Cost Effectiveness of Soda Taxes

In a piece for Cato, Christopher Snowden discusses the effectiveness (or lack thereof) of soda taxes that seem to be gaining traction worldwide.  Snowden's views closely mirror my own.  I like the way he framed the relative effectiveness of soda taxes in this passage:

“Whilst the benefit remains forever on the horizon, the cost can be easily calculated; it is simply the amount of money squeezed from consumers by the tax. In New Zealand, for example, advocates claim that a 20 per cent tax on soda would save 67 lives per year and raise $40 million (NZ).[12] Leaving aside the reliability of the New Zealand forecast, this works out as a cost of $600,000 (NZ) for every life that is extended and does not represent good value for money.

Political action on public health grounds is often justified by the costs of unhealthy lifestyles to the healthcare system, and therefore to the taxpayer. The economic costs of obesity are often misrepresented and fail to account for savings to taxpayers, but even if they were more reliable it is far from obvious that additional taxes would relieve the economic burden.[13] For example, the UK’s Children’s Food Campaign recently claimed that a 20 per cent tax on sugary drinks would reduce healthcare costs in London by £39 million over twenty years, but their own figures suggest that the tax itself will relieve Londoners of £2.6 billion over the same period.[14] The cost of the tax will therefore exceed the savings by several orders of magnitude.”

By the way, if you want to see which (out of more than 100) action will produce the biggest bank for your buck, check out the work of the Copenhagen Consensus, which routinely conducts cost-benefit analysis on a whole set of issues.  See their list for the most cost-effective actions.

100 year old fat tax

Thanks to David Allison and his colleagues' weekly email summarizing the latest research on obesity, I ran across this policy proposal in the British Medical Journal from 1904.  If you can't read the fine print, it says, in part, "A superfluity of fat, which is mostly the result of luxurious living, may therefore not unfairly be regarding as a fitting object of taxation."  You're off the hook if you weigh less than 135 lbs.  

Cost of Vermont's GMO labeling law

Back in 2014, the Vermont legislature passed a law mandating labels on certain foods produced with genetically engineered ingredients.  The law is set to go into effect this summer, and it has prompted a lawsuit and at least a couple federal attempts at a GMO labeling law to provide uniform standards across all states (the most recent is a bill by senator Pat Roberts from Kansas).

Against this backdrop comes a new study on the potential costs of Vermont's law.  According to Agri-Pulse:

“A new study funded by the Corn Refiners Association concludes that if Vermont’s mandatory labeling law were allowed to go into effect and spread nationwide, the increased cost of producing food in the U.S. would reach about $82 billion per year, or about $1,050 per family.”

That's a sizable sum, and one that's somewhat larger than the often-cited $500/family from  William Lesser of Cornell who estimated the costs of such a policy in New York.  We can add this new study to other previous ones like that of Julian Alston and Dan Sumner of UC Davis who estimated a $1.2 billion cost on California food processors when  that state had a ballot initiative back in 2008.  Tom Marsh and other economists estimated the costs (just of monitoring and oversight) in Washington State of over  $700,000/year when that state had a ballot initiative in 2012.  Here's a nice discussion of labeling effects by some Colorado State University agricultural economists produced with that state held a ballot initiative.

Of course a lot of pro-labeling groups dispute these estimates, and have written their own reports to "debunk" them, (though I find it curious that none of the de-bunkers have much economics training, while each of the authors of the above reports are respected and well known agricultural economists).  The organization Just Label It, for example says

“there’s no evidence that requiring food manufacturers to label products that contain genetically modified (GMO) ingredients will increase food prices at the supermarket.”

So, where's the truth?  All the studies (by pro- and anti-labeling groups alike) rely on assumptions.  One assumption often made by pro-labeling groups is that the government costs of monitoring and enforcement are essentially nonexistent.  As the Washington study suggests, however, that's unlikely to be true and these extra costs will either manifest themselves in higher taxes or higher food prices, depending on how they're funded and people respond.  Pro-labeling groups are right to suggest that the physical costs associated with changing the label are relatively small and close to the "cost of ink."  The much bigger question, and where most the controversy arises, is how food companies will respond to the label.  If they respond by seeking to source non-GM crops, the cost implications could be quite significant, and this is how we arrive at numbers like $1050/family (the new Vermont study also assumes manufactures will have to comply in all states not just Vermont because of possibility of liability if one of their unlabeled products sold elsewhere unwittingly finds itself on a store shelf in Vermont).  If instead food companies shrug their shoulders and just slap the label on all their products, the costs are likely closer to just the physical re-labeling costs and the government oversight and regulatory costs.  

