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Tarnished gold
VIEWPOINT I
1
Tarnished gold US farm commodity programmes after 50 years Don Paarlberg
It is fifty years since the introduction of the US farm commodify programmes launched under the New Deal. Based on the concepts of relief, recovery and reform, fhe New Deal gave new hope to farmers emerging from the Great Depression. But how successful were these programmes? Don Paarlberg
believes they were miscarried, becoming preferential, profligate and perennial. With the recent recession and the introduction of new farm legislation, the author speculates as to whether history will repeat itself. The author is Professor Emeritus, Purdue University, Lafayette, Indiana, USA. An earlier version 0:this article was presented 2 August 1983, at the Annual Meeting of the American Agricultural Economics Association at Lafayette, Indiana, and scheduled for publication December 1983 in the Proceedings Issue of the American
Journal of Agricultural Economics.
‘G. F. Warren and F.A. Pearson, Prices, Wiley and Sons, 1933, pp 178-182. *John D. Black, Agricultural Reform in the gt;ct States, McGraw-Hill, New York, %SDA, Agricultural Statistics, 1942, p 859. ‘Milton Friedman, A Monetary History of the United States 1867-1960, National Bureau of Economic Research, 1963.
6
1983 is the golden anniversary of the farm commodity programmes launched by the New Deal. An assay shows the ‘gold’ of this anniversary to consist of considerable base metal. The Great Depression laid the basis for the Agricultural Adjustment Administration (AAA). Only older people can recall it. A few figures help calibrate the disaster. From 1929 to 1932, the index of prices received by US farmers fell 56%. Net income of agriculture fell 70%) from $6.3 billion to $1.9 billion. I was farming then, with my father and brother, in Northwestern Indiana, keeping farm records in collaboration with Purdue University. Our labour income in 1932 was a negative $1 203. Farmers, needing help, undertook a number of desperate acts. In a dramatic protest against foreclosures they threatened to hang a federal judge. They overturned milk trucks, picketed packing plants, and boycotted farm sales. The mood was ominous. There was anger, frustration and insistence on action. The Great Depression was worldwide. In Italy and Germany representative government was replaced by dictatorships. The US political and economic systems were threatened. There were two schools of thought as to the cause of the trouble. One, led by Dr George F. Warren of Cornell University, assessed the problem as general, resulting from the collapse of money and credit. The remedy, said this group, lay in a changed monetary policy.’ The other school, led by Dr John D. Black of Harvard, diagnosed
the farm problem as arising within agriculture itself, the result of surplus production. The remedy, according to this group, consisted of reducing supplies so as to increase farm prices.2 As always, disciples interpreted and misinterpreted their prophets. Proposals were offered in the names of Warren and Black that were far from the views of these men. In any case the two groups polarized, one wanting monetary reform and the other pushing for production control. The contention that the problem was overproduction of farm products had a shaky foundation. Total agricultural production during the five first and worst years of the Great Depression, 1930-34, was actually 2% below the production of the five preceding years.3 Belief that the problem was a phenomenon of money and credit had much to support it. Credit collapsed; the stock of money fell by more than one-third.4 Prices fell for virtually all commodities, whether abundant or in short supply. Commodity prices fell in every country for which statistical information was available. Neither farmers nor politicians understood the complexities of central banking. On the other hand the diagnosis that agriculture was suffering from overproduction was credible to both farmers and politicians. They knew that excessive production meant low prices and reasoned that with prices low there must be excess production. It was felt that with the low prices of internationally traded farm products FOOD POLICY February 1984
1 VIEWPOINT
I
‘The keywords of the New Agenda deal were relief, recovery and reform’
5Earl 0. Heady, ‘The agriculture of the US’, Scientific American, 235, pp 106-27. 6Theodore Saloutos, The American Farmer and The New Deal, Iowa State University Press, 1982, p 98. 7James Thornton, Oral Statement at the meeting of the National Agricultural Credit Committee, Chicago, 10 September, 1979. ?Iarden Fuller, ‘Wheat, cotton and political California Monthly, Julyarithmetic’, August 1964.
