Category: Policy

A little while ago a commenter asked why I hate subsidies so. I said I’d try and work something up, but the truth is that because this isn’t really my field of expertise, I rely on others. What I’ve read in the past has convinced me that production subsidies in general are a very poor idea, but I would only be parroting what I’ve read if I were to explain why. Fortunately I don’t have to.

There’s a somewhat brief discussion at an Economist blog. Better yet, Tim Haab at Environmental Economics has recently done a very good job of explaining, in reply to a student question. This is Haab’s own summary:

Who benefits from U.S. farm subsidies?

1. U.S. farmers—increased income

2. Foreign consumers—lower prices and increased quantity supplied of staples

Who is hurt by U.S. farm subsidies?

1. 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.

2. Foreign farmers—crowded out of the market by the surplus crop generated in the U.S.

Actually, you can delete U.S. from that without altering the arguments one bit. Subsidies generally create a surplus, and governments sell that surplus on world markets at whatever price they can get to reduce the cost of the subsidy. That can be good news for famine relief agencies, who may be able to get their supplies at low cost. But the gifts to rich country farmers damage farmers in poorer countries, who cannot compete with subsidized imports. They also damage the health of consumers there and at home, because the products that are available cheaply are generally rich in energy but very poor in other nutrients. Subsisting on a diet of cheap wheat flour fried in cheap oil and dusted with cheap sugar may prevent hunger, but it brings ill health in its wake.

There are many other ill effects of subsidies that people more expert than me have examined at length, but that’s enough to be getting on with and I think it justifies my dislike for them. In fact a few years ago the organization I work for, which is dedicated to improving the lot of poor rural farmers, was examining its future and wondering what directions it should take. At a retreat we were asked what the single most important contribution we could make would be. I said, “quit and devote ourselves to dismantling agricultural subsidies”. There was a somewhat embarrassing silence.

There are ways of supporting farmers that don’t encourage over-production. One is to pay the farmers not for what they grow but for how they grow it. Pay them for managing the landscape, in other words, and for providing goods and services such as cleaner water, hedgerows, public access and that sort of thing. One that I used to be a bit familiar with was Tir Cymen, a scheme in Wales ((Which, strangely, is not easy to find written-up on the intertubes.)). Farmers had to draw up a plan for environmental management, which if approved resulted in additional payments to them. As I recall it was pretty successful, and there other similar schemes dotted around Europe, which is still struggling to get rid of its main forms of (production) subsidy.

Most subsidy schemes in the developed world were created some time ago when there was a desire to support small farmers and secure domestic food supplies. They have been subverted by changes in the nature of farming, such that most of the cash goes to a few farmers (or farming companies) and the small farmers continue to struggle. The big ones, the ones getting the big money, can afford to lobby hard to protect their incomes. In times of crisis starving people may benefit from subsidized food, but rich governments might actually save money by simply buying food when emergencies require it and giving that food to the relief agencies.

All that is why I hate subsidies. Over to you …