July 1996
Agricultural Policy Reform in the United States
Edited by Daniel A. Sumner
This book is a collection of essays that critique recent U.S. agriculture policy and propose alternatives to the current regulatory regime. The editor is Frank H. Buck Jr., Professor of Agricultural Economics at the University of California, Davis. The introduction to the book follows.
For most of this century the United States and other wealthy countries have applied intensive regulations to agricultural prices, production, and practices. In addition to regulation, these nations have pursued complex schemes of direct income subsidies for producers of selected crops. Recently, some progress toward more market orientation in agricultural policy has been made. While moderate at best, the continuing reforms are encouraging to those who believe that the world would benefit from less subsidy and regulation of agriculture. Although change has been slow and difficult, there is growing evidence that agricultural policy is responsive to well-developed empirical arguments that demonstrate the unwelcome consequences of current policy interventions and the benefits of specific reforms. For several decades, the American Enterprise Institute has helped create the analytical underpinning for many agricultural reform efforts. This book represents a continuation of that effort.
For the past decade, the federal budget deficit has focused attention on farm programs as a source of savings in federal outlays. This attention can be an impetus for positive policy change when it encourages scrutiny of broad public benefits from spending taxpayer dollars. Concern about the budget deficit, however, may also move policy toward more economic distortions when it encourages regulations and restrictions to substitute for the more visible costs of direct government subsidy.
The 1985 and 1990 farm legislation, the North American Free Trade Agreement, and the Uruguay Round agreement under the General Agreement on Tariffs and Trade have all encouraged more attention to the market in setting farm policy. With this progress, now may be the time to initiate reforms in areas that have thus far been resistant. Of particular concern are those areas where the policy has been recently moving toward more intrusive regulation. In the past few years we have also witnessed new import subsidies, new export subsidies, new production subsidies, and expanded outlays that subsidize farmers for crop loss. All of these areas deserve the attention of those who seek to improve U.S. farm policy. This book builds on a long tradition of the American Enterprise Institute by providing research information to guide policy on agricultural issues. Each of its chapters provides information useful for policy makers and stakeholders, including descriptions of empirical relationships and facts necessary for understanding the consequences of policy, critiques of recent policies, and analyses of specific policy alternatives. The research is addressed to those who design policy in the various branches of government and those who influence policy from outside government, including farm and business representatives, academics, and analysts in policy research centers.
When Is Government Regulation Justified?
This book begins with a careful and unyielding examination of arguments that have been used in the past to justify government's extensive involvement with agriculture for the past sixty years. Brian Wright, from the University of California at Berkeley, reviews these arguments one by one in the light of basic economic reasoning and recent history. He finds a lack of intellectual or empirical support for claims that the unique position of agriculture makes government programs more necessary or successful than they are in other parts of the economy. Wright's study challenges the current policies by providing a reasoned examination of their justification. He then reviews those parts of agricultural policy that deserve support for their contributions to efficiency or equity, and suggests alternatives or modifications without regard to their current political feasibility.
Bruce Gardner, from the University of Maryland, examines some specific consequences of the commodity programs operating under the 1990-1995 farm legislation. He investigated potential modifications to policy operation that retain much of their basic structure and compared the projected effects of alternative policy changes. The study looks at various implications of current program options in a "pro and con" framework and discusses how to reduce the negative impacts while retaining some of the features that make the programs politically resilient. Gardner generally finds the 1990-1995 programs costly and inefficient and suggests a number of innovative ideas that move agriculture in the direction of more market orientation.
The International Context
Gardner focuses on the domestic price and income support policies, but it is difficult to consider commodity policy in the United States without also considering the international context in which U.S. agriculture operates. Trade policies of the United States and most other countries facilitate and interact with domestic regulations and subsidies. Programs such as domestic peanut and sugar price supports could not operate without import barriers. Such important commodity industries as wheat and dairy have come to depend on a complex mixture of domestic subsidy programs, output regulations, import barriers, and export subsidies. Trade policies have themselves evolved rapidly since the 1990 farm legislation.
The fourth chapter of this book, which I prepared, reviews these recent changes along with more fundamental questions. Beginning with the Canada-U.S. free trade negotiations and continuing with NAFTA and the Uruguay Round of GATT negotiations, the United States has been involved in major trade policy discussions for a decade. Chapter 4 considers the implications of recent and prospective multilateral trade agreements along with other farm trade programs and policies. The chapter devotes particular attention to export subsidies and new import barriers that run counter to the spirit of the recent trade agreements. This chapter suggests that U.S agriculture and the overall economy would benefit if the United States pursued a consistent open market policy. Such a policy is best if accomplished multilaterally, but it is beneficial to the United States even if other countries do not reduce subsidies and barriers as quickly or thoroughly.