So, how will retailers respond to the label?  My guess is that the answer is somewhere between the extremes: some will dis-adopt GM and others won't.  Thus, the expected cost should be calculated by multiplying the costs of disadoption by the anticipated likelihood of disadoption.   I find it a bit hard to believe that all retailers will fully move away from GM content to avoid the label (i.e., that the probability of full disadoption is 1).  Why?  A lot of consumers are unconcerned about GMOs and many more have no opinion on the issue, and thus there will remain an incentive for food companies to remain cost competitive.  Also, the US is going to produce a lot of GMO corn no matter the labeling policy because around 40% of the corn crop goes into our gas tanks as ethanol and most of the remaining corn crop is used for animal feed (and animal products are typically exempted from the label).  These much larger demanders of corn, as opposed to comparatively small demands for high fructose corn syrup or corn starch, are likely to drive the market for corn.  

So, all this would suggest that $1,050/household/year is an upper-bound estimate associated with the mandatory labeling law.  And, I think that's true, except for one thing.  The potentially much larger (and admittedly more speculative) costs could come about if we create a culture and market environment that is hostile to the introduction of biotech crops and crop technologies.  What future innovations will we forego if retailers chose to disadopt?  We may never know, but it would be a mistake not consider these opportunity costs.

False Beliefs about Food Stamps

In this post on the University of Illinois Policy Matters blog, Craig Gundersen tries to lay to rest a few false beliefs (or misconceptions) that may people (and policy makers) have about the Supplemental Nutrition Assistance Program (SNAP, also known as "food stamps").

Does SNAP participation lead to obesity obesity?  Gundersen writes:

“It is not clear why people would think SNAP leads to increases in obesity insofar as one doesn’t generally think that increasing someone’s ability to purchase food leads to higher weights. For example, one doesn’t usually think that a pay raise leads to increases in someone’s weight. Along with common sense, virtually all studies indicate that SNAP recipients are no more likely than eligible SNAP non-recipients to be obese, after controlling for selection into the program and other issues.”

Does SNAP participation cut down hunger?  Gundersen writes:

“the central goal of SNAP is to alleviate hunger and, in this role, SNAP has been enormously successful. (See Kreider et al., 2012, and references therein.) Along with these direct impacts on food intakes, SNAP has also been found to improve well-being over other dimensions including reductions in poverty (e.g., Tiehen et al. 2012), improvements in birth outcomes (Almond et al. 2011), lower mortality (Krueger et al. 2004), and better general health (Kreider et al. 2012). Moreover, by reducing food insecurity, the negative impacts of food insecurity on various health outcomes are diminished. (See Gundersen and Ziliak, 2015 for a review of these impacts on health.)”

If you've got a relatively decent income, it might be hard to imagine how SNAP could have such dramatic hunger and health effects, but it is important to keep in mind Engel's Law: the poor spend a larger proportion of their income on food than the rich.  That phenomenon is alive and well in the US, and I can see it in my Food Demand Survey (FooDS) data, which measures food expenditures.  Here's how estimated spending on food varies with household income, as measured by FooDS.

If you're on the right tail of the income distribution spending only about 5% of your income on food, then it is probably hard to imagine how food spending and eating will change when you're on the left tail of the distribution where food consumes almost 25% of the household's budget.

Finally, Gundersen takes on the idea that various health restrictions on SNAP spending will have much impact.  He writes: 

“If restrictions are imposed, there is unlikely to be any change in obesity in the U.S. Instead, the main consequence will be a reduction in the number of SNAP participants. This reduction is due to two factors, stigma and transaction costs. (I concentrate on the former here, for a discussion of the latter, see Gundersen, 2015.) Stigma would increase as participants would feel singled out as being irresponsible and incapable of making well-informed food purchases. More broadly, through its message that adults receiving SNAP are not responsible enough to make their own food choices, recipients would be further stigmatized. After all, the federal government doesn’t tell, say, government employees how to spend their earnings; why do some feel it is fine to tell SNAP recipients what they can purchase? This stigmatization due to restrictions is the central reason why the USDA has rejected proposed restrictions.

Due to increased stigma and increased transactions costs, participation in SNAP will decline as recipients leave the program and potential recipients are less likely to enter the program. (For at least some advocates of SNAP restrictions, this may be their central goal for imposing restrictions.) As a consequence, the positive benefits of SNAP will be realized for fewer Americans and, in particular, there will be an increase in food insecurity and, therefore, increases in negative health outcomes and subsequent health care costs (Tarasuk et al., 2015).”

