The Impact of Inflation on the Real Income of U.S. Farmers: Discussion

Abstract

Starleaf, Meyers, and Womack (SMW) investigate a popular aphorism: is non-neutral with respect to farm prices. Despite the importance of this issue, the shortcomings of their analysis severely limit its contribution to the and agriculture literature. In particular, this paper fails to distinguish between and inflation and omits a mechanism that causes inflation. Moreover, the chosen sample period includes three wars, the Great Depression, several episodes of price controls and major supply disruptions, but none of these factors is dealt with in the statistical tests. The comments that follow are directed to isolate specific analytical shortcomings in most work on and agriculture that persist in the SMW paper. On the basis of these criticisms, it seems clear that none of the results reported by SMW supports their assertion that has non-neutral effects on farm prices and income. Had SMW drawn a necessary analytical distinction between price change and inflation, the content of their paper would have been substantially different. As other authors have stressed (Grennes and Lapp, Walden, Belongia and King, Lombra and Mehra), observed changes in agricultural prices consist of a relative component caused by shifts in supply and/or demand schedules and a nominal component associated with the trend rate of growth of the money stock. SMW explicitly ignore variations in agricultural output, however, and implicitly assume that each observed annual price change is wholly a nominal change unrelated to price controls, real aggregate demand, energy shocks, and other factors that affect relative prices-but have little to do with the causes and effects of inflation. The absence of any variable to control for nonmomentary causes of relative price changes makes the SMW tests for neutrality meaningless except under a limiting-and highly unrealistic-set of assumptions.