This document summarizes an article about inflation's effects on agricultural output and productivity. It finds that while national productivity growth slowed after 1973, agriculture did not see the same decline. Productivity in agriculture remained as high in the 1970s as in the 1950s-1960s. The data has limitations but if taken at face value suggests inflation rates of 10-15% did not significantly reduce agricultural resource productivity. While other sectors struggled after 1973, agriculture appeared to escape major declines in productivity growth seen elsewhere in the economy.
This document summarizes an article about inflation's effects on agricultural output and productivity. It finds that while national productivity growth slowed after 1973, agriculture did not see the same decline. Productivity in agriculture remained as high in the 1970s as in the 1950s-1960s. The data has limitations but if taken at face value suggests inflation rates of 10-15% did not significantly reduce agricultural resource productivity. While other sectors struggled after 1973, agriculture appeared to escape major declines in productivity growth seen elsewhere in the economy.
This document summarizes an article about inflation's effects on agricultural output and productivity. It finds that while national productivity growth slowed after 1973, agriculture did not see the same decline. Productivity in agriculture remained as high in the 1970s as in the 1950s-1960s. The data has limitations but if taken at face value suggests inflation rates of 10-15% did not significantly reduce agricultural resource productivity. While other sectors struggled after 1973, agriculture appeared to escape major declines in productivity growth seen elsewhere in the economy.
Author(s): D. Gale Johnson Source: American Journal of Agricultural Economics, Vol. 62, No. 5, Proceedings Issue (Dec., 1980), pp. 917-923 Published by: Oxford University Press on behalf of the Agricultural & Applied Economics Association Stable URL: http://www.jstor.org/stable/1240284 . Accessed: 22/09/2014 23:20 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp . JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. . Agricultural & Applied Economics Association and Oxford University Press are collaborating with JSTOR to digitize, preserve and extend access to American Journal of Agricultural Economics. http://www.jstor.org This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:20:36 PM All use subject to JSTOR Terms and Conditions Inflation, Agricultural O utp ut, and Prod uctivity D. Gale Johnson Why should inflation have an ad verse effect up on agricultural outp ut and p rod uctivity? Since most economists accep t the view that inflation is bad and should be avoid ed -if d oing so d oes not cost too much-our knee- jerk reaction is that inflation has significant ad verse effects up on outp ut and p rod uctivity. True, inflation red istributes wealth and in- come, as most of us who work for universities and , in ad d ition, have annuities d erived from d efined contributions realize. And when infla- tion rates reach some levels, the breakd own of confid ence in money and financial institutions can have serious economic, social, and p oliti- cal consequences. But have the inflation rates of 10% to 15% to which we have been sub- jected d uring the p ast year had significant re- source and p rod uctivity effects in agriculture? When I started to write this p ap er I was not sure how I would answer this question. Was I more sure when I finished ? I leave it to you to jud ge. The first issue that I ad d ress is what has hap p ened to p rod uctivity in the economy and in agriculture d uring the 1970s. In consid ering what may have hap p ened to the growth of p rod uctivity in agriculture, we should con- sid er that change in the context of the national p icture. The available d ata on changes in national p rod uctivity, whether as measured by total factor p rod uctivity or by labor p rod uctivity (average labor p rod uct) show clearly that na- tional p rod uctivity growth has been sig- nificantly slower since 1973 than in the years before. What is much less clear is why the slowd own has occurred . What d o the d ata show? Table 1 gives d ata on total factor p rod uctivity for the p rivate d omes- tic economy and selected segments. There can be little d oubt that p rod uctivity growth after 1973 was at a lower rate than in any other p eriod since 1948. Table 2 p rovid es similar d ata on labor p rod uctivity, and the general p icture is the same as for total factor p rod uc- tivity. There are those who argue that the p rod uc- tivity slowd own started before 1973. Tables 1 and 2 give some sup p ort for that view, though the p re-1973 slowd own seems to have been concentrated in areas