Friday, August 1, 2008

If You Subsidize the Production of Something, Less of it Will Be Produced

That’s the economic wisdom behind an op-ed piece in today’s NYT by Victor Davis Hanson, a former classics professor and current columnist for the National Review (where he extolled the “humane treatment” of Guantanamo inmates in a recent offering). Far be it from me to defend the current level and especially pattern of subsidies, which go largely to the wrong people for growing the wrong things in the wrong way, but I’d love to see the economic model that shows how agricultural subsidies lower food output in a hungry world.


YouNotSneaky! said...

When did you get all neoclassical on us? But seriously, you're right and this seems to be a common mistaken meme which folks both on left and right have been making lately.

Anonymous said...

I'm not reading the op-ed to say that there is a direct link between the subsidies and production levels. May be problem is that there are two forms of subsidy described. On the one hand there are tariffs, an indirect form of protective subsidy. Then there are direct subsidies to farm businesses. I'm not fully knowledgeable in this area. My understanding is that farm subsidies were, in the past, used to encourage/require farms not to produce certain crops or to at least reduce production of those crops. On the other hand such subsidies may be used to enable farmers to lower the selling price of crops thereby giving the farmers an artificial, tax payer funded, advantage in the market place.

My point is that the "subsidies" enjoyed by farmers is too complex an issue to say what effect such will have on production of the subsidized crop. If we still pay farmers to not grow A, B, or C, then there will be less product due to the subsidies.

This thread is yet a better choice for a question I asked on an earlier thread entitled,"Neo-liberal 'freedom'= Government...,"
but that no one had responded to. It has to do with trade "partners"
expecting differential advantages from one another.

"This seems like an apropos topic to bring up a question that came to mind this AM while listening to a report on WBAI about an issue related to changes in the WTO being negotiated during the past several years. It seems that India, in particular, has been objecting to a wholely free market approach to food basics trade and the more establilshed econnomies, ie US, England, Australia,etc., were arguing for such an open market approach through the WTO. India it seems wants some protections for its local farmers from a sudden surge in cheaper grains from the other member states. The commenters on the program did not raise the popint that, as far as I can remember, the US provides just such protections and export supports for its farm companies.

Am I not understanding the issue, and the relative arguments? How can one side of the negotiation object to the other side practicing the same forms of national support for farms that the first side itself practices?"

International trade has almost always been the impetus to warfare.
That's how important ann issue this is. I'd like to understand it better, but one thing that seems clear regarding farm subsidies is that states that re-elect their reps repeatedly have ouotsized influence in our government resulting in dangerous political situations.

Sorry to be so verbose, but I'm looking for answers.

Peter Dorman said...


First off, it's important to note that US farm policy changed in the past couple of decades. It used to be that the government paid farmers not to produce, a policy that dates back to the days of Henry Wallace. There is a vestige of this in the current "conservation" program; otherwise the whole system has been upended. Now farmers are paid to continue production, at least in a few "commodity" crops like corn and soybeans. Global prices in these crops are lower than they would be otherwise, which is exactly what many developing countries are complaining about.

Meanwhile, the politics of ag trade are complicated. Some countries, like Brazil, are mainly interested in gaining access to US and European markets for agribusiness fare like soybeans and ethanol. They support trade liberalization but oppose our subsidies. China and India, on the other hand, are worried about food security. In practice this has two dimensions. First, they want to maintain a substantial amount of agricultural production within their borders, even if it is uneconomic (perhaps sporadically) in global terms. Second, both face enormous rural-urban disparities and struggle to keep enough folks down on the farm to prevent even more unmanageable urban growth. For both purposes they need to protect the farm sector from too much external competition.

There is a lot more to be said about trade in agriculture; for starters take a look at the latest op-ed) by Tim Wise and Kevin Gallagher.

Anonymous said...

Thanks for the direction. As is obvious, I'm a bit out of date in regards to our farm policies. I do understand that India, in particular,
is worried about being deluged by cheaper imported agricultural product. Given Mexico's experience the Indian farmers may have a point. If cheaper imports destroy the home industry, what happens to the end users when world prices go way up and there is no home producers to rely on for supply if not for a bargain.

Also, are the others justified in their complaint that the established participants, US, England, Australia, etc, utilize the very same price support systems that they are being expected to give up?

Peter Dorman said...

It's difficult to blame any side in trade negotiations for being hypocritical, since that's the whole point. You push for market access for your guys and against everyone else's nontariff barriers, like regulations and subsidies. You resist the same demands against your people. Then, if all goes well, there is a flurry of horse-trading and an agreement is announced.

That said, yes the US blocks some imports directly, like Brazilian ethanol and subsidizes capriciously. I would caution, however, against adopting a rigid eliminate-all-subsidies position, one that Oxfam, for instance, seems to slide into periodically. There are excellent reasons for food production to be subsidized, although an excellent subsidy system would look very different from the one we have right now.

Unknown said...

It should also be noted that, entirely accidentally of course, the tariff on ethanol imports is just about the only ecologically sustainable policy in the US energy policy mix.

In general, a high-income nation with twice the global average biocapacity per capita needs to develop sustainable, renewable energy technologies that allow it to live within its own means. And in particular, encouraging Brazil to increase production of sugar cane in former food crop and cattle pasturage in the South only encourages those croppers and ranchers to shift their production into deforested lands in the Amazon.

Clearly, focusing so much of US energy policy on corn-starch ethanol, with an Net Energy Return on Investment of around 30%-40% at best, is a certifiable insane energy policy. But its silly because it is not on the path toward sustainable renewable energy self-sufficiency, which is a pre-requisite for any sane policy.

Anonymous said...

Also, sorry that I can't remember the details, but I was listening to a radio interview concerning the effect of bio-fuels on the food production capacity. During that interview it was noted that the US govt support for the production of bio-fuel was obtainable by foreign producers who ship the product to a US entry port and then ship it on to its intended destination. Some how, some way the price support becomes available to the bio-fuel product because it shipped from a US port in spite of having originated at some foreign producer. Pretty clever planning if true. The person being interviewed seemed to speak with knowledge of the entire issue.