The "Beltway Cut"

info@reason.com (Stephen Slivinski) — Mon, 12 Feb 2007 06:00:00 EST

So you're the president. Your party has just taken a beating in the 2006 mid-term elections. Voters came to realize that your party—over the previous 20 years has been affiliated in the public imagination with fiscal discipline—was no longer interested in making government smaller. So when it comes time to present your first federal budget in the post-rout era, what do you do?

If you're George W. Bush, you start the spending bonanza all over again, with an opening bid of $2.9 trillion. You increase the Pentagon budget by 10 percent, and that's before you add the price of the troop surge for the increasingly unpopular war in Iraq. In short, you do what you've always been doing. You spend like hell and hope nobody—particularly fiscal conservatives—pays attention.

If you've followed media reports about the budget, you might have the impression that the Bush budget actually cuts spending overall. The Boston Globe, for instance, reported “deep cuts” in the Bush plan. But only by the pretzel logic of Washington could an overall spending increase of 4 percent, as Bush has proposed, be considered a cut. It’s what you might more accurately call a "Beltway cut."

Here's how it works: Assume government spending will continue to grow annually by seven percent on average, as it has for the past six years. Then imagine you only get a four percent increase this year. Official Washington would see this as a three-percentage point cut. It's the fiscal equivalent of a recovering alcoholic drinking only two and a half beers instead of the whole six-pack before the A.A. meeting.

Another example of the Beltway cut is the president's proposal for Medicare, a program which is already racking up an estimated $32 trillion dollar deficit over the next 75 years. The new budget simply reduces the expected growth of the program from an average of 6.5 percent each year to 5.6 percent. That modest decrease in the rate of expansion was enough to make the New York Times editorial board livid, calling it an attempt to “slash key entitlement programs.”

The Bush proposal does include some useful structural changes to Medicare that could reduce the long-term deficit in that program by $8 trillion. But even that is yet another version of the Beltway cut. His Medicare drug benefit has already increased those unfunded liabilities by more than $8.7 trillion. His proposals still leave a $700 billion hike intact.

In order to balance the budget by 2012, as Bush claims he wants to do, spending would have to actually be cut from current levels. But what’s so special about 2012? The president could have presented a plan that really cuts overall spending, and balances the budget by the time he leaves office. This might have helped repair some of the damage of the past six years, during which Republicans successfully destroyed their image as the party of small government by hiking non-defense spending over 40 percent since 2001. And balancing the budget in the next two years would completely eliminate the Democrats' ability to use the deficit as a reason to kill the Bush tax cuts. Instead, the president has honed in on 2012, four years after he's left office.

Meanwhile, Democrats will continue to say the president’s budget will destroy the social safety net and the press will continue to claim it is austerity incarnate. The bipartisan embrace of the Beltway cut continues and political life goes on. Everyone goes home happy.

Except taxpayers.

Stephen Slivinski is director of budget studies at the Cato Institute and author of Buck Wild: How Republicans Broke the Bank and Became the Party of Big Government .

Six Reasons to Kill Farm Subsidies and Trade Barriers

Wed, 01 Feb 2006 00:00:00 EST

America's agricultural policies have remained fundamentally unchanged for nearly three-quarters of a century. The U.S. government continues to subsidize the production of rice, milk, sugar, cotton, peanuts, tobacco, and other commodities, while restricting imports to maintain artificially high domestic prices. The competition and innovation that have changed the face of the planet have been effectively locked out of America's farm economy by politicians who fear farm voters more than the dispersed consumers who subsidize them.

The time is ripe for unilaterally removing those distorting trade policies. In 2006 Congress will begin to write a new farm bill to replace the protectionist and subsidy-laden 2002 legislation that is set to expire in 2007. Meanwhile, the Bush administration will be negotiating with 147 other members of the World Trade Organization to conclude the Doha Round before the president's trade promotion authority expires in mid-2007. Congress and the administration should seize the opportunity to do ourselves a big favor by eliminating farm subsidies and trade barriers, a change that would benefit all Americans in six important ways.

