Don Paarlberg is Professor Emeritus at Purdue University in Indiana where he taught for many years. His degrees in agricultural economics were received from Purdue and Cornell University, supplemented by his own active experience as a farmer for nearly a decade. He has held appointments from three Presidents: Eisenhower, Nixon and Ford, having been a Special Assistant to the President, Coordinator of the Food-for-Peace program, Assistant Secretary of Agriculture and Director of the Agricultural Economics pro-gram respectively. He has also served as an economic advisor to four Secretaries of Agriculture: Benson, Hardin, Butz, and Knebel. He is the author of Farmers of Five Continents (1984), Farm and Food Policy: Issues of the 1980s (1980), Great Myths of Economics (1968), and American Farm Policy (1964). In March of 1987, Dr. Paarlberg presented this lecture during the Center for Constructive Alternatives (CCA) seminar, "The Legacy of the New Deal: Our Inheritance."
Editor's Preview: The American farmer has been one of the most important and enduring symbols of our independent heritage. He has also played a significant role in the development of our economy for over two hundred years. Yet today, ironically, he is less independent and less influential than members of most other constituent groups. Charity drives and calls for emergency legislation have been made on his behalf; he is on society's endangered species list and no one, least of all those in government, feel that he is capable of surviving on his own.
In this essay, Don Paarlberg, former Coor-dinator of the Food-for-Peace Program and Assistant Secretary of Agriculture, suggests that this insistence on subsidizing agriculture has guaranteed its demise. Mr. Paarlberg's valuable perspective as a farmer, agricultural professor, and government administrator lends considerable credibility to his own alter-native program to aid the American farmer.
A little more than 50 years ago, the New Deal farm program was launched. Today, we may refer to its "golden anniversary," but it is tarnished gold. I have a special stake in this judgment; I was a farmer when the programs began, later a university lecturer and researcher, and then a farm program administrator in Washington, D.C. I have been in retirement for a decade now, and have had ample time to reflect upon the New Deal's legacy to American agricultural policy.
The programs were initiated early, during the onset of the Great Depression, which was a terrible time. I remember it vividly. I was farming then with my father and brother in northwestern Indiana. Agricultural prices fell 56 percent from 1929 to 1932. The value of land declined by more than half. We had bought our farm in 1926, and paid half the purchase price in cash, but when the price of land collapsed, it wiped out our equity entirely.
In 1932, our return on labor and manage ment was a negative $1,200, even though the harvest was particularly good that year. Farms were being foreclosed; ours escaped only narrowly. We were able to refinance our farm and save it, but many were not so lucky. An ominous mood prevailed. Farmers overturned milk trucks and picketed packing plants. In Iowa, they set out to hang a federal judge.
Perhaps the Depression struck more severely in agriculture than in other fields of endeavor, but distress was recognizable everywhere. Unemployment hit hard. Prices for nearly every product plummeted. Worldwide, the value of farm products experienced a sharp decline, presaging dramatic political unrest. In Germany, and in Italy, representative governments were supplanted by dictatorships. There was talk of revolution even in the United States. Something had to be done, but what should be done? What was the cause of this debacle? Dozens of competing explanations for this catastrophic event were put forward by serious people, but among farm economists there were two leading schools of thought.
One, led by George F. Warren of Cornell University, assessed the problem as general, resulting from the collapse of money and credit. The remedy, said Warren and his adherents, lay in a revised monetary policy. With this diagnosis and prescription I agree.
The other school, led by John D. Black of Harvard, diagnosed the farm problem as arising within agriculture itself, the result of surplus production. The remedy, according to this group, consisted of reducing supplies so as to increase prices.
Belief that the problem was a phenomenon of money and credit had much to support it, however. The money supply in the United States fell by one-third during the Depression. Similar declines in the stock of money occurred in other countries and prices fell for virtually all commodities, agricultural and otherwise, regardless of whether they were abundant or in short supply. This was the case in every country for which statistical information is available. But at the time, neither farmers nor farm politicians understood the complexities money, credit, or central banking involved.
