Sugar tax

I was on the CBC's The 180 on Sunday, discussing sugar taxes, fat taxes and paternalism. The audio's at the CBC site.

While lots of people can point to expanding waistlines as something they find undesirable, just not liking how other people look isn't a sound basis for public policy.

To the extent that costs are borne by the public health system, it's not even obvious whether sugar-linked obesity increases or decreases overall health care costs: there's higher cost at every age, but earlier death. Which effect dominates really isn't clear.

Further, much of the effect is what economists call a transfer. Sure, there will be some effect on total consumption when the cost of the medical bill is externalised, but that's different from the costs of being unhealthy. Most of the costs of being unhealthy are borne by the person who's sick. Maybe you'll consume a bit less exercise and a bit more unhealthy stuff, at the margin, when your health insurance bill doesn't vary with your decisions, but you still have to live with the consequences. People would take less care when driving if their insurance premiums weren't affected by the number of speeding tickets they get, but they'd hardly start rolling their cars on purpose.

For the part of the effect that is due to changes in behaviour under a public health system, implementing a full tax-and-subsidy mechanism to make people behave as they would if they were under an insurance system winds up undoing much of the benefit of a public health system: it replicates insurance premiums, but at a higher administrative cost.

Finally, there's just something wrong with telling people not only that they have to be signed up for a compulsory insurance system that they might not want, but also that because they're signed up for it, they're going to be subject to a pile of taxes and subsidies and regulations to make sure that the overall system isn't too expensive.

And even if all of that could be swept aside, there isn't particularly good evidence that soda taxes even work. Instead, there's just substitution over to calories from non-soda drinks. A comprehensive, and very high, sugar tax would change behaviour. Tobacco taxes have reduced smoking considerably. But recall that, at least in New Zealand, you're paying $0.55 in tax per cigarette. If the average price of a pack of 20 cigarettes is about $17.20, then tax is 63% of the cost of a pack. A comprehensive tax on all sugars that resulted in a $0.50 increase in the cost of a can of Coke might also reduce sugar consumption. There's no particularly good reason for doing such a thing, or at least not one motivated in things other than your aesthetic preferences over how other people should behave, but that high a tax could have effects.

Paternalistic regulations on consumption are insulting. They're classist in application. When they're based on "costs through the public health system", they are unlimited in potential range. And when they're packaged up as "let's tax soda and subsidise healthy foods", you empower an army of rent-seekers to argue over the edge cases.

The costs of everything... a continuing series.

The real cost of fiscal externalities running through the health system isn't the transfer from relatively healthy taxpayers to those choosing unhealthy lifestyles (and the otherwise sick), it's the cost we bear when we put too much priority on reducing that total health bill relative to other goals.

Recall that a fiscal externality is an effect I have on you by virtue of the tax system. If my behaviours affect my health, and even if I would have made exactly the same choices if I bore all of the costs of my own healthcare, I nevertheless impose a cost on you through the tax system. But as just about every choice you make has some effect on your health, the scope for individual autonomy is awfully limited in a world where we tried setting policy to minimise those behaviour-related costs. @LibertarianView provides a short list of things you might be doing that cost the UK's NHS money.

I fielded an email from the producer over at Freakonomics Radio who wondered if I knew of any studies of the aggregate cost of sex; Stephen Dubner had a pretty tongue-in-cheek proposal around it a while back. I didn't know of any. I hope that nobody took Dubner's proposal too seriously as I'm rather sure he didn't. But I suppose a study tallying the costs of sex, under an assumption that there'd be no loss of consumer surplus were it abolished, could be just the thing to make the whole "Costs of X" industry finally die of shame.

Tax maximisation, smoking, and the Stalin Gap

If my lifestyle and leisure choices lead me to remit less to the government in taxes than I would have under alternative scenarios, have I imposed an externality on the State?

