GTAP Resources: Resource Display
| GTAP Resource #1268 |
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"Farm and Non-Farm Households Distributional Effects of U.S. Farm Commodity Programs" by Somwaru, Agapi and Kenneth Hanson Abstract In March 2003, countries will agree on new and perhaps different modalities for further agricultural policy reform. The impacts of domestic farm support on international commodity markets remains a key point of contention among the various countries. The main purpose of this paper, using a highly disaggregated U.S. Computable General Equilibrium (CGE) model, is to analyze the distributional impacts of policy changes involving price-contingent and lump sum payments on U.S. farm and non-farm households. The farm household impacts occur through program effects on farm sector output, commodity prices, factor returns, and trade. Non-farm household impacts occur through taxes and the cost of food. Analysis of U.S. farm households that receive commodity payments reveals striking differences in their characteristics, such as wealth, ownership of land, and dependence on off-farm income. By incorporating farm households distinguished by the USDA-ERS typology into a U.S. CGE model, we capture the heterogeneity in response and in outcomes across farm households generated by changes in commodity programs. Farm household response has not typically been used as an indicator of policy effects because policies have historically affected relative commodity prices, and distortions of production and trade are direct and easily tracked through commodity markets. Traditional CGE models show the economy-wide effects of commodity programs on relative commodity prices and factor market returns to agriculture. Although there is some heterogeneity in how relative price effects are felt across sectors, most models capture the effects of policy through a single representative household ignoring how households decide to engage in labor markets, allocate income to current consumption, or allocate savings on farm and non-farm investments. Integrating farm and non-farm household surveys into a CGE framework, we evaluate the distributional effects of U.S. farm policy while we capture the broad view of agriculture within an overall economy. Not only do farm policies affect different types of farm households differently, they also affect different types of non-farm households differently. Agricultural Resource Management Survey (ARMS) data on farm households by the USDA-ERS typology are integrated with Current Population Survey data on non-farm households, distinguished by income and various social-demographic characteristics. Each household receives income from earnings, returns to ownership of capital and land, and transfers from government programs. For earnings, household members make a labor-leisure choice, with farm households having the additional complexity of making a farm and off-farm labor allocation. From their income they pay taxes, consume food and nonfood goods and services, and save. Given the structure of the U.S. CGE model, with its detail on industry and households, we illustrate several distributional effects that can be expected from recent change in U.S. farm policy under different world market conditions. The Farm Security and Rural Investment Act of 2002 (2002 Farm Act) will have a distributional effect among farm households. All farm programs under the new act are expected to distribute $10.7 billion per year for the next ten years as an annual average to farm households. Farm commodity programs, conservation programs, and trade programs account for 67 percent of the total government payments. Past payments have not been equally distributed among farm types, with large commercial farms receiving close to 50 percent of government payments. Our analysis explores the distribution of government payments from the 2002 Farm Act among the farm types, which depends on economic conditions in the different commodity markets. The 2002 Farm Act will also have distributional effects among farm households, low-income non-farm households, and other non-farm households. The other or mid- and high-income non-farm households pay the taxes that finance the government payments. Due to inefficiencies introduced by the tax system and market adjustments triggered by the taxes there is an additional welfare cost associated with the taxes. The distribution of taxes and loss in wellbeing due to inefficiencies introduced by the tax system are compared to the distribution of government payments. For low-income non-farm households, food prices are important as food consumption is close to one-fourth of their budget. Though the budget share for food is smaller for other households, their wellbeing is also influenced by food costs. To the extent that farm programs reduce farm prices and these lower prices are passed onto consumers as lower food prices, households benefit, particularly low-income households. In 2000, households consumed $660 billion of domestically produced food, and on average 20 percent of food expenditures are accounted for from the cost of farm products. Consequently, on average, food costs fall by 0.2 percent or $1.32 billion for a 1 percent reduction in farm prices. In an economy-wide distributional impact analysis of the 2002 Farm Act, we compare the distributional impact from lower food costs to all households but particularly low-income non-farm households, from government payments to farm households, and from tax payments and the efficiency cost of taxes to mid- and high-income households. Preliminary analysis indicates that farm households gain $10.7 billion, while taxpayers lose an additional amount of $2.7 billion (25 percent) due to the efficiency cost of taxes, and all households gain about $1 billion from lower food costs. |
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- Agricultural policies |
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Public Access  GTAP Resource 1268 (389.9 KB) Replicated: 0 time(s) PDF Version (1.0 MB) Replicated: 0 time(s)Restricted Access No documents have been attached. Special Instructions No instructions have been specified. |
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Last Modified: 9/15/2023 2:05:45 PM