1. Lower Food Prices for American Families

The foremost reason to curtail farm protectionism is to benefit American consumers. By shielding the domestic market from global competition, government farm programs raise the cost of food and with it the overall cost of living. According to the Organization for Economic Co-operation and Development, the higher domestic food prices caused by U.S. farm programs transferred $16.2 billion from American consumers to domestic agricultural producers in 2004. That amounts to an annual "food tax" per household of $146. This consumer tax is paid over and above what we dole out to farmers through the federal budget.

American consumers pay more than double the world price for sugar. The federal sugar program guarantees domestic producers a take of 22.9 cents per pound for beet sugar and 18 cents for cane sugar, while the world spot price for raw cane sugar is currently about 10 cents per pound. A 2000 study by the General Accounting Office estimated that Americans paid an extra $1.9 billion a year for sugar due to import quotas alone.

American families also pay more for their milk, butter, and cheese, thanks to federal dairy price supports and trade barriers. The federal government administers a byzantine system of domestic price supports, marketing orders, import controls, export subsidies, and domestic and international giveaway programs. According to the U.S. International Trade Commission, between 2000 and 2002 the average domestic price of nonfat dry milk was 23 percent higher than the world price, cheese 37 percent higher, and butter more than double. Trade policies also drive up prices for peanuts, cotton, beef, orange juice, canned tuna, and other products.

These costs are compounded by escalating tariffs based on the amount of processing embodied in a product. If the government allowed lower, market prices for commodity inputs, processed foods would be substantially cheaper. Lifting sugar protection, for example, would apply downward pressure on the prices we pay for candy, soft drinks, bakery goods, and other sugar-containing products.

The burden of higher domestic food costs falls disproportionately on poor households. Farm protections act as a regressive tax, with higher prices at the grocery store negating some or all of the income support the government seeks to deliver via programs such as food stamps.

If American farm subsidies and trade barriers were significantly reduced, millions of American households would enjoy higher real incomes.

2. Lower Costs and Increased Exports for American Companies

Producers who export goods to the rest of the world and manufacturers who use agricultural inputs would also stand to benefit significantly from farm reform. So would their employees.

When government intervention raises domestic prices for raw materials and other commodities, it imposes higher costs on "downstream" users in the supply chain. Those higher costs can mean higher prices for consumers, reduced global competitiveness for American exporters, lower sales, less investment, and ultimately fewer employment opportunities and lower pay in the affected industries. Artificially high commodity prices drive domestic producers abroad to seek cheaper inputs--or out of business altogether.

In the last two decades, the number of sugar refineries in the U.S. has dwindled from 23 to eight, largely because of the doubled price of domestic raw sugar. During the last decade thousands of jobs have been lost in the confectionary industry, with losses especially heavy in the Chicago area. Expensive food also hurts restaurants.

Enterprises outside the food business would benefit from farm reform as well. Rich countries' agricultural trade barriers remain the single greatest obstacle to a comprehensive World Trade Organization (WTO) agreement on trade liberalization. The current round of talks, the Doha Development Round, came to a halt in Cancun in 2003 when the Group of 20 developing countries demanded more serious farm reform by the rich countries as an essential pre-condition. Any progress at the December 2005 meeting in Hong Kong and beyond will depend on real progress in cutting U.S. farm subsidies and trade barriers.

A successful Doha Round would lower trade barriers for a whole swath of industrial products and services. A 2001 study by Drusilla Brown at Tufts University and Alan Deardorff and Robert Stern at the University of Michigan estimated that even a one-third cut in tariffs on agriculture, industry, and services would boost annual global production by $613 billion, including $177 billion in the United States--or about $1,700 per American household. Some of the country's most competitive sectors, including information technology, financial services, insurance, and consulting, probably would increase their share of global markets if the Doha Round were successful. Farm reform remains the key.

A common argument against liberalization is that the U.S. should hold onto its agricultural tariffs as "bargaining chips" in WTO negotiations. The worry is that if we were to dismantle our barriers unilaterally, other countries would lose any incentive to give up theirs.

