A problem with cost-benefit analysis?

I'm a fan of cost-benefit analysis.  The approach provides a systematic way to think through the consequences of public policies and provides a reasonable approach to debate merits and demerits of a policy.  

Cost-benefit analysis shouldn't be the final word on a policy because there are some "rules" we may care about regardless of immediate short-run consequences.  For example, even if a cost-benefit analysis found that the benefits to TV thieves outweighed the costs to prior TV owners, few would support a policy of decriminalizing TV theft, in part because a society that had such little respect for property rights is not likely one that would be prosperous in the long-run (or enjoyable to live in for that matter).   All this is a way of saying that our moral intuitions often conflict (sometimes rightfully so) with a short-term utilitarian premise implied by cost benefit analysis (the trolley problem is a common example).

In the realm of food and public health policy, sometimes the way benefits and costs are calculated are myopic, fail to account for dynamic market responses to policies, and rest on shaky methodological assumptions.  Moreover, when we find that benefits exceed costs, one should also ask: what is preventing the market from capitalizing on this arbitrage opportunity?  Stated differently, there would need to be solid evidence of market failure (or some  government failure) in addition to a positive cost-benefit test to justify a public policy.          

Despite these qualms, I see cost-benefit analysis as a useful tool, and it provides one input into the decision making process.

Lately, I've been thinking about what happens to a cost-benefit analysis when one considers multiple policies - in an environment where are increasing calls for new regulations? 

Suppose one did a cost-benefit analysis (CBA) on mandatory country of labeling for meat.  Then, a CBA on a ban on use of subtherapeurtic antibiotics in meat production.  Then, a CBA on a ban on growth hormones.  Then, a CBA on banning gestation crates in pork production.  Then, a CBA on banning transfats.  Then, a CBA on new water regulations for confined animal feeding operations.  Then, a CBA on a carbon tax on methane production from cows.  (I could go on - these represent but a few of the policies that are commonly batted around that have some impact on meat and livestock markets.)  

Is it possible that each of these policies - in isolation - could pass a cost benefit test, and yet when considered jointly fail the test?  Stated differently, is it possible to strictly follow a cost-benefit rule when adopting public policies (only passing policies that pass a CBA) and wind up with a world that we find as less desirable than the one we started with?

I think the answer may be "yes."  For example, each CBA in isolation will assume that the status quo prevails with regard to every other policy.  But, the general equilibrium effects could differ from these individual partial-equilibrium analyses, particularly if there are nonlinearities.

Tyler Cowen recently linked to a new paper by Ian Martin and Robert Pindyck on policies related to catastrophic events that also seems relevant to this discussion.

“How should we evaluate public policies or projects to avert or reduce the likelihood of a catastrophic event? Examples might include a greenhouse gas abatement policy to avert a climate change catastrophe, investments in vaccine technologies that would help respond to a “mega-virus,” or the construction of levees to avert major flooding. A policy to avert a particular catastrophe considered in isolation might be evaluated in a cost-benefit framework. But because society faces multiple potential catastrophes, simple cost-benefit analysis breaks down: Even if the benefit of averting each one exceeds the cost, we should not avert all of them.”

Cowen summarized the paper as follows: 

“The main point is simply that the shadow price of all these small anti-catastrophe investments goes up, the more of them we do, and thus we cannot do them all, even if every single investment appears to make sense on its own terms.”

Typical CBAs often ignore the the hundreds (if not thousands) of laws that already affect farmers' and food purveyors' ability to operate.  It does make one wonder whether diminishing returns shouldn't feature more prominently in CBA.

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.

Farm Size and Productivity

There seems to be a lot of consternation about "large farms" in the foodie community and a desire to enact policies to support "small farms."  One of the issues often missed in such discussions is that larger farms tend to be the most productive farms and countries that tend to have the smallest farms tend to be the poorest.

These "stylized" facts were summarized in this paper by in Adamopoulos and Restuccia in the most recent issue of the American Economic Review.

