When farm subsidies are really financial subsidies

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Article Highlights

  • All told, taxpayers shelled out $12.1 billion to the farm bill 2012.

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  • Dems want a government program, and the GOP ensure there's a profit-taking middle-man.

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  • The USDA reimbursed the companies $1.4 billion for administrative costs.

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The farm bill moving through Congress today provides a great reminder of how Washington works: Whenever you see a government subsidy for some sympathetic cause or group -- such as the working man, green-energy, homeownership, or college -- there's a good chance that the financial industry is also pocketing taxpayer cash through the same program.

These thinly disguised financial subsidies are everywhere. Goldman Sachs, for instance, made a pretty penny off the federal loan-guarantee to Solyndra that ended up costing taxpayers half a billion dollars. The subsidy program backing Solyndra consisted of Energy Department guarantees for loans by private banks.

When President Obama subsidizes Boeing exports, he calls it "New Economic Patriotism" and pitches it as a boost to the working man. Of course, these subsidies take the form of taxpayer guarantees for loans by the likes of JP Morgan, which was awarded "Lender of the Year" by the federal Export-Import Bank.
 
The Small Business Administration likewise subsidizes Mom & Pop with loan guarantees that insulate Wall Street lenders from risk. Student loan subsidies, for decades, were largely taxpayer subsidies for student lenders like Citibank. Washington "helps homeowners" by shouldering the risk for mortgage lenders.

In farming, the best (that is, the worst) example may be the federal crop insurance program.

Crop insurance is a sensible product. Farming is unpredictable. Hail storms devastate crops. Drought depletes yields. Prices at harvest time might be far below what the farmer predicted at planting time. To smooth out these bumps in the road, farmers buy insurance.

But in the U.S., taxpayers pay much of the tab for crop insurance.

For example, a farmer may buy a crop insurance plan that kicks in if his yield is 20 percent less than expected. Like any insurance, the farmer has to pay a premium. But unlike your car or life insurance, the taxpayer picks up most of the premium - the USDA covers 60 percent.

This helps farmers, but not only farmers. Search for lobbying filings that mention the crop insurance program, and you'll see, for instance, Wells Fargo working the issue. Why? Because Wells Fargo owns one of the handful of companies approved by the Agriculture Department to issue this taxpayer-backed crop insurance. When taxpayers pay part of the price, more farmers are willing to buy what Wells Fargo is selling.

The next subsidy is more explicitly a gift to the insurers. The USDA reimburses insurers for their administrative and operating costs. In 2012, for instance, taxpayers shelled out $1.4 billion to cover these costs for crop insurers.

But that's not all. If too many farmers suffer too many losses, and the subsidized crop insurers have to pay out too many claims, guess who acts as the reinsurer? A government agency called the Federal Crop Insurance Corporation. This effectively guarantees that crop insurers will make a profit.

The Environmental Working Group crunched the numbers for 2012 -- a rough year for farmers.

U.S. farmers last year paid $4.1 billion in crop insurance premiums, according to EWG, while taxpayers gave the crop insurers another $7 billion. But the insurers had to pay out $16.1 billion, leaving them, on paper, $5 billion in the red.

So taxpayers then stepped in again, footing $3.7 billion of that $5 billion loss. Also, the USDA reimbursed the companies $1.4 billion for administrative costs.

All told, taxpayers shelled out $12.1 billion to this program in 2012, according to the EWG.

So as Congress took up the farm bill this year, talking "reform," how did the House Republicans (who talk of free markets) or the Senate Democrats (who rail against special interests) handle the crop-insurance program?

They decided to expand it.

Currently, the federal crop insurance program covers only "deep losses" - yields or revenues that drop 15% or more below expectations. The current farm bill creates a "Supplemental Coverage Option" (SCO) that covers even shallow losses. And of course the premiums are subsidized.

SCO would not be a government backstop to private insurance as with ordinary crop insurance is. SCO is designed as straight-up government insurance. But then again, ordinary federal crop program was first created in the New Deal as a totally federal program, but eventually shifted into a federally backed private program. How long will it be before Republicans propose to "reform" SCO by handing it over to private banks while keeping the government subsidies?

This is a common species of bipartisanship in Washington: Democrats want a government program, and Republicans ensure there's a profit-taking middle-man.

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About the Author

 

Timothy P.
Carney
  • Timothy P. Carney helps direct AEI’s Culture of Competition Project, which examines barriers to competition in all areas of American life, from the economy to the world of ideas. Carney has over a decade of experience as a journalist covering the intersection of politics and economics. His work at AEI focuses on how to reinvigorate a competitive culture in America in which all can reap the benefits of a fair economy.


     


    Follow Timothy Carney on Twitter.

  • Email: timothy.carney@aei.org

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