Mark Gritter (markgritter) wrote,
Mark Gritter

Count the Economic Fallacies

Mark Muller's column opposing federal money for Mississippi navigation is hard to understand and utterly unconvincing. He views this infrastructure work as an "export subsidy" which harms Minnesota farmers.

The first argument is that the export market reduces the incentives to develop investment locally:

The federal government spends an estimated $100 million a year maintaining navigation on the Mississippi River system, which is primarily used to get crops such as corn and soybeans out to international ports... How does this create investment elsewhere? The production of an agricultural commodity is just the first step in the processing that eventually produces food, materials and energy. It isn't too exciting to think of Minnesota crops becoming the low-cost feed supplier of a Taiwan poultry operation. Why then should we encourage that processing to take place in other parts of the world rather than in job-creating industries in the Midwest?

This seems like classic broken-window thinking. Yes, we sell corn to Taiwan instead of just to local poultry farms and bakeries. But that means that capital can be directed at other industries in Minnesota which could be equally, or more, profitable. It means that we can buy Taiwanese goods, like semiconductors, more cheaply than if we had no exports to them. Taiwan's gain is not necessarily our loss; the jobs we "don't have" are probably balanced by jobs we do have.

The next claim is harder to understand: that "subsidies" (it is not clear whether we are still talking about navigation improvements) cause farmers to grow corn and soybean instead of more profitable alternatives.

When agricultural production is narrowed down to just a couple of crops, such as corn and soybeans, economic opportunities that provide a greater return are lost. This hurts Midwest farmers who have little choice but to grow these crops even when prices are lousy, and hurts rural communities that need economic development. Land locked up in corn and soybeans can't be used for higher value production such as locally grown fruits and vegetables or grass-fed livestock, products for which consumers are willing to pay a premium....

Federal policies play a primary role in keeping Midwest agriculture less innovative than it should be. The farm bill drives down prices and reduces the financial risk of growing commodity crops such as corn, soybeans, wheat, cotton and rice. This encourages farmers to grow these crops -- and grain buyers to trade and process these crops -- at the expense of other opportunities.

While I oppose direct agricultural subsidies, it is hard to imagine that any farmer is growing corn or soybeans instead of a more profitable alternative. Are we really saying that the export market demand for corn leads farmers to grow corn even though it makes them less money? I think Muller has switched targets, but the argument still doesn't make a lot of sense.

Economists usually treat specialization as a positive; if we grow corn and California grows avocados, we can trade and both be better off instead of trying to grow avocados here and corn in California. The same applies to Mexico or Taiwan. (That is not to say there are no objections which could be raised to the economic orthodoxy here, but a bare statement that an export market causes farmers to choose financially less-rewarding crops is very strange.)

The final argument is that exports don't actually benefit farmers:

Federal transportation policies fall into this same trap. With the farm bill encouraging corn and soybean production, policymakers apparently feel some responsibility for facilitating the export of these crops. Export subsidies, quite simply, are used to try to offset bad policy decisions in the agricultural economy, which have flooded the Midwest with cheap corn and soybeans, and to drive farmers off the land.

Farmers don't export, and there's scant evidence that farmers get better prices because of exports. It's the grain companies that almost always reap the profits from this trade. So why, then, are we spending taxpayer dollars on navigation?

"Farmers don't export"? Really? After all the trouble convincing us in the previous two arguments that exports are economically harmful, Muller then turns around and admits that there is an economic surplus, it's just being captured by "grain companies." If true, this would be interesting--- how could it be that only the exporter captures the profit of shipping corn to Taiwan, but it is not reflected in Minnesota corn prices? There may well be a market failure here, but "drive farmers off the land" is a populist argument, not an economic one.

Suppose you're a farmer and the Chicago Board of Trade has price $N per bushel. How can the presence of another buyer offering $M per bushel drive the price lower? Either $M <= $N, so you sell through your old route, or $M > $N, and you ship your corn to Taiwan instead.

And, even the higher-value industries Muller would like to see also benefit from improved transportation. Who are we going to sell all those chickens or grain products to? Wouldn't we ship much of it down the Mississipi for international export?

Today, Chinese LED factories can go on E-Bay and sell parts directly to American buyers. Is it that difficult to image some means by which farmers can realize more of the gains of an export market? That seems a better investment than arguing it should be shut down. Muller has other ideas, though:

There are much better ways of investing in Minnesota agriculture. What if that $270 million were instead used to encourage business opportunities for the storage, processing and transportation of Minnesota-grown foods?

Finally, Muller ends up with a call for subsidies ("encouragement") at a different level of the economic food chain. If his previous arguments about "subsidies for export" distorting the market and making farms less profitable is true, why would we believe subsidies on manufacturing and processing would be better?

Rather than a reasoned argument about the distorting impact of subsidies, or even an explanation of how better transportation hurts Minnesota farmers, this op-ed ends up sounding like nothing more than parochialism and protectionism. It seems far more likely that reducing navigability on the Mississippi will harm Minnesota, and the environment, by forcing farmers to other means of transportation, rather than reversing the forces of globalization.
Tags: economics, minnesota, rant
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