Congress can save billions of dollars a year on the 2018 farm bill by axing crop subsidies, crop insurance and many conservation programs, says the free market American Enterprise Institute in reports issued today. Some of the money “should be re-allocated to programs that do provide U.S. households with genuine positive benefits,” such as agricultural research, and the rest of the $16 billion a year “could be re-allocated to other uses, including lower tax rates,” says AEI.
Farm-state lawmakers are aiming for minor changes to the 2014 farm law rather than a major overhaul and are likely to be hostile to the think tank’s ideas. Senate Agriculture chairman Pat Roberts, for instance, has spoken repeatedly against cuts in the federally subsidized crop insurance system. At a confirmation hearing for two USDA nominees last month, Roberts asked the men if they would help write a farm bill with no cuts in insurance. “Your answer is ‘yes,'” he told them. They took the hint.
“The data show clearly that current and recent agricultural policies not only largely transfer funds to farm owners and operators to programs now often labeled as farm income ‘safety net’ programs or import barriers, but also send substantial government revenues to households whose average incomes are several times the U.S. average,” wrote economists Vince Smith, Joe Glauber, Barry Goodwin and Dan Sumner in an AEI “overview.” Farm subsidies provide “no measurable economic benefits for the rural poor” nor do they reduce overall food costs for consumers.
While making the case for fundamental reform, the economists said if Congress is averse to a shift in policy, there are “many changes in existing policy that … deserve serious consideration.” AEI will issue a lengthy series of reports on how to reform ag policy in the near future. For crop insurance, the most expensive part of farm spending at $8 billion a year, AEI suggested a “no cost to farmers” disaster relief program based on indexes of plant growth for each crop eligible for coverage. That approach could save $4-5 billion a year while eliminating any incentives to plant on fragile land.
“If the crop insurance program is continued, we recommend that the HPO (Harvest Price Option) be terminated with a potential savings in taxpayer outlays of close to $2 billion (annually),” said the AEI paper devoted to crop insurance.
President Trump proposed elimination of the HPO last May as part of sweeping reforms in crop insurance. Some 80 percent of crop policies carry the option, which indemnifies growers for losses at the crop price at harvest if it is higher than the price guaranteed when the policy was purchased in the spring. AEI called HPO “gold plated” coverage. Crop insurers say it is the equivalent of home insurance policies that make payments at the replacement cost of lost property.
Trump also proposed a $40,000 a year limit on premium subsidies paid by the government and to deny the subsidy to people with an adjusted gross income above $500,000 a year. The government pays an average 62 cents of each dollar of premium. Lawmakers have ignored all of the proposals, despite support among deficit hawks and reformers.
AEI mentioned additional approaches for reducing the taxpayer cost of crop insurance: Limiting the premium subsidy to 50 percent, setting a limit of 70 percent on the coverage level of revenue insurance, returning operation of crop insurance to USDA from private insurers, or allowing insurers to offer lower premiums. At present, the government sets premium rates and requires companies to write policies for anyone who wants one.
In discussing crop subsidies, the economists said creation of a cottonseed subsidy “would likely trigger another WTO case by Brazil.” The cotton industry says cottonseed should be eligible for the same subsidies offered to grain and oilseed growers to offset low commodity prices. Brazil successfully challenged longtime U.S. cotton subsidies as violating world trade rules. To satisfy the ruling, Congress revamped the cotton program in 2014.
They were critical of conservation programs on ground they are poorly coordinated and disproportionally are used by large operators.
Studies have consistently shown high rates of return on spending on agricultural research. “These high rates of return show that the United States is under-investing in agricultural research and that much of this must be supported by the government or it will not be done at all,” said AEI.
The economists who wrote the papers for AEI will hold a panel discussion, “U.S. agricultural policy in disarray,” at the think tank this afternoon.