Agricultural & Applied Economics Association

Inflation, Agricultural Output, and Productivity
Author(s): D. Gale Johnson
Source: American Journal of Agricultural Economics, Vol. 62, No. 5, Proceedings Issue (Dec.,
1980), pp. 917-923
Published by: Oxford University Press on behalf of the Agricultural & Applied Economics
Association
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Inflation,
Agricultural O utp ut,
and
Prod uctivity
D. Gale
Johnson
Why
should inflation have an ad verse effect
up on agricultural outp ut
and
p rod uctivity?
Since most economists
accep t
the view that
inflation is bad and should be avoid ed -if
d oing
so d oes not cost too much-our knee-
jerk
reaction is that inflation has
significant
ad verse effects
up on outp ut
and
p rod uctivity.
True,
inflation red istributes wealth and in-
come,
as most of us who work for universities
and ,
in
ad d ition,
have annuities d erived from
d efined contributions realize. And when infla-
tion rates reach some
levels,
the breakd own of
confid ence in
money
and financial institutions
can have serious
economic, social,
and
p oliti-
cal
consequences.
But have the inflation rates
of 10% to 15% to which we have been sub-
jected d uring
the
p ast year
had
significant
re-
source and
p rod uctivity
effects in
agriculture?
When I started to write this
p ap er
I was not
sure how I would answer this
question.
Was I
more sure when I finished ? I leave it to
you
to
jud ge.
The first issue that I ad d ress is what has
hap p ened
to
p rod uctivity
in the
economy
and
in
agriculture d uring
the 1970s. In
consid ering
what
may
have
hap p ened
to the
growth
of
p rod uctivity
in
agriculture,
we should con-
sid er that
change
in the context of the national
p icture.
The available d ata on
changes
in national
p rod uctivity,
whether as measured
by
total
factor
p rod uctivity
or
by
labor
p rod uctivity
(average
labor
p rod uct)
show
clearly
that na-
tional
p rod uctivity growth
has been
sig-
nificantly
slower since 1973 than in the
years
before. What is much less clear is
why
the
slowd own has occurred .
What d o the d ata show? Table 1
gives
d ata on
total factor
p rod uctivity
for the
p rivate
d omes-
tic
economy
and selected
segments.
There can
be little d oubt that
p rod uctivity growth
after
1973 was at a lower rate than in
any
other
p eriod
since 1948. Table 2
p rovid es
similar
d ata on labor
p rod uctivity,
and the
general
p icture
is the same as for total factor
p rod uc-
tivity.
There are those who
argue
that the
p rod uc-
tivity
slowd own started before 1973. Tables 1
and 2
give
some
sup p ort
for that
view, though
the
p re-1973
slowd own seems to have been
concentrated in areas other than manufactur-
ing.
However,
there is little d oubt that the
sharp
break in
p rod uctivity growth
occurred from
1973 on. There are at least two
imp ortant
comp etitors
for
exp laining
the d ecline. O ne is
that 1973 was the
year
that oil
p rices
were
increased
substantially.
Another is that it was
in 1973 that we started on a roller coaster of
inflation, d eflation,
and inflation
again.
O ther
factors could be the ad verse effects of envi-
ronmental
regulations,
the low rate of
cap ital
investment in the U.S.
economy,
and the d e-
cline in real
sup p ort
of research. After
noting
how little can be attributed to these
factors,
Griliches came to the
following equivocal
but
not unreasonable conclusions:
There remain three interrelated forces: the rise of
energy p rices, accelerating inflation,
and errors in our
measures
p rod uced by
the
inability
of the
existing
statistical framework to
cop e ad equately
with such
changes.
To me
they ap p ear
to be the most
likely
susp ects
in this case. The main source of this
susp i-
cion lies in the coincid ence of
timing
and the fact that
the
p rod uctivity
slowd own
ap p ears
to be
world wid e,
and not
just
restricted to the United States.
