measuring aggregate impacts: the case of the conservation reserve program

Agricultural Systems 38 (1992) 35-60 .

Measuring Aggregate Impacts: The Case of the Conservation Reserve Program

Roy Boyd

Department of Economics, Ohio University, Athens, Ohio 45701, USA

Kazim Konyar

Department of Economics, California State University, San Bernadino, San Bernardino, California 92407, USA

&

Noel D. Uri

Economic Research Service, US Department of Agriculture, Washington D.C. 20005, USA

(Received l l January 1991; revised version received 1 July 1991; accepted 11 July 1991)

A BSTRA CT

This' paper uses an aggregate modelling approach to assess the impacts of the Conservation Reserve Program ( CRP) on the United States economy, in general, and the agricultural sectors, in particular. The approach consists of a general equilibrium model composed of 12 producing sectors, 13 consuming sectors, six household categories classified by income and a government. The effects of removing 33"9 million acres and 45 million acres of cropland from agricultural production on prices and quantities are examined. The results are revealing. For example, keeping the CRP at 33"9 million acres will result in lower output by the producing sectors (by about $191 million), a decrease in the consumption of goods and services (by about $99 million), and a reduction in welfare (by about $95 million ). The government would realize an increase in expenditures o[" about $77 million. The agricultural sectors would be ~:ff'ected. For example, (['the CRP is limited to 33"9 million acres, output in the program crops sector will rise (by $57"1 million), output in the livestock sector will decline (by $22 million), output in the all other agriculture commodities sector will be reduced (by $173 million), and output in the

35 Agricultural Systems 0308-521 X/92/$05.00 © 1992 Elsevier Science Publishers Ltd, England. Printed in Great Britain

36 Roy Boyd, Kazim Konyar, Noel D. Uri

foresto, sector wil(fall (by $2 million ). Finally, when subjected to a sensitivity analysis, the results are reasonably robust with regard to the assumption of the values of the substitution elasticities. That is, while the model's equilibrium values do vao' in response to different assumptions of the values of these elasticities, the fluctuations are not so enormous to suggest that the model is unrealistically sensitive to these parameters.

INTRODUCTION

While it is often expedient to assess the impact of an agricultural program on just the agricultural sectors of the economy, any inferences drawn run the risk of being inaccurate because of the interrelationships between these sectors and the rest of the US economy. For example, the interactions between supply and demand, both within the markets for agricultural commodities as well as between these markets and the rest of the economy, are quite significant. (Harrington et al., 1986 has a discussion of these.) Given these interrelationships, the use of a computable general equilibrium approach to modelling the effects of an agricultural program is a logical decision. In what follows, the aggregate impacts of the Conservation Reserve Program will be assessed using such an approach.

The Conservation Reserve Program (CRP) is a voluntary cropland retirement program established in the Conservation Title (XII) of the Food Security Act of 1985 and continued in the Food, Agriculture, Conservation, and Trade Act of 1990 (Title XIV). In exchange for placing cropland that is highly erodible into the CRP for 10 years, the federal government (through the US Department of Agriculture) pays participating farmers an annual per acre rent plus one-half of the cost associated with establishing conservation practices and a permanent land cover.

Given the design of the CRP program, the expected impact of the original program (as detailed in the Food Security Act of 1985) as well as its extension (as detailed in the Food, Agriculture, Conservation, and Trade Act of 1990) can be determined. Thus, simple analytics suggest that taking cropland out of production will result in higher agricultural commodity prices. This, in turn, might or might not lead to an increase in net farm income. Whether net farm income will change is a function of the elasticity of demand for the various agricultural commodities together with the changes in the absolute and relative prices of the factor inputs and the quantities used, as well as the changes in the absolute and relative prices and mix of outputs.

There have been a few empirical efforts at analyzing the CRP in a partial equilibrium setting. For example, Young & Osborn (1990) using a partial

Conservation Reserve Program: measuring aggregate impacts 37

equilibrium model called FAPSIM (Salathe et al., 1982) suggest that taking 45 million acres out of production (the original CRP target under the Food Security Act of 1985) will reduce total agricultural commodity production (planted acreage falling between 5 and 20% depending on the commodity), increase net farm income (by $20.3 billion over the life of the CRP), and decrease federal government outlays for commodity programs (by $12.2 billion over the life of the CRP). Another assessment of the impact of the CRP is that by Osborn & Konyar (1990). This represents an update of the earlier analysis. The essential differences between the two assessments are that Osborn & Konyar use as the basis of their analysis the actual number of acres enrolled in the C RP through August 1990 of 33"9 million instead of the 45 million used by Young & Osborn, and Osborn & Konyar use a slightly different modelling structure. (This modelling structure will be discussed below.) The qualitative conclusions concerning the direction of movement in the variables of interest are the same between the two studies while the magnitudes of the impacts on various measures are somewhat different. Thus, Osborn & Konyar find that taking 33-9 million acres out of production will reduce total agricultural commodity production (planted acreage falling by 8%), increase net farm income (by $2.1 to $6"3 billion over the life of the CRP), and decrease federal government outlays for commodity programs (by $5.3 to $8 billion over the life of the CRP) (see note 1).

These and other empirical efforts (including those cited in note 1) that evaluate the impacts of the CRP have been for the most part rather ad hoc, focusing only on the direct effects of removing cropland from production while ignoring any substitution effects (e.g. the substitution of program crops for non-program crops, see note 2), secondary price effects on both inputs and output, resource use, and import and export (i.e. foreign sector) response. Given the various interrelationships, however, the use of a general equilibrium approach to modelling the impact of the CRP would seem to be a more reasonable choice (see note 3).

The use of a general equilibrium model to assess the impact of government programs on the economy, in general, and agriculture, in particular, is not unique to this study. Earlier efforts in this direction include those by Adelman & Robinson (1986) and Dervis et al. (1982). While it is not the purpose to critique these and other earlier efforts, it should be noted that each one is subject to a variety of shortcomings. One of these limitations is that agriculture is only considered as a component of some larger sector. Thus, for example, Dervis et al. (1982) have only a single agriculture, forestry and fisheries producing sector. Another limitation is that factor substitution (either in the production or consumption of goods and services) is not adequately dealt with. Adelman & Robinson, for example, use only a standard input-output model devoid of any factor substitution (see note 4).


