Mea culpa - fat tax version

About two years ago, I co-authored a paper that was published in the journal Health Economics  with the title "When Do Fat Taxes Increase Consumer Welfare."  

I started work on that paper because I was troubled by the contradictory way in which economists had approached the analysis of fat taxes.  One the one hand, economists estimated the effects of fat taxes by using elasticities of demand that were derived from a rational consumer-utility maximizing model.  In this kind of conceptual model, a tax (or a price increase) cannot make a consumer better off.  However, on the other hand, economists were publishing these papers with the premise that somehow the tax could make people better off.   In the paper, we tried to think about an approach for reconciling these two stances by asking whether a tax could make people better off if we make the reasonable assumption that people also care about (and consider) weight or health effects when choosing the quantity and type of food to buy.   

We had argued that in this situation, it was possible but empirically unlikely a tax could make people better off.  Enter Professor Neill, who wrote a comment on our work, saying "no" - it is concetually impossible for a fat tax to increase consumers' well-being in a "standard" economic model of the consumer.  Here are the first sentences of our forthcoming response to Dr. Neill:

We are flabbergasted at how such a fundamental lesson of mathematical economics escaped our attention, but Professor Neill is right and we were wrong. We apologize. 

Neill pointed out, embarrassingly to us, what should be obvious to any serious student of economics.  A tax is akin to reducing someone's income.  No one is better off with less income.  Even if one wants to weight less, they don't need a tax to do it.  A consumer can achieve a lower weight at current prices and re-allocate their income toward other non-weight-increasing goods and achieve a higher level of satisfaction.  

So, how do economist justify fat taxes?  One approach is to claim that obesity is an externality - that my food choices impose a cost on you (via Medicare/Medicaid) and thus a tax can force me to properly consider those costs.  However, in a paper a couple years ago, Bhattacharya and Sood dismantled the validity of that argument (although it is not well understood and continues to be debated).  

Another response is that the "rational consumer utility maximization" model is incorrect.  This "behavioral economics" approach posits that people fail to properly account for their future well-being and that a tax can force people to make decisions today that their future selves will ultimately find beneficial.  The precise mechanism for this welfare improvement is rarely laid out with any precision.      

In our reply to Neill, we tried to sketch out a behavioral-economics type model to see when a fat tax might be justified on those grounds.  Here is our conclusion:

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.

Locally-produced as compost the solution to global warming?

Gary Paul Nabhan published an op-ed yesterday in the NYT on global warming, agriculture, and farm policy.  Some of his suggestions, such as reducing regs and restrictions on "gray water" might have some merit (assuming food safety risks can be adequately handled) but most of his suggestions presume government is the only answer.

First, let's look at his premise that global warming will invariably lead to a "coming food crisis".  In actuality, a warming planet will produce some winners and some losers, and may be net-plus for agriculture.  It is possible that farmers in Arizona, where Nabhan resides, will lose from higher temperatures, but there likely to be other locations, like Canada, where agriculture benefits.  There is a lively debate among economists, fought out in the pages of the American Economic Review over precisely this issue (see the papers here or here suggesting climate change will benefit US agriculture or here, here, or here suggesting the reverse).  It would have been nice to see some discussion on this issue rather than simply claiming a disaster is coming.

Where things really go off base, however, are in the policy prescriptions.  Here are a few with some brief comments. 

First, he says about his strategies that: 

The problem is that several agribusiness advocacy organizations have done their best to block any federal effort to promote them

I'm not sure exactly what "blocks" these groups have but in the way of Nabhan's ideas, but more generally several farmer groups like the idea of carbon trading because they'd get paid for sequestration.   

His first policy is to: 

promote the use of locally produced compost to increase the moisture-holding capacity of fields, orchards and vineyards.

I'm not sure why the compost needs to be local if it is really so beneficial.  It is also unclear why farmers wouldn't source these materials now if they improved yield and limited chances of loss. I suspect if research showed these techniques could improve the moisture-holding capacity of soils, there wouldn't need to be much promotion or subsidy for farmers to adopt.

Then, we are told: 

the farm bill should include funds from the Strikeforce Initiative of the Department of Agriculture to help farmers transition to forms of perennial agriculture — initially focusing on edible tree crops and perennial grass pastures 

However, if the problem is that conventional crops are not as profitable in a warming environment, there needn't be a Strikeforce Initiative or top-town planning; farmers will willingly seek out those alternatives they can grow most profitably given altered weather conditions.

Then, we have another crisis: 

We also need to address the looming seed crisis. Because of recent episodes of drought, fire and floods, we are facing the largest shortfall in the availability of native grass, forage legume, tree and shrub seeds in American history

and

the National Plant Germplasm System, the Department of Agriculture’s national reserve of crop seeds, should be charged with evaluating hundreds of thousands of seed collections for drought and heat tolerance, as well as other climatic adaptations — and given the financing to do so.

Don't you think Monsanto, Dow, Bayer, and other seed producers have a HUGE incentive to store and develop crop varieties that are likely to be more profitable in a warmer climate?  I'm not exactly sure what is described here as a "seed crisis" that profit-making seed companies (and University breeders) aren't already thinking about.  Moreover, if the problem is really so dire as Nabhan suggest, why doesn't he suggest using all methods - including biotechnology - to increase drought resistance of crop varieties?  

The answer to that last question, I think, says it all.  I suspect Nabhan doesn't support use of biotechnology to solve the problem he sets up because his issue isn't really with the global warming effects on crop production per se, but rather it seems he sees an opportunity to re-engineer a food system to his liking using subsidies, regulations, and Strikeforce Initiatives, without giving much thought into the effects of such a system on global hunger and the price consumers pay for food.  It is all together fanciful to imagine the food system he proposes as bring down food prices, which, ironically, Nabhan, sets up as being the problem he aims to solve.  
 

