Globalization’s impact on emerging markets and stalwarts has been generally positive, but from a microeconomic perspective one must analyze the myriad effects that a globalized market can have on locales and their corresponding business practices. An anecdotal example would be how a local salesperson may have to significantly decrease prices when globalized varieties become available, as they have smaller margins and can afford to lower prices. This is something that has seriously impacted agricultural markets, as local farmers struggle to keep up against global competition. This has resulted in farming subsidies, government intervention designed to help local farmers remain competitive because their local produce is a boon to the society at large. While this is true and therefore government intervention may be a benefit, the nuance and complexity of the issue grows as one continues to look at it on a smaller and smaller scale.
Government intervention in the form of agricultural subsidies can provide much needed support to some of America’s poorest rural folk, but it also has many risks. The first risk, and a key part of all economic analysis, is the question of whether or not it will even be effective. Interventions of any kind must be routinely evaluated for their practical efficacy, as these programs are useless if they do not create results, irrespective of their intent. News and Tribune recently published an article called Farmers insist subsidies help despite controversy over program and it outlines many of the issues and what essentially makes a farming subsidy controversial (Grady, 2017). Market equilibrium dictates that when all else is equal, the highest quality product at the lowest price will naturally succeed. When this capitalist equilibrium is intentionally interfered with it can have major negative ramifications.
In a market equilibrium situation, the farmers with the most competitive product succeed. However, perfect market equilibrium still suffers from the issues of locality, rent-seeking behavior, and a need to support local commerce in order to ensure that local economies can supply jobs and wealth that is transferable to those in the surrounding area. If all of the produce is purchased from far away, that can mean that local business is disrupted and while this does provide better prices for consumers, they may not have any money to spend if they have been entirely priced out of the industry. This is why the discussion of farming subsidies is sparked, but the problems (specifically, rent seeking behavior) are calamitous enough that they need to be thoroughly considered before proceeding (Baumol & Blinder, 2015).
The problems arise from the growth of farming subsides as an unintentional reward for failure to farm. In the article mentioned above, an Indiana farmer named Terry Vissing explains that he may only break even. Now normally in a business if one breaks even consistently while putting in hours of labor, that is a bad business and it is time to reconsider strategies, yet in farming that often means that the government cuts a check supplied by tax payers. This leads to rent seeking behavior, where the people enjoying the subsidies have every reason to push for more subsidies and to stop caring whether or not their behavior is actually amounting to any level of economic success (Chavas & Kim, 2015). Food is a necessary part of life and importing it from other countries is challenging and means that far less fresh and organic produce can reach American shores.
The incentive to ensure that American farmers are provided with the government assistance that they need to be profitable or at least break even also stifles innovation. This is a reality not discussed in the article in question, but that fits with themes from this class. When subsidies exist, the microeconomics of the locale change in such a way to ensure subsidies are earned instead of ensuring that the business itself is effectively profitable (Frank & Glass, 1991). When it becomes more profitable to lose money than to earn it, the government has created an environment where many failing businesses will prevail. Naturally, the result of this has been many weak farms in America. Is this the fault of government subsidies? Surely not in its entirety but at least to some extent the subsidies in place have led to further inflation, significant rent seeking behavior, and a lack of innovation. Market equilibrium can only be reached when these subsidies are not just rolled back but are no longer needed.
Farming subsidies have been a part of the American economy since the 1930s. It is unlikely that they will ever be totally removed but they can at least be curbed. The problem that they lead to is that many failing farms are allowed to continue anyway. While there should be no doubt that these small business people deserve to be successful, if their business model is consistently failing, there is a point that providing them with more tax payer funds is actually hurting them by not allowing the market to find equilibrium and potentially stifling innovation. In order to rectify this it is paramount that subsidies be removed, ergo the controversy. The article from Indiana discusses all of this, though in brief detail, and concludes that the way of life many of these farmers enjoy is simply one that is slowly disappearing. Small farms may have to be replaced with larger business farms simply because they can operate on smaller margins and can survive without the use of subsidies.
- Grady, Danielle (2017). Farmers insist subsidies help despite controversy over program. News and Tribune.
- Frank, R. H., & Glass, A. J. (1991). Microeconomics and behavior. New York: McGraw-Hill.
- Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage Learning.
- Chavas, J. P., & Kim, K. (2015). On the microeconomics of specialization: an application to agriculture. In Department Seminar Series. University of Verona, Department of Economics(pp. 1-38).