In the spirit of these earlier general equilibrium efforts, the model developed here attempts to capture the interactions between the CRP and economic activity, in general, while at the same time endeavoring to overcome some of their limitations. In doing so, the linkages between sectors of the economy are explicitly taken into account and the price responsiveness of producers and consumers both to absolute and relative changes in the prices of the various goods and services is considered. The analytical approach used will be a computable general equilibrium model that has been disaggregated into 12 producing sectors, 13 consuming sectors, six household (income) categories and the government. This level ofdisaggregation allows for an assessment of the direct effects as well as the indirect effects of the CRP. By measuring these effects, it will be possible to identify the extent to which the agricultural sectors and the other producing and consuming sectors and household groups stand to gain or lose. Hence, equity considerations as well as efficiency considerations can be addressed. Before conducting the analysis, a brief overview of the model is provided.

A G E N E R A L EQUILIBRIUM MODEL

(a) Introduction

The model presented follows in the tradition of the Shoven & Whalley (1972) tax analysis research and incorporates some of the methodological enhancements of the general equilibrium work of Hudson & Jorgenson (1974, 1976). For example, it recognizes the differences in preferences of consumers as a function of their incomes and specifies a distinct demand system for each group of households. Additionally, a neoclassical microeconomic model of producer behavior is employed. The model of consumer behavior is integrated with the model of producer behavior (which contains a price-responsive inpu t -ou tpu t component) to provide a comprehensive frame-work for policy simulations.

The general equilibrium nature of the model is reflected by its attempt to determine a vector of prices for consumer goods and services and producer goods and services that will clear all markets. The equilibrium prices determine the optimal allocation of resources, given the endowment of labor, capital and natural resources (land).

On the production side, technologies are represented by production functions that exhibit constant elasticities of substitution. Technological progress (both embodied and disembodied (e.g. see Uri, 1984) is assumed not to occur over the period of investigation.

On the demand side, the model captures the behavior of consumers (who


can also serve as investors), the government, and foreigners. Consumers are grouped according to income and a demand system is specified for each group. Each income group has an endowment of labor and capital and, given the vector of prices, decides the amount to save and invest and the amount of each good and service to consume (purchase). Investment, consequently, is determined by savings. The government levies taxes on both production and consumption. That is, there are taxes on factors of production, on output, on income and on consumption. Revenues are used to distribute income back to consumers and to purchase goods and services, as well as capital and labor.

The foreign sector produces imports and consumes exports. Trade balance is assumed but the exchange rate is not explicitly incorporated into the model specification. Foreigners are regarded as consumers who purchase United States exports with income from the sale of imports to the United States. Without the assumption of trade balance, a complete Computable General Equilibrium (CGE) model of the rest of the world would be required to handle the exports and imports sectors. Moreover, the impact of the trade balance assumption, while affecting the quantitative magnitude of the results (the magnitude being a function of the demand and supply elasticities, etc.) does not interfere with the direction of changes.

Table 1 details the specific producing sectors and types of consumer goods and services considered in the general equilibrium model. The various household categories (classified by income) are delineated in Table 2. This choice of the level ofdisaggregation was predicted on the availability of data and on the producing and consuming sectors and income categories that are of interest.

TABLE 1 Classification of Producing Sectors and Consumer Goods and Services

Industries Consumer goods

1. Manufacturing 1. Food 2. Mining 2. Alcohol and tobacco 3. Service 3. Utilities 4. Chemicals and plastics 4. Furnishings and appliances 5. Food and tobacco products 5. Housing 6. Petroleum refining 6. Clothing and jewelry 7. Financial 7. Transportation 8. Forestry 8. Motor vehicles 9. Crude oil and natural gas 9. Financial and other services

10. Agriculture l - -p rogram crops 10. Reading and recreation 11. Agriculture 2--livestock 11. Non-durable household items 12. Agriculture 3--all other 12. Gasoline and other fuels

agriculture 13. Savings


TABLE 2 Household Categories Based on Income

Category Income range

1 $0-9 999 II $10000-14999 II1 $t 5 000-19 999 IV $20 000-29 999 V $30 000-39 999 VI $40 000 and over

(b) A general equilibrium model (see note 5)

( i) Production The production component of the general equilibrium model is composed of an input-output model with some flexibility with regard to the substitution of the factor inputs (capital, labor, and land). The degree of flexibility depends on the choice of functional form for the production function. In the current model, each sector is assumed to have a constant elasticity of substitution (CES) production function (see Arrow et al., 1961) where the value added by the sector is a function of labor and capital.

For four sectors (the three agricultural sectors and the forestry sector), a third factor of p roduc t ion- - land- - i s included. This is done because of the special importance of land to these sectors (e.g. see Heady & Dillon, 1961 for a discussion of this issue). Incorporating this factor in the production function is accomplished by nesting the CES production function. While it would be possible to simply add land as an explicit input in the production function, this would implicitly assume that the elasticity of substitution between all pairs of inputs are the same. By nesting, however, the substitution elasticities are permitted to be different between different inputs.

( ii ) De mand The output of the 12 producing sectors accrues to the owners of the factors of production (i.e. land, labor and capital) which they sell. With the receipts t¥om sales, these individuals either consume domestic or foreign goods and services, save, or pay taxes to the government. The savings are used for investment and the taxes are ultimately returned to these individuals.

The demand for final goods and services comes from three primary sources. First, final goods and services may be directly consumed by individuals. Second, investment (which is equal to savings) consumes some


of the goods and services produced. Finally, foreign demand (in the form of exports) consumes a portion of the goods and services.

A review of Table 1 will show that the composition of the consumer goods and services sectors does not match that of the producing sectors because the final goods and services produced by the producing sectors must go through various channels (i.e. transportation and distribution) before they can be consumed. To address this problem, a transformation matrix is introduced that defines the contribution of each producing sector to the composition of each of the final (consumer) goods and services.