FOOD POLICY
February 1984
US agriculture could not compete in world markets. The proposal was to reduce production, turn inwards, and create an American farm price structure basically higher than in the rest of the world. This could not be done through individual decision making; it had to be done by government. Consensus formed around this idea. The AAA, based on this principle, was passed by the Congress on 12 May 1933. Passage of the AAA was a major change in the agenda. For 70 years, after passage of the Homestead Act and the Morrill Act, the farm policy agenda had been agricultural development, the components of that policy being research, education, and improvement of agricultural resources. Earl Heady has called this ‘the best, the most logical, and the most successful program of agricultural development anywhere in the world’.’ The historic agenda, based on increased production, individual farmer decisions, and competitive markets, was not compatible with the ideas underlying the AAA. The historic agenda was quickly nudged aside to make room for the New Deal agenda, the keywords of which were relief, recovery and reform. Relief was to come from a number of sources, including the Federal Emergency Relief Administration. Recovery was to be accomplished with price increases brought about by the AAA. Reform was to come from modifications of the competitive system that would reduce inequities and diminish the likelihood of another debacle. Reform consisted not only of price stabilization but also of new institutions of farm credit, new tenure arrangements, federalfcrop insurance, and special help for the disadvantaged sectors of agriculture. I remember well the revival of hope on the farm front that accompanied passage of these New Deal farm programmes. Farmers were given a role in working out their own chosen solution to their problems. They were put on committees by the thousands. They elected officers, went to meetings, and spoke their minds. Government cheques began to flow. On every hand was evidence that the government
cared. The Great Depression dragged on, but the mood changed for the better on US farms. Whether the analysis which underlay the AAA was right or wrong, the programmes in the early years were accompanied by better morale and some improvement in economic conditions on US farms. The early years are now behind us. What has been the experience with these programmes? Over the SO-year span, what happened to the objectives of relief, recovery and reform with which the AAA began? Relief came with the federal Emergency Relief Administration, the AAA cheques, and innovative lending on the part of the new credit agencies. On that score the New Deal must be given high marks. Recovery was only partial until the outbreak of World War 2, seven years after passage of the AAA. Agricultural recovery from the Great Depression must be credited more to the stimulus of the war than to management of supply and price on the part of the AAA and its successor agencies. What of reform? Reform was for the greater part aborted.6 The agricultural elite, generally the large landowners, managed to retain most programme benefits themselves rather than share them with tenants or employees. The Resettlement Administration and its successor, the Farm Security Administration, both intended to lift the status of agriculture’s disadvantaged, were closed out. Today’s incarnation of these two agencies, the Farmers’ Home Administration, has been co-opted by the agricultural establishment. In 1979, the Farmers’ Home Administration had 300 loans in excess of $1 million each and had one loan of $17 million.’ There is general though not universal agreement that the AAA widened rather than narrowed income differentials within agriculture.8 In the 50 years since passage of the AAA, relief was achieved, recovery occurred for whatever reason, and reform was miscarried. With the passage of time, a new and unannounced agenda emerged. These programmes became preferential, profligate and perennial. These are serious charges. I
7
VIBWPtMNT I
‘The programmes transferred income from the poor to the more wealthy’
‘D. Paarlberg, American Farm Policy, Wiley, 1964. ‘%Qllard W. Cochrane and Mary E. Ryan American Farm Policy, 7948-1973, University of Minnesota Press, 1976, pp 336 367. “Luther G. Tweeten, ‘Agriculture policy: a review of legislation, programs and policy’, in Food and Agricultural Pa/icy, American Enterprise Institute for Public Policy Research, Washington, DC, 1977, p 52. 12USDA, Agricultural Outlook, August 1963, p 1. ‘3William G. Lesher, The “Cost” of P/K, Mimeograph, USDA, 16 May 1963, p 2. 14USDA, World Agricultural Supply and Demand Estimates, WASDE-151, 13 June 1963, p 24. ‘%JSDA, Farmline, Vol IV, No 4, May 1963, p4. j6D. Paarlberg, Farm and Food Policy, University of Nebraska Press, 1969, p 263.
