Does Subsidized Crop Insurance Encourage Farmers to Take Risk?

“This paper devises a tractable empirical framework to examine whether the highly subsidized crop insurance program by the United States government makes farmers more sensitive to changes in extreme heat and thereby limits their ability to cope with extreme heat or adapt to it. Insured farmers might not engage in the optimal protection against harmful extreme heat as the resulting crop losses are covered by the insurance program. . . Our results suggest a significant amount of moral hazard in federal crop insurance. ”

That's from a paper by Francis Annan and Wolfram Schlenker  just released in the American Economic Review proceedings issue.  The authors go on to write:

“This has important implications: first, since the federal government encourages participation in the crop insurance program through premium subsidies, the presence of moral hazard implies that there will be additional cost to the program as losses exceed what they could have been without the program. Second, climate change will amplify the government induced distortion as it will increase the frequency of extremely hot temperatures. Third, our findings imply that there are possibilities to adapt to climate change as uninsured areas show lower sensitivities, but this adaptation potential is skewed by government programs that give a disincentive to engage in it. A farmer will choose subsidized yield guarantees over costly adaptation measures.”

Distributional Effects of Selected Farm and Food Policies

The Mercatus center released a report yesterday that I wrote on the farm-to-consumer effects of food policies, focusing crop insurance subsidies, SNAP, and ethanol promotion.  

The federal government subsidizes the premiums farmers pay for crop insurance - often around 65% of the premium.  What effect does that have on farm and food prices?  Here's a summary:

“Federal crop insurance is a textbook example of concentrated benefits and diffuse costs. Most food producers and consumers receive some benefit from crop insurance through the direct subsidy and decreased food prices. Those who stand to benefit most from the program are best able to convince legislators to continue it. But taxpayers as a body, less able to advocate for their own interests, suffer a net loss as money is transferred from the pockets of all taxpayers through higher taxes to the pockets of producers and consumers of food, meaning people pay higher taxes rather than choosing to pay higher grocery bills. The $932 million in projected savings if federal crop insurance were ended represents the deadweight loss of subsidies: the economic cost of transferring money from many to some and the cost of the lobbying necessary to maintain the system.

Some farmers win from subsidies while other farmers lose. While farmers in the plains states that produce the bulk of the food insured by the government would lose money if the program were eliminated, farmers in western states such as California, Oregon, and Washington would benefit because products such as fruit, vegetables, and nuts, which are not heavily subsidized, would no longer be disadvantaged.

Consumers pay more in taxes rather than more at the grocery store. Consumers would pay higher prices for food if subsidized crop insurance were removed, but the benefit to taxpayers more than compensates for the higher food prices. Taxpayers have to pay about $1.80 for every $1 in lower food prices owing to federal crop insurance.”

I also find that SNAP (or food stamps) is a very inefficient form of farm support: for every dollar spent by taxpayers, farmers benefit by only one cent.  A reduction in demand for corn-based ethanol would reduce food - especially meat - prices, while hurting corn producers.  

Nightly Show on Food Policies

A colleague alerted me to this episode of the Nightly Show on Comedy Central.  The entire show focused on two food polices: restrictions on food stamps and minimum wage for fast food workers.  Maybe I'm getting old, but I didn't find much of it very funny.  Which is too bad, because I agree with the underlying premise of at least one of their arguments.  Which also happens to undermine their other argument.

First, the episode takes issue with state laws that would restrict what food stamp recipients can buy with the money they receive.  I've written before about how food stamp restrictions are unlikely to have much effect.  But, here they focus on the paternalism of it.  Should the government tell people what they should and shouldn't eat?

I'm somewhat sympathetic to the conservative argument that these are not "earned" dollars but rather a government handout, and as such the state might have some leeway in dictating how they're spent.  However, as I explain at the above link, the restrictions are really an allusion anyway in the sense that most recipients can "get around" them by simply reallocating their budget.  Moreover, if the government can assume the right to tell food stamp recipients what to eat, what's to stop regulators from assuming they know better how you and I should eat?  In short, we ought to respect the choices of others.  We may not agree with everyone's choices, but we live in a free country.  Give people the dignity of the presumption that they know best how to better their own situation with whatever resources they might have.  