The contention that the problem was over-production was, to them, quite persuasive. They knew that excessive production meant low prices and reasoned that this was the reason for the decline. But their superficial cure rested on a poor diagnosis. Total agricultural production during the five first years of the Great Depression—the worst years by far—was 2 percent below the production of the five preceding years.
The general populace and the policymakers were certain that something had to be done. It was felt that with the low prices of internationally traded farm products, American agriculture could not compete in world markets. The proposal was advanced that we should raise domestic farm prices above the international rate and limit production to what the domestic market could handle; we would only sell abroad such small amounts as would be acceptable at our higher rate. Intervention in the market system on this scale could not be accomplished by individual farmers' decisions; it had to be accomplished by the government. Consensus formed around the plan and spawned the Agricultural Adjustment Act, which was passed by the U.S. Congress on May 12, 1933.
Those who bore responsibility for our money and credit system in the Roosevelt administration were happy with the surplus theory for low farm prices; it meant acceptance of a micro-analysis for what was in fact a macro-problem. It helped place the onus for the farm disaster on the impersonal forces of overproduction rather than on Roosevelt's inept bureaucrats' own inept monetary management.
Had our monetary and credit system been better managed in the 1920s, the Great Depression might have been averted. Sadly, it was not, but even given the Depression's disastrous effect on agriculture, it would have been better to put a government check in each farmer's mailbox and avoid tampering with the market. Certainly government price-fixing and production control ought to have been terminated with the outbreak of World War II, when the Depression disappeared. Instead, we continued the programs for more than 50 years.
Passage of the New Deal farm program was a major change in the farm-policy agenda. For 70 years, after passage of the Morrill Act which set up the land grant colleges, the farm-policy agenda had been agricultural development; the components of that policy were research, classroom teaching, on-site education, and improvement of agricultural resources. Professor Earl Heady of Iowa State University once called this "the best, the most logical, and the most successful program of agricultural development anywhere in the world."
This historic agenda, based on increased production, individual farmer decision and competitive markets, was not compatible with the ideas underlying the New Deal farm program. Very quickly the historic farm-policy agenda was nudged aside by statist bureaucrats. The key words for the new farm-policy agenda were relief, recovery and reform. Relief was to come from a number of sources, including the Federal Emergency Relief Administration. Recovery was to be accomplished by the transfer of decisionmaking from the market to the government, specifically price support and production control. Reform was to come from modifications of the competitive system that would reduce the likelihood of another debacle. It consisted not only of price supports but also of new institutions of farm credit, new tenure arrangements, federal crop insurance, and special help for the disadvantaged sectors of agriculture.
I recall well the revival of hope on the farm front that accompanied passage of these New Deal farm programs. Farmers were given a role in working out their own chosen solutions to their problems. They were put on committees by the thousands. They elected officers, attended meetings, and spoke their minds. Government checks began to flow. The hemorrhage of farm foreclosures began to abate. On every hand was evidence that the government cared. The Great Depression dragged on, but the mood changed for the better on American farms. The New Deal's agricultural policies were in the early years accompanied by better morale and some visible improvement in economic conditions on American farms.
But now the early years are far behind. What has been the long-term experience with these programs? What of the New Deal farm-policy agenda of relief, recovery, and reform? Relief came with the Federal Emergency Relief Administration, the flow of government funds, and innovative lending on the part of new credit agencies. On that score, the New Deal must be given high marks.
Recovery was only partial until the outbreak of World War II, seven years after the passage of the initial New Deal legislation. Agricultural recovery from the Great Depression must be credited more to the stimulus of war than to management of supply and price.
Reform was, for the greater part, aborted. The agricultural elite, generally the large landowners, managed to retain most of the program benefits themselves rather than share them with tenants or employees. The Resettlement Administration and its successor, the Farm Security Administration, both intended to lift the status of agriculture's disadvantaged, were closed out. Today's incarnation of these two agencies, the Farmers' Home Administration, has been co-opted by the agricultural establishment. The New Deal farm programs, intended to lift average farm income, actually widened the income gap between the top and bottom economic groups.
