The Economy

Peter Crabb: Subsidies, immigration system hold U.S. agriculture back

Professor of finance and economics at Northwest Nazarene University in NampaJuly 16, 2014 

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Peter Crabb


Paul Harvey's famous speech, "So God Made a Farmer," portrays the many personal virtues of the farmer. He knew well that even though farmers work long hours, they always stand ready to help their neighbors.

Farmers stand for all that is good about America, but they are not working in the best of all markets.

Economic models and historical experience shows that if you have a high level of competition, you get the most efficient level of output at the best price. Markets work best when consumers have lots of choices and sellers must serve their needs by producing something of quality at the best price.

Economic theory shows that for markets to be perfectly competitive, there must be many buyers, many sellers with little differentiation in their products, and free entry or exit from the market. The farm sector is perhaps the most frequently cited example of perfect competition.

The agricultural sector of the economy looks to have all the right characteristics for markets to work well. We all need and buy food regularly, there are many farmers competing for our food business with similar products, and farmers can open and close for business as they see fit.

However, the U.S. farm sector fails the test of perfect competition for two key reasons: Our agricultural sector receives generous subsidies from taxpayers, and government policy unnecessarily restricts farm labor.

Agricultural subsidies increase supply beyond the quantity that would result from perfect competition, resulting in what is known in economics as deadweight loss. Deadweight losses occur because the taxation cost of the subsidy regularly exceeds what society can gain from the increased level of production.

In April, the Congressional Budget Office reported that direct support for U.S. farms and crop insurance will amount to more than $130 billion over the next 10 years. This amount is down from previous decades, but the U.S. agricultural industry remains the most directly subsidized market in our supposedly free economy.

While farmers don't generally support a reduction in subsidies, they agree that freeing up the labor market will help the agricultural sector.

Productivity growth in U.S. agriculture is slowing. According to the most recent data from the U.S. Department of Agriculture, total factor productivity, which includes labor and capital inputs, grew 4 percent between 2001 and 2011. This compares with a 19 percent growth rate over the previous decade. Immigration reform will help farmers best meet their labor needs.

Farmers typify what is good about America. But economically our agricultural markets could be so much better. Reducing subsidies and immigration reform will help all Americans.

God made the farmer, but only we can keep the farm market free.

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