supply-side solutions

No, this isn’t about government fiscal policy. It’s about corn. But the two aren’t as unrelated as you might think. These days, our corn production has a lot in common with our production of money – that is, we can make about as much of either as we so desire. And we make a lot of it. In the NYT magazine, Michael Pollan addresses the problem of corn overproduction and its ramifications on both the global economy and on the health of our nation. He first draws a parallel between the current overproduction binge and an earlier agricultural boom in the 19th century, the result of which was an excess of corn and a boom in production of alcohol (whiskey):

The results of all this toping were entirely predictable: a rising tide of public drunkenness, violence and family abandonment and a spike in alcohol-related diseases. Several of the founding fathers – including George Washington, Thomas Jefferson and John Adams – denounced the excesses of the ‘‘alcoholic republic,’’ inaugurating the American quarrel over drinking that would culminate a century later in Prohibition.

Pollan argues very convincingly that we are now in a similar predicament with our production of corn:

… first there’s the $19 billion a year the government pays to keep the whole system afloat; then there’s the economic misery that the dumping of cheap American grain inflicts on farmers in the developing world; and finally there’s the obesity epidemic at home – which most researchers date to the mid-70’s, just when we switched to a farm policy consecrated to the overproduction of grain. Since that time, farmers in the United States have managed to produce 500 additional calories per person every day; each of us is, heroically, managing to pack away about 200 of those extra calories per day. Presumably the other 300 – most of them in the form of surplus corn – get dumped on overseas markets or turned into ethanol.

So why are we producing so much corn? Why don’t the laws of supply and demand correct this situation? If the price of corn drops so significantly, why don’t suppliers drop out of the market, decreasing supply and regaining equilibrium?

The rules of classical economics just don’t seem to operate very well on the farm. When prices fall, for example, it would make sense for farmers to cut back on production, shrinking the supply of food to drive up its price. But in reality, farmers do precisely the opposite, planting and harvesting more food to keep their total income from falling, a practice that of course depresses prices even further. What’s rational for the individual farmer is disastrous for farmers as a group.

Indeed, the rules of classical economics for a commodity market don’t seem to apply. Instead, the rules for a monetary market seem much more apt – a parallel that Pollan missed, which is unfortunate because it strongly reinforces his case. The amount of money we produce is unlimited. This is why we have fiscal policy, and the federal reserve. So, it seems then that a reasonable solution to the problem would be to take measures to control the supply of corn, by taking steps to control the supply, and by maintaining a flexible surplus – just like the Federal Reserve. Indeed, this describes the system that was in place for a long time. Following the depression, Roosevelt implemented a system designed to carefully control the supply and the price of corn:

Basically, the federal government set and supported a target price (based on the actual cost of production) for storable commodities like corn. When the market price dropped below the target, a farmer was given an option: rather than sell his harvest at the low price, he could take out what was called a ‘‘nonrecourse loan,’’ using his corn as collateral, for the full value of his crop. The farmer then stored his corn until the market improved, at which point he sold it and used the proceeds to repay the loan. If the market failed to improve that year, the farmer could discharge his debt simply by handing his corn over to the government, which would add it to something called, rather quaintly, the ‘‘ever-normal granary.’’ This was a grain reserve managed by the U.S.D.A., which would sell from it whenever prices spiked (during a bad harvest, say), thereby smoothing out the vicissitudes of the market and keeping the cost of food more or less steady – or ‘‘ever normal.’’

This worked well enough until the 1970’s, when the system was dismantled by the Nixon administration in response to a crisis in the price of corn. In ‘72, the price of corn was soaring and in response the government completely reversed the system designed to prevent overproduction and instead did everything they could to encourage it. Unfortunately, not much has changed since.

The problem is that big food industry has learned to capitalize on this newfound excess in ways that weren’t feasible in the 19th century. These days, the real money is in the processing of food. The market for plain-ol’ corn may have dried up, but the market for new, inventive (calorie rich) processed foods (as Pollan puts it “ginkgo biloba-fortified brain-function-enhancing puffs”) is just now being explored and exploited. Corn syrup has supplanted sugar as the sweetener of choice for almost every product, and it’s become such a cheap commodity that marketing and distribution have become the biggest costs. Increasing portion size costs so little that it’s a very effective selling-point – the “biggie size” effect.

So, we have a system where farmers are barely scraping by, selling a commodity whose price has bottomed out. They are kept alive purely by government subsidization. Meanwhile, the big food industries reap the rewards of a dirt-cheap commodity being sold to a populace that doesn’t really need it. It’s a great racket, if you can get a piece. Unfortunately, you and I and the rest of America are paying the price for this artificially-inflated market, both in the expanses of our staggering obesity epidemic, and in the billions spent on subsidization of agriculture. The rest of the world, too, takes a hit, when the flood of American surplus competes mightily with regional economies. (This is an aspect I don’t know too much about but would love to explore further. It’s times like this I wish I had Krugman on speed dial.)

The impact on the environment is unfortunate, too, as Pollan has explored in other pieces in the past:

We know a lot more about what 80 million acres of corn is doing to the health of our environment: serious and lasting damage. Modern corn hybrids are the greediest of plants, demanding more nitrogen fertilizer than any other crop. Corn requires more pesticide than any other food crop. Runoff from these chemicals finds its way into the groundwater and, in the Midwestern corn belt, into the Mississippi River, which carries it to the Gulf of Mexico, where it has already killed off marine life in a 12,000 square mile area.

In case you can’t tell, this guy really hates corn. Corn is evil. But honestly, the upside is that this is a problem which seems to have a pretty clear solution: re-tool our government policy to discourage overproduction. But unfortunately, this simple solution is thus far being ignored:

One need look no further than the $190 billion farm bill President Bush signed last month to wonder whose interests are really being served here. Under the 10-year program, taxpayers will pay farmers $4 billion a year to grow ever more corn, this despite the fact that we struggle to get rid of the surplus the plant already produces. The average bushel of corn (56 pounds) sells for about $2 today; it costs farmers more than $3 to grow it.

It seems the interests of the Coca-Cola and and Kraft Food are more important to our government than that of its people. That sucks.