Is the Dust Bowl on Its Way to California?
SACRAMENTO — With federal spending topping $6 trillion and the national debt approaching an impossible-to-fathom $34 trillion, it might seem petty to pick on a relatively small federal program designed to help the nation’s farmers insure their crops against natural disasters, extreme weather, and insect infestations. The program’s $17.3 billion may be a rounding error in the Capitol — and is only a fraction of the $220 billion in gear the Pentagon seems to have lost — but sometimes it’s easier to understand the federal government’s insanity best by focusing on the little stuff.
For starters, the Federal Crop Insurance Program was started by Franklin Delano Roosevelt as part of his New Deal Initiative. That was in 1938, at a time when nearly 90 percent of U.S. farms lacked electricity. That was a very different time, a mere two years after the Dust Bowl sent 200,000 Okies to California. In other words, the continuing existence of the FCIP reinforces what we all know: It’s nearly impossible to eliminate a federal program or agency even after it outlived its purpose.
The program has evolved over the decades, but it still functions largely in the same way. It offers American farmers taxpayer-subsidized insurance to cushion them against not only the above-mentioned disasters but also unexpectedly low prices and disappointing yields. Like all subsidized programs, it ends up benefiting the biggest, most powerful interests the most. And those interests lobby to keep it going, whatever the impact on broader society.
It also promotes something economists call “moral hazard.” As the University of South Carolina explains, “’Moral hazard’ refers to the risks that someone or something becomes more inclined to take because they have reason to believe that an insurer will cover the costs of any damages.” That’s a problem with all insurance situations, but it’s more pronounced when the insured purchases the insurance at below-market rates. Another example of moral hazard is when companies are perceived to be too big to fail — and know the feds will bail them out if they make stupid investment decisions.
A study released last month from the U.S. Government Accountability Office (the federal agency with the most oxymoronic name, by the way), found that the U.S. Department of Agriculture subsidizes 62 percent of farmers’ insurance premiums. Above and beyond the outsized premium subsidy to farmers, the program also reimburses 100 percent of the expenses of private insurance companies that administer the program. The program cost taxpayers $9.4 billion in 2021 and rose to $17.3 billion today. Most of the money went to the largest enterprises, rather than to the family farmers it promised to support.
The GAO didn’t draw huge conclusions and, in keeping with typical government oversight reports, explained the situation in an understated way. Still, its conclusion here is striking:
From 2011 through 2022, companies received an annual rate of return on retained premiums of 16.8 percent on average (about $1.4 billion in underwriting gains per year), which exceeded a market-based rate of return (10.2 percent)…. Adjusting the program’s rate of return to more closely reflect market conditions could save the federal government hundreds of millions of dollars per year.
The New York Times put it better: “[Insurance] companies that participated in the program saw outsize returns.” In other words, the government is directly subsidizing FCIP-approved insurance providers, ensuring that they received higher returns than competitors. U.S. Sen Cory Booker, the New Jersey Democrat who called for the GAO review, rightly complained that a “shocking proportion” of FCIP payments was “eaten up by companies and agents who write policies for the very largest farms,” per a statement quoted in the article.
The report and most news coverage neglects one area that needs more attention — the degree to which the subsidies encourage farmers to undertake environmentally destructive techniques. As conservatives and libertarians, we often critique federal and state governmental programs that claim to save the earth from climate change and other forms of despoliation, but, in reality, the government itself often encourages poor stewardship. One of my American Spectator columns last month spotlighted how federal sugar subsidies encourage the draining of the Florida Everglades.
In a study in October, my R Street Institute colleague Caroline Melear, an insurance, trade, and financial fellow, noted the program’s “disconnect from any free-market principles sends incorrect price signals and encourages risky farming practices that have led to serious environmental concerns.” The program actively discourages the use of conservation and mitigation measures. It incentivizes farmers to grow corn, wheat and soybeans rather than fruits and vegetables.
Our government touts its commitment to protecting the environment, but it prefers hectoring us with new regulations rather than halting its own policies that encourage overplanting and land depletion. And when one considers the program started shortly after the Dust Bowl, a crisis that ultimately was caused by similar practices, it really boggles the mind. Bottom line: It encourages moral hazard, whereby the program’s recipients can make risky choices knowing that taxpayers will bail them out.
GAO and others have proposed a variety of solid technical reform ideas, but the best one is to simply phase out the program and allow the marketplace to work. It’s a waste of taxpayer dollars, and it distorts the agricultural market in ways that harm consumers, harms the environment, and showers subsidies on the largest corporate players. If Congress wants to root out waste, here’s an easy place to start.