The way farm subsidies work makes no sense
The Trump administration has oscillated in recent weeks between pledging to renegotiate and threatening to withdraw from NAFTA. This back and forth is a major cause for concern and looming economic uncertainty for the agricultural community.
The effects of NAFTA withdrawal would fall particularly hard on U.S. farmers and ranchers. And the threat comes at a time when the challenges of rural poverty and development demand policy solutions. As Congress begins to piece together the 2018 Farm Bill, it is of utmost importance to disabuse policymakers of the notion that farm subsidies are a silver bullet in the fight against rural poverty. In fact, farm subsidies do not meaningfully help most rural Americans.
Agricultural subsidies romanticize the past with the pretense that they serve to preserve the archetypal small family farm. However, farm subsidy programs do not keep small farmers in business. Rather, subsidies have provided corporate handouts to agribusiness. This has resulted in higher land prices, more environmentally risky farming, more farm consolidation, and an increasing difficulty for younger farmers to enter farming.
In terms of the ability of the agricultural sector to help alleviate rural poverty, it is first important to note that most U.S. farmworkers actually are employed in metropolitan areas. Only about 45 percent of the total number of farmworkers are employed in rural counties, while the other 55 percent work in urban or suburban counties.
Just as most farmworkers do not work in rural areas, the overwhelming majority of those who do work in rural areas do not work on farms. In fact, only about 6 percent of workers in nonmetro areas are employed on farms, compared to 1 percent of Americans in metro areas. Nonmetro employmentis considerably higher in such sectors as trade, government, transportation, and utilities. This is consistent with overall labor-market trends — away from manufacturing and farming and toward a service-based economy.
NAFTA renegotiation is particularly troubling to the agricultural sector because of the agreement’s pivotal role in increasing American exports. Since it was signed, U.S. agricultural exports to Canada and Mexico have more than quadrupled, growing from $8.9 billion in 1993 to $38.6 billion in 2015. Total agricultural exports in 2016 totaled $129.7 billion, with an increase of more than $10 billion projected in 2017.
Rather than helping these exporters, existing agricultural subsidies actually make it harder for them to access foreign markets, while also diminishing consumers’ purchasing power at home. The World Trade Organization’s Doha Development Round, which would have provided American farmers and ranchers with more market access abroad, broke down over the United States and European Union’s unwillingness to cut domestic farm subsidies.
The failure of the Doha Round demonstrates how domestic subsidies hinder free trade. Consumers, especially the poor, suffer the greatest consequences for this in the form of higher prices for food, while their taxes fund increasingly expensive corporate handouts.
For example, the crop insurance program has cost taxpayers almost $72 billion since 2007. Under current law, the government subsidizes roughly 62 percent of the cost of an average farmer’s crop insurance premiums. Not only are the premiums heavily subsidized, but the support isn’t either capped or means tested. In practice, this means the subsidies flow primarily to the largest corporate farms that are able to purchase the most generous insurance policies.
A 2011 Government Accountability Office study found that less than 4 percent of farmers who participate in the crop insurance program received approximately one-third of the nearly $7.5 billion in premium support subsidies. Additionally, the Environmental Working Groupfound that between 1995 and 2014, the top 1 percent of subsidy recipients received 26 percent of all payments, at an average of more than $1.5 million per farm. By comparison, the bottom 80 percent of farms each received less than $8,000 over the same time span.
Not only do these top-skewed programs cost taxpayers way too much and hinder free trade, they are also applied unevenly and thus discriminate against certain farmers. For example, soybean farmers can qualify for essentially all of the various agricultural safety net programs, while hog farmers cannot. While the hog farmer may benefit from subsidies in feed products, the overall effects of these corn, wheat, and soybean subsidies on public health have been questionable at best. Additionally, the healthier and most labor intensive crops such as fruits and vegetables receive the smallest amount of subsidies.
The USDA also has a troubling history of racially discriminatory farm lending practices which have exacerbated racial wealth gaps among farmers. This has led to a pernicious cycle of subsidies for the wealthiest, most high-producing farmers and a widening racial farm subsidy gap. None of this portends well for rural communities seeking to adapt to changing labor markets and demographic challenges.
Policymakers need to be wary of status quo bias and the political incentives of special interests. Instead, considerations for the distributional consequences to and well-being of all Americans, especially those in rural areas, should encourage more trade liberalization and less corporate favoritism through subsidization.
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