The leaky subsidy bucket
William Watson
National Post
Wednesday, January 22, 2003
In small towns in the French Alps, near where I'm spending the academic year, they have a festival every fall -- in one local town they were running it for the 405th year in a row -- in which ruddy-faced dairy farmers march their herds down from summer pastures high in the hills and gather them in the biggest parking lot in town to show off their best milkers, drink wine, eat greasy sausage and catch up on the local gossip. Watching the cows being paraded down the main street of a nearby town one sunny Saturday in September, I was seized with a sudden urge to shout out "OMC! OMC! OMC!," which is French for "WTO! WTO! WTO!" I can only imagine how the local paper would have described the dénouement if I had: "Visiting free-market economist trampled to death by the world's most subsidized cows." For my family's sake, I bit my tongue.
French farmers are famously well treated. A new OECD study on farm incomes shows that the average French farm household has an annual income more than 50% higher than the average French household. (In Canada, by contrast, average farm incomes are only slightly higher than average non-farm incomes.) The study doesn't actually break out how well French dairy farmers do, but it does show that in the European Union as a whole, dairy farmers make more than 50% more than the average farmer. That confirms all of our worst expectations about pampered European farmers -- except that the same section of the report shows Canadian dairy farmers with farm income almost five times average Canadian farm income, and U.S. dairy farmers with farm income more than 10 times the U.S. average.
Europe's dairy farms aren't actually its most subsidized farms. That dubious honour belongs to the continent's cattle farms. Dairy farms make almost half their income from sales, with the rest coming from public support of one kind or another. Cattle farms, by contrast, make only about 40% of their farm income in the market. The report doesn't provide numbers for Canadian dairy farming, but although Canadian farmers in general receive comparatively little largesse, our dairy farmers get lots of help from the marketing board system, which keeps milk prices high.
The new OECD report's message is that farm subsidies are extremely inefficient, not in the economist's sense -- that they encourage too much farm production -- but in the layman's sense that they are very leaky buckets: The money just doesn't get through to the people it's meant for.
On average in the OECD, deficiency payments -- making up the difference between market prices and a target price -- deliver to farmers just 25¢ of every subsidy dollar paid out. Market price supports, like those used in our dairy industry, deliver 24¢ on the dollar. Payments by acre do better: 47¢ on the dollar paid out. But subsidies to farmers' inputs do worst of all: just 17¢ on the dollar.
What's the problem? Where do the leakages come from? Several places. Part of the benefit gets capitalized in land values. If the farmer owns the land, good for him or her. But in France, only a third of farmed land is owned by farmers, so there's a big leakage. In Canada, farmers own more than 80% of the land they farm, which is higher even than in the United States (61.4%), so more of the money may stick. But if the farmer sells the land, he or she pockets the increase in its value created by the subsidy and the next owner gets no benefit at all, which creates a big fairness problem if you want to withdraw subsidies that have been in place for a while. It also means that in the long run, subsidies to land may not be as efficient as the numbers cited would suggest.
If farmers respond to subsidies by boosting production and buying more inputs, then some of the benefit of the subsidy is passed along to various farm suppliers. They might be good people, too, but if the goal of policy is to get money to farmers, subsidizing suppliers defeats the purpose.
Then there's the problem of induced costs. If the subsidies persuade farmers to grow more, produce a different combination of crops or work more on the farm and earn less money away from the farm, that consumes farmers' resources, so the net benefit of the subsidy falls further.
And none of this takes into account the cost to the taxpayer of raising the extra dollar that in the end will deliver only 25¢ to the farmer.
A farmer who had such a leaky bucket would either get a new bucket or stop hauling subsidies. Getting a new bucket means giving money directly to low-income farmers. But then the question arises: why special help for poor farmers that poor pizza-makers or beauticians or cab drivers don't get, too? In the end, it may be best just to stop hauling subsidies.
© Copyright 2003 National Post
William Watson
National Post
Wednesday, January 22, 2003
In small towns in the French Alps, near where I'm spending the academic year, they have a festival every fall -- in one local town they were running it for the 405th year in a row -- in which ruddy-faced dairy farmers march their herds down from summer pastures high in the hills and gather them in the biggest parking lot in town to show off their best milkers, drink wine, eat greasy sausage and catch up on the local gossip. Watching the cows being paraded down the main street of a nearby town one sunny Saturday in September, I was seized with a sudden urge to shout out "OMC! OMC! OMC!," which is French for "WTO! WTO! WTO!" I can only imagine how the local paper would have described the dénouement if I had: "Visiting free-market economist trampled to death by the world's most subsidized cows." For my family's sake, I bit my tongue.
French farmers are famously well treated. A new OECD study on farm incomes shows that the average French farm household has an annual income more than 50% higher than the average French household. (In Canada, by contrast, average farm incomes are only slightly higher than average non-farm incomes.) The study doesn't actually break out how well French dairy farmers do, but it does show that in the European Union as a whole, dairy farmers make more than 50% more than the average farmer. That confirms all of our worst expectations about pampered European farmers -- except that the same section of the report shows Canadian dairy farmers with farm income almost five times average Canadian farm income, and U.S. dairy farmers with farm income more than 10 times the U.S. average.
Europe's dairy farms aren't actually its most subsidized farms. That dubious honour belongs to the continent's cattle farms. Dairy farms make almost half their income from sales, with the rest coming from public support of one kind or another. Cattle farms, by contrast, make only about 40% of their farm income in the market. The report doesn't provide numbers for Canadian dairy farming, but although Canadian farmers in general receive comparatively little largesse, our dairy farmers get lots of help from the marketing board system, which keeps milk prices high.
The new OECD report's message is that farm subsidies are extremely inefficient, not in the economist's sense -- that they encourage too much farm production -- but in the layman's sense that they are very leaky buckets: The money just doesn't get through to the people it's meant for.
On average in the OECD, deficiency payments -- making up the difference between market prices and a target price -- deliver to farmers just 25¢ of every subsidy dollar paid out. Market price supports, like those used in our dairy industry, deliver 24¢ on the dollar. Payments by acre do better: 47¢ on the dollar paid out. But subsidies to farmers' inputs do worst of all: just 17¢ on the dollar.
What's the problem? Where do the leakages come from? Several places. Part of the benefit gets capitalized in land values. If the farmer owns the land, good for him or her. But in France, only a third of farmed land is owned by farmers, so there's a big leakage. In Canada, farmers own more than 80% of the land they farm, which is higher even than in the United States (61.4%), so more of the money may stick. But if the farmer sells the land, he or she pockets the increase in its value created by the subsidy and the next owner gets no benefit at all, which creates a big fairness problem if you want to withdraw subsidies that have been in place for a while. It also means that in the long run, subsidies to land may not be as efficient as the numbers cited would suggest.
If farmers respond to subsidies by boosting production and buying more inputs, then some of the benefit of the subsidy is passed along to various farm suppliers. They might be good people, too, but if the goal of policy is to get money to farmers, subsidizing suppliers defeats the purpose.
Then there's the problem of induced costs. If the subsidies persuade farmers to grow more, produce a different combination of crops or work more on the farm and earn less money away from the farm, that consumes farmers' resources, so the net benefit of the subsidy falls further.
And none of this takes into account the cost to the taxpayer of raising the extra dollar that in the end will deliver only 25¢ to the farmer.
A farmer who had such a leaky bucket would either get a new bucket or stop hauling subsidies. Getting a new bucket means giving money directly to low-income farmers. But then the question arises: why special help for poor farmers that poor pizza-makers or beauticians or cab drivers don't get, too? In the end, it may be best just to stop hauling subsidies.
© Copyright 2003 National Post
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