Are crop subsidies a good or bad thing?

[Art]

So what? Why is preferable for money to flow in rather than out?

Again, where is the harm? Everyone takes it as a given that a "deficit" is a bad thing, but no one can explain why!?

I already explained why in post #4

In fact there are strong indications that America's deficit could already be leading the US economy into major problems.

The US dollar is in severe decline against all other major currencies. This fall could become precipitous as more countries decrease their holdings in US dollars to avoid being caught with a depreciating asset. Already some oil producing countries are demanding payment in euro leading to further falls in demand for USD reserves thus perpetuating the downward spiral. Add to this reduced demand for US treasury bonds (again depreciating asset) and you have all the ingredients for an economic crisis. To shore up the currency the fed will need to raise interest rates which applies deflationary pressure to the economy which can in turn lead to recession.

 

[Averagesupernova]

I might add that paying farmers NOT to produce is what is known as the Conservation Reserve Program (CRP). This is often applied to land that is not very productive crop-wise. Anyone who owns land can participate in this. It is not uncommon for a wealthy non-farmer to purchase land and take advantage of this. To say the least, this does NOT bring in more income than actual farming. It is often done for hunting or similar reasons. The more you study farm subsidies the more you will learn that they help the actual farmer who has a direct interest in growing a crop less than anyone else. Too bad most farmers are unable to see or accept this.

 

[Bitter]

My understanding is corporations are far more efficient in this area because they use confined animal feeding operations CAFO though corporations wouldn't be interested in a couple of hundred cows precisely because at those numbers it would be inefficient and by definition would not qualify as large scale.

There are arguments over the effect of CAFOs on the ecology but disregarding those it is a far more efficient system than the small farmer can implement.

Here's a good overview on US farming in relation to subsidies from 2006 a key point being the number of farms in the US has decreased enormously as small farms have gone under to be amalgamated into bigger farms because of the greater efficiencies in large scale production.
http://www.abareconomics.com/publications_html/trade/trade_06/us_ag.pdf

Well it depends on what you mean by effective. If you mean that produce more, than you are right, they do produce more. When a corporation handles cattle in all processes, the beef is generally damaged. This may happen for a number of reasons. Most commonly is that most corporation don't have time to deal with rogue cows and instead of dealing with the lead cow, they tend to beat and drag all the cows. It is quicker, but not exactly good for the animal or you.

Small farmers tend to produce a higher number of better quality meat than the big industry. It is far to costly for the industry to invest in doing so and the return wouldn't be that great, but it is cost effective for the small farmer. Holding cattle in a pen and feeding them while they stand is not the way to produce good meat.

So, it really depends on what you mean by more effective.

 

[Bitter]

I might add that paying farmers NOT to produce is what is known as the Conservation Reserve Program (CRP). This is often applied to land that is not very productive crop-wise. Anyone who owns land can participate in this. It is not uncommon for a wealthy non-farmer to purchase land and take advantage of this. To say the least, this does NOT bring in more income than actual farming. It is often done for hunting or similar reasons. The more you study farm subsidies the more you will learn that they help the actual farmer who has a direct interest in growing a crop less than anyone else. Too bad most farmers are unable to see or accept this.

Well, I must say that it may help us less, but help is help. In Missouri, we are suffering through a drought, so it is tough to be a self-sufficient farm right now. Anything from drought relief to subsidies do help even if only a little.

 

[mbrmbrg]

Then there's http://www.nytimes.com/2007/04/22/magazine/22wwlnlede.t.html?_r=1&oref=slogin" fascinating article from this past Sunday's New York Times which adds the dimension of what should be subsidized as long as subsidizing is happening...

edit: added same article as an attatched Word document

 

[russ_watters]

I already explained why in post #4

You said they are not inherrently bad and I agree.

But when you talk about accumulated debt, that just simply isn't true. That's not what a trade deficit is: There is no such thing as a 'trade debt'. We've had that discussion before: since people assume all deficits are talking about the same thing, they assume there is a 'trade debt' like there is a national debt. There isn't.

In fact there are strong indications that America's deficit could already be leading the US economy into major problems.

The US dollar is in severe decline against all other major currencies.

Whether a falling currency is a problem depends again on who you ask (our gdp growth is a strong as ever), but regardless, the trade deficit isn't why the dollar is falling. The dollar is falling because money is a commodity like any other, so when people start buying Euros instead of Dollars, the dollar falls. Simple supply and demand.

 

[BillJx]

I know next to nothing about farming. Come to think of it, ranchers, wheat farmers, truck farmers and organic herb gardeners probably don't know much about each others' businesses either. So I don't feel too alone.
Anyway, what I do know is that in my part of the world, good farmland is continually being converted to suburban development, despite an agricultural "land freeze" that's been in place for decades.
In my overwhelming ignorance of the issues, it seems reasonable to use subsidies to compensate farmers for farming their land instead of selling it off at ridiculous prices.

