- A program in the House farm bill is likely to cost taxpayers $2 billion/year with 20% going to crop insurance companies.
- There are 6 reasons the truly feckless House farm bill could be even worse than the current law.
- If Congress is serious about moderating spending with minimal harm, it should focus on the farm subsidy programs.
The House of Representatives last week passed a nutrition-only bill that ignited controversy by axing $4 billion per year from the Supplemental Nutrition Assistance Program's (SNAP) expected annual budget of $76 billion. Many Republicans view SNAP as low-hanging budget-cutting fruit; many Democrats view it as an essential benefit to America's neediest families.
If Congress is serious about moderating spending with minimal harm, it should focus elsewhere: on the farm subsidy programs the House and the Senate have already passed. Billions more in savings could be obtained from cutting farm program subsidies than from the proposed cuts to SNAP. But pressured by the ag lobby, legislatures are giving with one hand and taking with the other. Behind the haze of the rancorous political fight over food stamps, both bills quietly expand welfare for wealthy farmers and insurance companies.
Ranking the current farm subsidy proposals that have passed the Senate and the House helps shed light on what's happening. Such rankings generally use a positive scale, where ten is great and one is abysmal. But from an economic efficiency and equity (income redistribution) perspective, neither proposal 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 is that bill worse even than current law and the Senate bill?
First, it would introduce a wasteful and distortive 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 percent 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 twenty percent of which will flow to crop insurance companies for almost no work and absolutely no risk. 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. No one believes that is a just and equitable use of taxpayer funds, except perhaps the recipients, their legislators, and crop insurance companies and agents.
Fourth, the House bill fails to reform U.S. international food aid by allowing genuine flexibility for local and regional sourcing of food aid to help desperately poor 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 U.S. sourcing and transport of food on U.S. flag ships increases the costs of providing aid by 50 percent. This practice also slows the delivery of aid by weeks and months with catastrophic consequences for millions of the world's poorest people.
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, the House bill could well increase total federal spending on farm subsidies by about $10 billion a year, even after terminating the $5 billion a year Direct Payments program-policy under which farmers receive welfare checks for doing nothing. Most of the increase would go to the wealthiest farmers and landowners involved in agriculture.
The Senate bill earns a score of minus 5. It too introduces and continues truly poor policies, including the new supplementary coverage insurance program. That bill also fails to limit crop insurance subsidies or substantially reform international food aid policy, and contains a dairy margin guarantee program. The Senate's bill is not quite so bad because its new subsidy give-away program, the Agriculture Risk Coverage program, gives away a little less than the House's Price Loss Coverage program. After accounting for savings from terminating the Direct Payments program, the Senate Bill could well increase total spending on farm subsidies by about $5 billion a year relative to current law-funds which would largely flow to the richest farmers and landowners.
There an alternative that would get a positive score. Current law, minus the "welfare checks mainly to rich farmers and landowners" Direct Payments program and minus a potentially expensive production and trade distorting program called ACRE, would save the taxpayer $5 billion a year and earn a score of plus 5.
These reforms would be simple, fair, and easy-to-implement. Though far from perfect, the resulting Farm Bill would be a move in the right efficiency and equity direction. More cuts in subsidies-especially to the federal crop insurance program-would be better, but a step towards a less distortive and more equitable farm bill would be a genuinely refreshing and historic policy initiative.
Smith is a visiting scholar at the American Enterprise Institute (AEI), a professor of economics in the department of agriculture at Montana State University, and co-director of MSU's Agriculturual Marketing Policy Center.