THE FARM BILL MAY INCLUDE PREMIUM SUBSIDY ADJUSTMENTS
Will they materialize?
[C]ongressional staff and interest
groups are busy drafting a
provision to renew and reform the Crop
Insurance Program. This year, the process is moving
more slowly than usual.
By Kevin P. Hennosy
Every five years, Congress decorates an elaborate legislative Christmas Tree known as the Farm Bill. A must-pass piece of legislation, the farm bill tends to collect ornaments, gifts, and shiny objects, like an old-time Christmas Tree. The Federal Crop Insurance Program is one such heirloom ornament.
Behind the scenes, congressional staff and interest groups are busy drafting a provision to renew and reform the crop insurance program. This year, the process is moving more slowly than usual.
Proposals to place a cap on the eligibility to receive crop insurance premium subsidies will once again receive consideration. The concept of applying a cap appears to receive bipartisan support from rank-and-file legislators, but that was true in previous years, without inclusion in the final farm bill. The tree trimming continues.
Since 2014, the Government Accountability Office (GAO) has recommended reforms to the program’s premium subsidies and compensation to insurers for selling and servicing the policies. An issue briefing, or “snapshot,” published on the GAO website in February of 2023, recounts the office’s findings.
The GAO recommends reducing premium subsidies for high-income agricultural operations. “By statute, the program provides the same level of premium subsidies to participants, regardless of income, notes the GAO.
This egalitarian approach is not used in other United States Department of Agriculture (USDA) programs. “For example, under the 2014 farm bill, some farm and conservation programs are not available to individuals or legal entities whose average annual gross income (AGI) exceeds $900,000,” explained the GAO auditors. The GAO recommended extending the policy to crop insurance premium subsidies, but Congress did not follow the recommendation.
According to a 2015 GAO study cited in the February 2023 issue briefing, the lack of an AGI-based limit on participation proved expensive for the USDA. “[W]e found that one participant whose AGI exceeded the limit in effect for farm and conservation programs from 2009 through 2013 received an average of $1.2 million annually in premium subsidies during those years. … [Another participant] whose AGI was less than the limit received an average of about $7,480 annually in premium subsidies during the same period,” observed the GAO auditors.
The GAO issue brief also recommended reducing payments to insurance companies for providing sales and service of crop insurance policies. GAO auditors “found in July 2017 that the compensation that insurance companies were projected to earn annually under their agreement with USDA for participating in the program was higher, on average, than would be expected under overall market conditions.”
The GAO recommendations explain how statutory prohibitions on the USDA hamper adjusting compensation. The “2014 farm bill requires that any changes that USDA negotiates with the companies for a new financial agreement be budget neutral, meaning that the changes cannot result in savings to the government.”
The GAO issue briefing reminded policymakers that reducing premium subsidies for insurance companies could provide funding for other USDA priorities.
Of course, not everyone sees providing funding for other USDA priorities as a noble aim. For example, the Heritage Foundation (Heritage) published an essay that argues that conservatives really should not support the existence of crop insurance subsidies, at all.
Heritage particularly dislikes the very existence of revenue-based crop insurance, which farm operations purchase as a hedge against “dips in expected revenue due to low prices, low yields, or both.”
In other words, insurance mechanisms transfer the risk of financial loss. Who would propose such Dark Arts! The Heritage essay described what the foundation viewed as dangers inherent to these transactions in risk transfer:
The federal government should not be in the business of insuring price or revenue; agricultural producers, like other businesses, should not be insulated from market forces or guaranteed financial success at the expense of taxpayers. Revenue-based crop insurance is unnecessarily generous and should be eliminated. Taxpayer-subsidized crop insurance should be limited to [production] yield insurance as it was in the past.
The Heritage cautionary tale reminds this writer of the Notice of Hazard printed on the front of George Carlin’s Class Clown album that reads, “Warning: This Record Contains ‘Seven Words You Can Never Say On Television.’ Hearing It Could Infect Your Mind, Curve Your Spine And Lose The War For The Allies.”
Echoing the savage worship of capital supremacy espoused by the robber barons of old, the banker Henry F. Potter of Bedford Falls, or Mr. Burns on The Simpsons, Heritage encourages the concept of “creative destruction.” Let the markets crush the weak and disadvantaged. Let the largest business concerns march on a road of bones and pick over the carcasses with indifference.