Hence,
any exp lanation
for it must be based on factors that
are not
unique
to recent U.S.
history. (p p . 12-13)
Table 3 shows
quite clearly
that the d ecline
in
p rod uctivity,
as measured
by
labor
p rod uc-
tivity
in
manufacturing,
has not been
only
an
American
p henomenon.
O f eleven
high
in-
come
countries,
all but one
(Germany)
had a
d ecline in labor
p rod uctivity
in
manufacturing
in 1973-76
comp ared
to 1970-73.
D. Gale Johnson is
Eliakim Hastings Moore Distinguished Service
Professor and chairman, Dep artment of Economics, University of
Chicago.
Cop yright
1980 American
Agricultural
Economics Association
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918 December 1980 Amer. J. Agr. Econ.
Table 1. Total Factor
Prod uctivity Growth,
United
States,
1948-76
Contract Private
Manufac- Construc-
Transp or-
Domestic
Period
turing Mining
tion tation
Economy
1948-53 2.9 4.1 2.6 1.8 3.4
1953-57 1.0 2.2 1.8 2.7 2.0
1957-60 1.1 0.6 4.2 2.3 2.1
1960-66 3.9 4.6 2.0 4.2 3.4
1966-69 0.9 1.7 -0.3 1.9 1.5
1969-73 2.7 -0.7 -5.0 2.3 1.8
1973-76 0.1 -4.6 1.8 0.3 0.7
1948-76 2.1 1.7 1.0 2.4 2.3
Source: Kend rick.
Agricultural Prod uctivity
In recent
years
there has been concern that
p rod uctivity growth
has slowed in
agriculture.
The National
Acad emy
of Sciences
exp ressed
its concern on this issue in
Agriculture
Pro-
d uction
Efficiency.
That
stud y
conclud ed that
while there was
inad equate
evid ence to
sup -
p ort
the conclusion of
d eclining agricultural
p rod uctivity (through
1972 or
1973),
there
were some trend s
p ointing
in that d irection.
Have the concerns noted in the
Acad emy
rep ort
materialized ? Table 4 ind icates that the
answer seems to be in the
negative.
I
say
"seems to be" because the
inad equacies
of
our d ata base make it d ifficult to be
quite
cer-
tain that the
growth
of
agricultural p rod uctiv-
ity
has remained
unchanged
in recent
years
comp ared
to earlier
p eriod s.
Stated
briefly,
our
currently
available total factor
p rod uctiv-
ity
measure for
agriculture
suffers from three
significant
d efects:
(a)
a failure to measure
most
changes
in the
quality
of
inp uts, esp e-
cially
labor and
machinery; (b)
the use of base
p eriod s
for
weighting inp uts
that are too far
ap art
in
time;
and
(c)
the failure to
ad just
outp ut
measures for
climate
changes.
O ther
p roblems
or d ifficulties are d etailed in an ex-
cellent
rep ort
of a task force of the AAEA.
Given these
d ifficulties,
one must be
quite
cir-
cumsp ect.
If one
accep ts
the d ata as
they are,
recognizing
the
qualifications,
certain conclu-
sions follow:
(a)
The
growth
of total factor
p rod uctivity
in
agriculture d uring
the 1970s was at least as
high
as for the two d ecad es 1950-70. Prod uc-
tivity growth
was
higher d uring
the 1950s than
d uring
the 1960s but the
average
for the two
d ecad es was
essentially
the same as for the
1970s.
(b) Agriculture
has not suffered the
sig-
nificant d ecline in either total factor
p rod uctiv-
ity
or labor
p rod uctivity growth
that has oc-
curred in the nonfarm
economy,
either the
total or
p rivate,
since the mid -1960s.
(c)
There d oes not
ap p ear
to have been
any
significant
d ecline in the rate of
growth
of
ag-
ricultural
p rod uctivity
after
1973,
in contrast
to what occurred in the rest of the
economy.
