Vince also discusses his paper published by the Mercatus Center, titled “The 2013 Farm Bill: Limiting Waste by Limiting Farm-Subsidy Budgets.”

(Vince’s segment comes in at 8:57 in the podcast)

Spring by Shutterstock

The 2013 farm bill presents a real opportunity for substantive changes in U.S. agricultural policy. But instead of reform, both the House and Senate agricultural committees are offering classic bait-and-switch proposals to protect farm subsidies — more than 80 percent of which flow to households much wealthier than the average American family.

As I discuss in my new study for the Mercatus Center at George Mason University, the bills’ bait is the elimination of the politically toxic Direct Payments program, introduced in 1996, which annually sends about $5 billion in welfare checks to people who own or farm cropland — whether or not they grow any crops. The switch is the introduction of new programs that would give farmers even larger subsidies if either crop prices or average per-acre crop revenues decline from their current record or near-record levels.

In the House farm bill, price supports, through a new Price Loss Coverage program, are the preferred subsidy vehicle. The PLC would establish target prices close to the current near-record market prices for crops like corn, wheat, rice, peanuts and oilseeds. Farmers would then receive payments when market prices fall below those target levels.

Read the full article at US News and World Report.

Montana State University economist and AEI scholar Vincent Smith and the Environmental Working Group’s Scott Faber offered their take at a widely attended briefing Wednesday on Capitol Hill.

As the bill heads to the House floor later this week, its claims deserve a closer look.

Like the Senate bill, the House bill does get one thing right: eliminating the Direct Payments program—a $5 billion annual giveaway to farmers just for being farmers. In the current era of tight budgets, such payouts are neither warranted nor possible.

Then come the budget gimmicks. Instead of counting the bill’s savings against the previous farm bill’s budget, the House committee members have included sequestration spending cuts in their savings estimates. This makes it appear as though the committee’s bill saves $600 million more per year than it really does. Strip that away, and the bill’s scored annual savings of $3.97 billion shrink to only $3.3 billion.

Then the gimmicks get worse. The House bill counts a proposed annual cut of $2.05 billion to nutrition programs as farm bill savings, allowing it to hide the fact that it lets farm-specific programs off easy. The House Budget Resolution, passed on March 14, called for $3.1 billion in annual cuts to farm programs alone. But after cutting Direct Payments, adding twin revenue protection programs, and stripping away sequestration savings, the House bill would save only $1.28 billion from farm programs. That’s almost $2 billion short of the House’s just-agreed-upon target—conveniently close to the $2.05 billion in nutrition cuts.

As reported in the AEI paper, “Field of Schemes Mark II: The Taxpayer and Economic Welfare Costs of Price Loss Coverage and Supplementary Insurance Coverage Programs,” authored by Bruce Babcock, Barry Goodwin, and myself, the PLC program would provide farmers raising major crops such as wheat, corn, peanuts, rice, barley, and soybeans with very substantial subsidies if crop prices move from their current record (or near record) levels towards relatively recent historical levels.  And the SCO is essentially a new heavily subsidized crop insurance option intended to ensure that farmers receive, at worst, about 90 percent of their average revenues. It is a program that no other business in America would expect the government to provide.

Using the assumption that crop prices will remain at or close to recent record highs, the Congressional Budget Office estimates that the PLC and SCO programs would cost $2.34 billion per year. Combine that with the $5 billion Direct Payments cuts, a few other items, the sequestration savings, and the nutrition program cuts, and the bill appears to save $3.97  billion annually overall. But if crop prices move back toward their long-run averages, PLC costs would balloon to as much as $18 billion or more annually. Under this scenario, the the House bill would cost $15 billion more per year than the previous farm bill if sequestration is not counted.

The data demonstrate that the House bill, with its crop insurance and PLC provisions, is essentially a bait and switch proposal. It exposes the taxpayer to substantial risk while, in combination with other federal subsidy programs, virtually guaranteeing that most farmers will always receive at least 90 percent of their expected farm incomes.

View the full size infographic. ►

But then come the budget gimmicks. Instead of counting the bill’s savings against the previous farm bill’s budget, Senate Agriculture committee members have included the sequestration spending cuts in their savings estimates. This makes it appear as though the committee’s bill annually saves $600 million more than it actually does.