But reducing protectionism would not primarily be a "concession" to other countries. It would be a favor to ourselves. In the process we would set a good example and create good will in global negotiations, inviting other countries to join us in realizing the benefits of lower domestic food costs.

3. Budget Savings and Equity for U.S. Taxpayers

Agricultural reform also would reduce the cost of government. The Office of Management and Budget estimates that taxpayers shelled out an expected $26 billion in direct agricultural subsidies in fiscal year 2005--the biggest single-year subsidy bill since 1986. Just nine years ago, Congress promised to phase out farm subsidies by 2003. Instead they've reached near-record highs.

Subsidy levels before 1996 were set by a formula that triggered an increase when crop prices fell. Starting in 1995, crop prices began to rise, resulting in lower payments from the federal government. The Freedom to Farm Act, passed in 1996 when commodity prices were high and demand for subsidies low, ended the price support program and replaced it with a declining fixed payment unrelated to market prices. Payouts were scheduled to drop from $5.6 billion in 1996 to $4 billion by 2002 and then disappear.

But Congress reversed course in 1998, when crop prices began to decline, passing an "emergency" supplemental bill that raised total farm subsidies to $12.4 billion. Subsequent supplementals hiked handouts to new heights, totaling more than $76 billion between 1999 and 2002, a whopping $57 billion more than the Freedom to Farm Act originally mandated.

In May 2002, President George W. Bush hammered the final nail into Freedom to Farm, signing a six-year appropriation that revived the old price support program. Taxpayers have coughed up $55.5 billion in the three fiscal years since. For the same money Congress paid to farmers during the "phase-out" period between 1995 and 2003, the federal government could have purchased outright more than a quarter of the country's farms.

Yet two-thirds of American farmers don't even receive subsidies. So where does all that tax money go? Mainly to large agribusinesses and the richest family farmers. In 2003, the most recent year for which comprehensive statistics are available, the top 10 percent of all subsidy recipients gobbled up 68 percent of the money, and the top 5 percent got 55 percent.

Take, for instance, Riceland Foods in Stuttgart, Arkansas, the largest single recipient of farm welfare. In 2003 it received $68.9 million in subsidies for producing rice,
soybeans, wheat, and corn--more than all the farmers in Rhode Island, Hawaii, Alaska, New Hampshire, Connecticut, Massachusetts, Maine, Nevada, and New Jersey combined.

The second-largest recipient of farm welfare in 2003 was Producers Rice Mill, also in Stuttgart, Arkansas, which received $51.4 million. The agricultural welfare rolls also include many Fortune 500 companies, such as Archer Daniels Midland and International Paper, plus corporations most people don't associate with farming, such as Chevron, Caterpillar, and Electronic Data Systems.

From the taxpayer's perspective, there is no good reason why the federal government should continue to subsidize farmers or companies, especially those that can remain profitable on their own.

4. More Environmentally Friendly Land Use

The distortions and perverse incentives of U.S. agricultural policies have encouraged practices that damage the environment. Trade barriers and subsidies stimulate production on marginal land, leading to overuse of pesticides, fertilizers, and other effluents. A central if unstated purpose of American farm policy is to promote production of commodities that would not be economical under competitive, free market conditions. This often means emphasizing crops better grown elsewhere, requiring more chemical assistance.

Overuse of fertilizers and pesticides adds to runoff that pollutes rivers, lakes, and oceans. According to the World Resources Institute, agriculture is the biggest source of river and lake pollutants in the United States. A study by the Environmental Protection Agency found that 72 percent of U.S. rivers and 56 percent of lakes it surveyed suffer from agriculture-related pollution. Areas of the Gulf of Mexico have become "dead zones" because of the runoff from farms in the Midwest. Even where fertilizers and pesticides are not used intensively, the mere act of plowing soil eliminates forest and grass cover, leaving soil exposed for weeks at a time and vulnerable to erosion. Erosion can build up silt in nearby rivers and downstream lakes.

Domestic sugar protection has maintained a concentration of producers in central Florida who have used up water from the endangered Florida Everglades while spitting back phosphorous content far above the level consistent with maintaining the surrounding ecosystem. The high runoff has seriously reduced periphyton, such as algae, that supports birds and other animal life. Congress has spent billions to repair the damage caused to the Everglades by the protected sugar industry.