Thus, agriculture ap p ears
to have
escap ed
the
sharp
d ecline in
p rod uctivity
evid ent in the
nonfarm
economy
after 1973.
There is a
rough ind ep end ent
measure of
growth
of
p rod uctivity
in
agriculture, namely
the
change
in
outp ut
to
inp ut p rices.
This mea-
sure suffers from whatever d efects there
may
Table 2. Labor
Prod uctivity Growth,
United
States,
1948-80
(Percent Change p er Year)
Nonfarm Nonfarm Private Business
Period
Manufacturing Nonmanufacturing Economy Economy
1948-55 3.3 2.4 2.7 3.4
1955-65 2.9 2.4 2.6 3.1
1965-73 2.4 1.7 2.0 2.3
1973-77 1.5 0.6 0.9 1.0
1977-78 2.5 -0.3 0.6 0.4
1978-79 0.9
-
-1.1 -0.9
1979-80 0.1
-
-1.5 -1.2
Sources: Council of Economic Ad visers and U.S. Bureau of Labor Statistics 1980.
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Johnson Choices
Affecting Agriculture
in
Inflation
919
Table 3. Growth Rates of
O utp ut p er
Man-
hour in
Manufacturing
in Different Countries
(Percent p er Year)
Country
1970-73 1973-76 Difference
United States 4.4 1.3 -3.1
Canad a 5.0 1.1 -3.9
Jap an
6.7 2.8 -3.9
Belgium
8.4 6.7 -1.7
Denmark 7.1 5.4 -1.7
France 5.7 4.7 -1.0
Germany
5.4 5.8 +0.4
Italy
7.6 2.9 -4.7
Netherland s 8.0 5.2 -2.8
Swed en 5.6 1.2 -4.4
United
Kingd om
5.0 0.6 -4.4
Source: U.S. Bureau of Labor Statistics.
be in the
p rice
ind exes
used ,
but avoid s some
of the d ifficulties of
measuring inp ut quan-
tities. It
introd uces, however,
the
d ifficulty
of
comp arative
resource returns in
agriculture
and the rest of the
economy.
It should be
noted that
change
in the relative
outp ut-inp ut
p rices
in
agriculture
is not a measure of the
absolute
change
in total factor
p rod uctivity
but of the
change
in relative factor
p rod uctiv-
ity.
If real resource returns in the
economy
were
increasing at, say,
2%
annually,
and if
the
outp ut-inp ut p rice
ind ex for
agriculture
d eclined by
0.5%
annually,
the
growth
in
ag-
ricultural
p rod uctivity
would be 2.5% annu-
ally.
The use of the measure assumes that the
return to
agricultural
resources increases at
the same rate as in the rest of the
economy.
If
the returns to
agricultural
resources
(labor,
land ,
and
cap ital)
increase relative to the re-
turns elsewhere in the
economy,
the d ecline in
the
outp ut-inp ut
farm
p rice
ind ex would un-
d erestimate the increase in
agricultural p ro-
d uctivity.
From 1960 to 1970 the
ad justed p arity
ratio
(1910-14
=
100)
d eclined from 82 to
77,
or
by
6%. From 1970 to
1979,
the d ecline was from
77 to
73,
or
by
5%.
During
each of these two
d ecad es,
the returns to
agricultural
resources
increased relative to similar resources in the
rest of the
economy.
A
rough
ind ication of the
imp rovement
was the increase in the ratio of
p er cap ita d isp osable
incomes of the farm
p op ulation
to the nonfarm
p op ulation d uring
the two d ecad es.'
During
the two
d ecad es,
the
Table 4. Factor
Prod uctivity
Growth in
Ag-
riculture,
United
States,
1940-79
(Percent
Change p er Year)
1940-50 1.7
1950-60 2.4
1960-70 1.3
1970-79 2.1
1940-79 1.9
1950-79 1.9
1960-79 1.7
Source: U.S.
