Ready for Washington to Nudge us in the "right" direction?
Want to eat a laboratory-grown hamburger? Watch a live tasting that will apparently occur in a few days.
GMOAnswers: A new website designed by biotech companies to answer the hard questions
The annual meeting of the Agricultural and Applied Economics Association starts this weekend!
That provocative claim was originally made bay a commentor at the Freakonomics blog. Freakonomics co-author, Stephen Dubner, turned the claim into an interesting podcast for NPR. Then Kyle Smith wrote an editorial on the topic for the New York Post celebrating the McDouble. The Wall Street Journal picked up the story, and predictably, a number of outlets offered a counter-response. It seems the story has gone viral.
If you care to hear my thoughts on the subject, I had to opportunity to briefly expound on it a bit this morning on Fox and Friends.
The one thing I didn't say is that it is not necessarily true that more nutritious food is always more expensive. The USDA published a report on this issue a few months ago. Basically, it comes down to how you measure it. If you measure the cost of nutrition as the price per calorie, then lettuce is going to look really expensive because lettuce doesn't provide many calories. But, if you measure the cost as the price per gram (or pound), then fruits and veggies don't look so costly compared to other foods.
Some people point out that it is more expensive to order a salad than a McDouble at McDonald's. Doesn't that prove it is more expensive to eat healthy? Well, first, a McDonald's salad is not necessarily better for you. It's important to actually look at the nutritional content of salads at McDonald's; you can easily eat more calories by ordering a salad - especially if you add chicken or use salad dressing. But, even if the salad is more nutritious, it is likely more expensive because there is more volume to the salad than the burger (i.e., there are more oz in the serving of salad than burger) so you're getting more with the salad; also, there is the extra storage costs required with the bulkier packaging, not to mention the costs associated with keeping salads fresh and dealing with spoilage and waste.
Finally, on this point, Adam Drewnowski - who was done a lot of research on this topic - sent me this recently published paper, where he calculated the cost of various fruits and veggies according to a nutrient score. I pulled out the second figure from the paper and reproduced it below. If I'm not mistaken, it looks like there is a positive correlation here: the higher the nutrient score, the more affordable the food is.
One take-away from the figure: if you want inexpensive nutrients, eat sweet potatoes!
Yesterday I received a phone call from a producer for a major cable news station asking if I'd be willing to come on a show and talk about this story that appeared in Business Insider entitled: "5 Of The Most Overpriced Items In The Grocery Store".
After reading the story, I gave the following response to the producer (slightly edited here for the blog). Although it would have been nice to have a little air time, I'm happy to report that they decided not to run with the story, at least as it was originally premised.
The story equates “overpriced” with the “percent markup”, which is pretty shaky. There are a lot of good reasons why the percent mark-up may vary across products that has little to do with being “overpriced”. For example, differences in demand for convenience and other characteristics, differences in costs of packaging, storage, transportation, etc. will cause differences in the percent markup.
Nonetheless, let’s play along.
1) Bottled water. On the surface, it does seem crazy that there is a 4000% mark-up for bottled water. But, part of the reason for the high percent is that the price of water is REALLY cheap to begin with (so the percent will look very high though the actual dollar mark-up in absolute terms is small). More importantly, how valuable is convenience to you? A lot of people are willing to pay an extra buck to have more convenient water and not have to fiddle with refilling and refrigerating a re-usable water bottle. Who am I to say that an extra $0.50 or $1 isn’t worth it to the person whose paying for it? If it were really the case that bottle water sellers were ripping us off, why doesn’t some entrepreneur enter the market and start selling cheaper bottled water and corner the market? The fact is that most of the cost is in the packaging, transportation, etc. When you buy bottled water, you’re paying for packaging and convenience.
The same arguments apply even more forcefully for pre-cut produce. Who cares if pre-cut carrots and onions are marked up 40%? I’m not having to do the work! That’s an extra $1-$2 I’m definitely willing to pay. And if someone else can figure out a way to do it for less than 40%, you can bet they’d have my business. Competition – in the long run- will eventually drive down prices to their approximate costs.
2) In general, I would characterize something as “overpriced” if people have mis-perceptions; if they believe they’re getting something from a product that they’re not actually receiving. Two of the examples in the story potentially fit that criteria: name-brand spices and brand-name cereal. One way to know whether you’re being fooled by marketing is to do a blind taste test. It is often the case that our brain is more powerful in influencing how we think something tastes than our tongues. So, with a neutral friend, try it out: can you REALLY taste the difference? If not, you may be over-paying.