Relief was achieved, recovery occurred for other reasons, and reform miscarried.
With the passage of time, a new and unadvertised agenda emerged. The programs became preferential, profligate, and perennial.
They were preferential to start with; they began by designating six "basic crops"—cotton, corn, wheat, rice, peanuts, and tobacco. Dairy products soon joined the group. Left out of the program were more than 100 other crops and all livestock products. More, in fact, was left out than was included. The politically influential basic crops produced only about 20 percent of the agriculture industry's income but received 75 percent of the program benefits. The omitted crops not only were left out; they also had to bear the burden of the increased output that occurred on acres diverted from the basic crops. Producers of cattle, hogs, and poultry had to accept the higher feed cost that resulted from reducing corn acreage, for example.
The programs were preferential in a flagrant fashion. The top one percent of the farmers got 21 percent of the benefits. The programs also raised the retail price of food, even though the average consumer had less net income than the big farmers who got most of the program benefits. So the New Deal policies transferred income from those who were poor to those who were, at least comparatively, wealthier. Despite the New Deal rhetoric about helping the Forgotten Man, the government's farm program was and still is regressive. Not only are the average incomes of the chief program beneficiaries above those of the average consumer but also the average equity of farm families is higher than the average of the nation's families—almost four times greater, as reported recently by Mary Ahearn of the Economic Research Service of the U.S. Department of Agriculture.
The New Deal farm programs were not only preferential; they were profligate. Estimated calendar year 1986 governmental outlays to the farm sector, including about $12 billion of direct payments and nearly an equal sum in commodity loans, totalled approximately $25 billion, a figure almost as large as the net farm income for the entire country in the same year.
The programs were and are not only preferential and profligate, they also have become perennial. They have flourished for more than 50 years, long after relief had been supplied, recovery achieved, and reform forgotten.
There are other indictments of these programs. By pricing ourselves out of foreign markets and reducing crop production, we have conceded market growth to rival exporters: the Canadians, the Argentinians and the European Economic Community. We have held the umbrella for the cotton growers of Brazil, the wheat growers of Australia, the corn growers of Western Europe and the tobacco growers of Africa.
The independent spirit of American farmers has been undermined by these programs which have grown to such size that producers of wheat, corn, cotton, and rice are now reliant on government for the bulk of their net incomes. The programs are "voluntary:' but the penalties for nonparticipation are now so great that a farmer who wishes to be self-reliant is nevertheless virtually forced to sign up. This subversion of formerly independent farmers is one of the worst attributes of government farm programs.
Another adverse aspect is the lax manner in which these programs are run and the consequent erosion of respect for law. Policies are administered at the local level by farmer committee members who are reluctant to impose penalties on their neighbors. So farmers, with no restraint, rent their poorer acres to the government and pour the fertilizer on their better acres. The government pays for a 20 percent reduction in acreage and gets less than a 10 percent reduction in output. There is a $50,000 limitation on payments, so big farmers divide the farm—on paper—among their spouses, children and tenants, collecting $50,000 on each bogus farm, again without restraint. Farmers talk frankly with equal parts of cynicism, humor and guilt about "farming the government."
From the beginning it was claimed that these programs would bolster farm income, keep farmers from going broke, and thus keep the people on the land and preserve the family farm. What are the facts? When the New Deal program began, America boasted of 6 million farms; now only 2 million survive.
With the advance of farm technology and the consequent increase in farm size, agriculture is becoming industrialized, a trend that no farm program can be expected to avert. In my grandfather's day it was common for the farm operator and his family to supply all the factors of production—land, labor, capital, and management. This was, in fact, the underlying concept of the family farm. But with the industrialization of agriculture, farms have grown to such size and capital needs have become so great that the ordinary farm family cannot supply all these factors. Land, labor, capital, and management are now being split up and supplied by different entities, much as is the case in factory production. The only way the family farm can be preserved is to redefine it. Let me suggest a modern definition: A family farm is one on which the operator and his family supply the majority of the labor and management. This leaves unspecified the suppliers of land and capital. With this modern definition, most of the dwindling number of farms are still family farms.
