Tuesday, May 29, 2007

Farm Subsidies Debated in an Unusual Forum

I found this interesting and surprising. Costco Connections Magazine, the magazine that Costco sends to members (such as myself) has a "debate" every month over an issue. Last month it was spanking children. This month the debate is over farm subsidies. An advocate and an opponent are asked to submit brief explanations of their positions, and members are polled.

It's not often that I hear someone actually attempt a real defense of farm subsidies. Bob Stallman, president of the American Farm Bureau Federation, tries to argue in favor of subsidies, and to a layman his arguments might sound persuasive. To an economist, his arguments sound downright deceptive. I'd say there's no way he can say what he said and honestly believe it; it is purely an attempt to fool those too ignorant to work out the economics.

You can read the arguments, pro and con, here: http://www.costcoconnection.com/connection/200706/?b=2&u1=texterity

You'll have to go to page 15, the "Debate" section. It is worthwhile excerpting sections of it for discussion, so here we go:

Americans enjoy the safest and most affordable food supply in the world. Citizens on average spend only 10 percent of their annual disposal income on food, compared to people in other countries, who spend up to 51 percent.

It may be true that Americans enjoy the safest and most affordable food, but that statistic doesn't show this. Suppose I told you that Bill Gates enjoys the safest and most affordable food supply in the world, because he spends less than a tenth of a percent of his income on food. You would rightly conclude that I was being misleading. Food makes up a small fraction of our income because we are wealthy compared to the rest of the world, not because our food is especially cheap. A better comparison would be to actually compare prices across countries. Mr. Stallman doesn't do this because we would probably not come out ahead that way. Of course, his statistic says nothing at all about food safety, and he does not go on to explain or prove his assertion.

Regarding safe food: It is the case that different countries have different standards regarding food production, and that food from some countries may be less safe. Farm subsidies don't solve this problem. A better solution would to require that imported food satisfy the same requirements as U.S. food. Alternatively we could inspect the food for quality. A solution that I like quite a bit is to simply label the food, perhaps with a label that says something like "This food is from Country X, which has lower quality standards than the U.S. Eat this food at your own risk." Then consumers get to make the decision for themselves.

And because of government support to help offset massive subsidies and trade barriers in other nations, our farmers can continue to produce food on U.S. soil, instead of it being outsourced beyond our borders.

Why is it bad to outsource food production beyond our borders? Is it bad that New York gets oranges from Florida? Should New York try to grow its own oranges? Of course not. Oranges can be obtained cheaply from Florida. Mangos can be obtained cheaply from India, so that's where they should come from. Forcing ourselves to consume food produced locally is really just forcing ourselves to be poorer. Also, the fact that other countries have trade barriers and subsidies is no reason to have our own trade barriers and subsidies--the fact that they are shooting themselves in the foot does not mean that we should also shoot ourselves in the foot.

Unlike other industries, farmers are price takers, not makers. Largely, they do not dictate the price they receive at market.

This is actually true. Economists call this perfect competition, and it is the benchmark for economic efficiency. Because such a market is so efficient, there is no need for government intervention (absent some other kind of market failure, such as externalities). This is what makes the next section so bizarre.

Also unlike other industries, farmers are significantly affected by weather-related conditions. And contrary to media hype and uninformed rhetoric, many farmers never see their government payments, which instead are sent straight to the bank to cover loans and other production costs.

Amazingly, Mr. Stallman is arguing that perfect competition is itself a reason for government intervention. This is silly. If a business cannot cover loans and other production costs without subsidies, it should shut down. The resources used by that firm have higher value in alternative uses. A firm should not be guaranteed a certain profit by the government; profit must be earned. If it cannot be earned, the firm should disappear.

Family farms make up American agriculture. Almost 99 percent of all U.S. farms are owned by individuals, family partnerships or family corporations, and they produce 94 percent of all U.S. agriculture products sold.

