More on soda taxes

A few days ago, the World Health Organization (WHO) came out with report, suggesting the use of food taxes and subsidies to encourage healthy eating.  They were particularly in favor of soda taxes.  Soda taxes seems to be picking up steam in the U.S..  After passage in Berkeley, they will now be on the ballot in several locales in coming weeks.  

I've written so much on these topics, it's hard to know what more to say.  So, I thought I'd just, for the record, tell you what I had to say on a recent Food Sommelier podcast when the host asked me about this topic (and revealed her support for soda taxes, which came about in part because she said she felt guilty for having worked for PepsiCo earlier in her career).  

I'm in episode 38 and the discussion on soda taxes starts at about the 20 minute mark.  Here is my lightly edited discussion on the issue. 

“I’m not a fan of soda taxes for a whole host of reasons . . . but let me first say, though, that it’s really not that big a deal.  And that’s probably one of the reasons I’m against it . . .  As much as I’ve written about it, you’d think I’d get my feathers ruffled a lot [over things like the Philadelphia soda tax], but I don’t have a dog in the fight really one way or the other.  It’s not a big deal in the sense that, number 1, it’s just not going to have much of an effect on obesity rates if you look at the best available research.  We are talking about taxes that will have very, very small effects on people’s weight, and there a lot of reasons for that.  

There are substitutes for sugar sweetened beverages.  People can switch to juices or even non-beverage alternatives that may have calories in them.  I’ve seen a number of studies that suggest that.  Just because we put a tax on something doesn’t mean people are not going to consume calories; they might instead switch to something else equally caloric.  . . . 

We have these intuitions . . . and little thumb rules like for every 3,500 kcal we cut out, we lose a pound.  The reality is that relationship is not linear at all.  It’s nonlinear . . .  When we’re thinking in a linear way, each calorie I cut out will cause a constant reduction in weight, but it doesn’t really happen that way.  There are diminishing returns.  You may lose a little bit initially but then it will really level off.  . . .

When you look at the burden of the tax, and this is really true of almost any food tax, its going to tend to be borne relatively (at least relative to income) more by people in the lower economic strata of society.  The reason for that is that if you look at the share of spending on food, it tends to go down as we make more money.  What that means is that poor people are spending a larger proportion of their income on food. So, anything we do to make food more expensive, that burden or that tax, is going to tend to fall more heavily on lower income populations. . . .

I’ve got a paper actually coming out . . . where we compare very low income to regular income consumers.  What we tended to find there is that is that, especially in the case of subsidizing healthy foods, the richer consumers benefit the most because they’re already, first of all, consuming relatively health foods.  And, because we found . . . that the poor tended to want to stick to their original diets. They were more habit prone, so they didn’t change quite as much either when it was a tax . . . or a subsidy trying to get them to eat something a little healthier.  

I would say lastly, I’m going to bring up this sort of elitism. . . . This sort of paternalism argument.  We feel like we know how other people should be eating.  . . . I think it’s really hard to put ourselves in the shoes of other people, and so for us to take a step back and say ‘you should be doing something different; you should be eating more like me’ presumes that we know what it’s like to have their life and have their kind of income and know all the other sorts of things they’re facing. . . .  I have a problem philosophically with that. . . .

And I do think it’s different than . . . cigarette taxes.  With cigarette taxes there really was this externality – the second hand smoke.  When you’re smoking, that really does have an effect on the people around you.  With the drinking of soda, it’s really less clear there’s that same kind of phenomenon at play.  Most of what’s happening here is some kind of redistribution within our healthcare system because of Medicare and Medicaid.  But, that’s much more complicated than most people realize.  Most of what’s happening here are subsidies flowing from relatively wealthy people to relatively poor people because relatively wealthy people pay more in taxes. . . . It’s not a popular solution but part of the argument is that if people know their health care expenses are going to be taken care of, they’re going to eat in an unhealthy way . . . Economists call that a moral hazard.  The answer for a moral hazard is that people need to have some skin in the game.  We need people to pay a little bit of the costs of their health care.  It doesn’t have to be the same for everybody, and maybe it’s just a small amount for people who don’t have much income, but I think if the concern is that if people are going to behave “irresponsibly”, there needs to be a bit of a price for that in terms of their health care costs.  But, of course, there is a real price for being obese.  That’s something we tend to forget – that there is a lot of social shame associated with being obese, wages can be lower especially for women, and there are all the attendant medical costs, some of which are shielded from the consumer because of our health care system but a lot of those are borne directly.  There is a real cost to being overweight and obese, and people bear a lot of that just through their own daily lives.  

