Bailing out farmers shows why tariffs were always bad policy

Bailing out farmers shows why tariffs were always bad policy
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The Trump administration recently announced that it will give out extra subsidies to selected American farmers to compensate them for the retaliatory effects, such as lower prices or even the cancellation of soybean contracts, of the trade war with China and other nations, including Canada and Mexico. Paying off some farm businesses because the prices they receive for the commodities they produce will be lower as a result of a trade war you instigated is Alice in Wonderland public policy. In Lewis Carroll’s world, such a program could only have been dreamed up by a queen of hearts on one of her more irrational days.

How silly is this? Impose tariffs on steel and aluminum imports from around the world that anyone with a lick of insight knows are sure to be countervailed by steel and aluminum exporting countries through tariffs on U.S. major exports like agricultural commodities. Then give subsidies only to one relatively small privileged group of businesses being damaged by the policy you dreamt up, in this case a small section of the rural population, because you hope they may vote for your party in November.

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In fact, use these tariffs as an excuse to double the crop insurance and price subsidies already being doled out to many of the same financially secure farm businesses who will receive the new subsidies. Just how financially secure are the farm businesses to whom you plan to give a helping hand? The average debt to asset ratio for the farm sector is about 12.6 percent, close to its record low of 11.3 percent in the last 50 years, and lower than in any other private sector of the economy. The subsidies farm businesses are already getting, by the way, will in any case be larger as a consequence of this trade war because they are triggered and increased when the prices of crops like wheat and corn fall.

Moreover, you can increase the federal budget deficit, although this time by only about $13 billion. Of course, happy thought for the day, as any trained economist knows, increasing the federal budget deficit will eventually only make the balance of trade deficit worse. So what is next? You can impose more tariffs to cure the increased trade deficit, which will be further countervailed by other countries, which will justify more subsidies for farm businesses. That way you can extend our new American farm subsidy and deficit spending program for several years.

In the meantime, let us pretend there will be no adverse employment consequences in America because the tariffs you imposed on steel and other imports have substantially increased the cost of roads, bridges washing machines, home construction, and commercial buildings, while to some extent destroying the domestic automobile industry. Sounds like a plan, but not one that even the best team would believe has a chance of making the American economy great again. No wonder, then, that many fiscally responsible legislators in Congress are skeptical of this approach.

Vincent H. Smith is a visiting scholar and director of agricultural studies at the American Enterprise Institute. He is also a professor and director of the Agricultural Marketing Policy Center at Montana State University.