For each category of households (Table 2), utility is assumed to be a weighted CES function of the 13 consumer goods and services. The weights on these goods and services are computed as the share of total purchases going to a specific consumer good or service. The nature of the CES utility function implies that the elasticity of substitution is the same between any pair of goods and/or services. Because reliable estimates of the respective substitution elasticities across pairs of goods and/or services is difficult to obtain, they are assumed to equal one for all of the combinations. Finally, consumers obtain utility from the consumption of all goods and services including leisure (consumer good and service sector number 10). Hence, it is necessary to determine a weight for this factor in the utility function. For the purpose of the current analysis, this value is assumed to be 0-5 times labor income. The net effect of adding leisure is to incorporate explicitly the fact that consumers not only derive utility from the act of consuming goods and services but that they also derive utility from leisure. Thus, an increase in leisure can lead to an enhancement of individual well-being in the model (e.g. see Deaton & Muellbauer, 1980 for more on the labor-leisure tradeoff).

A household's budget constraint is defined such that expenditures on goods and services must be less than or equal to its income, which is defined to equal its portion of the returns to labor, plus the returns to capital, plus the returns to land. That is, expenditure by a household must be less than or equal to the total factor payments it receives. Maximizing utility subject to this expenditure constraint gives the demand for the various goods and services by household categories (e.g. see Mixon & Uri, 1985 for a discussion of this). Observe that since savings are considered as an item in an individual's utility function, the choice between consumption and savings and, hence, intertemporal tradeoffs is made explicit.

The second component of the demand for goods and services is investment. Like the final demand by individuals, total investment is disaggregated by the sector of the economy that produces it. For the purpose of constructing the general equilibrium model and calibrating it, investment is taken directly from the national income and product accounts (as compiled by the Bureau of Economic Analysis of the US Department of


Commerce) and, since savings are assumed to exactly equal investment, personal savings are scaled to equal the gross investment measured for each of the 12 producing sectors.

The final componen t of the demand for goods and services is that by foreign consumers. In the model, exports (i.e. foreign demand) are delineated by producing sector. A similar description is used for imports (i.e. foreign supply). The exports are then scaled so that the total foreign account is balanced. By employing elasticity estimates (both demand and supply) found in the literature, export and import demand relationships are constructed for each producing sector.

(iii) Taxes The government a n d its tax receipts are an integral part of the general equilibrium model formulation. Tax receipts do impact the model results with regard to factor use, factor prices, and output .

First, there is a question of how to treat the government in a general equilibrium model. For the purpose at hand, it is treated as a separate (household) sector with a CES utility function. The elasticity of substi tution is assumed to be one. This means that the CES product ion function collapses to a Cobb-Douglas - type product ion function. The government collects tax revenue in various forms. The taxes explicitly considered include personal income tax, labor taxes (e.g. a social security tax), capital taxes (e.g. a corporate income tax), property taxes, and sales and excise taxes. All these are advalorem taxes and a marginal rate is used for each household category, consumer good and service sector, producing sector and factor input. In this respect, the model is a distinct improvement over earlier general equilibrium models (e.g. Shoven & Whalley, 1972) which simply employed lump sum transfer schemes or used average tax rates.

(c) A mathematical statement of the model

Given these foregoing considerations, it is useful to state precisely the condit ions that the model being used here must satisfy for a general equilibrium to exist. First, there cannot be positive excess quantities demanded. That is

~ aijM j - E~(p, Y) > 0 for c.s. Pi >- 0 (1)

j = l

and where i (i = 1,2, . . . , n) denotes the consumer goods and services, Mj ( / = 1, 2 . . . . . m) denotes the activity levels, a~j denotes the ijth element in the activity analysis matrix, Y denotes a vector of incomes for the k consumers, p


denotes a vector of prices for the n consumer goods and services and Ei denotes the excess demand for good or service i.

The notation c.s. implies that complementary slackness holds for each consumer good and service. That is, if the expression (for a specific good or service i) is multiplied bypi, then the relationship will hold with equality (e.g. see Takayama & Uri, 1983).

The second requirement for general equilibrium is that the profits associated with a given activity are not positive. That is

- ~ , aijpi > 0 for c.s. Mj >_ 0 (2)

n

i = l

Finally, all prices and activity levels must be non-negative. That is,

and

Pi > 0, i = 1, 2,..., n (3a)

mj>o, j= 1,2 . . . . ,m (3b)

The model is solved for a general equilibrium using the iterative algorithm nominally referred to as the Sequence of Linear Complementary Problems (SLCP) developed by Mathiesen (1985a, 1985b). This algorithm is based on the fixed point theorem proved by Scarf (1967).

A complete listing of the equilibrium conditions together with relevant definitions is found in the Appendix.

(d) Data for the 1984 base year

The general equilibrium model is calibrated for 1984. For the producing sectors, data on capital receipts and taxes are computed from data obtained directly from the Bureau of Economic Analysis of the US Department of Commerce, the US Department of Agriculture, the US Department of Energy, and from Hertel & Tsigas (1987). The various elasticities of substitution employed in the analysis were obtained from the empirical literature on production functions. (Boyd, 1988 has the details on where the values of the elasticities of substitution were taken from.)

Capital income (earnings) and labor income were obtained from the Bureau of Economic Analysis of the US Department of Commerce. Land income was estimated using factor shares obtained from the Economic Research Service of the US Department of Agriculture and applied to the capital income component.

Data on expenditures on each of the 13 goods and services by each of the six household categories were obtained from the Consumer Expenditure


Survey: Interview Survey, 1984 (Bureau of Labor Statistics, 1986). By combining this information with the number of households in each household (income) category (these data come from the Bureau of Economic Analysis), the aggregate expenditures on each category of consumer goods and services by each household category were computed.

The various marginal tax rates used were obtained from numerous sources including the Internal Revenue Service, the Economic Research Service of the US Department of Agriculture, Hertel & Tsigas (1987), and Ballard et al. (1985).

