Posted by
Andrews on Monday, November 16, 2009 2:29:34 AM
Unlike my earlier installments in the "Bad Economics" series, I am not going to begin by describing my topic. I will instead start with a little story, and then a question, and it is best if you know as little as possible when you hear that question. So, bear with me, we will get to all the details soon enough.
Let us suppose an industry were to go to congress and ask for legislative relief. Let us say it is the major movie studios. They explain that their industry is unique. They have along production cycle, they need to take out massive loans at the start, and only see profits after a very long period. And if they have a bad year, then they may not make enough to cover the loans, and will be forced into bankruptcy. They also argue that, because of their unique industry, there are limited number of firms, and should they being to fail, we may be left with no film companies at all.
To remedy this, they ask congress to subsidize their industry, to provide funds to make sure they are profitable, or maybe just to bail them out when they suffer a loss. As an alternative, they propose congress pass laws establishing minimum ticket prices, so that they will be guaranteed a profit, but theater goers will not blame them for high prices. All of which they describe as a regrettable necessity due to the unique nature of their industry.
Would anyone think this anything other than a self-serving attempt to drain money from the tax payers? Would anyone take this argument seriously? What if it weren't the film makers, but maybe the auto makers? Or the computer hardware manufacturers? Or those running vacation resorts? Or ski lodges? Novelists? Sculptors? Any or all of those could make effectively the same arguments. Almost all firms rely on money borrowed before the production cycle begins, and at some stage almost all firms are but one failure away from bankruptcy. Nor are there many firms that do not have some lag between beginning and ending the production cycle. Maybe not every aspect, but almost every aspect can be applied to firms in any branch of industry.
So, would we accept this argument form any business? Is there some industry out there which should be protected from competition because of the reliance on credit, the long productive cycle, are very sensitive to down years or misfortune, or a variety of other reasons? Is it not the conservative position that the free market produces better results than intervention over the long term? ( "
Fairness and the Free Market", "
Planning For Imperfection", "
Greed Versus Evil
") Is it not our belief that intervention produced worse results, regardless of circumstances? ("
The Inherent Disappointment of Authoritarianism
") That the management imposed to meet government obligations is inherently inefficient?("
The Inevitability of Bureaucratic Management in Government Enterprises") And that no matter how much it may seem to help, subsidizing failing firms does nothing but harm? ("
Subsidizing Irresponsibility and Poor Planning
", "
Welfare for Malibu Residents", "
When Help Hurts", "
Anti-Business Businesses
") Is there any way a conservative could ever argue for bailing out firms which are simply suffering the failures inherent in a competitive market?
Then why do so many nominal conservatives join with the centrists and liberals in supporting various types of farm subsidies?
This is an issue like public education, central banking, medical regulations and drug criminalization
1, one which is not easily defined in terms of the political spectrum
2. Politicians from all over the political spectrum offer up justifications for these subsidies. And, obviously, there are the less than savory justifications. There is need for anyone with presidential ambitions to support farm subsidies, as Iowa plays a crucial role in the primaries and is unlikely to forgive any opposition to farm bills. There is also the demand from one's home district to bring home pork, whether a district is nominally conservative or liberal
3. And finally there is the ability to use such bills to pay off favored agri-business firms and political allies masquerading as "small farmers".
But what is more interesting is how much support for the policies, be they subsidized loans, buy back programs, price supports, soil conservation programs, protective tariffs or others, is true, heartfelt support. Perhaps not among the politicians, most probably have at least some additional motives in minds, but among the public at large, they sincerely believe the justifications offered. In this case there is little distrust of politicians. The public really seems to believe there is a need for farm assistance, and, whatever problems there are, is the outcome of corruption, political games or badly formed laws, and, were farm bills written and administered properly, they would be beneficial.
It is my intent to show that, even were they run perfectly, by total saints, and were the parties all gifted with perfect knowledge to match their perfect morals, even were all corruption and abuse to simply vanish, the laws would still do more harm than good. Even under absolutely, impossibly ideal circumstances, there is no justification for such laws. The benefit they confer on some individuals tend to come at a cost much higher than simply paying off farmers an equal amount in cash, and, even for those who appear to benefit, in most cases they end up suffering long term harm greater than any benefit they enjoy.
