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

A House on Every Lot? Reconsidering the Economic Ramifications of Pursuing National Homeownership Policies

Similar to other western countries, Canada has deliberately encouraged homeownership as a policy objective. One of the means Ottawa uses is the Canada Mortgage and Housing Corporation (CMHC), a crown corporation created in 1946 to resolve housing shortages that emerged when swaths of soldiers returned home from Europe and Asia following the Second World War. Today, it encourages banks to provide mortgages in many ways, such as insuring risky loans, which reduces the cost of homeownership for low-income individuals. In response, bank officials assert that interest rates on mortgages would rise with CMHC’s support.

However, since many Canadians rely on mortgages to purchase their homes–and since higher interest rates would deter loans and mortgages–removing insurance, it appears, would reduce Canadian homeownership.

Currently, Canadian homeownership is nearly 70 per cent. In other countries, though, homeownership rates are dramatically lower. Switzerland’s rate, for instance, is 34 per cent, Germany is 41 per cent, and Denmark is 52 per cent. In fact, all three countries rank higher than Canada in terms of human development as reported by the United Nations in 2013. Although the average rate of home ownership of OECD members is closer to Canada’s, the fact that some countries have succeed without such high rates raises the issue of whether encouraging homeownership is worthwhile.

Upon examination, it seems that Canada’s homeownership policy facilitates a number of serious economic harms.

First, encouraging homeownership destabilizes the economy. The CMHC lowers mortgage rates artificially by providing insurance on all mortgages. This creates significant moral hazard–a situation in which an actor privately benefits from taking excessive risks, since the costs are borne unto other actors (i.e. taxpayers).

If a mortgage falls, for example, CMHC compensates the lender. Knowing this, the lender is more likely to give risky mortgages.

In the United States, the federal government created similar environments, albeit much worse, by instructing Fannie Mae and Freddie Mac–government-sponsored enterprises–to encourage homeownership aggressively among low-income individuals that would not otherwise qualify for a mortgage. Insuring these firms and providing them with implicit government support fueled the subprime mortgage crisis that wrecked the American economy and deflated its real estate market.

Many factors differentiate the American arrangement from Canada’s system–CMHC insures all mortgages rather than aggressively encouraging lower-income ones. And, for the most part, in the United States, it is easier to walk away from mortgages. But in both situations, the public must take on private risk in the mortgage market.

The second destabilizing characteristic of government-sponsored homeownership is that homes become difficult to convert into cash and usually constitute a very large chunk of their owner’s net worth. By subsidizing mortgages, Ottawa encourages people to invest their income in a single volatile asset that, unlike stocks and bonds, are difficult to sell. Furthermore, when payments or rates increase, the possibility of a national housing crisis emerges and the inability to convert assets to cash exacerbates the process.

Encouraging homeownership also reduces labour market flexibility by making it more difficult for people to mobilize when new job opportunities arise or old employment arrangements dissolve. Renters, however, by virtue of renting and not owning, tend to be keener of exploiting interregional wage and employment differences. In fact, studies reveal a positive relationship between homeownership and unemployment. This is probably because homeowners are less likely to move to areas with more job opportunities. (Economist Milton Friedman argued that the natural rate of unemployment in an economy depended on its labour market mobility, which is dependent on how people house themselves.)

The politics of homeownership are appealing and owning property is an attractive prospect. However, the economic harms associated with government-sponsored homeownership suggest that it is imprudent. Considering the rising demand for mobilize labour, not only in the global setting, but also in Canada, it is, perhaps, time for the Canadian government to reconsider the role of the CMHC and homeownership in general.

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