Unanticipated Effects of Soda Tax, example 1037

On the surface the logic of a soda tax seems simple: raise the price of an unhealthy food, people consume less, and public health improves.  But, as I've pointed out again and again on this blog, the story is much less simple than it first appears.  

First, even if we believe people suffer from various behavioral biases, higher prices almost certainly make people worse off.  Second, when we raise the price of one unhealthy thing, people might substitute to consume other unhealthy things.  Third, if the tax is just added at the checkout counter and not on the shelf display, it may not have nearly the effect on purchase behavior as assumed.  Forth, if people know the reason for the tax, some may "protest" and buy more instead.  Fifth, the projected weight loss from such taxes often relies on unreasonable rules of thumb like 3500kcal=1lb. Six, even when taxes have an effect, the causal impact may arise more from an "information effect" rather than a "price effect."  Seventh, such taxes may induce unanticipated effects because of how sellers respond to the policy.  Finally, soda taxes are regressive - having a proportionally larger effect on on lower income households (see also my co-authored paper on effects of "unhealthy" food taxes more generally).

Now, comes this new paper in the American Journal of Agricultural Economics by Emily Wang, Christian Rojas, and Francesca Colantuoni, which incorporates the insight that some households are more likely to respond to promotions and to store.  The abstract:

“We apply a dynamic estimation procedure to investigate the effect of obesity on the demand for soda. The dynamic model accounts for consumers’ storing behavior, and allows us to study soda consumers’ price sensitivity (how responsive consumers are to the overall price) and sale sensitivity (the fraction of consumers that store soda during temporary price reductions). By matching store-level purchase data to county-level data on obesity incidence, we find higher sale sensitivity in populations with higher obesity rates. Conversely, we find that storers are less price sensitive than non-storers, and that their price sensitivity decreases with the obesity rate. Our results suggest that policies aimed at increasing soda prices might be less effective than previously thought, especially in areas where consumers can counteract that price increase by stockpiling during sale periods; according to our results, this dampening effect would be more pronounced precisely in those areas with higher obesity rates.”

Worrying Trends with Farm Surveys

“Response rates on [USDA-National Agricultural Statistics Survey] crop acreage and production surveys have been falling in recent decades (Ridolfo, Boone, and Dickey, 2013). From response rates of 80-85 percent in the early 1990s, rates have fallen below 60 percent in some cases (Figure 1). Of even greater concern, there appears to an acceleration in the decline in the last 5 years or so, suggesting the possibility that this decline reflects a long-term permanent change.”

That's from an interesting (yet worrying) article by the USDA chief economist Robert Johansson along with Anne Effland, and Keith Coble at farmdocdaily. 

Why does this matter?

Responses to these surveys form the basis of what we think we know about, for example, how much farmland is in production, how much corn vs. soybeans is planted in a given year, the extent to which wheat yields are trending upward, and more.  It's hard to understate how much of what we think we know about the state of U.S. agriculture stems from these surveys.   For examples, I used these data in my article in the New York Times to describe the gains in farm productivity over time;  economists use the data to try to predict the possible effects of climate change on crop yields and farm profitability; the data are used to try to figure out how farmer's planting decisions respond changes in crop prices (which provide estimates of the elasticity of supply, which feed into various models that inform policy makers), and much more.

The concern with falling response rates is that the farmers who respond may be different than the one's who don't in a way that biases our understanding of crop acreage and production.  The authors write:  

“Reduced response rates can potentially introduce bias or error to the estimates released by USDA. For example bias may occur if higher yielding farms drop out. Reduced response will almost assuredly introduce error to the estimates making them noisier and randomly more inaccurate. This will be most noticeable in county estimates. ”

The authors go on to note that some farm program payments depend on county-level yield estimates (which the above note notes are now less reliable).  As such, this isn't just some academic curiosity, but an issue that could literally affect millions of taxpayer dollars.    

The problem of declining response rates isn't just with farmers.  This paper, appropriately titled "Household Surveys in Crisis", points out it is an issue with other government surveys of households as well. These are the surveys that attempt to provide statistics on people's incomes, employment, and so forth.

