Against farm subsidies

Many countries, especially those in the West, support their farmers with generous agricultural subsidies. In 2011, for example, Canada spent $6.9 billion on them. These programmes, however, create inefficiency and lead to morally questionable outcomes.

Farm subsidies artificially reduce the cost of farming. In other words, farmers produce more in jurisdictions with subsidies than those without, i.e. subsidized farmers produce more than what would otherwise be profitable under purely competitive market conditions.

For instance, consider a developed country without farm subsidies. Farmers would use land that allows them to earn as much, or more, money than they could by renting it to the highest bidder. If this country introduced agricultural subsidies, farmers would purchase or rent additional land, since it would increase their revenue from the additional land above its market price (which, all things equal, was uneconomical before subsidization). Under competitive conditions, farmers would not utilize the additional land, whereas providing subsidies encourages them to do so.

Now, imagine a farmer who plans to purchase land in one of two countries. He must choose between Country A, which has extremely fertile land, and Country B, which has only passable land. If the cost of doing business and renting land were equal in both countries, he would likely choose Country A. However, if Country B offered subsidies that compensate him for utilizing less productive land, then he may opt to operate there, instead. In other words, agricultural subsidies are inefficient, in that they encourage farming on land that could be useful for building shopping malls, restaurants, or movie theatres. Moreover, subsidies create inefficiencies between countries with different agricultural policies.

These subsidies are more pervasive in the developed world than in its developing counterpart. Farmers in poorer countries are unable to compete with farmers in richer countries that offer artificially low factor prices resulting from lavish subsidies. As a result, these subsidies encouraging production in areas that are not especially suitable for agriculture, while discouraging production in areas that are suitable for farming. It is in the interest of developing countries to end agricultural subsidies, as it would allow them to expand their agricultural industries, which currently underperform due to subsidies in rich countries, and would alleviate rural poverty by boosting production and prices. Currently, however, richer countries “dump” their subsidized products in poorer countries, not only deteriorating their ability to generate economic activity, but also creating a dependency trap. From the perspective of richer countries that provide billions in annual subsidies, it is more efficient to stop transferring wealth to their agricultural industry and, instead, purchase foodstuffs from abroad.

Agricultural subsidies additionally affect wealth distribution at the domestic level. Policymakers fund the subsidies using tax revenue, which they transfer to farmers and landowners that tend to be wealthier than most; in 2011, the average income of a farm family was $93,426. That is, they redistribute wealth from the general population to a small group of wealthy individuals and firms. Indeed, contemporary “farming” is much different from its predecessor: most “farmers” are wealthier individuals and many farm operations involve large firms that use factories.

Farm subsidies also have a tendency to remain politically relevant–the special interest group behind farm subsidies is very powerful. It is politically expedient for governments to stay these benefits, as they require little funding per capita, yet, provide massive benefits to a small group. In other words, the cost of fighting these subsidies exceeds to cost of providing them in the first place. Moreover, when subsidies increase, this group begins to sense that they can generate more profit by lobbying the government than by actually producing foodstuffs or agricultural commodities.

Lastly, the farming lobby provides a massive obstacle to potential trade deals. In 2007, for instance, American and European governments’ objected to limiting their agricultural subsidies, which threatened the World Trade Organization’s Doha talks. India and Brazil, the countries proposing that western farm subsidies recede, in turn, refused to open their markets.

Proponents of agricultural subsidies typically defend their position by arguing that they benefit farmers and increase food security. However, in world of institutionalized trade relationships, there is little reason why any country should strive for food autarky at the expense of efficiency. Additionally, the age of rural poverty in rich countries is essentially over: farmers whom subsidies support tend to be quite wealthy. For these reasons, and those mentioned above, all states would be wise to stop subsidizing agriculture.

Michael Sullivan is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

Reconsidering Income Statistics

The measure most often used to track prosperity is some form of income statistic. Although this intuitively makes sense, the devil can be in the details. Income statistics, in general, can be misleading in many ways. Furthermore, some measures of income seem to be better than other measures. Nevertheless, measures of prosperity are likely to continue comprising of income measures and, therefore, it is important to understand their flaws and limitations.

The limitations of income statistics as a measure of prosperity fall into two categories. First, income is only one part of the picture. Second, it is not always clear that changes in income statistics accurately reflect changes that occur in actual per-capita income.

To begin with, income is not an all-encompassing measure. Other contributors to prosperity include job satisfaction, health, and leisureliness, which income statistics do not typically capture. In addition, certain aspects of the economy remain unaccounted for using income statistics, such as volunteer work, the black market, the household division of tasks, and other activities that do not appear on an individual’s tax return. As a result, using income on its own to measure prosperity is clearly misrepresents an individual’s level of affluence.