James Meanwell asks:

Eric, care to weigh in on a debate I'm having about this elsewhere? Specifically, does loss of tax revenue as a result of lower productivity (e.g. due to smoking, eating too much) count as an externality? I've argued that the government would have to be spending efficiently, which is unlikely, for the loss of revenue to count as an externality and so it probably doesn't (count). Not sure if that's right, but the notion (i.e. loss-of-revenue-due-to-lower-productivity-as-externality) seems odd to me.

I started replying to his comment, but reckoned it deserved its own post.

Let's start with the big picture and work down to details.

Consider two people, alike in relevant ways at age 10 and equal in earnings potential, but with different utility functions. So they make different choices.

Mr. A decides that the rat race isn't for him and decides instead to take a part-time job at 20 hours per week instead of 40. Were he to have worked a full time job, his earnings would have doubled and, because of progressive taxation, his tax payments would have more than doubled. But he's not on welfare; he just can transform relatively little income into a fair bit of happiness because he really likes leisure.

Mr. B does not enjoy sitting idle; he consumes his leisure by smoking while working a full-time job. Associated health issues reduce his productivity and, as consequence, he earns a quarter less than he otherwise would; his tax payments are then perhaps a third lower than they otherwise could have been. Other sources have a lower wage penalty for smoking; we'll stick with a big one for present purposes.

If Mr. B's lower tax payments because of his choice to smoke are of policy consequence, then so too are Mr. A's lower tax payments because of his choices. Indeed, we could say that Mr. A is far worse than Mr. B: while Mr. B pays, in New Zealand, about three times as much in tobacco excise as he'll cost the public health system and is so kind as to die before costing the superannuation system very much, Mr A pays zero tax on his leisure and will earn two-thirds of the national average wage in his retirement despite having contributed relatively little to the superannuation system.

If we need to use policy to nudge Mr. B into smoking less, because of reduced tax earnings, then we also need to nudge Mr. A into working harder. And when nudges don't work in tobacco and start becoming shoves, we need to start shoving Mr. A as well.

Mancur Olson argued that Stalinist Russia had the world's most effective extractive tax regime. Workers were effectively compelled to work by near complete inframarginal taxation combined with very low taxation at the margin. If Stalin had had the ability to solve the Socialist Calculation Problem, he could have done slightly better, leaving each worker with an individualised menu of two choices: starvation, or a personalised bundle of very hard work and some goods leaving the worker epsilon better off than under starvation. I suppose that we could consider any deviation from that level of work as a harm imposed on the state. But it's only Stalin who'd really want to push there.

The Okun Gap is the difference between potential and realised GDP due to excess unemployment. I'll call the Stalin Gap the difference between an individual's potential maximal tax payments and his actual tax payments based on his choice to consume leisure over labour - partially because he would choose some leisure even in the absence of taxes, partially because too high of income tax rates yields substitution to leisure.

Most of us could earn more, and consequently submit higher tax payments, by choosing more labour and less leisure. But we'd be less happy.

So that's the big picture: the world in which the smoker's lower income tax payments (ignoring his much much higher excise tax payments) are sufficient basis for taking away his leisure is one where we want to penalize people for taking holidays or failing to work as many hours as they otherwise could: closing the Stalin Gap. Unless we say that leisure via time off relaxing is, by assumption, good, while leisure via smoking is bad - but that remains question-begging.

Smaller picture: is this even an externality?


Short answer: likely, but likely very small, and that small portion mostly because of how the tax system treats poor people.

All right. An individual chooses between smoking, leisure and labour. In a world with private health care and no taxation, the individual optimally balances health harms from smoking against enjoyment of smoking - he earns less because he smokes, but that's just part of the full cost of tobacco that he enters into his optimisation. All you behavioural guys who want to complain about whether he can be rational or informed on this can shut up for the moment - we're trying to figure out whether he's imposing an externality on the government once we move to a tax regime, so the behavioural stuff is entirely beside the point.