The solutions to these problems are not obvious or easy.  Here is the authors' take:

“Some research suggests that tailoring survey approaches to differing audiences within the survey population could improve response rates (Anseel et al., 2010). Other data sources like remote sensing, weather data, modeling, machine data, or integrated datasets may also be useful in providing additional information. NASS already makes use of some of these other data sources and methods in developing estimates, but as a supplement, not a replacement, for survey data. Further use of such sources is costly. For now, the best approach remains encouraging greater producer response.”

How risk averse are you?

Economists have long been interested in trying to figure out people's tolerance for risk.  Such information is useful in predicting, for examples, which crops farmers will plant, which stocks investors will buy, how much insurance is bought, how much of a premium one is willing to pay for organic food, and how fast people drive.  Of course, we don't expect all people to have the same risk preferences, so for decades economists have sought to identify tools and methods that will allow them to discover different people's levels of risk aversion.

One of the most popular techniques is the so-called Holt and Laury (H&L) multiple price list (MPL) based on this paper in the American Economic Review.  As of this writing, the paper has been cited 3,900 times according to googlescholar, making it one of the most cited economic papers published in the last 15 years.  The approach requires people to make a choice between a relatively safe lottery (e.g., 10% chance of $2 and a 90% chance of $1.60) and a relatively risky lottery (e.g., 10% chance of $3.85 and a 90% chance of $0.10).  Then, the subject repeats the choice except the probability of the higher payoffs increases.  This process is repeated again and again about 10 times until one gets to the very easy choice between 100% chance of $2 and 100% chance of $3.85 (If you don't know which of those you prefer, give me a call.  We need to talk).  One very crude measure of risk aversion is simply the number of times a person chooses the relatively safe lottery over the relatively risky lottery.  

The H&L method is relatively easy to use, which goes a long way toward explaining it's popularity.

With all that as a backdrop, I'll point you to a new paper I published with Andreas Drichoutis in the Journal of Risk and Uncertainty. We point out an important problem with using the H&L method as a measure of risk aversion and propose a new, yet equally easy to use, MPL that helps solve the problem.  If you're not an academic economist, the rest of this may get a bit wonky, but here goes:

“In what follows, we show that H&L’s original MPL is, perhaps ironically, not particularly well suited to measuring the traditional notion of risk preferences — the curvature of the utility function. Rather, it is likely to provide a better approximation of the curvature of the probability weighting function. We then introduce an alternative MPL that has exactly the opposite property. By combining the information gained from both types of MPLs, we show that greater prediction performance can be attained.”

Here is one of the main critiques of H&L, which relates to whether people weight probabilities non-linearly (the parameter γ is a measure of the extent to which probabilities are "distorted").

“Now, consider a simple example where individuals have a linear utility function (i.e., they are risk neutral in the traditional sense), U(x) = x. With the traditional H&L task, a risk neutral person with U(x) = x and γ = 1 would switch from option A to B at the fifth decision task. However, if the person weights probabilities non-linearly, say with a value of γ = 0.6, then they would instead switch from option A to B at the sixth decision task. Thus, in the original H&L decision task, an individual with γ = 0.6 will appear to have a concave utility function (if one ignores probability weighting) even though they have a linear utility function, U(x) = x. The problem is further exasperated as γ diverges from one. Of course in reality, people may weight probabilities non-linearly and exhibit diminishing marginal utility of earnings, but the point remains: simply observing the A-B switching point in the H&L decision task is insufficient to identify the shape of U(x) and the shape of w(p). The two are confounded. While it is possible to use data from the H&L technique to estimate these two constructs, U(x) and w(p), ex post, we argue that more information is contained about w(p) than U(x) in the original H&L MPL.”

The other problem we point out with the H&L approach is that it provides very little information about the shape of U(x) as only four dollar amounts are used in the design (and only two differences are uniquely identified).  Instead, 10 different probabilities are used, which provides much more information about the shape of γ.  What can one do about this if they truly want to know about the shape of U(x)?  We suggest a new kind of payoff-varying MPL.

