Federal Policy Created Farm Crisis

Lawrence R. Klein received the 1980 Nobel Prize for economics. He is a professor of economics at Wharton School, University of Pennsylvania, and was a founder of Wharton Econometric Forecasting Associates.

The two deficits and their corresponding debt levels that we have been preoccupied with have been the federal budget deficit (public debt) and the foreign trade deficit (debt owed abroad). Now, those deficits have been joined by a third area of concern, farm debt, which is currently more than $200 billion. Farm income has been weak since 1982, and there is no thought of catching up with inflation of the past few years. In fact, net farm income is expected to be about $30 billion for 1985, no better than the 1981 value.

Just as the other high debt accumulations can be traced to the imbalances in the Reagan Administration's economic policies of the past four years, so can the farmers' plight be credited to the same source. The economic crisis facing the farm sector of our economy is associated with high interest rates, high exchange values of the dollar and weak world commodity prices. In some respects, the economic plight of American farmers resembles the problems of debt-ridden developing countries and those of our own traditional manufacturing industries.

Developing countries were pursued by zealous bankers who wanted to keep excess reserves fully invested and imprudent loan volumes at variable interest rates. These commitments imposed unsustainable burdens on less-developed countries as soon as world export prices weakened in oil and other commodities during the deflationary slide that has been taking place since 1980.

Excessive Loan Burden

There is a feeling within the agricultural community that farmers were similarly pursued by bankers and are now finding their high-interest loans to be an excessive burden because agricultural prices are relatively weak. And because productivity in American agriculture has been high, farmers understandably feel that they are being treated unfairly.

Just as "imprudent" borrowers in the Third World were treated insensitively, farmers are sorely treated in the Administration's budget proposals. Budget Director David Stockman's statements at recent Senate Budget Committee hearings revealed the same insensitive attitude of letting farmers--as opposed to less-developed countries--have their due for incurring debt that they cannot now afford to service.

Economic ideology at its extreme, based on unwavering faith in the market mechanism, can cause as much mischief for the farm sector as it has in the developing areas of the world economy. There appears to be little concern for the effects on rural financial institutions, on the agricultural supply sector and on one of our "showpieces" of net-export performance--namely, the whole agricultural economy.

The cumulative reductions proposed in the Administration's budget for farm price supports in 1986-90 is the largest among all entitlement or mandatory program savings, at the cool figure of $38.8 billion. Only Medicare savings at $32.5 billion come close in magnitude to the slashing treatment of farmers. Among the discretionary programs, subsidized agricultural credit is the largest item targeted, at $18.4 billion. Rural housing, not unrelated to farm well-being, is set back by $17.1 billion.

To use the ideological arguments of market performance to enhance the breaking up of our farm sector is as bad as what has been taking place in communications: The world's best telephone system has been taken apart on ideological grounds of fostering competition. Now, small, efficient farmers are being forced into bankruptcy by the harsh laws of the "free market," and the new budget proposals encourage this process.

While the U.S. merchandise trade balance was steadily deteriorating over the last decade or more, the agricultural surplus stood as a bulwark, lending support to our external position. One could not criticize American agriculture as being inefficient or exhibiting low productivity growth. Instead of cutting back, we should be doing everything possible to sustain this highly efficient sector of our economy.

Strong Dollar, Weak Demand

Other sectors of the American economy are in trouble because they are not fully competitive on a world scale and are going through a severe transitional change, either to make them more efficient as exporters or to enable them to compete with the flood of imports. Agriculture is facing the same consequences as these conventional manufacturing industries, but it cannot be accused of lagging in a technological sense or carrying a burden of excessive wage gains.

The agricultural sector's problem, to a large extent, is the high exchange value of the dollar combined with sluggish demand outside the United States. The perverse fiscal-monetary mixture of policies that is causing so many imbalances in the economy is now picking out a new victim--agriculture--and that is a sad story for our export posture.

Agricultural exports are between $35 billion and $40 billion per year, while total merchandise exports are just in excess of $200 billion; so the farm sector obviously contributes a significant amount in support of our external position. Farming was a strongly expanding trade sector until 1983, when agricultural exports fell, both in current and in constant prices. The quarterly data for 1984 show a continuing slide in real--or inflation adjusted--terms. It is only this unusual situation of the strong dollar that has put farm and all other U.S. exports into decline. The sector should be given a proper chance to recover its export brilliance, because we certainly need it. This is no time for the initiation of harsh, restrictive treatment.

The answer for dealing with the farm economic crisis is straightforward: We should pay for the good things in the American economy--its infrastructure, its environment, its rural life, its culture--with a tax increase, together with a balanced program of budget cuts in defense and many non-defense lines. But by stubbornly concentrating only on cuts in non-defense social programs, in which agriculture receives very harsh treatment, we create new distortions in our economy and impose undue adjustment problems on particular segments of our population.

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