Dude, Where’s My Subsidy?

If you ever took an economics class you probably learnt a lot about subsidies, tariffs and quotas and drew dorky supply-demand charts to show the theoretical impact of these on consumers, producers and the economy. But few of us were ever told stories about the actual effect of subsidies, tariffs and things like that, on real people.
Well, now may be a good time to find out.

I have been closely following the current debate in the U.S. Congress over government programs that have been assisting farmers in America for years. If you watch C-Span sometimes, then you probably have been too.

Here are some facts:

The U.S. government’s farm subsidy program (i.e. financial support to farmers in America) in effect deny millions of people in poor countries a chance to survive in the global economy. U.S. farm policies have been around since the Depression era when farmers really did need the help. But due to sheer government negligence in upgrading policies for changing times, as well as due to the power of some fierce agricultural lobbies, these subsidies have remained to this day.

So how do they affect people in poor countries?

When subsidies are given to U.S. farmers, they are able to produce more rice, sugar, cotton or wheat than they would normally be able to produce given the regular prices of inputs. As a result, over-production takes place, and the world prices of these commodities are artificially lowered (remember that as supply goes up, prices goes down!), which means that farmers in poor countries like Mali, Laos or Cambodia are not able to get a fair price for these same products when they are sold on the world market.

Quite obviously, the governments of these puny countries also don’t have the same-sized war chest as the U.S. government that would enable them to help their own farmers with subsidies. As a result, farmers in poor countries suffer, or even get priced out of the market.

The primary justification given by the U.S. government for providing support to farmers is that it is necessary to protect small-holder farming families which are unable to deal with the high costs of inputs, such as tractors, pesticides etc.

However, the facts show that subsidies overwhelmingly go to the largest farmers and agribusinesses in the United States. According to the Environmental Working Group, between 1995 and 2005, the largest 4 percent of farms garnered half of farm subsidy payments, while the largest 10 percent pulled in 73 percent.

Important note: these large farmers are also important contributors to the political campaigns of elected officials from farm states.

Although the domestic rice market in the United States is saturated, the U.S. government continues to subsidize rice that the U.S. sells in the world market. Rice producers are among the biggest beneficiaries of the U.S. farm program.

Meanwhile, rice is a staple in the diets of half the world, in countries like Cambodia, Bangladesh and other countries, and an important symbol of rural self-sufficiency and national identity. Subsidized rice provides a deathblow to farmers in Asia that don’t stand a chance against the mighty U.S. Treasury.

Also of note: As if these massive rice subsidies weren’t enough, recently the U.S. Patents and Trademark Office granted a Texas company a patent for basmati rice, which Indians been eating for hundreds of years. After a long and painful battle the patent was finally revoked.

There is also some hope of ending the subsidies. A few loud and diverse groups, under the banner of Alliance for Sensible Agricultural Policies (ASAP), including fiscal conservatives, anti-poverty activities and nutritionists, are fighting to get rid of the subsidies that distort the market once and for all. I hope they win.