Some optimal level of smoking will be found above. What happens when we add taxation and government? The smoker will bear fewer of the wage costs of smoking because the government takes a portion of his earnings and so he should optimally smoke more. But again, the same is true of the individual's choice to consume other forms of leisure in the presence of income taxation. Recall that in economics, we don't care about externalities because of pecuniary effects like "the government gets less in tax". We care about them rather because they distort choices: people move from taxed labour to untaxed leisure in the presence of income taxation. The incremental increase in smoking when the returns to labour drop under a taxation regime can be viewed as a distortion. But, again, think of anything that helps increase the marginal utility of leisure. In a world with taxes and government, people choose more days off playing cheap but excellent video games relative to the zero-tax world. What then is the productivity cost of video games? Or of any other kind of leisure? It's hard for me to see any productivity externality of smoking that is different in kind from any other labour-leisure distortion generated by taxation. And it would take some number crunching to show that the technological portion of any effect* here isn't already over-internalised by current levels of tobacco excise.

Gordon Tullock reminded us in 1998 that government produces externalities as well as solving some externality problems. The vast bulk of reduced income taxation accruing to government due to smoking could only be remedied by imposing harms on smokers that are larger than the potential gains to government. Now, if you want to assume that smokers are irrational and hurting themselves by their choice to smoke, you can do that, but you don't really need the effects on income taxation to make the case.

Recall that smoking is concentrated among poorer cohorts and that marginal tax rates, though not average tax rates, are very high for the poor. If the deadweight costs of high marginal tax rates are making poor people smoke more than they otherwise would because the personal income losses are low, they're probably also screwing up a whole lot of other choices that are of greater consequence as well. If you're going to worry about it, start by trying to fix the tax schedule and abatement rates for the various income-contingent benefits so that the effective marginal tax rates facing poor families are not insanely high.

The Ministry for Social Development noted that 35% of beneficiaries (people receiving benefits other than just Working for Families, NZ's EITC) in paid work in 2008 enjoyed effective marginal tax rates higher than 75%, with some non-beneficiary low income families enduring abatement of the minimum family tax credit facing EMTRs over 100%. MSD concluded dryly, "Work incentives are very low for such families".

Effective marginal tax rates in excess of 75% are very likely to induce all sorts of very real distortions in behaviour; I expect the decision to smoke incrementally more because of reduced returns to wages is pretty trivial in this mess.



* Again, we don't care about externalities that are pecuniary. Imagine that the smoker smokes exactly as much under a tax regime as under a no-tax regime. The government earns less than it would were the smoker a non-smoker, but this is purely pecuniary: the gain to the government by forcing him to quit would be overmatched by the losses experienced by the smoker. The only portion that can matter for welfare is the excess smoking induced by the lower return to labour under the tax regime. And that's unlikely to be large relative to the amount of smoking that's invariant to income tax rates.

Social Costs of Healthy

Chris Auld was prescient. If we require corrective policy to internalise pecuniary costs running through the public health system, then we have to do it across the board. And what if it turns out that healthy people wind up costing more because they have a longer retirement in which they consume lots of subsidized health services? He wrote:

If healthy behaviors wind up increasing lifecycle health care costs, we should either subsidize less than we otherwise would, or perhaps even tax, healthy behaviors. Healthy behaviors in this scenario benefit the person exhibiting the behavior but impose costs on everyone else, and this logic demands that we discourage healthy behavior relative to whatever policies we would otherwise have enacted.

This argument does not sit well with me.

A new article in PLOS Medicine finds that the lifetime health costs of the healthy are indeed highest:Non-smokers of moderate BMI imposed the highest lifetime costs. [HT: @Dick_Puddlecote, who points to the Telegraph's report on the study.] Update: I'd missed the date on the PLOS online study; it's from a few years ago. So Auld's prescience may have been overstated. Thanks to Chris Snowdon for the correction.

