It Won’t Kill Crop Insurance
Cutting the Fat: Introduction
The cost to taxpayers of providing crop insurance has more than tripled since 2001, increasing from an average of about $3 billion a year in 2001-2003 to more than $10 billion annually in 2012-2014. The Congressional Budget Office projects costs will average more than $8.5 billion a year in the future.The program’s costs have increased dramatically because both the cost of subsidizing farmers’ premiums and the cost of subsidizing the private-sector delivery of crop insurance have soared. Unlike typical insurance, where the premiums cover both the cost of paying claims and the cost of delivering the insurance, the premiums paid by farmers cover only about 40 percent of the cost of claims paid and none of the cost of delivering the policy: adjusting loss claims, agent commissions, salaries and other overhead, including profit.
Any rapid escalation in the cost of running a government program invites scrutiny for signs of waste and improvements in efficiency. The Obama Administration has long advocated modest cuts in the crop insurance subsidies to farmers and to insurance companies, believing that both are excessive. Many in Congress support such proposals for reform. But these supporters are not members of the House and Senate agriculture committees, where attempts to reduce subsidies have consistently been thwarted.
The recent budget agreement passed by Congress and signed by President Obama bypassed those committees, which explains how the modest cut in the subsidies was achieved. However, that victory for advocates of reform was short-lived. Defenders of the status quo for crop insurance have railed against the cuts, arguing that their true purpose is not about reform. Instead, they claim that the cuts are “… about killing the crop insurance program”4 that they would “…gut the crop insurance program”5 and that they represent “…devastating cuts to crop insurance.”6 The all-out effort against the reduction in subsidies has resulted in an agreement between Congressional leaders and the agriculture committees to replace the savings from crop insurance with other savings that will be identified later this year as part of budget negotiations.
What was agreed to in the budget deal was a reduction from 14 percent to 8.9 percent in the target rate of return for crop insurance companies. This reduction would generate estimated savings of $3 billion over 10 years, for an average of about $300 million a year, a modest drop in taxpayer support. The average annual taxpayer cost of the program is budgeted by the Congressional Budget Office at $8.5 billion per year, so the $300 million is a 3.5 percent reduction in subsidies. It seems implausible that such a modest drop in subsidies could lead to devastating impacts to the crop insurance program.
While the program’s defenders have been quick to argue against the cut in subsidies, reform supporters have been mostly silent.7 This asymmetry in information and passion is typical when subsidies are cut. Although all taxpayers reap the benefits of lower program costs, the benefit to each individual is so small that it is not worth the effort to fight for them. In contrast, the few who are directly affected by a cut in their subsidies have a large financial incentive to reverse them.
One of the most effective arguments against cutting subsidies is that they serve a broad public purpose. Advocates of crop insurance subsidies argue that they are needed to stabilize agriculture and ensure that food is readily available to the American public. While it is easy to debunk arguments that the subsidies serve the public’s interest, those claims deflect attention from the actual impact that a reduction in subsidies would have.
The objective of this analysis is to explain how the proposed reduction in subsidies would affect the crop insurance program. More balanced information about the impact of reduced subsidies should lead to a better- informed debate. Given the recent cuts to government programs that actually serve broad public interests – such as weather forecasting, law enforcement, tax collection, highway funding, pollution control, public health measures and food safety programs – it makes economic sense to cut programs that fund narrow interests in order to preserve programs that serve the public at large.
This analysis demonstrates that the primary impact of a cut in the rate of return to crop insurance companies would not be lost profits for the industry but rather a reduction in its costs. Rather than devastating or killing the program, the proposed reductions in subsidies would result in a more efficient (yet still far from lean) crop insurance delivery system.
7 One notable exception is a blog post on the American Enterprise Institute website: http://www.aei.org/publication/the-budget-deal-and-crop-insurance-the-sky-is-not-falling/