JUNE 2, 2009

Rethinking How We Eat: What Should We Do?

After my last post went up, I got a few e-mails from friends and family (yeah, I send people my blog posts) wondering how the government could possibly “do something” about the nation’s food problems without raising costs for American families. And, unfortunately, the short answer is that they can’t - any successful government effort to reform America’s diet will mean higher costs for consumers. The reason? Modern management and scientific techniques have made our food industry insanely productive, yet those same techniques have led to the ethical, environmental and health problems I mentioned in my last post. Fixing the problems mean losing some (but not all) of the benefits of a productive food industry, which means higher costs for food. You can see this divide in the higher prices you pay for vegetables at a farmer’s market vs. those at a supermarket.

But, I’d respond with the fact that a reformed food industry ultimately means lower environmental, ethical and health costs. Incidences of diabetes and obesity, for instance, would likely decline if high-fructose corn syrup were not used to the extent it is today. And those two diseases account for a variety of other complications that cause health costs to rise, a serious threat to family budgets as well as the continued solvency of Medicare. It’s the same with the scarcity of fresh foods in poor urban areas. So ultimately, we’re paying for our Pop-Tarts and Coco-Puffs, but in a much less transparent and predictable way.

Economists call this an “externality” - a cost of a product not reflected in its price. Consider, for example, a hypothetical widget plant in Widgetville, VA. The total market value of the widgets produced there is $10,000,000, but, in the manufacturing process, the widget plant causes $1,000,000 worth of damage to Widgetville in the form of pollution. Those costs, under a strictly free market, are borne by the residents of Widgetville; they are not reflected in the price of the widgets everyone else buys. Not fair, right?

There are four ways to fix externalities: 1) make the external cost illegal - in this case, simply outlaw pollution in Widgetville; 2) pass tort legislation to allow lawsuits against the producers of external costs - in other words, allow Widgetvillians to sue the factory; 3) government provision - in other words, having the government take over the widget industry and set prices itself, to compensate for the external cost; and 4) taxes - in this case, creating a widget tax whose proceeds go to compensate for the external cost.

You can probably imagine that there are downsides to all of these. Making widget pollution illegal means no more widget business. Encouraging lawsuits means huge and unpredictable costs on widget producers, which would discourage the production of widgets, not to mention that damages paid would be ex post facto, requiring Widgetvillians to live in a polluted town. Government control of the industry means a lack of competition, which means poorer-quality widgets. Of these, only taxation manages to capture the true cost of widget production while spreading that impact out among the entire widget market. Widget buyers have to cope with a little additional cost, sure - but Widgetvillians are happy and compensated for their loss and the widget producers are still in business and profitable.

To cope with the external costs of the modern food industry, we’ve tried banning pollution and we’ve tried tort law. There are always loopholes in any pollution law, and the tort system would require someone to actually be poisoned by food before external costs can be imposed. Our political culture precludes attempting long-term nationalization of almost all industries, and it’s not a great idea in any case. What we haven’t tried, however, is a small tax that incentivizes local, healthy ingredients over mass-produced “food“. And with modern technology, we can easily create much more precise taxes that get closer to the true cost of a good - for instance, charging a 1-cent tax for every 25 miles an ingredient travels from its source to its retail outlet, which would help account for greenhouse gases released in the transportation process, or a small tax indexed to grams of saturated fat or high-fructose corn syrup - funds that could be diverted to Medicare or tax rebates to save people money on medical care. That way, people still have the choice to eat unhealthy foods, but at least those who do eat healthy wouldn’t have to pay for it down the line.

So, the long answer to the question is that yes, food prices would increase. But there are two important advantages in changing tax law to incentivize healthier foods - first, we’d have a dedicated revenue source to deal with unpredictable external costs, and second, families could opt out of paying those costs by making smarter choices at the supermarket.