Okay, fellow Fat Heads, if you read Part I and came back anyway, thanks for your patience. I’m sure it was grueling for some of you, but I wanted to illustrate some fundamental economic concepts for a model that helps explain our current nutritional predicament, and the Business Cycle analysis covers a couple of those. Here’s a quick synopsis:
* Government “helping” in the economy — via government programs, money printing, subsidies, bailouts, regulations, tax breaks, etc. — distorts prices. This is an unstated but automatic goal.
* Price is the mechanism by which markets convey information, so government intervention = bad information.
* Whenever a company or industry or government program gets created or propped up, a constituency is created that has an existential interest in maintaining those subsidies.
* As this bad information gets diffused and incorporated throughout the economy, its source becomes rapidly unrecognizable, but the damage doesn’t lose potency.
We’ll hit a few other concepts as we go.
[ Finally, please note that this model and these concepts apply regardless of stated intentions, desired outcomes, or party affiliation, okay? I’m getting tired of being called a closet Republican. Thanks. –OB ]
Okay, let’s get back to my premise from Part I — real food seems to cost too much, but it’s really the right price. It looks high because Big Food costs too little.
First, let’s put our cool-looking Official Junior Economics Nerd beanies on and take a walk down to the farmer’s market.
We’ll note that — setting aside the burdens, barriers, and hoops local food providers have to jump through (which do increase costs) — there’s not a lot else in the price at our vendor’s booth that isn’t real. Real labor, real fertilizer, real sunshine, real seeds. Gas money for the 20 mile drive to market. That’s their costs. Not much place to hide anything. Hopefully, they’re adding enough of a markup to make a good living for themselves and their families, but they’re not flying to shareholder meetings on the corporate jet (not that there’s anything wrong with that).
If they get a little too proud of their produce, the folks in a booth a couple of doors down will probably be exerting a little “market discipline,” i.e., charge a lower price. Even if they all band together like OPEC to collude on prices, by the end of the day they’ve either got to sell at a price that literally “clears the market” or they’re hauling the result of all that time and sweat and seed money home to the compost pile.
That’s about as honest of a price as you’re going to get.
So the cost of that dozen eggs may be twice what they sell for at the store, but it’s real chickens raised on real ground, fed real chicken feed shipped over a reasonably short distance, along with some water, sunshine, and labor. Same with those tomatoes, or turnips, or grass-fed beef.
So if those are real prices, that means perhaps the mega-mart goods are under-priced. But how so? Grocery stores are pretty low profit margin operations (they make their money on volume), but surely they’re not selling food for half its cost.
Of course, “economies of scale” (meaning it’s usually more efficient to make, say 1,000 widgets in one place than it is to have 10 widget factories making 100 each) could certainly be a factor, but how are the Big Food boys so ungodly efficient that they can ship eggs 500 miles, or move fruit up from South America, and still undersell a family farm that lives in the same zip code by 50%?
Perhaps there’s some bad information? Let us count the ways.
Let’s start with outright subsidies.
Under the (proposed 2012) five year Farm Bill, our government will again tax or borrow $100 billion a year from somewhere and inject it into the food system. How’s that for bad information?
About $20 billion of that goes to things like commodities support. Said commodities consist 90% of corn, soybeans, wheat, cotton, and rice. These billions are spent to keep prices stable, meaning “up.” Okay, nerds, follow along:
By guaranteeing a minimum price level and income, we’ve now manipulated the profit and risk information farmers evaluate when making planting decisions, driving production away from other types of crops (green veggies, pastured operations, etc) and into the subsidized and insured (mostly grain) crops. That means supply is higher that it would’ve been otherwise, which reduces the market price. So, spending money to keep the prices ends up reducing the price. Hello, Cheerios.
[The government sometimes buys up these excess commodities to boost the price back up. Can’t give it out here, though, because that would just be silly, so we magnanimously bundle it up as foreign aid and ship it to other countries, where free food tends to wipe out any indigenous agricultural markets and make them dependent on handouts and just a wee bit resentful. Ingrates. (In case there’s an extra credit question on the quiz, kids, that would be a good example of the “Law of Unintended Consequences.”)]
Meanwhile, back in the States, the fact that there’s not enough farm state votes in Congress, means that in order to pass a Farm Bill to spend $20 billion to boost food prices, you’ll have to include another $80 billion for food stamps to help the “po folk” buy the food the urban politicians are voting to help jack the price up on.
