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The Hidden Cost of Cheap Food

The "food movement" has a long and varied history, but it seems to me that much of the force behind the modern calls for action came from writings during the early to mid-2000s (think Supersize Me or Fast Food Nation or Omnivore's Dilemma or Food Politics, which ultimately lead to more recent things like Food Inc and Salt Sugar Fat and Pandora's Lunchbox).   

The interesting thing about this time period is that food commodity prices were historically very low.  As a result, a common mantra developed that goes something like the following.  Food is too cheap.  This cheap food masks costs to health and the environment.  These masked costs represent externalities, and economics tells us that externalities justify government action like food taxes, subsidies, etc.  This line of thinking reached such a level that the CDC and the Institute of Medicine of the National Academies has held a couple meetings on the issue (I participated in one of those; more on that in a moment).   

There are two problems with this like of reasoning.  First, in the US, we witnessed extraordinarily run-ups in commodity prices in 2008 and again in 2011.  Worldwide, food prices are higher today in real terms than has been the case for almost 40 years (e.g., see this UN FAO graph).  One might argue that certain types of foods are "too cheap" but to broadly make such a claim is no longer consistent with the facts.  Second, I think outside circles of trained economists, there is often a deep misunderstanding of the nature of externalities, and even within economic circles a lack of critical thinking about the ability of taxes/subsidies to solve externality problems.  

This second point was the focus of an invited talk that I gave to the Northeastern Agricultural and Resource Economics Association this summer in Ithaca, NY.  That address has been published in the association's journal, the Agricultural and Resource Economics Review.  The paper is now available online.  

Here is the abstract:

Social critics have taken aim at modern production agriculture using a common theme: many food, health, and environmental problems are explained by corporate farms, agribusinesses, and fast-food restaurants failing to account for the full costs of their actions. How accurate is this diagnosis? How feasible is the assumption that these externalities are most effectively mitigated via Pigovian taxes and subsidies? Drawing on my experiences at a National Institute of Medicine meeting on the subject, I seek to clarify the definition and nature of externalities and discuss situations in which public policy is most and least effective in efficiently making "hidden” costs of food visible.

A few snippets:

One of the striking observations that emerged from the conference was
the wide disconnect between the views held by participating economists
and noneconomists about the nature and role of externalities. Among many of the noneconomists, it seemed that any “bad” outcome that resulted from food production and consumption—heart attacks, obesity, the low pay of slaughterhouse workers, soil run-off, animal welfare problems, climate change— was evidence of an externality that required regulation, typically in the form of some sort of tax. I also learned in the process that some of my views about externalities were perhaps a bit unorthodox relative to those of other economists.

and

Clearly, the case for regulating externalities is more complicated than first
meets the eye. Indeed, as the preceding examples illustrate, one is apt to
see externalities everywhere. The sheer abundance of examples that fit the definition of “externality” coupled with our unwillingness to tax them all
away is suggestive. As Coase put it, “The ubiquitous nature of ‘externalities’ suggests to me that there is a prima facie case against intervention”

and I start the conclusions with the following:

This essay arose from my failed attempts to explain externalities to
noneconomists and my desire to challenge fellow economists to think more seriously about the real-world implications of policy advice derived from simple textbook models. In popular writing about food and agriculture, there seems to be a lack of appreciation for the types of externalities that reduce welfare and of the difficulty associated with crafting corrective actions that actually increase the size of the pie. Moreover, the concept of externality is often used to advance a particular cause or point of view. There is a lot of talk about the “hidden costs” of our modern food production system. What about the “hidden benefits?” Failing even to mention, let alone seriously address, that question suggests that one is not willing to think seriously about externalities as anything more than academic-sounding justifications designed to garner enough power and support to enact a faction’s preferred policy.

I learned a lot writing the essay, I hope readers might learn something too.

When Is Reliance on Voluntary Approaches in Agriculture Likely to Be Effective?

That's the title of a paper by Kathleen Segerson recently published in the Applied Economics Perspectives and Policy.  Although I think she under-estimates the power of factors like reputation and over-estimates the ability of government solutions to efficiently coordinate actions, she offers a useful discussion that we ought to have more often.  The abstract:

Voluntary approaches have been used in a variety of contexts and for a variety of purposes in agriculture, including voluntary conservation programs and product labeling. This paper provides an overview of some of the general principles that emerge from the literature on voluntary approaches and their application in agriculture. The literature suggests that, to be effective, voluntary approaches must provide sufficiently strong participation incentives to a targeted population, clearly identify standards for behavior or performance that ensure additionality and avoid slippage, and monitor outcomes. Thus, reliance on voluntary approaches in agriculture is likely to be effective only if there is sufficient market demand for certain product characteristics, significant public funds are committed to pay for voluntary actions, or the political will exists to impose regulations if voluntary approaches fail.

 

Ban Beer?

The abstract of recent article from the journal Economic Inquiry:

Few studies explore the linkages between health behaviors and macroeconomic outcomes. This study uses 1971–2007 state-level data from the United States to estimate the impact of beer consumption on economic growth. We document that beer consumption has negative effects on economic growth measures once the endogeneity of beer consumption is addressed. Our estimates are robust to a range of specification checks. These findings run parallel to a large body of literature documenting substantial social and economic costs stemming from alcohol use.

If we apply the same logic the FDA used to justify banning transfats, then clearly beer must be also banned.  Prohibition redux.  

I also have to wonder whether beer consumption is causing lower growth or whether lower growth is causing beer consumption.  Or whether higher growth states are shifting from beer to wine consumption.   Or whether there is some third factor, like unemployment, that drives lack of growth and beef consumption.  The authors tried to address some of these questions in their analysis, but it isn't clear how well their approach controls for these problems problem.  

(HT: Andreas Drichoutis)

Stiglitz on Farm Policy

The Nobel Prize winning economist, Joseph Stiglitz, weighs in on recent farm bill debates in the New York Times.  Here are a few excerpts

American food policy has long been rife with head-scratching illogic. We spend billions every year on farm subsidies, many of which help wealthy commercial operations to plant more crops than we need. The glut depresses world crop prices, harming farmers in developing countries. Meanwhile, millions of Americans live tenuously close to hunger, which is barely kept at bay by a food stamp program that gives most beneficiaries just a little more than $4 a day.

and

FARM subsidies were much more sensible when they began eight decades ago, in 1933, at a time when more than 40 percent of Americans lived in rural areas. Farm incomes had fallen by about a half in the first three years of the Great Depression. In that context, the subsidies were an anti-poverty program.

Now, though, the farm subsidies serve a quite different purpose. From 1995 to 2012, 1 percent of farms received about $1.5 million each, which is more than a quarter of all subsidies, according to the Environmental Working Group. Some three-quarters of the subsidies went to just 10 percent of farms. These farms received an average of more than $30,000 a year — about 20 times the amount received by the average individual beneficiary last year from the federal Supplemental Nutrition Assistant Program, or SNAP, commonly called food stamps.

Unlike Stiglitz, I do not believe that the food stamps program is a sacred right that should be protected at all costs (I'm sure that's not his precise view but that's the way this piece reads), but he is right on the optics of the farm bill which, as he says, is

 taking from the poor to subsidize the rich.

Those are the optics but I'm not even sure that those are right.  It is not as though the poor are paying the farm subsidies.  Most of the taxes are paid by the rich.  So, farm policies are taking from the less-well organized rich to subsidize the better organized rich.