Some of the antics of the commodity programs are so ludicrous as to be almost unbelievable. Dairy programs are perhaps the most fantastic. The government supported the prices of dairy products with the intention of increasing dairy farm incomes. But, as every student who has taken a beginner's course in economics knows, the result was to stimulate production, reduce consumption, and accumulate a surplus. The surplus of butter, cheese, and dried milk was then donated to those on the welfare rolls. This proved to be an inadequate outlet so then these products were donated overseas. The surplus was still growing so the government bought and slaughtered whole herds of dairy cattle. Thereupon the beef cattle producers, who are self-reliant and are not shielded by price supports or production controls, complained of this subsidized competition with their product and the government responded by purchasing beef for donation to the school lunch program. This did not adequately alleviate the complaints of the beef producers so the government exported beef from the slaughtered dairy herds, a strange action indeed since we suffer from beef shortages and import substantial amounts. Our forced exports of dairy beef disturbed other beef exporters, making an additional problem for the GATT multinational trade negotiations in Geneva. All of these questionable strategies were undertaken because the government was unwilling to follow the most simple and effective expedient: lowering the official price.
Meanwhile, those dairymen who stayed in business currently anticipate a reduced supply of milk and a better market. They are increasing their herds and laying the basis for a larger supply of milk. Like the sorcerer's apprentice, they have heard the signal for delivering more water (in this case, milk) and have heard no credible signal for stopping. The commodity programs create surplus. They make a burden of what should be a blessing—our capability to produce food.
It is not as if we lacked precedents for commodity programs and so had to learn the principles of price competition by pioneering experience. In the 1920s the Stevenson Plan reduced the supply and raised the price of rubber in the Malay States and so stimulated rubber production in a rival country, Java. Some years later the Brazilians restricted the supply and raised the price of coffee, putting a competitor, Africa, in the coffee business.
The United States is not alone in these mistakes. The Europeans, with their Common Agricultural Policy, are on a course similar to ours. Canada, Australia, and Argentina tailgate us. For 50 years we have almost unilaterally adjusted production, supported the price, carried the stocks, and paid the bill. Other exporters moved in to take the markets from which we withdrew.
There were agricultural economists who warned about these programs from the beginning, among them G.F. Warren and F.A. Pearson of Cornell and T.W. Schultz of the University of Chicago. As the years have gone by, other agricultural economists have opposed them: D. Gale Johnson, G.E. Schuh, Varden Fuller, Bruce Gardner, and now recently Willard Cochrane, who has courageously reversed his earlier position. The political scientist Charles M. Hardin has given these programs scholarly and unfavorable examination. Every Secretary of Agriculture since World War II has spoken out strongly against them: Benson, Freeman, Bergland, Hardin, Butz, Knebel, Block, and Lyng. Every President, Democrat and Republican, beginning with Eisenhower, has tried to scale them back. But these voices have been overwhelmed by the tide of political advocacy, aided by the funds of political action committees.
Why have the programs continued so long, despite their obvious failure? There are some politically powerful farmers who, in the short run, gain by them. The public thinks well of farmers and is under the illusion that with these programs we protect the family farm. We are riding a tiger and fear to dismount lest we get mauled. In other words, there appears to be more political advantage in continuing the programs than there would be in taking the tough steps necessary to correct them.
These can no longer be correctly called New Deal programs; they have been adopted by most of the Republican farm politicians. As an observer, I can no longer find credible differences in the Congress between the farm politicies of the two major parties.
