By Vikram Mansharamani, PhD
A steady stream of Lincoln town cars delivering confident executives. Unbridled enthusiasm in the air, record attendance, and eager attendees seeking pictures with the keynote speakers. An assassinated former president was reincarnated with impressive accuracy to provide for audience entertainment. Professional videos were prepared to tout the industry’s successes.
Mortgage bankers convening in 2007? Nope, the scene I describe was from the USDA’s Agricultural Outlook Forum in late February in the Washington DC area. Attendance at last week’s event exceeded two thousand, and included farmers, politicians, regulators, agribusiness executives, bankers, and academics from around the world.
Might the collective confidence of the event’s attendees indicate an irrational exuberance that is destined to reverse? Was the widespread enthusiasm and economic success (farm income exceeded $100bn in 2011) sustainable? Was the “life is good” attitude indicative of a bubble before it bursts?
I have been a student of booms and busts over the past 20 years and have developed a set of indicators for identifying bubbles. Two in particular seem relevant to the study of agricultural conditions today. First, there is a always a believable story of how “it’s different this time” and the inevitable (over)confidence and invincibility that accompanies such a feeling. Second, moral hazard (via government guarantees or downside price protection) makes for a “heads I win, tails you lose” risk environment. With respect to agriculture, both of these indicators suggest the situation is not sustainable.
It was hard not to notice the celebratory tone that hailed the many impressive accomplishments of US agriculture. In many ways, the success of agriculture has generated a sense that good times will continue indefinitely. I was gently (and regularly) reminded that the USDA touches every American since we all eat food. It was repeatedly mentioned that Lincoln referred to the department as the “People’s Department” and that while 50% of Americans lived on farms in 1862 (the year Lincoln established the USDA), today 2% of Americans live on farms that produce a surplus that is exported to a hungry world. Record land prices drew some discussion of bubbly dynamics – but rationalizations of how “it’s different this time” seemed to win the day. Demand from emerging middle classes in the developing world provided strong support for the belief that we are in a new era of agricultural prosperity (i.e. that it’s “different this time”).
As is typical of most bubbles, past trends are extrapolated into the future to paint a picture of continuing good times ahead. The pinnacle of last week’s events was a plenary session moderated by Secretary of Agriculture Vilsack that included 7 former Secretary’s of Agriculture discussing the future of agriculture in America. It was noteworthy that the 8 members on stage included republican and democratic appointees, lawyers, farmers, and legislators. While the event was truly a “love-fest” in that everyone was praising everyone else about how great a job everyone was doing, there were some noteworthy exceptions from former secretaries who commented on the sustainability of US agriculture and implied heavily that the current good times were unlikely to continue indefinitely.
Clayton Yuetter, Secretary of Agriculture from 1989-1991, noted “the antidote to high prices is high prices; the antidote for low prices is low prices.” While an appealing intellectual construct, USDA supports policies that contradict this perspective. The counter-cyclical and marketing loan programs both allow for farmers to not consider prices when making planting decisions. Lower prices don’t deter production as government subsidies effectively create the moral hazard-induced asymmetric risk-reward trade-off.
Given these two very concerning dynamics, it is not surprising that John Block, Secretary of Agriculture from 1981-1986, suggested the USDA’s “strength and power and influence in the halls of government and in the nation” are at risk in a time of budget cuts. He even suggested the USDA change its name to the “Department of Food, Agriculture, and Forestry” in order to maintain control of the food programs (~70% of the annual budget, includes food stamps, school lunches, and other nutrition programs) and the forest service (manages ~193 million acres and employs more people than any other group within the USDA). His specific rationale: USDA would be at risk of losing its cabinet level status without the size and breadth of these two programs.
Why should cabinet status drive inappropriate organizational structure? Birthdays are wonderful times to celebrate the past, but they are also appropriate times to reconsider plans for the future. As the USDA turns 150 this year, we should consider if the food and nutrition programs actually belong in it. Might these programs be more appropriately placed in the Department of Health and Human Services? Or, as mentioned by Secretary Block as a risk, perhaps the Forest Service should be relocated to the Department of the Interior. Frankly, even the underlying agricultural subsidy programs should be reconsidered. Should American taxpayers be providing subsidies to an industry that posted record profits in 2011? The time to reduce or remove subsidies is now, while prices are high and pain of removing them minimal. Further, the Farm Bill should be rewritten from scratch, not modified incrementally from Depression-era policies that in many cases are no longer relevant.
Reorganizing the USDA and rewriting the Farm Bill might remove some of the hot air supporting the bubble dynamics in agriculture today. The USDA has inadvertently contributed to overconfidence and moral hazard, much to the detriment of taxpayer resources. The fiscal tightening that appears necessary might best begin by grabbing the “low-hanging fruit” (pun intended!) at the USDA. The time has come to return the People’s Department to the people.
Vikram Mansharamani is a Lecturer at Yale University, a TIGER 21 Scholar, and author of Boombustology: Spotting Financial Bubbles Before They Burst.