THE HIGH COST OF FARM WELFARE

by Clifton B. Luttrell Cato Institute, 224 Second Street SE Washington, DC 20003, 1989 149 pages $19.95 cloth, $9.95 paper Reviewed by E. C. Pasour, Jr.

Government programs haven't solved the economic woes plaguing U.S. agriculture. Despite record expenditures on agriculture during the Reagan era was at its highest level since the Great Depression of the 1930s. Luttrell's short book describes government farm programs and demonstrates why they have been an expensive failure.

The book is divided into 11 chapters. Chapters 1 and 2 describe government intervention in agriculture following World War I that culminated in the Agricultural Adjustment Act of the Roosevelt New Deal. Chapters 3 through 6 analyze price support programs for crops from their beginning in the 1930s until the present time. Chapters 7 through 10 discuss other programs, including food stamps, subsidized credit, and price supports for milk and sugar. Chapter 11 describes the winners and losers, emphasizing that farm programs are a "high-cost way to aid low-income farmers."

Historical data are presented for a range of activities including production and exports of farm products, levels of price supports and market prices, sugar imports, government expenditures on food stamps, Farmers Home Administration loans, farm income by farm size, and expenditures by the U.S. Department of Agriculture (USDA).

Farm programs today are remarkably similar to those instituted during the 1930s. And government expenditures on farm programs adjusted for inflation have increased dramatically during the past 50 years, despite remarkable changes in the farm economy. Indeed, USDA outlays since 1980 have been higher each year than net farm income.

Luttrell pinpoints numerous inconsistencies and inefficiencies of price supports, subsidized credit, and other farm programs. For example, milk, sugar, and peanut programs raise food prices to consumers. At the same time, more than $10 billion is spent on food stamp programs to make food more available to lower-income consumers. Again, while espousing self-help and providing foreign aid to assist less-developed sugar-producing nations, the United States has impeded economic development in these countries, notably in the Caribbean area, through sharp decreases in sugar quotas which reduced their economic independence.

Of course, farm programs are inconsistent with competitive markets. Price supports that raise domestic prices above world price levels not only spawn protectionism to prevent the substitution of lower-priced imports by U.S. consumers, they also create the "need" for export subsidies to make U.S. products competitive in international trade. The massive export subsidies under Public Law 480 ("Food for Peace") and similar programs not only continue today but have been substantially increased in recent years.

Luttrell shows that most of the benefits of farm programs go to farmers whose incomes, on average, exceed those of the nonfarm population. For example, in 1985 the top 4 percent of farms (measured by value of products sold), with average net income of well over $100,000 per year, received about onethird of all government price support payments. In this reverse Robin Hood approach, the programs provide the lion's share of government payments to a relatively few higher-income farmers. Moreover, the benefits of higher product prices are quickly incorporated into higher prices and costs of land and other farm assets. Consequently, farm programs have little effect on the long-run profitability of U.S. agriculture.

What is the reason for this apparent anomaly in which the "government taxes so many for the benefit of so few"? Although Luttrell briefly addresses this topic, it would have been helpful to devote more space to the reasons why government tends to spend great sums on agricultural programs.

There are two explanations for the persistence of government farm programs -- "market failure" and income redistribution. In the former view, government farm programs persist because the decentralized market process isn't capable of coordinating economic activity in agriculture. Luttrell demonstrates that the evidence doesn't support this conclusion and that government intervention in agriculture frequently destabilizes markets for farm products.

The income distribution explanation appears to be more consistent with the evidence. The political process is shortrun oriented, and farmers (and other groups) often exert disproportionate amounts of influence in the political process because program benefits (as Luttrell stresses) are highly concentrated and the costs are widely diffused. For example, the sugar program that costs the average U.S. family no more than $50 per year benefits the 12,000 to 13,000 domestic producers of sugar and sugar substitutes, on average, by thousands of dollars per year. It isn't surprising that sugar producer interests exert more effort to influence the political process than do consumers!

How should the nation move to restore market forces in agriculture? Luttrell suggests a five-year adjustment period in returning to a competitive system. He also puts forth a controversial "decoupling" proposal in which farm programs would be dismantled, and current farmers would receive government payments unrelated to agricultural production until death or the age of 70. Luttrell recognizes that economic theory cannot be used to justify income redistribution to farmers. Moreover, he staunchly advocates the dismantling of farm programs, leaving no doubt about the inevitable result if agriculture isn't decontrolled: "...ever-increasing costs to taxpayers and consumers, resulting in further regulation and more highly inefficient, centralized decision making."