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Like the past ones, Farm Bill 2013 is an American boondoggle

Published on July 17, 2013, by
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The House of Representatives has now passed a farm bill on an entirely partisan basis. No Democrat voted for the bill, not least because the House leadership voted out the nutrition title that would have reauthorized food stamps, or Supplementary Nutrition Assistance Program.

Several Republican members also refrained from offering support for the modified legislation because of their concerns about feckless spending on farm programs that waste economic resources and disproportionately send billions of subsidy dollars to wealthy individuals. The farms that would receive over eighty percent of all the subsidies in the 2013 House bill are owned and managed by farm households and landowners with assets that are measured in the multiple millions of dollars, and incomes that are several times larger than those of the median U.S. households.

The real puzzle is why any House representative, Republican or Democrat, who has any serious concerns about reducing the federal deficit, or ending wasteful and poorly targeted programs that ship transfer payments to wealthy families and corporations, would have voted for the 2013 House farm bill.

The answer leads back to the wealthy farmers, insurance companies, and agri-business lobbies that benefit most from farm programs, and their influence in farm-heavy districts. They wanted to preserve and expand agricultural entitlement programs that pay their constituents billions. Reforming the program to make it economically efficient, equitable, and effective seems to have taken a back seat to other concerns.

How else could one explain why serious Republicans who have consistently sought for more efficient and sensible fiscal policies supported a bill that includes a crop insurance program that costs over taxpayers over $10 billion per year, pays more than 80 percent of its benefits to the wealthiest 20 percent of farm households, and encourages high risk and wasteful management practices. The government picks up 70 percent of the cost of the crop insurance program that provides unlimited subsidies to wealthy farmers, thousands of whom receive six figure plus premium subsidies every year. The federal government also pays crop insurance companies like Wells Fargo an average over $2 billion a year to sell and service the policies.

Then there is a new Price-Loss Coverage program that would lock in record-high prices for farmers. If crop prices fell to historical average levels, the program would cost taxpayers as much as $18 billion annually.

Also worth mentioning is an international food aid disaster program that wastes one out of every three dollars it spends by requiring that crops be sourced from U.S. producers and shipped by U.S. shippers. The protectionist policy doesn’t help save lives of starving people in places like Darfur. Indeed, more food could be delivered more quickly to millions more of the poorest people in the world at a lower cost if it was acquired locally. And, of course, a new Soviet-style program that, at taxpayers’ expense, guarantees milk producers a minimum margin between the revenue they receive for their milk and the estimated costs they incur for their cows’ feed.

Then there is a new cotton subsidy that will continue to violate World Trade Organization rules and is likely to continue to requires the U.S. to pay Brazil $147 million annually-just so U.S. cotton producers can continue to receive substantial subsidies.

The House Bill also ensures that a decades old sugar policy that relies on import quotas and supply controls to raise sale prices for sugar farmers will remain in place. Since 1980, the 20,000 sugar farmers in the U.S. collectively have gained an average of $1.7 billion a year from this policy which costs U.S. consumers more than $3 billion per year in higher food prices.

Undoubtedly, some farm-focused programs are important. Conservation programs provide genuine benefits for society as a whole by reducing air and water pollution and soil erosion.  And publicly funded agricultural research programs far exceed their costs to the taxpayer by lowering crop prices through technological innovation and dissemination.

Still, unless Congress makes serious and major changes to the House and Senate bills, the question remains: Why would any Republican or Democrat legislator vote for either? Bills likes this are not why Republican voters sent Republican politicians to Washington.

 

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A chance for leadership on the farm bill

Published on June 24, 2013, by

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The House of Representatives has shown considerable wisdom in voting down the House Agricultural Committee’s proposed farm bill.  The bill included an array of new economically wasteful price supports and crop insurance farm subsidy programs that could easily have been budget busters. It would have continued to transfer taxpayer funds to wealthy and very wealthy farmers and landowners, and would have created the potential for more trade disputes with other countries.

Now Congress has the opportunity to seriously rethink and make economically meaningful reforms to farm programs, including substantively reducing and eliminating wasteful and inequitable policies like the Direct Payments program and unrestricted crop insurance subsidies. It now has the opportunity to do this without inventing new policies that could have even more serious adverse economic effects.

There is a straightforward way for the House to move forward on a farm bill that involves genuine reform and yields real budget savings, rather than cosmetic accounting gimmicks. First, separate nutrition programs from farm subsidy programs, giving them their own bill and their own debate.

