Lobbyists generally have a bad reputation, but all they really do is advocate for their client’s best interest. Those particular interests may not be best for the rest of the public, but that’s fine as long as the rest of the public understands what’s going on.
Farm subsidies provide the perfect example.
A farm lobbying group is calling for new legislation to address the “depressed farm economy.”
Among other things, the lobby group wants price supports (subsidies) because a glut of commodities—an oversupply of corn, wheat, cotton, etc.—has “the potential to continue prolonged periods of depressed prices.” Put differently, there are so many of these commodities, farmers will not be able to charge higher prices.
Aside from the lobbyist’s view, this fact may not be such a bad thing. Furthermore, the remedy the group seeks is likely to cause future gluts in these commodities and all but ensure future demands for further subsidies.
The dynamics of this can be seen with the most basic analysis of supply and demand.
What’s going on here is that farmers grew more of these commodities than they could sell at higher prices. There is, for example, so much corn on the market that anyone who wants to buy corn can get it from many equally good sources.
Given this situation, buyers can easily negotiate lower prices. All farmers know that buyers can easily go to any farmer to get all the corn they want, so the farmers can’t hold out for higher prices.
Another way of looking at this situation is that the buyers didn’t want as much corn as the farmers grew at higher prices. So the only way that they’ll buy all that corn—the only way the market clears—is if farmers drop their prices.
Either way, without lower prices, we end up with a bunch of corn sitting around waiting to rot.
An important part of this process is what these lower prices signal to the farmer: don’t plant so much corn next time. The farmer has a better chance of selling corn at a higher price next season if the supply is lower.
These are the direct effects of supply and demand, with all other factors held constant. It’s true that some of these factors (call them external events) might change the way the market clears, but these factors are unlikely to overwhelm the direct effects on a regular basis.
That’s why any policy that artificially keeps prices higher than they would otherwise be is harmful to both consumers and farmers. By preventing the market from clearing, consumers pay higher prices and farmers plant crops that people don’t really want, thus wasting resources.
The mere fact that there is a commodities glut does not justify subsidies and price support programs, especially if that glut was caused by subsidies in the first place.