But more importantly, despite eliminating the Direct Payments waste, the new bill might actually make things worse. Instead of simply eliminating this outdated expense, Senate lawmakers replaced it with a new one that could very likely be more costly: the Shallow Loss Agricultural Risk Coverage program (ARC). As reported in the AEI paper, “Field of Schemes: The Taxpayer and Economic Welfare Costs of Shallow Loss Farming Programs,” authored by Bruce Babcock, Barry Goodwin, and myself, this program essentially guarantees that farmers receive approximately 89% of their expected incomes — a program about which no other business in America could dream. In effect, the program would issue payments to farmers when crop prices (and thus revenues) fall.

Using the assumption that crop prices will remain at or close to recent record highs, the Congressional Budget Office estimates that the new program would cost $2.372 billion per year. Combine that with the $5 billion Direct Payments cuts, a few other items, and the sequestration savings, and the bill appears to save $2.4 billion annually overall. But if crop prices move back toward their long-run averages, ARC’s costs would balloon to $7 billion or more annually. Under this scenario, the total cost of the Senate Bill would be more than $3 billion more than the previous farm bill, if sequestration is not counted.

The data demonstrate that the Senate Bill, with its crop insurance and ARC provisions, is essentially a bait and switch proposal. It exposes the taxpayer to substantial risk while, in combination with other federal subsidy programs, virtually guaranteeing that most farmers will always receive at least 89% of their expected farm incomes.

Check out the infographic below for a detailed look at how the Senate Farm Bill actually breaks down (click on the image for a larger version).

How many of us read a story of disaster striking people half a world away and respond by getting out our checkbooks?  Tens of millions of us in any given year, and Americans are especially generous. Relief agencies received more than $1.2 billion in the wake of the disastrous 2010 earthquake in Haiti and $3.9 billion following the 2004 Indian Ocean tsunami.  But is anyone foolish enough to go to the local grocery store, buy food and ship it to communities devastated by disaster? Of course not. That would cost much more, take too long to reach people in need, risk spoilage in transit, and likely not provide what is most needed.

Yet with only minor oversimplification, this is precisely what our government’s food aid programs have done since 1954. Our main international food aid programs are authorized through the Farm Bill and must purchase food in, and ship it from, the United States. This system was originally designed to dispose of surpluses the government acquired under farm price support programs that ended decades ago.  These antiquated rules continue today thanks to political inertia in Washington.

As a result, only 40 cents of each taxpayer dollar spent on international food aid actually buys the commodities hungry people eat; the rest goes to shipping and administrative costs. And the median time to deliver emergency food aid is nearly five months. We can do better.

Thankfully, the Obama administration’s 2014 budget sensibly proposes that the federal government, for the first time, begin handling most food aid the way all of us manage our charitable contributions: give the money directly to those agencies that help the needy. It would cut red tape and let USAID more flexibly allocate $1.5 billion in scarce resources to do maximum good with minimum waste and quickly, providing food assistance in the forms that make most sense to save the greatest number of lives. Sometimes this will mean buying food close to where the crisis has struck, while other times U.S. farmers and food manufacturers will supply food to be shipped where it is needed most.

The key is the flexibility to move resources quickly and efficiently, saving more lives and giving recipients foods they typically prefer over unfamiliar commodities from a distant continent.  Peer-reviewed research on pilot programs run in 2010-11 conclusively supports these claims.  All the other major food assistance donors in the world – the Australians, Canadians, and Europeans – made these changes years ago and enthusiastically endorse their effectiveness. Virtually all of the major international charities that handle food for disaster assistance support the proposed changes. It would save money, accelerate and maybe even expand delivery of life-saving food assistance, and promote the development of market economies around the world.

Yet a powerful coalition of U.S. agribusinesses, shippers and a few international development organizations want to block this sensible proposal. Why? This “iron triangle” of special interests benefits from the outdated arrangements, at the expense of taxpayers and hungry people around the world. Agribusinesses get a small profit boost, but mainly a reliable government market without having to compete all around the world for this business. But thanks to high food prices in global markets American farms and agribusinesses have enjoyed record profits in recent years and don’t need more handouts.

