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.   

Livestock, Externalities, and the Environment

The Wall Street Journal published a piece  today that I wrote dealing with externalities in livestock production.  I didn't choose the title - my argument isn't that livestock production doesn't have environmental impacts, rather I question the relative size of the impacts and discuss the best way to handle those impacts.

A few snippets:

“That the price of meat is too low might come as news to food consumers who, according to data from the Bureau of Labor Statistics, paid 14% higher prices for ground beef this June than they did in June 2013 and 29% more than two years ago. Recent droughts and high corn prices—due in part to Washington’s support for ethanol—are largely to blame. It is unclear how high prices must rise to overcome the view that meat is “too cheap.” Some industry critics have even called for new “meat taxes” to discourage consumption.”

and

“The Environmental Protection Agency estimates that U.S. agriculture, including livestock production, accounts for only about 8% of total greenhouse-gas emissions in the country. Livestock in the U.S. have lower greenhouse-gas footprints than in other parts of the world. This is partly because American producers generally use higher-quality feeds, higher-yielding breeds, and more productivity-enhancing technologies such as probiotics, vaccines and growth hormones. Future improvements in feed and animal genetics could further reduce animal-agriculture’s impact. As economists have shown, one should not underestimate the ability of innovation, markets, the courts and private negotiation to resolve the adverse effects of externalities.

Moreover, the concept of externalities when applied to food is nebulous. At a recent Institute of Medicine meeting I attended, a room full of Ph.D.s struggled to understand exactly what to measure.”

and

“Let us also not gloss over what is beef’s most obvious benefit: Livestock take inedible grasses and untasty grains and convert them into a protein-packed food most humans love to eat. We may be able to reduce our impact on the environment by eating less meat, but we can also do the same by using science to make livestock more productive and environmentally friendly.”

For more on that last point, see my previous post.

The piece was in part motivated by the fact that social commentators’ accounts of externalities often reflect a shallow understanding of complexity of the subject.  The economists A.H. Barnett and Bruce Yandle accurately discerned the fact that, “economists unwittingly developed a weapon of mass destruction that, in the hands of journalists and popular policy analysts, at times corroded almost to the point of uselessness the beneficial theory of markets and competition.”  As a participant in one of the CDC-IOM planning workshop on “Exploring the True Costs of Food”, I have witnessed the disconnect that often exists between public health advocates and economists on the nature and role of externalities (I discuss some that disconnect and the complexity of externalities in this article published in Agricultural and Resource Economics Review).  Often, factors that are argued to be externalities are simply zero-sum transfers (as is the case for health care costs paid by public insurance programs like Medicaid), have effects that are actually internalized in other market prices (such as the risk of injury to workers in meat packing plants), or are not externalities at all. 

If the issue is that livestock are consuming "too much" water and that water isn't appropriately priced, the key is to think about how to develop water rights and markets so that the price of water reflects its relative scarcity.  But, it should also be clear - given the correlation between drought and beef prices - that a lot of the water use is factored into the price of beef.

That there are externalities in beef production is hardly news.  The much more difficult question is how to address them.  Technological progress is a key solution.  Research shows that the carbon footprint of beef production fell 16% from 1977 to 2007, with much of that reduction resulting from responsible use of technologies.  Many consumers are averse to these externality-reducing practices and technologies, but more “natural” production systems are often associated with lower productivity, greater water and land use, and higher carbon footprints.  

Multiplicity of farm programs

A new report from the U.S. Government Accountability Office discusses the extent of farm subsidies in the US.

A few interesting bits:

“From fiscal years 2008 through 2012, the U.S. Department of Agriculture (USDA) reported spending about $114 billion on 60 programs providing financial assistance to farmers, including about $28 billion in crop insurance subsidies. ”

Although, interestingly enough . . .

“except crop insurance subsidies, most of the estimated 2.2 million farms reported receiving no program payments from 2008 through 2011”

However,

“about 37 percent (800,000) received a payment from at least one farm program. Farms receiving payments reported receiving $11,293 on average (median payment of $3,719) annually from various programs. Payments were higher if a farm received assistance from multiple farm programs—less than 1 percent of farms received payments of $57,899 on average (median payment of $27,412) annually from multiple programs. Larger farms or farms producing cash grains such as corn were more likely to receive payments from multiple programs than small farms or farms producing other crops. Larger farms also received more crop insurance premium subsidies than other farms.”

