05/09/2013 02:52 pm ET Updated Jul 09, 2013

'Shallow Loss' Is a Loser of a Program

Buried deep inside the $950 billion farm bill soon to come before the House and Senate agriculture committees is a policy proposal that easily ranks among the most misbegotten welfare-for-the-wealthy efforts ever to spring from the banks of the Potomac. The proposed new program, something called "Agricultural Risk Coverage" or "Shallow Loss," literally offers something for everybody to dislike: its wasteful, environmentally destructive, and might well start a trade war.

Some background on farm subsidies and the proposal first. While the federal government runs at least two-dozen programs that send money to agricultural interests, two of them -- "Direct and Countercyclical Payments" (direct payments) and crop insurance -- dwarf all of the others combined. Crop insurance charges premiums and pays out money following crop losses from natural disasters and market declines in crop prices. Congress created Direct Payments in 1996 as a transition measure intended to wean farmers off of government subsidies by providing them a limited guaranteed stream of income based on historical planting patterns. Because of this, it doesn't even require farmers to farm in order to receive money--they simply need to own farm land. It was supposed to end in 2002 but, instead, has actually grown over time. Because it's so obviously absurd, even most farm groups have advocated its demise. In its place, they support shallow loss and, in public, often portray it as a simple extension of crop insurance. But, in reality, the program is anything but insurance. Unlike a real insurance policy, it won't charge any premiums or make any underwriting decisions. Instead, it's a pure welfare program that simply sends farmers money (and lots of it) when they lose crops or see the prices decline below current, historically high levels.

And doing this is pure waste. On balance, farm households are already very well off -- they take home $20,000 more than the national median -- and don't particularly need welfare to remain in business. Shallow loss would give almost all farmers a profit guarantee that no other category of business enjoys and add to what the Heritage Foundation has accurately called an "already lavish safety net." The cost, scholars affiliated with the American Enterprise Institute estimate, could be as much as $74 billion over 10 years.

The program would also threaten to do environmental damage. While current, heavily subsidized crop insurance programs possess a number of deep flaws, the high deductible structure of existing coverage means that farmers avoid planting in areas where they know soil erosion and habitat destruction are likely. (A set of accountability rules also encourages this.) By covering almost all of farmers' losses, however, the shallow loss program would provide a huge potential incentive to plant in environmentally sensitive areas that would almost certainly be left fallow absent the subsidies. The results will destroy wildlife habitat, increase soil erosion, and ruin otherwise fertile land.

Finally, as the AEI-affiliated scholars point out, shallow loss probably violates World Trade Organization rules about agricultural subsidies. Trade sanctions against the United States could result. To get around these sanctions, it's entirely plausible that implementing the program as currently proposed would result in Congress being compelled to make payments to other countries akin to the nearly $150 million the United States sends to Brazil each year as payment for keeping its own WTO-illegal cotton subsidies.

The proposed shallow loss program, in short, is a bad deal for just about every interest group and every taxpayer in the U.S. If Congress has any fiscal sense -- not to mention environmental, or trade responsibility -- it should make sure that the proposed program dies in committee.

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