Next, accept the fact that the farm sector is perhaps the most financially successful sector in the U.S. economy, and therefore the sector least in need of direct subsidies or any kind of subsidy program.

Finally, accept the reality that no new subsidy programs are needed. The programs in the current bill would have exposed taxpayers to open-ended obligations—all to keep every farm’s income within a few percentage points of its recent five-year average revenues.  No wonder seven House Committee chairmen voted against the House Bill, as they almost surely would have voted against the Senate version of a 2013 Farm Bill, which has many of the same problems.

Then make three sensible changes to current farm programs:

  1. End the Direct Payments program and the related Average Crop Revenue program (ACRE), for a real annual savings of five billion dollars.
  2. Reduce Cadillac crop insurance subsidies from 60 percent of the actuarially fair premium rate to 40 percent, rolling such subsidies back to 1999 levels. This would save $4 billion each year according to the Congressional Budget Office, while also retaining a very generous farm specific financial safety net subsidy.
  3. Reform food aid policy. Do the right thing and adopt the Royce-Engel amendment, which would allow up to 45 percent of the emergency disaster food aid budget to be used to source food for such aid regionally and locally. With the same amount of funding, the amendment would save millions of additional lives by putting efficient markets to work.

These changes would yield three key outcomes:

  1. $9 billion a year in savings–$90 billion over ten years–while farm policies would become less wasteful and less economically inefficient.  There would be a real contribution to deficit reduction with effectively no measurable adverse effects on the financial viability of the farm sector.
  2. Millions of lives saved in the world’s poorest countries. Emergency food aid funds would be used more efficiently to help more of the world’s neediest families–demonstrating the common decency that has historically characterized the best in American generosity.
  3. Bipartisan support. The farm bill could comfortably be moved forward on an overwhelmingly bipartisan vote.
  4. Real leadership. From the perspective of the House, a fourth positive would be passage of a Farm Bill that provides the Senate Agricultural Committee with the real leadership it needs on farm policy issues.

One last thing: the House could get rid of the requirement that, if current legislation expires, price supports for major commodities like corn, wheat and milk rise in real terms to the levels established sixty four years ago in the 1949 farm bill. That would end the farm bill legislative nonsense associated with “dairy cliffs” and the possibility of $14 price supports for wheat (almost twice the current near-record prices farmers have been getting from the market for the past six years).

This article originally appeared on the AEIdeas blog.

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When farm subsidies are really financial subsidies

Published on June 20, 2013, by

 

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The farm bill moving through Congress today provides a great reminder of how Washington works: Whenever you see a government subsidy for some sympathetic cause or group — such as the working man, green-energy, homeownership, or college — there’s a good chance that the financial industry is also pocketing taxpayer cash through the same program.

These thinly disguised financial subsidies are everywhere. Goldman Sachs, for instance, made a pretty penny off the federal loan-guarantee to Solyndra that ended up costing taxpayers half a billion dollars. The subsidy program backing Solyndra consisted of Energy Department guarantees for loans by private banks.

When President Obama subsidizes Boeing exports, he calls it “New Economic Patriotism” and pitches it as a boost to the working man. Of course, these subsidies take the form of taxpayer guarantees for loans by the likes of JP Morgan, which was awarded “Lender of the Year” by the federal Export-Import Bank.

The Small Business Administration likewise subsidizes Mom & Pop with loan guarantees that insulate Wall Street lenders from risk. Student loan subsidies, for decades, were largely taxpayer subsidies for student lenders like Citibank. Washington “helps homeowners” by shouldering the risk for mortgage lenders.

In farming, the best (that is, the worst) example may be the federal crop insurance program.

Crop insurance is a sensible product. Farming is unpredictable. Hail storms devastate crops. Drought depletes yields. Prices at harvest time might be far below what the farmer predicted at planting time. To smooth out these bumps in the road, farmers buy insurance.

But in the U.S., taxpayers pay much of the tab for crop insurance.

For example, a farmer may buy a crop insurance plan that kicks in if his yield is 20 percent less than expected. Like any insurance, the farmer has to pay a premium. But unlike your car or life insurance, the taxpayer picks up most of the premium – the USDA covers 60 percent.

This helps farmers, but not only farmers. Search for lobbying filings that mention the crop insurance program, and you’ll see, for instance, Wells Fargo working the issue. Why? Because Wells Fargo owns one of the handful of companies approved by the Agriculture Department to issue this taxpayer-backed crop insurance. When taxpayers pay part of the price, more farmers are willing to buy what Wells Fargo is selling.