Dep artment
of
Agriculture.
increase in the ratio was from
ap p roximately,
55% in 1960 to near
equality
in
1979,
with the
imp rovement
in terms of
p oints being ap p rox-
imately
20
d uring
each of the two d ecad es. It is
true that much of the
imp rovement
in the rela-
tive incomes of the farm
p op ulation
has been
the result of a more
rap id
increase of nonfarm
than of farm income. But the farm
p rod uction
activities of the rural farm
p op ulation ad justed
and
ap p arently ad justed very
well to the labor
force
changes
associated with the increased
imp ortance
of nonfarm
emp loyment
of mem-
bers of farm families.
These
rough comp arisons
are consistent
with the view that
agricultural p rod uctivity
has been maintained at a
relatively high
growth
rate for the
p ast
two d ecad es. In ad d i-
tion,
there seems to be no
sup p ort
for the view
that
p rod uctivity growth
in
agriculture
was
lower in the 1970s than in the 1960s.
Whatever factors
may
have been
resp onsi-
ble for the slowd own in the
growth
of
p rod uc-
tivity
after 1973 in the United States and other
economies seem not to have had much effect
up on agricultural p rod uctivity
in the United
States. O r if there had been some
effects,
the
effects were not
large enough
to have been
caught by
our
inad equate
measures of
p rod uc-
tivity growth.
We
p erhap s
have more of a
p uz-
zle on our
hand s,
because U.S.
agriculture
ap p arently
has
escap ed
unscathed from the
d ramatic economic events that have occurred
since
1972,
than would have existed if
p rod uc-
tivity growth
in
agriculture
had slowed
sig-
nificantly.2
I
This measure is a
rough
ind ication since no effort is mad e to
d etermine the amount of resources
p er cap ita
in
agriculture
and in
the rest of the
economy. Thus, it is
p ossible
that resources
p er
cap ita
increased much more in
agriculture
than in the rest of the
economy, though
I d oubt if such a
change
could account for much
of the imp rovement in relative incomes.
2 At this meeting last year, Vernon Ruttan gave
a
p ap er
with a
similar
title, "Inflation and
Prod uctivity."
While there are a num-
ber of similarities in our
p resentations,
Ruttan is
significantly
more
p essimistic
than I am
concerning
recent and future
p rod uctivity
growth
in
agriculture (p . 901).
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920 December 1980 Amer. J.
Agr.
Econ.
In the
longer run,
there is
likely
to be some
effect of national
p rod uctivity growth up on
agricultural p rod uctivity growth.
While the
current
ep isod e
shows that this
long-run p o-
tential has so far not had ad verse effects
up on
our
agriculture,
it would not be safe to assume
that the lack of effect can
go
on
ind efinitely.
In
any case,
farm
p eop le
realize the benefits of
p rod uctivity growth p rimarily through
the in-
creasing
value of human effort. Slow or nil
p rod uctivity growth
in the rest of the
economy
means slow or nil increases in real labor earn-
ings
and thus in the alternatives available for
the use of the human
cap ital
of farm
p eop le.
Exp ected
Ad verse Effect of Inflation
Why
should we
exp ect
that inflation would
have an ad verse
imp act up on agricultural p ro-
d uctivity
or
outp ut?
There are three reasons
why negative
effects
may
exist. O ne is that the
rate of inflation is not
correctly anticip ated .
A
second reason is that a
change
in the rate of
inflation
may
have effects on the
p rices
of
some or most
agricultural p rod ucts
relative to
inp ut p rices. Finally,
the
p olicies
and interven-
tions
by government
in
resp onse
to the infla-
tion
may
have inhibited the
ap p rop riate
re-
sp onsiveness
of the markets. Each of the rea-
sons
imp lies
that inflation increases the
d egree
of
uncertainty confronting
farmers-uncer-
tainty
about
p rices
and
availability
of in-
p uts
since the
government may imp ose p rice
ceilings
or force the
rationing
of cred it or
sp ecific inp uts.