Farm programs also waste scarce water resources, especially in the arid West. Agricultural water subsidies alone amount to around $2 billion annually, propping up such uneconomical enterprises as growing cotton in the Arizona desert.

Finally, farm programs crowd out more environmentally friendly land uses by artificially driving up land prices. A sizeable share of the increased income that protection and subsidies deliver to farms becomes "capitalized" through higher land values, because the subsidies increase the stream of income that land can produce. Higher prices for farmland, in turn, render it more expensive to acquire and maintain environmental preserves, parkland, forests, or other land use alternatives that would be more likely to preserve habitat and biodiversity. By keeping marginal farmland under cultivation, the government has slowed the trend of reforestation.

When New Zealand dramatically reduced farm trade barriers and subsidies in the mid-1980s, farmland values fell sharply, allowing marginal land to return to such uses as forestry and eco-tourism. The use of fertilizers declined, along with overgrazing and soil erosion.

5. Larger Markets for U.S. Farmers and Economic Diversity for Rural America

Federal farm programs actually work against the interests of many farmers. Growers, especially the two-thirds who don't receive subsidies, pay a heavy price through lost export opportunities from high trade barriers abroad. Agriculture exporters face average foreign tariffs that are several times higher than the average tariffs on manufactured products. The most promising opportunity to lower those barriers is the Doha Round, which won't achieve a breakthrough until the rich countries stop trying to prop up their farms.

If global barriers to farm trade were removed, the World Bank estimates, worldwide farm exports would be 74 percent higher in 2015 than they would otherwise. American farmers would be among the biggest winners:

Comprehensive reform would mean an additional $88 billion in annual U.S. farm exports by 2015 and an additional $28 billion in farm imports, for a net $60 billion surplus.

Protection has not served the long-term interests of even the most protected farm sectors. Barriers to commodity imports discourage diversification of production into higher-value-added items and retard development of the food processing industry. They discourage domestic consumption and encourage the use of lower-priced substitutes, undermining the protected sectors' own domestic market share.

Artificially high prices for sugar, for example, have contributed to a long-term decline in domestic sugar consumption. Today Americans consume about 40 percent less sugar per capita than they did when consumption was at its peak in 1972. Domestic sugar has been replaced on the menu not by imports but by U.S.-made substitutes such as high-fructose corn syrup and low-calorie sweeteners such as Splenda. Sugar's share of the domestic sweetener market has been cut in half since 1967.

Experience shows that American farmers can thrive in free and open markets. American farmers profitably produce lettuce, celery, cauliflower, potatoes, almonds, pistachios, apples, pears, cherries, melons, blueberries, grapes, and hundreds of other specialty crops without guaranteed prices or protected markets. The impact of farm subsidies on land prices makes growing these unprotected crops more expensive, and barriers caused by the protection of other crops block exports.

The experience of New Zealand and Australia demonstrates that farmers can survive and thrive without significant state support. Both of those countries enacted sweeping, unilateral reforms, including the elimination of import barriers and domestic price support subsidies. As expected, some farms have gone out of business, but many others have changed their operations to meet consumer demand. The result has been not a massive downsizing of the agriculture sector but a surge of innovation, productivity, and output.

6. A More Hospitable World

The collective effect of American farm policies is to depress the income of agricultural producers worldwide, exacerbating poverty in areas, such as sub-Saharan Africa and Central Asia, where people are heavily dependent on agriculture.

The frustration and despair caused by these policies undermine American security. Many people who depend on agriculture for their survival, both as a source of nourishment and a means of acquiring wealth, perceive U.S. farm policy as part of an anti-American narrative in which Washington wants to keep the rest of the world locked in poverty. Indeed, in a survey of anti-American sentiment around the world, the Pew Research Center found a majority of respondents in more than a dozen countries were convinced that U.S. farm and trade policies increased the "poverty gap" worldwide. These sentiments transcended geographic, ethnic, or religious boundaries. In such an environment, terrorist ringleaders find fertile ground for their message of hate and violence.

