Fat Tax Complications

About four months ago, I gave a talk at a planning meeting of the Institute of Medicine of the National Academies hosted by the CDC​.  The title of the meeting was the "Exploring the True Costs of Food."  Health, nutritional, epidemiological, and environmental experts from all the top Universities were there as were representatives from major livestock industries and food and environmental NGOs.  

The implicit objective of the meeting was to determine factors affecting the "true" cost of food.  As an economist, my initial response to such inquiries is "markets already do that."  Except when there are externalities.  Aside from what seemed (at least to me) some slivers of agreement on a few environmental issues, there was remarkably little agreement between some of the economists in the room and the nutrition/health experts on the extent to which obesity and other diet-related diseases represent an externality.  

I won't rehash the whole debate in one post, but I do want to make reference to one issue that I mentioned several times at the meeting.  ​It is an issue that Robert Murphy discusses in a feature article just released at the Library of Economics and Liberty.  His argument, which relies on work in an American Economic Review article by Bovenberg and Goulder, relates to carbon tax swaps, but it could equally apply to issues like fat taxes.

In short, even if we could agree that obesity and dietary-related diseases represent an externality (and we don't), one would still have to do the really hard work of determining the "optimal" tax.  This hard work is further complicated by the fact that there are myriad distortions in the economy from other taxes, subsidies, and regulations.  Another complicating factor is that an "optimal" tax is not a static measure - it changes constantly with prevailing conditions such that the "optimal" tax at one point in time can actually do more harm than good​ when market conditions change.  Just look at a plot of corn or soybean prices over the past five year and it is quite clear that market conditions can and do change rapidly.  Moreover (and this is one of the key points of Murphy's article), it can't be taken for granted that the revenues from a fat tax would be subsequently used in ways that generate economic benefits that are often presumed by fat tax advocates.  

Here is the second paragraph of Murphy's article:​

Although the thinking underlying the conservative case is correct, there is a potential downside from a carbon tax swap. This negative side effect is rarely mentioned in any but the most technical discussions. It is the "tax interaction effect." A new carbon tax can exacerbate the harms caused by pre-existing taxes, thereby offsetting the potential environmental benefits. What's worse, not only can the tax-interaction effect operate in theory, but also numerical simulations suggest that it might be very large in practice, greatly reducing the "optimal" carbon tax.

​and the last:

Proponents of a carbon tax swap deal are right when they claim that the gross harms of a new carbon tax can be partially offset if its receipts are used to reduce other taxes. However, they typically leap from this true claim to the unjustified conclusion that a revenue-neutral carbon tax will be a "win-win" for the economy—by reducing distortions from the tax code as well as providing environmental benefits. On the contrary, it is theoretically possible and empirically likely that a revenue-neutral carbon tax will impose more deadweight loss on the economy, offsetting at least some of the potential environmental benefits. A carbon tax may still be a good policy, but its proponents should first understand the tax-interaction effect before making their case and choosing the tax level.

How do Californians Plan to Vote on Prop 37?

​That is the question many in the food and agricultural community have been asking.  Because of a recent survey that Brandon McFadden and I just conducted, we now have a much more definitive answer.  

Here is the executive summary from our report, which we just released today.​  I will have more to say about the findings in future posts.

A new poll was conducted during September 20-27, 2012 among 1,003 Californians, 822 of whom were considered likely voters in the November 2012 election.  Respondents were asked about their knowledge, likely vote, and reasons for voting on Proposition 37 related to mandatory labeling of genetically engineered (GE) foods.  We also studied how respondents reacted to either a “vote YES” or “vote NO” commercial on Prop 37. 

A large majority of likely voters, 76.8%, indicated an intention to vote yes on Proposition 37.        

Among those indicating an intention to vote yes, 71% said the primary reason was because “people have the right to know what is in their food,” followed by 16% who said it was to “make the food supply safer.”  Among those indicating an intention to vote no, 35% said the primary reason was “to avoid higher food costs,” followed by 22% who said it was “because it will impose unneeded costs on farmers” and 17% who said it was “because genetically modified foods are not harmful.”

Despite the large majority of voters planning to vote in favor of Prop 37, several results suggest the potential for erosion of support in the coming month.

