HOW FARM SUBSIDIES WORK
To understand the development and security implications of the Farm Bill, it's first necessary to understand how subsidies work. A subsidy is "a form of financial assistance paid to a business or economic sector. This can be used to support businesses that might otherwise fail or to encourage activities that would otherwise not take place." Government subsidies sometimes have a role--for example, by supporting critical businesses like airlines or promoting research and development within the energy industry--but they can also be used to unfairly tilt the market in favor of American business, by giving it an edge over foreign products. Under World Trade Organization rules, this is a form of protectionism and usually illegal. It is also a form of "unfair" trade.
For example, let's suppose that American farmers can sell sugar for $1.50 per pound (a hypothetical number). Because of their production costs, that's the lowest price they can set and still make a profit. Now let's suppose that production costs are cheaper in Brazil, and Brazillian farmers can sell sugar for $1.00 per pound. Which would American consumers rather buy? The Brazillian sugar, of course; it costs less. Importing Brazillian sugar will harm a few thousand American sugar farmers, but the cost savings will be tremendous and will be distributed across the entire American population. The savings will strengthen the overall economy, and create more jobs in different sectors. Brazil's economy will also grow stronger; large volumes of sugar exports will bring in lots of profit, which can be reinvested in local infrastructure, education, and new industry. As Brazil's economy grows, its wealthier citizens will buy more American products, improving their quality of life and strengthening the American economy. As trade expands there will be adjustment costs as wealth shifts from one sector to another, but in the end, everybody wins.
Now let's introduce a subsidy. We've already established that, in this example, American farmers can sell sugar for $1.50 per pound and Brazillian farmers can sell sugar for $1.00 per pound. Let's suppose the US Congress passes a farm bill, authorizing a subsidy of $0.75 per pound of sugar for American farmers. For every pound of sugar American farmers produce, the US government (and the taxpayers) pay $0.75 of the price. This allows American farmers to drop their selling price from $1.50 to $0.75 per pound--cheaper than the Brazillian competition. This will keep the American sugar farmers in business, but at enormous cost. US taxpayers will foot a tremendous bill. Brazil--and other sugar exporters--will be effectively shut out of the US market, because they cannot compete with subsidized prices. Their own economies will grow at slower rates, so will be less likely to import American goods. The net effect on the American and global economies is negative; the only winners are a small group of American farmers.
The American government has insitutionalized these agricultural subsidies through previous farm bills. These beneficiaries, however--who are not mom-and-pop farmers, but wealthy families earning an average income of over $220,000, with net worths of over $2 million--are a powerful Washington lobby. Through shrewd lobbying, and cynical dealings by Congress, they have managed to line their pockets with subsidies that are bad for the American and global economies. The 2008 Farm Bill takes these scandalous subsidies to new heights.
Harm to the American economy. Americans will pay billions in tax dollars to rich American farmers; according to The Economist, sugar provisions alone will cost $1.3 billion over the next ten years. Furthermore, Americans will pay an extra $2 billion a year in higher sugar prices. Multiply these effects across a variety of crops, and you get costly market distortion that harms the overall American economy.
Harm to developing nations. For years, opponents of "free trade" have criticized US hypocrisy; while the US tries to pry open foreign markets, it keeps high barriers in place to block cheaper imports from foreign countries. So long as the US keeps its agricultural subsidies in place, developing countries that rely on agricultural exports are effectively shut out of the US market. This severely curtails their potential for economic growth. Advocates of "fair trade" should be outraged by the Farm Bill, because it is utterly unfair; while throwing generous benefits to a small group of wealthy American farmers, it harms poor farmers across the rest of the world.
Sustained higher food prices. At a time when food prices are soaring (see my previous post) and threatening to destabilize parts of the developing world, the Farm Bill pours fuel on the fire. Market-distorting subsidies keep food prices high, and insitutionalize economic inefficiency.
Worsening the global North-South divide. Agricultural subsidies are an enormous source of contention between the global North and South--which roughly correlates to the most developed countries (the US, the EU) and the least developed (Africa, Latin America). Economists and policymakers in the global South blame US/EU subsidies for many of their development problems. By accelerating the subsidy program, the US is sending a hostile message to the global South. It is further eroding what goodwill might still exist toward America. Over time, developing countries in the global South will be less inclined to trade with the US, and will look for trading partners elsewhere. This should be particularly alarming to US policymakers, at a time when new centers of power are emerging (such as China) to contend with the US.
Derailing World Trade Organization talks and threatening the international trade system. For all the criticism it's faced from left-leaning activists, the WTO is a remarkable organization that has helped insitutionalize a global trading system. Most of us take the fruits of globalization for granted, but many of these gains would have been impossible without the WTO and its trade rules. Today, the WTO is facing a crisis. The "Doha Round" of negotiations between countries has shipwrecked on several divisive issues, along a fault line running between North and South. At the center of the crisis is Southern resentment over US/EU agricultural subsidies. Doha is nearly dead already; unless the US and EU budge on subsidies, the entire global trading system could unravel. This would be a disaster for those who care about global peacebuilding. Trade is one of the strongest glues that binds countries together; if the global trade system collapses, the economic and political fallout could contribute to conflict around the world.
The Farm Bill furthers the scandalous US support for ethanol. This requires another article in itself, but the allure of ethanol is a thoroughly--debunked myth; it owes more to the Farm lobby and Congressional politics than any real benefits to the US. Corn-based ethanol requires as much energy to produce as it saves over conventional fuels, and the massive shift of farmland away from food and towards ethanol production has contributed to soaring food prices. The ongoing Congressional support for ethanol borders on the criminal, but the Farm Bill throws even more market-distorting subsidies towards ethanol production. This will accelerate the rise in food prices and distract US policymakers from more viable alternatives for sustainable energy.
Confirming accusations that America practices hypocritical foreign policy. This lies at the heart of the Farm Bill. Agricultural subsidies are one of the worst examples of "unfair trade." At a time when America has tried to sell itself on a vision of promoting liberal democracy, the overwhelming bipartisan support for the Farm Bill sends a clear message: we don't mean what we say. We'll liberalize YOUR markets, but we'll do whatever it takes to shelter ours. When such crooked legislation passes both the House and Senate with enough votes to override a Presidential veto, I can't blame leaders in the developing world who feeling cynical about negotiating with the US.
The 2008 Farm Bill is criminal. Unfortunately, the economics are not intuitive, and the high costs to US and global citizens are distributed far and wide. The general public does not usually understand these silent killers, which is why we entrust these complex issues to elected, representative politicians. I fear for the future of our country, when a dysfunctional Congress so blatantly ignores sound policymaking, in favor of throwing pork to a wealthy, self-interested lobby. Over the long run, reforming US agricultural policy is one of the best investments we can make in a better collective future; unfortunately, our country seems determined to sprint the opposite direction.
"Farm subsidy bill is a fiscal nightmare" by Rep. Jim Matheson, Salt Lake Tribune
"A Harvest of Disgrace", The Economist