The Bear’s Lair: Corn Laws beat farm subsidies

British farmers are concerned about a “no-deal” Brexit, under which they would lose access to bounteous EU farm subsidies. U.S. farmers have had their subsidies increased by President Trump as a result of the China trade dispute. Agriculture subsidies burden national budgets and almost exclusively benefit large corporations and the very rich. There is a better model for supporting agriculture: the 1815-46 Corn Laws, reviled by Whig historians, but much cheaper and infinitely less corrupt.

Robert Banks Jenkinson, second Earl of Liverpool, had three objectives when introducing the Corn Laws in March 1815. One was to help Ireland to develop its corn agriculture, diversifying from potatoes – an objective partly achieved, mitigating the 1840s potato famine, but alas lost after the Corn Laws were repealed in 1846. The second was to ensure that Britain was close to food self-sufficiency in any future war – the Corn Laws would have been useful before the World Wars, in both of which Britain came close to starvation through German attacks on merchant shipping. The third objective, much pilloried by Whig historians, was to preserve the economic viability of British agriculture against “dumped” foreign competition.

The Corn Laws, for those who were not subjected to them in the British school system, were a system whereby (in the 1815 version) corn imports were prohibited when corn prices were below a base level of 80 shillings per quarter (28 pounds weight), then free above it. Each quarter’s (3 months) average corn price was used to set the allowability of imports for the following quarter; this granularity made the system transparent for importers and allowed them to plan shipments. Since Britain was almost but not quite self-sufficient in corn, this system allowed domestic producers protection against cheap dumped imports but tended to cap the price for consumers in years of dearth by opening the ports freely. In this classic version of the Corn Laws, no tariffs were imposed.

The one problem the Corn Laws did not solve occurred in their second year of operation; the “Year Without a Summer” in 1816, caused by the Mt. Tambora volcanic eruption the previous year, produced a corn dearth in early 1817 across the whole northern hemisphere, so no extra supplies were available when prices rose. However, other than that the system worked well. It was modified twice in the 1820s, after the deflation caused by Britain’s return to the Gold Standard made 60 shillings a more sensible equilibrium price than 80 shillings.

Agricultural protection today focuses primarily on the last of Liverpool’s objectives, preserving the economic viability of agriculture, which involves large capital investments and suffers badly financially when crops fail or a world market glut makes crops grown in rich countries (with high labor costs) uncompetitive. In Britain, there is a wish to avoid the dismal fate of agriculture in 1870-1939, when Corn Laws repeal and global free trade left British agriculture uncompetitive, de-capitalized the sector, ruined the traditional landed classes and impoverished the agricultural workforce. (David Lloyd George’s policies of land tax, before and after World War I, demonstrated an irrational class hostility to the landed gentry — not to the rich in general, with whom Lloyd George loved to hobnob – at that time, the landed gentry were engaged in a desperate, generally unsuccessful, attempt to stave off bankruptcy.)

In the United States, sentimentality about the “family farm” shows the same wish, though most U.S. farming is undertaken by agri-conglomerates. In Europe and Japan the cultural signals may be different but the result is the same: a wish to protect agriculture, which appears common to all rich countries. Oddly enough, poor countries, where labor-intensive agriculture is often more competitive, often subject it to increased burdens or outright harassment.

Take it as a given, then, that rich countries want to protect their agriculture. Their rationale for doing so is not all that different from Liverpool’s wish to protect the traditional agricultural interest, but their methods are very different, and much more expensive. The United States, for example, provides a wide range of subsidies to producers of various agricultural and similar products. These stretch so far as a subsidy to cotton, a commodity of which the U.S. is a major international exporter, causing huge economic damage to African cotton producers, which would otherwise be highly competitive because of their low labor costs. These subsidies have a huge direct budgetary cost.

The U.S. also regulates the use of agricultural products in ways which benefit producers but impose costs on consumers and the economy as a whole. For example, the U.S. requires a minimum percentage of ethanol in gasoline and uses various means to ensure that the ethanol so used is U.S. corn-based ethanol (environmentally very inefficient) rather than the much more environment-friendly sugar-based ethanol used in Brazil.

A further area of agricultural subsidy is the food stamps program. This is primarily a welfare program but is dealt with in the agricultural budget and at the margin provides additional support for U.S. agriculture. While highly subject to fraud, food stamps provide a function that would probably be provided somehow in any modern welfare-state economy.

A much more pernicious subsidy to agriculture is the temporary visa program, which allows U.S. agriculturalists to import workers and pay them far less than the normal U.S. wage rate. These programs impose crime and welfare costs on the society as a whole and subsidize the production of farm products that would not be viable at market wage rates. They thus impede mechanization in many crop areas where machinery could be used instead of cheap labor. If a particular crop cannot be produced in the United States using U.S. labor at market rates, then U.S. economic welfare will be increased by allowing foreign producers to produce it instead.

Both commodity-rich countries like the United States and commodity-poor countries like Britain, should replace the current subsidies to agriculture with a system of Corn Laws covering the major commodities produced by domestic producers. This would relieve the immense budget cost of current farm subsidies and greatly lower the even larger and more dangerous economic costs inherent in the current system. There would be no food stamps or special visas for low-cost labor; any poverty problems would be relieved by cash payments through the welfare system.

For Britain, Corn Laws would work much as they did in 1815-46. They would prevent imports of commodities when prices were low, thus keeping the domestic price close to the base price and ensuring a reasonable return for farmers. Farmers would adjust their crop production to reflect domestic needs, to avoid producing surpluses dumped on the international market at lower prices. Food prices would average somewhat higher than currently, although crop failures would result in imports (which would be more readily available than in 1815-46, in a world with Southern Hemisphere producers and fast transportation). The 1846 objection to the Corn Laws, that they raised food costs for the working classes, would be less salient now that only 13% of consumer expenditures are on food products; in any case the welfare system could be adjusted accordingly, much more cheaply than providing indirect handouts to the poor through agriculture subsidies.

For the United States, a no subsidy/Corn Laws system would, as in Britain, provide producers with an adequate and more stable income, but only to the extent they produced for domestic consumption. Producers of, for example soybeans with heavy international sales would be reliant on the vagaries of the international market, and accordingly might lose out compared with the current system. However, subsidizing production for export of items that can only be sold at below their production cost is economically suicidal and should be avoided however loud the squawking from the producer lobbies.

When base prices for Corn Laws were calculated, it might very well be that some agricultural products were viable only at impossibly high prices, having been heavily subsidized currently, both directly and indirectly through imports of cheap labor. Labor-intensive crops, in particular, are very often unsuited to high-wage economies except in specialty varieties, and hence should be imported rather than grown domestically. Wine is such a crop, for example. It makes no sense to produce cheap wine in France or California; those high-costs growing areas should be reserved only for high-quality, high-priced production, while the cheap wine is imported – even to France.

For Britain’s 19th Century economy, repeal of the Corn Laws and the move to unilateral free trade were a disaster; they destroyed the traditional agricultural basis of society and, in the long run, hollowed out the industry that had led the world in 1825. In an era when budgets all over the world are in huge deficit, agricultural subsidies make no sense today. As in many economic areas, Liverpool was far ahead of today’s thinkers; we should recognize this fact and return to his well-thought-out Corn Laws.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)