 

[Art]

said they are not inherrently bad and I agree.

I added the proviso so long as the deficit is related to capital investments then it isn't bad.

But when you talk about accumulated debt, that just simply isn't true. That's not what a trade deficit is: There is no such thing as a 'trade debt'. We've had that discussion before: since people assume all deficits are talking about the same thing, they assume there is a 'trade debt' like there is a national debt. There isn't.

Whether a falling currency is a problem depends again on who you ask (our gdp growth is a strong as ever), but regardless, the trade deficit isn't why the dollar is falling. The dollar is falling because money is a commodity like any other, so when people start buying Euros instead of Dollars, the dollar falls. Simple supply and demand.

There are a few elements to this.

Currency is akin to an IOU. You pay for your imports with currency which worthless in itself is subject to redemption at some time in the future which is why I referred to it as an inter-generational debt.

America's economy is critically dependent on the dollar being a strong currency used in international transactions amongst leading countries thus requiring them to hold large dollar reserves and thus never redeeming the debt which in effect means America gets other countries goods and services in return for pieces of paper. The greatest most farsighted and skillful economic achievement ever was America persuading the Saudis and other OPEC countries to only sell oil only in dollars. Not only did this instantly create a huge demand for dollars then but as the world's economy has grown and demand for oil has soared so has the demand for dollars soared with it.

Problems arise when the value of a currency is perceived as not being backed up by economic output and this perception leads to currency devaluation on the world markets. You refer to simple supply and demand and you are right but it is critical to understand the reasons behind falling demand. Large trade deficits are a key driver.

Currency devaluation reduces international confidence leading other countries to look for ways to reduce their dollar reserves thus increasing the fall in demand leading to further falls in the exchange rate of the dollar, leading to further loss of confidence etc...

Left unchecked you reach the point where other countries are no longer prepared to accept your currency in return for their output and so to pay for your imports you now have to spend your own foreign currency reserves which were earned by selling actual products with real value.

To further the pain those countries holding your currency who no longer need it to finance trade with other trading partners want to get rid of it and so they start to buy your products using the money you paid out x years ago (never expecting to see it again) to pay for them. Suddenly not only does America no longer receive other countries' goods in exchange for worthless pieces of paper but those worthless pieces of paper you thought you had seen the last of years ago are now coming back to bite you hard.

It is this that can make trade deficits a very bad thing.

The above doomsday scenario is not far-fetched. Iran has set up a new oil bourse trading in euro* and Russia too is converting it's energy sales to euro. China and Japan have both expressed a willingness to pay for their fuel imports in euro whilst China has also said it intends to substantially reduce it's dollar reserves and so the dollar is currently under serious threat from a multitude of sources.

* Iraq under Saddam did this too which leads some to suspect this was a major factor in the decision to invade Iraq. One of the first things the US did after the invasion was to revert oil sales to dollars.

ps If you want to discuss this further you might think about splitting the relevant posts off into a new thread as we seem to have drifted away from subsidies.

 

[russ_watters]

Currency is akin to an IOU. You pay for your imports with currency which worthless in itself is subject to redemption at some time in the future which is why I referred to it as an inter-generational debt.

That's a run-on sentence, but you seem to be saying that at some time in the future, people might call on the US to provide them with gold in exchange for their paper money. That isn't how money works anymore. Money today (the money of a rich nation anyway) is a commodity like any other and does have real value in the way that gold or diamonds do and like gold or diamonds, the value is set by supply and demand. And I know your response - but diamonds and gold have industrial value besides their precious commodity value. That's true, but it isn't what drives their prices and money also has a real value: it is an enabling medium for trade (which is the whole reason other countries use the dollar or the euro).

America's economy is critically dependent on the dollar being a strong currency used in international transactions amongst leading countries thus requiring them to hold large dollar reserves and thus never redeeming the debt...

Again, there is no debt there. There is nothing to redeem. You cannot go to a bank and exchange your dollars for gold. A dollar's value is what it is.

...which in effect means America gets other countries goods and services in return for pieces of paper.

Well gee, now you're making a trade deficit sound like a good thing - like we are getting something for nothing. Ironic that you're contradicting yourself like that, but still wrong.

Problems arise when the value of a currency is perceived as not being backed up by economic output and this perception leads to currency devaluation on the world markets. You refer to simple supply and demand and you are right but it is critical to understand the reasons behind falling demand. Large trade deficits are a key driver.

