Higher food prices won't always hurt
It's hard to walk into the grocery store without experiencing sticker shock. But economist and commentator Tyler Cowen says as time passes we'll get so used to the higher prices, we may even be tempted to splurge.
Tyler Cowen (George Mason University)
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Kai Ryssdal: The floods that've been hitting the Midwest this week are threatening to push already high food prices even higher. Today, the Department of Agriculture lowered its already-low guess for the size of this years corn crop by 3 percent.
Short supplies of some crops have contributed to food prices rising at twice the rate of inflation, which sounds bad, and in absolute terms it is, but commentator and economist Tyler Cowen says we'll adapt.
Tyler Cowen: We all know that food prices are rising fast. As a result, people are cutting back on their food expenditures. They're buying fewer luxuries and eating at home more often. That's the shorter run trend. But here's what's less commonly understood: In the longer run, organic food, luxury foods and fancy restaurants will do just fine.
The economic logic is this: If all food becomes more expensive, what originally looked expensive suddenly appears cheap in relative terms. Consider a simple example: If food costs nothing to transport, say cheap milk would be $2 and organic milk would be $4. The organic milk costs twice as much. Now add on a $2 transport cost to each item. The price comparison is then $6 to $4. The organic milk seems only a little more expensive. If you are going to buy milk in any case, you might even switch to the organic product.
Of course at first, people are horrified by the higher prices. They cut back on food costs across the board, as we've been seeing. We're also in the middle of a recession and that won't last forever. Over time, people will get used to the general idea that food costs so much. They'll start to think about spending more for the organic milk because, in relative terms, it doesn't seem so outrageously high. Wealthier families in particular will turn away from Safeway and look toward Whole Foods.
Economists refer to this result as the "Alchian and Allen theorem," named after its two founders Armen Alchian and William Allen, both formerly economists at UCLA. There's a lot of evidence that the theorem describes actual consumer behavior; it also explains why people tend to spend more when they are on vacation -- because it is not worth flying across the country to eat at McDonald's.
So if food costs stay high, for a lot of people the future will be fresh pasta, caviar and organic tomatoes, not plain oatmeal and a can of beans.
Ryssdal: Tyler Cowen is a professor of economics at George Mason University. His latest book is called "Discover Your Inner Economist."
Comments
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From Boise, ID, 06/23/2008
I help at the local food bank, which has seen a steady increase in "customers" as food prices go up. I myself no longer buy meat, just eggs and peanut butter for protein sources. In rural Idaho driving to work is a one person one car reality. No mass transport for rural people. So one must fill that tank with gas.
From chapel hill, NC, 06/12/2008
Interesting that Mr. Cowan seemed to think paying extra for organic milk was worth anything, much less 50% more. The assumption that organic food is better for you has never been proven, and the benefits to the environment are questionable. So maybe the show should do a piece on the scientific validity of organic foods, as opposed the the marketing of them.
From Belmont, MA, 06/11/2008
Mr. Cowen can take rising commodity prices for granted, but I can't. Before I die, I'd like at least one authoritative source to tell me who has profited from the run-up in prices for everything, and what role they played in the scenario. After all, some traders have powerful software that can tell them who is buying what, when and where. Why can't such systems be used to profile traders who have done so well? I suspect what I would learn is that a huge slice of the pie went to people who moved into the market to take advantage of futures using exchange traded securities that investment banks and hedge funds created to lure new investors into commodities, and a lot of capital responded. Mr. Cowen, why should these marginal players get rich by squeezing the whole world?
From sedona, AZ, 06/11/2008
Firstly, I loved the exclusion of the bold type after the "cow" in Cowen, perhaps an editor's glee regarding the milk price model.I used to be an omnivoire, but now I have become a "SALEIVOIRE", relying on the purchase of whatever is on sale, whether it be organic ( my preference) national brand or otherwise, while still keeping my dietary needs in perspective.
It makes sense to purchase food based on availability, seasonality and the ever present supply and demand scenario. These buying trends are constantly analized (sic) by means of the "thank you" cards so use them to help your markets realize your preferences.
As for Cowen's theory that higher overall prices will encourage higher end purchases,I'll invest in what is on sale today, and save the truffles for those who really need them.
From Macon, GA, 06/11/2008
My empathies clearly align with most of the readers' comments. Mr.Cowen's remarks were not rooted in reality for the most of us. Any fool can see that recent precipitous food and energy price increases cannot just be fluffed away by saying we will all get used to it and revert to our former buying habits somewhere down the road. These increases are a hardship. The piper will have to be paid soon, and the impact on our economy is not yet known.