The value of exports and imports for 1984 were taken from the Survey of Current Business (various issues) with the exception of the energy data which were obtained from the Energy Information Administration of the US Department of Energy and the agriculture data which were obtained from the Economic Research Service of the US Department of Agriculture.

A METHODOLOGICAL CAVEAT

Before proceeding to discuss the results obtained from the general equilibrium model, a short digression is in order. In particular, a discussion concerning the advantages and shortcomings of using the particular modelling approach that has been opted here is in order.

The primary advantage of the general equilibrium modelling approach is that, with all economic entities maximizing their behavior (subject to the relevant constraints), all markets are required to clear. No transactions are conducted at prices other than equilibrium prices and for every factor of production and every good and service consumed, the quantity supplied must exactly match the quantity demanded. All interactions among markets are taken into account and, consequently, all interrelationships between sectors (both consuming and producing sectors including the agricultural sectors) are explicitly considered.

Another advantage of this modelling approach is that it performs the analysis at a disaggregated level and hence can identify sector specific impacts of the policy question being addressed. Frequently, small aggregate effects obfuscate the larger impacts at the sectoral level. Thus, for example, at the aggregate level a change might have little effect on income, but at the household level, the distributional impacts on income might be fairly substantial.

The general equilibrium model also includes a treatment of all taxes. These taxes can introduce a considerable differential between prices paid by consumers and prices received by producers. This may result in distortions in market signals that lead to market failure (e.g. inefficient use of factors of production). (e.g. see Friedman, 1984, for more information.)


The model is solved numerically and, after any change in the exogenous (e.g. policy) variable(s), a new, independent (i.e. independent of the previous solution) equilibrium is computed. As a result, the conclusions do not depend on first-order or second-order approximations or the assumption of an infinitesimally small change in one or more of the variables.

The general equilibrium modelling approach is not devoid of deficiencies. The values of the various parameters used in the model are not estimated directly by econometric means. Rather, as noted, they are taken from the literature and represent a consensus among researchers with regard to appropriate values. This does not mean that a complete set of econometric results cannot be generated at some future date. The complexities of such an undertaking, however, are enormous (e.g. see Jorgenson, 1984 and MacKinnon, 1984 for a discussion of these) and so it is not attempted here.

Another assumption that does not emulate reality completely is that consumer and producer behavior is modelled with full and complete adjustment between perturbations. This means that the distributed lags associated with the adjustments of the various factors are not overtly modelled although the magnitude of the full adjustment by each producing and consuming sector is captured. Additionally, there is the implicit assumption that all economic agents know the vector of final equilibrium prices, thus allowing for full adjustment on their part.

Next, there is no provision for the environmental effects of the policy initiative. That is, for example, the benefits associated with the reduction in soil erosion from the CRP are not explicitly measured. Consequently, the measurement of the impact on social welfare (household utility) is biased downward.

Finally, the model does not, as noted, make any provision for technological innovation and, hence, is not suitable for addressing policy issues that will take a long time to have their full (cumulative) impact.

These model limitations imply that the results of the subsequent modelling effort should not be unequivocally accepted but rather interpreted in the context of offering an improved, but not perfect, analysis of the impact of the Conservation Reserve Program.

GENERAL EQUILIBRIUM RESULTS

Before discussing the results of the general equilibrium model, a couple of items need to be mentioned. First, in order to assess the impact of the CRP it is necessary to determine how the mix of agricultural commodities produced will change in response to taking acreage out of production. The general equilibrium model is too aggregated to make this determination accurately


between program crops and non-program crops. Consequently, a partial equilibrium model is used to get a first-order approximation of the production impacts. These results are then integrated into the general equilibrium model to determine the aggregate effects. The partial equilibrium model is detailed in Konyar (1990). The model is regional (23 regions for the contiguous United States), it considers both program and non-program crops (10 crops), it divides crops by irrigated and non-irrigated acreage, and each crop is produced by seven factor inputs (including labor, fertilizer, agricultural chemicals, energy, etc.). Linear demand and supply functions are assumed making the objective function quadratic. The objective is the maximization of net farm income. The model is run with no CRP acreage and then with the CRP acres taken out of production. The resulting changes in crop mix and hence total production for both program and non-program crops are used as inputs into the general equilibrium model. The equilibrium levels of production for the agricultural sectors indicated by the partial equilibrium model in general will differ from those levels indicated by the general equilibrium model. Consequently, it is necessary to iterate between the two models until a consensus is reached. As it turned out (for the specific issue under consideration), the solutions from the first iteration were sufficiently close (within 1%) to make a second iteration unnecessary.

TABLE 3 Reference Case Equilibrium Prices (Normalized) and Quantities (in Hundreds of

Billions of Dollars) for the Producing Sectors

Sector Price Quantity

1-000 O0 18"876 2 1 "000 O0 0"462 31 1.000 O0 23"781 8 1-000 O0 2'273 75

5. 1"000 O0 3"505 74 6. 1 '000 O0 1-612 41 7. 1"000 O0 5"548 83 8. 1000 O0 O' 105 92 9. I'000 O0 1-290 60

10. 1-000 O0 0'452 10 I 1. 1 "000 O0 1.099 21 12. 1 '000 00 0-612 86

1-000 00 59"621 73

For the agriculture sectors, PC = program crops, L = livestock, and O = all other agricultural activities. Some of the other titles have been abbreviated, see Table 1 for complete titles.

1. Manufacturing 2. Mining 3. Service 4. Chemicals

Food and tobacco Petroleum refining Financial Forestry Crude oil Agriculture - P C " Agriculturc--L Agriculture O Total


Second, the magnitude of the effect that the C R P will have on the substi tution of other goods and services consumed for agricultural commodities is an important consideration. Consequently, median values of 1.0 for the elasticities of substitution between the various agricultural commodities and other goods and services incorporated in the model are used. (These values are consistent with the values reported by Uri, 1982.) Because of the potential overall importance of these values to the results of the analysis, however, a sensitivity analysis will also be performed whereby the values will be assumed to vary around the point estimates.

