Economics, Politics and the Farm: Whatever Happened to Old MacDonald?

Johnnie Beer

Writer’s comment: My Agrarian Studies 2 research paper assignment was to write on some aspect of agriculture that we had discussed in class. The material covered a good 10,000 years, so my choices were very broad. I decided to focus on agricultural economics since I was about to receive my degree in Agricultural Economics—but I didn’t choose the topic because I thought it would be a “gimme.” On the contrary, Ag Econ at the undergraduate level is a very quantitative study. I had never been asked to use my expository skills to make a persuasive economic argument. This was the first time I was able to use an authoritative voice. The use of Old MacDonald as symbol was simply an attempt to add a little color to “the dismal science.”
—Johnnie Beer

Instructor’s comment: The course “Perspectives in Agriculture” is comprised of necessarily brief overviews of agriculture’s many facets—historic, economic, geological, geographic, and ecological. For their term paper, students are asked to develop and describe their own perspectives on a particular facet of interest to them.
         In this short paper, Johnnie Beer effectively juxtaposes several conflicting elements encompassed in our federal farm support program. Justifiable concerns for long-term food adequacy jar with apparent food surpluses; agricultural subsidies and import restraints clash with advocacy for free trade; persistent strains of agricultural fundamentalism (Old MacDonald’s Farm!) conflict with current agribusiness and demographic realities. In a few poignant paragraphs, Johnnie gives one a clear perspective on this muddled agricultural policy. One is left with the distinct impression that much is to be resolved if we are to sustain the productive, ecological, and cultural attributes of our nation’s agriculture. Johnnie Beer’s venture into law and, perhaps in time, into politics, could be a step toward resolution.
—Roger J. Romani, Pomology Department