The Nightly Show

In the second half of the show, they take on minimum wage.  I find this a bit ironic because the first half of the show repeatedly makes the case that we shouldn't tell people what they can and cannot do with their money (in this case money received by the state).   But, apparently when it comes to minimum wage, the government SHOULD tell people what they can and cannot do with their money (in this case money that employers have earned in the market).  You can't pay people a wage they'd willingly accept.  It's not a ban on soda, it's a ban on hiring low skill workers at a wage  equal to their marginal productivity.

The show also seem to miss the potential substitutions between labor and mechanization that will be hastened with higher worker wages.  As I said in a tweet  last week: Here's how I ordered at McDonalds the last time I was in France where minimum wage is ~12/hr

California's Water Problems

Kevin Williamson has an excellent article in the National  Review on how California is (and how it should be) dealing with it's drought-induced water shortage.

He frames the problem as one that should be familiar to any economist: how do we allocate a scarce resource.  He also makes the point that scarcity is a fact of reality that cannot be wished away or swept under the rug.  

About agriculture, he writes:

“Farmers, who by some estimates consume about 80 percent of the water used in California. Agriculture is a relatively small component of California’s large and diverse economy, but California nonetheless accounts for a large share of the nation’s agricultural output. Both of those things are, in a sense, the good news: If market-rate water costs were imposed on California farms, as they should be, then any higher costs could be passed along — not only to consumers, but up and down the supply chain — in a very large global market, where they should be digested more easily”

So, how should we allocate water?

“There are two possible ways to allocate water in California: The people in Sacramento, Governor Brown prominent among them, can pick and choose who gets what, with all of the political shenanigans, cronyism, inefficiency, and corruption that brings. Or Californians can get their water the same way they get most everything else they need and value: by buying it on the open market. This is an excellent opportunity to apply the cap-and-trade model that many progressives favor when it comes to carbon dioxide emissions, with an important difference: This deals with real, physical scarcity, not artificial scarcity created by regulation.””

More precisely, here's a route forward.

“As noted, the water-rights picture is complicated, but it is not so complicated that California could not 1) calculate how much water is available for consumption; 2) subtract preexisting claims; 3) auction off the remainder, with holders of preexisting water rights allowed to enter that market and trade their claims for money. A gallon of water used to green up a lawn in Burbank and a gallon of water used to maintain a golf course in Palm Springs and a gallon of water used to irrigate almonds in Chico would be — and should be — on exactly the same economic and political footing.”

To the extent one is worried about the poor being able to afford water, use block rate pricing or take some of the receipts from the sale of water and re-allocate to the poor to let them decide whether it is worth buying.  

Economists weight in on sugar tax

Tamar Haspel has another sensible article in the Washington Post, this time on the potential effects of a soda tax.

She interviewed a slew of top food and agricultural economists, and by and large, I agree with most of what they had to say.  There were three points I would have added.

First, Haspel discusses the potential of sugar (rather than soda) taxes without mentioning the fact that sugar is ALREADY taxed (indirectly via various government programs).  Here's what I wrote in a short piece for the Congressional Quarterly on the issue:

“Should the government tax sugared soda? It already does. Farm policies make U.S. sugar prices two to three times higher than elsewhere. Moreover, ethanol policies have led to a more than doubling of the price of high fructose corn syrup since 2005. It’s no wonder that per capita sugar consumption has fallen precipitously over the last decade.”

Second, while Haspel mentions a quote from the industry that the taxes are "unfair", she doesn't mention that they're regressive -meaning  the costs being born relatively more by those who can least afford to pay them.  Yes, we need to raise government revenue some way, but as I've noted before, even some good economists seem to miss the fact that we should choose taxes in a way to minimize dead weight loss, not how taxes feel or appeal to a particular cause.

Finally, despite acknowledging that soda taxes are likely to have very little benefits, Haspel concludes,

“If the choice is to do this or do nothing, I choose this. ”

I'm sorry, but if my choice is between nothing and a policy that is paternalistic, regressive, will create economic distortions and deadweight loss, and is unlikely to have any significant effects on public health, I choose nothing.