From the article's conclusion:

In this study we have shown that, although obese people induce high medical costs during their lives, their lifetime health-care costs are lower than those of healthy-living people but higher than those of smokers. Obesity increases the risk of diseases such as diabetes and coronary heart disease, thereby increasing health-care utilization but decreasing life expectancy. Successful prevention of obesity, in turn, increases life expectancy. Unfortunately, these life-years gained are not lived in full health and come at a price: people suffer from other diseases, which increases health-care costs. Obesity prevention, just like smoking prevention, will not stem the tide of increasing health-care expenditures. The underlying mechanism is that there is a substitution of inexpensive, lethal diseases toward less lethal, and therefore more costly, diseases [9]. As smoking is in particular related to lethal (and relatively inexpensive) diseases, the ratio of cost savings from a reduced incidence of risk factor–related diseases to the medical costs in life-years gained is more favorable for obesity prevention than for smoking prevention.

Here's the graph of the expected costs and benefits of smoking and obesity prevention, imagining a costless intervention that would switch the obese or smokers into normal-weight non-smokers. For the first few decades after the assumed-costless intervention, all's great. And then...

If it were free to turn smokers into non-smokers, and if we ignore tobacco excise revenues entirely, they say the costless intervention only passes a fiscal cost-benefit analysis for discount rates higher than 5.7%. If we remember that tobacco excise revenues are heavily front-loaded, being paid often decades before the health costs obtain, then you're not going to find a discount rate where the costless intervention saves the government money.

They warn that they've only focused on health care costs and have left aside productivity costs. But the bulk of productivity costs are borne by the drinker, smoker, or eater himself: they're reflected in lower wages.

Smokers remain the benefactors of the rest of us - voluntarily paying ridiculous levels of tax and then dying before taking much out of the superannuation system.

It's a mistake to model governments as unitary agents. The zealot parts of government want to ban tobacco; the sane parts worry about revenue consequences. I wonder, as does Lionel Shriver, whether worries about lost excise motivate government antipathy towards electronic cigarettes. The zealot side of government doesn't like them because they let smokers keep having fun without moral consequence; the fiscal side doesn't like the lost revenue: bootleggers and baptists in different government departments.

Meanwhile, the British Labour Party contemplates bans on sugary breakfast cereals. I agree entirely with Alex Masse's piece at the Spectator. Alex writes:

Yet one of the features of our society is the steady accumulation of influence – and increasingly of power too – of what might be termed the Government-Health-Security Complex*.

Sometimes slippery slopes really do exist. Some folk warned that the public health industry – that is, the Government-Health-Security Complex – would never be satisfied with its battles against tobacco and alcohol and that it would, in time, launch fresh offensives against fast food, soft drinks, and all things salty an sweet.Don’t be silly, we were told. That’s different. Well, who looks stupid now?

Like so much else this is also, in the end, a question of power and class. The NHS – treated as some kind of secular religion – is to be used as a means of shaming the population (especially the bestial lower orders) into behaving in a more comely, acceptable fashion. The class prejudice inherent in all this is rarely far from the surface. The common people are revolting. Their pleasures must be taxed or, wherever possible, suppressed entirely (see extending the ban on smoking in working-class clubs for example).

And, always, the message is simple: the people – poor, lardy, wheezing, sods – are too stupid to make their own choices and it is government’s role to save them from themselves.

Next step then is plain packaging for breakfast cereals....

Externalities: A Primer

It is far too easy to come away from a lazy version of Econ 101 thinking that, because externalities are pervasive, the range of meliorative government policy is very broad indeed. It's hard to think of any part of life that doesn't involve external costs of one sort or another.

When you get past Econ 101, you start getting all the caveats. The range of externalities that actually generate inefficiencies is pretty small relative to the universe of externalities. And, even those that can potentially be fixed by policy aren't necessarily best handled by policy. Private solutions to some kinds of externality problems do emerge; layering policy on top of private solutions can make things worse than leaving things alone.

Let's start by walking through a narrative version of Buchanan and Stubblebine's seminal work. And, we'll start by separating out two very different kinds of ways that other peoples' behaviour can affect you.

Suppose that you and I both attend a house auction. I show up wearing a t-shirt that is so offensive that you feel physically ill.* In fact, you would have been willing to pay me $100 to have worn a different t-shirt this morning. I would have been willing to have changed shirt for any payment greater than $20. Despite your nausea, you are able to bid on the house. But, because I'm bidding against you, you wind up paying $10,000 more than you otherwise would have.