As for the ocean freight industry, a 2010 peer-reviewed study found that most of the windfall gains from food aid shipments go to foreign shipping lines that operate U.S. flag vessels precisely in order to book these profits. Ostensibly the “cargo preference” provisions restricting food aid shipments to U.S. flag vessels are for national security reasons. But that 2010 study showed that 70 percent of the subsidized vessels are not militarily useful and there has been no military call-up of seamen from food aid vessels since the program began in 1954. Yet food aid restrictions provide ship owners with an annual subsidy equal to $100,000 per merchant mariner. Many militarily useful vessels also get a rather generous double dip: a $2.5 million direct payment per vessel each year under the Maritime Security Program, enacted in 1996.

There really is no good economic or humanitarian reason to oppose the administration’s proposed reforms. The only reasons are political: the willingness of some groups to extort corporate welfare at the expense of disaster-affected hungry people, and the resistance of some in Congress to transfer appropriations authority to a more suitable committee jurisdiction.

It is time for the government to respond to disasters abroad the way you and I do: generously, promptly and efficiently. The time for food aid reform is now.

Yet much of the debate over new farm legislation seems oblivious to these facts. The latest farm bill would give farmers even greater subsidies. In 2012, the Senate and the House failed to reach a consensus on a farm bill and instead passed a compromise extension of expiring law. The hope was that the agricultural committees would then develop a traditional omnibus farm bill package of legislation. The extension is set to expire on September 30; House and Senate leaders have pledged to complete a bill this year and the House will hold a markup this month.

Today, as has increasingly been the case since the early 1980s, U.S. farmers are protected from significant yield and price losses by a massive and heavily subsidized crop insurance program. The program offers most producers the option to guarantee up to 85 percent of their projected yield or revenue. The most popular form of crop insurance guarantees revenue and promises to replace yield losses at the greater of the expected price at planting time or the actual price at harvest. As crop prices and farm incomes have increased to record levels, so too have the revenues guaranteed to farmers under these insurance contracts and the subsidies paid by taxpayers.

The full text of this article is available on The American’s website.

When somebody else pays for their drinks, most partygoers find they want and need more than a modest amount to drink because at an open bar, the cost of a drink is the time spent waiting in line for service. At a cash bar, lines are shorter because most people find they just don’t need that much to drink when they have to pay for it.

What holds for drinks also holds for crop insurance. Since 2001, taxpayers have paid more than two-thirds of the tab for farmers’ crop insurance purchases. Almost all of this federal largess goes to producers of corn, soybeans, wheat and cotton, with the largest subsidies filling the pockets of the largest and wealthiest farmers. Advocates for continuing these subsidies claim that the fact that farmers buy large amounts of the most expensive and heavily subsidized crop insurance product is proof of the importance of the program. But using farmers’ current crop insurance decisions to measure how much they value insurance is as valid as measuring the value of drinks by how much alcohol is consumed at an open bar.

Crop insurance subsidies were dramatically increased in 2000. Since then, farmers have increased the amount of insurance they buy and have overwhelmingly chosen to insure their crops with Revenue Protection. This is the champagne of crop insurance products. It protects against revenue shortfalls when crop prices decline and against yield shortfalls when crop prices increase. Revenue Protection can cost up to 80 percent more than regular revenue insurance that only protects against revenue shortfalls. Most of this 80 percent extra cost is paid for by the taxpayer. The record $12.7 billion insurance payout to corn and soybean farmers in 2012 was more than twice what they would have been had subsidies not induced farmers to buy Revenue Protection rather than regular revenue insurance.

Sen. Jeff Flake, R-Ariz., and Rep. John J. Duncan Jr., R-Tenn., recently introduced legislation that would sharply reduce the powerful incentive farmers have to increase their consumption of crop insurance. The extent to which farmers’ purchases of insurance would change under the Flake-Duncan proposal is reflected by the $40 billion in tax dollars that the Congressional Budget Office estimates would be saved over 10 years. Tellingly, the bill would not restrict farmer choice over the type of crop insurance they could buy or eliminate subsidies. It would only reduce the taxpayer portion of the tab.

Just as charging for drinks dramatically reduces alcohol consumption, increasing the farmers’ share of the cost of managing their risk would dramatically reduce their use of insurance. This policy change would dramatically lower taxpayer costs while simultaneously improving agricultural efficiency. Rather than taxpayers taking the risk out of crop production, which in fact encourages farmers to adopt more risky business and production strategies, changing the program would allow those farmers who can best manage their production and price risk to reap the highest rewards. Returns would flow more to good farmers rather than just to any farmer who uses taxpayer dollars to buy the most insurance.

