What's good for countries is good for communities

A new paper by Trevor Tombe in the American Economic Journal: Macroeconomics provides a cautionary tale for those who think we'd be better off economically if we sourced more food closer to home.  

The paper starts off with this stylized fact

“Agriculture in poor countries has low productivity and high employment relative
to other sectors. Differences in aggregate productivity and income between
rich and poor countries are therefore primarily due to differences within agriculture;
Schultz (1953) calls this the Food Problem”

The problem, it seems, is that poor, agricultural-based countries don't trade.

“Trade data, though, presents a puzzle: with low relative agricultural
productivity, developing countries should be massive food importers; yet, they
are not (see section I.B). The “missing” food imports suggests trade costs may
be important for international productivity differences.”

These "trade costs" that are holding up trade include bad policies like tariffs but also bureaucratic problems like border delays.

The paper has a nice set graphs, and the following shows a few of them related specifically to agriculture.

First, when you don't trade agricultural products with you're neighbors, you tend to be poor.

Countries that have more agricultural trade have higher GDP/worker.  The correlation is 0.68.  Countries that have more agricultural trading partners tend to be richer and more productive.

A lot of local food advocacy is premised on the idea that we need smaller farms with more farmers.  I don't think anyone would argue that greater local food production would mean  more employment in agriculture.  Well, would that be good for the economy?  According to this paper, no. This graph shows a very clear negative correlation between a country's employment share in agriculture and GDP/worker.  More workers in agriculture is typically going to mean lower economic output.  

Finally, this graph shows that the higher the share of food spending on domestic output (i.e., the more local foods purchased), the lower the country's GDP/worker.   

There's no reason to believe what's true of countries wouldn't also be true for states or cities trading with each other.

The author concludes:

“Agricultural trade costs account for roughly 25 percent of the aggregate differences between rich and poor countries. Trade costs in agriculture and manufacturing together account for over 40 percent. Even observable, policy-relevant trade costs (tariffs and border
delays) have important negative productivity effects in poor countries. The food
trade is missing in poor countries and in our models; it should be no longer.”

Buying local good for the economy?

Here's a nice video by Don Boudreaux for MRUniversity on the myth that buying local is good for the economy.  Sometimes a picture (or in this case, video, is worth a 1,000 words). 

Vertical indoor farming - boon or boondoggle?

What do consumers do when the price of beef rises?

A reader recently sent me an interesting set of questions that I've actually been thinking about for a while.  

The context is the rising price of beef.  As I've written about several times in the past, beef prices have increased steadily for the past two years.  Here is data from the BLS for the price of all 100% ground beef ($/lb) over the past four years.  Over this time period, nominal prices have almost doubled. There were big jumps in retail prices in 2014, but throughout much of 2015, prices have leveled off. 

The questions:

“has the increased cost in beef caused people to eat “healthier” foods like vegetables? Are people substituting beef for cheaper, processed meats? Or perhaps chicken? Is there any indication that people are consuming less beef and replacing it with “healthy” alternatives? ”

The first thing to note is that if the price increases are caused by supply shocks (as is almost certainly the case),  higher beef prices are unambiguously bad news for consumers.  So, even if consumers are today eating "healthier", they aren't happier.  If people really wanted to be eating more veggies or chicken, they could have voluntarily chose to do so five years ago without a beef price spike forcing them into that outcome.  

The core of the question relates to substitutability.  When the price of beef rises, what do people substitute toward?  This is the so-called cross-price elasticitiy of demand.  There is an enormous academic literature in agricultural economics estimating  the cross-price elasticity of demand for beef and other types of food.  

The problem with a lot of this literature is that, due to data limitations, all beef is lumped together as an aggregate  category and the researchers study how consumers substitute aggregate beef for aggregate pork and aggregate poultry.  Most of the studies I've seen put the cross-price elasticities between aggregate beef and aggregate pork/poultry at something less than 0.3 and often much smaller than that.  So, a 1% increase in the price of beef causes a less than 0.3% increase in pork and poultry.  A 100% increase in the price of beef (something like what we've seen over the last 5 years) causes a less than 30% increase in quantity of pork an poultry demanded.