3) In this light, there are a number of products that many people have “incorrect” beliefs relative to what scientific studies say – thus, they may be paying a premium for characteristics that they’re not actually recieving. One example is food with a "natural" claim. A “natural” label is pretty vacuous, and I've previously touched on those issues here and here. Another example is organic food. People believe a lot of things about organic foods that just aren't true: that they’re pesticide free, that they support small farms, that they are more nutritious, etc. I’m not saying there are NO benefits to organic, only fewer benefits than most believe. A lot of the same arguments apply to local foods. Chapters 5 and 9 in The Food Police have all the details and citations.
About two years ago, I co-authored a paper that was published in the journal Health Economics with the title "When Do Fat Taxes Increase Consumer Welfare."
I started work on that paper because I was troubled by the contradictory way in which economists had approached the analysis of fat taxes. One the one hand, economists estimated the effects of fat taxes by using elasticities of demand that were derived from a rational consumer-utility maximizing model. In this kind of conceptual model, a tax (or a price increase) cannot make a consumer better off. However, on the other hand, economists were publishing these papers with the premise that somehow the tax could make people better off. In the paper, we tried to think about an approach for reconciling these two stances by asking whether a tax could make people better off if we make the reasonable assumption that people also care about (and consider) weight or health effects when choosing the quantity and type of food to buy.
We had argued that in this situation, it was possible but empirically unlikely a tax could make people better off. Enter Professor Neill, who wrote a comment on our work, saying "no" - it is concetually impossible for a fat tax to increase consumers' well-being in a "standard" economic model of the consumer. Here are the first sentences of our forthcoming response to Dr. Neill:
We are flabbergasted at how such a fundamental lesson of mathematical economics escaped our attention, but Professor Neill is right and we were wrong. We apologize.
Neill pointed out, embarrassingly to us, what should be obvious to any serious student of economics. A tax is akin to reducing someone's income. No one is better off with less income. Even if one wants to weight less, they don't need a tax to do it. A consumer can achieve a lower weight at current prices and re-allocate their income toward other non-weight-increasing goods and achieve a higher level of satisfaction.
So, how do economist justify fat taxes? One approach is to claim that obesity is an externality - that my food choices impose a cost on you (via Medicare/Medicaid) and thus a tax can force me to properly consider those costs. However, in a paper a couple years ago, Bhattacharya and Sood dismantled the validity of that argument (although it is not well understood and continues to be debated).
Another response is that the "rational consumer utility maximization" model is incorrect. This "behavioral economics" approach posits that people fail to properly account for their future well-being and that a tax can force people to make decisions today that their future selves will ultimately find beneficial. The precise mechanism for this welfare improvement is rarely laid out with any precision.
In our reply to Neill, we tried to sketch out a behavioral-economics type model to see when a fat tax might be justified on those grounds. Here is our conclusion:
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.
That mouthful is the name of an article I wrote for the journal Animal Frontiers.
Here are a few excerpts:
Walk in almost any Department of Animal Science in the U.S. and one is likely to find a few black and white photos of stern, cowboy-hat wearing animal husbandry students from the early part of the last century. The remarkable thing about those photos is not the now unfashionable clothes but rather the champion cattle the students were proudly displaying for posterity. Today, one can scarcely find a bovine as fat and squatty as those that were once so esteemed. Pondering the difference between the prized cattle in those black and white photos and almost any old steer in a modern feedlot provides a stark illustration of the role of technology in shaping animal production over the past century
and
The direst of the Malthusian predictions have failed to materialize. Although the population of the world has grown dramatically over the past three centuries (and is expected to grow further still), the rate of growth has slowed, and in some developed countries has even begun to fall. While people of Malthus’s day probably could not have envisioned modern birth control methods, the most pessimistic interpreters of Malthus’s model almost certainly underestimated the impacts of productivity-increasing technological change.
I used a number of approaches to calculate the economic value of the productivity gains that have occurred in meat production in the past 40 years. Here are the results of one approach applied to beef cattle:
if we applied the same genetics and technology used in 1970 to a cow herd the size of the one at present, we would expect to experience only $24.8 billion in farm value produced. The remaining $37.16 - $24.80 = $12.36 billion in value actually observed (or about 33% of current total value) is a result of factors (e.g., genetics, technology) that gave rise to improved productivity