8
I have earned the right to make them, having spent 16 years in Washington at the highest levels, administering these programmes. The programmes were preferential to start with: they began by designating six ‘basic’ crops - cotton, corn, wheat, rice, peanuts and tobacco. To these must be added the price support programme for dairy products, a major undertaking. Left out of the programme were about 100 other crops, especially fruits and vegetables. The politically powerful basic crops provided only about 20% of agriculture’s income but received ‘75% of the programmes benefits.’ The left-out crops not only had to make it without help; they often had to absorb production from acres diverted out of the basic crops. The left-out livestock products had to accept the cost of higher-priced feed. The programmes became preferential in another way. The top 1% of the farmers received 21% of the benefits.” And in yet another way the programmes were preferential. The average food consumer had lower net worth and less net income than the big farmers, who got most programme benefits. So the programmes transferred income from the poor to the more wealthy.” The programmes not only became preferential, they became profligate. The government outlay for these programmes now approaches total net farm income. Net farm income for 1983 is projected for $25 to $29 billion.” Government outlays for farm programmes this year are estimated at $21 billion. Government costs for the Payment-In-Kind (PIK) programme during FY 1983 are variously estimated. Bill Lesher, Assistant Secretary of Agriculture, says the PIK programme will convey $12 billion-worth of commodities from the government to the farmers. But Lesher says that by reducing storage costs, deficiency payments and other outlays, the PIK programme will reduce costs $9 billion below what they would otherwise have been.13 When the outlay for commodity programmes for a half dozen or so farm products approaches the net
income not only from the protected crops but from the whole of agriculture, we would have to say the programmes are profligate. The programmes have also become perennial. They have continued now for 50 years. They continued after relief had been supplied, recovery achieved, and reform forgotten. They held the umbrella for the cotton growers of Brazil, the wheat growers of Australia, the corn growers of Western Europe, and the tobacco growers of Africa. The most vivid example of the long-term effect of reducing supply and increasing price is to be found for cotton. During the three years 1928 1930, before the AAA, the USA produced a yearly average of 14.4 million bales of cotton, more than the rest of the world combined. In 1983, after 50 years of curtailed acreage, the USA is expected to produce only 8.4 million bales, a 40% decline over the half-century. Meanwhile, foreign production of cotton increased to 58 million bales, almost seven times as much as the USA.14 The USA, which was once preeminent in cotton production, is expected, in 1983 to rank third behind the People’s Republic of China and the USSR. The reduced supply and increased price of cotton have given encouragement to man-made fibres. Fifty years ago man-made fibres were almost non-existent. Today they account for fibre about half the world production. l5 Over the short term, the cotton programme has served to increase incomes of those cotton growers who survived in this shrinking industry. In the long term, it is bringing slow death to the cotton business. It is not as if we lacked precedents for commodity programmes, and so had to learn the principles of price competion by pioneering experience. In the 1920s the Stevenson Plan reduced the supply and raised the price of rubber in the Malay states and so stimulated rubber production in a rival country, Java. Some years later Brazil restricted the supply and raised the price of coffee, putting a competitor, Africa, into the coffee business.16 What have agricultural economists
FOOD POLICY
February 1984
‘Agricultural economists have not made as good a contribution as they might’
‘The effect of a fourth cocktail is different from the effect of the first’
FOOD POLICY
February 1984
contributed to the assessment of the AAA and its successor agencies? The agricultural economists, I believe, have not made as good a contribution as they might to understanding the long-term consequences of reducing supplies and increasing prices of farm products. First, the programmes have suffered from a degree of analytical neglect, probably because they were perceived as being primarily political. When the agricultural economists did assess these programmes they often used flawed methods. They generally abstracted from important forces, particularly inflation and deflation, which affect the prices of virtually everything that is bought and sold, including farm products. Inflation and deflation sometimes overwhelm the forces of supply on which most agricultural economists focus. The 50-year old victory of the surplus diagnosis over the monetary assessment has had the unfortunate consequence of dulling awareness of the effects of changes in the general level of prices. Furthermore, the agricultural economists have often classified as exogenous certain variables that were at least to some degree endogenous. The decision of firms producing man-made fibres are not exogenous to the cotton programme. The planting decisions of wheat growers in Canada and Australia are not unrelated to the US wheat programmes. In estimating the effect of certain farm programmes short-term coefficients of the elasticity of supply and demand have been used. The use of these highly inelastic coefficients was undoubtedly appropriate in the early stages of the programmes, when the short-term effects were being estimated. But their continued and repeated use over the SO-year period was not appropriate. The effect of a fourth cocktail is different from the effect of the first; permanent legislation to reduce the supply and raise the price of cotton or corn or wheat has an effect different from that of a one-year programme. Unfortunately, the profession has given only limited attention to long-term effects. Economists generally used the same coefficients of