(a) Reference case

The reference case results (both quantities and normalized prices) are presented in Tables 3, 4 and 5 for the producing sector, the consuming sector, and households (income categories), respectively. Note that the nominal values of the quantities are in hundreds of billions of 1984 dollars. The sector numbers and category numbers correspond to those used in Table 1 and Table 2. By themselves, the values found in Table 3 through Table 5 provide little useful information beyond showing how the model is calibrated. Rather, the significance of the general equilibrium model and of the equilibrium values is in how these values change in response to some policy initiative(s) that perturb(s) the general equilibrium.

TABLE 4 Reference Case--Equilibrium Prices (Normalized) and Quantities (in Hundreds of

Billions of Dollars) for the Consuming Sectors

Sector a Price Quantity

1. Food 1.00000 4.52066 2. Alcohol and tobacco 1-00000 0-83300 3. Utilities 1.000 00 1.177 93 4. Furnishings 1.00000 1-461 37 5. Housing 1.000 00 3.740 71 6. Clothing 1.00000 1.833 23 7. Transportation 1"000 00 0"280 41 8. Motor vehicles 1.00000 1.463 37 9. Financial 1.000 00 5.587 40

10. R and R 1.00000 1.661 32 11. Non-durable goods 1-00000 0"672 38 12. Gasoline 1.00000 0.911 56 13. Savings 1.00000 3"033 33

Total 1.000 00 27.436 68

a Some of the sector titles have been abbreviated, see Table 1 for complete titles.


TABLE 5 Reference Case--Equilibrium Utility Levels (in Hundreds of Billions of Dollars) by Household

Categories

Category a Utility level

I 2"238 26 II 2"10802

lI l 2"424 17 1V 6"013 11 V 5.497 34 VI 13"7363

Total 32.017 2 Government 7.457 53

The household categories correspond to those defined in Table 2

(b) CRP implemented at the 1990 level

By December 1990, there were 33"9 million acres enrolled in the CRP. (This represents approximately 3% of the cropland available for production.) Tables 6, 7 and 8 present the general equilibrium values for prices and quantities for the producing sectors, consuming sectors and households, respectively, as a result of this level of enrollment. Tables 9, 10 and 11 indicate the changes in the equilibrium quantities in the producing sectors, consuming sectors and households in response to the CRP enrollment.

The reduction in cropland used for agricultural commodity production as a result of the CRP will have several effects. Consider the producing sectors first. In response to the reduced acreage, total output in the producing sectors will fall by 0.003% or by about $191 million (see note 6). This fall, however, is not uniformly spread across producing sectors. For example, the output of food and tobacco products sector will fall by 0.020% ($69 million) (see note 7). This is the result of a decrease in agricultural production (see below). For the service sector, output falls by 0-003% ($60 million). Output in the manufacturing sector will increase by 0"003% ($50 million) while output in the chemicals and plastics sector will expand by 0.003% ($6 million).

What will happen in the three agriculture sectors plus the forestry sector? Output in the program crops sector will rise by 0-126% (or by $57.1 million), output in the livestock sector will decline by 0-020% (or by $22 million) and output in the all other agriculture commodities sector will be reduced by 0-283% (or by $173 million). Output in the forestry sector will fall by 0.019% (or by $2 million). Thus, the CRP in the aggregate stands to potentially

Conservation Reserve Program: measuring aggregate impacts

TABLE 6 CRP Initiative--Equilibrium Prices (Normalized) and Quantities (in Hundreds of

Billions of Dollars) for the Producing Sectors

49

Sector Price Quantity

1. Manufacturing 1.00000 18'876 7 2. Mining 1.00002 0-462 32 3. Service 1.00002 23.781 2 4. Chemicals 1.00004 2.273 81 5. Food and tobacco 1.000 02 3"505 05 6. Pctroleum refining 1.00006 1.61250 7. Financial 1.00006 5.548 86 8. Forestry 1.000 52 0'105 89 9. Crude oil 1.00007 1.29068 I 0. Agriculture--PC a 1'005 07 0'452 67 11. Agriculture--L 1-001 80 1'098 99 12. Agriculture--O 1.001 43 0.611 12

Total 1.001 07 59.619 82

For the agriculture sectors, PC = program crops, L = livestock, and O = all other agricultural activities. Some of the other titles have been abbreviated, see Table I for complete titles.

TABLE 7 CRP Initiative--Equilibrium Prices (Normalized) and Quantities (in Hundreds of

Billions of Dollars) for the Consuming Sectors

Sector a Price Quanti O'

1. Food 1.00045 4"51981 2. Alcohol and tobacco 1-00040 0-832 87 3. Utilities 1-00002 1'177 93 4. Furnishings 1.00000 1.46t 37 5. Housing 1.000 06 3.740 69 6. Clothing 1.00002 1'833 23 7. Transportation 1.00002 0'28041 8. Motor vehicles 1.00001 1.463 37 9. Financial 1.00002 5.847 39

10. R and R 1.00006 1.661 30 11. Non-durable goods 1-00002 0"672 38 12. Gasoline 1-00004 0-911 56 13. Savings 1.000 02 3-033 36

Total 1.000 08 27.435 68

"Some of the sector titles in the table have been abbreviated, see Table 1 for complete titles.


TABLE 8 CRP Initiative Equilibrium Utility Levels (in Hundreds of Billions of Dollars) by Household

Categories

CategmT ~ Utility level

I 2-238 12 II 2.10795 II1 2.424 l0 IV 6.01292 V 5.497 17 Vl 13.7359

Total 32.016 2 Government 7457 86

The household categories correspond to those defined in Table 2.

TABLE 9 Comparison Change in the Equilibrium Quantities tin Hundreds of Billions of Dollars) for the Producing Sectors

Sector CRP Initiative-

re]brence case

1. Manufacturing 0'000 50 2. Mining 0"00002 3. Service - 0.000 60 4. Chemicals 0-000 06 5. Food and tobacco -0"000"69 6. Petroleum refining 0"000"09 7. Financial 0"00003 8. Forestry -0 .00002 9. Crude Oil 0.00008

10. Agriculture -PC" 0'000 57 11. Agriculture L -0"000'22 12. Agriculture O -0 '001 73

Total -0"001 '91

For the agriculture sectors, PC = program crops, L = livestock, and O = all other agricultural activities. Some of the other titles have been abbreviated, see Table 1 for complete titles.


