pay Farmers \" The most important class conflict in the poor countries of the wo
ID: 118261 • Letter: P
Question
pay Farmers
"The most important class conflict in the poor countries of the world today is not between labor and capital. Nor is it between foreign and national interests. It is between the rural classes and the urban classes."--Lipton 1977:13
Figure 21:1 (page 352) shows an increase in prices causes an increase in quantity supplied, moving along a stable supply curve. Historically, agricultural subsidies have been administered as "target price--deficiency payment" programs. The United States program is outlined on page 353. What potential problems do you see with this type of subsidy? Compare this type of program with the 2014 Farm Bill (356) that makes payments to farmers triggered by low prices or low revenues. Explain the positive and negative benefits of this new program.
Explanation / Answer
From 1933 to 2000, taxpayers spent $561 billion (year 2000 dollars) to support farm
prices and incomes (Luttrell, p.17; Spitze; US Department of Agriculture, March 2001 and
earlier editions). Spending since 1950 alone totaled $451 billion or nearly $9 billion per year.
Whether federal funds for farm price and income support have been well spent depends on the
public objectives for those funds and whether these objectives were served. Farm numbers
dropped from 6.5 million in 1933 to 2.0 million in year 2000 or by 69 percent (US Department of
Agriculture, July 1960, p. 40; February 2000, p.39), but preserving farms is only one objective of
commodity programs.
In the best tradition of public policy economics, it is customary for an economist to list
positivistic options (means) to meet the needs of people. The media make clear that society
wants policies that improve well-being of people through greater economic efficiency (more real
income), economic equity (if transfers are made they best go from the wealthy to the poor), and
freedom to make decisions. Somewhat more objective socio-psychological scales of the well-
being constructed by social scientists also indicate that these objectives contribute to the well being of society.
The new paradigm emphasizes that agricultural commodity markets work. To be sure,
the government needs to play a role in provision of public goods (e.g. grades, standards, basic
research, information systems, infrastructure, competition) so the market can function well. But
compelling historical experience demonstrates that when these public goods are provided, the
market rarely can be improved upon for economically efficient provision of food and fiber and
for economic growth, international competitiveness, and food security. Farmers respond to
prices set by supply and demand to clear markets, using all publicly available information. Farms
like other firms are always in very short-run equilibrium but never fully achieve long-term
equilibrium because markets are dynamic. However, equilibrium is close enough so that able
commercial farmers with or without subsidies on average earn returns comparable to what their
capital and labor resources would earn if employed in other sectors of the economy.
This new paradigm contrasts with the traditional wisdom which held that government
must perennially intervene in agricultural commodity markets to avoid surplus production and to
raise prices, resource returns, and incomes that inevitably would be low without interventions.
(For a superb review of historic development of the old paradigm, see Bonnen and
Schweikhardt.) The old paradigm held that, because farm markets do not work, chronic income transfers from taxpayers and consumers (the latter from commodity prices inflated by supply
controls) are essential for farm resources to earn a eparityf return. The old paradigm contended
that farmers could not adjust rapidly enough to avoid surplus output and chronic low returns as
agribusinesses released a continuing torrent of new labor-saving, output-increasing technologies.
The old paradigm held that farmers could not survive in a farming economy at the mercy of
shocks from nature and mancthe latter from misguided macroeconomic policy, use of food as a
weapon, and the like. The new paradigm recognizes that market failure is much more frequent
with natural resources than with commodities and that government failure in providing public
goods is more common than price-system failure in supplying market goods.
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