Calorie Labeling at Harvard

“There have been some suggestions that we need to post calories at schools and certainly in college dorms … it’s not really a good solution, and Harvard recently removed this information for fear of contributing to eating disorders, because students were going in and selecting their foods based on the calories and not necessarily the nutritional value.”

That's from Anding, Roberta A. Professor, Baylor College of Medicine and Texas Children’s Hospital. “Lecture 20: Obesity—Public Health Enemy Number One.” Nutrition Made Clear from the Teaching Company (HT Bailey Norwood; one transcript is here)

When fat taxes meet the supply side

Last week at the European Association of Agricultural Economist's meetings, I saw Louis-George Soler present a keynote talk on food and nutrition policies.  The paper-version of the talk, written with Vincent Réquillart  is being published in the European Journal of Agricultural Economics.

One of the key points of his talk was that much of the policy analysis on effects of fat taxes, soda taxes, veggie subsidies, etc. only consider consumer responses and ignore how firms will react to the policies.  It is often the case that such supply-side responses will substantively reduce the health impacts of the policies.

For example, suppose Congress passed a law banning advertising of sweetened sugared cereal to children.  How might Kellogg's or General Mills respond?  Given that the firms can no longer  use their revenue on promotion and advertising, they might instead re-direct those funds to cost-cutting efforts that reduce the cereals' prices.  Competition moves from who has the most compelling ad to who has the lowest price.  Lower prices will encourage more consumption: exactly the opposite of what was intended by the ban.

Another point they raise is related to the "pass-through" effect of taxes on firms profits and retail prices.  Given the nature of competition between firms and the type of tax (excise or ad valorem), a tax can be "over-shifted" or "under-shifted" to consumers.  Thus, tax policies might cause a larger or smaller reduction in consumption than anticipated.

Take another example.  Suppose the government requires firms to add "high fat" labels to certain products.  The research cited in the Requillart-Soler paper suggests that firms may respond by lowering the price of the high fat items and increasing the price of the low fat items.  While the "high fat" label will tend to discourage consumption, the now lower relative price for high fat items will tend to encourage consumption.  

None of this is to say that food policies won't have any impact on health, only that studies which ignore food companies' responses to the new policy environment will often overestimate the health impacts of food policies.   

Effects of fat taxes and thin subsidies on the poor

I've been working on a paper with some French colleagues (Laurent Mueller and Bernard Ruffieux) using data from a food purchasing experiment in Grenoble and Lyon France looking at the effects of  "fat taxes" and "thin subsidies" on poorer vs. richer households.  The paper is still in review, so I won't yet go into the details of the results, but I can say that they closely align with the results of this new paper by Richard Tiffin and Matthew Salois that was just published in the European Review of Agricultural Economics.

They write that their:

“results reinforce the finding that a fiscal food policy based on a tax on saturated fats and a subsidy of fruits and vegetables is socially regressive”

and

“not only are the poorest households more negatively effected by the policy, but that even a subsidy is regressive because of the distribution of consumption of fruits and vegetables”

As they discuss, and we are finding in our work, such effects can occur through a number of channels.  Take a subsidy on fruits and veggies.  If richer households are already eating more fruits and veggies, who do you think receives the largest gains from the subsidy?  Fat taxes are regressive because the poor spend a larger share of their income on food (so taxes take a proportionally bigger chunk of their income) than the rich, but also because they are often eating more of the foods that will be taxed and because they may be less responsive to such price changes.  

The social and distributional consequences of these sorts of price policies are seldom discussed with any seriousness by those who promote the policies.   

Medicare and Medicaid as justification for public health interventions

When public health care costs rise due to obesity, diabetes, smoking, and the like, it is often said that an externality exists,justifying public intervention.  The logic is that as costs to Medicare and Medicaid rise, so too must taxes to offset the higher costs.  Thus, my health care costs (if I'm enrolled in Medicare or Medicaid) impose an externality on you the taxpayer.

I've written several times in the past suggesting that this sort of argument is not particularly well founded (e.g., see here or here or here). I ran across another line of reasoning in a post about immigration and the welfare state by Don Boudreaux that suggests how slippery a slope this sort of reasoning can be.

“And, while we’re at it, doesn’t the existence of the welfare state require government also to restrict which majors college students choose? Without a welfare state, students would be more focused on finding gainful employment after they graduate. But with a welfare state, the risk of being unemployed for long periods – or of earning very low pay for most of one’s working life – as a result of majoring in the likes of “race studies” or “dance criticism” will too often be ignored by irresponsible or lazy students, who rely upon welfare-state payments to subsidize their indulgence in majors that promise no decent monetary rewards.

Where does the enhanced scope for government action end once we admit that government buys for itself, by illegitimately exercising power W, an indulgence for the exercise of otherwise illegitimate power R? What sort of distrust of the motives and knowledge of government officials leads many self-described libertarians to oppose government’s exercise of power W but approve of government’s exercise of otherwise-illegitimate power R if government insists on simultaneously exercising illegitimate power W?”

The logic used to assert that existence of public health care benefits justifies restricting (or altering) consumers' choice of foods is no different than the logic Boudreaux uses (in jest) to argue that the existence of welfare programs and public unemployment benefits justifies restricting (or altering) student's choice of college majors.

Is Food too Inexpensive?

A recent review study (opinion piece) published in the journal CA: A Cancer Journal for Clinicians  is making the rounds, and it seems to fit a narrative that food is "too cheap" and cheap food is a major cause of obesity (e.g., see here or here).  The article actually does a good job dispelling several myths about obesity and food consumption (for example, fruit and vegetable consumption is up over time).  However, much of the commentary on the issue is rather glib and ill conceived. 

A basic economic tenant is that that when prices fall, consumers consume more (i.e., demand curves slope downward).  It is not surprising that falling food prices would be associated with greater food consumption.  

Standard welfare economics suggests consumers are unambiguously better off with lower prices.  Paying less for food allows consumers to reallocate income toward buying other items that they can now afford.  All this remains true even if people care about body weight.  It is possible that people suffer from behavioral biases (i.e., they don't consider future effects on weight when deciding what to eat today), but as I showed in this reply in the journal Health Economics, even if that's true, prices declines still benefit consumers in most plausible scenarios.  As I said there:

under this sort of behavioral economics framework, where people naively or myopically optimize utility without considering future weight effects, it is possible to imagine situations where raising prices might increase ultimate experienced welfare. However, this condition occurs only when price is very high and falls in the range where consumption would take place only because people are ignoring the ultimate health impacts; at lower prices, a ‘fat tax’ would only lower welfare. 

Moreover, if one looks at recent trends in food prices, they are increasing.  Here is data from the UN Food and Agricultural Organization on the world food price index over time.

Who do you think is most affected by these price increases?  Probably not well-to-do people reading food and economics blogs.  Recall, that the US exports large shares of domestic agricultural production, so what we do here in the US has an important effect on world prices, and the prices paid for food by some of the most impoverished people in the world.  It has been suggested that these food price spikes are responsible for civil unrest in many parts of the world.  But they have effects even here in the U.S.  In the U.S., there are almost 50 million people on food stamps, and almost 15% of US households are food insecure.  Food prices and food stamps are related, even in the US, to hunger and food insecurity.  Higher food prices mean more hunger. 

That alone would be enough to suggest caution in price policies aimed at obesity.  Moreover, research by Okrent and Alston suggests that obesity is a result of over-consumption of ALL kinds of food, and they conclude the only kind of tax that is effective is an across-the-board food tax. And, yet we can see precisely why such a tax is a bad idea.  It is regressive because the poor spend a higher share of their income on food than the rich.   

Ultimately, when papers published in medical or nutrition journals start advocating for fat taxes or thin subsidies, as they often do, they often move into shaky territory, because they often lack appropriate conceptual background for their policy proposals beyond the simple mantra "it promotes public health".

Once one wants to pass policies that set prices at a point where they are no longer equated with marginal cost, there will be a dead-weight loss to society. The first fundamental theorems of welfare economics suggest that (absent the usual caveats), a competitive equilibrium (i.e., market outcomes) leads to a Pareto efficient outcome (one where you cannot make some people better off without making others worse off). So, if you move prices away from that competitive equilibrium (say with a fat tax or thin subsidy), welfare loss is likely to result.  

Even if the preceding arguments are don't hold water, there is a very strong assumption that someone (namely the “government” in this case) knows what the “right” prices are, and that any mistakes in getting the right prices produce less dead-weight loss than whatever benefit might have been created through the tax/subsidy policy. This is a very old argument going back to people like Hayek in the midst of the “socialist calculation debate".  As he aptly argues, it is hard (or impossible) for experts to know the "right" prices.  

Simply asserting that price changes through fat taxes can reduce obesity doesn't mean people are better off with the policy.  One needs some sort of conceptual model showing how the tax/subsidy indeed makes people better off (not just thinner), all things considered.  Some people might argue for a fat tax, for example, because they think it will offset an externality. In the externality case, we presume, there is a market failure and have some belief that altering prices can offset the deadweight loss of the market failure (I would disagree, but at least I understand the argument being made). However, without the author explicitly articulating the market failure justifying the food taxes/subsidies, they are making a general case that a technocratic third party has the knowledge to re-set prices and make society better off.  I find this position untenable.