T A B L E 10

Compar i son- -Change in the Equilibrium Quantities (in Hundreds of Billions of Dollars) for the Consuming Sectors

Sector a C R P Initiative-

r£:ference case

1. Food -0 -00085 2. Alcohol and tobacco -0 -000 12 3. Utilities 0-000 00 4. Furnishings 0.000 00 5. Housing -0 .00002 6. Clothing 0.000 O0 7. Transportat ion 0.000 00 8. Motor vehicles 0.00000 9. Financial - 0"000 01

10. R and R -0-000.02 11. Non-durable goods 0.00000 12. Gasoline 0.000 00 13. Savings 0.00003

Total - 0.000 99

Some of the sector titles have been abbreviated, see Table 1 for complete titles.

T A B L E 11

Comparison--Change in the Equilibrium Utility Levels (in Hundreds of Billions of Dollars) by Household Categories

Categoo ,~ C R P Initiative-

re['erence case

I - 0'000 05 1I -0"00007 III - 0 ' 0 0 0 0 7 IV - 0"000 19 V - 0"000 17

VI - 0"000 40 Total - 0-000 95

Government - 0.000 22

a The household categories correspond to those defined in Tablc 2.


impose some costs, in terms of reduced output, on the agriculture sectors (consisting of the three agriculture sectors plus the forestry sector) of about 0.001% (or $140 million) in the aggregate. The rise in output in the program crops sector is caused by taking land out of production that, in turn, results in an increase in the price of program crops. This increase in the price of program crops results in land being used more intensively and consequently, more land being used to grow program crops (at the expense of non- program crops and livestock). The total returns to agriculture go up because demand for agricultural commodities is relatively inelastic. This means that the price of land increases. Less is produced because of factor adjustments. Output, however, does not go down by as much as a partial equilibrium analysis would suggest.

Accompanying the changes in agricultural output are changes in the prices of the agricultural commodities. Thus, for example, the price of the output of program crops will rise by 0"507% (attributable to taking land out of production), the price of the output of the livestock sector will rise by 0.180%, the price of the output of all other agricultural commodities will increase by 0" 143% and the price of the output of forestry products will rise by 0.052%. These latter price increases are the result of the land previously devoted to production in these sectors now being used to grow program crops in response to the higher price for program crops.

Finally, with regard to the agricultural sectors, imports of program crops, livestock, and non-program crops will expand by 0-381% ($2.03 million), 0.048% ($271 000), and 0.025% ($270 000), respectively. These increases in imports are the result of the higher prices for domestically produced agricultural commodities. As the result of an increase in the imports of agricultural commodities, crude oil imports are expected to fall by 3-701% ($1"9 million). (Other producing sectors will also be impacted but the effect is the largest in the crude oil sector.) This result is observed because of the requirement that trade must be balanced (a condition in the general equilibrium model).

With regard to the consuming sectors, the implementation of the CRP results in a slight decrease in the consumption of goods and services by about 0-004% ($99 million). The most adversely impacted sector is the food sector which experiences a 0-019% ($85 million) fall in consumption. The second most significantly impacted sector is the alcohol and tobacco sector which realizes a 0"015% ($12 million) reduction in output. Most other sectors experience minimal changes in consumption attributable to the indirect effects of the CRP. These indirect effects include a lower real income (brought about by an increase in the agricultural commodities) and changing relative prices (which leads to substitution of relatively less expensive goods and services for relatively more expensive).

Utility falls for all six of the household categories. The aggregate


reduction in utility is 0.003% ($95 million) for all household categories. The reduction does fall fairly evenly across households, however. Category VI households (i.e. those with incomes in excess of $40000) experience a reduction in utility of 0.003 % ($40 million) while Category V households (i.e. those with incomes ranging between $30000 and $39 999) suffer a 0.003% ($40 million) reduction in utility. The remaining household categories incur percentage reductions in utility of about the same order of magnitude. Additionally, when all of the effects of the CRP (that is, both the direct and the indirect effects) are considered, it is not, in general, regressive. That is, the consequences of the CRP do not fall most heavily on the lowest household (income) category and progressively less heavily on households with larger incomes. Rather, the impacts are approximately equal (in relative terms) across income categories.

The government incurs additional costs as the result of the CRP. While program costs fall as the result of program cropland being idled, the direct costs of the CRP more than make up for reduced program outlays. The aggregate effect is a fall in net government revenue of 0.009% or about $77 million.

In sum, the impact of taking 33.9 million acres out of production will be a reduction in output by all producing sectors of 0.003% or about $191 million, a decline in output in the agricultural sectors of 0.001% or about $140 million, a fall in the consumption of goods and services by about 0.004% or $99 million, a fall in total utility by 0-003% or $95 million and increased expenditures (for the CRP) for the government of $77 million.

(c) An increase in the CRP to 45 million acres

Also analyzed was the situation where 45 million acres of cropland are retired under the CRP. This is the target specified in the Food, Agriculture, Conservation, and Trade Act of 1990. The results are not presented in detail. (They are available from the authors upon request.) The direction of the changes are analogous to those in the previous example. The magnitude of the changes are larger. Thus, the impact of taking 45 million acres out of production will be a reduction in output by all producing sectors of 0.004% or about $216 million, a decline in output in the agricultural sectors of 0-001% or about $123 million, a fall in the consumption of goods and services by about 0-007% or $197 million, a fall in total utility by 0.006% or $190 million and increased expenditures (for the CRP) for the government of $45 million.

A COMPARISON

How do the results obtained here relate to those obtained by others? Two studies were referred to in the introduction and they will be used for


comparative purposes. Osborn & Konyar (1990) conclude that taking 33-9 million acres of cropland out of production will result in a fall in agricultural production of 2%, a rise in food prices of 0.005%, and an increase total government outlays by $63 million per year. Comparable estimates obtained here indicate that agricultural production will fall by 0.001%, food prices will rise by 0.045%, and government expenditure will rise by $77 million. Clearly, a portion of the difference in the results is attributable to the partial equilibrium framework used for the Osborn & Konyar analysis.