But that will come later. For now, let us take a look at the many arguments offered in support of these arguments:
1. Virtue - The first argument is a rather nebulous one, an argument more "idealist" than "practical". That is the argument that farmers are "the backbone of the nation". Various individuals define this differently, but the basic premise is that farmers have some innate virtue that demands we protect their interests. I touched on this in "The World's Oldest Myth", but will detail it more below.
2. Essential - This argument is based upon the premise that "food is essential to life", and so needs to be specially protected. This is specially amusing coming from conservatives, as they are currently fighting a variation of the same argument being used to justify health care reform. The argument has one serious flaw, it assumes, but does not prove, that a regulated market provides goods better than the free market. If that is not true, then this is an argument for ending regulation, not adding to it.
3. National Interest - This is a variation on the previous argument advanced by protectionists. It is essentially the same as all their arguments for economic autonomy. Food is essential and if we have a free market, foreign nations could subsidize their exports, causing us to rely on them exclusively, or at least to a dangerous degree, for our food supply. They could then either cut off supplies during war time, or else simply use the threat of embargo to extort money or concessions. So we need to protect our domestic food producers. It is less foolish than some arguments, but still fairly absurd. Especially given the fact that most farm subsidies RAISE domestic prices (which would favor cheaper imports), and that a mostly free market has not resulted in this foreign capture of food commerce.
4. Dangerous Competition - This is the theory I discussed in "Bad Economics Part 2". As was theorized for banks, some argue that a free market in food would drive marginal producers out of business, reducing food supplies below the required level, and leading to some degree of famine. It is economically implausible, but we will discuss that later. For now let me say it makes no more sense for farms than for any other industry. Supply and demand is still the same for foodstuffs as for any other product, no matter how much others assert it is not.
5. Small Farms - A lot of ink is spent arguing about "family farms" being "swallowed up" by "Big Agri-Business". Yet very little ink is expended telling us why family farms should get preferential treatment. Yes, the name is full of loaded emotional content, but outside of special pleading and pulling on the heart strings, there is no explanation why economies of scale don't work for farms, or why farm families should be preferred to families who buy food, so that high food prices are better than low. This is, in many ways, the farm version of the "Small Business Fetish" I described in the essay of the same name, though without even the "job creation" fig leaf the other argument has.
6. Disaster Sensitivity - This argument is based on the idea that farming is somehow especially sensitive to disasters or the randomness of weather. That would surprise those who own ski resorts, beach front businesses, charter boats and a lot more firms. But even ignoring the dubious validity of that argument, the thesis I put forth in "Subsidizing Irresponsibility and Poor Planning
" and elsewhere would argue that by indemnifying them against misfortune we encourage them to exercise less prudence, take fewer precautions of their own, and generally to assume more risk as the cost in paid by someone else.
7. General Humanitarianism - This is the catch all I added to include all those nebulous arguments that start "but we just should..." The previous actually may fall in this category, for example. This is hardly unique to farm subsidies, but as it is often part of the argument, I figured I should include it. Whenever discussion of a specific extant aid program arises, someone will mention the hardships that will come from terminating it, and others will point out the good it has done. As these arguments never consider the cost, or the consequences, I figure I will use this section to do just that, so that next time someone says we should help out farmers in a drought because it is "just right", you can offer up a response.
Not that a single individual would offer up all of these arguments. instead, most would offer up a list of three or four of these points, usually a mix of "pragmatic" and "idealist" arguments, many times including several somewhat contradictory ideas. However, as the lists sued normally lack any sort of unifying logic, having no underlying theory to justify them or tie them together, I will not bother refuting any specific set of arguments, but will instead simply rebut each point individually, as it appears in the list above.
Before we start, let us point out something obvious. Whether farmers are essential to the economy or not, whether farmers have a special virtue or not, and whether or not many of these claims are true, there is no point in providing interventionist protections for farming unless we can prove that intervention produces better results than the free market. If the free market provides more and better goods, then, regardless of rationale, it makes little sense to engage in intervention which will only make things worse, while costing us money and reducing our freedoms.