(i) There are striking differences in the size distribution of farms between rich and poor countries with the operational scale of farms being considerably smaller in poor countries. Using internationally comparable data from the World Census of Agriculture, we show that in the poorest 20 percent of countries the average farm size is 1.6 hectares (Ha), while in the richest 20 percent of countries the average farm size is 54.1 Ha, a 34-fold difference. In poor countries very small farms (less than 2 Ha) account for over 70 percent of total farms, whereas in rich countries they account for only 15 percent. In poor countries there are virtually no farms over 20 Ha, while in rich countries these account for 40 percent of the total number of farms.

(ii) Larger farms have much higher labor productivity (value added per worker) than smaller farms, implying that farm size differences can potentially have large effects on measured agricultural productivity. Using data from the US Census of Agriculture (USDA 2007) we document a 16-fold difference in value added per worker between the largest and smallest scale of operation of farms reported. Available data from other sources, based on national censuses and farm surveys, indicate that labor productivity rises with size in a large set of developing countries as well (see, for instance, Berry and Cline 1979; Cornia 1985). This occurs despite differences in land scarcity, soil, geography, agrarian structure, and form of agriculture observed among these countries. In India, Foster and Rosenzweig (2011) show that efficiency also rises with farm size.

They also show this interesting graph relating average farm size in a country to GDP per capita in a country

Adamopoulos and Restuccia conclude that one of the main causes of inefficiently small farms in poor countries is government policy. Here are some examples they discuss

Many countries have set direct restrictions on farm size. In most cases these restrictions were ceilings on the size of permitted land holdings and were imposed as part of postwar-period land reforms that redistributed land in excess of the ceiling (e.g., Bangladesh, Chile, Ethiopia, India, Korea, Pakistan, Peru, Philippines). In many cases the ceiling on land holdings was accompanied by prohibitions on selling and/ or renting the redistributed land. Other countries have distorted size by also imposing minimum size requirements. This is done either directly by setting an explicit lower bound, as in the case of Indonesia and Puerto Rico, or indirectly by setting conditions for subdivisions, such as a “viability assessment” in the case of Zimbabwe. Several countries have imposed progressive land taxes where larger farms are taxed at a higher rate than smaller farms (e.g., Brazil, Namibia, Pakistan, Zimbabwe). Several African countries have offered input subsidies for fertilizer and seed that are either directly targeted at smallholders or disproportionately benefited them (e.g., Kenya, Malawi, Tanzania, Zambia). In other cases smallholders were provided with subsidized credit (e.g., Kenya, Philippines) or grants to purchase land (e.g., Malawi). Tenancy regulations, such as rent ceilings, tenure security, and preferential right of purchase (e.g., India), can also provide smallholders with an advantage.

However noble or virtuous it may seem to want to subside "small farms", we should at least acknowledge the adverse consequences and inefficiencies of such policies, which this paper shows are nontrivial because of  lower productivity,  and as a result lower wages, less economic growth, and higher food prices.   

The new dietary wisdom

Carbs are out.  Fats are in.  

We seem to be bombarded by messages these days warning of the evils of carbs, particularly sugar.  The recently released documentary, Fed Up, produced by Katie Couric presents one conspiratorial, over-wrought perspective on the issue.

In their indictment of farm policies, somehow the makers of Fed Up, failed to look at some of the best economic research on the topic, which shows that sugar import quotas, among other policies, make US sugar prices 2-3 times higher than the world price.  Moreover, ethanol policies have driven up the price of corn and have made high fructose corn syrup (HFCS) more expensive as well.  Here, for example, is USDA data on the price of HFCS over the past 14 years.  As you can see, prices have more than doubled since 2005.

Of course, that's just one example.  This week in the Sunday Review edition of the New York Times ran an editorial by David Ludwig and Mark Friedman, which a argued that over-eating is actually making us hungrier.  They seem to place the blame mainly on carbs, writing:

By this way of thinking, the increasing amount and processing of carbohydrates in the American diet has increased insulin levels, put fat cells into storage overdrive and elicited obesity-promoting biological responses in a large number of people. Like an infection that raises the body temperature set point, high consumption of refined carbohydrates — chips, crackers, cakes, soft drinks, sugary breakfast cereals and even white rice and bread — has increased body weights throughout the population.

One reason we consume so many refined carbohydrates today is because they have been added to processed foods in place of fats — which have been the main target of calorie reduction efforts since the 1970s. 

