“The most controversial of these [farm subsidy] programs are the $5 billion in annual so-called direct payments to farmers of corn, soybeans and other crops, awarded simply for owning tillable farm land, even if they do not plant on it.” New York Times, May 6, 2011
No one expects farm subsidies to escape the budget axe in the current environment, but it matters a lot for developing countries where the cuts come. As noted in last week’s New York Times, “direct payments” to farmers seem to be an obvious target. These payments, created in the 1996 farm bill, were originally intended to be a bridge to a more market-oriented and less trade-distorting farm policy that involved phasing out traditional subsidies. The idea was to eventually replace payments linked to prices and production of particular crops with direct payments designed to support farm incomes and be less market-distorting.
But, these direct payments quickly became another bridge to nowhere as Congress retreated from reform when prices dropped in the late 1990s. Old-style subsidies remain on the books and payments will start increasing as soon as prices fall. And, fifteen years after “reform,” farmers are still getting direct payments as well—in good years and bad.
So, from a taxpayer’s perspective, direct payments should absolutely be eliminated, or at least capped so they don’t continue going overwhelmingly to larger, richer producers. But, direct payments are less distorting than traditional subsidies, so cutting them will not help to spur the Doha Round of trade negotiations nor will it remove the disincentives to increase agricultural production in developing countries when prices fall and the old traditional subsidies pick up again. So, in the spirit of not letting a crisis go to waste, budget cutters should not forget about cutting the more distorting subsidies. Oh, and Congress could save another $3 billion this year and $6 billion in future years by voting to eliminate the subsidy for ethanol as proposed by Senators Dianne Feinstein (D-CA) and Tom Coburn (R-OK). Senator Tom Coburn (R-OK) rightly calls it “bad economic policy, bad energy policy and bad environmental policy.”