Criticism of the CAP concentrates on the first pillar of production and income support and often proposes the transfer of funds to the second pillar for rural development and environmental protection. Strengthening the second pillar is seen as the logical next step after decoupling the subsidies of the first pillar from production – a step on the path towards an ever more efficient and thus legitimate CAP. Much intellectual and rhetoric groundwork for this shift is done in the discourse on public goods, food quality and safety, and food security.

Criticism of the second pillar tends to come from environmentalists who focus on its ecological shortcomings. They highlight the inefficiency of Axis 2 programs dedicated to improving the environment and the countryside, and they lambaste adverse ecological side effects of Axis 1 payments (for improving the competitiveness of the agricultural and forestry sector) and Axis 3 payments (for improving the quality of life in rural areas and encouraging diversification of the rural economy).

Only insufficiently voiced is the critique of Axis 1 and Axis 3 payments on economic grounds. Their commonality is that they rely on governmental micro-management to promote economic efficiency and innovation. Axis 1 does so on a sectoral and Axis 3 on a territorial basis. Unsurprisingly, those who make a living on designing and advising and implementing and monitoring the host of small-scale programs and individual measures employed under Axis 1 and 3 favour their continuation. They do so not only because they are making a living on it. In their daily work, they see the fruits of all the successful projects they have managed, and they hold the heavy summary reports of their joint endeavours proudly in their hands. But it is all too human to perceive one's work in an excessively benign light, and governmental reports have the irresistible habit of being embellished at every stage of their production process. So it is quite easy to see a bright overall picture and to excuse the dark spots as necessary steps on the learning curve.

Even more important than the biased perception of what has happened thanks to government intervention (and of what will happen in the future when governments and advisers will have further enhanced their knowledge) is the lack of awareness of what would have happened without these policies. Any sound policy evaluation needs to compare the case with and without government intervention in order to put the advantages into perspective and trace all the hidden costs.

A first cost of Axis 1 and 3 payments, common to all expenditures, is that of raising public money. This goes well beyond running finance ministries and filling in tax declarations. The more insidious distortions brought about by taxes are less visible: citizens work less, save less, and invest less in their education if taxes are high. Companies also invest less in high tax countries.

A second type of costs – the transaction costs of public and private administration – is particularly high in the second pillar of the CAP. Governments need to set detailed rules, verify entitlements and compliance, decide on individual claims, and process payments. Beneficiaries need to inform themselves about subsidy programs, engage consultants, file applications, and cooperate in official controls.

Third, the payments may be used for inefficient expenses. If governments subsidize the renovation of farm buildings, so that these can be used for non-farm purposes, owners are inclined to engage in such investments even if their personal (and the collective) benefits fall short of the costs. Similarly, many of the most absurd investments into public infrastructure and tourist facilities can be explained by local authorities taking advantage of EU and national subsidies. Fourth, the payments may distort economic activity. The German rural development program, for instance, offers farmers the choice on a list of subsidized diversification investments. Farmers may get money for providing tourist accommodation, boarding pet animals, and producing alcohol. So some farmers who would be better qualified to become web designers will distil schnapps instead. Another distortion arises because competition between farmers, who have the exclusive right to subsidies, and non-farmers is no longer even.

It is also possible that payments have no effect. Recipients may go exactly in the kind of business which they would have preferred without subsidies and they may undertake exactly the same investments they would have undertaken if they had to pay the full price themselves. Then, costs 3 and 4 are avoided but costs 1 and 2 still occur – without any benefit to society.

Even broader considerations need to be taken into account in order to assess Axis 1 and 3 measures. Western societies have made a wise choice to leave the economy to the market within the limits of generally applicable rules that maintain fair competition, address externalities, and regulate the provision of public goods. Public subsidies to enhance economic efficiency and innovation are to be limited to those cases where the benefits clearly outweigh the costs, that is, primarily to research and development. The CAP, by contrast, abounds with subsidy programs that have explicitly economic objectives but where a solid analysis demonstrating the net benefit is missing – although they require heavy administrative involvement and should thus be subject to a special burden of proof. This deviation from the free-market principle can be used to justify other transgressions and undermine a societal choice that has promoted economic growth and individual freedom (see ‘How would society look like if all of it was run like the CAP?’).

In sum, it is far from clear that the second pillar is the lesser evil. Axis 2 is clearly preferable to the first pillar although much has to be done to make payments more effective for the provision of environmental public goods. But some payments under Axis 1 and 3 may be worse – in terms of administrative costs, economic distortions, and restrictions of individual freedom – than the Single Farm Payment. The phasing out of the Single Farm Payment must therefore not lead to indiscriminate increases in second pillar funds. The economist’s sceptical look at the bottom line of state intervention is a better guide to judging Axis 1 and Axis 3 payments than the mainstream optimism of the involved policy-making community.