The
economy
of the United States d oes not
have
many
of the institutional
relationship s
that
p ermit
it to exist
mod erately
well with
inflation. We still function with
long-term
bond s and
mortgages
with fixed interest rates.
But there is an ind ication that the
sharp
and
generally unexp ected
rate of inflation has led
to the introd uction of a number of mod ifica-
tions of d ebt instruments. These includ e vari-
able rate
mortgages,
rollover
mortgages,
and
the various certificates of d ep osits
tied
to
short- and intermed iate-term treasury security
rates. I d o not know if there have been vari-
able rate or rollover farm mortgages
written
d uring the p ast year, but such a
p ossibility
must certainly
be und er consid eration by some
financial institutions.
Inflation
and Resource Allocation
For a rate of
inflation-say
in the
range
of 5%
to 20%-it is
unlikely
that the errors in re-
source allocation d ue to incorrect
anticip a-
tions will have a
significant imp act up on
the
real
outp ut
level or
p rod uctivity. True, some,
if
not
most,
asset
p rices
will need to be read -
justed
as the true rate of inflation is
revealed ,
but actual resource misallocations will have
been
quite small, esp ecially
in the short run of
one
p rod uction p eriod .
I am not
saying
that
the effect is
nil; certainly
one would not
exp ect
such a statement from the author of Forward
Prices
for Agriculture.
But the
uncertainty
created
by
variable inflation rates is an ad d i-
tion to
existing uncertainty
rather than an en-
tirely
new
p henomenon. Thus,
we can
hard ly
exp ect
that the ad d ed effects of variable infla-
tion
up on uncertainty
could be of sufficient
magnitud e
to be
p icked up by
our
imp erfect
measures of
outp ut
and
p rod uctivity.
I know of but one
stud y
that
may
throw
some
light
on the ad verse
p rod uctivity
effect
of
very high
rates of inflation.
Unfortunately,
the
agricultural
area involved was afflicted
with civil d isturbance as well as a
high
and
ap p arently unexp ected
rate of inflation.
Briefly,
Dittrich and
Myers
obtained access to
d etailed farm
management
d ata collected
by
the
Jap anese
for three
villages
in North China
for various
years
from 1937-40. These d ata
were used to fit
p rod uction functions,
which
were then used to estimate the
efficiency
of
resource allocation in the d ifferent
villages
and
years.
In one
village
d ata were available for
three consecutive
years.
In 1937 it was esti-
mated that the actual resource allocation com-
p ared
to an ex
p ost
reallocation of resources
resulted in an income loss of 1.4%. Between
1937 and
1938,
farm
p rices
increased
by 21%;
the income loss d ue to resource misallocations
was 3.3%. Between 1938 and
1939,
farm
p rices
increased
by 136%;
the income loss from re-
source misallocations was 17.5%. The authors
conclud ed : "The
find ings
. ..
suggest strongly
that the
p easants
of these farm
surveys-
op erating
within a framework of trad itional
agriculture and p rivate ownership of land -
were able to allocate scarce resources fairly
efficiently.
This was true as
long
as economic
cond itions reflected by rising
farm
p rices d id
not
change very rap id ly" (p . 895).
As a net d ebtor in terms of financial assets,
farmers usually gain from an
unexp ected
in-
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Johnson Choices
Affecting Agriculture
in
Inflation 921
crease in inflation rates.
However,
this benefit
is
through
an increase in real wealth and has
rather little effect on current
outp ut
and
p ro-
d uctivity.
Farm
O utp ut
Prices
The second reason for an ad verse effect of
inflation is that the fact of
largely
unantici-
p ated
increase in
inflation
may
result in ad -
verse
changes
in relative
p rices
and thus re-
d uce
outp ut.
