Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Wednesday, March 30, 2005

$1 Billion in Farm Aid from the Canadian Federal Gubmnt

The Canadian Federal Gubmnt has announced that is will provide $1 billion in aid for Canada's farmers [from the Globe & Mail, registration req'd]

Tuesday's payment comes as Canadian beef farmers continue to be hammered by continued trade restrictions with the United States. Grain growers, meanwhile, are struggling to overcome low commodity prices, the impact of a stronger Canadian dollar and the one-two punch of recent droughts and frosts in some regions.

This bailout policy, like all previous ones, is being implemented to cushion farmers' losses from detrimental risk. Essentially, all Canadian taxpayers are providing insurance for the farmers.

The main beneficiaries, however, are not farmers, per se. Rather, the main beneficiaries are farm land owners. If farmers had buy their own insurance or had to bear these risks themselves, people would be less willing to go into farming, the demand for farm land would be lower, and farm land prices would drop. But by subsidizing farming through these types of insurance schemes, the gubmnt induces more people to stay in farming (or get into farming), thus increasing the demand for farm land. It has gotten to the point that most people expect the gubmnt to bail out farmers during off-years, and this expectation is now capitalized into the price of farm land.

The other major beneficiary of this aid is lending institutions. What would happen if the gubmnt just let the farmers go bankrupt? Major lending institutions would lose big on many of their agricultural loans. The result of bailing out farmers (who likely could work elsewhere in the economy) is that the financial institutions can avoid the costs and losses due to bankruptcy proceedings.

Of course, as Posner and Becker point out, if lending institutions anticipate that borrowers are less likely to declare bankruptcy, the borrowers will receive lower interest rates on their loans. And so once again, they will be willing to pay more for the farmland.

Henry George would have loved it.
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