Last week, I looked at one aspect of the cronyism going on in this year’s farm bill: farm subsidies. Today, I look at another aspect of the question: the potentially massive farmers’ bailout called the shallow-loss program.
This is amazing to me. In theory, capitalism or the free market is supposed to be a system of loss and profit. Well, not for farmers. Under this new program, farmers will pretty much be sheltered from revenue losses. Here is how it works:
Under current crop insurance program, farmers can buy insurance that covers poor yields and declines in prices. The government heavily subsidizes such insurance by paying about two-thirds of the premiums, at a cost of $7 billion annually.
Like most insurance plans, the current system doesn’t insure against all revenue losses. The shallow-loss program would change that by sending money to farmers in the event that their actual revenue fall by 11 percent to 21 percent, a drop typically not covered by existing crop insurance.
The funny part (in a sick kind of way) is that once again this program is being sold to us as a fiscally responsible thing to do. That’s because though it will cost taxpayers $3 billion annually, it’s also meant to replace $4.9 billion in direct payments. That’s a $2 billion cut!
#more#I don’t buy it. Not only is the idea that farmer’s revenue should be sheltered from the potential ups and downs of the market absurd, but this program has the potential to be a gigantic budget buster and cost taxpayers billions of dollars. One reason is that farm revenues are at record-high levels because of high crop prices, and as soon as the prices start falling, which they will, the taxpayers will start paying up. In addition, since the bailout is linked to current production, it has the potential to lead to a dangerous “more production, lower prices, more bailout” spiral. Also:
[A]ccording to the recent study “Field of Schemes: The Taxpayer and Economic Welfare Costs of Shallow-Loss Farming Programs” published by the American Enterprise Institute, even at CBO baseline prices, a shallow-loss program would be almost twice as costly as currently scored. . . .
If history is any guide, it won’t be long before the program resembles the direct payments it is supposed to replace. That’s because, if implemented, these subsidies will kick in at relative low level of losses. Given that prices will surely come down from their current record levels, it will guarantee that most farmers will get a payment every year.
Enjoy your pretend savings while it lasts. One good thing about this is that it will demonstrate that bailouts aren’t just for bankers and that cronyism isn’t restricted to one part of the economy.
The whole thing is here.