Economics

Agricultural subsidy cuts: Moving in the right direction

Rep. Paul Ryan (R-Wisconsin) has thrown a modest deficit reduction cat among the Senate and House Agricultural Committee pigeons by announcing that the House Budget Committee wants agricultural insurance and other farm subsidies to be cut by $30 billion over the next ten years. That is $7 billion more than the $23 billion those committees thought they would have to lose in a new farm bill. So they and the agricultural lobbies who work with them are now suffering from mild conniptions.

In fact, the House Budget Committee proposal is only a small step in the right direction, although Ryan should be applauded for putting crop insurance subsidies back on the budget-cutting table. That program sucks between $7 and $8 billion a year from the taxpayer, of which more than half goes to private crop insurance companies for program delivery, making the U.S. crop insurance program perhaps the most expensive way of giving farmers government money in the world. The other $3 to $4 billion goes to farmers, who generally only pay premiums that are about 40% of the payments they receive for the losses they experience. Wouldn’t you and I love to have the government pay more than two-thirds of our auto insurance premiums every year? That’s the crop insurance deal farmers currently get from the government, and most of the benefits go to the largest and wealthiest farms.

Source: Author calculations.

As Ryan points out, taxpayers shouldn’t be asked to give farmers special crop insurance subsidy protections from normal business risks; such protections actually encourage them to take unreasonable chances and discourage them from controlling costs and increasing productivity. Getting rid of the crop insurance program, instead of just limiting the subsidies as the Budget Committee recommends, would save about $8 billion a year, while just making the delivery system efficient would reduce program costs by at least $2 billion and save $20 billion over ten years.

Ending direct payments would save another $4.9 billion annually. These are the monies farmers receive because somebody produced the “right” crops on the land they own or farm 30 years ago. About 80% of direct payments also go to farm households who are at least six times wealthier than the average U.S. family. Stopping these payments would generate almost $50 billion in deficit reduction savings over the next ten years.

So there you have it: Abolishing a wasteful crop insurance program and the direct payments program, which both mainly benefit larger farms and richer farm households, would save $13 billion a year (not just the $3 billion recommended by the House Budget Committee) and $130 billion over ten years, while doing no harm to the U.S. food sector. Simply making crop insurance more efficient and ending the direct payments program would save at least $7 billion a year and $70 billion over ten years.

Congress has room to be bolder about cutting farm subsidies, and doing so would be good policy and good economics. The farm sector, which has enjoyed unprecedentedly high prices and record farm incomes over the past five years, doesn’t need and shouldn’t continue to enjoy crop insurance and direct payment welfare programs targeted, for the most part, at its wealthier constituents.

One thought on “Agricultural subsidy cuts: Moving in the right direction

  1. It truly is a shame if congress is allowed to continue its war against small family farmers with the highly financially discriminatory crop insurance scheme. This scheme which guarantees the greatest probability of the greatest income to the largest farmers creates impossible financial competition for most small farmers. In other words congress gives so much more to the haves that those with less are unable to have any chance of competing in the farm business. Crony capitalism is the term that describes federal crop insurance. Federal crop insurance is a government scheme that uses the taxpayers’ contributions and government resources to disproportionately guarantee greater wealth to those with the greatest probability of the greatest wealth. In exchange for highly subsidized premiums the wealthiest farmers or those with the greatest probability of the greatest wealth (generally those with the most acres controlled or owned) receive nearly bullet proof investment and profit insurance worth many times what smaller farmers can obtain. (Fair market values of investment /profit guarantee received.)In short, government is guaranteeing the most to those who have the most. This granting of overwhelming prosperity in exchange for highly subsidized premiums allows the largest and already most financially competitive farm operators the ability to make sure most smaller farmers can see the lights of the uncoming train financially.

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