Wednesday, June 11, 2008

Inflation, Real Income and Calorie Counting

I'm going to wander around in this post; but that's okay, I can use the exercise.

It started last evening with me reviewing parts of Gregory Clark's book, A Farewell to Alms, reviewed on this blog back in April. In his chapter on "Modern Growth: The Wealth of Nations," one quote seemed to grab my attention.
"As incomes increase, consumers switch spending between goods in very predictable ways. We have already seen that the increase in demand with income varies sharply across goods. Most importantly, food consumption increases little once we reach high incomes. Thus in Germany real incomes per person rose by 133% from 1910 to 1956, while food consumption per person rose by only 7%, calorie consumption per person fell by 4%, and protein consumption fell by 3%. Indeed the calorie content of the modern European diet is little higher than that of the eighteenth century, even though people are 10 to 20 times wealthier."
Thus far, the observation is interesting but a bit like the joke about the statistician who is lying on a bed with his feet in the oven and his head in freezer. When asked how he feels, the response is "on average, I'd have to say pretty well." The data selection (country and time frame) in the guts of the paragraph left me a bit skeptical. But I was willing to go along for the sake of the argument. The sentence about the modern European diet is a bit more intriguing. But now here's the statement that started this whole thought process.
"The character of the diet, however, has switched toward more expensive calorie sources. As people become sated with calories their demand for variety, in the form of more expensive foods, becomes insatiable: goodbye to bread, hello sushi."
This seems to have a ring of truth. As income rises, I would expect a change in diet. At the low end, I expect it is quantitative as much as qualitative. As one moves up the income ladder, it makes sense that qualitative change would begin to outstrip quantitative change. (After all, how much can one eat?) Note: The link is a gratuitous reference to Monty Python skit. You don't have to go there.

Then when I opened this morning's copy of The Wall Street Journal, it contained this interesting article (now subscriber content) about some of the international repercussions of inflation. The article describes how numerous central banks are moving to reduce rising price pressures. And the picture shows state government employees in India rioting for, among other things, wage increases.

This got me to thinking about a possible connection between what I had read last night, and the news of this morning. And I think I have one.

If we accept Clark's statement about an increase in income leading to a switch to more expensive calorie sources, we can equate the switch with a rise in real income, other things like overall price levels being held equal. An improved wage allows people to buy more (or in this case, better) goods. If we combine this with other things we’ve heard over the past few years about improving conditions in many of the world's poorest countries, we can construct a case wherein people in many countries have not only experienced improved income but also improved diets. (Again, there have been stories in the media explaining part of the world-wide food shortage is due to improving economies in various countries.)

Now, add the inflation component. If there is wide-spread upward pressure on food prices, this would be tantamount to a reduction in real income (our wage defined by what we can purchase). Higher food prices would translate a number of ways: (1) buy less food; (2) buy less other stuff; (3) buy the same quantity but purchase lower quality. These choices are not desirable. I suspect they would be less so in nations with lower average incomes, as the people in those situations have less of a cushion than most people in more developed nations.

My question to you and your students is "is this a plausible connection or have I stretched too far?" I look forward to your comments.


Anonymous said...

I'm no Expert or anything but i don't see any flaws in your connections. If food prices do, in fact, increase then majority of the people have to choose from (1) buy less food; (2) buy less other stuff; (3) buy the same quantity but purchase lower quality. however, this isn't too important but when most people, especially in third world countries, experience increases in food prices they usually choose to give up there wants, not there needs. Which leaves them with one option, option number (2). Overall, i agree with you on the connection.

Jon Gold said...

This might be a stretch for all areas of food. The main price increase has occured in corn and rice, which are mainly lower-income foods. Though they can play a part in more elegant meals, the largest drop in quality of food should be seen in the lower classes as their food prices will be hit hardest. The upper class, however, generally dines on foods that have not experiences enormous inflation recently, so although their real income may have gone down, the food prices for them will not change much and they will "buy less other stuff" because of the prices of those goods, not due to food prices. The real concern of this price spike should be those third-world countries who have felt the brunt of the food shortage, as their aid has now almost doubled in price. With the economy in a slow stretch, donations will surely decrease, making food much harder to be given to those in need.