I’m running on here, but one last point that is really important because I hear so many people get this wrong.  What they say is, ‘well our farm policy system subsidizes food and makes sugar cheaper.’  That is absolutely false.  I’m not a fan of farm subsidies, but that particular argument is false for two reasons.  One is that if you look at cane sugar.  Cane sugar has a set of really convoluted policies, but they essentially restrict supply. . . . What [sugar producers via policy] are able to do is keep out foreign competition and keep other producers from growing sugar cane.  . . . World sugar prices are much higher than they would be if we didn’t have our US cane sugar policies.  The other thing is high fructose corn syrup (HFCS).  Right now roughly 40% of our corn supply goes to ethanol.  Ten years ago, that was mostly going to livestock and food processing. . . .  It’s not exactly a farm policy, but the energy policies we’ve had over the past 10-20 years have dramatically shifted corn production from going to places like HFCS to instead ethanol production and our cars, and as a result has made HFCS more expensive than it would be otherwise.  

Should we tax sugar?  In some ways, we already do, it’s just not very transparent that we’re doing it."                                       

Evaluating the Policy Proposals of the Food Movement

That is the title of a paper I presented a few months ago at a conference put on by the American Enterprise Institute.  

The paper is a critical evaluation of the food policy proposals put forth by by Mark Bittman, Michael Pollan, Ricardo Salvador, and Olivier De Schutterand (see here, here, and here).  As I argue in the paper, these policy proposals have largely escaped serious criticism, but it is important to take a closer look for the following reasons.

“While members of the so-called food movement have historically had much less influence on farm and food policy than, for example, farm commodity organizations, recent events suggest that power dynamic could be changing. Food movement members have been extraordinarily adept in fomenting the modern day food and farm zeitgeist, selling numerous bestselling books and garnering space in influential media outlets. For example, in 2015 the New York Times hosted a “Food for Tomorrow” conference which focused on food and farm policy issues that are centerpieces of the food movement agenda. First Lady Michelle Obama made food policy a signature issue by planting a White House garden, retooling school lunches, and including the White House chef as a policy advisor. The emergence of the local food and farm-to-table movements, as well as state ballot initiatives on labeling of genetically modified food and farm animal housing, can also be seen as outgrowths of the impacts of the food movement.”

The authors first start by painting a dire picture of the state of food and agriculture.  Then they offer a set of "guiding" principles before putting forth more than 20 specific policy proposals.  In the paper, I go point by point and address each one.  Here I'll just offer my summary:

“I demonstrate that the authors offer no consistent, underlying philosophical basis for when the federal government should (and should not) intervene and offer no framework for making tradeoffs when proposed “guarantees” come into conflict. Moreover, the authors misjudge the trajectory and impacts of changes in food and agriculture and thus overstate the urgency and scope for intervention. The authors’ numerous specific policy proposals tend to represent a hodge-podge of ideas that have already been tried, are already being undertaken by the USDA, or fail to hold up under close scrutiny, although there is some common ground on a few proposals. ”

In a particularly telling example, where the authors propose funding for all sorts of youth activities to promoting cooking and agriculture, they make no mention of the largest food and agricultural youth organizations already working in schools across the country: 4-H and FFA.  

Food Insecurity is Down

The USDA just released their annual accounting of food security in the United States.  Good news!  Food insecurity fell to 12.7% in 2015 (down from 14.9% in 2011).  Here's a key graph from the report.

One could quibble with the USDA's method of computing food security (it is based on  responses to a variety of survey questions), but whatever "flaws" are inherent in the USDA methods, as long as they have remained constant over time, the trends should be informative.  

Of interest is how food insecurity measures change with participation in SNAP (aka "food stamps).  Using USDA data on SNAP participation, I calculated per-capita participation which is shown in the following graph.  Though the pattern is somewhat similar (i.e., food insecurity and SNAP participation both rose after the Great Recession and then declined in 2015), it isn't a perfect corollary.  In particular, food insecurity is higher in 2015 than in was in 1995, but today there are more participants per capita on SNAP than there were in 1995.  

Another variable which might relate to food insecurity and SNAP participation is the price of food.  Here is a graph of Bureau of Labor Statistics data showing the price (or CPI) of food relative to the price (or CPI) of non-food items from 1995 to 2015.  

Over at the US Food Policy blog, Parke Wilde notes that even though food insecurity has fallen, it hasn't fallen nearly enough to keep up with food insecurity targets.  The above graphs suggest one potential reason why: food is relatively more expensive today than was the case 20 years ago.  Of course, the overall story is surely much more complicated than that.  

Why Do Farm Programs Exist?

