Shallow Loss: Another Entitlement Program

If you don’t support the Farm Bill, then you must hate farmers or food stamp recipients, right?  Actually, this is not the case, at all; in reality, if you do not support the Farm Bill, you are one of the Americans who are able to spot a waste of taxpayer money when he or she sees it.  The shallow loss program in this year’s Farm Bill is hardly a better alternative to the previous direct payment plan.  Under the shallow loss program, if farming profits fall below 90% of the previous five year’s average, taxpayers will be responsible for covering the difference.  Currently, the farming industry is experiencing record-high profits, and to some that means a new wasteful entitlement program must be established.

Conservatives regularly, and rightfully, preach about the problems with entitlement programs, but what is Congress doing about it?  Judging by the new Farm Bill, not much.  The good news is that this year’s Farm Bill removes the costly direct payment program.  The bad news is that the new Farm Bill replaces the direct payments with a brand new entitlement program, the shallow loss crop insurance program.  While the government has long (and very generously) subsidized crop insurance for catastrophic crop loss, the shallow loss program, insures much smaller fluctuations in revenues, essentially guaranteeing near record-high profits for farmers.  

While the Congressional Budget Office estimates that the cost of the shallow loss program will be around $3.2 billion per year, people should be cognizant of the fact that the CBO’s estimates are based on the assumption that farming revenues will remain at, or near, the current record-high earnings.  However, when prices inevitably return to their average levels, taxpayers will be forced to pay around $5-7.5 billion per year, and with no cap on spending, the shallow loss program could consume an even more absurd portion of the federal budget in the future.  

Furthermore, if the farming industry is experiencing record-high revenues, then why must its safety-net, already overly generous, be expanded?  Shallow loss is nothing more than welfare for farmers, despite the fact that farmers tend to be financially secure—the median income for farmers is $20,000 above the national average, and their average debt-to-asset ratio is only 9%.

Additionally, because the payments under the shallow loss programs would be tied to crop production, the U.S. could violate the World Trade Organization’s trade distortion policy and would be subject to possible retaliatory tariffs.  As an example, the U.S. currently pays $147 million each year to Brazil because the U.S. subsidies on cotton have distorted trade in Brazil.

Even the American Farm Bureau recognizes that this bill is very much flawed.  The Farm Bureau explains that because shallow loss insurance will make it nearly impossible to lose money farming, farmers will take on more risk rather than respond to market signals.  Iowa State economist Bruce Babcock concurs, pointing out that taxpayer subsidies encourage farmers to buy higher coverage than they need.  This incentivizes unnecessary land acquisitions, disproportionately benefitting the wealthiest farmers.

Moreover, taxpayers will have no way of knowing who receives the new insurance subsidies—a problem for a variety of reasons.  Firstly, recipients are not required to prove they are farmers, so taxpayer dollars could be handed to anyone who merely owns farm land.  Additionally, no income limits apply to the bill, allowing millionaires to receive aid.  Lastly, as Montana State University economist Vincent Smith explains, it is important to understand how wasteful crop insurance is:  “About 58 percent of crop insurance subsidies ultimately flow to crop insurance companies and their agents.”  These problems, combined with the incentivizing of excessive land acquisitions, make it not improbable that the majority of the money being spent on this entitlement program will be spent aiding the wealthiest farmers.

The shallow loss program, similar to other entitlement programs, will perpetuate a system of “private profits, public risk,” and will disproportionately benefit the farmers who need the least help.  In short, the Farm Bill solves the problem of direct payments by creating a new, equally wasteful, entitlement program for an industry that is not struggling.