Some say we’ve cut the federal budget to the bone, that there’s nothing more that can possibly be removed. But billions of dollars every year are wasted on programs that aren’t only inefficient, but are counterproductive.
Today we’ll begin a series of blog posts examining not only where federal spending can be cut, but where it’s morally important for it to be cut.
Take crop insurance programs, for example. The Senate voted last week to open debate on a bill that would see the expansion of a federal insurance program that compensates farmers for crop losses and price declines.
This planned expansion comes at a time when crop prices are soaring, and farmers are expanding on to millions of acres of land where extremely limited yields are likely. This combination could potentially translate into billions of dollars in loses for the U.S. government, should the land fail to produce, or prices decline.
With the average farmer earning 25% more than the average U.S. household ($84.400 vs. $67,530), these government insurance subsidies are as unnecessary as ever, and represent a transfer of wealth from lower-earning housholds to higher-earning households.
Federal crop insurance was established in 1938, when F.D.R. introduced many centrally planned programs across the economy. Today, the federal government specifically encourages participation in the federal crop insurance program by subsidizing farmers’ insurance premiums, and acting as the primary reinsurer for private insurance companies that underwrite the farmers’ policies.
In 2011, the government subsidized 62% of farmers’ total premiums, at a cost of nearly $7.4 billion, plus $1.3 billion in administrative costs. The federal crop insurance program allows farmers to insure against losses on more than 100 crops, including major crops such as corn, cotton, soybeans, and wheat, which accounted for 75% of the acres insured during 2011.
The bill the senate is debating would see the creation of another crop insurance subsidy, costing $3 billion per year, which would cover any losses farmers suffer before their crop insurance policies kick in.
The problem is that this federal insurance program only acts to incentivize farmers to plant on low yield land and reduce the amount of cash holdings they accumulate during years when output is strong. In addition, the potential for fraud is enormous. The government admits that, “Crop insurance fraud cases can be particularly complex in their details and correspondingly time-consuming to review.”
In other words, it’s pretty easy for farmers to game the system.
Don’t think for a second that farmers are unaware of the tremendous financial benefits the program provides. In a recent New York Times article on the issue, Darwyn Bach, a farmer in St. Leo, Minn. was quoted as saying, “When you can remove nearly all the risk involved and guarantee yourself a profit, it’s not a bad business decision. I can farm on low-quality land that I know is not going to produce and still turn a profit.” Bach said that because of crop insurance, he is guaranteed about $1,000 an acre in revenue before he plants a single seed.
What the government has created is a moral hazard, in which farmers decide to plant on land of limited yield because they know they are protected against any downside. This guarantee by the government against risk is exactly what drove banks on Wall Street to engage in risky lending and securitization practices.
In a free market, private insurance would never offer a price to a farmer that would make it profitable for him to plant crops on low-yielding land. It is pretty unsettling that the government is acting as the primary reinsurer, in addition to subsidzing insurance costs. As stated previously, with crop prices forecasted to rise, the government can only expect to pay more for any claims.
A GAO report on crop insurance states: “As crop prices increase, the value of the crops being insured increases, which results in higher crop insurance premiums and premium subsidies. For example, the prices of major crops were substantially higher in 2011 than in 2006, and premium subsidies in 2011 (about $7.4 billion) were substantially higher than in 2006 (about $2.7 billion). USDA forecasts that the prices of major crops–corn, cotton, soybeans, and wheat–will continue to be substantially higher than 2006 prices through 2016.”
There is absolutely no need to subsidize farmers’ insurance costs. The free market can work fine on its own. Let farmers deal with private insurers without any assistance and it will result in a more efficient market and won’t cost taxpayers a penny. As far as fluctuations in prices, farmers can enter into future contracts to eliminate price risk.
We might being seeing some progress on the need to cut crop insurance. President Obama asked the senate to cut crop insurance, and Sen. Tom Coburn (R-Okla.) and Sen. Richard J. Durbin (D-Ill.) are planning to offer an amendment that would cap crop insurance subsidies.
Cutting inefficient and counterproductive spending–especially when such spending is being financed by lower-earning households for the benefit of higher-earning households–should be an initiative that both liberals and conservatives can embrace.