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Beefs and Beliefs

Subsidies may look good but they have distorted distribution

Subsidies may look good but they have distorted distribution
Subsidies always flow toward the most limited resource and ultimately rob those who pay taxes to supply them.

One day last week on social media I was asked to name studies I mentioned showing market distortion from subsidies. I think it's valuable to share those again.

The conversation that started this focused on the Democratic party's new come-on, free college for everyone. I mentioned that not only is this unfair to those who must pay for college, but cheap loans and grants have been driving up the cost of college tuition for decades now.

This is similar to the results of subsidies in agriculture, which have been shown to flow through the agricultural production chain and ultimately inflate land prices. Ultimately, that's because in all subsidy systems, especially for commodities, the money eventually ends up in the pockets of those who control the most limited resource required in the production process.

This was well said by Don Holfstrand of Iowa State University in a 2008. I reported on that excellent study. Here are page one and page two of a story I wrote in 2008 on that Iowa State University study. It outlined who ultimately got the mammoth share of the ethanol tax credit, even though it was paid by the federal government to the "blenders," meaning the energy companies who prepare and sell wholesale gasoline.

Holfstrand described a process wherein the money flows through the hands of one segment to the next, as the forces of supply and demand work to incorporate the new money.
• First it was the ethanol makers.
• Next came the corn growers.
• After that the input suppliers of fertilizer, fuel and more.
• The final layer to get the money was landowners, as rent and outright sales prices skyrocketed.

If you think about it, and if your memory is true, all this is clear as a Caribbean ocean current.

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Today we're watching this unwind as the actual subsidy expired on Dec. 31, 2012 and the market is correcting itself for reality.

In fact, Kansas State University researchers Kevin Dhuyvetter and Terry Kastens have long studied the effects of farm-program subsidies and found the same pattern. It is the landowner, holding the most limited resource, who is the primary end winner of those monies.

This 2011 paper discusses the possible capitalization of subsidies into land prices and suggests possible land price drops if all farm subsidies were eliminated, according to the Kansas State researchers' database.

Based on 2011 conditions, they project an elimination of farm programs could have decreased agricultural land values in the Great Plains and the Corn Belt from 6% to 20%

In explaining their figures, they said this: "The literature on what percent of government payments are capitalized into land values ranges from less than 25% to more than 75% and thus this value is debatable. However, it is quite safe to say that it is definitely not 100%. We would suggest that a more reasonable government payment capitalization rate might be something on the order of 50%."

The pair further explained that agricultural land values, of course, depend on how important agriculture is to any particular location and also how much competition there is for that land from other sources.

Still, the inherent problem is that subsidies distort the marketplace. Perhaps more important, they allow the government to arbitrarily decide winners and losers and to take from one group and give to another. Vesting that level of power in any government is never a good idea.

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