Let's take a look at Chapter 11. For this lecture, I want to look specifically at agricultural programs over the First and Second New Deal. And so there's two big programs that we're going to look at. The Agricultural Adjustment Act of '33 and then the second Agricultural Adjustment Act of 1934. Recall that after World War One, farmers were suffering for different reasons I had mentioned in previous lectures. Early 30's, you got the dust bowl. The Dust Bowl is certainly going to hurt farmers in Oklahoma and Texas and similar states around that area. But also during Hoover's period from the previous chapter, the Federal Reserve is also decreasing the money supply, which is depressing farm prices as well as all prices. And farmers are having problems paying off debt. So FDR wants to come in, save the day and help farmers out. And his logic on how to do this is kind of similar to the National Industrial Recovery Act, sort of. The key difference instead of with big industries with a few leaders, in farming you have a lot of competition. And so he passes the Agricultural Adjustment Act of '33, which basically requires farmers to reduce their production, which will increase prices to make them better off supposedly. We'll go ahead and see if that's true or not. So let's start with the Agricultural Adjustment Act of 1933. Here we go, this creates the Agricultural Adjustment Administration. And this Administration replaces the Farm Board that failed under Hoover's term. The key is ultimately though, that this act establishes quotas, which are limits on production. And for farmers that go over their quotas, then they will have to pay fines, is the key. Not only that, the government also comes in and it destroys some production too. For example, 11 million acres of growing cotton were plowed under. That was a complete waste. This act is also known as being responsible for the "murder of 6 million little pigs". There was a study that the AAA here had done that found that pork prices would fall in the future, because there's too many baby pigs. So let's go ahead and just kill a bunch of little baby pigs, you know, so that those pork prices won't plummet and then just throw out all the pork. Not a very productive thing to do over the Great Depression. Did it make farmers better off or worse off? Let's go ahead and look as a whole for the industry, it's not too difficult to do. We have quantity and price. I'll just put food instead of agricultural product, this deals with of course, you know cotton, pork, all sorts of different stuff like that. The key is for agricultural product, the demand you always want to draw is relatively inelastic. We have the supply, and we've actually done this before in Chapter six with farmers during the 1800's, just backwards. Recall that technological advances were increasing the supply, and that has implications for the total revenue in the industry when demand is inelastic. What happens here because of this act with the fines, and the quotas, and destroying stuff, this is a supply side solution. And the key is to decrease supply, which means that the price will rise and the quantity will fall. But remember that total revenue equals price times quantity, and with inelastic demand, the price rises by more than the quantity falls, and total revenue rises. So for the industry, the farmers are better in terms of revenue at least, producer surplus we can't really determine here. But in terms of total revenue, we can say that total revenue is higher. Who's worse off? Total expenditure is the same thing as total revenue here. The revenue that's brought to the farmers as a whole is the same as the amount of money that buyers are paying for food, it's just price times quantity. So total expenditures are higher. So here in 1933, you have an unemployment rate that's close to 25%, people are having problems finding jobs and feeding themselves. And now they have not only less food to eat, but their expenditures on food or higher. So with the little remaining income or, or whatever they're living off of, or the bird's nest of money that they had saved if they were lucky enough, they're spending more ultimately on food. This really angers a lot of individuals, it's seen as a very wasteful and a very destructive program. The other thing we can say for sure here is that consumer surplus --which is just the willingness to pay minus the price paid-- the consumer surplus here obviously has to fall. So I don't wanna say consumer surplus equals, I want to say consumer surplus falls. We've done that kind of analysis a lot before, so you should know how to do consumer and producer surplus analysis by now. So consumers, without a doubt, are worse off, they're very angry. This program is so unpopular, it pretty quickly hits the Supreme Court. So the Supreme Court comes in, and they declared this thing unconstitutional. How they do it is really based off how the taxation was done. They said it was unconstitutional to have tax on processors only. But ultimately, the big picture of this Act is that it hurt consumers, it benefited farmers as a whole, but again, it's highly wasteful over the Great Depression. It's it's not very efficient. There's more people who are going hungry. So after this program's declared unconstitutional, FDR comes back for a second round and he passes the second Agricultural Adjustment Act of 1938. So let's go ahead and take a look at that program. By the way, you'll read about FDR trying to jury rig the Supreme Court in the chapter. Long story short, a lot of FDR's programs were being declared unconstitutional, and so FDR wanted to shift the balance of power, to say the least, with the Supreme Court and therefore have a better chance getting his programs passed. Lucky for him, I guess, for the Second New Deal programs, most of those were approved, but there were new Supreme Court justices, but you can read more about that in the book. Let's look at the Second Agricultural Adjustment Act. This occurs in 1938 so this one is the Second New Deal. And this is similar to the first program in the sense that it establishes