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Home > Social Issues
Farm Policy Failure
by Bob Powell, 5/10/05
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Farm Policy Failure: It fails because both supply & demand are inelastic
How NAFTA and Farm Policy Subsidies Created the Illegal Immigration Problem

Added 9/3/10: Number of Illegal Immigrants in U.S. Fell, Study Says By JULIA PRESTON 9/1/10

The number of illegal immigrants in the United States, after peaking at 12 million in 2007, fell to about 11.1 million in 2009, the first clear decline in two decades, according to a report published Wednesday by the Pew Hispanic Center.

The reduction came primarily from decreases among illegal immigrants from Latin American countries other than Mexico, the report found. The number of Mexicans living in the United States without legal immigration  status did not change significantly from 2007 to 2009. Some seven million Mexicans make up about 60 percent of all illegal immigrants, still by far the largest national group, the Pew Center said.

The report is based on census data from March 2009, the most recent census sample that is detailed enough for Pew demographers to estimate the statistically elusive population of illegal immigrants. The figures show that more than a year of recession  in the American economy, coupled with intensifying immigration enforcement at the Southwest border and in workplaces around the country, brought a reduction of at least 900,000 illegal immigrants.

But the figure that may be most sobering to all sides in the increasingly contentious immigration debate is the estimate that more than 11 million illegal immigrants remain here. The Pew report shows that despite myriad pressures, there was no mass exodus of those immigrants to their home countries, especially not to Mexico.

Instead, the report confirms earlier findings by American and Mexican demographers that the flow of Mexicans coming in to the United States illegally to look for work had slowed sharply.

While the hottest immigration debate has taken place in Arizona over the last two years, that was not the state with the largest decrease in illegal immigrants from 2007 to 2009, according to the Pew report.

Florida, Virginia and Nevada showed the steepest declines — three states that saw booms followed by busts in home construction, an industry that attracts illegal immigrant workers. ...

Added 7/7/09: Here's more on how the 1996 Republican "Freedom to Farm Act" did not work ... "free market" ideology fails for farming. The reasons why there's a problem of money [as Daryll E. Ray says below, "undernutrition is ... a problem of money"] are described at The 9/22/08 Economic Crisis and Data on Income & Tax Distributions.

The looming food crisis? By Daryll E. Ray July 2, 2009

We tend to cringe when we hear someone argue that food production is not keeping up with demand. We heard Earl Butz make that argument when he began to dismantle farm programs, telling farmers that they needed to plant fencerow to fencerow. They did, and the price soon headed south.

Supporters of the 1996 Farm Bill argued that export demand from China would use all of the corn we could supply as the result of a growing middle class that demanded grain-fed meat. China increased its utilization of corn; the only problem for US farmers was they grew it themselves and managed to export millions of bushels of corn along the way. It took four years of Emergency Payments and Loan Deficiency Payments to keep the crop sector from going belly up.

Today those who are promoting the use of genetically modified crops (GMOs) make the food shortage argument—paraphrasing the pitch: “If you don’t get behind GMOs, agricultural production will not be able to keep up with the growth in population.” The apparent implication is “Support GMOs or people will starve.”

We are not trying to pick a fight with the scientists and companies who provide the basic research on GMOs, just their pitchmen. From our perspective their arguments are disingenuous at best and blackmail at worst.

Despite all of the arguments about a looming food crisis, we think the evidence points in the other direction. First, the problem of undernutrition is not an issue of production; it is a problem of money.

The world produces enough grains and oilseeds to meet the nutritional requirements of all of the people on the earth. So, if the 800 to 900 million who experience chronic undernutrition had enough money, they could outbid livestock producers and ethanol plants for the corn, soybeans, and wheat they need to meet their basic caloric requirements.

Not only does the world’s agriculture have the ability to meet the nutritional requirements of those who are alive today; it has the ability to meet the world’s needs for the time horizon used by most GMO pitchmen and pitchwomen.