elasticity for export as for domestic markets, despite evidence that they differed. All these common analytical errors had the same directional effect - they made the prospects for the programmes look better than in fact they were. Despite general inattention to the commodity programmes, some agricultural economists have given careful study to them and acknowledged their shortcomings. Among others, these are professors D. Gale Johnson, F.A. Pearson, G. Edward Schuh and T. W. Schultz. The political scientist Charles M. Hardin has likewise given these programmes scholarly examination. Three Secretaries of Agriculture have spoken out plainly regarding these programmes: Ezra T. Benson, Earl L. Butz, and John R. Block. Every President during the past 30 years, Republican and Democrat, has tried to scale back these programmes. But these voices have been overwhelmed by the tide of political advocacy. During the recession of the past few years we have seen, on a smaller scale, a re-enactment of the 50-year old debate between those who believe agricultural distress is largely a phenomenon of money and credit and those who believe it is mostly the result of overproduction. From about 1972 to 1980 there was a general rise in prices, leading to inflationary expectations, stimulating agriculture to largescale borrowing and overinvestment. About two years ago a strong antiinflation effort was launched. The consumer price index, which had been rising at a double-digit rate, rose instead at an annual rate of only 4%. Prices of raw materials including farm products, which are traded in competitive markets and are more responsive to the manipulation of money and credit, actually declined. Inflation overkill was unhappily combined with two record-breaking crops. For farmers, not only were inflationary expectations wiped out - actual deflation occurred, a very painful experience. The inflation was the result of inept fiscal and monetary policy; the restrictive policies of the past two years - too restrictive, I think - were a consequ-
9
Both might have been avoided had we been more even-handed. As during the 1930s the past two years saw almost all the blame for agricultural distress laid on supply; little responsibility was attributed to the restriction of money and credit. The PIK programme is a reflection of this asymmetrical analysis. Given the existing structure of high loans and target prices, the PIK programme was the least bad of several unattractive alternatives. One must regret, however, a prospective 30% cut in US cotton, which reduces this once-proud crop to only 13% of world cotton production. And one must be concerned about cutting US wheat production by 16% while Canada, Australia and Argentina increase acreage. And one must deplore cutting US production of coarse grains by 26% while foreign output is expected to go up to 5%. i’ The obsession with price as a sole objective and restricted supply as the major policy instrument has caught the USA in undertakings which are in the long run hurtful to itself and helpful to its rivals. The effect of high price supports is not well understood. Presently there is much concern about the disappointing volume of US farm exports. Many explanations are offered - large world supplies, a strong dollar, global recession, lagging demand, competitor trade practices, the embargoes and debt problems of the importing nations. Little is said about high loan levels, which have put the USA on a price plateau and again made it the residual supplier. It is high time to look at these programmes not in terms of their stated intent, but in terms of their actual results. What of the future? What comes after PIK? What will be the farm policy agenda? Various studies are being made as to what kind of commodity programmes should be written into the Agricultural Act of 1985. The logical thing, which is in the long-term interest of the farmers themselves, is to reduce the levels of loans and target prices. These levels could be reduced so that the market would clear maybe two years out of ence.
‘This has led to the biggest production cut and the most costly farm programme in fifty years’
“USDA, op tit, ref 14. ‘*Clifford M. Hardin, ‘Government by subcommittee’, Wall Street Journal, 24 June 1983, p 16.
10
three. Loans, stock accumulation and target prices, which have been a straitjacket, could be converted to a safety net, protecting farm income during these bad years. Release of stocks would occur in years of better prices. The purpose should be to reduce the gyrations of supply, price and income - a worthy goal. Such programme modifications would make us competitive in foreign and domestic markets. It would be painful in the short term but it would be to the long-term advantage of agriculture. Whether this will come about is doubtful. Two good chances were missed to reduce US dependence on these commodity programmes, once during World War 2 and again during the run-up of prices a decade ago. During those two periods market prices moved above support levels, so that supports could have been adjusted downwards without causing immediate pain. Whether another such opportunity would appear and whether the Congress would have the courage to seize it are extremely doubtful, The Congress is controlled by subcommittees, each with the custody of a particular programme. Each is the ready focus for special interests. There is limited concern in these subcommittees for programme effects on other sectors of the economy or effects extended beyond the next election. As former Secretary of Agriculture Clifford M. Hardin has pointed out,18 adding together the products of these subcommittees does not give a total that is in keeping with the national interest or with the long-term interest of agriculture. This is the setting which, despite an administration that is economyminded and market-oriented, has led to the biggest production cut and the most costly farm programme in 50 years. Can we hope for a fundamental change in the analytical format and the programme thrust of initiatives with so much momentum? Probably not from those who presently control the agenda. Only if the base for farm policy making is broadened will we see discipline applied to these runaway programmes.
