Why Public-Private Partnerships Can Be Expensive: The Case of the Federal Crop Insurance Program
American Enterprise Institute
February 01, 2023
Key Points
- The crop insurance industry, today a $3 billion or more enterprise, was essentially created by a sequence of government subsidies and mandates initially authorized under the 1980 Federal Crop Insurance Act and substantially increased in provisions in the Federal Crop Insurance Reform Act of 1994 and the Agricultural Risk Protection Act of 2000.
- Crop insurance companies would likely not exist in their current form without the substantial premium and administration and operations subsidies they benefit from, as farmers have other effective ways of mitigating risk.
- Contrary to some claims, there is no evidence that the delivery of crop insurance products through public-private partnerships is more efficient than public delivery, but that approach has encouraged rent-seeking behavior that wastes resources and increases program costs.
Introduction
Rent-seeking by narrowly defined special interest groups is endemic in any political process that involves government spending and, arguably, long ago reached pandemic proportions in the case of US agricultural policy. Whenever programs provide benefits for multiple interest groups, as is the case with many farm subsidy and conservation initiatives, those programs become almost immutable fixtures in farm bills and the federal budget. When real money is involved, as is always the case when public-private partnerships are established for program delivery, spending on the initiatives typically has only one way to go: Up!
As discussed in this report, the federal crop insurance program is perhaps the agricultural policy poster child of the private-public partnership problem. But it is far from an isolated case both within and beyond the agricultural sector. It is, however, a genuine example of wasteful government spending and therefore worth examining.