Given the availability of land and yield-increasing technologies, it appears to us that the most pervasive problem that farmers will face for the foreseeable future is the same one they have experienced for the last one hundred years—on average production will exceed demand and chronic low prices will be the periodic norm. ... [more]


Farm Policy Failure: It fails because both supply & demand are inelastic

For those familiar with Supply/Demand graphs, these show why the "free market" does not work for farming.

Agriculture markets (both buyers and producers)

Farmers sell in an uncertain domestic market  -- Foreign Markets make this much less of a problem

1. Demand is very inelastic as people's physical needs are limited and lowering price will not substantially increase quantity sold.

2. Demand increases slowly for most agricultural products as many are inferior goods for which quantity demanded decreases as income increases.

3. Supply is very inelastic in the short run as crops grow slowly.

4. Supply is volatile because of the weather.

5. Technology has caused supply to increase substantially.

6. Annual supply fluctuations cause the prices farmers receive and resulting revenue to fluctuate considerably.

The Republican congress passed  the "Freedom to Farm" Act in 1996. The idea was to relieve economic pressure on farmers by allowing them to plant as much as they want, ending farm subsidies and decades of government interference, such as crop quotas and payments to take land out of production. 

It didn't work. Farm subsidies have increased by over 100% since 1996. 

While each farmer's decision is individually logical, the overall behavior of the system is dysfunctional; the behavior of the whole is collectively insane. This is an example of what's known as the "Fallacy of Composition": When we act as if what is true for the parts is true for the whole.

Here's a story about how farm and commodity subsidies have gotten out of hand. It's an example of how systems effects can produce counterintuitive and pernicious consequences. 

It's good that President Bush's new budget proposes overall limits on subsidy payments to farmers. It's true, as he says, that the limits would inject market forces into the farm economy. But the truth is that it's those "market forces" that led to the subsidies and the subsidies along with NAFTA led to our illegal immigration problem. 

I know, I know. It's not politically correct to say, but it's exactly the case that what we have here is a "market failure. The fact is that the "free market" doesn't work for farming because both supply and demand for farm commodities are relatively inelastic. 

How can this be? Step by step, here's how and why . 

1. Farmers either don't earn enough or they want to earn more. 
2. Each farmer makes a logical decision to increase land in production or invest in equipment to increase efficiency. 
3. When every farmer logically does this, the greater supply of farm commodities depresses market prices. That's because supply and demand don't change much as prices change; that is, supply and demand are relatively "inelastic" to price. Supply doesn't decrease as prices fall because farmers tend to plant all their land. They can't predict demand and just-in-time production isn't possible ... it takes months for a crop to grow. Also, demand doesn't increase that much as prices fall because people who can afford food can only eat so much.
4. Farm income falls due to depressed prices.
5. Farmers ask for price supports, subsidies and loans so they can keep farming and invest in equipment to increase efficiency to increase profits. 
6. This cycle continues to increase supply, depress prices and increase subsidies, which is the behavior we've observed.

There are even health effects in the U.S. The increase of corn production for cattle and the marketing of super-size products have contributed to the problem of American obesity. (Factory Farms & the Politics of Food)

While it's a good move to reduce subsidies, this is a case where it's a bad move to rely on "market forces." One can look at the total market for farm commodities as a "commons" in which there is only so much demand. With too many farmers using too much technology on too much land, prices fall to produce what's known as a "tragedy of the commons." 

The only "solution" is take land out of production, and to preserve the "family farm," limit the size of farms. Heresy. This "free market" failure is described in System dynamics meets the press by Donella Meadows. It was an invited paper at the 1988 System Dynamics Conference, published in the 1989 System Dynamics Review. She describes how criticizing the "free market" in the corporate media is too often just not allowed. To do so is the economic right's version of being politically incorrect.

Inelasticities of supply and demand cause changes in supply or demand to result in enormous volatility of revenue.

Result: The "free market" does not work for farming.

Woe unto us when ideology and ignorance, instead of pragmatism, drives public policy.

I describe in detail farm policy dynamics with a causal loop diagram, and why the "free market" does not work for farming, in The Squeeze on Farmers.