FOOD POLICY February 1984
1
Tarnished gold US farm commodity programmes after 50 years Don Paarlberg
It is fifty years since the introduction of the US farm commodify programmes launched under the New Deal. Based on the concepts of relief, recovery and reform, fhe New Deal gave new hope to farmers emerging from the Great Depression. But how successful were these programmes? Don Paarlberg
believes they were miscarried, becoming preferential, profligate and perennial. With the recent recession and the introduction of new farm legislation, the author speculates as to whether history will repeat itself. The author is Professor Emeritus, Purdue University, Lafayette, Indiana, USA. An earlier version 0:this article was presented 2 August 1983, at the Annual Meeting of the American Agricultural Economics Association at Lafayette, Indiana, and scheduled for publication December 1983 in the Proceedings Issue of the American
Journal of Agricultural Economics.
‘G. F. Warren and F.A. Pearson, Prices, Wiley and Sons, 1933, pp 178-182. *John D. Black, Agricultural Reform in the gt;ct States, McGraw-Hill, New York, %SDA, Agricultural Statistics, 1942, p 859. ‘Milton Friedman, A Monetary History of the United States 1867-1960, National Bureau of Economic Research, 1963.
6
1983 is the golden anniversary of the farm commodity programmes launched by the New Deal. An assay shows the ‘gold’ of this anniversary to consist of considerable base metal. The Great Depression laid the basis for the Agricultural Adjustment Administration (AAA). Only older people can recall it. A few figures help calibrate the disaster. From 1929 to 1932, the index of prices received by US farmers fell 56%. Net income of agriculture fell 70%) from $6.3 billion to $1.9 billion. I was farming then, with my father and brother, in Northwestern Indiana, keeping farm records in collaboration with Purdue University. Our labour income in 1932 was a negative $1 203. Farmers, needing help, undertook a number of desperate acts. In a dramatic protest against foreclosures they threatened to hang a federal judge. They overturned milk trucks, picketed packing plants, and boycotted farm sales. The mood was ominous. There was anger, frustration and insistence on action. The Great Depression was worldwide. In Italy and Germany representative government was replaced by dictatorships. The US political and economic systems were threatened. There were two schools of thought as to the cause of the trouble. One, led by Dr George F. Warren of Cornell University, assessed the problem as general, resulting from the collapse of money and credit. The remedy, said this group, lay in a changed monetary policy.’ The other school, led by Dr John D. Black of Harvard, diagnosed
the farm problem as arising within agriculture itself, the result of surplus production. The remedy, according to this group, consisted of reducing supplies so as to increase farm prices.2 As always, disciples interpreted and misinterpreted their prophets. Proposals were offered in the names of Warren and Black that were far from the views of these men. In any case the two groups polarized, one wanting monetary reform and the other pushing for production control. The contention that the problem was overproduction of farm products had a shaky foundation. Total agricultural production during the five first and worst years of the Great Depression, 1930-34, was actually 2% below the production of the five preceding years.3 Belief that the problem was a phenomenon of money and credit had much to support it. Credit collapsed; the stock of money fell by more than one-third.4 Prices fell for virtually all commodities, whether abundant or in short supply. Commodity prices fell in every country for which statistical information was available. Neither farmers nor politicians understood the complexities of central banking. On the other hand the diagnosis that agriculture was suffering from overproduction was credible to both farmers and politicians. They knew that excessive production meant low prices and reasoned that with prices low there must be excess production. It was felt that with the low prices of internationally traded farm products FOOD POLICY February 1984
1 VIEWPOINT
I
‘The keywords of the New Agenda deal were relief, recovery and reform’
5Earl 0. Heady, ‘The agriculture of the US’, Scientific American, 235, pp 106-27. 6Theodore Saloutos, The American Farmer and The New Deal, Iowa State University Press, 1982, p 98. 7James Thornton, Oral Statement at the meeting of the National Agricultural Credit Committee, Chicago, 10 September, 1979. ?Iarden Fuller, ‘Wheat, cotton and political California Monthly, Julyarithmetic’, August 1964.