To that I'll add that most SNAP participants can easily get around the restrictions on what they buy by rearranging what they buy with SNAP and what they buy with non-SNAP dollars (see my explanation of that phenomenon here).  

One might reasonably ask whether SNAP spending is too low or too high, and alternative variations on the program might be worth considering.  Either way, decisions about SNAP's future should be ideally based our our best understanding of the program's impacts rather than false beliefs. 

Effects of Crop Insurance Subsidies

The journal Applied Economics Perspectives and Policy just published my paper entitled, "Distributional Effects of Crop Insurance Subsidies."  Farmers of the major commodity crops (and increasingly even minor crops including fruits and vegetables) are eligible to buy subsidized crop insurance.  The insurance is, in principle, priced at actuarial fair rate (i.e., the price of the insurance is equal to the expected loss), but the government subsidizes the insurance premium paid by the farmer (in addition to some of the costs of the insurers).  The average subsidy is around 65% of the premium amount.  If there were a similar program for your car insurance, and the annual premium you pay for your car is $1000/year, you'd get back $650 in subsidy.  In addition to this premium subsidy, the latest farm bill also has provisions to subsidize the deducible in the case of a loss.  All this begs the question: what impact do these subsidies have on food prices and production?  

From the abstract:    

“Results indicate that the removal of the premium subsidy for crop insurance would have resulted in aggregate net economic benefits of $622, $932, and $522 million in 2012, 2013, and 2014, respectively. The deadweight loss amounts to about 9.6%, 14.4%, and 8.0% of the total crop insurance subsides paid to agricultural producers in 2012, 2013, and 2014, respectively. In aggregate, removal of the premium subsidy for crop insurance reduces farm producer surplus and consumer surplus, with taxpayers being the only aggregate beneficiary. The findings reveal that the costs of such farm policies are often hidden from food consumers in the form of a higher tax burden. On a disaggregate level, there is significant variation in effects of removal of the premium subsidy for crop insurance across states. Agricultural producers in several Western states, such as California, Oregon, and Washington, are projected to benefit from the removal of the premium subsides for crop insurance, whereas producers in the Plains States, such as North Dakota, South Dakota, and Kansas, are projected to be the biggest losers.”

Because producers in different states grow different crops, the effects of the subsidies aren't equally dispersed.  I write:

“Take for example the comparison of California, which generated about $32.6 billion in annual food-related agricultural output from 2008 to 2012 and Kansas, which generated about $11.2 billion over the same time period. Despite the fact that California generates about three times more agricultural output than Kansas, Kansas farmers received 2.65 times the amount of crop insurance subsidies and attributed overhead ($618 million vs. $233 million) in 2013. Moreover, the states are radically different in terms of the types of agricultural commodities grown. Just under 70% of the value of all food-related agricultural output in California comes from fruits, vegetables, and tree nuts; for Kansas, the figure is only 0.04%. ”

These differences in commodities produced lead to differences in the uptake of crop insurance subsidies and the prices paid in each location.

“To illustrate how this heterogeneity comes about, again consider California and Kansas and the results from 2013. Removal of premium subsidies is projected to increase vegetable (a major California crop) prices by 1.4% and wheat (a major Kansas crop) prices by 7.9% (aggregate reductions in quantities are 0.2% and 3.1%, respectively). The implicit subsidy lost by California producers of vegetables is only 0.16%, whereas the implicit subsidy lost by Kansas producers of wheat is 12%. Thus, California vegetable producers gain an effective price advantage of 1.4% −0.16% = 1.24% whereas Kansas wheat producers experience an effective price change of 7.9% −12% = −4.1%. Therefore, California vegetable producers sell about the same amount of output at about 1% higher effective prices, but Kansas wheat growers sell less output at about 4% lower effective prices. As a result, California producers benefit and Kansas producers lose from the removal of food-related crop insurance premium subsidies.

Even the results in figure 4 mask within-state heterogeneity. For example, despite the fact that Kansas wheat farmers are net losers, California wheat farmers are net winners. Why? Because the implicit price subsidy to California wheat farmers is much lower than the one to Kansas (3.6% vs. 12%). But, not all California producers benefit. California barley, hog, poultry, and egg producers are projected to be net losers from the removal of crop insurance subsidies. Within Kansas, wheat producers lose about $86 million but cattle producers gain about $12 million annually from the removal of the premium subsidy for crop insurance”