May 27, 2024 

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LONG-RUN AGGREGATE SUPPLY: The total (or aggregate) real production of final goods and services available in the domestic economy at a range of price levels, during a period of time in which all prices, especially wages, are flexible, and have achieved their equilibrium levels. Long-run aggregate supply (LRAS) is one of two aggregate supply alternatives, distinguished by the degree of price flexibility; the other is short-run aggregate supply (SRAS).

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Getting Your Share Of FARM SUBSIDIES

Our pedestrian excursion through the economy has helped me work up a ferocious appetite. I vote for a quick stop at the Mr. Market Super Food Discount Store where we can purchase a loaf of bread, assorted meats, and some cheese -- all for a luncheon tribute to the Earl of Sandwich. While a self-made tribute to the Earl is less expensive than any purchased from Manny Mustard's House of Sandwich, the ingredients from Mr. Market Super Food Discount Store still carry a hefty price tag. If you're hungry and have limited cash on hand, you might wonder whether food prices are higher than they need to be.

A View from the Market

Whenever the question of prices arises in a conversation, we need to think in terms of the market. As we saw in Fact 2, Our Subjective Values, and Fact 4, Our Monopolized Markets, prices result from buyers and sellers doing their buying and selling. Such is the case for food prices.

A view from the market tells us that food prices might be high because:

  • The sellers are doing very little selling.

  • The buyers are doing a lot of buying.

For example, if Godzilla left Tokyo and decided to devour Southern Florida, then the reduction in citrus production would likely increase the prices of oranges, grapefruit, and the ever-popular tangerines. More realistically, a similar result would be expected if the land of sunshine and tourist attractions had a hurricane, spring freeze, drought, or some other devastating natural disaster that reduced the supply of delectable citrus products.

Higher citrus prices would also be observed at the Mr. Market Super Food Discount Store if nutrition researchers uncovered a link between citrus products and mental telepathy. A veritable throng of mind-expanding buyers would push up prices as they purchased unusually large amounts of vitamin C laden fruits.

Price gyrations caused by these sorts of changes in supply and demand are quite common in markets for food products -- as well as a lot of other stuff. There is, however, something else that can assist food prices to higher ground -- our good old friend government.

Our Necessary Evil Lends a Hand

The good thing about being a card-carrying member of the first estate (which most of us aren't) is that virtually anything you do carries the force of law. Whether you're democratically elected or rise to power through the extensive use of large tanks, what you say goes until the next election, Supreme Court decision, or encounter larger tanks.

Food prices are the recipients of extensive use of this government power. In fact, it's very, very difficult to find any farm product that's not subject to a myriad of government laws and regulations affecting its price. If the government says that a price is $5 a bushel, $10 a ton, or $15 a gallon, then that's what it is.

This power can be used for good or bad. Because good and bad are relative concepts, I'll (try to) let you form your own opinion on government's influence of farm prices. From an economist's standpoint, however, it's not good. For most members of the third estate who have developed a nasty habit of eating, it's not particularly good, either. But, don't let me bias your opinion before you know the details -- the first of which is why the government screws around with food prices.

It's the Right Thing to Do

Recall if you will, the plight of Hapless Herb, a wheat farm from western Kansas whom we met in Fact 3, Our Unfair Lives. Herb's grandson, Harv (Hopeless Harv) continues to operate the family wheat farm under the watchful eyes of the western Kansas skies. Hopeless Harv, however, is as helpless as Hapless Herb when in comes to extracting a successful living from the Kansas plains.

We can note a couple of reasons for Hopeless Harv's horrendously poor plight.

  • The unpredictable weather. Farming, as an industry, is world famous for relying on the natural generosity of the weather. Harvests can be plentiful if farmers like Hopeless Harv get the proper mix of sunshine, rain, temperature, and other assorted meteorological events in the right amounts at the right times. Nature, however, very seldom gets everything right during the same growing season, meaning Hopeless Harv and the others are typically warding off one near financial disaster after other.

  • A whole bunch of competition. Farming is also one of the more competitive industries -- at least on the supplying side -- that we have in the economy. There are gadzillions of farmers ready, willing, and able to supply every farm product imaginable. As a general rule it's very, very difficult to monopolize the production of farm stuff. And as we saw in Fact 4, Our Monopolized Markets, competition on the supply-side of the market tends to keep prices very close to production costs. Unlike cable television, there's not a lot of extra profit to be had in farming.

  • Competition and weather don't mix. Because of competition among farmers, bad weather can be good and good weather can be bad. Hopeless Harv will be quite happy if he has good weather while other wheat farmers have bad weather. The bad weather for the others will limit the wheat supply and drive the price up. Harv's good weather will lead to a bountiful wheat harvest, sold at high prices, which gives the Hopeless Harv homestead a high income. Of course, if Harv succumbs to bad weather, while other wheat farmers have good weather, then wheat prices will be down and Harv will be doubly hopeless with very little harvest and low prices.