The words to the famous old children’s song “Old MacDonald Had a Farm” are due for a revision. The new lines should read “Old MacDonald had a farm . . . with a lawyer here, and an accountant there, and everywhere a new federal program and regulation.” Not quite as poetic, but definitely more appropriate. The current state of agribusiness consists of an incredibly complex mix of subsidies, price supports, and bureaucratic regulations that could confound the most knowledgeable business minds. Underlying this tangled web of rules and regulations are political battles that pit normally allied groups against each other, and bring normally adversarial groups into allegiance. One bizarre outcome of federal farm policy is that consumers and tax-payers (usually one and the same) are set at cross-purposes. In this paper, I will highlight some of the unusual policies that exist today and will try to present some rational alternatives to alleviate the nightmare that is U.S. agribusiness. E...I...E...I...Ohhhhhhh.....
         The United States Government and agriculture have had a working relationship for most of the twentieth century. In 1916, Congress established the Federal Land Bank to provide farmers with easier access to credit. Then, during the Great Depression, many New Deal programs came to the aid of the farmer (Rapp, 1988). A system of price supports and production quotas was established to ensure price stability. For the first time, farmers were being told not to grow as much as they could. After World War II, the government found that prices were a very difficult thing to stabilize, so it focused its attention on income supports. That is, it attempted to guarantee a farmer a certain amount of income. This was accomplished through Congress allocating direct payments to farmers to make up the difference between the prevailing market price and some established “target price.” At first, payments to farmers were a small percentage of their income, averaging 10% in the early 1960s. However, by the late sixties and early seventies the percentage had climbed to 20%, and in 1987 direct payments totaled 30% of net farm income (Rapp, 1988).
         Now, most economists will tell you that government control of prices simply does not work. Artificially high prices provide an incentive for an efficient producer to undercut the price to grab a larger share of the market. This wasn’t the only problem. Besides trying to control the power of the free market, the government faced another uncontrollable force: the weather. Agriculture, being entirely dependent on the whims of Mother Nature, and therefore an industry where accurate forecasts of production are nearly impossible, is not suited to long-range price-fixing schemes. Thus, the 1950s saw the abandonment of price-supports and the introduction of income supports.
         Early in the twentieth century, our leaders believed that the vitality of our agri-cultural base was vital to our national interest, and as the most abundant country in the world there was no reason to expect that we would lose that vitality. But the Great Depression changed that perception. Since the depression, it has been the continuing policy of the government, Republican and Democratic administrations alike, to support the financial security of the farmer. However, society’s composition, and thus its outlook, has changed dramatically. Whereas in 1920 approximately 50% of U.S. citizens lived in rural areas, by 1970 that figure was down to 25% and falling (Rawlins, 1980). Now, tens of millions of Americans have never seen a farm. Many Americans give no thought to the plight of the farmer as long as the shelves at Safeway are fully stocked. And, because of the ever-growing urban population and the ever-growing budget deficit, the tendency has been for the populace to look askance at ever-growing aid to farmers. In the last decade this situation has led to momentous budget battles that have created some very strange coalitions.
         Generally, the two major parties split in this manner on economic issues: Democrats favor intervention in the markets to protect “the little guy” from being trampled on by Big Business; Republicans favor a free, unfettered marketplace. So theoretically, Democrats should line up behind the policy of aid to farmers, while the G.O.P. supports the abolition of federal supports, letting the market decide who succeeds and who fails. In fact, the parties split internally along rural state/urban state lines. Republican Congresspersons in the heartland strive for increased support, claiming the preservation of the “American way of life.” Big-city Democrats try to pull money away from farmers in order to distribute it to the urban poor. Only in the farm arena could we see Congressmen like Republican Senator Robert Dole of Kansas allied with Representative Richard Gephardt of Missouri, as witnessed with passage of the 1985 Farm Bill. On the opposing side, trying to decrease farm support payments, were liberal Senator Edward Kennedy and President Ronald Reagan! The 1985 Farm Bill brought to the extreme the absurdity of federal farm policy. Every farm state’s Congressperson was able to get something: sugar-cane and sugar-beet growers got protection for their domestic markets, corn-belt states got guaranteed income regardless of market forces, and soybean farmers were given a flat $30 an acre, etc. (Rapp, 1988). These handouts came in markets that were already heavily subsidized. It is very difficult politically to achieve agricultural reforms in the U.S. Congress (as it is to achieve any kind of reforms), pork-barrel interests being pervasive. According to Senator Jesse Helms: “We must protect the American family farmer.” It is to this aspect of farm policy that we now turn our attention.
         American agriculture was built on the backs of individual farmers working small homesteads. As the Industrial Revolution improved technology, farmers were able to work larger acreages. Eventually, the more successful farmers were able to increase their holdings until they became large-scale enterprises. These vast agribusinesses then became attractive to large conglomerations, so that by the sixties we had International Telephone and Telegraph in the meat-packing industry, Boeing Company in the potato business, and Dow Chemical Company producing lettuce (Robbins, 1974). These firms with their “deep pockets” and their ability to “monopolistically price” were able to squeeze out many small farmers. By 1975, small family farms constituted only 62% of U.S. farms and generated only 10% of the total revenues, compared to 92% and 67% respectively in 1960 (Rawlins, 1980). Government policies seem to favor this trend. In recent years, government supports have benefited 50% of the farmers who produce 90% of the product. This seems to contradict Senator Helms’ statement of government intentions. Does it? And even if the small farm is being driven out, is that bad?
         According to Agricultural Economics Professor Luther Tweeten, it cannot be that: (a) small farms provide a better quality of life, and (b) government policies have hastened their demise. In his amalgamation of various reports, Professor Tweeten could find no proof for any of the usual justifications for the continuing existence of small family farms (1983). That is not to say that small farmers shouldn’t be allowed to take up a shovel and a plow, only that agribusiness cannot be efficiently based on their predominance. Tweeten found that government supports are larger for dollar output on small farms than for large. It is simply a matter of economies of scale that allow large farms to outproduce small ones on a per-unit basis. This is not universally true, of course; many small farmers have found ways to be very productive. It is merely my contention that the federal government should have no interest in the structure of the industry.
         Now we turn to an example of the travesty that is U.S. agricultural policy. Letus look at the rules governing production of an average wheat farmer. The farmer borrows money from the Farm Credit System, a government institution that needed a $58 billion bailout in 1987, to plant his wheat. The interest rate is pegged to product price fluctuations. However, the 1985 Farm Bill included a proviso that insured a minimum 20% annual reduction in the loan rate through 1990. Unfortunately, receiving such cheap capital, his total cost of inputs fell, leaving his market price well below the established target price. So another measure in the Farm Bill called for the annual reduction of target prices, totaling 10% by 1990. So now he has an idea of how much money he will receive. How much to plant? A condition of government support is that he only plant 70-80% of his base acreage, the exact figure established by the Secretary of Agriculture. Of course, if he doesn’t want to actually plant that much, he can opt for the “50-92” plan, where he plants 50% of his acreage and receives 92% of his support benefits. Or better still, by a 1987 amendment, he can plant nothing (!) and still receive the same 92% of his income-support benefits (Rapp, 1988). Now this does not mean that he can live luxuriously, sucking off the public teat. He will be receiving less money than he could if he exposed himself to the free market. But it is an incredible situation. Our economy is based on the idea that it is individual entrepeneurship and technical progress that provides for increases in wealth and the standard of living. To chain down the farmer with restrictive regulations while at the same time criticizing the Japanese government for “unfairly” subsidizing their industries is blatant hypocrisy.
         To tie this all together, we now look at the effect on the consumer. The most galling aspect is that with one hand we are paying artificially high prices for products like sugar, nuts, and dairy products because of protectionist import quotas and government-mandated target prices. With the other hand we are reaching into our pocket to pay taxes so that government can provide farmers with enough income so that they don’t have to plant anything, so that we can pay artificially high prices . . . and so it goes. We throw up barriers so that sugar prices can remain high, which helps the corn producers because soda manufacturers will substitute corn sweeteners into their products, which hurts the sugar producers. People will argue that we pay the lowest percentage of our income toward food of any country in the world, approximately 16%. This is, however, an average figure—poor people in America pay up to 50% of their income on food (Robbins, 1974). This is still better than in most Third World nations, but that is no excuse for not doing better when we have the ability to do so. Another argument could be that we are paying a premium on food products to support farming, and thus our national security. Well, who is getting this premium? Not Old MacDonald. He was foreclosed on in 1986.
         The solution to this complex problem is not an easy one, and I do not profess to have the magic solution. But it seems to me that the free-market system has worked very well for this country. Some may disagree, and there are certainly many negative externalities associated with unfettered capitalism. However, in this industry it is time to cut the apron strings. Of course, once programs are eliminated there could be a great deal of displacement. The money that is saved on farm programs could be used to re-train displaced farmers. And with the free-market at work, those farmers who are innovative and efficient will prosper, while those who are marginal will not continue to be a drain on the economy. We cannot continually advocate free trade around the world (the GATT talks) while protecting our farm industry at home. I believe that when the government gets out of the food-growing business, farming efficiency will increase, consumers will benefit, and the economy will be better for it. And after the shakeout, Old MacDonald’s son or daughter will have a chance for greater prosperity.

References

Rapp, David. How the U.S. Got Into Agriculture and Why it Can’t Get Out. Washington, D.C.: Congressional Quarterly, 1988.

Rawlins, N. Omri. Introduction to Agribusiness. Englewood Cliffs: Prentice-Hall, 1980

Robbins, William. The American Food Scandal. New York: William Morrow, 1974.

Tweeten, Luther. “The Economics of Small Farms,” Science 219 (4 March 1983): 1037-41.