“Given the preceding discussion, one might ask if there is a simple way to use a MPL that yields more information about U(x) and, at least in some special cases, avoids the confound between w(p) and U(x)? One can indeed achieve such an outcome by following an approach like the one used by Wakker and Deneffe (1996) in which probabilities are held constant. Using this insight, we modify the H&L task such that probabilities remain constant across the ten decision tasks and instead change the monetary payoffs down the ten tasks. ”

I'm under no allusion that our new MPL will become nearly as popular as the original H&L task.  But, if we even get one-tenth their number of citations, I'll be thrilled.

Agricultural Economics Journals

For the professional agricultural economists out there, you might want to take a look at my latest President's column in the Agricultural and Applied Economics Association (AAEA) Exchange.

Here's a preview:

“There have been some dramatic changes in the publishing landscape for authors of journal articles in agricultural and applied economics. However, my sense is that these changes are not widely known or acknowledged. As a result, the AAEA and some of our “sister” associations have been caught a bit flat footed. Despite the fact that the publishing landscape has dramatically changed in the past decade, some core aspects of the AAEA’s journal offerings have remained static. If we want to continue to serve our members and remain a source for key research in agricultural and applied economics, some change is likely warranted.”

The whole thing is here.  I'll also emphasis the closing call for feedback and input:

“More broadly, the aforementioned changes have prompted the board to consider whether and how the AAEA might increase the supply of journal articles published under the Association’s banner either through existing outlets or perhaps through a new one entirely. We are in the beginning stages of thinking about how to respond to these structural changes in the publishing landscape. I’d appreciate hearing your thoughts and suggestions. ”

Country of Origin Labeling and Cattle Imports

My post from back in November about the (lack of a) relationship between the repeal of mandatory country of origin labeling (MCOOL) and cattle prices seems to have been receiving a lot of attention lately.  A main driver seems to be that Tomi Lahren, a conservative journalist with a large social media following, again promoted the idea that MCOOL was a cause of declining cattle prices in a video interview with R-CALF's CEO.  For a summary of the controversy see this article by Carrie Stadheim in the Tri-State Livestock News. 

I won't re-adjudicate my original arguments as you can read them for yourself.  However, I do want to bring some data to bear on an additional claim that has been made in relation to MCOOL and cattle prices.  The article in the Tri-State Livestock News contains a quote that seems to be attributed to me, but I said nothing of the sort.  I presume, instead, the "he" in quote below is the R-CALF CEO.  Here's the quote:

““Without COOL…meatpackers can reach out and source live cattle and beef from 20 countries, bring it into the US, sell it to unsusepecting consumers with a US inspection sticker on it, even though it comes from a foreign source and consumers don’t know the difference,” he said.”

So, let's take a look at the implication of this argument.  We repeal MCOOL, and now meatpackers turn to the 20 countries and import more meat.  And, presumably, this caused the decline in cattle prices?

Well, here is USDA data on meat and veal imports to the US and on live cattle imports to the US.  The solid black line is the date of the repeal of MCOOL.

There was an uptick in live cattle imports right after repeal of MCOOL but then an even more dramatic decline.  Overall the above figure suggests no discernible impact of MCOOL on US imports of beef or cattle.  If I look at the total imports the first 11 months of 2015 prior to repeal of MOOL and compare it to the first 11 months of 2016 after the repeal of MCOOL (I use the first 11 months because the December 2016 data is not yet out), I find that, if anything, US imports of beef and cattle are, in fact, down after the repeal of MCOOL by 369 million pounds and by 297,290 head, respectively.   

Here's the thing.  Yes, it is true that: "meatpackers can reach out and source live cattle and beef from 20 countries, bring it into the US".  But, all those countries selling meat to the US can sell it instead to dozens and dozens of other countries instead.  And, why would these countries try to sell more meat to the US when prices are down in this country?  They wouldn't and the didn't.  

In any event, the point of all this isn't to argue for or against MCOOL.  Rather, I'm simply trying to make sure the claims being made about MCOOL mesh with the best evidence we have, and that evidence suggests that repealing MCOOL seems to have had very little effect on cattle prices.  Attention would be better focused on other issues to help ranchers and cattle producers who are currently experiencing financial hardship.