other than manufactur- ing. However, there is little d oubt that the sharp break in p rod uctivity growth occurred from 1973 on. There are at least two imp ortant comp etitors for exp laining the d ecline. O ne is that 1973 was the year that oil p rices were increased substantially. Another is that it was in 1973 that we started on a roller coaster of inflation, d eflation, and inflation again. O ther factors could be the ad verse effects of envi- ronmental regulations, the low rate of cap ital investment in the U.S. economy, and the d e- cline in real sup p ort of research. After noting how little can be attributed to these factors, Griliches came to the following equivocal but not unreasonable conclusions: There remain three interrelated forces: the rise of energy p rices, accelerating inflation, and errors in our measures p rod uced by the inability of the existing statistical framework to cop e ad equately with such changes. To me they ap p ear to be the most likely susp ects in this case. The main source of this susp i- cion lies in the coincid ence of timing and the fact that the p rod uctivity slowd own ap p ears to be world wid e, and not just restricted to the United States. Hence, any exp lanation for it must be based on factors that are not unique to recent U.S. history. (p p . 12-13) Table 3 shows quite clearly that the d ecline in p rod uctivity, as measured by labor p rod uc- tivity in manufacturing, has not been only an American p henomenon. O f eleven high in- come countries, all but one (Germany) had a d ecline in labor p rod uctivity in manufacturing in 1973-76 comp ared to 1970-73. D. Gale Johnson is Eliakim Hastings Moore Distinguished Service Professor and chairman, Dep artment of Economics, University of Chicago. Cop yright 1980 American Agricultural Economics Association This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:20:36 PM All use subject to JSTOR Terms and Conditions 918 December 1980 Amer. J. Agr. Econ. Table 1. Total Factor Prod uctivity Growth, United States, 1948-76 Contract Private Manufac- Construc- Transp or- Domestic Period turing Mining tion tation Economy 1948-53 2.9 4.1 2.6 1.8 3.4 1953-57 1.0 2.2 1.8 2.7 2.0 1957-60 1.1 0.6 4.2 2.3 2.1 1960-66 3.9 4.6 2.0 4.2 3.4 1966-69 0.9 1.7 -0.3 1.9 1.5 1969-73 2.7 -0.7 -5.0 2.3 1.8 1973-76 0.1 -4.6 1.8 0.3 0.7 1948-76 2.1 1.7 1.0 2.4 2.3 Source: Kend rick. Agricultural Prod uctivity In recent years there has been concern that p rod uctivity growth has slowed in agriculture. The National Acad emy of Sciences exp ressed its concern on this issue in Agriculture Pro- d uction Efficiency. That stud y conclud ed that while there was inad equate evid ence to sup - p ort the conclusion of d eclining agricultural p rod uctivity (through 1972 or 1973), there were some trend s p ointing in that d irection. Have the concerns noted in the Acad emy rep ort materialized ? Table 4 ind icates that the answer seems to be in the negative. I say "seems to be" because the inad equacies of our d ata base make it d ifficult to be quite cer- tain that the growth of agricultural p rod uctiv- ity has remained unchanged in recent years comp ared to earlier p eriod s. Stated briefly, our currently available total factor p rod uctiv- ity measure for agriculture suffers from three significant d efects: (a) a failure to measure most changes in the quality of inp uts, esp e- cially labor and machinery; (b) the use of base p eriod s for weighting inp uts that are too far ap art in time; and (c) the failure to ad just outp ut measures for climate changes. O ther p roblems or d ifficulties are d etailed in an ex- cellent rep ort of a task force of the AAEA. Given these d ifficulties, one must be quite cir- cumsp ect. If one accep ts the d ata as they are, recognizing the qualifications, certain conclu- sions follow: (a) The growth of total factor p rod uctivity in agriculture d uring the 1970s was at least as high as for the two d ecad es 1950-70. Prod uc- tivity growth was higher d uring the 1950s than d uring the 1960s but the average for the two d ecad es was essentially the same as for the 1970s. (b) Agriculture has not suffered the sig- nificant d ecline in either total factor p rod uctiv- ity or labor p rod uctivity growth that has oc- curred in the nonfarm economy, either the total or p rivate, since the mid -1960s. (c) There d oes not ap p ear to have been any significant d ecline in the rate of growth of ag- ricultural p rod uctivity after 1973, in contrast to what occurred in the rest of the economy. Thus, agriculture ap p ears to have escap ed the sharp d ecline in p rod uctivity evid ent in the nonfarm economy after 1973. There is a rough ind ep end ent measure of growth of p rod uctivity in agriculture, namely the change in outp ut to inp ut p rices. This