The Economic Impact of Agricultural Subsidies in the United States

Article excerpt

The purpose of this paper is to examine the negative impacts of governmental corn subsidies on the American and global economies. This paper's analysis will examine how such policies, which were first passed in 1921, enable the United States government to manipulate the supply of corn, and thus directly influence international food prices. Specifically, the focus will be on the various externalities and long-term consequences associated with this policy, including inefficiencies in the global market for food, the rise of government sponsored monopolies in the agriculture industry, the negative health implications of diets heavily weighted in corn and corn derivatives, and the prevalence of ethanol as an inferior alternative to carbon-based fuel sources.

Key Words: Food prices; Agricultural subsidies; Externalities of farm subsidies; Agricultural monopolies; Global market for food; Diets weighted in corn; Ethanol.

I. Introduction

Our thesis in this paper is that free enterprise, private property rights and very limited government are the best recipe for economic welfare, and that agriculture is no exception to this general rule. We discuss in this regard several governmental farm policies that have had deleterious effects on this economy. In section II we briefly discuss agricultural history. Section III discusses subsidies and agribusiness concentration. We conclude in section IV.

II. History

In the 1800s, the U.S. government's agricultural policy was aimed at the exploration and development of arable land. The Land Act of 18201 encouraged settlers to purchase property in the Western Territory by reducing the price of an acre of land, while the Homestead Act of 18622 enabled farmers to develop unclaimed territory, thus becoming the property owner. A third legislative enactment, the Morrill Land-Grant Colleges Act,3 created schools specifically devoted to research on agriculture. These three laws laid the foundation for programs designed to incentivize and support family farms in the U.S.

During World War I, the U.S. became a large supplier of food, supplies, and weapons to Allied nations fighting in Europe. U.S. growers saw this as an opportunity to increase the size of their farms to meet Europe's growing demand for U.S. crops. However, the Treaty of Versailles created a heavy burden for the Central Powers, as they were required to pay reparations for the war, thus bankrupting Europe4 and causing major U.S. export markets to close. This sharp drop in Europe's demand for U.S. goods left American farmers with large debt and a surplus of crops, resulting in a brief recession from August 1918 to March 1919. At the conclusion of World War I, Herbert Hoover, then the head of the Food Administration, provided shipments of food to the defeated German nation and famine-stricken Bolshevik-controlled areas of Russia in 1921.

The period from 1922 to 1935 caused the U.S. to reevaluate its agricultural policy, mainly because of the poverty and economic turmoil experienced during the Great Depression and the Dust Bowl,5 which caused crop prices to fall by approximately 60% (Cochrane, 1958). To stave off the inevitable downfall of the U.S. family farm6 as a result of technological advancements and low demand, Congress passed the Agricultural Adjustment Act of 1933.7

The AAA ordered farmers to reduce crop surpluses, thus raising the value of their crops and helping American farmers who had been hurt by the economic downturn (Ganzel, 2003). The government levied a tax on companies that processed farm commodities in order to compensate farmers for forgone profits. Tactics used to artificially restrict the supply included destroying massive quantities of crops, killing millions of heads of livestock, restricting the amount of a commodity a farmer could produce, paying farmers to not produce, and having the government buy large quantities of commodities to keep them off the market, all while Americans were reeling from the debilitating effects of the Great Depression (Blevins, 2002; Bovard, 1990; Kelly, 2008; McLaughlin, 2007). …