SENSITIVITY ANALYSIS

No analysis is complete without an examination of the sensitivity of the results to key assumptions. In the foregoing discussion, many assumptions were made with regard to model structure and parameter estimates. A full examination and discussion of these assumptions would be virtually impossible. Consequently, only the results from the sensitivity analysis of one crucial assumption will be discussed. Namely, what are the effects on the vector of equilibrium prices and quantities of the assumption concerning the elasticity of substitution? Recall that the original point estimates of these elasticities used in the model were 1"0 (i.e. the Cobb-Douglas case). In subsequent simulations, however, these were lowered for all goods and services to 0"5 and then raised to 1'5. In general, the effect of raising the elasticity of substitution is to magnify the influence of the CRP. The quantitative magnitude of the effect, however, on the results is minimal. Under a CRP with 33.9 million acres removed from production, neither output nor consumption is affected by more than $150 million and in no case is there any change in the qualitative results discussed above.

These sensitivity results suggest that the values of the substitution elasticities, while important in the determination of the vectors of general equilibrium prices and quantities and significant in determining the implications of a policy initiative affecting the agricultural sectors, are not so pivotal to the model that errors in their values lead to misleading and nonsensical results.

CONCLUSIONS

The foregoing analysis has examined the impact of the Conservation Reserve Program on the United States economy, in general, and the agricultural sectors, in particular. The analytical approach used in the analysis consisted of a general equilibrium model composed of 12 producing sectors, 13 consuming sectors, six household categories classified by income


and a government. The effects of removing 33-9 million acres and 45 million acres of cropland from agricultural production on prices and quantities are examined. The results are revealing. For example, keeping the CRP at 33-9 million acres will result in lower output by the producing sectors (by about $191 million), a decrease in the consumption of goods and services (by about $99 million), and a reduction in welfare (by about $95 million). The government would realize an increase in expenditures of about $77 million.

The agricultural sectors would be impacted. For example, if the CRP is limited to 33.9 million acres, output in the program crops sector will rise (by $57.1 million), output in the livestock sector will decline (by $22 million), output in the all other agriculture commodities sector will be reduced (by $173 million), and output in the forestry sector will fall (by $2 million).

Next, when subjected to a sensitivity analysis, the results are reasonably robust with regard to the assumption of the values of the substitution elasticities. That is, while the model's equilibrium values do vary in response to different assumptions of the values of these elasticities, the fluctuations are not so enormous to suggest that the model is unrealistically sensitive to these parameters.

As a consequence of this analysis, the implications of the imposition of the CRP are clear. Namely, in addition to the increase in federal government expenditures, the various producing sectors (in the aggregate) will be adversely impacted in terms of a reduction in output while the various consuming sectors will experience a cumulative fall in the consumption of goods and services. Moreover, social welfare (measured as utility in the model) will decline. All of these changes, however, are relatively modest.

NOTES

1. In citing these two studies, there is no intention of implying that these are the only studies focusing on the impact of the Conservation Reserve Program. There are a myriad of others (e.g. see Reichelderfer & Boggess, 1988; Ogg et al., 1989; Schaible, 1989; Shoemaker, 1989; Huang e t al., 1990; Taft, 1990). These two studies, however, are representative of many of the studies in terms of methodology and results that have examined the issue.

2. Note that there is no implicit suggestion in this discussion that the CRP is targeted at cropland on which program crops (or non-program crops, for that matter) are produced.

3. General equilibrium models in general are not going to be reviewed here. Rather, the interested reader is referred to, Adelman & Robinson (1978), Ballard et al. (1985) and Harberger (1962, 1974).


4. Hertel and Tsigas (1989) detail addit ional limitations. 5. A comprehensive description of the general equilibrium model together

with its parameterizat ion is found in Boyd (1988). 6. Note that these and other effects are in terms of the annual impacts. That

is, they indicate what will occur each year. 7. In order to limit the number of tables, some of the equilibrium prices and

quantities will not be explicitly presented a l though selected values will be discussed. Such is the case with the prices and quantities of imported goods and services. The omit ted tables are available f rom the authors upon request.

A C K N O W L E D G E M E N T

The views expressed are those of the authors and do not necessarily represent the policies of the organizations with which they are affiliated. They would like to thank the anonymous referees for helpful suggestions.

R E F E R E N C E S

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Adelman, I. & Robinson, S. (1986). U.S. agriculture in a general equilibrium framework. American Journal of Agricultural Economics, 68, 1196-1207.

Arrow, K. J., Chenery, H. B., Minhas, B. S. & Solow, R. M. (1961). Capital--labor substitution and economic efficiency. Review of Economics and Statistics, 43, 225 35.

Ballard, C. L., Fullerton, D., Shoven, J. B. & Whalley, J. (1985). A General Equilibrium Model.[br Tax Poli¢ 3, Evaluation. University of Chicago Press, Chicago.

Boyd, R. (1988). The Direct and Indirect Effects of Tax Reform on Agriculture. Technical Bulletin Number 1743, Economic Research Service, U.S. Depart- ment of Agriculture, Washington, D.C.

Bureau of Labor Statistics (1986). Consumer Expenditure Survey: Interview Survey, 1984, U.S. Government Printing Office, Washington.

Deaton, A. & Muellbauer, J. (1980). Economics and Consumer Behavior. Cambridge University Press, Cambridge.

Dervis, K., DeMelo, J. & Robinson, S. (1982). General Equilibrium Models jbr Development Policy. Cambridge University Press, Cambridge.

Friedman, L. S. (1984). Microeconomic Policy Analysis. McGraw-Hill Book Company, New York.

Harberger, A. (1962). The incidence of corporate taxation. Journal of Political Economy, 70, 215-40.

Harberger, A. (1974). Taxation and Welfare. University of Chicago Press, Chicago.