Farm subsidies, commodity types, and obesity

A recent opinion paper in the American Journal of Preventative Medicine takes a look at farm subsidies and draws implications for obesity.  One problem is in how the study (or rather review) is interpreted by media outlets.  For example, one source had the headline:

US Farm Subsidy Policies Contribute To Worsening Obesity Trends, Study Finds.

However, this was not a new "study" and the authors readily acknowledge the economic research showing very little to no link between farm subsidies and obesity. This study by Okrent and Alston in the American Journal of Agricultural Economics, in fact, finds removal of subsidies would increase weight: 

Eliminating all subsidies,including trade barriers, would lead to an increase in annual per capita consumption in the range of 165 to 1,435 calories (equivalent to an increase in body weight of 0.03% to 0.23%) [note, however, my previous comment about their weight calculations]

Okrent and Alston conclude:

These results indicate that U.S. farm policy, for the most part, has not made food commodities significantly cheaper and has not had a significant effect on caloric consumption.

Don't, get me wrong.  I am not a fan of farm subsidies - largely because they are economically inefficient and reduce the size of the economic pie.  But, I think we ought to get the causes and effects right, and it simply isn't true that farm subsidies caused obesity.  Moreover, I am not a fan of re-engineering farm subsidies to meet "public health" goals, as the authors of the AJPM article apparently are.  Here is their recommendation: 

More specifically, sustainable practices should yield biodiverse, quality foods, optimize nonrenewable resources, and sustain the economic viability of farmers. Important policy reforms could direct increasing subsidies to family farms and/or fruit and vegetable growers in the aim of making their prices more competitive

Frankly, I find the recommendation naive, simplistic, and likely to produce unintended consequences whilst simultaneous failing  to produce the kind of benefits the authors desire.  

On a positive note, I found this table in the paper quite interesting.  At first, I thought the table had to be wrong since they have livestock subsidies (and livestock isn't subsidized per se), but apparently they are also adding in payments for crop insurance premiums for different commodities.  I wonder if they did they same for all fruits and vegetables?  It would also be useful to calculate these subsidies as a percentage of the total value (or revenue) for each crop type for a bit of perspective.    

A Farm Bill without Food Assistance

Earlier, I mentioned the long-standing rural-urban "partnership" that has held together the farm subsidy and food stamp portions of the farm bill.  At the time, I said:

Although I realize it is probably politically infeasible (although perhaps less so given recent developments), it would seem to make some sense to me to separate the components of the farm bill and see if they can stand on their own.  Those advocating for food-stamp spending should make their case and put the money over in the Department of Health and Human Services.  Those advocating for farm supports should make arguments with merits that stand on their own grounds.  

It appears that the House agricultural committee has done just that.  The revised bill is very similar to what it was before - but missing the Nutrition Title (which is by far the largest budgetary component).

The revised bill is currently being debated on the House floor, and perhaps not surprisingly, the change is being opposed by supporters of food stamps.  It will be interesting to see how it pans out.   

Economic Effects of Environmental Regulation

Jeffry Dorfman, an agricultural economist at the University of Georgia, weighed in on Obama's proposed environmental regulations at Real Clear Markets.  After discussing the fact that the environmental effects are probably smaller and more nuanced than most people expect, the got to the economics of the issue:

First, rising energy prices. A fascinating part of the special-interest coalition that makes up the Democratic Party is how many of its groups have aims which are at odds with another coalition partner. Environmental groups advocate a set of policies that uniformly hurt poor people. Environmental protection is essentially a luxury good. If you have enough money to provide food, clothing, and shelter for your family, then you start to care about the environment.

Krugman and I can both afford to pay a little more on our electricity bill and when we fill up our gas tanks, but those higher energy costs are regressive. Poor people spend a higher percentage of their income on energy bills, so raising those costs in order to improve the environment means that the poor will feel more pain than those with higher incomes. If we were talking about tax policy, no liberal would forget to mention the poor and how the rich should carry more of the burden. Yet, somehow, on environmental policy most liberals favor policies which hurt the very people they normally want to help.

Then he gets into the broken-window fallacy - that somehow by forcing companies to invest in new equipment, everyone can be made better off.  

Now if we build a brand new power plant while continuing to operate all the ones we have, that can lead to economic growth because we are increasing the productive capacity of the economy. But shutting down a plant that is fine in every way except for producing emissions that worry some people is the same as when a natural disaster destroys property. Something that had value no longer exists. The idea that replacing the previous item leads to economic growth is one of the most basic fallacies in all of economics, known as the broken window fallacy.

The Eli Lehrer in the Weekly Standard also had an interesting response to Obama's proposed environmental regulations. Here is one snippet:

Indeed, if free-market conservatives really want evidence of climate change, they ought to look towards the insurance markets that would bear much of the cost of catastrophic climate change. All three of the major insurance modeling firms and every global insurance company incorporate human-caused climate change into their projections of current and future weather patterns. The big business that has the most to lose from climate change, and that would reap the biggest rewards if it were somehow solved tomorrow, has universally decided that climate change is a real problem. An insurance company that ignored climate change predictions could, in the short term, make a lot of money by underpricing its competition on a wide range of products. Not a single firm has done this.

and yet, Lehrer rightly says:

The scientific consensus that exists about the causes and effects of climate change can’t point to an optimal policy solution any more than improvements in heart surgery techniques can provide guidance on health care reform.