Shallow-loss programs could leave taxpayers in deep trouble

Shallow-loss programs have been an explicit part of U.S. farm commodity subsidy policy since 2008. The 2008 Food Conservation and Energy Act introduced two such programs, the Average Crop Revenue Election (ACRE) program and the Supplemental Revenue Assistance Payments (SURE) disaster program.

Recently, three senators from the Northern Plains — Max Baucus (D-MT), Kent Conrad (D-ND) and John Hoeven (R-ND) — proposed their own commodity subsidy program in the form of a blend between ACRE and SURE in which payments would be triggered by farm-level yields in many cases.

This type of program is the most problematic variation on the shallow-loss theme from any economic efficiency, budgetary or trade-relations perspective. And farm lobbies are pushing hard to have exactly this type of program expanded.

Like the federal crop insurance program that currently accounts for the largest share of taxpayer outlays on agricultural programs (about $9 billion a year over the next 10 years, according to the CBO), the proposed shallow-loss programs contain features that could cause adverse consequences.

Under shallow-loss programs, revenue guarantees and support levels increase as prices and yields rise, regardless of the overall health of the farm economy. The taxpayer is therefore exposed to what could be budget-busting expenses if prices drop unexpectedly in the short term, even though those prices would themselves be relatively high. Shallow-loss programs have the potential to pay out large sums even though the loss is only on paper. It is indeed a strange policy that increases support levels in the face of rising crop prices and improving farm household incomes.

Another problem of shallow-loss programs is that, because they substantially reduce the negative financial consequences of risk-taking, they can encourage unwise and wasteful changes in farm management and crop production practices. As in other areas of economic activity, this moral hazard incentive will cause farmers to choose strategies that offer some prospect for above-average profits but relatively high probabilities for significant losses.

Why? Because, to the farmers, the losses do not matter anymore; they have become the taxpayer’s problem. Crop insurance programs in which indemnities are triggered by a farm’s yields have consistently been shown to have such effects. Shallow-loss programs based on a farm’s individual yields will simply make matters worse.

Finally, the fundamental structure of all of the proposed shallow-loss programs violates U.S. World Trade Organization (WTO) commitments to avoid introducing new “amber box” policies providing production incentives for crops, opening up the potential for numerous WTO trade complaints that the United States will find difficult to refute.

At a time when severe budget pressure is forcing legislators to consider cuts to food stamps, it does not seem appropriate to double down on wasteful farm subsidies that largely flow to wealthy households. Shallow-loss programs are not reforms; they are a big step backward. “Too big to fail” and “private gains, public losses” are Washington concepts that infected Wall Street and ended up costing Main Street. We shouldn’t extend those “privileges” to America’s heartland.

Vincent H. Smith is a professor of economics at Montana State University and a visiting scholar at the American Enterprise Institute. Barry K. Goodwin is the William Neil Reynolds Professor of Agricultural Economics at North Carolina State University. This essay is based on the recent AEI working paper and a part of the American Boondoggle: Fixing the 2012 Farm Bill project. Learn more at www.aei.org/americanboondoggle.