Academic journal article Economic Inquiry

The Political Economy of U.S. Wheat Legislation

Academic journal article Economic Inquiry

The Political Economy of U.S. Wheat Legislation

Article excerpt

BRUCE A. BABCOCK, COLIN A. CARTER and ANDREW SCHMITZ

Both taxpayer subsidies to U.S. wheat producers and domestic deadweight losses increased as a result of the U.S. wheat program adopted in 1985. A calculation of the costs and benefits of alternative wheat policies shows that mandatory production controls with no taxpayer expense could have made wheat producers as well off as the adopted policy. Becker's theory of competition among interest groups and Peltzman's theory of the equilibrium amount of regulation are shown to be consistent with the observed policy choice if the list of affected interest groups includes agricultural input suppliers and grain marketing firms.

I. INTRODUCTION

Every five years Congress drafts new farm legislation dictating the provisions of commodity programs for cotton and the major food and feed grains for the subsequent five years. From 1973 through 1985 the primary features of the commodity programs were guaranteed farm prices and government stockholding activities. Deadweight losses from the programs, during this time, were minimal. Market prices were generally higher than the government-defended price floors because of a booming export market. Legislated increases in commodity support prices, combined with a severe drop off in the demand for agricultural exports beginning in 1982, increased the economic costs of the commodity programs. The U.S. price floor became the world price for wheat, cotton and corn. Grain stocks accumulated while government payments to U.S. farmers grew to unprecedented levels.

Most agricultural interest groups in 1984 agreed that an overhaul of agricultural policy was necessary. Supporters of large levels of production and exports wanted to stimulate the demand for exports by eliminating price floors. Others felt that the United States should reduce budgetary costs by using direct supply controls to raise farm prices. The clear winners in the new 1985 Farm Bill were the proponents of maintained production levels and expanded exports. The new policy froze the relatively high supply prices received by farmers while simultaneously lowering price floors.

Becker [1983] argues that two forces mainly determine the outcome of policy debates. The first, following Stigler 1971] and Peltzman [1976], is the relative efficiency with which interest groups exert political pressure. Interest groups that are efficient in exerting political pressure can increase the subsidization (or decrease the tax burden) of their constituents. The second force is the extent of deadweight losses associated with proposed policies. Those policies with lower deadweight losses are, ceteris paribus, more likely to be adopted, for the simple reason that less tax needs to be collected from losing interest groups for given transfers to winning groups.

Gardner [1987] finds empirical evidence that both the ability to redistribute efficiently and the effectiveness of political organizations help explain which farm commodities have received the most government support since 1930. His study provides little insight, however, into which force is more important in determining the type of redistribution policies that are ultimately adopted for a given commodity. An examination of the wheat program adopted in the 1985 Farm Bill and alternative policies that were rejected provides an opportunity to determine whether the efficiency of programs or the political prowess of interest groups is more important in determining policy outcomes. This task requires a calculation of the magnitudes and the distribution of costs and benefits of the chosen policy and alternative policies. Costs and benefits are calculated for: (1) a continuation of the 1981 Farm Bill policies through 1986-1990; (2) the adopted 1985 Farm Bill policies; and (3) mandatory production controls. All three alternatives are examined relative to a laissez faire policy whereby the U.S. government has no direct involvement in agriculture. …

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