Last week, the Wall Street Journal also ran an editorial on the issue by Nina Teicholz, who has a recently released book, The Big Fat Surprise: Why Butter, Meat and Cheese Belong in a Healthy Diet.  In the editorial, she argues that past nutritional guidelines that emphasized carbs and demonized fat were a major cause of the rise in obesity, writing:

Seeing the U.S. population grow sicker and fatter while adhering to official dietary guidelines has put nutrition authorities in an awkward position. Recently, the response of many researchers has been to blame "Big Food" for bombarding Americans with sugar-laden products. No doubt these are bad for us, but it is also fair to say that the food industry has simply been responding to the dietary guidelines issued by the AHA and USDA, which have encouraged high-carbohydrate diets and until quite recently said next to nothing about the need to limit sugar.

Indeed, up until 1999, the AHA was still advising Americans to reach for "soft drinks," and in 2001, the group was still recommending snacks of "gum-drops" and "hard candies made primarily with sugar" to avoid fatty foods.

Teicholz does a good job describing how previous dietary guidelines were based on tenuous scientific evidence and largely represented group think and a desire to "do something."  

Here's my question: How can we be so sure we now know more?  It seems to me this history lesson would cause us to be much more cautious about what we know about nutritional science and about the ability of public policy to beneficially affect food choice, weight, and health.  Yet, the aforementioned writings, and others, often contain as much hubris as ever.  It is unhealthy to eat too many carbs (or too much fat for that matter), but do we really know enough to design policies that will have intended effects?  I'm skeptical.

One reason is that writings by medical doctors and nutritionists on carbs often narrowly focused and miss larger "macro" issues.  Here, for example, is USDA data on per capita sugar consumption.  I've added in the recent trend lines, which show a strong downward trend in consumption over the past decade.

I suspect some of the downward trend is due to increased public awareness of the dangers of over-consumption of sugars, but also because of market conditions and aforementioned government policies.   

Another factor that many of these writers seem to overlook is that we grow a lot of carb-producing grains not just because of nutritional guidelines but because of economic forces.  The reality is that, by far, the most cost efficient producers of calories and protein are crops like corn, wheat, soybeans, and rice.  Historically, the challenge has been (and it remains a current challenge in many parts of the world), producing enough food and calories to keep pace with a growing population.  Moreover, if you're concerned about environmental issues, you also want to get as many calories and nutrients using the least amount of land and other resources, and that's precisely why economic forces lead farmers choose to grow so much corn, wheat, soybeans, and rice (not to mention these can be stored and will not spoil and waste soon after harvest).  I'm not saying we shouldn't re-think how much of these types of grains we eat, often in processed food, but I think it is useful to have some perspective on why these crops are so prevalent on our farms and in our diet.

I'll conclude with this passage I recently read from Sara Hara, a nutritionist who was dismayed by what she saw in Fed Up.   

An important note for those who are earnestly trying to sort through the abundance of the information and misinformation about "good foods" and "bad foods" in search of the truth: know the source of the information being promoted and the difference between a real nutrition expert and a self-proclaimed "expert". Most medical doctors are well trained in medicine, but have less than a semester of nutrition education in the entirety of their training (there are a few rare exceptions). Medical doctors are smart, but are not typically experts in nutrition. Investigative journalists are also a talented lot, but rarely have formal education in nutrition.Registered Dietitians/Nutritionists (RD or RDN) have at least a 4 year degree in nutrition (many have an additional 2 year master's degree), have completed a clinical nutrition internship, and maintain continuing education requirements to retain their credential. THESE are the nutrition experts... along with researchers and other professionals who have advanced degrees in Nutrition. I was struck by the fact that the new film Fed Up has a list of "experts" that includes medical doctors, a psychologist, politicians and journalists...all very intelligent and respected professionals, but none with extensive training in nutrition. There are no RDN's among their "experts"... and for good reason. Most true nutrition experts do not agree with the propaganda being promoted by this film. The RDN experts know that the issue is multi-faceted and cannot be reasonably blamed on a single factor. Nutrition needs to be viewed in context of lifestyle habits, genetics, personal preferences, and so much more. Sensationalism sells... but healthy living and common sense are what will fix our nation's failing health.