Perhaps we are entering an era in which Congress will need to be more accountable for the subsidies it provides to farmers and other industries. If so, then Congress and the administration should seek to spend money on programs only where there is a clear public interest at stake and even then only on programs where that clear public interest is being met in a cost-effective manner. The crop insurance program fails both tests.

In an attempt to rationalize the program’s $9 billion annual average cost, its supporters argue that this is a small price to pay for stability in our food supply. But the idea that the U.S. food supply depends on a taxpayer-provided “safety net” is ludicrous. The United States produces large surpluses of food for the export market, and farming has never been as profitable as it is now. Simply put, the only public interest at stake in the farm subsidy debate is the increase in interest on the national debt.

It may be too much to expect Congress to actually eliminate subsidies to a program that serves no broad public purpose, but perhaps it is not too much to ask for greater cost-effectiveness. A simple first step would be to ask farmers to pay a greater share of the cost of insuring their crops. Just as conversion of open bars to cash bars reduces excessive consumption of alcohol, this step would dramatically reduce farmers’ over-consumption of insurance.

Bruce Babcock is a professor of economics at Iowa State University and a contributor to the American Enterprise Institute’s American Boondoggle Project.

When Supreme Court Justice Elena Kagan recently referred to the Agricultural Marketing Agreement Act of 1937 as “the world’s most outdated law” (U.S. Supreme Court, Oral Argument transcript, March 29, 2013), she could just as well have been referring to the whole convoluted array of U.S. farm programs that have their origins shrouded in New Deal history.

The “dairy cliff” over which milk consumers were left dangling on December 31, 2012 was just the latest peril on the absurd farm policy path that farmers, consumers and taxpayers on which have been wandering for decades. Years ago, the rationale for the “wool and mohair subsidy” was to assure we could have wool combat uniforms for Vietnam. Today, we provide crop insurance for export and biofuels crops like corn, soybeans and even cotton–all in the name of food security.

In fact, for generations no one has been able to maintain any plausible economic reason to support prices, subsidize business insurance, or distribute government payments, mainly to farmers of grains, oilseeds and cotton, while perpetuating convoluted regulations for milk marketing and trade barriers to subsidize sugar producers. Rationales that might have sounded credible in 1950 – e.g.: farmers tend to be poor; the free market just doesn’t work – were shown over the decades to be weak rationalizations for transfers to the wealthy. Other stories, such as that farm subsidies aid rural economies, are similarly at odds with basic facts. Farms account for a tiny share of rural employment, and subsidies do not go to poor regions. Where rural poverty is an issue, a direct approach is far better than hoping for a trickle down through farm subsidies.

Despite record high farm profits and prospective profits (well-documented by record high land prices) the talented farm lobby argues that today’s wealthy farmers still need “safety nets” from taxpayers. But as the farm bill delay stretches from 2012 into the middle of 2013, many objective observers are no longer convinced of the need for any of these programs.

The farm bill was among the first instances in the long, discredited tradition of wrapping countless disparate programs into one massive spending bill that no one could read and in which only each narrow interest knows where their special goody is hidden. For example, most of the spending in the farm bill is for the Supplemental Nutritional Assistance Program (SNAP or food stamps), which itself has become essentially equivalent to a cash transfer, with almost no relation to food and no significant connection to farming or any other feature of the farm bill. But, it has become and effective strategy to package farm subsidies with programs popular with urban members of Congress. At $80 billion per year, SNAP deserves its own legislation.

Farm commodity subsidies, including federal crop insurance, trade barriers, arcane price regulations for milk and other products, and the subsidies for the grains, cotton and oilseed are relics of a distant past. We seem to need no federal subsidy for lettuce, broccoli or alfalfa and those crops have fared at least as well over the years as the favored crops.

What about the rest of the massive farm bill? Rural environmental issues are not unique, so let us debate them in the context of environmental policy more broadly, not as an excuse for another form of farm subsidies.

The government rightly provides R&D support, and the evidence from high rates of return suggests an underinvestment in agricultural research by public sources. But, that evidence indicates that we should use some alternative authorization process, rather than trying to slip a few dollars into the farm bill where the R&D spending competes with dollars used to pay farmers directly. Imagine trying to fund the National Institutes of Health by transferring money from Medicare or Social Security. That is not a fight scientists are likely to win. So free agricultural research from the farm bill. It can stand on its own merits.