Even though the last farm bill was passed only a couple years ago, I've already started to hear rumblings of lobbying groups jockeying for position in anticipation of the next farm bill which will likely be debated and go into place sometime in 2018 or 2019.  Some of the discussion has come about because of the low commodity prices which are leading to lower farm incomes.  Discussion is also spurred on by the presidential campaign and talk of the candidates' agricultural advisers.  There are also various groups lining up to try to reform farm policy.

Given that backdrop, now's probably as good a time as any to ask: why do farm programs and farm subsidies exist? The question (for this post at least) isn't whether they should they exist, but rather what explains their existence and persistence?  Also note I'm not talking about the reasons or justifications farm groups provide for why they say they need subsidies.  Rather I'm interested in why they actually exist in the first place.  What are the economic and political considerations that lead to the set of farm policies we see?

I touched a bit on this in a paper that was released this summer.  Here's a summary (see the paper for the references and more discussion).

A common explanation for agricultural subsidies is a model of concentrated benefits and diffuse costs: the costs of agricultural subsidies go relatively unnoticed by the general public because they are spread across all taxpayers, but the payouts are concentrated among a smaller group of farmers who are well organized and who lobby for the redistributive policies. While this explanation can go part of the way to explaining agricultural subsidies, there are many more considerations and empirical insights offered in the academic literature.  

One important fact to note is that farmers aren't subsidized in every country.  In fact, farm subsidies mainly exist in relatively rich, relatively urban countries with small numbers of farmers; in poorer, more rural countries with many farmers, subsidies tend to flow in the other direction - from the farms to the cities.  

This “puzzle” can be explained by political economy (or "public choice") models. For example, in 1994 Swinnen published a political economy model of farm support to explain why policies often differ markedly across countries, commodities, and time. His model views politicians as utility-maximizing actors who seek election in return for redistribution policies that increase political support. His model leads to a number of interesting predictions, such as (1) politically optimal farm subsidies will increase as agriculture’s share of total economic output falls, and (2) transfers to agriculture will increase if agricultural income falls relative to income outside agriculture.

In a seminal work on the topic in 1987, Bruce Gardner conceptualized agricultural support as arising from an attempt at efficient redistribution (i.e., minimizing the deadweight loss of transfers) given a weight assigned to the rents accruing to agricultural producers, which depends on political and economic characteristics of commodity interest groups. Gardner analyzed how agricultural support varied over time and across agricultural commodities and hypothesized that the weight given to agricultural producers depends on economic factors that convey political power. Groups that have more common economic interests and that are able to reduce the cost of lobbying are likely to garner greater redistribution.

Analyzing data on subsidies paid to 17 farm commodities from 1909 to 1982, Gardner found that redistribution to a given commodity fell (1) as the absolute value of the elasticities of supply and demand for the commodity increased, (2) when the number of producers exceeded one million, (3) the more production a commodity shifted geographically over time, (4) for commodities whose production was more geographically diffuse (rather than concentrated in a given region), (5) as farm income increased, and (6) for commodities that were imported less frequently.  Subsequent research by other authors has analyzed the relationship between political donations, lobbying, and congressional voting, and the general finding is that these activities increase subsidies and protection for agricultural groups. 

Finally, I'll mention an issue I rarely hear discussed among economists who have studied the political economy of farm support. Often ignored is the influence of another important interest group: voters and food consumers. A growing body of empirical literature has revealed that the US public is surprisingly interventionist when it comes to farm and food policy. As described by economist Bryan Caplan, voters are able to hold onto a variety of antimarket biases because they provide psychological benefits but are unlikely to impose significant costs (at the individual level). Thus, one possible explanation for why inefficient agricultural subsidies exist is that voters elect politicians who favor them. That is, one reason agricultural subsidies exist because a majority of voters want them. 

Berkeley Soda Tax

There have been a number of news stories about this new paper in the American Journal of Public Health that studied the impact of Berkeley's new sugar-sweetened beverage tax (aka "soda tax").  The authors surveyed residents of Berkeley before and after the implementation of the tax and asked about beverage consumption.  They also surveyed people in Oakland and San Francisco (who were presumably not affected by the tax) before and after the tax.  By comparing these two groups before and after, the authors can calculate something like a difference-in-difference estimate of the impact of the tax.

What did they find?

“Consumption of SSBs decreased 21% in Berkeley and increased 4% in comparison cities (P = .046). Water consumption increased more in Berkeley (+63%) than in comparison cities (+19%; P < .01).”

