Beat the Press

Dean Baker's commentary on economic reporting

7/03/2006

W.T.O. Mysteries in the Washington Post

Economists always like to talk about the ideal situation of perfectly competitive markets. This is the world in which there are vast numbers of buyers and sellers so that no individual buyer or seller can affect the price. In this world, every producer is a price taker. This means that the price is set by the market, and they can sell as much as they want to produce at the prevailing market price.

In the real world, this is not an accurate description of most markets, which have a relatively limited number of sellers. The one market that does seem to fit the competitive story reasonably well is agriculture. Farmers see a price in the market for corn, wheat, soybeans, etc. and they can sell as much as they choose at this price.

Unfortunately, the Post apparently does not believe that agriculture is a competitive market. It reports today that the United States is trying to open up markets in developing countries in order to give U.S. farmers something to offset the loss of subsidies in a new W.T.O. agreement. Sorry, this doesn’t make any sense.

Farmers can already sell all they want in the market today at the prevailing price. It is unlikely that farmers will feel any better if the wheat they sell at $2.50 a bushel is going to Zambia than if it’s going to Pennsylvania.

Perhaps the article meant that by opening up markets in Zambia, and other developing countries, the price of wheat would rise. It doesn’t seem very likely that the new markets would produce any substantial rise in price (the new entrants would be relatively small compared to the existing world market), but this would be a qualitatively different effect than simply an increase in the quantity of wheat sold. It would mean that all of us would be paying more for wheat. This could lead a more efficient world market, but it would also mean higher prices for consumers in the U.S. If this is the intended outcome from an new W.T.O. agreement, shouldn’t the Post be telling its readers?

10 Comments:

  • At 7:37 AM, Anonymous Anonymous said…

    I understand the logic of the resulting higher prices for agricultural goods for US consumers, but I'm not convinced that it would be a net loss, either monetarily or in utility.

    Theoretically the elimination of subsidies could encourage increased efficiency by producers, free up the money previously used to subdize arigulture to be returned to tax payers (unlikely), or be used towards programmes that have a higher overall utility return for the tax payers.

    There are potential benefits for US consumers in the relaxation of agricultural subidies.

     
  • At 10:41 AM, Anonymous John said…

    I want to make an argument that so-called "illegal immigration" from Mexico can be reduced by eliminating tariffs on cane sugar and subsidies on corn. My idea is that the tariffs and subsidies give US agribusiness an unfair advantage over Mexican sugar, leaving the peons working the cane fields to starve or immigrate.

    I want to argue to my right wing friends that they should show their belief in free markets AND lower taxes by ending subsidies and tariffs, which incidentally will lower "illegal" immigration.

    I just want to make my right wing friends squirm by using their supposed beliefs against them. The trouble is, I don't know enough economics to argue it.

    How about it, Dean, any help?

     
  • At 8:59 AM, Anonymous Joe Populist said…

    I agree with your observation that the Post is all mixed up on it's reporting of the "free" trade in agriculture. My feeling is that the opening of third world markets to US farmers is a vain attempt by the Free Trade Fundamentalists to find a way to remove the subsidies the Federal Government pays to food suppliers, without destroying the US food production infrastructure.

    It seems to me that that one of the most important contradictions to the Free Trade Fundamentalist mantra of "open markets", is seen in the discussion of U.S. agriculture. First of all, the original argument for agricultural "subsidies", was stable food supply and stable prices. I can think of no economic activity that is more subject to the laws of inelastic supply then agriculture. It is irrational for the US consumer to be left to flucuations in commodies markets.

    This doesn't even get into the thorny problems of the political stablility of Lation American countries, or their lack of adherance to the Health and Safety standards that US consumers have come to expect.

    Journalists from the Post are so young and so ignorant, that they have forgotten the times when Farmers were uniting to pour milk in the gutters in desperate attempts to raise the prices so they could survive. On almost any agricultural commodity I can think of---sugar, milk, corn--- prior to the 1930's, US consumers were constantly struggling with shortages and huge flucutions in price and availability of basic food stuffs.

    As someone with a Red State background (Nebraska) and living in a Blue State (Maryland), I can't comprehend the resentment of subsidies to Red State Farmers, which assure the Blue State metropolitan areas of a stable supply of cheap food.

    In any discussion of this subject, noone seems to mention that the outright subsidies to US farmers were a consequense of the failure of the 1994 Freedom to Farm Act, which eliminated Government intervention in the commodies market.

    It was only when faced with the prospect of 3/4 of American farmers going bankrupt, that Congress voted outright subsidies that we have today instead of admitting that Free Trade Fundamentalism is wrong, and go bake to the original system that served the US so well for so long.

    Let's also not forget that the consequenses in the event of massive bankrupcty of the farm commmunity was far less then the cost of the subsidies.

    It's irrational for U.S. consumers to be told that they should depend for their food supply on the stability pf the food production system of a Latin American country, especially with the corrupt nature of most Latin American governments.

    I'd appreciate it if you could include in your radar of subjects for "truth monitoring", the US farmer and the domestic food supply. It's an important issue.

     
  • At 9:06 AM, Anonymous Joe Populist said…

    Anonymous said: Theoretically the elimination of subsidies could encourage increased efficiency by producers, free up the money previously used to subdize arigulture to be returned to tax payers (unlikely), or be used towards programmes that have a higher overall utility return for the tax payers.