mea- sure suffers from whatever d efects there may Table 2. Labor Prod uctivity Growth, United States, 1948-80 (Percent Change p er Year) Nonfarm Nonfarm Private Business Period Manufacturing Nonmanufacturing Economy Economy 1948-55 3.3 2.4 2.7 3.4 1955-65 2.9 2.4 2.6 3.1 1965-73 2.4 1.7 2.0 2.3 1973-77 1.5 0.6 0.9 1.0 1977-78 2.5 -0.3 0.6 0.4 1978-79 0.9 - -1.1 -0.9 1979-80 0.1 - -1.5 -1.2 Sources: Council of Economic Ad visers and U.S. Bureau of Labor Statistics 1980. This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:20:36 PM All use subject to JSTOR Terms and Conditions Johnson Choices Affecting Agriculture in Inflation 919 Table 3. Growth Rates of O utp ut p er Man- hour in Manufacturing in Different Countries (Percent p er Year) Country 1970-73 1973-76 Difference United States 4.4 1.3 -3.1 Canad a 5.0 1.1 -3.9 Jap an 6.7 2.8 -3.9 Belgium 8.4 6.7 -1.7 Denmark 7.1 5.4 -1.7 France 5.7 4.7 -1.0 Germany 5.4 5.8 +0.4 Italy 7.6 2.9 -4.7 Netherland s 8.0 5.2 -2.8 Swed en 5.6 1.2 -4.4 United Kingd om 5.0 0.6 -4.4 Source: U.S. Bureau of Labor Statistics. be in the p rice ind exes used , but avoid s some of the d ifficulties of measuring inp ut quan- tities. It introd uces, however, the d ifficulty of comp arative resource returns in agriculture and the rest of the economy. It should be noted that change in the relative outp ut-inp ut p rices in agriculture is not a measure of the absolute change in total factor p rod uctivity but of the change in relative factor p rod uctiv- ity. If real resource returns in the economy were increasing at, say, 2% annually, and if the outp ut-inp ut p rice ind ex for agriculture d eclined by 0.5% annually, the growth in ag- ricultural p rod uctivity would be 2.5% annu- ally. The use of the measure assumes that the return to agricultural resources increases at the same rate as in the rest of the economy. If the returns to agricultural resources (labor, land , and cap ital) increase relative to the re- turns elsewhere in the economy, the d ecline in the outp ut-inp ut farm p rice ind ex would un- d erestimate the increase in agricultural p ro- d uctivity. From 1960 to 1970 the ad justed p arity ratio (1910-14 = 100) d eclined from 82 to 77, or by 6%. From 1970 to 1979, the d ecline was from 77 to 73, or by 5%. During each of these two d ecad es, the returns to agricultural resources increased relative to similar resources in the rest of the economy. A rough ind ication of the imp rovement was the increase in the ratio of p er cap ita d isp osable incomes of the farm p op ulation to the nonfarm p op ulation d uring the two d ecad es.' During the two d ecad es, the Table 4. Factor Prod uctivity Growth in Ag- riculture, United States, 1940-79 (Percent Change p er Year) 1940-50 1.7 1950-60 2.4 1960-70 1.3 1970-79 2.1 1940-79 1.9 1950-79 1.9 1960-79 1.7 Source: U.S. Dep artment of Agriculture. increase in the ratio was from ap p roximately, 55% in 1960 to near equality in 1979, with the imp rovement in terms of p oints being ap p rox- imately 20 d uring each of the two d ecad es. It is true that much of the imp rovement in the rela- tive incomes of the farm p op ulation has been the result of a more rap id increase of nonfarm than of farm income. But the farm p rod uction activities of the rural farm p op ulation ad justed and ap p arently ad justed very well to the labor force changes associated with the increased imp ortance of nonfarm emp loyment of mem- bers of farm families. These rough comp arisons are consistent with the view that agricultural p rod uctivity has been maintained at a relatively high growth rate for the p ast two d ecad es. In ad d i- tion, there seems to be no sup p ort for the view that p rod uctivity growth in agriculture was lower in the 1970s than in the 1960s. Whatever factors may have been resp onsi- ble for the slowd own in the growth of p rod uc- tivity after 1973 in the United States and other economies seem not to have had much effect up on agricultural p rod uctivity in the United States. O r if there had been some effects, the effects were not large enough to have been caught by our inad equate measures of p rod uc- tivity growth. We p erhap s have more of a p uz- zle on our hand s, because U.S. agriculture ap p arently has escap ed unscathed from the d ramatic economic events that have occurred since 1972, than would have existed if p rod uc- tivity growth in agriculture had slowed sig- nificantly.2 I This measure is a rough ind ication since no effort is mad e to d etermine the amount of resources p er cap ita in agriculture and in the rest of the economy. Thus, it is p ossible that resources p er cap ita increased much more in agriculture than in the rest of the economy, though I d oubt if such a change could account for much of the imp rovement in relative incomes. 