This statistic is both misleading and irrelevant. The fact that a farm business is family owned does not mean that it is not a huge agricultural corporation. Second, why does this matter? Why should we care whether a farm corporation is owned by a family or by owners of stock in that company? Do family-run businesses deserve some special privilege? Why? Why does this apply only to farms? There are millions of family-run businesses across the country. Is Mr. Stallman arguing they should all be subsidized? Would Mr. Stallman be in favor of eliminating subsidies for agricultural corporations that are not family-owned and operated?

Farmers are the primary caretakers of the land and environment. And with help from the current farm program, which provides more than $39 billion for conservation programs, farmers have become exceptional stewards of the land and water.

The effect of subsidies is to create more businesses producing more output--in other words, more farms growing more stuff. Eliminating subsidies means fewer farms growing less stuff. It is necessarily the case that the environmental impact of a large number of farms is more severe than the impact of a small number of farms, ceteris paribus. It is therefore not clear that subsidies reduce net environmental impact of farms. Furthermore, if farms would be causing more environmental harm without these conservation programs, there is a less expensive solution: tax them whenever they cause environmental harm. This is the economist's usual solution to such a problem. Suggesting that we subsidize them to prevent them from harming the environment is rather like suggesting we pay a bully with our lunch money so that he doesn't beat us up. It's only going to encourage more beatings.

Rural communities also depend on U.S. agriculture. The agriculture sectors not only buys local grain and other products needed on the farm, it also employs local workers, a total of more than 24 million Americans, or 17 percent of the entire U.S. workforce.

Something screwy is going on here. According to the BLS, in May 2006 there were 450,040 people working in farming, fishing, and forestry. The civilian labor force is more than 152,000,000 people. That means that less than one percent of the labor force is directly involved in agriculture. It is surely true that some people who do not work directly in agriculture work with farmers, selling them goods and services, but they would also be selling goods and services to ex-farmers who leave their farm jobs because of the elimination of agricultural subsidies.

So, as we develop the 2007 farm bill, let us not forget that agriculture is the backbone of this country. Not only does it supply jobs and other benefits, such as a cleaner environment, it also provides peace of mind for all Americans in the knowledge that affordable, safe and abundant food can be found in their backyard.

So as we eliminate the farm subsidies this year (I wish), let us not forget that agriculture is only one of many industries in this country, and it deserves no special, sacred status. Not only do farm subsidies force jobs to stay in one industry, when they should move to another, they also force us to pay farmers not to harm the environment while at the same time encouraging more farming, and therefore more harm to the environment. Eliminating farm subsidies provides peace of mind for all Americans in the knowledge that food will become more affordable and abundant, while being just as safe, whether it comes from their backyard or around the world.

Monday, May 14, 2007

A Missing Market Revisited

Not long ago I blogged about a missing market: the market for used goods at small schools, such as the school at which I currently teach. A student of mine had the same idea, and planned to create a Craigslist-like site, which could be adapted to different schools as necessary. He planned to test it at the school here. He was even going to write something about it, and possibly develop it as an entrepreneurial opportunity.

Unfortunately, Facebook had the same idea. Their new Marketplace function allows users to enlist themselves in local "Networks", such as their city or school. They can then view, buy, list, or trade goods and services with other members of their Network. It's all free, too. Someone finally picked up the $20 bill that Craigslist intentionally left lying on the ground.

Craigslist has been praised for refusing to sell out, but think what this really means. Refusing to sell out means that there are many places that want a service that Craigslist is not big enough to provide (You may recall in my previous blog post that a colleague contacted Craigslist, and was told that they only had a few people to manage everything, so they could not spare the resources for college-level sites). Millions of college students and others in similar situations have had to find other ways to get rid of their unwanted stuff. If my school is representative, a lot of stuff apparently just gets thrown away. *

Yet Craigslist's refusal to "sell out" means that someone else will fulfill this need. So what has Craigslist accomplished? They gave up a market and the profits that go with it, keeping themselves smaller, and making themselves just a little bit less relevant as a result. Sometimes, when the market speaks, it's wise to listen. If someone is willing to pay a lot of money to make Craigslist bigger, that might mean that making Craigslist bigger would create benefits that consumers are willing to pay for, making consumers, the old owners of Craigslist, and the new owners of Craigslist all better off than they were before.

*Thanks to Art Carden for these points.