The results have been largely heralded as indicating that the taxes "work".  Here is a bit from the organization Healthy Food America:

“this study provides another key piece of evidence that sugary drink taxes work, not just to raise revenue for important community priorities, but also to reduce consumption and shift sales from an unhealthy product to healthier drinks, such as bottled water,” said Jim Krieger, MD, MPH, executive director of Healthy Food America. “As four other communities consider their own taxes this fall, the Berkeley findings join those from Mexico and elsewhere to show that sugary drink taxes have great benefits – especially in low income communities.””

We shouldn't be too surprised that a tax reduces consumption - more confirmation that the demand curve slopes downward.  Yay Econ 101!  The real question about soda taxes hasn't been "whether" but "how much" consumption falls when prices rise.  

First, I'll touch on some conceptual issue related to the interpretation of the study then offer a few thoughts on the study methods.  

As indicated, I've seen numerous studies showing that this paper "proves" that soda taxes "work."  I'm not sure what "work" means.  There have been scores of studies projecting impacts of soda taxes, and virtually all suggest the taxes will lower soda consumption by some amount (though curiously the evidence is much less clear if you look at studies that have looked at actual sales data before and after taxes).  But the goal isn't to reduce soda consumption for the sake of reducing soda consumption.  The goal, presumably, is to make people's lives better - to reduce obesity or other dietary related diseases.  On this front, the evidence is much less clear that soda taxes will have a substantive effect on body weight.  Moreover, as other studies have shown, we need to be cognizant of what people eat and drink instead when they substitute away from higher-priced soda, and many of these options could have adverse health impacts as well.

The largest conceptual issue in all this is whether a tax can actually make people better off.  Yes, a tax can reduce consumption.  But, does that mean people are happier?  Even if people switch to a lower-priced alternative after a tax, it doesn't follow that they're necessarily better off.  After all, consumers could have chosen the lower-priced alternative before the tax if that's what they really preferred.  Thus, the tax causes people to choose a lesser-preferred option.  This is a standard economic result: consumer welfare falls when prices rise.  Here's what I wrote in a piece for the Canadian Journal of Diabetes. 

“More fundamentally, one must ask what conceptual basis is being used to assert that SSB taxes will increase consumers’ welfare? Presumably, some consumers already consider health impacts when they choose what to eat and drink. More generally, taxing food or SSBs is analogous to reducing consumers’ real income, which almost certainly harms the consumers (9). Perhaps consumers suffer from lack of information or other cognitive biases, but even so, Lusk and Schroeter (10) show that only in very limited cases would a tax increase consumers’ long-term welfare. Sugden (11) further points out the philosophical (not to mention political) problems encountered when attempting to base public policy on the presumption of consumers’ behavioural biases. In particular, asserting that someone else consumes “too much” SSBs presumes that the nutrition expert or politician knows better which factors most impact an individual’s ultimate well being than the individual herself or himself. Such paternalism may be justifiable in the case of children or the mentally impaired, but it is less compelling when considering the general population. It is likely the case that excess consumption of SSBs will lead to health problems; however, people care about tasty, satisfying foods and beverages in addition to health. Life is full of difficult tradeoffs, and it is conceptually problematic for a third party to deem another person’s choices wrong or incorrect, given that different people have different preferences, incomes and constraints (assuming that people are making decisions with accurate information about the risks they face). If the argument is that people do not understand the risks of SSBs, then the appropriate policy response is information provision, not a tax.”

I went on to tackle the argument that rising public health care costs justify the tax, but I won't belabor the point: showing a tax "work" involves much more than showing that it reduces consumption.  

Now on to the Berkeley study's methods.  Overall, this is a nicely designed study that uses a difference-in-difference approach to try to tease out a causal effect.  My biggest beef with the study is that it relies on consumers' stated consumption behaviors.   The Berkeley tax has been a high profile event, and no doubt many Berkeley residents were aware of the debate and policy change.  It is possible that what we're picking up is some form of social desirability bias: Berkeley residents know they and their neighbors passed a tax on soda, and now here's this researcher asking about soda consumption.  The social pressure is clear: I don't want to be the kind of person who consumes the product everyone else wants to tax.  I don't want to look like some kind of social outcast, so I'm going to hedge and give a lower level of consumption than I actually consume.  

Why didn't the authors do this study using scanner data based on actual grocery sales?  These data are easily attainable from companies like Nielsen and IRI and can't be much more expensive than the surveys the authors conducted.  Even still, there would be other questions about the longevity of the effect, the substitution toward other food and beverages after the tax, the degree of substitution across city boundaries, and so on.

All that said, I'm more than willing to accept the finding that the Berkeley city soda tax caused soda consumption to fall.  The much more difficult question is: are Berkeley residents better off?