The American Enterprise Institute (AEI), also a center for conservative thought, advocates for capping crop insurance premium subsidies but not eliminating the program. In September 2022, AEI published an article by Eric J. Belasco and Vincent H. Smith entitled, Who Receives Crop Insurance Subsidy Benefits?
Belasco and Smith noted that the current program concentrates premium subsidies in the largest operations. “The largest 10 percent of farms receive 54 percent, and the largest 5 percent receive 36.4 percent, of all crop subsidies,” according to the AEI authors.
Sounding a touch more populist than the AEI is known for, the authors observe: “Despite some policymakers’ and lobby groups’ highly questionable assertions that the federal crop insurance program is essential to save the family farm, the view that … [i]f these programs were intended to save the family farm, then surely their benefits would be targeted toward farms that are more financially vulnerable.” (emphasis added)
New Deal aims
Those with knowledge of the history of the New Deal will recognize that the AEI’s observation around saving family farms is worth thinking about. The purpose of the crop insurance program and farm subsidies extended beyond saving family farms to include the economic well-being of the rural population.
In 1920, the U.S. Census, having first identified the farm population as a separate group, found that 30.2% of the population lived on farms. The growth of the urban population, coupled with U.S. farmers and ranchers facing competition from European production returning after WWI, reduced the percentage of people living on farms. That decrease continued later in the 1920s, when the Dust Bowl resulted in foreclosures on farm mortgages.
The New Deal recognized that low agricultural prices and high foreclosure rates did not just reduce the farm population. Poverty in rural areas led to business and banking failures in small towns and presented a demand-side drag on the national economy.
Policymakers crafted crop insurance and other agricultural subsidies to ease the larger problem of rural poverty, not just to bail out family farms. This use of insurance mechanisms was for purposes beyond the interest of individual insureds. The concept appeared 20 years before the New Deal in the 1914 U.S. Supreme Court decision German Alliance Ins. Co. v. Kansas, where the Court majority opined that insurance mechanisms serve a public interest. The majority opinion notes in part:
The effect of insurance—indeed, it has been said to be its fundamental object—is to distribute the loss over as wide an area as possible. In other words, the loss is spread over the country, the disaster to an individual is shared by many, the disaster to a community shared by other communities; great catastrophes are thereby lessened, and, it may be, repaired.
The individual insured is not the only beneficiary of insurance risk transfer and claims payment. Customers, employees, and investors benefit from an insured enterprise’s ability to maintain confidence in the face of peril, survive a loss, or rebuild following catastrophe.
The original Crop Insurance Program indirectly provided support to rural counties and school districts that depended on property taxes by keeping farmers and ranchers in business and able to pay those taxes and buy from local businesses. All those many actors and entities benefit from insurance claims received by an insured, who then redistributes that capital into the economy.
As noted by the AEI authors, the Crop Insurance Program tends to support large agribusiness now. We could go further and say that family farms fell victim to uninsured perils: 1) Capital intensive agricultural mechanization, and 2) Corporate conglomerates that could bring the capital to agricultural enterprise and had no desire to save family farms or support rural economies.
Offering premium subsidies to the most wealthy and powerful absentee agribusinesses only serves to weaken America’s rural economies. The conglomerates receive subsidies to participate in an insurance mechanism that should keep family farms providing support to Main Streets of small towns.
Instead, the subsidized premiums benefit the bottom-line and stock price of absentee corporate entities—with little or no benefit to the rural population that the New Dealers wanted to help.
Those large operations report to firms located far away from rural areas. So, the benefits of the program do not result in rural localities receiving the benefits of insurance mechanisms. The counter-cyclical spending necessary to an area after a loss never arrives where needed so that great catastrophes are thereby lessened, and … repaired.
Adjusting the premium subsidies draws from the political support of the Left and Right, but the lobbying power wielded by opponents has fought off reform for many years now.
Kevin P. Hennosy is an insurance writer who specializes in the history and politics of insurance regulation. He began his insurance career in the regulatory compliance office of Nationwide and then served as public affairs manager for the National Association of Insurance Commissioners (NAIC). Since leaving the NAIC staff, he has written extensively on insurance regulation and testified before the NAIC as a consumer advocate.