Inequalities of Fat Taxes and Thin Subsidies

I was excited to see The Economist ran an article on my paper with Laurent Muller, Anne Lacroix, and Bernard Ruffieux, which appeared in the Economic Journal.  In typical Economist fashion, they didn't mention us by name, but here's their summary of our findings:

“The study found that the taxes and subsidies actually widened health and fiscal inequalities. Fat taxes meant the women on lower incomes paid disproportionately more for food—their habits changed less. They preferred to buy food they liked rather than what made nutritional sense. Taxing the food they eat most made the poor poorer.

Subsidies encouraged all income groups to buy more fruit and vegetables. But those on higher incomes proved more responsive and so benefited most. Interestingly, richer folk were also more likely to buy the subsidised healthy food and then spend the savings they had accrued on yet more healthy food. But poorer women, if they responded to lower prices, often used the money saved to buy unhealthy items or something else entirely. Once the nutritional price policies were applied, the average share of budget spent on healthy food actually increased for the better-off. ”

How Food Consumption Varies in Rich and Poor Countries

The American Journal of Agricultural Economics recently released an interesting paper entitled by Kenneth Clements and Jiawei Si.  Using previously unpublished data from the World Bank on consumption of 31 different food items in 150 countries, the paper has a lot of fascinating details about how food consumption differs in rich and poor countries, where find "substantial differences in per capita incomes lead to sharp, almost extreme, differences in consumption patterns."  I took some of the data in their paper to construct the graphs below.

First, their data strongly support "Engel's Law" in that the share of income spent on food declines the wealthier the country.  One of the poorest countries in their sample is the Central African Republic where consumers spend 64% of their income on food; in the richest countries like the U.S. and Bermuda, consumers spend less than 10% of their income on food.

The paper reviews some interesting details about how food expenditures differ across countries.  For example, the figures below show how consumers' food budgets are allocated in the richest quarter of countries as compared to countries in the lowest quartile of income.  I've drawn the pie charts so that they are roughly proportional to the quantity of food consumed in each country grouping.  Consumers in the lowest income countries consume about 77% less food than consumers in the highest income countries.  So, compared to richer consumers, poorer consumers are not only consuming a larger share of their income on food, they're eating less food.  

The other thing revealed in the graphs below is that richer consumers have greater diversity in their diets than poor consumers.  Just to give one example, Clements and Si estimate that consumers in richer countries spend only 3.3% of their food budget on rice and other cereals and flours (this is part of the 14% for bread, rice, and cereals in the figure below), but consumers in poorer countries spend 23.7% on rice and other cereals and flours (this is part of the 29% for bread, rice, and cereals). Thus, poorer consumers diets are more concentrated in rice and cereals and is less diversified in other foodstuffs.  Of course dietary diversity is a key measure of the nutritional quality of consumers' diets.  Clements and Si estimate that the diets of the rich are 3.5 times more diverse than the poor's.  

They write:

“A more varied diet brings nutritional advantages and for most, diet diversity is valued in and of itself, if not an essential part of their life. As the diversity of the diet tends to increase with income, not only does the food share fall with higher incomes, spending is also likely to be spread more evenly over foodstuffs, providing a more balanced diet. Relatedly, higher incomes bring a shift away from lower-quality items, towards more expensive, possibly more tasty and nutritious foods.”

Clements and Si find other interesting consumption patterns, such as the following::

“we find considerable differences between pairs of countries. Higher incomes bring higher-quality food, but the overall elasticity is small: enhanced food quality can only be achieved with substantially higher incomes. Furthermore, better-quality food comes at a higher price, but interestingly, this cost, relative to lower-quality food, falls as we move from poorer to richer countries. The structure of food prices is thus regressive in its impact on the global distribution of real income. This effect is modest, however.”

The whole thing is here.

Food Values of the Rich and Poor

As I've discussed in the past, I've been measuring consumers "food values" in the monthly Food Demand Survey (FooDS) for the past four years.  The way this works is that a list of 12 items is presented to respondents and they are asked which are most and which are least important when buying food.  Respondents have to click and drag four of the items into a "most important" box and also put four in a "least important" box, leaving four in neither box (for exact question wording see page 7 of this document).  

The advantage of this questioning approach is that it requires a tradeoff - respondents can't say all issues are important and they have to indicate some food values as least important.  To create a scale of importance, I simply calculate the percent of times an issue is placed in the most important box and subtract it from the percent of times it is in the least important box, creating a measure that ranges from 100% to -100%.  

Month in and month out, we consistently find that taste, safety, nutrition, and price are the four most important food values and environment, origin, fairness, and especially novelty are the least important.  Issues like appearance, naturalness, animal welfare, and convenience fall in the middle.  

While the above rankings of values are true on average, it is useful to ask: how do food values differ across consumers with different incomes?  This question is important because not all consumers have the same preferences, and the people with the ability and connections to affect public policy (and grocery store bottom lines) may give priority to food issues that are less relevant to people in the lower end of the socioeconomic spectrum.  

To address this issue, I used some statistical analysis to control for differences in age, gender, education, etc. and then compare how people in different income categories rate each food value.  For ease of comparison, I always set the food value of people lowest income category (less than $20,000 in annual household income) at zero and compare how much higher or lower (again on the -100% to +100% scale) people in other income categories are relative to consumers in the lowest category.    
 

Food Values Relatively More Important to the Poor than the Rich

There were three food values for which importance tended to decline with income: price, safety, and taste.  The big one is price.

