lesher, at the Conference on Al ternative Agricultural and Food Policies and the 1985 Farm Bill, sponsored by the Giannini Foundation and Resources for the Future, Berkeley, California, June 11, 1984. 6Bruce L. Gardner, The Governing of Agri culture (Lawrence, Kansas: Regents Press of Kansas, 1981), p. 118.

7Dairy: Background for 1985 Farm Legislar tion, Economic Research Service, U.S. Depart ment of Agriculture, Agricultural Information Bulletin No. 474, September 1984, p. 28. A Page on Freedom Each of these brief messages is a handy way to share with friends, teachers, editors, clergymen, employees and others a thought-starter on liberty. It also serves to introduce the reader to our work at FEE. See page 323 for this month's Page on Freedom. (Copies of previous messages are also available; specify title when ordering.) Small quan tities, no charge; 100 or more, 5 cents each. Or, feel free to reprint the message in your own format if you'd prefer. We hope you'll enjoy this feature! Order from: FOUNDATION FOR ECONOMIC EDUCATION, INC. IRVINGTON-ON-HUDSON, NEW YORK 10533 Jane M. Orient ComparableWorth versusCivil Liberty: Are Feminists Pro-Choice? THOUGH enshrined in the 1984 plat form of the Party of New Ideas, the comparable worth concept was both proposed and demolished in 1928 by George Bernard Shaw. "To Each What She Deserves" was the title of its chapter in his book The Intelli gent Woman's Guide to Socialism, Capitalism, Sovietism, and Fascism.