There is yet a deeper flaw in the measurement of income statistics, which lies in the imperfect science of trying to draw conclusions using statistical abstractions.

For instance, a common way to measure, and think about, income statistics is to consider the household unit. After all, most people are familiar with their household’s monthly budget and use this to help their understanding of the economy.

Household income, however, is, perhaps, the worst way to measure income. This is fundamentally a result of household variation, not only over time, but also between different demographics and income brackets. Thus, changes in household composition often cause variations in household income. Economist Thomas Sowell has studied this phenomenon extensively, offering three general observations:

1) Household size has decreased over time. Between 1967 and 2005, real per-capita income in the United States grew 122% (whereas household income grew 31%). In this case, shrinking household size has “weighed down” apparent income growth
2) Household composition, including the number of working household members, varies between groups. For instance, the highest earning 20% of American households consists of 64 million people, while the lowest earning 20% of households consists of 39 million people, including single-parent families, single-earner families, and so on. It is therefore easy to speculate that differences in household income can partially be attributed to differences in households
3) Most household income statistics do not follow flesh-and-blood individuals over time. This is important because a given income bracket does not perpetually consist of the same individuals, despite some narratives. While many people are surely living in conditions of poverty, individuals gradually climb the income ladder throughout their career. Sowell’s research suggests that individuals in the bottom 20% of households are more likely to end up in the top income bracket than to remain in the bottom bracket after ten years.

In any case, ‘household income’ is an abstract measure. Consider a fictional economy, for instance, consisting of a married couple living in a single dwelling. If said couple separates, however, “household” income decreases by 50%. Although per-capita income does not change, using household income as a measure would not lend that impression. This is precisely the rationale for distinguishing per-capita income from other statistical categories, such as household income.

Overall, it is important to recognize the limitations of income statistics when attempting to assess the wellbeing of specific groups, entire populations, or whole nations. While household income is particularly flawed, it is unlikely that any single income measure wholly measures prosperity or happiness.

Michael Craig is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

The Debt Party is About to be Crashed

Personal debt among Canadians has reached a 20 year high and now exceeds 160% of income, almost precisely the same amount which was present in the United States before the bursting of the government generated real estate bubble. Canadians have been enjoying an unprecedented period of economic stability, low interest rates, low unemployment and a dollar at parity with the U.S. greenback. Naturally these factors have encouraged Canadians to purchase real estate and increase personal consumption.

debt

While debt accumulation was natural and expected, the beginning of 2013 should usher in a new era in the personal finances of Canadians. Here are five reasons why we should do everything in our power to eliminate credit card debt, reduce mortgage debt as much as possible, and start rebuilding our savings.

1. U.S. and European economies will remain vulnerable

Don’t expect the kind of strong American economic upsurge upon which our economy is reliant for deeper growth, the U.S. is too politically mired to structurally reform itself. America will still be vulnerable to economic shocks and political indecision, an employment slump or return to recession is possible as government debt continues to rise and economic fundamentals remain very weak. Across the pond many European countries will continue to slide towards bankruptcy as government raise taxes instead of cutting spending to deal with unsustainable borrowing. Weakness in these regions will dampen our economic strength and will keep the world economy exceptionally fragile. Greece, Spain, Portugal, and Croatia are among the few which will see their economies shrink in 2013.

2. Interest rates will have to go up soon

The Federal Reserve would be foolish to keep interest rates artificially low past 2014, inflation and prices are rising and criticism of the U.S. economy’s reliance on low interest rates is mounting. The Bank of Canada will have to escalate rates in response to a Fed increase and might have to raise rates earlier if inflation exceeds 2% before 2014.

3. The housing boom is finally cooling down

While a massive housing bust is only going to occur if a huge employment shock transpires, it is clear that housing prices and demand are beginning to plateau in many parts of the country. This means regions and economies dependent on residential construction and real estate, such as the Greater Toronto Area and Vancouver will have to prepare for slower growth and a less dynamic market.

4. Take advantage of strong banks, governments are doing more than ever to encourage savings

Canadians are serviced by some of the strongest banks in the world; high interest credit card debt should be weaned off through lower interest personal and student loans, 7% interest is better than 19% interest. Tax free savings accounts and generally declining tax rates should be taken advantage of; Canadians should reduce retail consumption and save more of their disposable income.

5: Listen to the experts

Former Bank of Canada Governor Mark Carney, along with countless academics, politicians, and public figures have been warning Canadians of high debt loads for many years now. While the temptation to take advantage of low interest rates is enormous, it is important to keep in mind that leaders of government and public policy are genuinely worried of the risks of skyrocketing debt. Nobody wants a repeat of the 2007-2009 financial crisis here at home.

-Dino Alec