Editor’s Note: Reason columnist Veronique de Rugy appears weekly on Bloomberg TV to separate economic fact from economic myth.
Myth 1: Because of the financial meltdown, and its repercussions on aid, the scale of hunger that we see now is unprecedented; more people face starvation related to disasters than ever before.
Fact 1: In fact, while unacceptably high, starvation deaths per year have been declining for the past 60 or 70 years. Better publicity, grain market integration, and work by aid agencies have decreased human deaths during each food crisis since the late 1950’s.
The latest available statistics indicate that some progress has been made towards achieving the first Millennium Development Goal, with the prevalence of hunger declining from 20 percent undernourished in 1990-1992 to 16 percent in 2010 (undernourishment describes the status of persons whose food intake regularly provides less than their minimum energy requirements). The Food and Agriculture Organization of the United Nations (FAO) estimates that a total of 925 million people were undernourished in 2010 compared with 1.023 billion in 2009.
Myth 2: Congress says farm subsidies insure a food supply for the U.S. and for the world.
Fact 2: U.S. farm subsidies have exacerbated the balloon in world food prices. In fact, economists have found that abolishing domestic subsidies would actually lower world prices for these crops.
It is often said that without subsidies there would be a smaller food supply and hence, higher prices. This is a common rational behind farm subsidies. It’s quite the opposite. The economic literature shows that abolishing subsidies would actually lower the world price of crops.
Moreover, looking at the 2007 Farm Bill, Julian Alston estimated that eliminating U.S. crop subsidies (but leaving other subsidies and tariffs in place) would result in an increase in U.S. crop production by 7.3 percent. A supply increase leads to lower prices.
The chart below shows the impact that abolishing farm subsidies would have on the price of different commodities, using Alston’s estimates.
As we can see, with the exceptions of wheat and corn, the price of the other commodities would go down in the absence of U.S. subsidies.
Also, here is a World Bank study which focuses on the effects of removing rich country protection and subsidies in agriculture. It finds that poverty rates would fall in virtually all of the developing countries included in the sample, and do so as a simple consequence of the lower world prices for farm products.
This evidence puts lawmakers’ actions in perspective. In 2008, Congress overrode a presidential veto to enact farm legislation that extended existing supports and created new subsidy programs. The legislation added a “permanent disaster” program for areas frequently hit by adverse conditions, and it added a revenue protection program designed to lock in 2008’s high commodity prices. It also aided producers of specialty crops, such as fruits and vegetables with various new programs.
The 2008 farm bill added a new sugar-to-ethanol program under which the government buys excess imported sugar that might put downward pressure on inflated domestic sugar prices.
The evidence also supports the hypotheses that unfavorable farm prices have reduced significantly the agricultural output and economic growth in many less developed countries.
Myth 3: Farm subsidies are necessary to bolster farmers’ incomes in order to alleviate poverty in the United States.
Fact 3: That rationale made some sense in the 1930s but it doesn’t today. Despite the fact that farm households are doing as well or better than other households, farm households are still targeted for billions of dollars in government payments.
In the 1930s, President Franklin D. Roosevelt introduced government farm subsidies as a temporary solution to deal with the plummeting of farm household incomes and massive farm failures, which affected 25 percent of the U.S. population.
According to the Bluegrass Institute, “Between 1929 and 1933, the index of prices received by farmers fell by 55 percent, causing net farm revenues to decline by 69 percent. Up until the Great Depression, the farm failure rate was less than five per 1,000. However, by 1932, failure rates reached 38 per 1,000-4 percent of all farms.”
Eighty years later, the subsidies have remained in place. Why? One common argument for farm subsidies is that they bolster farmers’ incomes and alleviate poverty.
Comparing farm-household incomes with other U.S. households easily disproves this myth.
For instance, according to the Environmental Working Group, “in 2008, the median income for farm households of all sizes was $50,971. This was similar to the $50,303 median for all households. But farm households are earning more than $10,000 (25 percent) more than their rural neighbors. The median rural (non-metro) income is just $40,785. The average (mean) farm income was $78,803, vs. a national average of $68,424.”
Moreover, despite the fact that farm households are doing as well or better than others, the federal government still subsidizes these households at the rate of billions of dollars each year.
Again according to data collected by EWG, “In 2008, that total amounted to more than $12 billion, according to the US Department of Agriculture’s Economic Research Service. (That’s slightly more than the total computed by EWG, not including crop insurance subsidies.) These payments went to only 39 percent of all farms, and the average payment was $11,922.
But the disparity is even more striking when you compare the amount of subsidies received to the household income of the farming operations receiving them. The chart above shows that the more money a farm household makes, the larger the subsidy. Also, even the household receiving the smallest amount of farm subsidy end up making more than the average American household.
Here is the data:
The average household income of farms that received $30,000 or more in government payments was above $210,000 in 2008, more than three times the average U.S. household income that year. Farming operations that received between $10,000 and $29,999 in subsidies earned $110,368 in total household income, 61 percent more than the U.S. mean household income. And the household income of farms that got between $1,000 and $9,999 in subsidies was $70,117, still above U.S. average.
Finally, here is an interesting chart that put the current price of food in perspective: