Monday, September 10, 2007

What will payments limits accomplish?...

As the Senate rouses itself to legislative action after a summer recess, one topic of huge debate is the idea of "payment limits". But in fact, there are two different types of restrictions under consideration.
First, a limit on payments to any given person.
In another news conference Thursday, Grassley explained his motives for reforming the farm programs. "The idea is that when we're subsidizing farmers to the point where 10 percent of the biggest farmers get 72 percent of the benefits out of the farm program, then it's tilted toward subsidizing big farmers to get bigger. And what my legislation also does is put a $250,000 cap (on farm program payments). Now I know to Iowans that still sounds like a lot of money, but this is a compromise that we can get through, getting farmers from all over the country to back it. And get senators to back it." [More]
This type of limit is based, I think, in the egalitarian ideal: "one man - one pile of money". It has appeal to those in the middle, since it would immediately place them on the same level of government favor as the largest operator - something dear to their hearts.

Second, a limit on how much money you can make and still receive any payment.
The current $2.5-million income cap on eligibility for farm program payments affects only a small number of farm program payment recipients each year. A reduction in the cap to $200,000 would affect a larger number of farm households but still only a small share of recipients. Based on IRS tax data for 2004, about 1.2 percent of all farm sole proprietors and about 2 percent of crop share landlords would be potentially subject to the proposed lower adjusted gross income (AGI) cap. ARMS survey data suggest a similar share of farm sole proprietors (1.1 percent) could be affected. When partnerships and farm corporations are included, about 1.5 percent of all farm operator households could be affected because a larger share of farm partnerships (2.5 percent) and farm corporations (9.7 percent) could be subject to the proposed cap. ARMS data indicate that $807 million in payments were received in 2004 by farm operators organized as proprietors, partnerships, and corporations with incomes exceeding $200,000. However, not all of these payments would be affected by a $200,000 income cap on eligibility for payments due to differences in IRS and ARMS data and changes by producers in how they manage their incomes and expenses. The study also found that farm income aver- aged $271,749 and net worth averaged over $1.86 million for farm households with AGI estimated to be over $200,000 based on the ARMS data. [More]
This proposal is much more straightforward: stick it to the rich. It arises from the inherent fairness bias programmed deep within our old brains. As the distribution of income and assets is perceived to be shifting to the tiny number of uber-wealthy, even irrational retribution seems like a good idea.
A brain region that curbs our natural self interest has been identified. The studies could explain how we control fairness in our society, researchers say. Humans are the only animals to act spitefully or to mete out "justice", dishing out punishment to people seen to be behaving unfairly – even if it is not in the punisher's own best interests. This tendency has been hard to explain in evolutionary terms, because it has no obvious reproductive advantage and punishing unfairness can actually lead to the punisher being harmed. Now, using a tool called the “ultimatum game”, researchers have identified the part of the brain responsible for punishing unfairness. Subjects were put into anonymous pairs, and one person in each pair was given $20 and asked to share it with the other. They could choose to offer any amount – if the second partner accepted it, they both got to keep their share. In purely economic terms, the second partner should never reject an offer, even a really low one, such as $1, as they are still $1 better off than if they rejected it. Most people offered half of the money. But in cases where only a very small share was offered, the vast majority of "receivers" spitefully rejected the offer, ensuring that neither partner got paid. [More]
If you are like most of us subsidy recipients, you have been analyzing these proposals in a very personal way: "OK, how can I get around this one if I need to."

Most of us won't have to yet, of course. But the obvious solution in both cases is to become more farmers. Make the wife an operator - and the kids. So one immediate outcome of payment limits of either sort will likely be: more farmers (on the books, anyway). And simple economics tells us the marginal cost to create and maintain these alleged operators will be slightly less than a DCP.
Payment limits will be a huge boost to a) attorneys, b) accountants, and c) "financial advisers" (a vague occupation at best). Limits will have to be brilliantly constructed to survive the onslaught of fevered minds seeking a workaround on commission.

Farmers will, I believe, contort themselves to "protect the downside" and in the process make their operations more unwieldy with artificial entities and bizarre bookwork. They will also hand over most of the government proceeds to the experts who manufacture these constructs.

But a few - an obnoxious few - will accept the limits in the spirit they were enacted and rise above federal control. Once beyond reach of the FSA, they will learn to operate like other businesses do - insuring their own risks and enduring the consequences of nature and decision.
Those will be some scary dudes!

Which leads me to my grand conclusion: Neither limit will grant much relief since they are therapy for a symptom - namely the declining number of farmers and the intense competition to stay in the game. But that is not caused by prices or subsidies nearly so much as this:

This $592,000 machine replaces lots of guys on the old farm. And it is typical of what technology is handing us to work with.
While that number might produce “sticker shock” for some growers, it can be argued — as Deere marketing managers did in Cincinnati — that the machine replaces at least two other pieces of harvesting equipment and one or two tractors (at $183,019 for one of Deere’s new 9230 tractors).

Currently, most producers operate a boll buggy ($70,000 or so), a module builder ($80,000 to $100,000) and at least two tractors with a conventional six-row picker ($300,000 to $325,000).

As Deere’s managers point out, the equipment savings represent only a part of the equation. Both Deere’s and Case-IH’s new module building pickers can reduce the employees needed to operate the equipment from three or four to one.

Deere is also expected to emphasize increased speed of harvesting — the company says operators won’t have to stop to unload the round module — and quality enhancements of the polyethylene-wrapped module when it begins selling the new picker next year.

The latter is expected to help keep more cotton in and moisture out of the module. Deere managers say wet cotton modules can cost growers up to a bale of lint when cotton wicks moisture from the ground. [More]
The problem we are facing - the rapidly decreasing need for warm bodies on the farm - is lightly affected by farm programs and mightily affected by technology. Farming is not rocket science, and hence we are watching much of our work shift to clever machines.

Our problem is actually creating some value machines cannot create.

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