Subsidies Can't Solve Farmers' Trade War Losses

Last month, Chinese Vice Premier Liu He, U.S. Treasury Secretary Steven Mnuchin, and U.S. Trade Representative Robert Lighthizer discussed a phase-one trade deal to potentially limit the ongoing US-China trade war. Many farmers and manufacturers hope such a deal could provide financial relief.  History can help U.S. policymakers understand that subsidies are not a reliable form of long-term assistance for American farmers and the agricultural sector. Often, subsidies provided by the U.S. government are harmful in the long run to American farmers.

While President Trump has boasted that the United States is winning the trade war, it has cost American farmers millions in agricultural sales. The Trump Administration has approved $16 billion in farm subsidies since June to compensate for lost income. These subsidies, however, have not been enough to offset the losses. For example, Iowan farmers received $973 million in direct payments from the first portion of Trump’s relief subsidy, while Iowa State University estimated the trade war cost farmers across the state $1.7 billion. This is not the first time that the U.S. government has failed to provide adequate relief to American agriculture.

In 1933, newly inaugurated President Franklin Delano Roosevelt held a special session of Congress to introduce 15 significant pieces of legislation. One of these bills was Roosevelt’s Agricultural Adjustment Act (A.A.A.), which declared Congress would  “balance supply and demand for farm commodities so that prices would support a decent purchasing power for farmers,” otherwise referred to as “parity.” FDR gave an address in support of the Agricultural Adjustment Act in which he stated: “I want to pledge to you not only our wholehearted cooperation as you go forward, but our continued deep interest in a problem that is not just a farmer's problem because, as I have said before, your prosperity is felt in every city home, in every bank and in every industry in the land.”

The Agricultural Adjustment Act came to Congress as one part of Roosevelt's packaged New Deal initiatives. Jim Powell, a senior fellow at the Cato Institute, discussed the struggle to finance all of the programs. The government had no other choice but to triple federal taxes from $1.6 billion in 1933 to $5.3 billion in 1940. Excise taxes, personal income taxes, inheritance taxes, corporate income taxes, and holding company taxes all increased. Everyday products like margarine and fruit juice faced high excise taxes in order to create revenue for the New Deal. The taxes imposed for the New Deal turned out to be damaging to jobs in the 1930s, as unemployment was prolonged and held steady at 17%.

According to American historian Gilbert C. Fite,   past government attempts at relief for the agricultural sector just left western and southern farmers dependent on federal assistance. Further, the A.A.A. primarily benefitted large producers. One farmer commented that the A.A.A. "will be of no benefit to the small landowner. Only the big landowner will benefit from it, as he can leave his percentage of land idle and farm the balance at a profit, besides drawing a large subsidy from the government as rents to buy more land to leave more land in idleness and to draw bigger subsidies.”

Similarly, Trump has lead farmers to believe he is helping their situation. While at a June state visit in Iowa, Trump told guests, "Within a year and a half, I would say, you'll be in the best position you've been in 15 years as farmers. And you deserve it. Under my administration, we will always protect and defend our great American patriot farmer. Always."

Yet, President Trump has increased U.S. farm debt -- debt that is expected to reach almost $427 billion in 2019, which is the highest level since the 1980s. The situation for American farmers and the heartland does not seem to have any positive outlook. Many farms have had to close shop. Within one year - from September 2018 to September 2019 -  all regions across the United States saw increased farm bankruptcies from the previous year, totaling 580 Chapter 12 bankruptcies. This amounted to a 24% increase compared to last year's levels.

In 1933 and now 2019, the U.S. government has used subsidies as a mechanism to fix the woes of American farmers. This strategy has only provided temporary relief and proved to be more detrimental to the agricultural sector in the long run. Economists Justin Spittler, Robert Ross, and Walter Block all explained that U.S. agricultural subsidies as historically lead to severe resource misallocation. High prices for products like food or clothing and other normal goods only exacerbated  the dark years of the Great Depression.

Very few would ever compare the actions and accomplishments of President Franklin Delano Roosevelt to President Donald Trump. However, both relied on farm subsidies to ease agricultural economic woes. While the 1933 Agricultural Adjustment Act is very different than 2019's trade war with China, the unfortunate economic situation for farmers shows a parallel failure in both cases by the federal government to help America’s heartland.