tl;dr: Widespread adoption of crop insurance alone might not be enough to prevent future disaster payments.
As I mentioned in a previous post, the Samaritan’s dilemma is a phenomenon with real consequences. During the 1990-2010 period, farmers who expected to receive 10% higher disaster payments purchased 2% less crop insurance coverage. This makes the disaster more expensive, and, since disaster payments are extra-budgetary expenditures, it adds more to the national debt. The general implication for the social safety net is clear: folks won’t fight quite as hard to avoid hard times. But what about the specific implcations for agriculture?
A lot of my colleagues believe “crop-disaster payments are a thing of the past.” Their primary (only) data point is the 2012 Midwestern drought, which garnered no crop-related disaster payments. By not providing disaster payments, Congress broke the historical trend. Up until 2012, Congress had issued emergency disaster payments in every year in the modern crop-insurance era, which began in 1980. What happened? Is our research wrong, or was 2012 an anomaly? The answer is neither.
What happened in 2012 is the exception that proves the rule. According to economic theory, the specialized circumstances surrounding the lack of a bailout in 2012 are exactly what it would take to avoid the Samaritan’s dilemma. The fundamental premise behind the Samaritan’s dilemma is that the Samaritan intrinsically cares for the victim’s wellbeing (Luke 10). In this case, the Samaritan is the government, or more accurately the electorate, and farmers play the role of the victim. To elicit the Samaritan’s aid, the victim must suffer. Leading up to the drought, however, farmers definitely were not suffering. Farmers’ income was at an all-time high in 2011, yet they still received $5 billion in subsidies. This made it difficult for the the electorate to have the sentiment that would support a bail out. Besides, a politically important part of the electorate–the Tea Party–were singularly focused on deficit reduction, making the passage of extra-budgetary emergency payments even more unlikely.
While crop-insurance coverage might be at an all-time high, it still isn’t that great. About 85% of eligible acres are covered, but the coverage levels are generally pretty low. On average farmers insure about 63% of the value of production. So even though coverage is at an all-time high, just slightly more than half of eligible production is insured. The question is why farmers purchase so little coverage. According to our research, the Samaritan’s dilemma plays an important role. Now that farm incomes are falling and debt is rising, don’t be surprised when the next major crop loss is met with emergency disaster payments. I’ll wait until then to say “I told you so.”