Many farm commodities are not covered by domestic price supports, direct income support, export subsidies, or even significant import barriers. But almost all of agriculture is affected by other policy. Closely connected to farm and trade policies that are specified on a commodity-by-commodity basis are issues of crop insurance and disaster aid, agricultural conservation and environmental programs, food safety regulations, farm credit programs, and policies related to agricultural research and extension. These are covered in the next five chapters of this book.
The book does not cover all issues. Several important policy areas that are not discussed have often been included in farm bills and are considered by the agricultural committees of the Congress. These include policies and programs that deal with national forests and other forestry issues, programs that subsidize domestic food consumption, and programs that subsidize rural communities. Each of these areas is important and each affects agriculture. They have been set aside in this project only to focus more intensively on a smaller set of topics.
Chapter 5 considers policies to deal with the vagaries of nature. The Midwest flood of 1993 was the most recent of a long list of multistate disasters that seem to cause the administration and Congress to compete in appearing to be the most generous in subsidizing those with crop losses. Legislation enacted in the fall of 1994 was the latest in the history of attempts to reform crop insurance and disaster policy. Barry Goodwin, from North Carolina State University, and Vincent Smith, from Montana State University, consider the recent experience with crop insurance and disaster aid that led to the 1994 legislation. They also analyze more fundamental issues, such as why the government provides crop insurance subsidy. They deal with the long-standing questions of why crop insurance does not provide the appropriate risk management incentives and how to minimize problems of adverse selection and moral hazard. This study investigates policy options for disaster assistance and crop insurance by considering both basic changes and marginal modifications of the new programs.
The Environmental Effects of Agriculture
Resource and environmental regulations and related subsidy programs play a large and increasing role in agricultural affairs and in the rural economy generally. In chapter 6, Walter Thurman, from North Carolina State University, deals with the implications of farm programs for the environment. The recognition that agriculture and farm programs have environmental consequences is not new. But this recognition and the policies associated with it have become more widespread. In the past decade, reducing the artificial incentives to higher yields and providing somewhat more flexibility in planting have made commodity subsidy programs less distortionary and have reduced the negative environmental consequences of farm subsidies. Further, the receipt of subsidies has been made conditional on meeting environmental standards. Thurman explores these and other relationships between farm programs and environmental goals, and he considers the environmental consequences of alternatives to the current farm programs. In addition to his analysis of commodity subsidies, Thurman analyzes the effects of long-term, paid land reserves and other programs directed toward limiting erosion, improving water quality, and preserving wetlands.
Food inspection, labeling, and other food safety and nutrition issues have been important concerns since 1909. But their becoming front-page news has spawned new regulations and increased government outlays. John Antle, from Montana State University, asks what economic principles should guide the regulation of food safety and what changes are needed in current policies. The various food inspection and safety regulations and agencies need to be modernized, streamlined, and consolidated. Besides the bureaucratic issues, Antle deals with the basic question of the appropriate role of government in food safety regulation. His research for the AEI project breaks new ground in the application of economics to food safety regulation.
Reforming the Farm Credit System
Farm financial policy includes the Farmers Home Administration and various institutions that form the Farm Credit System. The costly farm financial regulations and subsidies of the 1980s led to major changes, including the move toward credit guarantees rather than direct lending and a reorganization of the Farm Credit System. Despite these changes, there remains the potential for significant federal outlays, and some may question the rationale for any government role in farm credit. Peter Barry, of the University of Illinois, examines the budget and nonbudget consequences of the whole array of farm financial programs and policies and suggests remedies for the serious problems he identifies.
The final chapter is by Julian Alston, from the University of California, Davis, and Philip Pardey, from the University of Minnesota and the International Food Policy Research Institute. They discuss public-sector agricultural research and extension. There is substantial evidence that public agricultural research has greatly contributed to productivity growth in world agriculture. Further, a broad consensus supports government involvement in agricultural research. Alston and Pardey review the record and the rationales relating to government's role in the science of agriculture. They explain how alternative institutions and policies can enhance the net return on the billions of dollars per year spent on public agricultural research and extension. They do not argue for less involvement with or spending on research, but rather they provide information needed to spend our funds more effectively.
This final chapter on science policy helps clarify the federal government's significant and appropriate role in agriculture: to make agriculture more efficient and effective. Unfortunately, most agricultural policy in the United States does not accomplish that goal. In many ways the policies of the past six decades have been counterproductive and counter to productivity. By the last years of the twentieth century, the flaws of the policies developed decades ago are finally becoming so obvious that more close observers and participants are willing to consider gradually eliminating many traditional subsidies and regulations. Another round of minor fixes is clearly insufficient. How much is accomplished in the years ahead, however, depends on making available well-conceived analysis and some carefully considered alternatives to the current programs. This book provides such analysis.