And that is precisely what we have shown over and over, in "
Planning For Imperfection", "
The Importance of Error", "
Fairness and the Free Market", "
The Limits of "Scientific" Management", "
The Inevitability of Bureaucratic Management in Government Enterprises", "
The Inherent Disappointment of Authoritarianism
" and "
Greed Versus Evil" , as well as many other essays. Which means that, in many of the cases above, the rationale itself falls down simply because the free market performs better than any interventionist or protectionist system.
However, many will simply not accept that basic truth. And even if they did, they would find some reason to ignore that truth and continue to cling to farm price supports and other subsidies. As I have discovered in arguing against public schools, central banks, fiat currency, drug criminalization and a host of other programs often supported by conservatives, despite the inconsistency, people have a way of ignoring the fact that their favorite projects don't work. Once they have invested an existing program with some personal meaning it takes very little effort to convince them to find a justification, regardless of the evidence.
So, let us go back and look at each argument, ignoring the fact that the free market is superior in every way to interventionism. For the moment, let us take each argument at face value and ask whether it makes sense.
1. Virtue - This argument is probably the weakest of the lot. First, regardless of the virtue of those practicing a trade, the purpose of that trade is to produce goods at the lowest relative cost. Whether or not farmers are the most virtuous beings on earth, if they cannot produce food cheaper than we can get it elsewhere, it makes no sense to support them.
But this argument is even more nonsensical than it first seems. You see, we are not even talking here of doing away with all farms, only allowing for the free market to work, allowing some farmers to go bankrupt and others to thrive. So we are not eliminating all farmers, only the least profitable. That may result in a smaller pool of virtuous farmers, but it would not eliminate this supposed font of virtue.
So, even taken on its own terms, this argument is flawed. No one wants to eliminate farmers, simply allow competition to work, which would leave a group of virtuous farmers in place, just different ones than would exist with price controls and subsidies.
2. Essential - This argument is also a weak one, for reasons which should be obvious. First, as mentioned above, it makes the implicit assumption that the free market cannot adequately ensure the supply of an essential good, and evidence from the rest of life seems to indicate that is not correct. We are more than adequately supplied with every form of luxury and recreation, all through the free market. So, why would the mechanism which can provide us with computers, cars, DVDs, movies, shirts, pants, and the rest fail to provide food? It can provide technological marvels, but fail to raise a carrot or ear of corn? That makes no sense.
But ignoring that argument, there are other problems.If the free market is incapable of supplying essential goods, then why retain it at all? Why rely on a defective free market patched with makeshift price supports? If the free market cannot supply essential needs, should we not nationalize food production? What sense is there in relying on the inadequate free market in part if we can't trust it in whole?
Likewise, if the free market fails at supplying essential goods, then why limits supports to food? Water, clothing, and shelter are all essential to life. So is medicine. Why not implement similar price supports and subsidies in those areas? Is it because textile makers lack the political pull of farmers? Or that were shelter and clothing prices to be increased to the degree these programs increase the cost of food, consumers would revolt? That food prices are a small enough percentage of most consumers' income that price supports pass unnoticed, but if applied to shelter, cars or even clothing they would be too obvious? Whatever the reason, it seems illogical to support only one "essential" good and not the rest.
3. National Interest - This argument fails on the point I mentioned in the summary. Were we interested in reducing imports, then we would want to favor consumption of domestic foodstuffs. But by enacting price supports, we make domestic food more expensive and thus favor imports. Similarly, paying farmers not to produce or buying domestic food and holding it off market does nothing to curb the consumption of imports, and instead favors them.
The only programs which encourage domestic consumption are import quotas and tariffs, and those apply to only select sectors of the food market (eg. sugar). For the most part, these laws either create domestic industries where previously there were only foreign sources (eg. sugar, again), or protect inefficient domestic producers against much cheaper foreign sources. Now this does mean we now have a domestic source, so that part of the protectionist worry is resolved, but it also means we have spent more on those goods than we need to, so we have less to spend on other goods. In short, we are now poorer, placing us at a disadvantage relative to other nations.
