Overview
This lecture covers government agricultural programs during the First and Second New Deal, focusing on the Agricultural Adjustment Acts of 1933 and 1938 and their economic impacts.
Background: Challenges Facing Farmers
- After World War I, farmers faced falling prices, debt problems, and the Dust Bowl.
- During Hoover's presidency, the Federal Reserve decreased the money supply, further lowering farm prices.
Agricultural Adjustment Act of 1933 (AAA)
- The AAA of 1933 aimed to help farmers by reducing production to increase prices.
- The Agricultural Adjustment Administration replaced the failed Farm Board.
- The act imposed quotas on production and fined farmers exceeding them.
- The government destroyed crops and livestock to limit supply (e.g., plowed under cotton, slaughtered piglets).
- Reducing supply raised prices more than it reduced quantity, increasing total revenue for farmers due to inelastic demand.
- Consumers faced higher prices and less available food, decreasing consumer surplus.
- The program was seen as wasteful and angered many during the Great Depression.
- The Supreme Court declared the 1933 AAA unconstitutional due to how taxes were levied.
Agricultural Adjustment Act of 1938 (Second AAA)
- The 1938 AAA, part of the Second New Deal, reintroduced quotas and fines.
- It established minimum prices ("price floors") for agricultural goods.
- A price floor leads to higher prices, higher quantity supplied, lower quantity demanded, and government purchase of surplus.
- Quotas were retained to prevent overproduction and protect price support.
- Farmers benefitted with higher revenue and producer surplus, while consumers paid more and received less.
- Government distributed surplus food to the needy, but only buyers counted in consumer surplus calculation.
Economic Analysis & Efficiency
- Consumer surplus decreased due to higher prices for remaining buyers.
- Producer surplus increased because farmers got higher prices for all units sold.
- Total surplus (social surplus) appeared to increase, but real efficiency fell due to government taxes needed to fund purchases and excess production beyond optimal level (marginal cost > marginal benefit).
- The program was not economically efficient due to deadweight loss and welfare loss.
Key Terms & Definitions
- Quota — a government-imposed limit on production.
- Price Floor — a legal minimum price set above equilibrium price.
- Consumer Surplus — difference between willingness to pay and actual price paid.
- Producer Surplus — difference between price received and marginal cost.
- Deadweight Loss — loss of economic efficiency due to market intervention.
- Inelastic Demand — demand that does not change much when price changes.
Action Items / Next Steps
- Read more about FDR’s attempts to influence the Supreme Court in the textbook.
- Review concepts of consumer and producer surplus, and welfare analysis for regulated vs. unregulated markets.