This effect
may
arise where the
d omestic
p rices
of
major
farm
p rod ucts
are
significantly
affected
by
international market
cond itions. This is the situation for
many
U.S.
farmers. Unless the U.S.
exchange
rate
falls,
an increase in the rate of inflation in the United
States relative to the
weighted inflation rate in
the
exp ort
d estinations will not result in an
increase in the absolute
p rice
of U.S. farm
p rod ucts.
While in the
long
run
p urchasing
p ower p arties
are
likely
to be reflected in ex-
change rates,
in the short run relative ex-
change
rates can move
quite ind ep end ent
of
relative inflation rates. This has
clearly
been
the case for the d ollar
exchange
rate since last
O ctober and
esp ecially
from
January
1980.
When real interest rates rose
absolutely
and
became
significantly real,
the
exchange
values
of the d ollar increased
significantly.
Between
January
and
Ap ril 1980,
the value of the d ollar
increased 13% in terms of the Deutsche
Mark,
12% in terms of the
yen
and 6% in terms of the
p ound . But,
when interest rates fell in
Ap ril
and the U.S.
inflation
rate
ap p eared
to be on
the
way
to stabilization or
d ecline,
the ex-
change
rate for the d ollar fell and
by July
has
returned to
ap p roximately
the levels of a
year
earlier.
Consequently, d uring
the
p eriod
of
high
absolute and real interest rates from De-
cember 1979
through Ap ril 1980,
farmers were
faced with
high cap ital
costs and
d eclining
real
p rod uct p rices.
Some
p rod uct p rices
fell in
absolute as well as real
terms, though
a
p artial
source of the absolute d eclines for the
grains
and
soybeans may
have been the U.S.
susp en-
sion of
grain
sales to the Soviet Union. But
even if there had been no
susp ension
of
grain
sales, the
p rices of
grain and other
exp ort
p rod ucts would have been und er
p ressure d ue
to the
strength of the d ollar in
resp onse to the
inflow
of fund s attracted by high short-term
interest rates. Later, starting
in
Ap ril and
May, there was an outflow of fund s as U.S.
short-term interest rates fell; the d ollar lost
value in the
foreign exchange market,
and the
net effect was to
p rovid e
some
strengthening
of the d ollar
p rices
of
major exp ort p rod ucts
comp ared
to what
they
otherwise would have
been. In the context of circumstances in
1979/80, high
interest costs were not offset
by
farm
p rices
of the
major exp ort p rod uct rising
at
ap p roximately
the same rate as
p rices gen-
erally;
in fact, quite
the
contrary occurred .
High
relative U.S. interest rates
p ut
d own-
ward
p ressure
on the d omestic
p rices
of
many
farm
p rod ucts
for a
p eriod
of several months.
These were critical months because
many
p lanting
d ecisions had to be mad e
d uring
the
p eriod .
Since the slowd own in the inflation rate has
been associated with a recession-ind uced d e-
cline in d emand for the farm
p rod ucts with
p ositive
income elasticities of d emand , the
p o-
tential
p ositive
d omestic
p rice
effect of the
d ecline in the U.S.
exchange
rate has been at
least
p artially
offset
by
d omestic events. The
U.S. market for feed
grains
and corn is
sufficiently large
that
changes
in the d omestic
market can affect international market
p rices.
It is
p robable
that the
consequences
of
vary-
ing
and
unanticip ated changes
in the rate of
inflation
have had some small
negative
effect
up on agricultural outp ut
and
p rod uctivity.
But
these effects have been too small to be
reflected in our measures. Not all of the con-
sequences
of the
inflation-d ominated events of
1979 and 1980 will be felt in the short
run;
both
farmers and financial institutions will almost
certainly mod ify
their behavior for some time
to come.