For these reasons farm prices and the farmers' incomes tend to be highly unstable. The good times are seldom good enough to compensate for the bad. At best, farmers are usually just getting by.

What do all red-blooded Americans do when faced with dire circumstances that threaten their livelihoods? Call in the government. Farmers would have nice steady incomes, if only those darn prices didn't jump around with every little change in the markets.

Subsidies to the Rescue

The answer, for more decades than most of us have been around, has been an assortment of farm subsidies that offset low incomes when prices drop. In fact, over half of a typical farmers income, like Hopeless Harv, comes from one form of government subsidy or another.

While the variety of farm subsidies reflects a century of government-types thinking up different ways to subsidize farmers, we can lump most of them into one of three categories:

  • Price supports -- keeping prices high. Government works very had to keep prices high enough to insure a good living for farmers. If $5 for a bushel wheat is what Hopeless Harv needs to stay in business, then by the force of law, government can mandate that all wheat will be sold only for $5 a bushel. If there aren't enough buyers at the mandated price -- which is usually the case -- then government buys the surplus. Consumers not only have the "good fortune" of paying higher prices at the grocery store, our taxes are used to buy the surplus. The surplus is then stored away in a grain silo, storage shed, or warehouse until it rots.

  • Crop reduction -- keeping supply low. Government tries to get around the rotting-surplus problem by making sure that stuff is never produced. The most common method is to pay farmers NOT to grow stuff. If Hopeless Harv and other wheat farmers removes part of their land from wheat production, then the supply of wheat drops and the price rises. The higher price, together with government payments for NOT growing stuff, should give farmers a decent living. While consumers still get to pay high prices, the tax bill for NOT growing is usually less than that for buying the surplus.

  • Direct payments -- keeping incomes up. Often government decides to stop beating around the bush, and just give farmers extra income. In this case, the market is left to work out a price. If prices are below what government thinks farmers need to maintain their livelihood, then it pays them the difference. If Hopeless Harv needs $5 a bushel, but can only get $3 from the market, then the government makes up the $2 difference. While this keeps consumers' food prices low, it keeps the tax dollars moving swiftly between consumers and farmers.
The Good and the Bad of Farm Subsidies

In that most of us can find a veritable throng of farmers among our ancestors a generation or two past (some even less), it's difficult to argue with the intended benefits of farm subsidies. Without subsides many farmers would have to park the tractor, sell the land to a nefarious suburban developer, and move into the city with their kids; forever destroying an American family-farming tradition.

As taxpayers and consumers of this country, however, we pay a high price to maintain cultural icons of the 1800s. Prices are high, tax dollars are spent, and perhaps most importantly, we have lost some efficiency.

When we subsidize farmers who could not remain in business otherwise, we are forcing the economy to use more resources for farm production than consumers want. If we really wanted as much of stuff as the farmers could produce, then prices would be high enough to keep them in business. The more we subsidize farmers, the more they produce, the more their incomes fall, and the more they need subsidies. This is a loop that never ends.

The problem with farming really stems from our longer-run economic growth. Note these two points of interest:

  • People don't eat like they use to. Today, consumers like you and me eat just about the same amount of food as our ancestors did 200 years ago. However, we're a whole bunch richer and we spend a smaller fraction of our income on food. In addition, when our economy grows a little, and our incomes go up, then farmers (unlike doctors, politicians, factory workers, and shoe clerks) get almost none of it. In fact, farming is what we call a shrinking industry. Over the years it has become much smaller compared to the overall size of oiur economic pie.

  • Technology doesn't quite come to the rescue. In fact, technological improvements in the way farmers do their farming has helped shrink the farming slice of the economic pie. Because farmers can produce 10 times as much food now as 100 years ago, we need 1/10 as many farmers to do their farming thing. Problems, however, crop up when we still have 2/10 of the farmers trying to do their farming thing.

They only sure way to improve the plight of farmers is to get a bunch of them out of farming and into something else. Doing so, however, runs counter to numerous special interest groups who claim to be protecting the interest of farmers. The U. S. Department of Agriculture is a the top of this list, followed closely by scores of producer groups, like the American Dairy Association.

Let's make note of a few tips on farm subsidies:

Tips on this Whole Farm Subsidy Business

  • We first need to ask if farm subsidies are worth the cost. Is keeping a bunch of farmers in business worth higher food prices, higher taxes, and the inefficient use of our resources?

  • If you're answer is no, then you need to face the political realities. Farm subsidies have been a way of life for 100 years. It's very difficult to convince farmers that taking away 50 percent of their income will be good for them in the long run. In the short run, of course, they still need to pay their bills.

  • It's also an uphill battle because of the scores of powerful special interest groups that are looking out for the "interests" of farmers. A few spirited politicians and consumers have waged the war against these groups, but most have come away bloodied and defeated.

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