A follow-up question asked respondents with an intention to vote yes: “Would you still vote "YES" on Proposition 37 if you knew it would increase food prices by X%,” where the value X was randomly varied from 5% to 25% across respondents.  Upon the prospect of a price increase, 46% of respondents who previously said yes switched their intended vote to no.  Our statistically analysis reveals that Prop 37 will garner majority support at a food price increase lower than 11.9%, but for any price increase greater than 11.9%, more than 50% of likely voters will vote against the proposition. 

Half the sample was randomly assigned to a group shown a “YES Prop 37” commercial and the other half was shown a “NO Prop 37” commercial.  After watching the “YES Prop 37” commercial, the percentage of voters indicating an intention to vote yes was 77%, almost identical to the vote indicated prior to watching the commercial.  However, after watching the “NO Prop 37” commercial, only 59% indicated an intention to vote yes on Prop 37.  Thus, at least among the two commercials we considered, the “NO Prop 37” video was much more effective. 

Overall, California voters were highly uninformed about the use of genetic engineering in general and about Prop 37 in particular.   Only 43% could correctly identify the topic of Prop 37 out of six topics presented.  When asked what percentage of corn, soybean, and wheat acres were planted with GE varieties in the U.S., respondents indicated, on average, 48%, 47%, and 45% respectively (the reality is 88%, 93%, and 0%).  On average, voters thought 47% of products on grocery store shelves had GE ingredients.  When asked if any products sold by Coke/Pespi, Frito Lay, Kashi, and Kellogg contained GE ingredients, only 31%, 45%, 21%, and 41% answered in the affirmative.

Another Dustbowl Averted

There is a group of people that like to bemoan the ills of modern agriculture and who cannot seem to see much good in our present system.  This piece in USA Today last month is a good reminder that things really are better off than they once were (HT Darren Hudson).  

Large parts of the Midwest experienced severe drought this summer with little rainfall and record high ​temperatures.  The conditions were like those that led to the 1930's Dust Bowl.  Yet, we didn't experience anything like it.  Why? 

According to the story:​

In the past 20 years, farmers have transformed from plowing fields 8 to 11 inches deep to "no-till" or "conservation-tillage" practices designed to minimally disturb the ground. That exposes the soil to less wind erosion, preserves natural nutrients, and captures and retains what moisture does fall. These minimum-tillage practices have been around since the 1960s, but farmers did not begin using them on a widespread basis until the 1990s.

Seed companies have built drought-, disease- and insect-resistance into plants. That not only helps crops resist extreme weather and pests but also requires fewer tractor passes through fields, lowering production costs and leaving the ground less packed and less likely to let moisture run off.

​Couple those technological advancements (no-till farming by the way is made easier with biotech seeds which allow broad application of herbicide), farmers' improved knowledge and know-how, and the Conservation Reserve Program which pays farmers not to plant environmentally sensitive land, and another dust bowl was averted.  

Organic Food Misperceptions

In my experience of doing numerous studies on consumer perceptions of organic foods, ​I've found a strong "halo effect."  That means the positive word "organic" acts as a halo and makes everything else about organic appear good even if it's not.  The result is that people often believe a lot of things about organic that aren't true.  

This piece by Christie Wilcox on the Scientific American blog ably dismantles two widely perceived myths about organic food: namely that organic foods don't use pesticides (they do) and that natural pesticides are less toxic than synthetic pesticides (they aren't).  

Effects of School Lunch Policies

This humorous vi​deo by some students in Kansas takes on the changes in the school lunch program brought on by the Healthy, Hunger-Free Kids Act of 2010.  

Although the kids mainly take issue with the calorie restrictions in the Act, one of the more subtle points in the video is that kids have lots of options.  If they don't like what's being offered at school, they can go off campus or just wait till they get home.  The ability of students to substitute tends to limit the effectiveness of school lunch interventions.  For example, this study found that: 

students who eat school lunches tend to consume fewer vegetables away from school, indicating that there might be some substitution effect present

​and

A policy of no store or snack bar leads to increased consumption of fruit in school. At the same time, there is some indication this policy is associated with less fruit and vegetable intake at home

A parody on the national school lunch policy mandated by The Healthy, Hunger-Free Kids Act of 2010 which humorously shows the results of the limitations in carbohydrates and proteins. No copyright infringement of original song "We Are Young" by Fun. was intended.