These programs, at their beginning, were innovative, addressed to the severe problems of an unfortunate minority, and were intent on coping with a truly disastrous situation—all attributes of what has come to be considered the liberal movement. They had the support of well-meaning politicians who sought to rectify a terrible problem. But during the past half-century, the programs have been co-opted by the agricultural elite and are now programs for the privileged. Farm lobbyists, knowing that farmers have the good will of the public, have estimated the value of that good will at so many billion dollars and are selling it off at so much a year. They need to know that they can't sell off an asset and still continue to possess it.
Presently there is authentic economic distress in agriculture. In my judgment, a major cause is ill-advised macro-economic behavior. During the '70s, expansionary credit and monetary policy caused inflation. Farm operators judged that this pattern would continue and borrowed heavily, hoping to repay with cheaper dollars. The expected inflation did not occur. We were racing down the highway, exceeding the speed limit. Then the monetary authorities put on the brakes, throwing farmers—and others—against the windshield. To this macro-problem is added a micro-problem—excess agricultural production, resulting in part from the stimulus of artificially high price supports here and abroad. As was the case 50 years earlier, farm politicians and farm lobbyists are trying to correct agricultural problems with commodity programs—which in some measure caused them, were unable to prevent them, and cannot cure them. Less than one-third of the government payments presently go to farmers who are experiencing financial stress. Efforts to target the programs to those in real trouble have been ignored. Presently the greatest difficulties are with the protected products—corn, wheat, cotton, rice, dairy. The unprotected products which have been selling in competitive markets—hogs, cattle, poultry, and most fruits and vegetables—are doing fairly well. One would think that this obvious fact would cool the ardor for the big commodity programs, but this has not been so.
The liberal myth is that competitive markets are selfish and are contrary to the public interest. Government programs, think the liberals, take economic activity out of the competitive environment and transfer it to the public sector where every person has a vote, assuring that the public interest will be uppermost. The chief lesson to be learned from this review is that for the farm programs the myth simply isn't true.
These programs have been built into land values, mortgaged indebtedness, living levels, community services, political careers, government jobs, and farmer expectations. Have we passed the point of no return? Is our reliance on these programs now so great that escaping from them would entail pains greater than we would be willing to bear?
There have been attempts to scale back our dependence on these programs, to buy our way out, to lay down a plan for a gradual withdrawal. Up to now these have failed. The Food Security Act of 1985 as conceived by the Reagan administration is a plan for withdrawal. Boldly and wisely, it lowers the level of prices for the supported crops. It attempts to scale back our excess agricultural capacity with a conservation reserve to convert 50 million acres of unneeded cropland to trees and grass.
But, contrary to the administration's wish, the Act holds target prices at a high level, making it by far the most expensive farm program in history. The Act is considered by the farm lobby as a model for free-spending farm programs indefinitely into the future. The farm lobby doesn't want to be escalated out of these programs any more than a typical drug addict wants to undergo withdrawal.
The proper course, in the opinion of this observer, is to:
It may be that at some point the public will become concerned about the cost of these programs, will come to see that they are preferential and profligate, and will rebel at their perennial nature. But cost is not the constraint it once was, since we no longer cover the cost with taxes but increasingly finance them with deficits.
If the programs are to be cut back and reformed, the effort will have to be applied from outside the farm sector; the farm lobby will never discipline itself. One hopes that if reform occurs, the programs would be so changed as to reduce instability, a legitimate objective. The purpose should be to cut down the amplitude of price fluctations around the equilibrium level rather than attempt to raise the level itself.
But maybe this is too much to hope. Some 30 years ago President Eisenhower learned that there was a tea-tasting unit in the Department of Commerce, placed there in the early days of the Republic to assure that the tea merchants of China and India did not sell us low-quality tea or stretch out the product with some adulterant. The President, intent on economy, thought this was an agency that could be abolished, and so intended. But the grocery chains rose in protest; their quality control and pricing schedules had become institutionalized around this governmental unit. Rather than use his political capital on this small issue, the President gave in.
I leave you with the question: Have the New Deal farm programs become equally institutionalized so that, despite their obvious failure, they cannot be basically changed?
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