Governmental Policies
I will not d well on the third reason for an
ad verse effect of
inflation up on outp ut
and
p rod uctivity-namely, governmental p olicies
instituted in
resp onse
to
p olitical
d emand s to
"d o
something
about
inflation." The
sharp
in-
crease in interest
rates,
and the
p robable
se-
verity
of the 1980
recession,
resulted from an
unwillingness
of the ad ministration to take
ap -
p rop riate
action to red uce inflation before late
1979.
By then, circumstances d emand ed that
d rastic action be taken
by the Fed eral Reserve
System. The d rastic action taken will have
ramifications
up on p rices and
outp ut for all of
1980 and
p robably well into 1981. O ne can
only hop e that since we have received the
shock, it will not be all for
naught because of a
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922 December 1980 Amer. J.
Agr.
Econ.
rap id
shift from contraction to
exp ansion
in
the
money sup p ly.
Slow Economic Growth
Far,
far more
d isturbing
than
any
of the effects
of inflation up on p rod uctivity
in
agriculture
is
the slow rate of
growth
that has
afflicted
our
economy
for the
p ast
d ecad e. Sooner or
later,
and
p robably sooner,
the
comp etitive p osition
of U.S.
agriculture
in world markets will be
erod ed
by
the slow
growth
of our
economy.
Agriculture's strong p osition
in world markets
is the result of efficient and
comp etitive
mar-
kets for
inp uts
and
outp uts.
The
d ynamic
na-
ture of American
agriculture
is d ue to the
characteristics of our farm
op erators,
the in-
vestment in
research,
and the
rap id
translation
of research results into useful
inp uts p rod uced
at
comp etitive p rices (Johnson).
O ne
imp or-
tant
ad vantage
of U.S.
agriculture
has been an
efficient,
low cost
transp ortation system
to
move
p rod ucts
from the farm to the
city
with
reasonable
d isp atch,
and remarkable
resp on-
siveness to the
rap id growth
of
exp orts.
But
imp ortant comp onents
of the
system, p articu-
larly
the
railroad s, ap p ear
to be on a
p ath
to
d isintegration
at worst and much
higher
costs
at best. We seem to be
p aying
the
p rice
for a
regulatory atmosp here
that has never had the
cap acity
to look more than a
year
or so into
the future or to und erstand that the sources of
comp etition
for rail
transp ort
have
changed
in
a
century. Agriculture
has not been without
fault in the
d isintegration
of the rail
system-it
has
long p ressed
for low rates in the forlorn
hop e
that someone else would
p ay
to
keep
the
system
in a state of
good
cond ition and
rep air.
Inflation and Value of Assets
Earlier,
I noted that
farmers,
as net
d ebtors,
gained
from
unanticip ated
increases in the rate
of inflation.
I
gave
no
emp hasis
to this
gain,
noting
that it d id not
significantly
affect re-
source allocation. This is not
strictly correct,
since wealth is a variable that affects a number
of d ecisions, such as consump tion-savings
or
the form of investment or the d esirability
and
availability of cred it.
There is a p otential
effect of inflation that I
have not mentioned , namely,
the effect of
farm land being
consid ered one of the few
good inflation hed ges.
Farm land
p rices
have
increased in real terms for the last four d e-
cad es and have d one so almost
every year.
However, d uring
the
p ast twenty years
there
seems to have been little
relationship
between
the rate of inflation
or the
change
in the rate of
inflation and the size of the increase in the real
value of farmland .
The
p rice
behavior of farmland d oes not
ap p ear
to d ifferentiate it from other
typ es
of
real estate.
Housing p rices ap p ear
to have be-
haved in
ap p roximately
the same manner as
agricultural
land
p rices.
The
only p ossible
d if-
ference is that farmland is a
major p rod uction
asset for
agriculture and , excep t
for
mining
and
forestry,
this is
not the case for other
typ es
of
p rod uction. Thus,
to the
d egree
that
farmland has been an inflation hed ge
and
p art
of
its current
p rice
so
reflects,
the
acquisition
of
land becomes more d ifficult for those who
must
acquire
it
by p urchase.
