Rabobank recently reported farmer confidence had plummeted in the September quarter. Some 41% of surveyed farmers expected the rural economy to worsen next year. Only 8% expected an improvement. That net negative response was 33%, far below a negative 2% in the June quarter.
There is a message for the government in this weakening business and farmer confidence. It is: policy signals that unnecessarily fuel distrust cost more.
The main continuing concern for pessimists in the past four quarters has been government policy, according to Rabobank. (Lesser concerns included the performance of Fonterra, negative public perceptions of farming and volatile overseas markets.)
So which government policies are causing angst for farmers? Rabobank’s press release mentions freshwater reform proposals and proposed greenhouse gas obligations.
Plausibly, farmers see these two policies as more predatory than civil.
To illustrate, the benefit principle of taxation proposes that those who benefit from the proceeds of a tax should pay the tax. In these two policies, the government wishes the wider public to benefit. That implies funding from general taxation.
The contrary principle, as farmers know all too well, is the polluter should pay. Those who want to benefit from less pollution commonly advocate this principle. In discussing the Resource Management Act, the Environmental Defence Society’s December 2018 report repeatedly endorses the polluter-pays principle. Its enumerated principles ignore the benefit principle.
An argument in the EDS report is that the polluter makes sufficient profits to compensate others for it. That ignores the capitalisation of profits in land values. Young and heavily indebted farmers have no fat to fund unexpected imposts. Nor do long-established affluent farmers, given farming costs, including land values. Every farmer has to work hard to stay competitive. Overseas buyers will not pay more for New Zealand produce just because the government increases farmers’ costs. They can buy elsewhere.
The economists’ perspective on these reasonable but conflicting principles is widely misunderstood. Our guiding principle is that those who want something should be confronted with the cost to community of providing it.
Where possible, this confrontation is best achieved by well-defined private property rights. Those who want land to be used for, say, non-polluting forestry, can have it if they are willing to meet a willing seller’s price. This process is a civil one, involving willing buyers and sellers. Symmetrically, an owner who turns down the non-polluters’ offer forgoes its value.
More specifically, dairy production contributes to national income but also pollutes rivers. Existing farmers may prefer that. The wider public may want less pollution even at the cost of lower national income. If the public values that preference highly enough, there is no need in principle to make existing farmers worse off. They can be compensated from the amount the public is willing to pay to achieve the change. Of course, the benefit farming communities derive from cleaner rivers would be an offsetting factor.
For economists, how much people are prepared to pay is their business – and for them to decide. The choice of best land use is a choice between conflicting views about value. Nothing is more common. It is the basis of every voluntary exchange. The more prosperous a community, the greater is its willingness to pay for a cleaner environment.
In a civil society, people should be constrained when possible from gaining at someone else’s coerced expense. Both parties should benefit from voluntary exchange. In contrast, forced exchanges readily victimise political minorities.
Does this view contradict economists’ general support for congestion charges and corrective taxes or subsidies? Not at all. No discipline puts more emphasis on the value of prices tracking costs than economics. The issue is not about getting prices right. Instead it is about achieving this in a civil rather than predatory manner. There is no in-principle reason for farmers or anyone else to be made disproportionally worse off by freshwater or greenhouse gas measures whose purpose is to benefit the public overall. (In practice, this may not always be possible but it should be the guiding principle in considering the case for compensation.)
Does this mean the government should not enforce laws against polluters? No. Unenforced property rights are meaningless. Illegal activities should be prosecuted. Instead, the issue is to amend the law to make the community better off without making a political minority worse off, unless there is good reason. The sharing of costs should not be uncivil.
What lessons might the government take from surveyed farmers’ fears? Governments that care about community wellbeing need to care about businesses’ willingness to invest in raising productivity and creating jobs.
That means governments need to think carefully about how what they propose and say might be interpreted by those making such investment decisions.
The bad news for the current government from the survey is that many farmers may be seeing the government’s intentions as more predatory than civil.
The better news is that farmers’ investment intentions in the September quarter survey were only marginally down from those in the June quarter. “Relatively strong” farmgate prices were an offsetting factor, according to Rabobank. That might not last.
Finally, for farmers who are feeling beleaguered, here is a recast version of an old joke.
Work & Income officials recently visited a small-scale farmer in response to a complaint that he was underpaying his workers.
“Who do you employ and how much are you paying them?” demanded the official.
“Well,” he replied. “There’s my labourer who has been with me for three years. I pay him $600 a week plus free room and board. Then there’s the half-wit who works about 18 hours every day and does about 90% of all the work around here. He makes about $10 a week, pays his own room and board, and I pay for his beer on the weekend.”
“That’s the guy I want to talk to, the half-wit,” said the official.
“That would be me,” replied the farmer.
Farming is a tough business and bankruptcies occur. Farmers are not the villains.