Tag Archives: Nobel Prize

Farm bill replaces conspicuous subsidies with inconspicuous subsidies

From consumers and taxpayers, the farm bill taketh. But to economics teachers, it continues to giveth.

The latest lesson comes courtesy of Ailsa Chang of NPR:

Also getting criticism is the newly-reformed crop insurance program. Now the idea was to protect farmers during bad seasons. The new bill expands that program with money saved from ending a system of direct cash payments to farmers. These are payments farmers would get regardless of their actual profits or even if they planted any crops. The payments amounted to about $5 billion a year. Democrat Debbie Stabenow who chairs the Sen. Agriculture Committee says now farmers will have to first incur losses before they get paid.

“With crop insurance, farmers don’t get a check. They get a bill. They may pay tens of thousands of dollars in premiums and never get a check in a year.”

But critics say farmers are just getting subsidized in a different way.

Ms. Chang is absolutely right to call crop insurance a subsidy in disguise.

Think of it this way:

Imagine that you make donuts and that in order for you to make donuts, you need to buy sprinkles. Now imagine that the government tells you that they will pick up 60 percent of your sprinkle bill. Yes, you still get a bill for sprinkles, but it is a much smaller bill than you would otherwise get. A normal person would call that a subsidy. Similarly, it only seems reasonable to say that when the government picks up 62 percent of a farmer’s insurance premium bill, it offers him (and his insurer!) a generous subsidy.

In many respects, however, crop insurance premium subsidies are worse than donut sprinkle subsidies because they encourage risk; they incentivize farmers to plant crops in flood or drought-prone fields. This is a lesson in moral hazard.

It’s also a lesson in political economy. Why are farm bill authors phasing out direct payments in favor of insurance subsidies and other complicated schemes like the “shallow loss” subsidy program that Professor Vincent Smith writes about? The answer is that direct payments are too conspicuous.

Nobel Prize winning economist Douglass North explained the logic in this piece from 1990:

[T]ransfer payments aside, unabashed redistribution is rare precisely because of its transparency. Farm price support bills in the US policy that simply paid the farmer not to produce never succeeded for just the reason that they were too transparent. And most legislation is not of this type. In most legislation redistribution is either concealed or a by-product of other objectives. In either case, not even the bill’s author may know all the consequences; much less the constituents.

 

The Economy as an Ecosystem

On Wednesday I testified before the Senate Committee on Small Business and Entrepreneurship. The title of the hearing was “Perspectives from the Entrepreneurial Ecosystem: Creating Jobs and Growing Businesses through Entrepreneurship.”

It was a less-formal type of hearing than I have done before. There were lots of witnesses, no formal oral statements, and we could more or less raise our placards whenever we wanted to talk.

In my one-minute introduction, I noted that George Mason University came to national prominence in 1986 when James Buchanan won the Nobel Prize here for his pioneering work in public choice. (Vernon Smith, another active researcher in the field of public choice, would become Mason’s second Nobel laureate in 2002). I then said:

Public choice focuses on the ways in which government policies are actually determined and carried out. And I think this weighs on entrepreneurship, in particular. I, too, appreciate the ecological metaphor. I think it is a really appropriate metaphor. Recently, I’ve been looking at the public choice ways in which the ecology of entrepreneurship can sometimes be interfered with. Just like a natural ecology, entrepreneurial ecologies need to be a bottom-up process. And quite often can be subject to interference from governments.

I was pleased that the Committee’s chairwoman, Senator Landrieu (D-LA) largely agreed with me. Channeling her inner-Hayek, she replied:

That is an excellent point and I hope that we’ll have a little bit more of thought provoking comments about that. Just like governments can ruin physical infrastructure—I mean physical and natural environments—governments can also, with the wrong policies, disrupt the… I don’t know if you’d call it ‘natural,’…but the strength, the dormant strength or natural strength of a people to grow jobs and produce wealth.

Unfortunately, not all of her comments were so Hayekian. Another of the witnesses was tech-entrepreneur-turned-academic, Vivek Wadhwa. Today he wrote about the hearing in the Washington Post:

Government leaders — at least some of those present — actually seemed to believe they could, through legislation and spending, increase entrepreneurship and innovation. They asked questions such as: What legislation can we enact to build innovation ecosystems, facilitate mentorship, and teach entrepreneurship? They didn’t seem to understand that these are things entrepreneurs do—not governments.

I couldn’t agree more.