I won't go into great detail, as I did so many times before ( "Cash For Clunkers Revisited", "War Stimulates the Economy? Let's Nuke San Francisco!", "Jobs, Jobs, Jobs, and More Jobs" and "Clarfiying My Argument"), but history shows that victors in wars were traditionally not those that encouraged autonomy, but those that were the most wealthy. Germany in World War II lacked many resources, yet faced down most of the world for six years. Venice, at its height, defied essentially every Catholic nation, yet had almost no domestic production. And England, despite a massive colonial empire, lacked many basic resources during both world wars, yet managed to both defend itself and play a major offensive role, fighting nations much better supplied by nature. Finally, the USSR had much better natural resources than the US, or, at least, was our equal, but that did not keep them from losing the cold war and collapsing.
History simply does not support protectionist claims that autarchy4 is necessary for self-preservation.
4. Dangerous Competition - This argument is probably the quickest to answer. Many times the idea has been put forth that somehow competition will lead to all firms vanishing in a given sector. Yes time and again reality has shown this simply does not happen. Competition does drive out inefficient firms, but that's it. The remaining firms survive and grow, or are driven out themselves by new competitors. So long as there are no artificial barriers to entry and firms are not artificially propped up and not allowed to fail, competition will never cause all firms to vanish, or even leave us with an inadequate supply.
The final is simply common sense. If, somehow, competition left us with too little food, prices would rise, causing imports to be more attractive and capital to flow into new farms. The imports would keep us going until new farms were available, and then the new farms, created due to high profits, would supply us with enough food once more. The market makes such worries unrealistic.
Then again, I could have just said "Read 'Bad Economics Part 2'."
5. Small Farms - This argument is sometimes tied with the first, suggesting that only small farms produce virtuous farmers, and as small farms are swallowed up by big, we lose that virtue. It is at least a consistent argument, better than the first, but again, in terms of economics this supposed virtue is irrelevant.
Then again, most often this argument is offered without even that thin fig leaf of justification. We are told that without price supports we would "lose family farms", with it being implied family farms are somehow important, though why is never stated. And again, there is imply no economic reason to be concerned with "family farms", or for "big farms" for that matter. Economically, we want whichever size firm produces the best results, whether big or small. Size is not irrelevant, but it is not a constant good or bad thing in every circumstance. And there is nothing inherently good about small farms or bad about big ones.
Even more interesting is the fact that this argument has been shown in the past to be simply false. I don't have citations, but I recall many studies in the 1980's and 1990's that showed this was nonsense. That big farms failed at a rate higher than medium farms in many industries. I recall specifically one study of dairy farms showed free competition ended up favoring mid-sized and slightly smaller farms over both small and large farms. So the worry that small farms and "family farms" would die out seem unsupported by facts. But even were it true, it is economically irrelevant.
6. Disaster Sensitivity - There is no evidence farming is any more sensitive to disasters, to weather, and to other uncontrollable factors than many other industries, such as tourism. But even assuming it were, does it make sense to indemnify them? As I wrote in "Subsidizing Irresponsibility and Poor Planning
", we get more of whatever we pay for. If we encourage people to take no precautions, to accept risks and then expect government aid, we will have people taking more risks and providing for themselves less. By removing all risk, we also do nothing to encourage prudent preparations.
I know many will argue farmers are in no position to take such precautions, but that is not true. We simply have created a situation where they have no incentive to do so. For instance, rather than planting all one crop to maximize profits, but risking all in the event of bad weather, perhaps farmers would plant some acres with drought resistant crops, adequate to pay off loans, but not turn a high profit, allowing them to effectively "hedge" against drought. Or maybe they would not sink every dime in a given year, planting every acre, but instead keep a reserve against disaster, allowing them to come back next year if there is a disaster.
Granted, not every farmer could do so, and not every situation allows for such precautions, but we also discourage them by providing disaster relief. We will never know what clever solutions there are to protect farms against unforeseen disasters, as we remove all cost for imprudent actions, and bail out farms when disaster strikes. And in so doing, we encourage farmers to put no thought into prevention, precautions, insurance and hedges against failure. That is the price of indemnifying against disaster.
