Agricultural Subsidies: Still a Bad Idea

If you want proof that the free-market intelligentsia really doesn't get what it wants, all you need to do is look at agricultural subsidies. The right hates them because, well, they're subsidies, and the left hates them because the beneficiaries are big agricultural companies while the losers are taxpayers and third-world farmers. Yet the subsidies stubbornly refuse to disappear.

And now, interestingly, the left is starting to have second thoughts on the subject. They're not coming out and saying that agricultural subsidies shouldn't be abolished, but they are pointing out that subsidies keep prices down, and that in an environment of rising food prices, now might not be the best time to start pushing them up even further. Dani Rodrik and Dean Baker have both made this point: If you're looking for solutions to the rising-food-prices problem, then it's hard in the same breath call for the abolition of agricultural subsidies.

Some of Rodrik's commenters do make a valiant attempt to square the circle. If you abolish US and EU agricultural subsidies, they say, then that will make developing-market agricultural production more attractive, which will mean more investment in developing-country agriculture, which will mean, ultimately, lower prices. Or something. It's all a bit vague and hopeful.

My view is that the effects of removing agricultural subsidies on food prices are much like the effects of implementing a carbon tax on gasoline prices: They make a difference at the margin, but that difference is much smaller than the big secular price changes driven by global commodity markets. So if the removal of agricultural subsidies or the implementation of a carbon tax makes sense on a big-picture level, then go ahead and do it and don't worry too much about first-order price effects.

I do appreciate that the first-order price effects are a large part of the reason to implement such changes in the first place. But the way I see it, these changes make sense as a matter of fiscal policy first and foremost, and the impact on government budgets can actually be quite large. And over the long term, making the changes will help eradicate market inefficiencies, such as rent-seeking behavior in the agricultural industry or negative externalities in the world of carbon emissions. And that's a good result as well.

Comments

[Greg Pinelli:]

First Felix..there is NOT A SINGLE INVESTIBLE IDEA in your article..surprise. Second...the Right and Left both love these subsidies..as long as we're clear that ethanol is..indeed..a subsidy. Which, of course, it is.
Subsidies are the order of the day..in fact, they're the order of this century and the previous. So..as an Investor..and this pretend site is supposed be about investors..WHAT DOES FELIX RECOMMEND??????

2008 Apr 10 09:53 PM

[phdinsuntan...:]

as most of developing countries are increasing trade barriers to food exports, and largest exporter US is subsidizing biofuels instead of food production, food supply is expected to reduce; and with a growing demand meausured in US dollars coming from countries that are importing more food at the same time their currencies are stronger, DBA will go through the roof. Risks: Obama bring back reaganomics and US interest rates jumps, or, large financial banks sell their assets to get more capitalization and the all market collapses like in 1929. Options are:
a. world food inflation+ massive dollar collapse+ poor countries in fire
b. dollar recovery with stock crash, G8 recession, food prices down
we are starting a. but can move to b., volatile times anyway...

2008 Apr 11 08:42 AM

[geonomist:]

Another positive step to take is letting farmers own land. To spur absentee owners of huge tracts to sell off their excess at prices poor farmers can afford, tax land at its annual rental value. Having to pay the overhead, big owners no longer find it worthwhile to be a middleman. This tax broke up huge estates in Denmark, California, Australia, New Zealand, and Taiwan, Afterwards, working their own land, farmers produced much more food, wiping out hunger in the case of Taiwan, and underpinning development. All those places offer much safer investments than where people still kill over farmland.

2008 Apr 16 08:30 PM