Congress is beginning debate on the new farm bill, which is, as usual, larded with subsidies and pork. So now is a good time to step back and reevaluate the potential costs and benefits of farm subsidies. Ethanol and raisins, two highly subsidized industries, provide informative case studies on how subsidies distort markets to benefit a few agribusinesses, at the expense of American consumers and taxpayers.
Ethanol is a new industry that owes its growth solely to Congressional action. Corn growers now get a subsidy of 51 cents per gallon of ethanol they produce. On top of that they enjoy a guaranteed market — Congress has mandated that gasoline manufacturers use 7.5 billion gallons a year, which amounts to a guaranteed subsidy of about $4 billion, courtesy of American taxpayers.
And how does this benefit the taxpayer? Less efficient fuel, for starters — ethanol provides less energy than gasoline, generating about 2.5 percent fewer miles per gallon. Ethanol subsidies also contribute to higher food prices, as corn growers reduce the supply of corn for food and plant more of it for fuel. In turn, corn-based animal feed has become more expensive, increasing the price of milk, as well as meat. The price of corn syrup goes up as well, which means that sodas and other sweet goods have also become more expensive. In short, all Americans are seeing higher grocery bills as a result of the ethanol subsidy — thus hurting even those who are too poor to pay taxes.
Nor does this stop at the border. The subsidy is exporting trouble. Mexico has seen a tortilla shortage because American corn exports are stymied by the combination of government price controls and decreased supply.
Not only is Mexico suffering, but the United Nations World Food Program, which does a reasonably good job of averting starvation in areas affected by famine, has seen its costs increase by 50 percent because of biofuel programs. That means that fewer people are going to get the food they need.
It is not an exaggeration to say that the U.S. ethanol subsidy could soon start killing people in developing countries. After all, how is corn most helpful to poor people — as a food source or as fuel for an SUV?
The ethanol subsidy effectively diverts food from the mouths of Africans into your gas tank. The raisin subsidy, though different in form, has a similarly negative impact on society.
In 1933, during the Great Depression, Congress passed the Agricultural Adjustment Act, whose aim was to “stabilize” prices by insulating raisin farmers from the normal process of supply and demand. This was accomplished through federal government confiscations; anywhere from a quarter to half of the U.S. raisin crop is confiscated each year, thereby limiting the amount of raisins on the market and essentially guaranteeing scarcity and higher consumer prices.
Raisin farming is the single most labor-intensive activity in North America. Each year, during August and September, farmers hire 40,000 to 50,000 workers, many undocumented, to pick the grapes and leave them to dry in the sun. Confiscating the fruit of their labor encourages further illegal immigration, a major strain on the U.S. welfare system, by creating demand for labor to pick a product that never reaches the U.S. marketplace.
Moreover, the subsidy inflates the price for grapes and raisins that do reach the market. Again, it doesn’t look like much of a deal for taxpayers and consumers.
There are some winners. For ethanol, it is the agricultural giants of Archers Daniel Midland and Cargill. For raisins, it is the big cooperatives like Sunkist. They profit handsomely from guaranteed returns and significant barriers to competition. Meanwhile, taxpayers and other businesses suffer, Africans starve, and Mexico and Central America are relieved of the pressure to reform their economies by an inflated demand for agricultural labor in America.
Agricultural subsidies reveal exactly what is wrong with Washington: Legislators think that they have solved one problem, but create dozens more in its place. As Congress considers the farm bill, it should do a little lateral thinking and consider the possibility that problems are more easily resolved by reducing government interference, not increasing it.
– Iain Murray is director of projects and analysis and senior fellow in Energy, Science, and Technology at the Competitive Enterprise Institute.