I hear too many economists painting a rosier picture than the current environment justifies. Methinks they are "whistling Dixie".
From NJ, 06/11/2008
Tyler Cowen's economic logic cannot be argued with, because it is logic based on economic theory, not reality. Other economists are more concerned with the fact that the poor and middle class are already doing more with less; we are already stretched to the limit and are still struggling to make ends meet. The fact is that CEOs today make about 500 times the average worker's salary in the US; 25 years ago it was less than 1/10 that amount. When all food becomes more expensive, who cares about what may be "relatively" cheap? We're choosing between any food and gas, between any food and medicine, between any food and heat, between any food and a roof over our heads. Tyler is out of touch with the facts of life for most Americans. Oh, and we won't be spending more on our vacations, either, because we won't be going on them in the first place. We'll be staying home. And we won't be thinking about Mr. Cowen's theory--we'll be catching up on the chores we couldn't do while we were holding down several, low-paying, part-time jobs (if we even have them). Time to focus on the reality that the majority of Americans struggle with every day, Mr. Cowen.
From Bloomington, IL, 06/11/2008
I think Tyler Cowen is right insofar as people may eventually get used to higher food prices. The microeconomic reality, though, is: I'll be able to purchase the same amount of food when my salary rises enough to offset the inflation of the food. (And gas, and everything else I need rather than want.) No pay raise = do more with less, and that also is a simple and inescapable reality for those of us with low disposable income.
From San Antonio, TX, 06/11/2008
I was outraged by Mr. Cowen's piece on milk prices and his absurd extrapolations. As the costs of oil, gas, heating, energy, etc., rise, consumers need more and more leeway in their budgets to cope with those added expenditures. They look for every way they can to cut costs, not add to them. Mr. Cowen is as out of touch with real people as the current administration is. Not only will I be refusing to buy higher-cost goods, I'm cutting down on food costs in order to pay for gasoline. Every ten cents saved on food is more money with which I can travel to work. I suspect I'm not alone.
From Sacramento, CA, 06/10/2008
While I understand how the dramatic increases in food and fuel costs hurts people in many ways, I understand what Mr. Cowen is talking about. This would be a great opportunity for many people to learn how to prioritize their spending and focus more on the essentials instead of continuing to consume products at an astonishingly high rate. But chances are some people will learn from this experience and most will just complain and take nothing from this. In addition, just like with everything else people will adapt and get used to the new world in which we live.
From Sacramento, CA, 06/10/2008
While I understand the comments posted ahead of mine, I agree with Mr. Cohen in many ways. People will adapt to the prices eventually, if only because there aren't really any other options. Hopefully, this will teach people to prioritize and stick to the essentials. But chances are people won't learn much from this experience and will instead use every opportunity to complain about it.
From Houston, TX, 06/10/2008
People, who planns their budget, will not go from cheaper products to relatively expencive. Opposite, they will buy products on sale more often and in bigger amounts (that is storable). There is nothing we can do to not buy gas (we have to drive to work!), but we can try to not increase dramatically our spendings on groceries.
From Tyrone, GA, 06/10/2008
Mr Cohen simplistic rational is totally unfounded. His milk example is assuming that the cost of transporting organic milk stays the same and that is not true. The increase in transportation cost impacts all commodities not only cheap milk. In fact the price increase for cheap milk will be an incentive for organic milk retailers to improve their margin to maintain the value difference. Organic milk consumers are in fact less sensitive to price
increases until a certain point. The impact is also less on luxury goods and fancy restaurants consumers.
The concern must be for the middle class with an ever decreasing purchasing power and facing increase energy cost, they will not have the resources to splurge if it continues at this rate.
From Baltimore, MD, 06/10/2008
Mr. Cohen thinks that people think of food prices in relative terms, and he may be right -- for the wealthy. For the middle class and the working poor, food is a significant portion of their budget. Increases of ten, fifteen, or twenty percent are noticable and challenging. While the wealthy class may simply overcome their 'sticker shock' of the price of milk, the working classes have to make difficult decisions and do not have the simple option of 'getting used to it'.
I'm a professional -- a computer programmer with a decent salary -- and I have seen a sharp increase in the cost of groceries. I've made changes in my buying patterns, not because of sticker shock, but because I have only so many dollars to spend.
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