7. General Humanitarianism - And that last section is but a specific application of the general principle here. We often provide aid thinking it will help, but, as my article "When Help Hurts", and others, shows, almost always, our good intentions end up providing short term relief at the expense of long term harm. For example, in another area, welfare may provide for a leg up when one is broke, but because the rules encourage one to adopt practices that work against self-sufficiency, it often make sit harder to get back to work. And, because welfare is assigned by a mechanistic set of rules, it also allows one to remain on welfare for life, providing you can play the game, so our aid ends up not helping out those in need, but creates a permanent dependent class. Similarly, by providing loans to businesses which are likely to fail, and thus could not get private loans, the Small Business Administration, seems to help people by letting them start a business they otherwise could not, but, because such businesses are likely to fail, ends up harming them by putting them deep in debt in order to launch an untenable enterprise.
And that second case is pretty close to some of my objections to farm aid. Aid ends up keeping farms in business which should be allowed to fail, keeping farmers working who should be encouraged to find work in another field, keeping them running up debts and earning too little to truly make a profit.
And, from the perspective of society at large, it is even worse. For one thing, as in industry, it keeps newcomers out of the industry. Farm aid is a complicated process, but tends to favor existing farmers. And so, as I described in "Anti-Business Businesses
", newcomers are partly shut out, or at least face bugger hurdles, entrenching existing farms, despite their inefficiency. This raises prices and lowers output, driving up prices for everyone, even beyond the explicit price increases of price supports.
In addition, by keeping farms running that should not, paying tax money to buy farm products, pay for disaster relief, keep land out of production, and so on, resources are allocated to farming that could be more profitably sued elsewhere, making us all poorer. Without price supports and the lot, we could produce the same amount of food on fewer acres, with less cost, and using fewer people5. All these additional expenditures, and extra labor, represents a net impoverishment of the individuals involved, the nation and the world. Considering that people still worry about famine, it seems unconscionable to spend money to ensure that more land is used to produce less food.
Nor is that all. There are environmental costs, and, in this case, very real ones. As some farm subsidies are buy backs, requiring farmers to grow produce the government buys, there is an incentive to over-farm marginal land. As the produce will be bought regardless of demand, and as the price is usually high enough to make it profitable to farm marginal land, farmers in such programs will farm every allowable acre, regardless of impact. And so we end up with soil erosion issues, as farmers exploit the buy back programs when they are excessively generous. Ironically, soil erosion then leads to new programs which pay the same farmers not to farm their land. Of course, while some land is being kept off the market, other farmers are being paid through buyback programs, so while solving soil erosion on one farm, the government encourages it on another, creating an endless cycle of self-created problems and solutions, all costing ever more money.
Finally, by making farming profitable despite market conditions, and thanks to buy backs placing arbitrary floors and ceilings on production for many regions, these programs end up discouraging innovation in farming. Yes, there is agribusiness and genetic modification, but do not be deceived. Whatever innovation we have is just the residual technological improvement. Were farms forced to compete on the open market, fully fighting for every dime, without protections, price supports, tariffs and so on, innovation would be a much greater factor in farming. Instead, by making farming in part a government make work scheme, we have dulled innovation. As I argued for medicine in "Medical Regulations", government "help" can often lead to the stifling of innovation and the stagnation of an industry, even for industries which are far from nationalized.
And that concludes my arguments against each of the seven rationales. I know I did not go into as much detail for some as others, but some were simply weaker arguments. And a few had been addressed earlier in other posts. Not to mention that many simply disappear once you accept that the free market is superior to intervention in terms of reliability and total production. And we did not even begin to discuss how much aid goes to agribusiness or pseudo-farmers who earn only $1000 a year
6, just enough to qualify for aid money.
But we can leave all that aside. The best argument against farm subsidies is simply to describe what they do. "Farm aid takes your money to stifle innovation, keep out newcomers, favor existing firms, reduce the amount of food in the world, ruin topsoil and make food more expensive, all while using more land and labor to produce less, preventing us from using those resources to increase our wealth." Once it is described in those terms, it doesn't really seem so sensible, does it?
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1. I have argued with both liberals and conservative son these issues. For education see "
You Don't Drown in a Glass of Water - Vouchers Revisited", "
Why Vouchers are not the Answer", "
Never Ascribe To Evil, A Discussion of Education". For drug criminalization, "
Drug Legalization". For medial regulation "
Medical Regulations", "
Medical Regulation II", "
Medical Reform, An Overview", "
Bad Economics Part 5". And for banking, among the countless articles I have written on the subject, the best are probably "
Bad Economics Part 3" and "
Bad Economics Part 5".