Currency devaluation reduces international confidence leading other countries to look for ways to reduce their dollar reserves thus increasing the fall in demand leading to further falls in the exchange rate of the dollar, leading to further loss of confidence etc...

Again, you are looking at the issue backwards. Economics is competition and so while people like to say the value of the dollar is "falling", it is kind of a meaningless thing to say. Due to inflation, the value of every currency drops. What is meant/implied is that the dollar's value is decreasing faster than previously in history and that just plain isn't true. Inflation for the past decade has been as low as it ever gets.

What is true is that the value of the dollar relative to some other currencies is fallling. But that isn't because the dollar's value is decreasing more than normal, it is because those other currencies (specifically, the Euro) are getting more competitive.

As a result, this is good news for Europe, but it does not present the crisis for the US that people like to think it does. As long as our economy keeps growing, we can simply absorb money dumped back into the open market - much like a corporate stock buy-back.

Left unchecked you reach the point where other countries are no longer prepared to accept your currency in return for their output and so to pay for your imports you now have to spend your own foreign currency reserves which were earned by selling actual products with real value.

"Left unchecked" a decending plane will crash. You're talking about consequences that just aren't in the reasonable realm of possibility.

 

[Art]

Russ you appear to have completely missed the point so I see no benefit in rehashing what I have already said as I suspect no matter how I rephrase it you will continue to refuse to accept it.

One point I will make is your continual reference to gold is a total strawman. Not once did I refer to gold in any of my posts. I referred to people redeeming currency for solid goods which have consumed real resources in their production as opposed to the token resources consumed in the printing of money.

And the 'check' to prevent a run on the dollar is a rise in interest rates, as I already said in an earlier post, which can lead to recession.

Dollar Trades Near Record Low Versus Euro; U.S. Growth May Slow

By Gavin Finch and Kosuke Goto

April 26 (Bloomberg) -- The dollar traded near to a record low against the euro as signs of slowing U.S. economic growth prompted traders to increase bets the Federal Reserve will lower interest rates this year.

The U.S. dollar fell to an all-time low against currencies of its major trading partners yesterday, according to a Fed index published on its Web site.

http://www.bloomberg.com/apps/news?pid=20601101&sid=aNB.3dAAZPOk&refer=japan

So America is in a quandary. They need to reduce interest rates to boost the home economy but doing so will lead to a further drop in the value of the dollar which further erodes confidence and threatens the US dollars status as the world's reserve currency.

All of this relates directly to America's current trade deficit

Petrodollar Hegemony
So how is Iran refusing to sell oil for dollars is connected to the US current accounts deficit?

Normally, when a country runs a current accounts deficit, it must pay the difference in cash. However, since the early 1970s, the US has had a special deal.

When OPEC formed, the US government negotiated a deal that all OPEC countries would only sell oil for dollars and dollar denominated securities. In other words, if you want to buy oil from an OPEC country, you need to buy dollars first.

This was a great deal for the US because it could essentially print dollars and sell them abroad to cover its trade shortfalls. Other countries had to buy those dollars so they could buy oil.

The OPEC countries, in turn, tended to invest their wealth back into the US (this is called petrodollar recycling) so the US economy could essentially enjoy its benefits without actually having to produce anything to earn it.

The run-up in oil prices since 2000 has been a bonanza for the US economy despite higher prices at the pump since the international demand for US dollars has grown in lockstep. This has allowed the US current accounts deficit to reach its present state of unimaginable bloat.

If OPEC changed its policy and allowed people to buy oil with other currencies, it would be a disaster for the US economy, because international demand for all those little green pieces of paper would evaporate.

Despite the high oil prices, the value of the dollar has been flagging against the euro since 1999 when the common European courrency was first introduced. This reflects the poor fundamentals of the US economy - other than the petrodollar system, US currency isn't backed by any real economic foundation

Iran leads attack against U.S. dollar

by Jerome R. Corsi

Global Research, April 12, 2007
WorldNetDaily.com

While the world press has focused on Iran's plans to move ahead with enriching uranium, Tehran continues to wage economic war against the U.S. dollar behind the scenes.

Tehran has reached a decision to end all oil sales in dollars, according to statements by Iran's central bank governor, Ehrabhim Sheibany, in Kuala Lumpur at the end of last month.

Zhuhai Zhenrong Trading, a Chinese state-run company that buys 240,000 barrels of oil per day from Iran, approximately 10 percent of Iran's 2.2 million barrels per day total output, has confirmed a shift to the euro for its Iranian oil purchases.

About 60 percent of Iran's oil income is currently in non-dollar currencies, according to Hojjatollah Ghanimifard, who is responsible for international affairs for National Iranian Oil.