Those food stamps, now being passed out to one in seven of your neighbors, apparently aren’t chasing fresh veggies around at the market. If they were, we wouldn’t keep hearing how obesity, diabetes, etc. disproportionately affect lower income folks. Think of it as a $80 billion transfer payment to the cereal, macaroni and cheese, fruit juice, soda, and junk food manufacturers.
Now for a couple of indirect subsidies or hidden costs.
It’s not always dollars getting shoveled around that distorts the true cost of our SAD foodstuffs. All of the government commodity programs incentivize high yields to maximize income because that means buying more chemicals and equipment from Big Ag,which higher income drives land prices and rents higher, but higher yields means prices go down (more supply = lower price, remember) which means increased reach for even higher yields to increase income, because there’s loans to pay for that equipment and land. Rinse. Lather. Repeat.
What’s getting lost in the equation is topsoil. Like the money we’re borrowing from our childrens’ futures, farmers are “spending” their kids’ topsoil at unsustainable rates in exchange for dollars to pay those loans and rents. The fact that we’re rapidly losing, through erosion and chemical sterilization, the very dirt that our agriculture depends on, is as much a ticking time bomb as the national debt.
Also not showing up on our SAD grocery receipt is all of transportation and fossil fuel infrastructure that gets subsidized by taxpayers generally, then benefits Big Food and Big Grain directly. Commodity corn doesn’t grow without fossil fuel based fertilizers and chemicals, and Big Meat doesn’t run without commodity grains. Or without taxpayer financed inspectors and regulators.
Related to the fossil fuel subsidies, let’s not ever forget that those are paid not just with treasure, but also blood. We can’t make “cheap” food without “cheap” oil, and for decades we’ve pursued policies and relationships around the world that say clearer than any speech that we’d rather have cheap oil, deal with despots, and pay with blood, than we would let the price of energy do what the market wants and adapt, adjust, and innovate our way around it.
(HA! NOW DO YOU BELIEVE I’M NOT A REPUBLICAN?)
I know I’ve gone really long, and if you’re still reading this your patience is probably getting really short, so I’ll just hit one final point of the economics of nutritional insanity:
Cost shifting. That’s where the actual cost of something gets paid somewhere else not related, making a good or product look cheaper than it really is. (You’ve probably noticed that many of these concepts overlap).
One of the commenters on Part I mentioned that they were spending somewhat more on food after going LCHF (and some folks report spending less money than on their former SAD grocery bill), but their medical spending had gone down and the savings more than offset the higher grocery bill.
That makes perfect sense, and this is exactly the kind of result we’d like to think a good system would produce. Spend an extra $100 a month on groceries, but end up with $200 less a month in medical costs — maybe less allergy attacks, avoid insulin or other diabetes drugs, all kinds of good things people here talk about. And feel better to boot. Beautiful. Doing smart things makes your checking balance bigger.
But, as I responded back, what if you didn’t have to pay any medical expenses out-of-pocket? In Illinois, 2.7 million people — more than one out of five — are on Medicaid (this occurs with anyone with subsidized health care, but Medicaid is generally “free”). So looking now, and dealing with people of limited means and options, what does it cost to make the same decision?
Let’s see, now you spend the extra $100, but in return, your savings are … zero. Yeah, feeling better, breathing easier, and not having your toes amputated would be nice, but the mashed potatoes and cola are cheaper than the argula and grass-fed beef (or store bought lettuce and hamburger), and coming up with another $100 a month isn’t a real option.
It’s going to shift costs to “society” potentially in the tens of thousands of dollars per person in future health claims, but that person on the bottom rung of the ladder is going to make the best rational decision they can. Based on really bad information.
All of this and more gets worked through our system, pushing prices up, pushing them down, pushing them sideways, to the point that you just have no idea what that carton of strawberries in the produce aisle is trying to tell you. All you can really know for sure is that whatever they’re saying, they’re lying their seedy little guts out, because they got bad information, too.
Okay, I guess you get the point. They don’t call economics “the dismal science” for nothing.
I’ll wrap up Thursday with a short (I swear) entry on why I wanted you to understand this, and what I think you should do with your new found fascination of all things economic — see you in the comments.
the Older Brother