Chapter 20 SELECTION OF POLICY IN POLITICAL-ECONOMETRICS ANALYSIS

During the early 1980s, U.S. agriculture underwent its worst financial crisis since the Great Depression in spite of record spending on government agricultural programs. In this chapter we test the hypothesis that the severity of the crisis may have been moderated if agricultural policy had been more flexible. Prior to the 1985 Farm Bill (U.S. Department of Agriculture 1986), agricultural policy instruments were set within narrow limits and were changed little from their predetermined levels regardless of changes in the economy or international conditions during the life of the farm bill. For example, in the early 1980s, the strong dollar and large crop production worldwide resulted in large reductions in U.S. grain exports and large increases in U.S. grain inventories, driving prices to support levels. During this period, the United States maintained its grain support prices at levels set in the 1981 Farm Bill. This had the effect of keeping U.S. commodity prices above world levels, exacerbating and