The Perils of Protection

Tuesday, June 25, 2013

This past week, to much public attention, the House of Representatives voted down H. R. 1947, the Agriculture Reform and Risk Management Act of 2013. The key provisions in this $940 billion and 629 page bill relate to food stamps and nutrition, which account for $744 billion of the bill. The Wall Street Journal points out that the food stamps program has ballooned from 21 million recipients a decade ago to about 47 million today. That monster program is then paired with about $194 billion worth of budget allocations to commodity support programs ($40 billion), crop insurance ($93 billion), and conservation ($56.7 billion).

  Illustration by Barbara Kelley

Tucked into the corner of this sprawling farm bill was bipartisan Amendment #55, offered by the Republican House Foreign Affairs Committee Chairman Ed Royce and Ranking Member Democrat Eliot Engel. The purpose of the Royce-Engel Amendment is to reform provisions of the 1954 Food for Peace Program (often called PL 480), which is used to supply food to individuals in need overseas. As currently constituted, the legislation requires that aid be provided in kind, and not in cash, and that all of shipped goods be carried in U.S.–flag vessels manned by unionized U.S. crews.

The Royce-Engel Amendment is designed to change this long-standing practice by allowing 45 percent of the funds that flow through this program to be sent in cash overseas where the money can be used to purchase food supplies in local markets. To everyone’s surprise the Amendment—itself a clear political compromise—failed by 17 votes with 203 in favor and 220 opposed. The larger issues it raised, largely ignored in the mainstream press, are worthy of a short post-mortem.

The Interest Group Line Up

It is no surprise that the Royce-Engel Amendment attracted the strong support of a wide range of some 30 activist organizations including the American Jewish World Services (on whose Board my wife sits and to which we give financial support). Their humanitarian instincts made this an easy call because they were confident that the Amendment would increase the amount of food aid to needy people.

By the same token, this prospect of legislative change brought strong opposition from agricultural and labor interests. The Royce-Engel Amendment would have sharply reduced the amount of farm goods shipped in American boats. Predictably, therefore, the opposition included a long list of agricultural groups headed by the American Farm Bureau Federation. Its coalition includes organizations for every known crop from dry beans, corn, peas and lentils, rice, soybeans, sorghum, and wheat, with millers thrown in for good measure. The agriculture groups were joined by both shippers and the unions that work for them; the Navy League of the United States and the Transportation Trades Department of the AFL-CIO (TTD) have chimed in with support for the status quo ante.

In many cases, a quick way to figure out which side of a legislative issue is correct is to look at the alignment of interests that are for or against the bill. In this case, it is easy to condemn any form of legislation that is championed by labor and agricultural groups who are trying to protect their own monopoly positions. Here, the agricultural and maritime groups that are fighting so hard to preserve the status quo ante have either gained or maintained their preferred positions by working hand and glove with the same activist and progressive groups that have long had a soft-spot in their hearts for farmer-labor coalitions.

Thus, within the framework of domestic progressive politics that runs from Franklin Roosevelt to Barack Obama, the case for government price supports in agriculture has rested on the misguided view that ruinous competition in the market for agricultural commodities will force farmers to the wall, so that government supports and protection are necessary to keep that industry healthy.

One consequence of that basic worldview was the New Deal embrace of Agricultural Adjustment Acts—an elaborate system of price supports that still informs a substantial fraction of the 2013 Farm Act. In its earlier incarnations, these price support programs meant that famers were encouraged to produce large amounts of farm goods. Those goods that could not be purchased in the open market were then purchased by the government, which had the dubious task of deciding whether to store or destroy the excessive crops.

One way out of this nasty dilemma was to ship excessive crops overseas to foreign nations as a form of aid for the needy. But a government-run program of that sort quickly attracted the attention of maritime and labor interests, who would want to gain a government monopoly to ship these goods in American bottoms staffed by (unionized) American crews.

To my mind, this unholy alliance between two powerful political interest groups deserves the condemnation of the activists who often line up on the same side as unions and farmers in many disputes. And it is to the credit of President Obama that he was prepared to support this legislation notwithstanding the fierce interest group opposition in his own Democratic coalition.

