From Greg Mankiw:

Like President-elect Obama (but unlike candidate Obama), I am all for getting rid of farm subsidies. But why would you want to use taxpayer funds to encourage large, efficient, profitable farms to break up into smaller, less efficient, less profitable farms? Isn’t that precisely what you do if you maintain subsidies only for small farmers?

I’ve thought about this, too. A lot. The answer is pure politics wrapped in an age-old economic battle: equity vs efficiency. Doing what’s efficient vs doing what’s “fair”. (Fairness being a subjectively ambiguous term.)

I’m all for getting rid of farm subsidies to everyone and letting the market sort out who wins and who loses. This places smaller farmers a distinct disadvantage because an industry like wheat farming is the almost-perfect definition of perfect competition. Neither side has market power. The only way for a farmer to increase their income is by producing more wheat. As the big guys are bigger, they have economies of scale, especially in terms of capital investment on their side. In a price-taking market, this advantage is the only business advantage possible.

Subsidizing the little guys makes them more competitive with the big guys, but this is a distortion of market efficiency. Sometimes this makes sense, but not in the case of farming in the US: we produce more food than we could ever consumer, so why are we subsidizing anyone? (Food shortages are not a production problem, they are political and logistics problems.) Subsidizing smaller producers can be done to encourage competition, but we’re already in a perfectly competitive market, so distorting the market in some way is entirely counterproductive.

Alas it is politically unacceptable to make a move that favors the big guy over the little guy. Even though doing so would ultimately better for society. Let us not fall victim to the broken window fallacy that we’re keeping smaller farmers in jobs by subsidizing them. We could just as easily be spending that money more efficiently by putting other people to work in areas that actually make sense: infrastructure repair and long-term capital investments in green energy technology, for example. We need these two things more than we need greater quantities of domestic farm products.