Compared to consumers in the highest income category (more than $160,000/year in household income), consumers in the lowest income category (less than $20,000/year in household income) place 42 percentage points higher level of importance on the price they pay for food.  Recall that the scale only spans from +100 to -100, and as such, this is a huge difference in the importance of price.  The implication is that policies and actions that adversely affect food prices will matter much more to lower than higher income consumers.  This isn't necessarily surprising, but as the above graph shows, the difference in magnitudes is remarkable. 

Lower income consumers also place relatively more importance on food safety than higher income consumers as indicated in the graph below, however the differences aren't as pronounced as that for price.  Note that this doesn't mean high income consumers don't care about food safety per se, only that safety is less important than other food values to the rich compared to the poor.

Lower income consumers also tend to place a lower relative value on taste than higher income consumers, however, the differences aren't particularly pronounced (at most a 7 percentage point spread between high and low income).

Food Values Relatively More Important to the Rich than the Poor

There were five food values for which importance tended to increase with income: naturalness, nutrition, environment, novelty, and origin.

As the figure above shows, the highest income consumers placed about 12-14 percentage points higher importance on naturalness than lower income consumers; for nutrition and environment (see below), the results are similar.  

The environment result is somewhat relevant to debates about the environmental Kuznets curve, which posits that as a country's income increases from a low to mid level, the environment degrades, but then as income increases from a mid to higher level, the environment improves.  One reason cited for the later results is that as people become wealthier, they care more about environmental amenities.  The above graph suggests this is true for the environmental impacts of food production as well.

The figure below also shows that higher income households place a higher relative value on the novelty of food than lower-income consumers.  This results is consistent with other research that suggests that lower-income households cannot afford to purchase novel or unfamiliar foods that other household members may not like and that might go uneaten.  That is, higher income households can afford the "risk" of trying new foods that may ultimately go to waste.

Published papers

In a testament to the slowness of academic publishing in economics, I noticed two co-authored papers were just released that we've been working and waiting on quite literally for years.  

1) The Economic Journal finally released a paper I wrote with Laurent Muller, Anne Lacroix, and  Bernard Ruffieux.  I blogged on this paper about a year and a half ago when it was first accepted. In short, we find that "fat taxes" and "thin subsidies" are a double whammy on the poor because the price policies lead to i): the poor paying higher taxes owing to the fact they tend to eat more unhealthy foods than the rich, and ii) the poor receiving fewer subsidies owing to the fact they tend to eat fewer healthy foods than the rich.  These effects were exacerbated by the finding in that the poor tended to be more habit prone than the rich, sticking more to their now relatively more expensive diets. These findings have direct implications for the food movement policy proposals I discussed last week.   

2)  In early 2010, I was working with a bright young Master's student named Rock Andre.  Rock happened to be from Haiti, and when the earthquake hit his homeland, he decided to shift his research focus.  He returned home in the aftermath of the earthquake and surveyed over 1,000 people.  Development Policy Review just published that research.  Here's part of the abstract:   

“The results indicate that almost two thirds of Haitians lost a friend to the earthquake, and nearly half lost a family member. People reported spending more on food in the aftermath of the earthquake, and the level of food aid received does not appear to have any impact on food expenditures. Among different types of aid, Haitians stated being most in need of a job—something difficult for international aid agencies to supply over the long run. They also indicated that quality of life would be most improved by education. The lessons learned in Haiti may prove useful in addressing future natural disasters.”

Paarlberg on Farm Policy

Yesterday, I posted on a paper I wrote critiquing some of the proposals of the food movement.  As such, its probably only fair that I share a paper sent to me by a reader.  It was written by Don Paarlberg in 1987 and takes issue with farm policy from the Depression up to that date.  I found the history fascinating; the paper is short and well worth a read.  By the way, Don was a Professor of Agricultural Economics at Purdue and was a former Assistant Secretary of Agriculture.  

Here's an excerpt that shows some of the challenges with trying to manage agricultural prices and supplies.

“Some of the antics of the commodity programs are so ludicrous as to be almost unbelievable. Dairy programs are perhaps the most fantastic. The government supported the prices of dairy products with the intention of increasing dairy farm incomes. But, as every student who has taken a beginner’s course in economics knows, the result was to stimulate production, reduce consumption, and accumulate a surplus. The surplus of butter, cheese, and dried milk was then donated to those on the welfare rolls. This proved to be an inadequate outlet so then these products were donated overseas. The surplus was still growing so the government bought and slaughtered whole herds of dairy cattle. Thereupon the beef cattle producers, who are self-reliant and are not shielded by price supports or production controls, complained of this subsidized competition with their product and the government responded by purchasing beef for donation to the school lunch program. This did not adequately alleviate the complaints of the beef producers so the government exported beef from the slaughtered dairy herds, a strange action indeed since we suffer from beef shortages and import substantial amounts. Our forced exports of dairy beef disturbed other beef exporters, making an additional problem for the GATT multinational trade negotiations in Geneva. All of these questionable strategies were undertaken because the government was unwilling to follow the most simple and effective expedient: lowering the official price.

Meanwhile, those dairymen who stayed in business currently anticipate a reduced supply of milk and a better market. They are increasing their herds and laying the basis for a larger supply of milk. Like the sorcerer’s apprentice, they have heard the signal for delivering more water (in this case, milk) and have heard no credible signal for stopping. The commodity programs create surplus. They make a burden of what should be a blessing—our capability to produce food.”