Social Issues
Farm Policy Failure
By Bob Powell, 5/10/05

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.

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 a part is true for the whole.

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.
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.
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 to lower wage jobs need assured supplies of inexpensive food.
14. Congress feels pressure to maintain farm subsidies to assure low prices.

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. Woe is us when ideology, instead of pragmatism, drives public policy.