Nicholas Stern, chief economist at the World Bank, is blunt about America's leadership role. "It is hypocritical to preach the advantages of free trade and free markets," Stern told the U.N. publication Africa Recovery, "and then erect obstacles in precisely those markets in which developing countries have a comparative advantage." Johan Norberg, of the Swedish think tank Timbro, argues that farm protection in developed countries amounts to a "deliberate and systematic means of undermining the very type of industry in which the developing countries do have comparative advantages." (See "Poor Man's Hero," December 2003.)

American subsidies and tariffs amount to much more money than its foreign aid to the developing world. According to Oxfam, "in crop year 2002, the U.S. government provided $3.4 billion in total subsidies to the cotton sector," including about 25,000 growers. "To put this figure into perspective," Oxfam says, "it is nearly twice the total amount of U.S. foreign aid given to sub-Saharan Africa. It is also more than the GDP of Benin, Burkina Faso, or Chad, the main cotton-producing countries in the region." The subsidies drive down world cotton prices, costing developing countries billions of dollars in lost export earnings.

Poor countries don't want our pity; they want our respect. To the extent that American security depends on the expansion of liberal democratic institutions and free market economics, Washington must be particularly sensitive to policies that exacerbate poverty in the developing world.

An Opportunity for Real Reform

For the sake of our broader national interest, Congress and the president should reduce, with the ultimate goal of eliminating, all agricultural trade barriers and production subsides. The long-term interests of Americans as consumers, producers, taxpayers, and citizens of the world should not be sacrificed for the short-term interests of a small minority of farmers.

Reform is a real possibility. The WTO's Doha Round will hit a hard deadline in 2007. That's also when Bush's authority to negotiate trade agreements and present them to Congress for an up-or-down vote will expire under the terms of the Bipartisan Trade Promotion Authority Act of 2002. Without such authority, it will be virtually impossible for the White House to conclude a complex multilateral agreement with the other 147 members of the WTO. Aggressive proposals by the U.S. government to slash its farm subsidies and trade barriers, and the willingness of Congress to make those proposals a reality, will be necessary for the successful conclusion of Doha by the 2007 deadline.

Meanwhile, the U.S. cotton program and the European Union's sugar subsidies have been found in separate WTO cases to be in violation of the body's trade rules. Both cases cast doubt on the legality of similar farm programs in the rich countries.

On the domestic front, the farm bill will be coming up for reauthorization at about the same time that the Doha Round negotiations enter their final stages. A new farm bill offers Congress an obvious opportunity to fundamentally reshape agricultural policy.

A farm bill with deep cuts in subsidies and trade barriers would save U.S. taxpayers and consumers tens of billions of dollars during the next decade while potentially opening markets abroad for tens of billions more in American exports across the economy. Congress and the president should seize the opportunity to bring America's farm sector into the nurturing sunlight of an open global market.

Table 1: Government Support for Farm Production in 2004

	Total Producer Support of Farm Income	Support as a Share
European Union	$133.4	33%
Japan	48.7	56
United States	46.5	18
South Korea	19.8	63
Turkey	11.6	27
Switzerland	5.8	68
Canada	5.7	21
Mexico	5.4	17
Australia	1.1	4
New Zealand	.3	3
Total	$279.5	30%
*Producer support estimate, in billions U.S. $
Source: Organization for Economic Cooperation and Development

Table 2: Aggregate Measure of Protection Against Developing Countries (tariff equivalent)

	United States	European Union	Japan
Agriculture	19.9%	46.6%	82.0%
Textiles, Apparel	10.9	11.6	9.2
Other Manufacturers	2.1	3.2	1.5
Oil and Other*	.9	.6	.3
All	4.0%	9.5%	16.6%
*Other = "non agricultural raw materials"
Source: William R. Cline, “Effective Economic Growth for People: The Role of the United States,” Center for Global Development, December 2004, p.4; and Cline, Trade Policy and Global Poverty

Figure� 1: Direct U.S. Government Payment to Farmers, 1990�2004 (in billions of dollars)

(graph not available online)

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