FOOD POLICY
February 1984
US agriculture could not compete in world markets. The proposal was to reduce production, turn inwards, and create an American farm price structure basically higher than in the rest of the world. This could not be done through individual decision making; it had to be done by government. Consensus formed around this idea. The AAA, based on this principle, was passed by the Congress on 12 May 1933. Passage of the AAA was a major change in the agenda. For 70 years, after passage of the Homestead Act and the Morrill Act, the farm policy agenda had been agricultural development, the components of that policy being research, education, and improvement of agricultural resources. Earl Heady has called this ‘the best, the most logical, and the most successful program of agricultural development anywhere in the world’.’ The historic agenda, based on increased production, individual farmer decisions, and competitive markets, was not compatible with the ideas underlying the AAA. The historic agenda was quickly nudged aside to make room for the New Deal agenda, the keywords of which were relief, recovery and reform. Relief was to come from a number of sources, including the Federal Emergency Relief Administration. Recovery was to be accomplished with price increases brought about by the AAA. Reform was to come from modifications of the competitive system that would reduce inequities and diminish the likelihood of another debacle. Reform consisted not only of price stabilization but also of new institutions of farm credit, new tenure arrangements, federalfcrop insurance, and special help for the disadvantaged sectors of agriculture. I remember well the revival of hope on the farm front that accompanied passage of these New Deal farm programmes. Farmers were given a role in working out their own chosen solution to their problems. They were put on committees by the thousands. They elected officers, went to meetings, and spoke their minds. Government cheques began to flow. On every hand was evidence that the government
cared. The Great Depression dragged on, but the mood changed for the better on US farms. Whether the analysis which underlay the AAA was right or wrong, the programmes in the early years were accompanied by better morale and some improvement in economic conditions on US farms. The early years are now behind us. What has been the experience with these programmes? Over the SO-year span, what happened to the objectives of relief, recovery and reform with which the AAA began? Relief came with the federal Emergency Relief Administration, the AAA cheques, and innovative lending on the part of the new credit agencies. On that score the New Deal must be given high marks. Recovery was only partial until the outbreak of World War 2, seven years after passage of the AAA. Agricultural recovery from the Great Depression must be credited more to the stimulus of the war than to management of supply and price on the part of the AAA and its successor agencies. What of reform? Reform was for the greater part aborted.6 The agricultural elite, generally the large landowners, managed to retain most programme benefits themselves rather than share them with tenants or employees. The Resettlement Administration and its successor, the Farm Security Administration, both intended to lift the status of agriculture’s disadvantaged, were closed out. Today’s incarnation of these two agencies, the Farmers’ Home Administration, has been co-opted by the agricultural establishment. In 1979, the Farmers’ Home Administration had 300 loans in excess of $1 million each and had one loan of $17 million.’ There is general though not universal agreement that the AAA widened rather than narrowed income differentials within agriculture.8 In the 50 years since passage of the AAA, relief was achieved, recovery occurred for whatever reason, and reform was miscarried. With the passage of time, a new and unannounced agenda emerged. These programmes became preferential, profligate and perennial. These are serious charges. I
7
VIBWPtMNT I
‘The programmes transferred income from the poor to the more wealthy’
‘D. Paarlberg, American Farm Policy, Wiley, 1964. ‘%Qllard W. Cochrane and Mary E. Ryan American Farm Policy, 7948-1973, University of Minnesota Press, 1976, pp 336 367. “Luther G. Tweeten, ‘Agriculture policy: a review of legislation, programs and policy’, in Food and Agricultural Pa/icy, American Enterprise Institute for Public Policy Research, Washington, DC, 1977, p 52. 12USDA, Agricultural Outlook, August 1963, p 1. ‘3William G. Lesher, The “Cost” of P/K, Mimeograph, USDA, 16 May 1963, p 2. 14USDA, World Agricultural Supply and Demand Estimates, WASDE-151, 13 June 1963, p 24. ‘%JSDA, Farmline, Vol IV, No 4, May 1963, p4. j6D. Paarlberg, Farm and Food Policy, University of Nebraska Press, 1969, p 263.