My bidding against you at auction imposes a cost on you, but one that does not change the efficient outcome. The house goes to the person who values it most: you. And while you have to pay more for it, the seller receives more for it: my action has caused a transfer from you to the seller. When we model things more formally, these effects run through your budget constraint rather than your utility function. You have less money with which to do things, but we have no reason to expect that anybody is choosing the wrong mix of goods given their budgets. We call these budget-affecting externalities "pecuniary externalities". When economists say, "Oh, but that's only pecuniary", that means that it's something that we don't really need to worry about if what we care about is efficiency. We only care about externalities because they induce resource misallocation; pecuniary externalities don't do that. There might be other justice-based reasons for worrying about pecuniary effects, but to the extent that we do, we generally conclude that those kinds of concerns are really best handled by just giving money to poor people.

But the nausea that I imposed on you with my careful choice of t-shirt is a real external cost. It's easy to imagine that you'd be willing to pay some amount to change the state of the world - that means it's potentially Pareto-relevant. A Pareto-efficient outcome is one where it's impossible to make anybody better off without making somebody else worse off at the same time; a Pareto-improving move is on that makes at least one person better off while making nobody worse off. A Pareto-relevant externality is one where a Pareto-improving move is available: the total willingness to pay to change the outcome, aggregated across all the people affected, is enough to generate a change in the outcome. You suffered costs of $100; I would have been willing to accept $20 to avoid imposing those costs. Eighty dollars worth of value was forgone by my having worn the wrong shirt. So the externality was Pareto-relevant: had I chosen a different shirt, the gains to you would have outweighed the losses to me. We call externalities of this sort technological: they affect others directly through their utility functions rather than indirectly through the budget constraint.

We expect technological externalities may induce inefficient outcomes. The real costs that I impose on you through your utility function are not factored into my decisions and so I can wind up choosing the wrong consumption bundle. But, again, not necessarily. If it would have cost me $100 to change shirt, and the burden on you was only $20, the efficient result is that I wear the t-shirt. The externality was only potentially Pareto-relevant, not actually Pareto-relevant.

Eli Dourado's Mercatus Working Paper on cybersecurity walks nicely through the difference between inframarginal externalities and marginal externalities, along with a host of policy and private solutions to externality problems. David Friedman's treatment is excellent; he also cautions in Law's Order of problems that can arise when we couple Coasean solutions to externality problems with tax-based approaches [see Chapter 4 in particular].

What about externalities that affect you through the tax system? Edgar Browning calls these "Fiscal externalities". They would count as pecuniary by the Buchanan and Stubblebine definition, but they also are effects that operate outside the market process. David Roberts worries about these when weighing the case for taxes on sugary drinks. In the presence of a public health system, any decision you make that affects your health also has effects on others through the tax system. To what extent is it efficient to worry about them?

First, imagine the limiting case in which nobody's behaviour changes as consequence of health care costs being borne by others: everyone behaves as though they had private insurance that charged actuarially fair premiums. In that limit case, every health cost borne through the tax system is only a transfer. It's a transfer from richer and healthier people to poorer and less healthy people, and it's a transfer from risk-averse to risk-preferring people, but it has no efficiency consequence. There is no simple efficiency case for worrying about it, though you could build complicated cases around the cost of raising money via taxes versus the costs of abating health care costs via other mechanisms.

Now, let's take the more realistic case where individual behaviour is at least somewhat responsive to that somebody else is paying for your hospital care and that your premiums do not vary with your costs. There's reasonable evidence for this: Jon Klick and Thomas Stratmann show that when state governments mandated that private insurance plans cover substance abuse treatment, people increased their alcohol consumption by an amount equivalent to about "48 extra beers per person per year".