2. Then again, the political spectrum itself is less than ideal. See "
The Political Spectrum
"
3. See "
What We Deserve", "
Don't Blame the Politicians
", "
"Doing Something" Revisited" and "
The Difficulty of Principle".
4. I do not know when the German/neo-Greek-transliteration spelling "autarky" came into vogue. As English almost always uses "-archy" in this context, I simply cannot write it that way, and find myself always using the older spelling. I don't know if the popular spelling came from objectivists/Austrian school fanciers, who like the Germanic spelling, or from the late-80's shift in the trends in Greek-English transliteration, when "Hector" became "Hektor", "Heracles" (or even "Hercules", if you prefer the familiar Latin version) became "Herakles" and "Achilles" became "Akhileus". Whatever the source, the spelling will always look funny to me. Until we start writing "monarky" and "tetrarky" I refuse to write "autarky". There is no reason to think "K" is "more like a kappa" than "ch" is. Both are symbols representing a hard "K" sound, so why not simply retain the older, more familiar spelling? But I have complained about this many times before, so I will say no more.
5. Some may see this as an argument against the free market. As I described in "
Jobs, Jobs, Jobs, and More Jobs" there are those protectionists who think we spend to justify working, rather than working to pay for our spending. With their inverted view, they tend to value "labor" above consumption, and look at wealth in terms of how much work it took rather than what satisfaction it gives to those consuming it. So they would probably argue tht reducing the labor required to produce a given amount of food is a bad thing. For a counter argument, see my satire "
I Have Seen The Light".
6. I may be wrong about this cutoff. My last figure came from the 1980's, so they may have redefined what makes one a "farmer". Still, there are those out there who keep a few sheep, or plant a quarter acre, to just meet the cutoff and cash in on government programs that pay to keep land fallow, or else provide cheap loans or disaster aid.
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POSTSCRIPT
The earlier Bad Economics posts were:
Bad Economics Part 1 - A discussion of how prices disprove theories of resource depletion
Bad Economics Part 2 - A debunking of the many theories based on "defective" or "damaging" competition
Bad Economics Part 3 - An examination of the many absurd claims about deregulation
Bad Economics Part 4 - An examination of problems with economic studies and empirical evidence
Bad Economics Part 5 - An examination of consumer protection and the harm it does to consumers and others
You can also read them in reverse order, starting with part 5, as each post contains links to the previous chapters.
POSTSCRIPT II
My previous writing on protectionism can be found in the following articles:
Exploiting Workers?
The Shortcomings of Pragmatism
Protectionism
War Stimulates the Economy? Let's Nuke San Francisco!
The Theory That Wouldn't Die
Beware Populist Deception
Fear of Trade
The Limits of Econometrics
The World's Oldest Myth
Authoritarian Oil Talk
STOP BIG PORCELAIN NOW!
I Have Seen The Light
Free Trade, Employment, Outsourcing, and Protectionism
When Help Hurts
Pragmatism Revisited
Misplaced Blame and A Power Play
Remember I Predicted It
Inescapable Logic
Smaller Government , Fair Weather Friends and Special Cases
Cheap Lighters, Overseas Dumping and Monopolies
Jobs, Jobs, Jobs, and More Jobs
Capital Investment
Fairness and the Free Market
More Proponents of Protectionism
John Stossel Imitates Me Again
Has No One Heard Of Lord Say?
Retaliatory Tariffs
Clarfiying My Argument
The Limits of "Scientific" Management
The Endless Cycle of Intervention
Exploited Labor
Planning For Imperfection
Protectionism Right and Left
Unfair Advantage and Foreign Trade
"Fair Trade"
More Timely Than I Realize
The Rubber Yardstick
The Political Spectrum
Greed Versus Evil
Inconsistencies in Historical Perspectives
Cash For Clunkers Revisited
The Inherent Disappointment of Authoritarianism
Keyhole Thinking
An Example of Inertia
Please note that some of the above deal with more than one subject. As Keynes is the major modern proponent of trade restrictions, and of monetary inflation, and as he bases both theories on the same bad model, I often had to address both. So if some of the posts above seem more relevant to inflation than protectionism or neo-mercantilism, that is likely the reason.