Cato on Farm Subsidies

I was interested to read the following in this June 2009 article from the Cato Institute (via this recent blog article):

An interesting example of farmers prospering without subsidies is in New Zealand. That nation ended its farm subsidies in 1984, which was a bold stroke because the country is four times more dependent on farming than is the United States. The changes were initially met with fierce resistance, but New Zealand farm productivity, profitability, and output have soared since the reforms.  New Zealand’s farmers have cut costs, diversified their land use, sought nonfarm income, and developed niche markets such as kiwifruit.

Today, data from the Organization for Economic Cooperation and Development show that farm subsidies in New Zealand represent just 1 percent of the value of farm production, which compares to 11 percent in the United States. New Zealand’s main farm organization argues that the nation’s experience “thoroughly debunked the myth that the farming sector cannot prosper without government subsidies.” That myth needs to be debunked in the United States as well.

I couldn’t agree more. The NZ experience is a good illustration of how counterproductive US farm subsidies are. The article estimates total US farm support at between $15 billion and $35 billion per year, even though the average income of farming households is 28% higher than the average of all US households.

The article also references another from Cato published in the Washington Post in 2002 that goes into more detail on the impact of removing subsidies in NZ:

Do we need farming subsidies in order for Americans to eat? Evidence from New Zealand indicates that the answer is an emphatic no on both counts. In 1984 New Zealand’s Labor government took the dramatic step of ending all farm subsidies, which then consisted of 30 separate production payments and export incentives. This was a truly striking policy action, because New Zealand’s economy is roughly five times more dependent on farming than is the U.S. economy, measured by either output or employment. Subsidies in New Zealand accounted for more than 30 percent of the value of production before reform, somewhat higher than U.S. subsidies today.

…Meanwhile, the value of farm output in New Zealand has soared 40 percent in constant dollar terms since the mid-1980s. Agriculture’s share of New Zealand’s economic output has risen slightly, from a pre-reform 14 percent to 17 percent today. Since subsidies were removed, productivity in the industry has averaged 6 percent growth annually, compared with just 1 percent before reform.

For this improvement in economic performance we can thank (even though few do) former Finance Minister Sir Roger Douglas.

Though the amounts involved in US farm subsidies are relatively small in comparison with the Government’s budget deficit (around 1%-3% of the $1.34 trillion estimated by the Congressional Budget Office for 2010), it will be interesting to see whether the Republican-controlled House of Representatives has the courage to eliminate them as part of their much touted campaign to reduce Government spending.

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