U.S. Farm Subsidies: A Prime Example of Crony Capitalism

Nearly a century after the Great Depression, why are we still subsidizing farmers? U.S. farm subsidies are designated in the “Farm Bill” that is updated every five years. The latest version of the Farm Bill was signed into law in December 2018, and the federal government is currently paying about $25 billion annually to farmers primarily through price supports and insurance programs. Although the annual amount of farm subsidies has fluctuated over the years, the share of federal subsidies in the net farm income has been significant. In 2019, government payments made up one fifth of all farm income at 20.6%.  Moreover, as more small farms are bought out by larger ones, farm subsidies per-farmer have greatly increased. 


One would think that subsidies of such a scale would be based on sound economics, but this is not the case. To the contrary, farm subsidies are a prime example of crony capitalism, in which businesses earn profits not by solely providing quality products and services at competitive prices, but also by extracting transfer payments from taxpayers through collusion with the political class. 
Farm subsidies got their start during the Great Depression as part of President Roosevelt’s New Deal.  The original intent was to stabilize farmers’ income amid an excess of crops and livestock accompanied by low prices. The economic environment has drastically changed since then, and continued government involvement in offering minimum price guarantees and subsidizing insurance premiums is no longer justified.[1]
Tax dollars are a scarce and valuable resource and will become especially scarce in our current and future economic environment of rising deficits and increasing national debt. The revenues spent on farm subsidies could be used for more productive alternatives. Economists would say there is an opportunity cost to using tax dollars in this way, and this is not even considering the idea of possibly reducing taxes. 
Farm subsidies are not efficient, as farmers make decisions about operations and crops based on what will take in the most subsidies and not which ones fetch the best price on the open market. First, government provided/subsidized crop insurance encourages farmers to take excessive risk, known as the “moral hazard” problem, since taxpayers pick up much of the tab upon failure.  Second, the effective rate of subsidy varies greatly across different crops without clear economic rationale, distorting the decision on what crops to grow.  For example, although corn received the largest product-specific assistance in 2016 with $2.2 billion in subsidies, the subsidy rate was only 4.4% as a percent of the $50.4 billion total value in corn production. In contrast, sugar received $1.6 billion in subsidies against a $2.5 billion total production value, amounting to an effective subsidy rate of 63.5%![1]
Additionally, the benefits of the farm subsidies represent redistribution in the wrong direction. In 2016, the average (median) income of all farm households was 42% (29%) higher than the average (median) income of all U.S. households.[2] The subsidies are also not evenly distributed among farmers. In recent years, 10% of farmers -- often with more profitable and larger operations -- received about 70% of the subsidy payments.[3][4]
If farm subsidies are bad economics, why do they persist?  They serve the direct interests of a small group – farmers are less than 1% of the U.S. population -- at the cost to the much more numerous taxpayers.  Among agriculture-heavy states and districts, it is well understood that members of Congress will almost always vote against any amendment that scales back farm subsidies. [3][5] Moreover, Congress’s agricultural committees tend to be dominated by lawmakers from farming states and districts. [6] 
Farm subsidies continue on as a manifestation of crony capitalism, where politicians implement policies benefitting their narrowly focused constituencies but at the cost of the country as a whole. In exchange, farmers provide support and even campaign donations to keep these politicians in office.  The fact that the farm subsidies have persisted for so long indicates just how powerful are the interest groups behind these subsidies. Indeed, years ago President George W. Bush vetoed the 2008 bill due to the cost increase over the previous bill -- a 47% increase – only to see his veto overridden by Congress.[7]    
Farm subsidies in their various formulations may have been well-intended at their start, but over time they have evolved into a prime example of crony capitalism. Their existence encourages “political entrepreneurs” who get ahead through rent-seeking – in this case, the unproductive or even counterproductive effort to extract additional transfers from taxpayers.  These efforts come at the expense of innovation and of management based on market incentives. This does not mean that farmers are not innovative or sound managers. Rather, the incentives embedded in the subsidies redirect their efforts and practices toward decisions that are less than optimal from the market perspective. The incentives result in greater transfers and these transfers lead to higher taxes, higher food costs, and economic inefficiency. Farm subsidies represent an inefficient use of the federal tax revenues, cause resource misallocation in the farming sector, and redistribute income in the wrong direction. Perhaps even more importantly, by rewarding rent-seeking, these farm subsidies reduce support for the free enterprise system.
[1] For example, the three main programs providing farm subsidies are the Price Loss Coverage (PLC) program where payments are made to protect against price decreases, the Agriculture Risk Coverage (ARC) program where insurance against yield or revenue losses are directly provided by the government, and the Federal Crop Insurance Corporation (FCIC) premium program where FCIC works with private insurers to provide federal crop insurance with taxpayers picking up more than 60% of the policy premium.[1]      

[1] “Federal farm subsidies: What the data says,” USA Facts, updated September 29, 2020, https://usafacts.org/articles/federal-farm-subsidies-what-data-says/
[2] “Farm Household Income and Characteristics,” updated February 5, 2021, Economic Research Service, U.S. Department of Agriculture, https://www.ers.usda.gov/data-products/farm-household-income-and-characteristics/
[3] “United States Farm Bill” Wikipedia 2021, https://en.wikipedia.org/wiki/United_States_farm_bill
[4] Where the Money Goes: The Distribution of Crop Insurance and Other Farm Subsidy Payments,” by Anton Bekkerman, Eric J. Belasco, and Vincent H. Smith, American Enterprise Institute, January 2018. https://www.aei.org/research-products/report/where-the-money-goes-the-distribution-of-crop-insurance-and-other-farm-subsidy-payments/
[5] “Sugar Shakedown: How Politicians Conspire with the Sugar Lobby to Defraud America’s Families,” by Mario Loyola, July 17, 2014, The Heritage Foundation, https://www.heritage.org/agriculture/report/sugar-shakedown-how-politicians-conspire-the-sugar-lobby-defraud-americas
[6] “Crony Farmers: Farm subsidies persist because of political power, not economics”, by Vincent H. Smith, U.S. News, January 14, 2016
[7] "Congress passes farm bill over Bush veto - CNN.com". www.cnn.com/2008/POLITICS/06/18/farm.bill/

Posted: July 29, 2021 by Dennis W. Jansen, Liqun Liu, Andrew J. Rettenmaier