Joe Mahon - Economist, Analyst
Published March 1, 2006 | March 2006 issue
There are a number of policy rationales for agricultural subsidies. Subsidies are intended to help producers in times of need, to ease the effects of price fluctuations on farm income and to ensure a stable food supply for the nation. Though some economists suggest that government involvement in agricultural markets might be counterproductive for the broader economy, current farm policy nonetheless delivers on these narrow goals.
But are farm subsidies critical for rural development? The Kansas City Fed's Center for the Study of Rural America posed this question in a recent analysis. Here, it seems, farm policy has reaped very little, despite massive payments to rural areas.
The study found little connection between farm payments and economic growth nationwide for the period 2000-03. An analysis of the data for the Ninth District reached a similar conclusion.
The data, which come from the U.S. Department of Commerce's Regional Economic Information System, track farm payments by the counties where they are received, as opposed to U.S. Department of Agriculture data, which provide only the location of the farm for which payments were assessed. This has the benefit of showing where farm payments actually go in cases where the owner of a farm lives somewhere else. For example, the Kansas City Fed found that two of the counties receiving the most payments are in Arizona, likely because of the large number of retirees residing in metro Phoenix.
Many of the top 25 percent of counties receiving farm payments are in the district, owing to the significance of wheat, corn and soybean production here. Other regions of concentration included the rest of the Corn Belt, the Southern Cotton Belt and Mississippi Delta, and heavily agricultural parts of California and the Pacific Northwest.
For comparison, it is helpful to break down counties by the importance of farm payments to their economies, by determining the share of total personal income coming from payments along with payments per capita. County economic performance can then be assessed with a look at employment, income and population at the county level for the four-year period.
Not surprisingly, farm payments make up a greater share of personal income in heavily rural counties. The counties ranking highest were scattered through the Dakotas and Montana, with the rural areas in Minnesota and Wisconsin showing up farther down the list. The counties in metropolitan areas were lowest, due to larger populations and more diversified economies.
The counties ranked higher for farm payments tended to perform worse for some economic measures than those lower in the payment rankings. For both payments as a share of income and payments per capita, the correlations with employment, income and population growth over the four years were all negative. That is, as the importance of farm payments in an economy went up, the measures of economic growth went down.
A more sophisticated regression analysis including poverty rates along with employment, income and population found little relationship with payments; poverty rates and employment had a slight positive correlation with payments, and income and population were slightly negative.
While this gives no indication of the cause of the differences, it does suggest that farm payments have a negligible effect on growth in rural areas. The data cannot tell us, however, if the counties would have fared worse in the absence of the payments or if subsidies actually hindered development by interfering with inevitable structural changes to rural economies.
Supporters of farm payments will have to rest on other rationales to make their case, and those looking to promote rural development will have to look elsewhere as well.