April 6, 2009
The core principle of economics is a concept called opportunity cost. Basically, opportunity cost is the value of an alternative course of action given the choice to do something else. For example, you give up current income to go to college (the opportunity cost) in the hopes of achieving a higher lifetime income. We live in a world of scarce resources, so choosing one use of those resources necessarily means that we are giving up the opportunity to do something else. Every freshman economics student hopefully understands this concept.
Now that the president’s budget “blueprint” has been released, we get a glimpse of how Mr. Obama does opportunity cost calculus (or doesn’t). Let’s start with a media “darling” — agriculture. Farm subsidies have been a favorite political target of developing countries as well as the Wall Street Journal editorial board, among others. Common themes include “payments to large agribusinesses,” “distortions to production and international trade,” and “suppresses prices harming developing country farmers.” These phrases are used to shape the public discourse in a particular direction. Here, I hope to provide a slightly alternative view that recognizes these arguments, but focuses attention back on opportunity cost.
First, a little perspective is in order. The total cost of farm subsidies in current dollars over the last 40 years is somewhere in the neighborhood of $140 billion. Compare this to the TARP and “stimulus” packages of the past several months. According to Reuters, the bailout of AIG alone is approaching $180 billion. Yes, that’s right. The bailout of a single insurance company is costing taxpayers more money than all of agricultural subsidies for the past 40 years. The debate on AIG and other companies is for another day, but the numbers provide some perspective on the relative size of agriculture in this debate.
A legitimate question, however, is whether there are opportunity costs associated with farm subsidies and other investments in agricultural infrastructure such as research and development, education, and extension? Of course there are costs. The money could have been used elsewhere in the economy. The subsidies have distorted resource use away from the allocation of resources that would have resulted in the absence of government intervention (how much, of course, is a relevant question). Subsidies, research, education, and extension expenditures directly affect a relatively small portion of the overall population.
We have to compare these real and potential costs, though, with what we get in return. In the 1940s, as much as 50 percent of U.S. household disposable income was spent on food. Today it’s less than 10 percent. Driven primarily by research and development that increase productivity, this relative decline means we have had more money to spend on DVD players and cars, thereby fueling economic growth (Research by Corey Miller and Keith Coble of Mississippi State calls into question whether direct farm support has led to lower prices; they conclude that productivity gains explain most of this result.). We have arguably maintained or improved the standard of living in many rural areas and promoted a sector that is the only industry that consistently maintains a positive trade balance. Finally, we have operated a food and fiber business that has consistently fed the U.S. population uninterrupted through two world wars and countless other conflicts and economic crises.
Platitudes aside, the question is whether the benefits to society outweigh the opportunity and cash costs of the programs. Well, society, since 1933, has consistently said “yes.” Now, we find in the president’s budget that for some reason that calculus has changed dramatically. Why? Surely, it is not cost. He argued for a $600-plus billion “reserve fund” for some future undefined nationalized health care system. What is the opportunity cost of those $600 billion? What is the future economic growth drag of a system like that? What is the potential “payoff”?
I have never been a proponent of farm programs. They are neither perfect nor without costs as are all government programs. But I recognize that there are social, political, and other reasons for their existence rather than simply economic efficiency. I also recognize that our trading partners will continue to subsidize their production even if we do not. (Do not be fooled; even developing countries are heavily subsidizing their agriculture through input and other direct subsidies that are not subject to discipline under the World Trade Organization.)
In years past, government budget and deficit spending levels were such that we economists were concerned with the social tradeoffs between agricultural and other government spending. Many economists argued the inefficiency of farm programs or their interference with reaching trade agreements, and even others lamented that the opportunity cost of agricultural subsidies was too high relative to other demands on government resources with limited budgets. In response, agriculture came to the table and has taken smaller and smaller shares of overall government spending.
But today, I am not so sure the opportunity cost arguments implicit in the President’s budget are genuine. If we are willing to spend $600-plus billion of borrowed or printed money per year on health care, what’s another $15 billion on food? To critics, this will sound like a “well, if they are getting theirs, why don’t we get ours” argument. But rather, this discussion should be about what are we giving up? Hopefully we will contemplate the costs and benefits of agricultural spending more than one week before the president is allowed to undo 70-plus years of opportunity cost accounting.
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