From the inbox [edited for length]:
Dr. Haab
My name is [blank] and I was in your AED Econ 200 class this past fall quarter. One of my classes this quarter was Rural Sociology 378 which focuses on globalization of the world's economy and how it affects the rural populations of countries...My professor proceeded to tell the class that the main cause of [the expolitation of Jamaican grain farmers] was the farm subsidies given to US farmers...I was wondering if maybe you had any more information regarding subsidies (how they work, who gets them, why they are good/bad). I feel that they are a good thing for most US farmers. I know the professor got some of the information wrong and I called him out on it but I feel really uneducated about them...I wanted another opinion on the issue because my rural sociology teacher is obviously not an economics professor. I'm just curious to hear your take on the issue of farm subsidies.
You asked for it...
Dear [blank]:
Thanks for the message.
The simplest answer to your question is that you are both right. U.S. farm subsidies create surplus production.
Update: When I wrote this post originally, I was trying to keep things short. Unfortunately, some of the logic was lost in my brevity. I have price supports in mind as the subsidy. The price support establishes an above market domestic price, creating a domestic surplus. The domestic surplus is dumped on the world market--shifting world supply outward. OK, carry on...
Update 2: Yes, I know the U.S. no loner targets prices (at least directly). But the price support analysis is more direct and substantially the same. Sometimes even I hate economists. Carry on again...
Subsidies are good for two groups: Farmers growing the crops, because they get to sell more of their crop at higher prices (and what farmer wouldn’t want that)? And groups receiving the surplus crops in the form of food aid—most often but not always. So on the surface, subsidies sound like a good idea—U.S. farmers earn higher incomes and feed the poor.
But as with most market interventions, there are unintended consequences. In the case of farm subsidies, the policy results in an increase in the world supply of food. Since the U.S is a major supplier of world grains, the effect is to crowd out foreign producers (like Jamaican farmers).
Now for the scorecard:
Who benefits from U.S. farm subsidies?
- U.S. farmers—increased income
- Foreign consumers—lower prices and increased quantity supplied of staples
Who is hurt by U.S. farm subsidies?
- U.S. consumers—someone has to pay for the subsidies and that will come in the form of higher taxes and higher domestic food prices.
- Foreign farmers—crowded out of the market by the surplus crop generated in the U.S.
If you want to know what would happen if we removed U.S. farm subsidies, just reverse the argument. Removal of subsidies will undoubtedly decrease U.S. farm incomes. Is that a bad thing? For a U.S. grain farmer, I’m sure it is. But U.S. consumers gain through lower food prices—although the magnitude of that reduction is probably small--and foreign farmers gain from being able to sell their crops on the market.
So with that, I'll let you decide whether subsidies are good or bad. I hope that helps.
