Thursday, May 12, 2005

Phasing Out Farm Subsidies, Is Samuelson Right?

Robert Samuelson mourns the dearth of budget-cutting zeal in Washington. He includes this statement:
"Plenty of programs could disappear without serious ill effects. Here are two of my regular favorites: farm subsidies and Amtrak. The CBO estimates that from 2006 to 2010 farm subsidies will cost $97 billion. If they were phased out, food would still be grown and the agricultural sector would still be viable. "
I'd challenge the "serious ill effects", because Mr. Samuelson ignores the lessons of history. It may well be true that the subsidies should be eliminated, but you cannot phase out subsidies of that size without serious effects. Economists believe that the subsidies get capitalized into land values. A farmer who's subsidized is able to pay a higher yearly rent for cropland, or to pay a higher price to buy cropland, thus pushing up values.
We should remember that we've had two experiments in phasing out subsidies: in the 1970's and with Freedom to Farm in 1996. Neither one suggests an easy road to eliminating subsidies.

In the 1970's after the Russian grain deal we were planting fence row to fence row, subsidies were almost zero, and land values soared. They reached a peak in the early 80's, then the bubble burst and values plunged. What happened then? (See this article in the Austin Daily Herald: land prices in one Texas county rose to $2112 per acre in 1981, then plunged to $531 in 1985. They've now risen to $2,821. )

The farmers who had inherited land and been cautious in expanding were okay. The farmers who had been bullish went bust. They were caught with mortgages based on high values for land that grew only low priced crops. As a result bankruptcies and suicides rose, rural banks went under, county tax rolls were decimated, people left farming, farms got bigger. The rural areas demanded relief. That stalwart of free enterprise and smaller government, Ronald Reagan, caved. Beginning in 1983 we had unprecedented (then) levels of subsidy.

Newt Gingrich and Pat Roberts pushed the 1996 Freedom to Farm law as a phaseout of the subsidy programs. It worked so well that subsidies over the last 10 years have dwarfed even Reagan's record.

Assuming that budget deficits and WTO rules result in drastic cuts of subsidies, when the current bubble in farmland bursts, the only reason we won't see a repeat of 1981-5 is that there are fewer farmers around to go bust.

No comments: