Fat taxes may be even less effective than previously thought

An article that just appeared in the most recent issue of the American Journal of Agricultural Economics by Yuqing Zheng of RTI and Edward McLaughlin and Harry Kaiser of Cornell University presents some interesting thoughts regarding fat and soda taxes.

Most of the studies on fat and soda taxes use elasticities of demand to simulate the effectiveness of a tax.  The elasticity of demand tells us how responsive consumption of a product is to a change in it's price.  So, for example, an elasticity of demand of -0.6 would tell us that for every 1% increase in price, consumption would fall by 0.6%

Zheng and colleagues point out, however, that most people don't "see" the tax when they're shopping.  It only shows up on the bill when you check out.  As such, it is incorrect to directly use the price elasticity of demand  ​to infer how consumption of soda or fatty foods will change after a tax.  

They show that an excise tax (​which is levied on the supplier rather than the consumer) is probably more effective at reducing soda (or fat) consumption than a retail sales tax, but even excise taxes are likely to to be less effective at reducing consumption than an equivalent price increase.  

As a result, researchers need to adjust the demand elasticities before calculating the effects of a soda or fat tax (regardless of whether the tax is excise or retail).  Yet, almost no one does this.  The researchers show, however, that the required adjustment can be fairly dramatic.  In their "baseline" scenario, they show that the elasticity of demand needs to be reduced by a factor of 0.14.  So, if the elasticity of demand was -0.6, then we'd project a 1% increase in sales tax would only reduce consumption by 0.6*0.14 = 0.084%.  Instead, previous research on this topic has applied the original elasticity (e.g., 0.6) rather than the adjusted elasticity (e.g., 0.084).  Clearly, the adjusted elasticity will imply much lower effectiveness of the tax.

The authors conclude:​

Therefore, even a large increase in the sales tax rate on food and beverages will only reduce demand by a moderate degree.

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our analysis of sales and excise taxes offers some explanation (e.g., imperfect tax knowledge, slow learning) on why the impact of sales tax is so difficult to detect, thus bridging the gap between the simulation studies and the empirical findings

How the Poor Spend on Food

About a week ago, Derek Thompson put up a post at The Atlantic ​with a lot of really interesting graphics on how we spend our money on food and how it has changed over time.

​He shows that we spend a lower share of our income on food than ever before and less than anywhere else in the world.  I know there are some who would bemoan his development and wish we were more like the Europeans.  But for real, life flesh-and-blood consumers it has been a boon.  

My family lived in Paris during much of 2011 and we literally spend twice as much on food there as at home.  Yes, we had access to many things in Paris that we don't in Stillwater, Oklahoma but I think I can pretty honestly say that we didn't eat twice as well in Paris as we do in Stillwater.  You have to remember that living in Paris is not the same as vacationing in Paris - you can't eat at 5 star restaurants every night with two kids and still afford to pay the bills.  So, a lot of what we ate - from cereal to salads to baked chicken - was virtually identical to what we'd have at home; only much more expensive. (I will give the French their bread and wine - the two things that were much tastier and less expensive than at home).   

But, I digress.  The issue I want to point out relates to the focus of the Atlantic piece on how the poor spend their money on food relative to the rich.  The author shows that from 1984 to 2011, the lowest 20% of families spent 16.1% of their income food and that figure remain unchanged over the time period, but for the highest 20% of income earners, in 1982 13.2% of income was spent on food and it fell to 11.6% by 2011.  He says:

In the last three decades, food's share of the family budget has fallen for all but the poorest families, where it's stayed the same

​The first thing to note is that the observation that the poor spend a larger share of their income on food is very old news.  In fact it is something of an economic "law" - Engel's Law - postulated by Ernst Engel in the mid 1800s.  Moreover, because the economic gains at the bottom 20% haven't been terribly pronounced over this time period, it probably isn't that surprising to see that the % they spend on food hasn't much changed either.  However, it is important to note that these are not the same families being compared in 1984 and 2011.  I would suspect the bottom 20% include a lot of really young people and a lot of really old people in 1984 who today are in better paying jobs (or no longer living).  

Not only are these not the same people, it is not the same food being eaten in 2011 as in 1984.  In the conclusion, the author notes:

we can't rule out that the lowest-income households only spend one-sixth of their money on food, not only because real food prices are falling, but also because they're forced to consume less, as mortgages and gas prices eat into the budget.

​Yes, but we also can't rule out that the poor are getting more for their money today then they did in 1984.  The author shows some interesting graphs of total spending on food at home and away from home by the relatively poor and rich in (I assume) 2011 but what isn't shown is how that has changed over time. 

Has total spending among the poor gone up or down in real terms?  Are the poor eating out more than they once did?  I'm not at all surprised to see that the rich eat out more than the poor in 2011, but the better question is whether the poor in 2011 are eating out more than the poor in 1984.  ​

I wasn't even yet a teenager in 1984 but if memory serves me right, it was about that time we got our first microwave (and our first dishwasher I believe).  Over the intervening years, the grocery store has grown and the available flavors, brands, and variety has grown enormously.  In short, the quality of food (including taste, convenience, etc.) has changed a lot from 1984 to 2011.  

As a result, I'm not nearly as worried by statistics showing that the percent of income spent on food by the poor hasn't changed over time as I am about statistics showing potential increases in hunger among the poor.  ​

Moreover, if we really want to worry about the poor and hungry, we should look outside the U.S.​

Food Price Changes

I happened to run across this document put out by the USDA Economic Research Service about a month ago (see the associated spreadsheet). I occasionally get calls from reporters asking about changes in food prices, so I thought I'd put the data in a couple graphs for easy digestion.  

First, overall food prices continued to rise in 2012 (at a rate of 2.3% away from home and 2.5% at home).  However, the rate of increase in prices of food at home has fallen from 4.8% in 2011 to 2.5% in 2012, and exactly the opposite has happened for food away from home (going from 1.3% in 2011 to 2.4% in 2012).  

What about individual food categories at home?  The following shows the percent change price of various food types from 2011 to 2012.  Beef and veal, fats and oils, and poultry all experienced rapid price increases (all over 5%).  Interestingly, the price of fresh fruits only rose 1% and prices of fresh vegetables fell 5.1%.  

Are Healthy Foods More Expensive?

Are healthy grocery items more expensive than their regular within category counterparts? How do purchases of foods with positive health attributes change given negative unemployment shocks? To answer these questions, I supplement five years of multi-market, multi-chain scanner data with additional information on positive health attributes to create a unique dataset. First, this enables a robust descriptive analysis of the price of products with positive health attributes versus their regular within category counterparts; I find no evidence that products with positive health attributes are systematically more expensive or promoted systematically less.

That's from the job market paper of Jessica Rider in the Agricultural and Resource Economics Department at UC Berkeley.  

This is an interesting contribution to the debate between some folks at the USDA, who argue that healthy foods are not more expensive, and the work of people like Adam Drewnowski who say the opposite (here is just one example of many news stories on the debate).  

Give (Frozen) Peas a Chance — and Carrots Too

That's the title of a nice article by Dr. Oz in Time Magazine earlier this month and he echos several themes in my forthcoming book, The Food Police.  I was pleased to finally see some good sense on food by someone so prominent in the media.  Here are some excerpts:   

Nutritionally speaking, there is little difference between the farmer’s-market bounty and the humble brick from the freezer case. It’s true for many other supermarket foods too. And in my view, dispelling these myths–that boutique foods are good, supermarket foods are suspect and you have to spend a lot to eat well–is critical to improving our nation’s health. Organic food is great, it’s just not very democratic. As a food lover, I enjoy truffle oil, European cheeses and heirloom tomatoes as much as the next person. But as a doctor, I know that patients don’t always have the time, energy or budget to shop for artisanal ingredients and whip them into a meal.”

and:

The rise of foodie culture over the past decade has venerated all things small-batch, local-farm and organic–all with premium price tags. But let’s be clear: you don’t need to eat like the 1% to eat healthily. After several years of research and experience, I have come to an encouraging conclusion: the American food supply is abundant, nutritionally sound, affordable and, with a few simple considerations, comparable to the most elite organic diets

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But for the most part, it's O.K. to skip the meat boutiques and the high-end butchers. Nutritionally, there is not much difference between, say, grass-fed beef and the feedlot variety. The calories, sodium and protein content are all very close.