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Fri April 20, 2012
Government Farm Subsidy Takeover Would Save Billions, Economist Says
Originally published on Fri April 20, 2012 10:27 am
Arithmetic can be quite enlightening sometimes. One of the country's top agricultural economists just fiddled with the government's balance sheet on crop insurance, and arrived at a shocking conclusion: We'd spend billions of dollars less than we do now if we just gave away a simplified version of the insurance for free.
(Quick reminder: Crop insurance is America's biggest farm subsidy. It pays farmers when storms destroy their crops or when prices fall, and its fate is one of the stickier issues in the current farm bill negotiations.)
"It is truly amazing, which is why I needed to write this up," says Bruce Babcock, the economist at Iowa State University who authored the new study, commissioned by the Environmental Working Group, a long-time critic of farm subsidies.
The results suggest farmers would also end up with more money in their pockets. The only losers, apparently, would be the companies that currently sell those subsidized crop insurance policies to farmers.
If you're like me, you're scratching your head at this point, wondering how this could be true. Why would providing crop insurance for free be cheaper than the current system, in which farmers pay for private insurance and the government covers just part — about 60 percent — of the cost?
Here's why, according to Babcock. Government subsidies have encouraged private insurance companies to offer increasingly gold-plated forms of crop insurance. The policies don't just cover the risk of bad weather anymore. They guarantee a farmer's income, covering all kinds of risks, including the risk that corn prices might fall.
Subsidies make these policies artificially cheap, so farmers have been buying more and more of them. As Babcock puts it, "it is fundamental tenet in economics that people have an insatiable appetite for products they can buy with someone else's money."
In addition, according to Babcock, crop insurance companies have managed to negotiate sweetheart terms for themselves, allowing them to pocket exorbitant fees. (According to Babcock, these companies collect a dollar from taxpayers for every dollar of benefit that farmers receive.) The result: A program that the Congressional Budget Office predicts will cost taxpayers $90 billion over the next ten years. That's more than projected spending on all other traditional farm subsidies.
Babcock's alternative is a basic crop insurance program that would only cover the risk of a poor harvest. If a farmer's harvest fell below 70 percent of the farmer's average yield, the government would pay that farmer the full market price of any additional loss. Babcock calculates that the cost of providing this coverage for free would be $5.7 billion to $18.5 billion less than the current program, depending on how many farmers participate.
The idea of giving away insurance for free, he admitted in an e-mail, was proposed with "tongue slightly in cheek." "I really did this as a device to show how absurd the program is." Think of it as a big water balloon that Babcock just lobbed into the middle of a dinner party of farm lobbyists on Capitol Hill.
The crop insurance program, of course, is currently up for renewal in Congress, along with nutrition programs, international food aid, and a lot of other agricultural programs, all contained in the "Farm Bill."
With the government short of money, there's pressure to cut farm subsidies, and one program — so-called "direct payments" to farmers — probably will disappear. Many farm groups have drawn the line at crop insurance. They're pushing hard to keep the program and even expand it.
Kenneth Dierschke, president of the Texas Farm Bureau, calls it " the last vestige of a safety net for American agriculture." And Mary Kay Thatcher, Director of Congressional Affairs for the American Farm Bureau Federation, points to the program's popularity among farmers as evidence that it should be renewed. "It's working," she tells The Salt.