Foreign Aid Done Wrong

The dispute over the Royce-Engel Amendment is not about expanding the amount of foreign aid. It is about seeing how to use the funds that are committed to foreign aid more efficiently. To the agricultural and labor interests, the current solution is justified on two grounds. According to the Navy League, “The current requirement that half of PL 480 cargoes are carried by reasonably-priced U.S.-flag vessels provides an essential source of peacetime cargoes for the U.S. Merchant Marine,” which has of course shrunk in recent years because it cannot match the prices offered generally by foreign competitors who are not shackled by American rules. The second piece of the argument is that the maintenance of this fleet, according to the TTD, “plays an important role in our national security, serving as a naval auxiliary in time of war or national emergency.”

Both arguments are profoundly misguided because they start from the implicit premise that the best way to ensure a strong merchant marine is through an extensive system of government subsidies. On this score, both of these protectionist groups could do a great service to the national interest by disbanding, and weaning American maritime issues off of these generous subsidies and onerous restraints.

The funds saved from supporting this enterprise can then be used to support more productive activities or to cut taxes, while more self-reliant industries make the necessary structural reforms that will allow them to become more competitive in global markets. That one maneuver will make available larger resources to the American military, which should on any account be allowed to contract with fleets of American allies to satisfy any transportation needs in times of war.

The humanitarian defense of the current programs is every bit as bad. In my view, the 1954 Food for Peace Program attracted bipartisan support from pro-union Democratic legislators and pro-agriculture Republicans. But even if that program made sense then, it surely does not now. At this point, the simple observation is that it is a lot cheaper and safer to wire money to overseas destinations than it is to carry agricultural produce overseas.

As the American Jewish World Service noted, “There is an average delay of three to four months in the delivery of food shipped from the U.S., a time lag that is a matter of life and death.” The activist groups were also right to note that “the delivery of U.S. commodities can be extremely difficult—due to insecurity, as has been the case in Syria, or due to a host of other obstacles.” Put simply there is of necessity a lot of wasted time and effort in using these traditional delivery systems, even if we adopted the sensible proposal of expanding supply by allowing shipment in low carriers that fly the flag of other nations.

Nor is it just a matter of how and when the goods get to places where they are needed. It also has much to do with the impact that the arrival of American goods has on the local economies. In some cases, the aid is like manna from heaven in times of natural disaster or political dislocations. But all too often, chronic local shortages can easily be traced to domestic protectionist policies that hamper the development of an indigenous agricultural system. Local price controls are the fastest way to kill the local farming industry.

But by the same token, on average it is probably far worse to dump subsidized American goods into local economies that make it impossible for local farmers to compete. Putting cash in on the buy side will, other things being equal, induce an increase in local output in ways that might do more to stop short-term starvation in countries that now receive aid.

It is important to recognize that a global analysis of this situation is necessarily a matter of doing second-best economics. Just that observation has been made by the Center for Global Development, which, while sympathetic to the Royce-Engel Amendment, rightly warned:

But local and regional purchase can distort markets and will not be the right answer in every situation. The administration should focus on adding flexibility to U.S. food aid, rather than replacing one set of shackles with another. Ultimately, the key to better food assistance rests on designing a delivery system with a variety of options so that interventions can be tailored appropriately to meet the situation at hand.

After all, to the extent that local markets are reasonably well integrated, the infusion of foreign cash could impact the operation of local distribution chains in ways that we do not yet fully understand. None of this counts as a defense of the current Food for Peace Program that, if anything, imposes some dislocations on local markets all around the world. It also calls into question whether it is necessarily wise to embrace any program that gives government officials “a variety of options” in structuring interventions overseas. Remember, any grant of political discretion always subjects program administrators to massive political pressures.

Nonetheless, hard decisions have to be made today. In a world of multiple imperfections, the preferred result is to phase out the current system of in-kind distribution that relies on multiple forms of government protection. Once one major source of distortion is removed, there will be time enough to figure out whether programs of direct cash support overseas will work as intended. In any system riddled with subsidies and restraints, the most that we can hope for is incremental improvement.

In the long run, the ideal is free trade across national borders without subsidies or restraint. But that result is a long time in coming. In the short run, the betting here is that Royce-Engel would have saved lives—which makes it a pity that the Amendment failed. As we used to say about the Brooklyn Dodgers of old, ”wait ‘til next year.” Hopefully, this Amendment will make it back to the floor sooner rather than later.