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.


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.