    Were you asleep during that part of the ECON 101 lecture on basic concepts of elastic and inelastic supply and demand.

    Fact is that YOU don't understand the fundamental nature of agricultural production. If you want a stable and cheap food supply, then Federal intervention in the commodies marketplace is absolutely necessary.

    In fact I rather doubt anyone who says things like this, even understand the nature of industrial production. US Corporatoins have largely abandoned manufacturing and rely on Contract Manufacturers who farm out development and production to a variety of Asian manufacturers.

    And of course, we know that in CHINA, where most of this production goes---industrial production is GOVERNMENT subsidized.

    Comments like this are more an article of religious faith, based on a lot of ignornace about what goes on in the world, then serious economic commentary.

     
  • At 10:08 AM, Anonymous Anonymous said…

    Dean, U.S. farmers would benefit from developing country tariff reduction, right? Tariff reduction does not raise the world price, but it does give them more market access. Could you please explain?

     
  • At 10:17 AM, Blogger Dean Baker said…

    A couple of points here:

    First, as a logical proposition, it doesn't make sense to say that U.S. farmers will gain from increased market access in developing countries, UNLESS you think that this will lead to a rise in the price of the goods being sold.

    There is no farmer in the U.S. who is sitting on wheat or corn because there is no one to buy it at the market price. There are huge grain markets where hundreds of millions of bushels are bought and sold every day. The issue for farmers is price, not quantity.

    As far as developing countries are concerned, removing their barriers is a very mixed story. Of course they will get cheaper food, that is almost true by definition (if it isn't cheaper, why would people buy it). On the other hand, opening up their markets will displace large numbers of people in agriculture. While this happens in countries as they develop (labor shofts out of agriculture) it is a difficult process and if it happens too quickly, you can end up with much of your population drifting with little hope of decent jobs. This is to a large extent what has happened in Mexico as a result of the reduction in their agricultural protection post-NAFTA.

    As a practical matter, the subsidies that the U.S. government gives to its farmers, makes the situation somewhat worse in Mexico or other developing countries, but subsistence farmers would not be able to compete with modern agriculture in the U.S. and elsewhere regardless of whether or not it was subsidized.

    (by the way, I am not a fan of U.S. farm subsidies. Most of them go the wealthiest farmers and many support environmental harmful agricultural practices. I just don't like to see people misled about the potential benefits of eliminating these subsidies.)

     
  • At 2:26 PM, Blogger failingeconomist said…

    I’m a little confused as to what is actually being discussed here. Are we actually saying that the US has agreed, as part of Doha, to eliminate US farm subsidies? I sorta doubt that as it would be headlines around the world.
    Or was Dean, in the original piece, stating that the WTO deal on offer reduces tariffs in poor countries without reducing US farm subsidies?

    John, I’m right wing and I agree with you absolutely. We really should be eliminating those sugar (and all other) tariffs. I’m not sure about the effect on immigration from Mexico but from Central America, yes there would be an effect.

    Joe Populist. If farm subsidies do indeed provide cheap food then you might have a point. If the US subsidies are anything like the European Union’s (which they sorta are) then, for example, that system of subsidies costs the average family in the UK 1,500 pounds a year extra on their food bill. Whatever this is, it isn’t cheap food.

     
  • At 3:25 AM, Anonymous Joe Populist said…

    Anonyomous: "If farm subsidies do indeed provide cheap food then you might have a point. If the US subsidies are anything like the European Union’s (which they sorta are) then, for example, that system of subsidies costs the average family in the UK 1,500 pounds a year extra on their food bill. Whatever this is, it isn’t cheap food."

    I'm taking you at your word that your numbers are correct. But most rightwingers here in the US are always wrong about the cost of government on most anything. So 9 times out of 10, a rightwinger's numbers are always wrong.

    While you might bitch about taxes for food subsidies, you're enjoying the benefits, without even understanding what consequenses would be if they were removed.

    While you may think that food production is a 'pure' market because there are many suppliers, you ignore the actual technology of food production---farmers can't just enter and leave the market easily...if you're a dairy farmer, you can't just go into growing artichokes (for example), just because milk prices are too low, or artichoke prices are more profitable. Nor can you tell the cows to reduce or increase their milk production based on the prices in the marketplace.

    I'm not advocating subsidies either, I'm talking about government intervention to smooth out the commodies marketplace, either buy up surplus grain, or lend the farmers enough money to get by until the prices rise.

    I can't think of anything that is more important to the US consumer then producing a food supply. And while 'right-wingers" like you may have become spoiled at the relative low cost and abundance that the system has created for you, you forget that the history of farming, and that consumers were subject to wide flucuations in prices and supply when we had markets that were "free" of government intervention.

    Also, while it seems unfair that a large percentage of the subsidies go to rich farmers, you're missing the point of the subsidies. The subsidies are a production incentive, not a income redistribution plan. Sadly US farming is so unpredictable and unprofitable, that it's become a rich man's tax deduction.

    But that's the problem of the "Freedom to Farm" Act created...lots of farmers would go belly up if the subsidies were removed, and then you'd either be dependent on Latin America's political and economic stability for your food supply. Which is not a good idea in my opinion. I can't think of anything that is more justifable for government intervention then assuring a safe and stable food supply at low prices.

    Food is too important to leave to the anarchy of the unregulated marketplace.

     
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