But
excep t
for
the
greater d ifficulty
of
acquisition, p rimarily
because our cred it
system
d oes not
p rovid e
for
100%
loans,
the fact that farmland is an infla-
tion
hed ge
is a
d isad vantage only
if it should
cease to be such a
hed ge.
At that
time,
the
owners of land would suffer a
cap ital
loss.
The
very large
real
cap ital gains
in
agricul-
ture
d uring
the 1970s have
p erhap s
been an
imp ortant
factor in the
ability
of farmers to
ad just
to and to overcome the
unanticip ated
events of the d ecad e. In terms of 1967
d ollars,
the value of farm
p rop rietors' equities
in-
creased
by
$110 billion,
or almost 50%
(Melichar
and
Wald heger, p . 34).
The real
value of liabilities increased
by
less than $22
billion. While there have been numerous
claims that farm
op erators
who have
acquired
their farms since 1972 have suffered such se-
vere financial
p roblems
that increased forclo-
sures were
inevitable,
d ata
through
1979 show
no increase in the
p ercentage
of farm real es-
tate sales d ue to foreclosures
(Melichar
and
Wald heger, p . 57).
The situation in 1980 and
1981
may
be
d ifferent, given
the
sharp d rop
in
farm income that is
likely
to occur in the sec-
ond half of 1980.
O ne reason that farm financial troubles have
not d ominated the agricultural
concerns in re-
cent years
has been that d uring the 1970s real
interest rates p aid
on all farm mortgages
have
been significantly negative. During the 1970s,
p rices received by farmers increased at an an-
nual comp ound rate of 9%; interest rates on
outstand ing mortgage d ebt averaged about
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Johnson Choices
Affecting Agriculture
in
Inflation
923
7%. And it was not until 1979 that short-term
interest rates
p aid by
farmers were
sig-
nificantly higher
than the annual rate of in-
crease of farm
p rod uct p rices.
Conclud ing
Comments
The
inflation exp erienced by
the United States
d uring
the 1970s has not had a measurable
imp act up on agricultural p rod uction
or
p ro-
d uctivity.
This statement should not be as-
sumed to mean that inflation has had no
effect,
but
simp ly
that our measures are not
sufficiently
refined to
p ick up
what effects
there
may
have been. The
p rices
of
major
ex-
p ort p rod ucts
were
erratically
affected
by
the
high
rate of
inflation
in
1979/80,
the
monetary
p olicies
that resulted in
high
rates of interests
and a short-run
significant
increase in the d ol-
lar
exchange
rate.
Some of the
p otential
ad verse effects of
inflation
on resource use
may
have been offset
by
the
p ositive
transfers received
by agricul-
ture as a result of land 's role as an inflation
hed ge
and the
negative
real rates of interest
that have
p revailed
in most
years
since 1972.
Since
agriculture
is a
very cap ital-intensive
sector of the
economy,
its
outp ut may
have
been
favorably
affected
by
a low real cost of
obtaining
and
hold ing cap ital.
The most
alarming asp ect
of the
p erfor-
mance of the U.S.
economy
since 1973 has
been the low rate of
p rod uctivity growth
and
the mod est or nil
growth
of real
wages.
Amer-
ican
agriculture
is
highly d ynamic
and
p ro-
gressive,
but much of that
d ynamism d ep end s
up on
the
way
in which the rest of the
economy
functions. When the rest of the
economy
is
sluggish
and
flound ering, eventually agricul-
ture must be affected
ad versely.
References
American
Agricultural
Economics Association Task
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AReview
of
Current Statistics and
Prop osals for Change.
Washington,
D.C.: U.S.
Dep artment
of
Agriculture
Tech. Bull. No. 1614, 1980.
Council of Economic Ad visers. Annual
Rep ort, 1979, p .
68.
Washington, D.C., 1979.
Dittrich, Scott R.,
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"Resource Al-
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All use subject to JSTOR Terms and Conditions