quotas, and then of course, fines for going over those quotas. But the bigger thing to pull from this act is it establishes minimum prices for different agricultural goods. Minimum prices in economics, we model as price floors. Price floors you can get from appendix number two in the book. And I'm going to go ahead and show you how these price floors work here. And we'll do a bit more analysis with consumer and producer surplus. So we have food again, just keep it simple. Here's the idea. The equilibrium price, equilibrium quantity requires supply equals quantity in demand is where we're going to start. FDR says "No, this price is too low, farmers can't support themselves," So the legal minimum price is here. This is the legal minimum price that farmers need to be able to support themselves. What this results in -- so this is a minimum price, it's a price floor -- the price wants to fall, but it can't. So relatively, the quantity supplied here is higher and this should be pretty easy refresher from your principles of micro. You should have seen this in that class. You have a higher quantity supplied, higher amount of production. You have a relatively lower quantity demanded at the higher price. This means that buyers of food will buy less. You would have a surplus in this situation. I will write surplus. The key is that the surplus exists and then the government comes in and it buys up the surplus. So farmers are obviously going to be better off here. Now one thing I do want to mention is here, what's the reason for the quotas? Well, recall under Hoover's administration during the worst part of the Great Depression when he had set up the Farm Board, that the Farm Board would just buy up a bunch of food and that was demand side. Then it'd store the stuff in the silos. So similar idea, the problem is that the long-run effects from the Farm Board buying up and propping up the food, is more farmers want to enter the market because they know that the price is going to be supported. So what FDR does here to stop that from occurring is in the ideal situation, we would put the quota right here, so that the quota where the quantity supplied is, is not going to result in an increase in supply. So those quotas exist. So that's the reason for the quotas. Let's do a little bit of welfare economics. I will go ahead and have a few more letters for the area. Here we go, this'll be handy. We have A, B, C, D, E, F. And I will have with the free market, which is the unregulated market, with the floor. So with price floor, let's start with consumer surplus. Consumer surplus in a free market here is the willingness to pay minus the price paid. Nothing new. A,B,C Here we go, now consumer surplus with the price floor is this new willingness to pay minus this new higher price. It's just A, obviously consumers are worse. You might say, wait a minute, what happens to this surplus? Well the government takes the surplus, and it starts reallocating it to those who are going hungry, to those who are unemployed. So why is there no consumer surplus in this model for those individuals? Those individuals are not buying the food, and so we don't call them consumers. To be a consumer, you have to be a buyer of food in this market. Otherwise you're not a buyer along this demand curve. So consumer surplus decreasing means that buyers of the food are worse off because they have to pay the higher price. So those individuals who do not receive the free food handouts, are certainly worse off over the Great Depression. Producer surplus -- so I'll say buyers. Producer surplus is of course the producers of the food, the farm product, the agricultural product. These are the farmers. Producer surplus in an unregulated free market would be price received minus marginal cost off that supply curve, E and F. Afterwards, the farmers receive this nice higher price here for each and every unit of food, they produce more. You subtract out the marginal costs. Government's buying up the rest so they get all B, C, D, E, F. The farmers are obviously better off with this program. So farmers will vote again for FDR if they have the chance. Which it turns out that they do, because he serves more than two terms. Part of that is due to World War II going on, that we'll get to in a later lecture. So what's interesting here is this -- consumer and producer surplus gives us total surplus or social surplus. And if you add these areas before and after, you'll see that area D is the increase in total surplus, so I'll write that down -- increases by D. So is this program economically efficient? For some people, they look at this and they say "Yeah, absolutely", because total surplus is higher, so that's higher efficiency. Well, this is not efficient, and the reason that this is not an efficient program is two parts. To do this, to buy the food, the government must tax other markets. So if it's excise taxes, remember there's deadweight loss from excise taxation. We learned that way back in chapter one. So, which came from appendix 4 for the excise taxes. So that creates deadweight loss in other markets. The second thing to think about is this -- in the market by itself, if it freely allocated this resource, it wouldn't allocate this amount of production right up here because the costs of these units here is greater than the benefit. So for the very last unit of production, the cost of that very last unit, compared to the benefit here of the very last unit, is higher. So there's a net loss. The marginal cost is greater than the marginal benefit for the new units produced. Which means that there's a welfare loss to society from doing this. Is it a good thing to do? Well, yeah, it's kind of nice to come in, and the government to take the surplus and give it the needy. That's certainly a nice thing to do. But in economics, we don't answer questions of, is it good or is it bad. You know, a lot of the programs, you can kinda make up your own mind. What is testable on a test or homework is -- is this economically efficient? And the answer is no, it is not economically efficient. So, thank you for listening.