Thursday, March 7, 2013

Sequester This! (Seriously)

by Duncan Gromko

Given that the absurd sequester is dominating talk in DC, I'm proposing two simple ways to cut $115-170 billion from the national debt over ten years: fossil fuel and agricultural subsidies. Both environmental Analysts and Activists can get behind these cuts. And folks like Paul Ryan and Rand Paul too.

To put the those billions in context, here is an abbreviated list of cuts that the sequester is making:
  • $600 million in special education grants to states
  • $97 million in homeless assistance grants
  • $424 million to Head Start
  • $350 million to the Center of Disease Control
  • $120 million to community health centers
  • $35 million to senior nutritional programs
  • $68 million to the Impact Aid Program (the cuts would reduce education funding to 1 million children with parents in the military
The losses to those programs add up to $1.7 billion, or around 1% of the subsidies to fossil fuel and agriculture.

To be fair, cutting subsidies doesn't cover all the sequester cuts, which are about $1.2 trillion over ten years. But the subsidies are not insignificant - they're about 10% of the sequester!

Fossil Fuel Subsidies

Fossil fuel subsidies recently celebrated their 100th birthday! Consumers are paying high prices at the pump, while Big Oil is enjoying record profits. So why do subsidies make any sense?

Source: Dirk Ingo Franke
Considering that fossil fuels already have such high externalized social costs, subsidizing them is sending the exact wrong price signal. Climate hawks' holy grail, the carbon tax, may be politically impossible, but cutting fossil fuel subsidies would achieve a similar effect.

Joseph Aldy identifies ten distinct subsidies for fossil fuel companies and values them at $41 billion over ten years. The subsidies and tax breaks are based upon production. That $41 billion in savings is based on estimates that predict modest growth in US fossil fuel production; now that fracking and oil production are exploding, the production estimates and, therefore the budget savings, are far too conservative.

In the words of Representative John Sarbanes: "Inexplicably, the Republicans in Congress have refused to eliminate huge taxpayer subsidies to the oil and gas industry, whose top five companies in 2011 posted profits of over $137 billion. How can we justify cuts to the Head Start program while these unwarranted subsidies continue to flow?"

On top of these tax breaks, a report from Representative Ed Markey's office reveals that the government is giving Big Oil royalty-free drilling rights. When oil prices were low in the 1990's, the government tried to encourage drilling investments by waiving their rights to royalties on federal land. At a time when the deficit wasn't viewed as a problem and most people didn't understand the threat of climate change, this sort of made sense. But now it's ridiculous.

Representative Markey says: “Oil companies are making record profits. They should be paying the American people a fair price for the oil and gas they are taking from America’s waters. We have already given oil and gas companies $11 billion in special free-drilling breaks. It’s time for this free ride to end.” Over the next ten years, these forgone royalties could be as high as $40 billion.

In terms of reducing the federal deficit, we can save about $80 billion on subsidies and lost royalties to the fossil fuel industry. But for some inexplicable reason, Congressmen and deficit hawks Rand Paul and Paul Ryan support fossil fuel subsidies. (Rand Paul actually said that cutting the subsidies would "punish the secretary that owns Exxon stock." You can't make this stuff up.) Weird, right? It's almost like they have an ulterior motive and reducing the deficit isn't actually their priority.

Agricultural Subsidies

Ag subsidies are hidden in the Farm Bill, which is a complicated piece of legislation. Unlike fossil fuel subsidies, it's hard to parse out what to cut and what to keep. Of the $300 billion in the 2008 Farm Bill, 67% was for food stamps. That I wouldn't cut.
Source: ml.wikipedia
In 2011 (I'm using 2011 as the baseline year because that's the most recent, comprehensive data I found), ag subsidies were about $15.2 billion to 1.2 million recipients, $1.9 billion for conservation subsidies, $0.9 billion to disaster subsidies, $4.9 billion to commodity subsidies, and $7.4 billion to crop insurance premium subsidies. 2011 was a bit of a low year; the CATO Institute estimates subsidies at an annual $15-35 billion. And given climate trends and implications for agriculture, it might not be wise to use 2011 as a baseline - the 2012 drought meant that crop insurance alone cost the federal government about $27 billion.

US subsidies to corn alone totaled $90 billion between 1995 and 2010.

Unlike fossil fuel subsidies, I don't think it makes sense to cut agricultural subsidies across the board. A bill that was passed by the House would have cut $35 billion over 10 years. That amount is probably conservative and I think there is more room for cuts. This report identifies $90 billion in cuts over the next 10 years. Let's say there is room for savings of $35-90 billion over 10 years.

In addition to the budget savings, ag subsidies cost the nation a lot in terms of environmental degradation and loss of biodiversity. They push farmers to plant corn in vast monocultures. Corn is a productive crop in terms of yield, but the way that our agricultural system uses corn is extremely inefficient. Rather than consume it directly, we use corn to make corn syrup, feed animals, or turn it into biofuels. Those conversions result in a lot of energy lost.

A recent study found that 1.3 million acres of grasslands were lost between 2006 and 2011 in the northern plains of the US (wonkblog short version). This is the fastest pace of conversion since the 1930s (when conversion of natural environments led to the Dust Bowl) and is comparable to deforestation rates in Brazil, Malaysia, and Indonesia. This conversion is a consequence of expensive subsidies and the recent push for biofuels.

...So, can we just do this? These subsidies add to the deficit and subtract from the environment and our well-being. Subsidizing corn makes refined sugar much cheaper, leading to obesity and other health problems. The best hypothetical objection to ending ag subsidies is that it would hurt small farmers. However, the large majority of the subsidies go to large, corporate farms. And there is another issue here that I haven't begun to address in this post: ag subsidies undercut poor farmers abroad. We'd need less foreign aid if we cut ag subsidies!

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