8
I have earned the right to make them, having spent 16 years in Washington at the highest levels, administering these programmes. The programmes were preferential to start with: they began by designating six ‘basic’ crops - cotton, corn, wheat, rice, peanuts and tobacco. To these must be added the price support programme for dairy products, a major undertaking. Left out of the programme were about 100 other crops, especially fruits and vegetables. The politically powerful basic crops provided only about 20% of agriculture’s income but received ‘75% of the programmes benefits.’ The left-out crops not only had to make it without help; they often had to absorb production from acres diverted out of the basic crops. The left-out livestock products had to accept the cost of higher-priced feed. The programmes became preferential in another way. The top 1% of the farmers received 21% of the benefits.” And in yet another way the programmes were preferential. The average food consumer had lower net worth and less net income than the big farmers, who got most programme benefits. So the programmes transferred income from the poor to the more wealthy.” The programmes not only became preferential, they became profligate. The government outlay for these programmes now approaches total net farm income. Net farm income for 1983 is projected for $25 to $29 billion.” Government outlays for farm programmes this year are estimated at $21 billion. Government costs for the Payment-In-Kind (PIK) programme during FY 1983 are variously estimated. Bill Lesher, Assistant Secretary of Agriculture, says the PIK programme will convey $12 billion-worth of commodities from the government to the farmers. But Lesher says that by reducing storage costs, deficiency payments and other outlays, the PIK programme will reduce costs $9 billion below what they would otherwise have been.13 When the outlay for commodity programmes for a half dozen or so farm products approaches the net
income not only from the protected crops but from the whole of agriculture, we would have to say the programmes are profligate. The programmes have also become perennial. They have continued now for 50 years. They continued after relief had been supplied, recovery achieved, and reform forgotten. They held the umbrella for the cotton growers of Brazil, the wheat growers of Australia, the corn growers of Western Europe, and the tobacco growers of Africa. The most vivid example of the long-term effect of reducing supply and increasing price is to be found for cotton. During the three years 1928 1930, before the AAA, the USA produced a yearly average of 14.4 million bales of cotton, more than the rest of the world combined. In 1983, after 50 years of curtailed acreage, the USA is expected to produce only 8.4 million bales, a 40% decline over the half-century. Meanwhile, foreign production of cotton increased to 58 million bales, almost seven times as much as the USA.14 The USA, which was once preeminent in cotton production, is expected, in 1983 to rank third behind the People’s Republic of China and the USSR. The reduced supply and increased price of cotton have given encouragement to man-made fibres. Fifty years ago man-made fibres were almost non-existent. Today they account for fibre about half the world production. l5 Over the short term, the cotton programme has served to increase incomes of those cotton growers who survived in this shrinking industry. In the long term, it is bringing slow death to the cotton business. It is not as if we lacked precedents for commodity programmes, and so had to learn the principles of price competion by pioneering experience. In the 1920s the Stevenson Plan reduced the supply and raised the price of rubber in the Malay states and so stimulated rubber production in a rival country, Java. Some years later Brazil restricted the supply and raised the price of coffee, putting a competitor, Africa, into the coffee business.16 What have agricultural economists
FOOD POLICY
February 1984
‘Agricultural economists have not made as good a contribution as they might’
‘The effect of a fourth cocktail is different from the effect of the first’
FOOD POLICY
February 1984
contributed to the assessment of the AAA and its successor agencies? The agricultural economists, I believe, have not made as good a contribution as they might to understanding the long-term consequences of reducing supplies and increasing prices of farm products. First, the programmes have suffered from a degree of analytical neglect, probably because they were perceived as being primarily political. When the agricultural economists did assess these programmes they often used flawed methods. They generally abstracted from important forces, particularly inflation and deflation, which affect the prices of virtually everything that is bought and sold, including farm products. Inflation and deflation sometimes overwhelm the forces of supply on which most agricultural economists focus. The 50-year old victory of the surplus diagnosis over the monetary assessment has had the unfortunate consequence of dulling awareness of the effects of changes in the general level of prices. Furthermore, the agricultural economists have often classified as exogenous certain variables that were at least to some degree endogenous. The decision of firms producing man-made fibres are not exogenous to the cotton programme. The planting decisions of wheat growers in Canada and Australia are not unrelated to the US wheat programmes. In estimating the effect of certain farm programmes short-term coefficients of the elasticity of supply and demand have been used. The use of these highly inelastic coefficients was undoubtedly appropriate in the early stages of the programmes, when the short-term effects were being estimated. But their continued and repeated use over the SO-year period was not appropriate. The effect of a fourth cocktail is different from the effect of the first; permanent legislation to reduce the supply and raise the price of cotton or corn or wheat has an effect different from that of a one-year programme. Unfortunately, the profession has given only limited attention to long-term effects. Economists generally used the same coefficients of