What are the policy implications? Let's recall first that the cost imposed by the behavioural change is likely to be small if consumption changes are small relative to the total amount that would otherwise have been consumed: average per capita beer consumption in the US is 78 litres according to Wikipedia. Imagine that we had no public health insurance but instead we gave a lump sum of cash to everybody and required that they use it to purchase health insurance; insurers could charge what they liked. How much would we really expect anybody to cut back on their consumption of sugary drinks? People bear very direct personal costs of being in poor health; the monetized value of that will not be trivial even relative to expensive insurance premiums. In other words, the effect may mostly be inframarginal. I refrain from engaging in extreme mountain biking even though ACC would cover all of my health costs: I really don't like pain and injury. I would pay multiples of the cost to the health system of a broken arm to avoid breaking my arm.


So any policy seeking to internalise the external costs of individual health-affecting decisions ought to focus on the incremental costs caused by the extrernalisation of those costs through the public health system, not the aggregate burden of related diseases. Browning, in the piece above-linked, shows that the set of taxes and subsidies that would be necessary to nudge everyone back to what they would have been doing if the health system didn't distort behaviour winds up replicating the insurance premiums individuals would have been paying under private insurance but at very high administrative cost. Private insurers can set premiums based on individually specific characteristics; governments are more typically constrained to using linear tax schedules. But for things like sugary drinks, health costs are likely exponential in consumption, not linear; for alcohol, it's a J-curve with health benefits from moderate consumption and costs from excess consumption. Your insurer might decide only to increase your premiums if you're a heavy drinker; governments are restricted to linear taxes on alcohol that overcharge moderate drinkers and undercharge heavy drinkers.

Setting excise taxes to try to internalise the largely pecuniary effects of consumption decisions can induce technological externalities by causing some would-be moderate consumers to consume too little.

A few bottom lines study notes for the exam, as this will also now be part of the readings for my Economics & Current Policy Issues class:

• There is no market failure case for responding to pecuniary externalities. 
• While there can be a market failure case for policies addressing technological externalities, we have to be awfully careful because private markets often have already internalised them. A decent rule of thumb: if people are linked through a contractual or quasi-contractual nexus, intervening is likely a bad idea. We don't need policies to address the costs screaming babies impose on other airline passengers; the airlines are residual claimant.
• Most of the "cost to the taxpayer through the public health system" aspect of individual consumption is pecuniary rather than technological. Any policy in this area has to be very careful to address only the parts of consumption behaviour that are directly caused by the potential for public defraying of health care costs; the risks of inducing inefficiency by setting policy to address pecuniary effects are real.
• Note too that the actual burden on the health system may be pretty complicated. Smokers cost the health system more in every year that they are alive, but potentially save the health system money in the long run by dying early - and they definitely save the government money in total when we consider that smokers die before drawing too much in superannuation. It's even pretty plausible that healthy people wind up costing the health system more in total because they impose costs for a long period of time. What do we do if we find out that it's the gym rats who wind up costing everybody more because they spend ten years in a publicly funded dementia ward instead of dying of a heart attack at 67?

This is part 2 of a two-part series; in part 1, I took a more rights-based approach. And see here for prior posts on externalities.

* Only weirdos would be offended by these fine shirts, but they count in the social welfare function too. Anybody stumped for Christmas presents for Crampton can send me one of these shirts; I'm likely a medium.

No slippery slopes

The case for taxing sugar builds explicitly on the work done in the anti-tobacco and anti-alcohol public health movements. Here's the latest from Nature.

HOW TO INTERVENE

How can we reduce sugar consumption? After all, sugar is natural. Sugar is a nutrient. Sugar is pleasure. So too is alcohol, but in both cases, too much of a good thing is toxic. It may be helpful to look to the many generations of international experience with alcohol and tobacco to find models that work ^8,9. So far, evidence shows that individually focused approaches, such as school-based interventions that teach children about diet and exercise, demonstrate little efficacy. Conversely, for both alcohol and tobacco, there is robust evidence that gentle ‘supply side’ control strategies which stop far short of all-out prohibition — taxation, distribution controls, age limits — lower both consumption of the product and the accompanying health harms. Successful interventions share a common end-point: curbing availability ^2,8,9.

