Fellow 1994-95

Bruce J. Sherrick

Agricultural & Consumer Economics

Public Guarantees of Private Activities: An Evaluation of Loan Guarantees in Agriculture

Government credit subsidies and loan guarantee programs have exploded over recent years. Estimates of the aggregate face value of all government loan guarantees range from $500 billion to over $1 trillion, including federal and state commitments. Recipients represent most sectors of the economy, including agriculture, housing, steel, manufacturing, education, exporting, and many others. Substantial additional commitments have been made recently to the agricultural sector through enhanced programs of the Farmers Home Administration (FmHA).

The logic justifying government loan guarantee programs is that the sum of benefits accruing to the economy from the guaranteed activity are greater than the costs of the guarantee borne by taxpayers, but less than the value of privately accruing benefits. This condition is referred to as economic rationality. However, there have been virtually no ex post assessments of existing programs to determine whether the economic rationality arguments are satisfied. Further, loan guarantees, as opposed to direct subsidies, are politically more attractive because benefits are realized immediately, but the liability of the guarantee is strictly an off-budget claim and is not recorded.

If the purpose of a loan guarantee program is to stimulate a particular economic activity, then it should be structured to minimize the value of the liability borne by the government. The objectives of this research are: (1) to develop guidance for state and federal government policy makers on the structure of loan guarantees; and (2) to assess the aggregate liability of major agricultural loan guarantee programs. Major programs will be evaluated with respect to program design, fee structures, and aggregate liability. The "economic rationality" and estimates of benefit accruals for agricultural programs also will be evaluated. FmHA and Illinois Farm Development Authority will provide data to empirically assess major agricultural loan programs.