More action on farm, ethanol subsidies

This week has seen a flurry of attacks on farm subsidies. First, as we documented on Monday and Tuesday, the Senate voted to reject a bill that would strip the tax credit for ethanol producers. On Thursday, however, they reversed their stance and voted against the subsidy while maintaining their support for a bill that would fund expansion of flex fuel pumps. Also defeated was a bill that would lower the maximum amount of subsidies an individual farmer could receive in a year.

While both of these bills have either failed or will fail as the legislation moves to higher levels, the fight over the budget has led to expenditure-cutting efforts to programs that are traditionally considered sacrosanct.

The numbers are pretty impressive, however. Getting rid of the ethanol subsidy would save about $6 billion, while the various and sundry cuts to conservation programs and commodity payments would save over $3 billion per year over ten years. That's pretty good when one considers the fact that a lot of this money is -- arguably -- wasted. In Tuesday's post on ethanol, we described how removing the subsidy on ethanol wouldn't have a huge effect on prices given the blend wall. The benefits to society from commodity payments are also somewhat questionable. As a friend from my department wisely pointed out, the value of agricultural land is driven largely by the income it generates. Mathematically, if we take V as the value of land, r as the rental rate, and i as the interest rate, the value of farmland V is

V = (r / i) or r = Vi where V = f(income, y) 

 and y is a vector of all other characteristics. If V is increasing in income, a reduction in income will decrease the rental rate farmers pay for the land, leaving farmers about as well off. Of course, landowners would be hurt by such an action, but at the end of the day, there's a lot of money that goes into farm subsidies; I shudder to think of what we could do with spending that much money on R&D or education.

Sorry for the math; sometimes it makes things more clear than words can. Especially if you're a geek. The point is, I'm very impressed that this type of legislation is being pursued. Sure, the whole budget thing is somewhat reactionary politics, but the fact that these subsidies are even being considered for cuts signal to me that our politicians have some guts -- so long as they don't have to face their detractors on stage during the Republican debates. (I'm looking at you, Pawlenty. That was just sad.)