By Laura D'Andrea Tyson
Most agricultural output in the U.S. is produced on huge farms. The family farmer tilling a small plot of land is a symbolic figure, reflecting America's past. But the myth of the self-reliant American farmer, and the values he represents, apparently still retains considerable political resonance. With the professed but disingenuous goal of creating "a generous and reliable safety net for American farmers," Congress, with the support of both Republicans and Democrats, has passed, and President Bush has signed, one of the worst pieces of legislation of the past decade. A fight for congressional seats in November's election, not the well-being of America's few farmers, is the real motivation behind this bill. Unfortunately, its collateral damage on the nation's foreign policy and budgetary priorities will be substantial.
The farm bill is dreadful economic policy. It dramatically increases subsidies on large staple crops like soybeans and wheat, introduces new subsidies on crops like lentils and peanuts, and resurrects old subsidies already eliminated on crops like honey, wool, and mohair. Overall, the bill raises the level of agricultural subsidies by at least 80% and will cost $180 billion to $190 billion over 10 years. Three-quarters of these subsidy payments will accrue to the biggest and richest 10% of farmers. By design, the subsidy schemes will encourage farmers to increase production when prices fall below specified levels, exactly the wrong response from a market point of view and one that will understandably ignite the wrath of our trading partners by encouraging American exports and depressing global prices. For years the U.S. government has lectured the rest of the world, especially Europe, to slash agricultural subsidies and to move away from production-based subsidies toward direct income-support payments to farmers. Now the U.S. is doing the opposite of what it has been preaching.
This about-face has dealt a severe blow to American credibility around the world. Less than six months ago at trade talks in Qatar, Washington promised that phasing out agricultural subsidies and improving access for agricultural exports from developing countries to the U.S. and Europe would be priorities for a new round of multilateral trade negotiations. This promise won support from leaders of the developing world for the launch of such a round, despite their concern that international trading rules are rigged to favor the rich countries. The new farm bill threatens to kill the negotiations before they have even begun.
Just three months ago at another international meeting in Monterrey, Mexico, the Bush Administration proudly announced a plan to increase America's paltry foreign aid budget by about $5 billion a year over three years, a 15% increase. But even if this increase is enacted, America will spend substantially less on foreign assistance for the world's poor than on subsidies for domestic farmers over the next decade. The developed countries already spend about $350 billion a year in agricultural subsidies, six times what they spend on foreign assistance to the 5 billion people in the developing world, most of whom rely on farming for their livelihood. Cutting agricultural subsidies, which depress global agricultural prices and reduce farm incomes in the developing world, would be the single most effective way for the U.S. and the other developed countries to help the world's poorest citizens.
The legislation is also emblematic of another alarming trend that has taken hold in Washington during this election year: escalating budget deficits fed by large increases in government spending. The political consensus on fiscal responsibility forged in the second half of the 1990s has shattered, and the discretionary spending caps and other budget process rules enacted more than 10 years ago to control deficit spending have lapsed. The President's decision to sign the farm bill, combined with his requests for significant new spending on homeland security and the military, indicates that the Presidential veto will not be used to stem the flow of budgetary red ink. A growing number of private-sector forecasters are predicting government deficits of $200 billion or more, averaging over 1% of gross domestic product, over the next five years. If the ill-advised Bush tax cuts slated to go into effect in 2006 and beyond are accelerated or made permanent, as the Administration favors, the deficit picture gets much worse.
The imposition of steel tariffs and the passage of the farm bill have shaken the world's faith in America's commitment to trade liberalization and to promoting development in the world's poorest nations. And a return to budget deficits is stirring unease in global capital markets, just when the foreign appetite for dollar-denominated capital assets appears to be waning. If the Bush Administration loses the confidence of its allies and global capital markets through a series of misguided, politically motivated policy mistakes, the risks to the dollar and the health of the economic recovery could be serious. Laura D'Andrea Tyson is dean of London Business School.