Tom Pepinsky

Category: Economics

  • Subsidies that Work; or, Why is Good Food So Cheap in Germany and Expensive in Australia?

    Two summers ago we traveled as a family to Australia, where we were based in Canberra for five weeks. This month we are in Germany, based in Freiburg. We love to travel, but since having kids, we’ve noticed that travel has become a lot more expensive. Nothing illustrates this more than our grocery bill.

    At least, that’s what we’ve come to expect. Here in Freiburg, we have been floored at how inexpensive our food bill has been. Some illustrations:

    1. We always have to stock a kitchen when we arrive in a new town. In Canberra, it cost us AUD245 in June 2011. In Freiburg in June 2013, our bill was EUR62. This is the case even though we also have one more kid this time, and little AP’s diet is pretty strict (and her favorite food, avocados, is hardly a local product).
    2. One Starbucks breakfast in Sydney cost us AUD28: that’s one tea, one long black, one yogurt, and three pastries. Our dinner last night at Hausbrauerei Feierling cost us EUR23: that’s one large fresh organic beer, one fresh-pressed organic apple cider, one bitter lemon, one large fresh soft pretzel, a basket of very good bread, two Landjäger, two Weißwürste, two Bauernwürste, and a salad. This is at a biergarten, yes, but it’s the most touristy one in Freiburg and the food was very good.

    Now in U.S. dollar terms, some of the comparisons might be overstating things. The $ / AUD exchange rate was about 1.2/1 in 2011, which was as bad as it’s been. The $ / EUR exchange rate right now is around 1.3/1, which is great by recent standards. Also, when it comes to stocking our kitchen, we had to be more aggressive in Canberra because we couldn’t walk to the Supabarn, whereas we can walk to the Rewe in about 7 minutes.

    But those differences don’t begin to explain the stark differences in the price of food between Freiburg and Canberra. Moreover, these inexpensive foods that we’re buying here in Freiburg are tasty and nutritious. If you don’t believe me, take a look at this fried egg, which is just a normal organic cage free egg from the grocery store. 10 of these cost EUR1!

    Deep orange yolk = extra delicious

    Subsidies in the U.S. seem to be producing huge amounts of grains, leading to a superabundance of white flour, corn syrup, and corn-fed beef. Here, they seem to be producing nutritious, locally-grown, organic vegetables, tasty dairy, cage free poultry, and free range meat.

    I see two questions here. One is why food is so expensive in Australia but so cheap here. One might think it’s just about subsidies—Australian farm subsidies appear to be very low—but don’t forget that Australia is a big sunny country with no one living in it, and (especially in Queensland) the land is incredibly fertile. Even with low subsidies, and a center which is useless for commercial agriculture, Australia is a net agricultural exporter. Agricultural subsidies in Germany are a big deal, and farmers are very powerful, yet this does not translate into either higher food prices or an abundance of lousy and unhealthy food.

    Which leads us to the second question: why, given the extensive subsidies to German farmers, does this not translate into industrial farms producing bland and unhealthy corn/wheat/soy by the kiloton? The most productive farm areas of Germany would produce approximately the same types of crops as would the most productive farm areas of the U.S. Yet farmers are growing a wide range of healthy, natural foods, and for the same price.

    I’ve asked around a bit, and I have some hypotheses. But none seem satisfactory.

    1. The “Freiburg” Effect. It’s possible that our experience is not a German experience, it’s a Freiburg experience. Freiburg is a very environmental town, and numerous people have explained to us that French culinary traditions shape Freiburgers’ approach to food. Maybe if we were elsewhere in Germany, we’d see fresh produce, dairy, and meats with the high prices that we expect. It’s possible that this is true, as neither JMP nor I have been anywhere else in Germany than Freiburg. But we doubt it: Germany is a capitalist economy with incredibly functional domestic transportation system, so it’d be hard to imagine that prices would differ that much in one city because competition would tend to equalize them. (Also, Freiburg is very close to France, so it should also experience competition from there as well.) This would probably only work as an explanation if the premium on local agriculture elsewhere were so high as to make it impossible to sell Freiburg’s local agricultural products elsewhere at nearly any price.
    2. EU Agricultural Subsidies. It’s also possible that EU agricultural subsidies just really work well, and that the low prices for food are just the consequence of high taxes, which we as tourists don’t see. Could be, but that doesn’t seem quite right, for one reason. German agricultural policy is made in Brussels, and we’ve been elsewhere in Europe (France, Italy, the UK) around this time of year, and seen tasty and nutritious food, but the prices were much higher prices.
    3. Farm size. One economist explained to me that German farms in what was formerly West Germany tend to be small. This creates stiff price competition, and inhibits mass production of cheap grain on an industrial scale. The former seems exactly wrong to me: small farms should be less cost-efficient, on average, than large ones. But there is perhaps something to the second argument. One piece of evidence in favor of this argument might lie in the large farms in the former East Germany, which are large as a legacy of collectivization under the GDR. Perhaps they act more like U.S.-style industrial farms, leaving the smaller farms in the former West producing other types of agricultural products that just happen to be better. But still, this does not explain why oranges (from Spain) and avocados (from Peru) are still so inexpensive.