elasticity for export as for domestic markets, despite evidence that they differed. All these common analytical errors had the same directional effect - they made the prospects for the programmes look better than in fact they were. Despite general inattention to the commodity programmes, some agricultural economists have given careful study to them and acknowledged their shortcomings. Among others, these are professors D. Gale Johnson, F.A. Pearson, G. Edward Schuh and T. W. Schultz. The political scientist Charles M. Hardin has likewise given these programmes scholarly examination. Three Secretaries of Agriculture have spoken out plainly regarding these programmes: Ezra T. Benson, Earl L. Butz, and John R. Block. Every President during the past 30 years, Republican and Democrat, has tried to scale back these programmes. But these voices have been overwhelmed by the tide of political advocacy. During the recession of the past few years we have seen, on a smaller scale, a re-enactment of the 50-year old debate between those who believe agricultural distress is largely a phenomenon of money and credit and those who believe it is mostly the result of overproduction. From about 1972 to 1980 there was a general rise in prices, leading to inflationary expectations, stimulating agriculture to largescale borrowing and overinvestment. About two years ago a strong antiinflation effort was launched. The consumer price index, which had been rising at a double-digit rate, rose instead at an annual rate of only 4%. Prices of raw materials including farm products, which are traded in competitive markets and are more responsive to the manipulation of money and credit, actually declined. Inflation overkill was unhappily combined with two record-breaking crops. For farmers, not only were inflationary expectations wiped out - actual deflation occurred, a very painful experience. The inflation was the result of inept fiscal and monetary policy; the restrictive policies of the past two years - too restrictive, I think - were a consequ-
9
Both might have been avoided had we been more even-handed. As during the 1930s the past two years saw almost all the blame for agricultural distress laid on supply; little responsibility was attributed to the restriction of money and credit. The PIK programme is a reflection of this asymmetrical analysis. Given the existing structure of high loans and target prices, the PIK programme was the least bad of several unattractive alternatives. One must regret, however, a prospective 30% cut in US cotton, which reduces this once-proud crop to only 13% of world cotton production. And one must be concerned about cutting US wheat production by 16% while Canada, Australia and Argentina increase acreage. And one must deplore cutting US production of coarse grains by 26% while foreign output is expected to go up to 5%. i’ The obsession with price as a sole objective and restricted supply as the major policy instrument has caught the USA in undertakings which are in the long run hurtful to itself and helpful to its rivals. The effect of high price supports is not well understood. Presently there is much concern about the disappointing volume of US farm exports. Many explanations are offered - large world supplies, a strong dollar, global recession, lagging demand, competitor trade practices, the embargoes and debt problems of the importing nations. Little is said about high loan levels, which have put the USA on a price plateau and again made it the residual supplier. It is high time to look at these programmes not in terms of their stated intent, but in terms of their actual results. What of the future? What comes after PIK? What will be the farm policy agenda? Various studies are being made as to what kind of commodity programmes should be written into the Agricultural Act of 1985. The logical thing, which is in the long-term interest of the farmers themselves, is to reduce the levels of loans and target prices. These levels could be reduced so that the market would clear maybe two years out of ence.
‘This has led to the biggest production cut and the most costly farm programme in fifty years’
“USDA, op tit, ref 14. ‘*Clifford M. Hardin, ‘Government by subcommittee’, Wall Street Journal, 24 June 1983, p 16.
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three. Loans, stock accumulation and target prices, which have been a straitjacket, could be converted to a safety net, protecting farm income during these bad years. Release of stocks would occur in years of better prices. The purpose should be to reduce the gyrations of supply, price and income - a worthy goal. Such programme modifications would make us competitive in foreign and domestic markets. It would be painful in the short term but it would be to the long-term advantage of agriculture. Whether this will come about is doubtful. Two good chances were missed to reduce US dependence on these commodity programmes, once during World War 2 and again during the run-up of prices a decade ago. During those two periods market prices moved above support levels, so that supports could have been adjusted downwards without causing immediate pain. Whether another such opportunity would appear and whether the Congress would have the courage to seize it are extremely doubtful, The Congress is controlled by subcommittees, each with the custody of a particular programme. Each is the ready focus for special interests. There is limited concern in these subcommittees for programme effects on other sectors of the economy or effects extended beyond the next election. As former Secretary of Agriculture Clifford M. Hardin has pointed out,18 adding together the products of these subcommittees does not give a total that is in keeping with the national interest or with the long-term interest of agriculture. This is the setting which, despite an administration that is economyminded and market-oriented, has led to the biggest production cut and the most costly farm programme in 50 years. Can we hope for a fundamental change in the analytical format and the programme thrust of initiatives with so much momentum? Probably not from those who presently control the agenda. Only if the base for farm policy making is broadened will we see discipline applied to these runaway programmes.
FOOD POLICY February 1984