There are a few studies that look at how demand food categories is affected by aggregate meat (lumping together beef, pork, and poultry).  This study, for example, estimates that a 1% increase in the price of meat would cause a 1% increase in quantity demanded for eggs, a 0.32% increase in demand for fruits and vegetables, a 0.24% increase in alcoholic beverages, and smaller effects on other categories of foods. 

But, most of these types of studies only study the inter-related demands for different aggregate meats and do not include effects on fruits and vegetables or other foods.  In so doing, the researchers are assuming beef demand is "separable" from demand for other foods.  Separability is a bit of a complicated concept but it basically means that my demand for one good is not directly affected by the price of another good (though it may well be indirectly affected as I have to re-allocated my budget to different categories in light of the price increase).  

There are some studies that have relaxed this separability assumption to look how consumers substitute among different types of meat.  For example, when the price of steak rises, are consumers more likely to substitute toward another beef product (like roast or ground beef) or similar product from a different species like a pork chop or chicken breast?   This older paper suggests in fact suggests that the latter is the case:  

In any event, one of the big challenges with answering these sorts of questions is that we simply don't have good data.  We can get aggregate "disappearance" data from the USDA which lumps all beef together.  We can get grocery store scanner data, but most of that is of limited use for fresh meat products or fresh veggies because these are "random weight" items and the datasets don't have information on product weights (it's tough to estimate demand when you don't know exactly how much people are buying).  That's one of the reasons I've been running the Food Demand Survey (FooDS) survey for over two years now, to provide better data to answer these questions.  My colleague Glynn Tonsor (whose written a lot on the very issues I mention here) from K-State and I are polishing up a paper now that uses the FooDS data to look at substitution patters among different types of meat and non-meat items in this period of high beef prices, but it's not quite ready for preview yet.  

Legislators potentially stall changes to dietary recommendations

An appropriations bill in the House of Representatives was passed out of the agricultural subcommittee last week.  It contained the following language:

“None of the funds made available by this Act may be used to release or implement the final version of the eighth edition of the Dietary Guidelines for Americans, revised pursuant to section 301 of the National Nutrition Monitoring and Related Research Act of 1990 (7 20 U.S.C. 5341), unless the Secretary of Agriculture and the Secretary of Health and Human Services comply with each of the following requirements:
(1) Each revision to any nutritional or dietary information or guideline contained in the 2010 edition of the Dietary Guidelines for Americans and any new nutritional or dietary information or guide line to be included in the eighth edition of the Dietary Guidelines for Americans—
(A) shall be based on scientific evidence that has been rated ‘‘Grade I: Strong’’ by the 6 grading rubric developed by the Nutrition Evidence Library of the Department of Agriculture; and
(B) shall be limited in scope to only matters of diet and nutrient intake. ”

Not surprisingly, the move has raised the ire of some nutritionists.  Here's one who pushes back by saying

“The type of studies that could produce “Grade 1: Strong” evidence is extremely difficult to do in nutrition science research, because of the realities of studying free-living human beings”

and

“It makes no sense to use different standards for existing recommendations than for new recommendations. ”

So, because it is too hard to get good evidence that goes beyond correlational analysis, we should be permitted to continue to use the voice of the government to promote weak evidence and advise millions of people how to eat?  And, because we've used weak science in the past, we should continue to to use it now?  

I'd ask many of these same people if drug companies should be able to get approval from the FDA for a new drug based on the same types of studies being used to make nutritional recommendations?  If the issue here is standards of scientific evidence, why the different bars of scientific scrutiny in one case vs. the other?

I'm sympathetic to the nutritionist's concerns about politics affecting science, and I don't have a position one way or the other on aforementioned language in the appropriations bill (which may or may not make into law).  Nonetheless, there is a presumption implicit in many arguments that support the recommendations that the scientists are relying on good, compelling scientific evidence.  But, they are people too, after all, as are our elected officials.  Moreover, as I've pointed out before with regard to these guidelines, there is as much value judgement going on here as there is science.  Another challenge is that the authors of the guidelines seem to presume that people will follow - precisely - the recommendations to a tee (rather than, say, substituting meat for more carbs) and will ignore cost implications, but this misses insights from behavioral research on how people will actually respond and substitute.  Most people won't follow the precise recommendations and that should be taken into consideration by the recommendation makers. The fact that we citizens are "free-living humans beings" not only makes the research hard, it should give us pause in expecting too much of high minded regulation.