This NY Times article on changes to US agriculture policy is a good example of reasonable sounding policies that are actually terrible ideas.

The article outlines proposals to reform US farm policy, moving budget allocations from paying farmers either to not farm (conservation reasons) or to cut checks to farmers based on their land (or previous production).  A shift towards more “crop insurance” policies would basically give farmers nothing when agriculture prices are high, and automatic payments would kick in for their products when farm prices are low.  Farmers are basically insured against future losses and they get paid for what they actually farm.  Seems fair.

Unfortunately, this goes against consensus that “coupled” farm payments, payments based on production, are terrible policies.  How does this work?  If you pay farmers a high price per bushel of corn, farmers grow more corn often at the expense of other crops, corn prices drop, producers and consumers substitute corn for other products.  Then Bloomberg has to ban sodas.  High subsidies based on production will lead to overproduction.  This isn’t hard to understand.

Crop insurance has similar distortions.  When global food prices are low, farmers have the incentive to keep producing if insurance prices are high enough.  There is a lot of complexity to this programs, but the key point is the difference between coupled and decoupled programs.  For a nice cross-national overview see this excellent book.

If politics or social objectives force us to subsidize agriculture, what is a better alternative?  Decoupled programs, like paying farmers based on historical production or acreage isn’t a bad option.  Farmers get cut a check, and then they can make their production decisions.  Conservation programs, if correctly targeted, can help keep farm prices high while having environmental benefits.  These still cost taxpayers money and have distortions, but to a lesser degree than coupled programs.

I’m no fan of US farm subsidy programs.  But if we’re going to spend scarce resources on subsidies, let’s do it in a way that causes the smallest distortions and has the most social benefits.  The proposed crop insurance changes fail on both counts.  Unfortunately, coupled programs make better talking points for politicians.

BREAKING NEWS:  The Environmental Working Group likes the ammendments on the crop insurance program.  Worth listening to their argument.