    In all, we’re stumped. But happily so: eating well and feeling healthy without breaking the bank. And it makes me wonder how agricultural subsidies here are working so well, given their incredibly distortionary effects on food production in the U.S.

    UPDATE:
    An old friend who is also both German and an economist writes the following:

    The low price of groceries compared to really anywhere else always puzzled me, too. Even Switzerland and England are very different. Compared to the US, it’s especially striking since basically everything else is cheaper in the US. The comparison to Switzerland is the most baffling, since Switzerland has free trade with the EU. No trade economist I asked had a good explanation…What people in Germany often say is that retailing is very concentrated. But why is this market power only used to push upstream prices down, and not also used to push up retail prices? Again, I haven’t seen a good explanation or model for this…

  • Political Science and the Critique of Policy Relevance

    The disconnect between academic political science and real-world policy is a topic of some concern in current discussions of the purpose and future of political science. Dan Drezner has insisted that even the most technical political science (or narrowly for him, IR) research has pretty clear implications for policy if you take the time to read it. Political scientists could probably do better to reach out—for this purpose, blogs are a tremendous resource—but the point is that there is plenty of policy relevant research out there already.

    There is, of course, another view. That is the perspective that political scientists should not reach out to policymakers, because they won’t listen. Or, they will mess it up. Or, they actually just select the research that comports with their views, sometimes even creating intellectual homes to produce the research that contains the ideas that will justify their actions (this is the critique of the Chicago school of economics and the Mercatus Center). In the extreme, it takes the form of beliefs like the RAND Corporation invented game theory as a tool of domination; or less audaciously, that the beliefs nurtured by RAND enabled domination. It’s ultimately a lazy critique, often made from the sidelines, and it contains within it the Simpsonesque implication that the lesson is, never try to engage with the policy community. Because you should never try, you can both be a strong critic of whatever odious thing you think is being done, but you are happily excused from offering any sort of solution.

    That critical view is a real barrier to policy engagement among academic political scientists. That said, the idea that policymakers are either ideological, or essentially career-minded, or flitting from one hot academic trend to another, is easy to understand. It is especially clear in the field of development (microfinance experiments for the QJE!). For someone with an academic background, especially a critical one (my college buddy loved to say that he wanted to “subvert the dominant paradigm”), the development industry can be depressing place. But my sense is that the general critique of the development industry greatly underestimates the self-awareness and self-criticism of many who work on the ground. There are plenty of “helicopter consultants,” but there are also of people who are deeply invested in local knowledge and understanding as well. Not just as naive do-gooders (although these exist too), but as real critical thinkers.

    Because I don’t see the development industry as simply an instrument of domination, I conclude for those of us who work on basic problems of governance and accountability, thinking in terms of policy relevance is profitable. I have no illusions that our research will shape the policy agenda, but it can be targeted in a way that finds common cause with the sorts of careful and critical thinking that, to me, should help to produce good policy.

    That is why I was particularly excited to receive an email from a colleague at AusAID in Jakarta, who reported that he had shared some thoughts with his colleagues about my recent paper on migration and the origins of governance in Java. I quote from his memo:

    Pepinsky’s paper is a novel new contribution to the growing literature on the political origins
    of comparative economic development – this time at a sub-national level. But is it of any
    relevance to us [the aid community]? The answer is in the last paragraph of the paper:

    “Understanding local political economies in the post-colonial states that have inherited extractive institutions requires attention to the informal institutions, norms, and practices that supported exchange when modern market relations were first established. Effective strategies to reform local economies, in turn, will depend on the informal institutions that they have inherited from the colonial
    era.”

    In other words – when working at the local level – it’s good to know a little history!

    Know history. Take local context seriously. Think about the political contexts in which market relations were formed, and why that matters. Exactly!