Even Japanese refiners who buy some 550,000 barrels of oil a day from Iran have indicated their willingness to buy Iran's oil in yen.

China, which buys approximately 12 percent of its crude oil supply from Iran, signed last year a long-term $100 billion deal with Iran to develop Iran's giant Yadvaran oil field. Estimates indicate China could draw 150,000 barrels of oil from the Yadvaran field for the next 25 years, assuring Iran's position as one of the major suppliers of oil to China for decades to come.

One possibility is that China may begin paying Iran for oil in yuans.

http://www.globalresearch.ca/index.php?context=viewArticle&code=COR20070412&articleId=5370

The threat to a fistful of petrodollars
By Liam Halligan

From Russia, you might say, with love. This weekend, Alexei Kudrin, Russia's finance minister, dropped a bombshell in Washington.

Attending the annual meetings of the World Bank and International Monetary Fund, Kudrin caused his American hosts discomfort by openly questioning the dollar's pre-eminence as the world's "absolute" reserve currency.

The greenback's recent volatility and the yawning US trade deficit, "are definitely causing concern with regard to its reserve currency status," he said. "The international community can hardly be satisfied with this instability."
<snip>
Most nations stockpile their foreign exchange holdings in dollars. The US currency accounts for more than two thirds of all central bank reserves worldwide.

This reserve status means that the dollar is constantly in demand, whatever the underlying strength of the US economy.

And now, with massive trade and budget deficits to finance, America is increasingly reliant on that status. The unprecedented weight of US liabilities means a threat to the dollar's dominance could result in a currency collapse, plunging the world's largest economy into recession.
<snip>
Kudrin's statement followed news that Sweden has cut its dollar holdings, from 37 per cent of central bank reserves to 20 per cent, with the euro's share rising to 50 per cent. Central banks in some Gulf states have also lately mooted a shift into the euro.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/04/23/ccliam23.xml

You will note a common theme when countries talk of switching their reserves to another currency is a concern about America's trade deficit.

That is what makes trade deficits a bad thing!

So to use your analogy the engines on your hypothetical plane are begininning to make uncomfortable grinding noises .

 

[Moonbear]

Why is it desirable that a particular industry remains a viable option for individuals? We don't do this for mining or forestry. Why is it important for farming?

I haven't read every reply in this thread, but I don't think I've seen this reason addressed: if you leave all farming to large corporations, large portions of your food supply are in the hands of very few people. If that corporation decides they're making a better profit selling widgets than farming, and sells the farm, you could lose a large part of the food supply all at once. With farming diversified among many smaller farmers, if one sells, you don't lose a lot of your food supply all at once.

Also, thinking through to the recent recalls this year with large corporations running packaging plants, etc., we saw what happened, for example, with everything containing spinach disappearing from store shelves because ONE plant processed so much of the food that what could have been isolated contamination in one field ended up wiping out sales of an entire crop. Can you imagine if you couldn't have even isolated the contamination to one of many farms?

As was alluded to before, national security is a good reason to subsidize crops, and part of that also involves ensuring that too few individuals don't gain control of too much of the food supply, otherwise they could potentially call all the shots while threatening to leave the people starving if they don't pay what they demand. Subsidies don't eliminate competition within the country that keeps food affordable.

 

[out of whack]

The need to retain farms instead of importing cheaper food is not in dispute. Subsidies are one way, another might be tax exemptions on anything farm-related. I don't have a grasp of all factors so I must defer to the economists.

About my own question on why it is desirable that farming remains a viable option for individuals, I summarize the points I have found most relevant:

1. Because private owners have a good lobby and outnumber CEO votes. Well, this is just political and not necessarily what is best for the country. But it is reality.

2. Because private owners care more about their land than corporations. This goes to motivation and love of the land. It has to be a strong factor that influences every decision made by the land owner so I see it as a real plus. Nothing beats personal commitment.

3. Because private owners have a history of higher food quality. This may be true and is probably linked directly to point 2 above (maybe it's actually the same point). Corporations must be pushed by market forces to improve quality, private owners do it naturally since they see what they eat directly while they produce it.

4. Because private owners are willing to put in more hours for equal pay. I'm ambivalent on this one since business owners in all other fields do this as well. There is a capital gain incentive so it's not strictly true that they don't get compensated for their time. They put in more hours to maintain and grow high-value operations that they can sell at retirement.

5. Because some farming tasks may not permit economies of scale. This was debated but not convincingly demonstrated in my opinion.

6. Because distributing food sources provides safety and stability. This goal is valid and sensible, and supporting private owners works towards this end. Of course, preventing over-sized farming operations through legal, fiscal or other methods could also do this, possibly better if it addressed the goal directly instead of indirectly. But here again I must defer to economists for the best approach.