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Scoring the farm bill policy options

Published on October 29, 2013, by in Farm Bill.

Farm_bill_infographicThere is an easy way forward on farm policy, and it is not contained in either the House or Senate versions of the Farm Bill that are about be considered by a conference committee. The answer is to extend current law, minus the indefensible direct payments program that almost everyone agrees needs to go.

Ranking the current farm subsidy proposals in the bills that have been approved by the Senate and the House helps shed light on what’s happening, and why extending current law—with simple, common-sense reforms—is the best and most realistic option. Rankings generally use a positive scale, say from one to ten, where ten is great and one is abysmal. But from an economic efficiency and equity (income redistribution) perspective, neither of the farm subsidy proposals passed by the House and the Senate deserves even a ranking of one. So let’s use a scale of minus 10 (diabolically irresponsible) to 0 (at least does no more harm than current law).

We should start with the truly feckless House Farm Bill, which genuinely earns its ranking of minus 10. Why does the House farm bill represent such a nadir in farm policy initiatives, and why is it worse even than current law and the Senate bill?

First, it would introduce an astonishingly wasteful and distortive new price support program, called price loss coverage (PLC). PLC would cost taxpayers billions of dollars each year if prices for crops such as corn, wheat and soybeans moderate towards their longer run historical levels, as is quite likely over the next five years. It also guarantees rice and peanut producers very large subsidies in most years, and will allocate most of the total subsidies to the largest 15% of farms whose owners on average earn over $140,000 per year and whose wealth is measured in multiple millions of dollars. All of this from a brand new program.

Second, the House bill includes a new heavily subsidized crop insurance program (called the supplemental coverage option) that is likely to cost taxpayers over $2 billion a year—about 20% of which will flow to crop insurance companies for almost no work and absolutely no risk (the CBO cost estimates for this program, which are much lower than this number, are widely viewed as gross underestimates). Once again a new program.

Third, the House bill places no limits on crop insurance subsidies to individual farms, which in the case of thousands of the largest and richest farms, exceed $100,000 a year and, in some cases, one million dollars a year. Regardless of their political persuasion, who believes that is a just and equitable use of tax payer funds? Probably no one: apart from the recipients, legislators from the constituencies in which they reside, and crop insurance companies and agents.

Fourth, the House bill fails to reform US international food aid by allowing genuine flexibility for local and regional sourcing of food aid to help desperately poor and disadvantaged people in places like Darfur, Ethiopia and Bangladesh suffering from man-made or natural disasters. Professor Christopher Barrett of Cornell University and others have estimated that requiring US sourcing and transport of food on US flag ships increases the costs of providing aid by 50%. More problematically, this also slows the delivery of such aid by many weeks and months. The result is a failure to deliver life and health saving aid to millions of the poorest people in the world.

Fifth, the bill includes a new subsidy program for dairy farmers that smacks of a Soviet approach to managing milk production through central planning by guaranteeing a minimum margin between milk prices and feed costs.

Finally, a score of minus 10 seems reasonable because the House bill could well increase total federal spending on farm subsidies by about $10 billion a year, even though it would terminate the $5 billion a year Direct Payments program – the policy under which farmers receive welfare checks for doing nothing. And most of that increase would go to the wealthiest farmers and landowners involved in agriculture.

So what about the Senate bill? Let’s give it a score of minus 5. It too introduces and continues truly poor policies. The Senate bill includes the new supplementary coverage insurance program, which also fails to limit crop insurance subsidies, fails to substantially reform international food aid policy, and contains a dairy margin guarantee program. So why does the Senate bill receive a somewhat less abysmal score? The reason is that the Senate’s new subsidy give-away program, called the Ag Risk Coverage program, gives away a little less than the House’s Price Loss Coverage program by loosely tying levels of farm income protection and subsidies to recent trends in crop prices instead of locking in subsidies to current record crop price levels.

Why give the Senate bill a score of minus 5? Because, after accounting for savings from terminating the Direct Payments program, and under plausible circumstances, the Senate Bill could well increase total spending on farm subsidies by about $5 billion a year relative to current law. Again, these funds would for the most part flow to the richest farmers and landowners.

What about the farm subsidies built into current law (the 2008 Farm Bill)? Well, current law gets a score of zero: it contains wasteful, unfair, production distorting, WTO violating policies that make no sense, but it is less costly and less distortive in terms of economic efficiency and fairness than either the House or Senate Bills.

Is there an alternative that would get a positive score? The answer is yes. Current law minus the “let’s give welfare checks mainly to rich farmers and landowners for doing nothing” Direct Payments Program and minus a potentially expensive and production and trade distorting program called ACRE, introduced in 2008. That would save the taxpayer $5 billion a year; so we could give that alternative a score of plus 5. It would be a simple, fair, and easy-to-implement Farm Bill. The reforms would be far from perfect, but would move in the right efficiency and equity direction from current policy. More cuts in subsidies would be better, especially in relation to the federal crop insurance program, but a step towards a less distortive and more equitable Farm Bill would genuinely be a refreshing and historic policy initiative.