2 At this meeting last year, Vernon Ruttan gave a p ap er with a similar title, "Inflation and Prod uctivity." While there are a num- ber of similarities in our p resentations, Ruttan is significantly more p essimistic than I am concerning recent and future p rod uctivity growth in agriculture (p . 901). This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:20:36 PM All use subject to JSTOR Terms and Conditions 920 December 1980 Amer. J. Agr. Econ. In the longer run, there is likely to be some effect of national p rod uctivity growth up on agricultural p rod uctivity growth. While the current ep isod e shows that this long-run p o- tential has so far not had ad verse effects up on our agriculture, it would not be safe to assume that the lack of effect can go on ind efinitely. In any case, farm p eop le realize the benefits of p rod uctivity growth p rimarily through the in- creasing value of human effort. Slow or nil p rod uctivity growth in the rest of the economy means slow or nil increases in real labor earn- ings and thus in the alternatives available for the use of the human cap ital of farm p eop le. Exp ected Ad verse Effect of Inflation Why should we exp ect that inflation would have an ad verse imp act up on agricultural p ro- d uctivity or outp ut? There are three reasons why negative effects may exist. O ne is that the rate of inflation is not correctly anticip ated . A second reason is that a change in the rate of inflation may have effects on the p rices of some or most agricultural p rod ucts relative to inp ut p rices. Finally, the p olicies and interven- tions by government in resp onse to the infla- tion may have inhibited the ap p rop riate re- sp onsiveness of the markets. Each of the rea- sons imp lies that inflation increases the d egree of uncertainty confronting farmers-uncer- tainty about p rices and availability of in- p uts since the government may imp ose p rice ceilings or force the rationing of cred it or sp ecific inp uts. The economy of the United States d oes not have many of the institutional relationship s that p ermit it to exist mod erately well with inflation. We still function with long-term bond s and mortgages with fixed interest rates. But there is an ind ication that the sharp and generally unexp ected rate of inflation has led to the introd uction of a number of mod ifica- tions of d ebt instruments. These includ e vari- able rate mortgages, rollover mortgages, and the various certificates of d ep osits tied to short- and intermed iate-term treasury security rates. I d o not know if there have been vari- able rate or rollover farm mortgages written d uring the p ast year, but such a p ossibility must certainly be und er consid eration by some financial institutions. Inflation and Resource Allocation For a rate of inflation-say in the range of 5% to 20%-it is unlikely that the errors in re- source allocation d ue to incorrect anticip a- tions will have a significant imp act up on the real outp ut level or p rod uctivity. True, some, if not most, asset p rices will need to be read - justed as the true rate of inflation is revealed , but actual resource misallocations will have been quite small, esp ecially in the short run of one p rod uction p eriod . I am not saying that the effect is nil; certainly one would not exp ect such a statement from the author of Forward Prices for Agriculture. But the uncertainty created by variable inflation rates is an ad d i- tion to existing uncertainty rather than an en- tirely new p henomenon. Thus, we can hard ly exp ect that the ad d ed effects of variable infla- tion up on uncertainty could be of sufficient magnitud e to be p icked up by our imp erfect measures of outp ut and p rod uctivity. I know of but one stud y that may throw some light on the ad verse p rod uctivity effect of very high rates of inflation. Unfortunately, the agricultural area involved was afflicted with civil d isturbance as well as a high and ap p arently unexp ected rate of inflation. Briefly, Dittrich and Myers obtained access to d etailed farm management d ata collected by the Jap anese for three villages in North China for various years from 1937-40. These d ata were used to fit p rod uction functions, which were then used to estimate the efficiency of resource allocation in the d ifferent villages and years. In one village d ata were available for three consecutive years. In 1937 it was esti- mated that the actual resource allocation com- p ared to an ex p ost reallocation of resources resulted in an income loss of 1.4%. Between 1937 and 1938, farm p rices increased by 21%; the income loss d ue to resource misallocations was 3.3%. Between 1938 and 1939, farm p rices increased by 136%; the income loss from re- source misallocations was 17.5%. The authors conclud ed : "The find ings . .. suggest strongly that the p easants of these farm surveys- op erating within a framework of trad itional agriculture and p rivate ownership of land - were able to allocate scarce resources fairly efficiently. This was true as long as economic cond itions reflected by rising farm p rices d id not change very rap id ly" (p . 