One of the things that can happen when there are so many over-lapping programs is that activities which appear to reduce risk may, in fact, do the opposite.  For example, here is a paper by Keith Coble and colleagues from a few years back showing that hedging in the futures market - an activity long thought to reduce price risk - may actually increase risk when a farmer is enrolled in other insurance government programs.  

Freedom to farm

As described in this New York Times article, Missourians are set to vote on a statewide constitutional amendment to "guarantee the right to 'engage in farming and ranching practices'.”

The amendment is supported by several farm groups in the state, and it comes about in response to initiatives in other states that have (or have tried to) outlaw certain animal production practices such as gestation crates for sows and battery cages for hens or to restrict use of genetically engineered crops.  

I'm not sure what to think about these sorts of amendments (a similar law was passed in North Dakota, and if this one in Missouri passes, I suspect we'll see similar propositions in other states).

On the one had, I see the supporters of the law trying to prevent the "unfunded mandates" that have occurred in other states: voters passing laws that shoppers are not fully willing to pay for via premiums in the marketplace.  On the other hand, the text of the law is vague and it is difficult to foretell what will be the consequences, intended and unintended alike.  

The amendment seems to enshrine a type of protectionism that is unlikely helpful for the economy.  Imagine an amendment to protect university professor's right to "engage in teaching and research practices" or an amendment 100 years ago to protect wagon wheel makers right to make wagon wheels.  It's hard to imagine those propositions gaining much support.  They - like the one aimed at farming - seem to violate of Kant's categorical imperative insofar as the rules attempt to set a different standard for farmers or professors or wagon wheel makers than for other workers or business owners.

This quote from a farmer in the NYT story reflects that sentiment:

““One thing’s for sure — it’s going to put ag culture above everybody else,” he said. “We’re going to be a different class of people. You won’t be able to complain about anything that we do. That should never be the case.””

That said, the attempt to paint this as a battle between "family farms" and "factory farms" is largely misplaced.  As if small family farmers don't like technology.  For example, here's one quote from Joe Maxwell, who works for who works for the Humane Society

““There are now two kinds of agriculture in America — we have seen over the last 30 years the advancement of the industrialized ag model,” Mr. Maxwell said. “The group of farmers who are aligned with industrialized ag believe big is better and they should be able to do whatever they want to the land and to the animals. Then there are a group of farmers who believe we are the caretakers of the land. I stand with many family farmers who are in opposition to this.””

There are many more kinds of agriculture than two.  Many family farmers are large; many use technology precisely because they want to take care of their land and animals.  

New Dietary Guidelines

The USDA and DHHS are in the process of revising the federal dietary guidelines.  It is unclear how similar or dissimilar the new recommendations will be relative to the current MyPlate recommendations. 

The committee drawing up the new recommendations has come under fire for what appears to be an attempt to work in environmental considerations when making the new dietary recommendations.

A recent appointment to the USDA has added further fuel to the fire.  Here's Jeff Stier writing in the Des Moines register:

“The appointment of Iowa’s Angela Tagtow, a controversial “environmental nutritionist” and local food activist, to head the U.S. Department of Agriculture’s Center for Nutrition Policy and Promotion is causing more headaches for the agency, already facing criticism about politicization of federal nutrition advice and its consequences for public health.”

It isn't necessarily a bad idea for the government to convey the scientific evidence on the environmental impacts of producing different foods.  The trouble comes when a single set of omnibus recommendations attempt to integrate disparate issues like environment, nutrition, and other factors.  

The trade-off between health outcomes, environmental outcomes, taste, and the price we pay (among other factors) is subjective and individual-specific.  Science might be able to tell us that eating food X is associated with environmental outcome Y and health outcome Z.  But, there is nothing in science that can tell us whether Y or Z is more important.  Nor should we expect every person to be willing to pay the same amount for Y or Z or to make the same trade-offs between taste and price to get these outcomes.  

Tell us which foods are more nutritious.  Tell us which foods are more environmentally friendly.  But, don't presume to know how much one values taste vs. nutrition, or environment vs. nutrition, or price vs. environment.  And, recognize that we can't have it all.  Life is full of trade-offs.