Tuesday, May 6, 2008

Farmers and Politicians

or Why not helping is helping

CBC Story: Farm crisis message 'not getting through:' NDP

I had a friend who was getting close to a new level of desperation with her finances. In her rental agreement she was responsible for the oil but not the electricity. So she turned off the furnace and bought an electric space heater.

Of course heating the apartment this way cost MUCH more than by oil, but that wasn't her problem. She paid for the oil not the electricity. She saved money.

A moral hazard has to do with who bares the consequences. The person who causes the problem is not the person who has to solve it.

This is now the matter as PEI farmers look for another bailout. The NDP is asking the government to guarantee loans to farmers. What is the effect of such a system? Where is the incentive for a farmer to produce? There is no incentive to produce, only to look like you are trying to produce. This is the moral hazard: farmers are not responsible for their low productivity.

Granted it isn't the farmer's fault that a government policy removed incentives to produce. But nor is it the government's responsibility to maintain it. Making the farmers responsible for their own production again cannot be anything but a painful process.

Ideally there could have been a middle ground struck, perhaps guaranteeing 50% of the loans, with eventual progress toward no guarantee. That could have made the transition slightly less jarring if there were no impediments to a middle ground.

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