My proposal is simple. This next farm bill should be the shortest in history. It should also be the last.

Let’s transfer the few programs that merit government attention to the appropriate legislation and department, and shut down the rest. Take the lead from Justice Kagan and accept that the U.S. farm bill is the world’s most outdated law.

Visitors to Washington should consider an added bonus. The Department of Agriculture Administration Building fills prime real estate right on the Washington Mall next to the Smithsonian. The building itself is a superb piece of period architecture. It would make a fine museum of agriculture. We could even have a special room dedicated to the farm bill as a historical artifact.

For many years, a persistent theme in House and Senate Agricultural Committee debates over farm policy has been “Give the farm lobbies the subsidy programs they want and the heck with the consequences for U.S. trade relations.”  Nothing reflects that attitude better than the recent history of the cotton subsidy program. Like other developed countries, the United States agreed to end explicit export subsidies for all agricultural commodities by the early 2000’s under the terms of the 1994 Marrakesh Treaty that established the World Trade Organization (WTO).

However, the cotton lobby had sought and obtained the Step 2 program that paid subsidies to domestic mills and exporters that purchased upland cotton. Step 2 clearly included export subsidies that violated U.S. WTO commitments and in 2006 a WTO dispute resolution committee determined that such was indeed the case. So now the U.S. taxpayer is annually contributing $147 million to improve the productivity of the Brazil cotton industry.

You might think that the cotton lobby would have learned its lesson, but no. In 2010, as the current farm bill debate was beginning to have a real life, they dreamed up a new subsidy program called STAX (apparently not to many literary types in cotton policy circles). The cotton guys claimed that because STAX would be an “insurance” program to which farmers would contribute 20 percent of total government payments, it would be a WTO legal policy. The Brazilian government argued that STAX was just another potentially large subsidy that would expand U.S. cotton production and suppress world prices. The Brazilian government was correct, but that did not stop the House Agricultural Committee from including the STAX program in its 2012 Farm Bill proposal.

The U.S. cotton lobby might be a poster-child when it comes to seeking subsidies that are likely to violate US trade agreements, but the disease is endemic in the industry. Last week, even the American Farm Bureau, which has had a long history of advocating for free markets, came out with a new “STAX for all” farm bill proposal. In their current Farm Bill rent seeking activities, peanuts, rice and cotton farmers have sought a new Price Loss Coverage price support program that would likely trigger large subsidies, even though crop prices are at near record levels for many commodities. Corn, soybeans and wheat organizations have been seeking an expanded and potentially very lucrative “shallow loss” program. Both proposals have been included in at least one of the Senate and House agricultural committee farm bills.

Why do these proposals all pose problems for U.S. international trade relations? First, as new subsidy programs, they undercut the credibility of the U.S. as a proponent for free trade in all goods and services. Second, all of the new farm lobby proposals (STAX, shallow loss, higher price supports, and the most widely used and heavily subsidized crop revenue insurance products) increase subsidies when international agricultural commodity prices fall. As a result, they create the potential for new WTO price suppression complaints from dozens of countries on over twenty agricultural commodities, ranging from major commodities such as corn and cotton to smaller acreage commodities such as canola, sunflower, chickpeas and lentils. Third, the subsidies associated with the proposed shallow loss and price support programs are potentially so large that they could cause the US to violate its commitments to limit spending on production distorting farm programs (its “amber box aggregate measures of support).

All this means that other countries are likely to bring more complaints against the U.S. and win the right to impose “countervailing measures”. These could legitimately include new tariffs on any U.S. agricultural exports, manufactured goods, or services. Alternatively, the U.S. can try to buy complainants off with taxpayer dollars to improve wheat production in Canada and Australia, and wine production in France and Austria, as well as cotton production in Brazil. But most seriously, perhaps, as long as congressional agricultural committees persist in ignoring U.S. trade commitments and trade relations, the U.S. government will continue to lack credibility in negotiations that open and expand new markets for all U.S. products and protect U.S. intellectual property from international theft.

Smith is a professor at Montana State University and a visiting scholar at the American Enterprise Institute where he directs the American Boondoggle farm policy project.