Saturday, January 31, 2009

Agriculture and Free Markets

How does a free market oriented blogger like myself approach the issue of government funding and farm programs?

There are two things that I would like to point out regarding this issue.

1) Total spending on agriculture comprises 1% of the federal budget. Of that amount, less than half is allocated to the producer. The bulk of the rest is spent on aid to the poor and school lunch programs.

2) Despite that the funding is a small proportion of total federal spending, I admit there are some market distortions that result from these programs.

One Iowa State University economist has pointed out that up to 1/3 of the price of farmland can be attributed to government payments. In fact many producers have expressed that government programs have increased the price of land and impeded their ability to expand their operation and remain competitive. It seems that while many producers favor maintaining a safety net, they are also utilizing technology, crop insurance, and marketing tools to manage much of the risk characteristic to their market.

We no longer see the commodity surpluses from farm programs like we did in my grandfather's day. Nor do we see the chronic shortages of food that characterized Soviet agriculture. However, if we look at government interventions outside the ag sector, we are plagued with these problems.

Take for instance the auto industry. One thing that plagues the auto industry is the surplus of low quality high fuel economy cars that noone wants to drive. Corporate average fuel economy (CAFE) standards forced automakers to overproduce these cars instead of the trucks and SUV's that Americans have revealed a preference for even in an environment of high fuel prices. ( see this article from Forbes and my other posts here ) Instead, if left to the market, the auto industry could have focused resources on the long term problem of building more fuel efficeint trucks and SUV's vs the immediate problem of meeting CAFE requirements.

And look at the current housing/financial market collapse. Could this have happened without major government interventions? Every time the federal reserve meets to 'set' the federal funds rate, they are engaging in the social planning of interest rates. i.e. depending on their policy stance, they are effectively setting a floor or cieling on interest rates. When investers react, resources get channeled into assets at an abnormal rate, often leading to a 'bubble'. This time we got a 'surplus' of housing on the market, as well as a 'surplus' of risky financial instruments related to housing. Eventually this 'malinvestment' must be corrected, leading to a bust. Many economists believe that this effect had much to do with the current financial problems we are experiencing today. ( see Walter E. Williams post on Town Hall for a good discussion)

Agricultural programs are not the drag on our economy that they are made out to be when compared to government interventions in other industries. That is why my posts are often more concerned with interventions in the ag industry that could be detrimental to our ability to provide safe, healthy, environmentally friendly, and abundant food. We don't want government interventions to cripple our industry like they have others, as I mentioned here. With the amount of lobbying, rent seeking, and government intervention that goes on across the board in all industries, Agriculture does not stand out any more than government programs related to the financial auto, oil, defense, construction, retail, education, medical, cosmetic... industries.

Because agricultural production is very much an export-oriented enterprise, free trade is essential to opening up markets for food and fiber. Further, given the free market solutions to pollution ( via the use of biotechnology, GPS & potential for selling carbon credits) that the ag industry provides, it is not accurate to characterize the agricultural industry as having a prominent interventionist overtone in relation to other sectors of the economy.It turns out that modern agriculture is very much a free market driven industry. As a result our farmers are competitive, independent, resilient, and the best in the world.

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