895). As a net d ebtor in terms of financial assets, farmers usually gain from an unexp ected in- This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:20:36 PM All use subject to JSTOR Terms and Conditions Johnson Choices Affecting Agriculture in Inflation 921 crease in inflation rates. However, this benefit is through an increase in real wealth and has rather little effect on current outp ut and p ro- d uctivity. Farm O utp ut Prices The second reason for an ad verse effect of inflation is that the fact of largely unantici- p ated increase in inflation may result in ad - verse changes in relative p rices and thus re- d uce outp ut. This effect may arise where the d omestic p rices of major farm p rod ucts are significantly affected by international market cond itions. This is the situation for many U.S. farmers. Unless the U.S. exchange rate falls, an increase in the rate of inflation in the United States relative to the weighted inflation rate in the exp ort d estinations will not result in an increase in the absolute p rice of U.S. farm p rod ucts. While in the long run p urchasing p ower p arties are likely to be reflected in ex- change rates, in the short run relative ex- change rates can move quite ind ep end ent of relative inflation rates. This has clearly been the case for the d ollar exchange rate since last O ctober and esp ecially from January 1980. When real interest rates rose absolutely and became significantly real, the exchange values of the d ollar increased significantly. Between January and Ap ril 1980, the value of the d ollar increased 13% in terms of the Deutsche Mark, 12% in terms of the yen and 6% in terms of the p ound . But, when interest rates fell in Ap ril and the U.S. inflation rate ap p eared to be on the way to stabilization or d ecline, the ex- change rate for the d ollar fell and by July has returned to ap p roximately the levels of a year earlier. Consequently, d uring the p eriod of high absolute and real interest rates from De- cember 1979 through Ap ril 1980, farmers were faced with high cap ital costs and d eclining real p rod uct p rices. Some p rod uct p rices fell in absolute as well as real terms, though a p artial source of the absolute d eclines for the grains and soybeans may have been the U.S. susp en- sion of grain sales to the Soviet Union. But even if there had been no susp ension of grain sales, the p rices of grain and other exp ort p rod ucts would have been und er p ressure d ue to the strength of the d ollar in resp onse to the inflow of fund s attracted by high short-term interest rates. Later, starting in Ap ril and May, there was an outflow of fund s as U.S. short-term interest rates fell; the d ollar lost value in the foreign exchange market, and the net effect was to p rovid e some strengthening of the d ollar p rices of major exp ort p rod ucts comp ared to what they otherwise would have been. In the context of circumstances in 1979/80, high interest costs were not offset by farm p rices of the major exp ort p rod uct rising at ap p roximately the same rate as p rices gen- erally; in fact, quite the contrary occurred . High relative U.S. interest rates p ut d own- ward p ressure on the d omestic p rices of many farm p rod ucts for a p eriod of several months. These were critical months because many p lanting d ecisions had to be mad e d uring the p eriod . Since the slowd own in the inflation rate has been associated with a recession-ind uced d e- cline in d emand for the farm p rod ucts with p ositive income elasticities of d emand , the p o- tential p ositive d omestic p rice effect of the d ecline in the U.S. exchange rate has been at least p artially offset by d omestic events. The U.S. market for feed grains and corn is sufficiently large that changes in the d omestic market can affect international market p rices. It is p robable that the consequences of vary- ing and unanticip ated changes in the rate of inflation have had some small negative effect up on agricultural outp ut and p rod uctivity. But these effects have been too small to be reflected in our measures. Not all of the con- sequences of the inflation-d ominated events of 1979 and 1980 will be felt in the short run; both farmers and financial institutions will almost certainly mod ify their behavior for some time to come. Governmental Policies I will not d well on the third reason for an ad verse effect of inflation up on