Tag Archives: farm subsidies

Revised: Why Farm Subsidies are Stupid

In the United States, the Farm Bill, which is passed every 5 years, determines our agricultural spending on both food subsidies and food stamps.  This post will focus on the subsidies portion of the farm bill, which accounts for approximately 20% of the bill’s spending. The following chart from the Wall Street Journal helps illustrates the tremendous amount of money spent on farm subsidies each year:

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As this chart makes apparent, the ten states that consume the most farm subsidy dollars consumed $9.445 billion in 2012.  While this expenditure doesn’t compare to the government’s massive defense or social security budget, $9.5 billion is not a trivial value.  After adding in farm subsidies paid throughout the rest of the United States, total annual expenditures is close to $17.5 billion.

It’s interesting to examine what crops the government is subsidizing.  If you watch the movie King Corn, or you read the Live Science article “Junk Food Subsidies Threaten American Health,” you’ll learn that the most commonly subsidized crops are commodity crops like corn or soybeans (they are called “commodity” crops because, given the way these crops are grown, they are not edible until processed into secondary products like High Fructose Corn Syrup).  Furthermore, without the existing government subsidies, many farmers would not profit from the production of commodity crops.  For example, the selling price for a bushel of corn is lower than the cost to produce a bushel; nevertheless, farmers continue to earn profits because of government subsidies.  As anyone who has taken Econ 101 knows, these subsidies ultimately distort the commodity crop market, leading to deadweight loss at the expense of American taxpayers (who are footing the bill for these subsidy payments).

Many support farm subsidies because they believe subsidies are necessary for America’s backbone (ie: Mom-&-Pop farmers) to support themselves.  Indeed, Thomas Jefferson believed that “Those who labor in the Earth are the chosen people of God.”  Whether or not you agree with Jefferson, the above statement about subsidies is simply not true.  Per the US census, farm household income has exceeded the average household income in America for over a decade and a half, and today the average farming household earns 53% more than the average non-farming household (maybe farmers really are God’s chosen people).  Additionally, the subsidies given out by the US government do not favor the Mom-&-Pop farmers living the American Dream.  Instead they support enormous commercial farms.  Of the $17.5 billion of farm subsidies paid out by the US government each year, 80% goes to the wealthiest 15% of farmers, whose wealth is usually measured in millions of dollars.

Thus it seems obvious that farm subsidies are negatively impacting the United States in three ways: (1) they distort the market for commodity crops (2) they place an additional tax burden on Americans who indirectly pay for farm subsidies (3) they contribute to economic inequality by favoring already wealthy, commercial farmers.

That said, there is another and more important way that farm subsidies adversely impact the economy: health care bills.  The American Heart Association identifies cardiovascular disease as one the most pressing health problems in the United States, with over 40% of Americans expected to suffer from cardiovascular disease by 2030.  With this increase in prevalence comes an increase in the costs associated with treating cardiovascular disease, which are expected to grow from $273 billion in 2010 to $818 billion in 2030.  So how is cardiovascular disease relevant to farm subsidies?  One of the leading causes of cardiovascular disease is obesity, and one of the leading causes of obesity is the exorbitant consumption of high fructose corn syrup.  And why are Americans consuming so much high fructose corn syrup?  Because US farm subsidies favor the production of commodity crops that make high fructose corn syrup so cheap to produce.

It is true that come 2030, the United States government will not be paying all $818 billion of the costs associated with cardiovascular disease.  But these rising health care costs will have a significant impact on Medicare and Medicaid payments, which already represent over $700 billion of federal spending (which is over 20% of the federal budget – see chart below).  And the onus of funding these payments will ultimately fall on the American taxpayer, depressing real wealth levels and spending.  Given the magnitude of Medicare and Medicaid payments, health care costs are responsible for the majority of the economic loss brought about by farm subsidies.

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Certainly there are many logical reasons to support farm subsidies.  While most farm subsidies support huge commercial farms, it is true that some Mom-&-Pop farmers would go under without government support.  Additionally, farm subsidies, by keeping commodity crop prices low, help keep food prices more affordable (especially highly processed foods, which typically are staples in the diets of low-income Americans).  Despite these benefits, I strongly support a gradual elimination of food subsidies.  And fortunately, the newest version of the Farm Bill, passed earlier this year, is doing just that (I believe tapering should be more aggressive, but you can only ask for so much at once).  While in the short-run, this tapering will likely cause marginal increases in food prices and adversely impact some Mom-&-Pop farmers, in the long run, I think the reduction in government expenditure and health care costs will certainly justify the tapering.

 

The Health Benefits of the Earned Income Tax Credit

Believe it or not, the Earned Income Tax Credit (EITC) does more than help low income families get involved in the economy.  A new study by the Federal Reserve Bank of Chicago finds that the EITC helps low income families to eat healthier.  (WSJ: Households Spend More on Healthy Foods When They Get Earned Income Tax Credit)

Unlike food stamps, the EITC is paid out as a lump sum payment, which takes advantage of the wealth effect.  Low income families, feeling richer after receiving a large cash payment, alter their spending habits and choose to purchase more healthy foods such as fish, eggs, and dairy products, and consume less unhealthy foods such as sugary beverages.  Given that obesity rates are significantly higher in low-income families (because unhealthy foods is typically much less expensive than healthy food), the EITC is helping to fight a rising economic concern in the United States.

According to Forbes, in 2012 obesity passed up smoking as the most expensive health issue in the United States, increasing annual national healthcare bills by over $190 billion a year!  Indeed, the average obese male has health care bills costing nearly $1,200 more each year compared to non-obese males.  For the average obese female, this cost is an additional $3,600 per year!  (Forbes: Obesity Now Costs Americans More in HealthCare Costs than Smoking).  Furthermore, given that obesity is most common in low-income families that will now have a significant portion of their health care costs paid by the government (via The Affordable Care Act), much of the cost of obesity will be passed on to the Federal Government, contributing to this country’s already growing debt problem.

By encouraging healthy behavior, the EITC is helping to drive down healthcare costs that are indirectly paid for by taxpayers.  Obesity has grown 34% since the 1960s, and this growth has made obesity is an issue that we literally cannot afford to ignore.  Additionally, the impact that the EITC has on food spending illuminates another important issue in the United States: the price disparity between healthy and unhealthy food.  It is unfortunate when a double-bacon cheeseburger costs $3 and a salad costs $10.  By the substitution effect, this type of pricing obviously encourages less healthy eating.  I think it is important for us to address the horrifying price gap between healthy and unhealthy foods, and I think a good place to start is farm subsidies.  I have already written about the impacts of farm subsidies on the market for high fructose corn syrup (https://econ411w14.lsa.umich.edu/why-farm-subsidies-are-stupid/), and as you pointed out with your comments, tariffs and trade barriers are likely another way that we can confront this price gap.  However we address this price gap, it is important that we do so soon, as rising obesity rates are not only saddening, but grossly expensive as well.