Is Food too Inexpensive?

A recent review study (opinion piece) published in the journal CA: A Cancer Journal for Clinicians  is making the rounds, and it seems to fit a narrative that food is "too cheap" and cheap food is a major cause of obesity (e.g., see here or here).  The article actually does a good job dispelling several myths about obesity and food consumption (for example, fruit and vegetable consumption is up over time).  However, much of the commentary on the issue is rather glib and ill conceived. 

A basic economic tenant is that that when prices fall, consumers consume more (i.e., demand curves slope downward).  It is not surprising that falling food prices would be associated with greater food consumption.  

Standard welfare economics suggests consumers are unambiguously better off with lower prices.  Paying less for food allows consumers to reallocate income toward buying other items that they can now afford.  All this remains true even if people care about body weight.  It is possible that people suffer from behavioral biases (i.e., they don't consider future effects on weight when deciding what to eat today), but as I showed in this reply in the journal Health Economics, even if that's true, prices declines still benefit consumers in most plausible scenarios.  As I said there:

under this sort of behavioral economics framework, where people naively or myopically optimize utility without considering future weight effects, it is possible to imagine situations where raising prices might increase ultimate experienced welfare. However, this condition occurs only when price is very high and falls in the range where consumption would take place only because people are ignoring the ultimate health impacts; at lower prices, a ‘fat tax’ would only lower welfare. 

Moreover, if one looks at recent trends in food prices, they are increasing.  Here is data from the UN Food and Agricultural Organization on the world food price index over time.

Who do you think is most affected by these price increases?  Probably not well-to-do people reading food and economics blogs.  Recall, that the US exports large shares of domestic agricultural production, so what we do here in the US has an important effect on world prices, and the prices paid for food by some of the most impoverished people in the world.  It has been suggested that these food price spikes are responsible for civil unrest in many parts of the world.  But they have effects even here in the U.S.  In the U.S., there are almost 50 million people on food stamps, and almost 15% of US households are food insecure.  Food prices and food stamps are related, even in the US, to hunger and food insecurity.  Higher food prices mean more hunger

That alone would be enough to suggest caution in price policies aimed at obesity.  Moreover, research by Okrent and Alston suggests that obesity is a result of over-consumption of ALL kinds of food, and they conclude the only kind of tax that is effective is an across-the-board food tax. And, yet we can see precisely why such a tax is a bad idea.  It is regressive because the poor spend a higher share of their income on food than the rich.   

Ultimately, when papers published in medical or nutrition journals start advocating for fat taxes or thin subsidies, as they often do, they often move into shaky territory, because they often lack appropriate conceptual background for their policy proposals beyond the simple mantra "it promotes public health".

Once one wants to pass policies that set prices at a point where they are no longer equated with marginal cost, there will be a dead-weight loss to society. The first fundamental theorems of welfare economics suggest that (absent the usual caveats), a competitive equilibrium (i.e., market outcomes) leads to a Pareto efficient outcome (one where you cannot make some people better off without making others worse off). So, if you move prices away from that competitive equilibrium (say with a fat tax or thin subsidy), welfare loss is likely to result.  

Even if the preceding arguments are don't hold water, there is a very strong assumption that someone (namely the “government” in this case) knows what the “right” prices are, and that any mistakes in getting the right prices produce less dead-weight loss than whatever benefit might have been created through the tax/subsidy policy. This is a very old argument going back to people like Hayek in the midst of the “socialist calculation debate".  As he aptly argues, it is hard (or impossible) for experts to know the "right" prices.  

Simply asserting that price changes through fat taxes can reduce obesity doesn't mean people are better off with the policy.  One needs some sort of conceptual model showing how the tax/subsidy indeed makes people better off (not just thinner), all things considered.  Some people might argue for a fat tax, for example, because they think it will offset an externality. In the externality case, we presume, there is a market failure and have some belief that altering prices can offset the deadweight loss of the market failure (I would disagree, but at least I understand the argument being made). However, without the author explicitly articulating the market failure justifying the food taxes/subsidies, they are making a general case that a technocratic third party has the knowledge to re-set prices and make society better off.  I find this position untenable.