Harrington, D., Schluter, G. & O'Brien, P. (1986). Agriculture's Link to the Macroeconomy. Economic Research Service, U.S. Department of Agriculture, AIB 504.

Heady, E. O. & Dillon, J. L. (1961). Agricultural Production Functions. Iowa State University Press, Ames. Iowa.

Hertel, T. W. & Tsigas, M. E. (1987). Tax Policy and U.S. Agriculture: A General Equilibrium Analysis. Staff Paper ~87-2, Department of Agricultural Economics, Purdue University, West Lafayette, Indiana.

Huang, W., Algozin, K., Ervin, D. & Hickenbotham, T. (1990). Using Conservation Reserve Program to protect groundwater quality. Soil and Water Conservation, 45, 341-6.

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Konyar, K. (1990). The U.S. Agricultural Resource Model. Economic Research Service, U.S. Department of Agriculture, Washington.

MacKinnon, J. (1984). Comments. In Applied General Equilibrium Analysis, eds H. E. Scarf and J. B. Shoven. Cambridge University Press, Cambridge.

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Mathiesen, L. (1985b). Computation of economic equilibrium by a sequence of linear complementary problems. Mathematical Programming Study, 23.

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Ogg, C., Aillery, M. & Ribaudo, M. (1989). Implementing the Conservation Reserve Program. AER-618, Economic Research Service, U.S. Department of Agriculture, Washington.

Osborn, T. & Konyar, K, (1990). A fresh look at the CRP. Agricultural Outlook, AO- 166, 33-7.

Reichelderfer, K. & Boggess, W. (1988). Government decision making and the Conservation Reserve Program. American Journal of Agricultural Economics, 70, 1-11.

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Schaible, G. (1989). Irrigated Acreage in the Conservation Reserve Program. AER- 610, Economic Research Service, U.S. Department of Agriculture, Washington.

Shoemaker, R. (1989). The Conservation Reserve Program and Its Effects on Land Values. AIB-554, Economic Research Service, U.S. Department of Agriculture, Washington.

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differential taxation of income from capital in the U.S. Journal of Public Economics, !, 281-322.

Taft, S. (1990). Using the Conservation Reserve Program to reduce program crop plantings. North Central Journal of Agricultural Economics, 12, 89-97.

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Young, E. & Osborn, T. (1990). The Conserration Reserve Program: An Economic Assessment. AER-626, Economic Research Service, U.S. Department of Agriculture, Washington.

APPENDIX

EMPIRICAL M O D E L

I. Overall equilibrium by sector

(1) Y j + G E j + UMj=Y~LRASjL + G D j + CDj+ U X j + I N V ~ (2) E~SL~ = EjDL s + GDL (3) E~SK,. = EsDKj + GOK (4) ZcSD ,, = ZjDDj + GDD

where

(5) GDL = Y;TL; (6) GDK = EjTK~ (7) GDD = Z iTD ~

II. Consumer goods and services

(8) CDj = ZiZji[GCE j - TCj] (9) ZcRCSi,. = GCEi

(10) ZiRCS~,. = SL c + SK,. + SDc + T R N , , - PIT: (11) G C = Z ~ R C S ~ - S A V c + (1 - T A Uc)(ZTA,, - 1)SL~

(12) GC, = SL, + SK~ + SD~ + TRN~ - PIT~ + (1 - TA U~)(ZTA~ - 1)SL~ (13) TE = Zc(SLcZTA~ TA U~ + SKc TA U,. + SD~ TA U~ - (el) + TRN))

where ¢I), = SLcTA U,, + SK,.TA Uc + SDcTA U, - PIT~

III. Foreign sector balance

(14) Zj(UMi(EMj/(1 + EMi)) + UMj/(1 + EMj)) = F_u(UX; + FEi)


IV. Consistency

(15) E~(SLc + SK~ + SD~ + TRN~ - P I T t -- TC~) = E~CGc (Net household income equals household expenditures)

(16) E s ( G S K j + G E j + T L j + T K j + T D i + T X O j ) + G T L

= E c T R N + E j ( G D K j + GDj) + GD~) (Government income plus endowments equals government outlays)

(17) Zj(UMj -- UXj) = 0

(Net exports equal zero) (18) E, (CDj + GDj + UXj - G E t - UMs)

= Y.j(DLj + D K j + T L s + TKj + TXOs) (The value of demand equals value added plus taxes)

yj---•

C D s = GEj=

U M s = Z L R A S j L =

GDj =

I N V j =

UXj =

SLc =

SKc= S D c = D L j =

OK j= D D j =

G D L =

G D D =

T L i = TKj =

TDj =

G C E i =

Zji= RCSic =

T C s TRNc

P I T t

VARIABLE DEFINITIONS

Total production in sector j (j = 1, 2,.. . , 12) Consumer demand for product j Government endowment of product j Imports of product j R A S balanced input-output intermediate demands Government demand for product j Investment in sector j Exports of product j Supply of labor by household c (c = 1, 2 . . . . . 6) Supply of capital by household c Supply of land by household c Demand for labor in the industry j Demand for capital in the industry j Demand for land in industry j Government demand for labor Government demand for land Tax on labor in industry j Tax on capital in industry j Tax on land in industry j Consumer demand for consumer product i (i = 1, 2 . . . . . 13) A 12 by 13 transformation matrix R A S balanced matrix of each household's demand for each consumer good

= Excise tax on consumer good j = Transfer payment to household c = Personal income tax payment for household c


TAUc= S A Vc =

G C =

ZTA = TE=

E M j = =

G S K j =

Marginal income tax rate for household c Savings in household c Gross consumption of household c Consumpt ion plus leisure coefficient Total government endowments Demand elasticity of export demand Endowment /demand sector of adjusted elasticity demand Government endowment of capital in industry j

GDKj = Government demand for capital in industry j GTL = Government wage taxes on its own employees

TXOj = Government output tax on industry j TCc = Consumpt ion taxes on household c CGc = Total government consumption by household c

of export

measuring aggregate impacts: the case of the conservation reserve program

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