The next subsidy is more explicitly a gift to the insurers. The USDA reimburses insurers for their administrative and operating costs. In 2012, for instance, taxpayers shelled out $1.4 billion to cover these costs for crop insurers.

But that’s not all. If too many farmers suffer too many losses, and the subsidized crop insurers have to pay out too many claims, guess who acts as the reinsurer? A government agency called the Federal Crop Insurance Corporation. This effectively guarantees that crop insurers will make a profit.

The Environmental Working Group crunched the numbers for 2012 — a rough year for farmers.

U.S. farmers last year paid $4.1 billion in crop insurance premiums, according to EWG, while taxpayers gave the crop insurers another $7 billion. But the insurers had to pay out $16.1 billion, leaving them, on paper, $5 billion in the red.

So taxpayers then stepped in again, footing $3.7 billion of that $5 billion loss. Also, the USDA reimbursed the companies $1.4 billion for administrative costs.

All told, taxpayers shelled out $12.1 billion to this program in 2012, according to the EWG.

So as Congress took up the farm bill this year, talking “reform,” how did the House Republicans (who talk of free markets) or the Senate Democrats (who rail against special interests) handle the crop-insurance program?

They decided to expand it.

Currently, the federal crop insurance program covers only “deep losses” – yields or revenues that drop 15% or more below expectations. The current farm bill creates a “Supplemental Coverage Option” (SCO) that covers even shallow losses. And of course the premiums are subsidized.

SCO would not be a government backstop to private insurance as with ordinary crop insurance is. SCO is designed as straight-up government insurance. But then again, ordinary federal crop program was first created in the New Deal as a totally federal program, but eventually shifted into a federally backed private program. How long will it be before Republicans propose to “reform” SCO by handing it over to private banks while keeping the government subsidies?

This is a common species of bipartisanship in Washington: Democrats want a government program, and Republicans ensure there’s a profit-taking middle-man.

This article originally appeared in the Washington Examiner on June 17, 2013

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Podcast: Vince Smith on the 2013 farm bill

Published on June 18, 2013, by

AEI’s Vincent Smith outlines some of the staggering amounts of cash the government pays to farmers, including $16 billion to $17 billion per year on average for farmers to buy crop insurance, while crop insurance companies get $2 billion to $3 billion on top of that. Subsidies to farmers average $7 billion per year while agricultural research, which ultimately does provide a return on investment to the public, gets about $1.5 billion annually.

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)

 

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A farm bill bait-and-switch

Published on June 17, 2013, by
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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.

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Farm bill briefing on Capitol Hill

Published on June 13, 2013, by

As the House prepares to take up the farm bill this month, crop insurance and shallow-loss programs promise to be the subject of much debate. Though the House and Senate bills would discontinue the Direct Payments Program, each would continue overly generous crop insurance coverage and subsidies and institute new revenue protection programs for farmers. The provisions raise important questions for policymakers: How much risk should taxpayers bear? What crop insurance reform proposals are likely to be offered? How would the House version of the new revenue protection program work? Where would the benefits go? And what are the potential costs of the new provisions and changes?

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.

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Fake savings: The 2013 House farm bill

Published on June 11, 2013, by

The House agriculture committee passed its version of the 2013 farm bill on May 15.  Like the Senate agriculture committee, the House agriculture committee is selling its bill as a bipartisan deficit-reduction measure that saves tax payer dollars on farm subsidy spending while introducing new programs to improve risk management for farmers.

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. ►

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A new bait and switch farm bill

Published on May 31, 2013, by

The Senate agriculture committee passed its version of the 2013 farm bill on May 14. Though sold as a deficit-reduction measure that maintains key supports for farmers, the bill’s numbers deserve a closer look as it heads to the Senate floor next week.
The new 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 needed nor possible.

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).

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How to get food aid right

Editor’s note: This article originally appeared on CNN Global Public Square. Christopher B. Barrett is a professor at Cornell University and author of an American Enterprise Institute paper on US food assistance programs and the book Food Aid After Fifty Years: Recasting Its Role. The views expressed are his own.

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.

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More subsidies for prosperous farmers

Published on May 1, 2013, by

The U.S. Department of Agriculture estimates that farm income in 2013 will be more than double what it was in 2009. The nation’s farmers are enjoying the benefits of high crop prices, massive crop insurance subsidies, and technological advances that have made crops more resistant to drought. As a result, farming’s record level of income far surpasses that of comparable non-farm sectors.

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.