Tuesday, 28 September 2010

Stupid symbolic policies

New Zealand's Labour Party has promised to ruin the world's cleanest GST by exempting healthy foods. As many have pointed out, it's hard to deny other merit goods their due once the door has been cracked open.

But would it even do any good? No, says our current Erskine visitor Jon Klick. From his recent paper:
In recent years, much attention has been directed at the ongoing increase in body weight, and what might be done about it. We use data from the National Health Interview Survey (NHIS) for the period 1982-1996 to estimate models relating measures of body weight (BMI, a dummy indicating that a person is overweight or obese, and a dummy indicating that a person is obese) to two food price indexes constructed using regional BLS price data as well as the official BLS food price index. The most aggressive use of our results suggests that variation in year-to-year food prices is unlikely to explain much of the increase in body weight over our sample period. This conclusion holds true regardless of the food price measure we consider.
In short, regional variation in food prices over the period, comparing baskets of "healthy" and "unhealthy" foods, explains very little of the rise in obesity in America. The best counterargument would be that tiny changes might accumulate over time. So maybe we'd see an effect in a decade or two.

Of course, things could run the other way as well. If food, as a whole, becomes cheaper than other goods, then people will consume more food relative to other goods. If the total increase in food consumption is greater than the effect of shifting from relatively unhealthy to relatively healthy foods, then obesity goes up, not down.

Prior GST posts here and here.