outp ut and p rod uctivity-namely, governmental p olicies instituted in resp onse to p olitical d emand s to "d o something about inflation." The sharp in- crease in interest rates, and the p robable se- verity of the 1980 recession, resulted from an unwillingness of the ad ministration to take ap - p rop riate action to red uce inflation before late 1979. By then, circumstances d emand ed that d rastic action be taken by the Fed eral Reserve System. The d rastic action taken will have ramifications up on p rices and outp ut for all of 1980 and p robably well into 1981. O ne can only hop e that since we have received the shock, it will not be all for naught because of a This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:20:36 PM All use subject to JSTOR Terms and Conditions 922 December 1980 Amer. J. Agr. Econ. rap id shift from contraction to exp ansion in the money sup p ly. Slow Economic Growth Far, far more d isturbing than any of the effects of inflation up on p rod uctivity in agriculture is the slow rate of growth that has afflicted our economy for the p ast d ecad e. Sooner or later, and p robably sooner, the comp etitive p osition of U.S. agriculture in world markets will be erod ed by the slow growth of our economy. Agriculture's strong p osition in world markets is the result of efficient and comp etitive mar- kets for inp uts and outp uts. The d ynamic na- ture of American agriculture is d ue to the characteristics of our farm op erators, the in- vestment in research, and the rap id translation of research results into useful inp uts p rod uced at comp etitive p rices (Johnson). O ne imp or- tant ad vantage of U.S. agriculture has been an efficient, low cost transp ortation system to move p rod ucts from the farm to the city with reasonable d isp atch, and remarkable resp on- siveness to the rap id growth of exp orts. But imp ortant comp onents of the system, p articu- larly the railroad s, ap p ear to be on a p ath to d isintegration at worst and much higher costs at best. We seem to be p aying the p rice for a regulatory atmosp here that has never had the cap acity to look more than a year or so into the future or to und erstand that the sources of comp etition for rail transp ort have changed in a century. Agriculture has not been without fault in the d isintegration of the rail system-it has long p ressed for low rates in the forlorn hop e that someone else would p ay to keep the system in a state of good cond ition and rep air. Inflation and Value of Assets Earlier, I noted that farmers, as net d ebtors, gained from unanticip ated increases in the rate of inflation. I gave no emp hasis to this gain, noting that it d id not significantly affect re- source allocation. This is not strictly correct, since wealth is a variable that affects a number of d ecisions, such as consump tion-savings or the form of investment or the d esirability and availability of cred it. There is a p otential effect of inflation that I have not mentioned , namely, the effect of farm land being consid ered one of the few good inflation hed ges. Farm land p rices have increased in real terms for the last four d e- cad es and have d one so almost every year. However, d uring the p ast twenty years there seems to have been little relationship between the rate of inflation or the change in the rate of inflation and the size of the increase in the real value of farmland . The p rice behavior of farmland d oes not ap p ear to d ifferentiate it from other typ es of real estate. Housing p rices ap p ear to have be- haved in ap p roximately the same manner as agricultural land p rices. The only p ossible d if- ference is that farmland is a major p rod uction asset for agriculture and , excep t for mining and forestry, this is not the case for other typ es of p rod uction. Thus, to the d egree that farmland has been an inflation hed ge and p art of its current p rice so reflects, the acquisition of land becomes more d ifficult for those who must acquire it by p urchase. But excep t for the greater d ifficulty of acquisition, p rimarily because our cred it system d oes not p rovid e for 100% loans, the fact that farmland is an infla- tion hed ge is a d isad vantage only if it should cease to be such a hed ge. At that time, the owners of land would suffer a cap ital loss. The very large real cap ital gains in agricul- ture d uring the 1970s have p erhap s been an imp ortant factor in the ability of farmers to ad just to and to overcome the unanticip ated events of the d ecad e. In terms of 1967 d ollars, the value of farm p rop rietors' equities in- creased by $110 billion, or almost 50% (Melichar and Wald heger, p . 