For more on the inelasticity of supply and demand in agriculture see these from Daryll Ray, Agricultural Policy Analysis Center 
at the University of Tennessee: 
Subsidies and Demand
Other industries have the tools needed to manage excess capacity
Policy Impacts on Agriculture
Jobless recovery: Another fallacy of composition example 3/20/04


How NAFTA and Farm Policy Subsidies Created the Illegal Immigration Problem

The effects of these subsidies extend beyond U.S. borders and return to bite us.

7. Excess farm commodities are sold on the world market ... farm products subsidized by U.S government.
8. This depresses world farm commodity prices.
9. Mexican farmers, for example, thanks to NAFTA are exposed to these highly-subsidized low prices and can't make a living farming ... U.S. subsidies were grandfathered in and Mexico is not allowed to subsidize their crops.
10. Mexican farmers leave farming and move to cities and need work.
11. U.S. jobs move to Mexico because of the abundant supply of low wage Mexican labor.
12. Now that those jobs in Mexico are going to even cheaper-labor China, this motivates Mexicans to illegally immigrate into the U.S.
13. U.S. workers displaced by low-wage competition to lower wage jobs need assured supplies of inexpensive food.
14. Congress feels pressure to maintain farm subsidies to assure continued lower food prices.


Turns out that it's no longer a problem. No need for a Trump Wall.

The Myth of the U.S. Immigration Crisis By Noah Smith, Bloomberg News, 2/21/17

With the rise of Donald Trump, anti-immigrant sentiment has reached levels not seen in decades in the U.S. Anger against illegal immigration and fear of refugees, previously confined to the fringes of the Republican base, are now at the center of public dialogue. Among some pundits and intellectuals, the response has been to try to accommodate this anger -- to see immigration as a problem that needs solving. For example, my friend Josh Barro at Business Insider recently wrote an article lambasting Democrats for failing to have a coherent program for immigration reform.

I think this is wrong. Yes, I'm in favor of improving the U.S. immigration system -- my proposal is to implement a skills-based system like Canada's. Yes, the current system is suboptimal in a number of ways. But by treating immigration as an urgent problem in need of dramatic policy action, centrists are conceding way too much. The current situation is not an emergency at all.

Illegal immigration to the U.S. ended a decade ago and, according to the Pew Research Center, has been zero or negative since its peak in 2007.
Illegal immigration to the U.S. ended a decade ago and, according to the Pew Research Center, has been zero or negative since its peak in 2007: (see graph at right)

About a million undocumented immigrants left the country in the Great Recession. But even after the end of the recession, illegal immigration didn't resume.

Why? One reason might be economic -- even after growth resumed, there was no return to the mania of the bubble years. Another reason is that Mexicans -- both undocumented and otherwise -- are flocking back to Mexico. Despite the country's drug-related violence, it's starting to look more attractive as a place to live. The economy has improved, and the fertility rate has fallen a lot, meaning that young Mexicans are needed back in Mexico to take over family businesses and take care of aging parents: (see figure at article).

A third reason is increased border enforcement. For years, many Americans demanded that the border with Mexico be secured in order to stem illegal immigration. Presidents George W. Bush and Barack Obama did exactly that. Obama, especially, stepped up the pace of deportation: (see figure at article). ...

So to all the pundits and thinkers scrambling to find some way to accommodate what they perceive as an anti-immigrant wave, I say: Think again. The outpouring represents a loud, angry minority. And the problem that minority is angry about has been waning for a decade now. Eventually, as people realize that illegal immigration is over, the furor will probably ease.

In the meantime, the U.S. shouldn't succumb to the urge to enact draconian policies. The possibility of a police state [Ex-Police Chiefs To Trump: Listen to Us] poses a far greater danger to the average American than the imagined threat of immigration. The Democrats' policy of resisting overreaction and sticking to the status quo doesn't represent a lack of vision -- it represents a sensible, prudent refusal to overreact to an imaginary crisis.



URL: http://www.exponentialimprovement.com/cms/farm.shtml

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