34). The real value of liabilities increased by less than $22 billion. While there have been numerous claims that farm op erators who have acquired their farms since 1972 have suffered such se- vere financial p roblems that increased forclo- sures were inevitable, d ata through 1979 show no increase in the p ercentage of farm real es- tate sales d ue to foreclosures (Melichar and Wald heger, p . 57). The situation in 1980 and 1981 may be d ifferent, given the sharp d rop in farm income that is likely to occur in the sec- ond half of 1980. O ne reason that farm financial troubles have not d ominated the agricultural concerns in re- cent years has been that d uring the 1970s real interest rates p aid on all farm mortgages have been significantly negative. During the 1970s, p rices received by farmers increased at an an- nual comp ound rate of 9%; interest rates on outstand ing mortgage d ebt averaged about This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:20:36 PM All use subject to JSTOR Terms and Conditions Johnson Choices Affecting Agriculture in Inflation 923 7%. And it was not until 1979 that short-term interest rates p aid by farmers were sig- nificantly higher than the annual rate of in- crease of farm p rod uct p rices. Conclud ing Comments The inflation exp erienced by the United States d uring the 1970s has not had a measurable imp act up on agricultural p rod uction or p ro- d uctivity. This statement should not be as- sumed to mean that inflation has had no effect, but simp ly that our measures are not sufficiently refined to p ick up what effects there may have been. The p rices of major ex- p ort p rod ucts were erratically affected by the high rate of inflation in 1979/80, the monetary p olicies that resulted in high rates of interests and a short-run significant increase in the d ol- lar exchange rate. Some of the p otential ad verse effects of inflation on resource use may have been offset by the p ositive transfers received by agricul- ture as a result of land 's role as an inflation hed ge and the negative real rates of interest that have p revailed in most years since 1972. Since agriculture is a very cap ital-intensive sector of the economy, its outp ut may have been favorably affected by a low real cost of obtaining and hold ing cap ital. The most alarming asp ect of the p erfor- mance of the U.S. economy since 1973 has been the low rate of p rod uctivity growth and the mod est or nil growth of real wages. Amer- ican agriculture is highly d ynamic and p ro- gressive, but much of that d ynamism d ep end s up on the way in which the rest of the economy functions. When the rest of the economy is sluggish and flound ering, eventually agricul- ture must be affected ad versely. References American Agricultural Economics Association Task Force on Measuring Agricultural Prod uctivity. Mea- surement of U.S. Agricultural Prod uctivity: AReview of Current Statistics and Prop osals for Change. Washington, D.C.: U.S. Dep artment of Agriculture Tech. Bull. No. 1614, 1980. Council of Economic Ad visers. Annual Rep ort, 1979, p . 68. Washington, D.C., 1979. Dittrich, Scott R., and Ramon H. Myers. "Resource Al- location in Trad itional Agriculture: Rep ublican China, 1937-40." J. Polit. Econ. 79(1971):887-96. Griliches, Zvi. "Prod uctivity: Background Notes." Un- p ublished p ap er. Mar. 1980. Johnson, D. Gale. "World Agricultural and Trad e Poli- cies: Imp act on U.S. Agriculture." Contemp orary Economic Problems, ed . William Fellner, p p . 293- 324. Washington, D.C.: American Enterp rise Insti- tute, 1979. - . Forward Prices for Agriculture. Chicago: Univer- sity of Chicago Press, 1947; rep rinted New York: Arno Press, 1976. Kend rick, John W. "Prod uctivity Trend s and the Recent Slowd own: Historical Persp ective, Causal Factors, and Policy O p tions." Contemp orary Economic Prob- lems, ed . William Fellner, p p . 28-29. Washington, D.C.: American Enterp rise Institute, 1979. Melichar, Emanuel, and Martha Wald heger. Agricultural Finance Databook. Washington, D.C.: Board of Governors of Fed eral Reserve System, Annual Series, O utlook Conference Issue, Nov. 1979. National Research Council, Committee on Agricultural Prod uction Efficiency. Agricultural Prod uction Efficiency. Washington, D.C.: National Acad emy of Sciences, 1975. Ruttan, Vernon. "Inflation and Prod uctivity." Amer. J. Agr. Econ. 61(1979):896-902. U.S. Dep artment of Agriculture. Changes in Farm Pro- d uction and Efficiency, 1978, p . 71. Washington, D.C.: ESCS Statist. Bull. No. 628, 1979. U.S. Dep artment of Labor, Bureau of Labor Statistics. International Comp arisons of Prod uctivity and Labor Cost Trend s in Manufacturing. Washington, D.C.: USDL 78-444, 12 May 1978. -. Prod uctivity and Costs. Washington, D.C.: USDL 80-343, 28 May 1980. This content downloaded from 202.41.10.21 on Mon, 22 Sep 2014 23:20:36 PM All use subject to JSTOR Terms and Conditions