Taxing alcohol and tobacco products — in the form of special excise duties, value-added taxes and sales taxes — are the most popular and effective ways to reduce smoking and drinking, and in turn, substance abuse and related harms ². Consequently, we propose adding taxes to processed foods that contain any form of added sugars. ...

Other successful tobacco- and alcohol-control strategies limit availability, such as reducing the hours that retailers are open, controlling the location and density of retail markets and limiting who can legally purchase the products ^2,9. A reasonable parallel for sugar would tighten licensing requirements on vending machines and snack bars that sell sugary products in schools and workplaces. Many schools have removed unhealthy fizzy drinks and candy from vending machines, but often replaced them with juice and sports drinks, which also contain added sugar. States could apply zoning ordinances to control the number of fast-food outlets and convenience stores in low-income communities, and especially around schools, while providing incentives for the establishment of grocery stores and farmer’s markets. ...

Government-imposed regulations on the marketing of alcohol to young people have been quite effective, but there is no such approach to sugar-laden products...

With enough clamour for change, tectonic shifts in policy become possible. Take, for instance, bans on smoking in public places and the use of designated drivers, not to mention airbags in cars and condom dispensers in public bathrooms. These simple measures — which have all been on the battleground of American politics — are now taken for granted as essential tools for our public health and well-being. It’s time to turn our attention to sugar.

And who's next in line after sugar? Remember that the anti-tobacco folks disarmed opposition in the 90s by insisting that there was no next in line.

"They use the 'slippery slope' argument. 'My God, if they can do this to smokers today they can do this to people who eat Haagen-Dazs ice cream or whatever."

I think it's safer to assume that there's no logical end to the line. Every behaviour has health consequences, and if there's a public health system, somebody will say regulation's warranted.

There's a good case to be made for abolishing the combination of American agricultural subsidies and sugar tariffs that together result in substitution from sugar to fructose, but the case for that would be independent of nutritional qualities of fructose and sucrose. There may be a case for changes to USDA nutritional recommendations. But let's not forget that it was the USDA's war on fat that helped prompt the shift to high-carb and higher fructose diets in the first place.

Pigovean paternalism

Frances Woolley reports on problems in her students' understanding of Pigovean taxes. After a set-piece question asking students to calculate equilibrium Pigovean tax in an externality case, students were told to answer this last bit:

Opponents of the tax on potato chips take a careful look at Dr. Economides’ study. It turns out that the only people harmed by potato chip consumption are potato chip eaters themselves, as potato chip consumption is associated with bad skin, weight gain and depression. Does this strengthen or weaken the argument for taxing potato chips?

Frances rightly notes that weakens the case for Pigovean taxation; I'd go farther and say that it darn near obliterates it. If the argument for taxation is consumer irrationality, then, as Seamus has noted before, we've stepped rather outside of the rational choice framework that's necessary for assessing costs and benefits in the first place. What does a demand curve even represent in the case where consumers aren't competent to evaluate net personal benefits? Maybe we can derive it from observing consumer behaviour, but revealed preference goes away and the welfare analysis then has to start from a rather different place. Some of the behaviouralists have started building frameworks for that kind of analysis, with multi-self Pareto criteria, but it's hardly canon.

...it seems that some students really don't believe that people are rational decision-makers, fully taking into account the long-term effects of their consumption choices. Even when people are only harming themselves, they support Pigouvian taxes on paternalistic grounds, to stop people from harming themselves.

It seems to take irrationality of a very particular form for Pigovean taxes to be a solution to internality problems. We need it to be the case that consumers irrationally discount health costs of monetized value x but to respond optimally to taxes of equivalent value. If consumers are also irrationally price-insensitive, you've doubly hurt them by imposing the tax. And we still have the problems that arise once revealed preference can't form a starting point for welfare analysis.

And, despite the explicit framing of the question - that consumers only harm themselves - some students read into it that they were hurting the taxpayer through the public health system:

Some students disputed the basic premise of the question, the idea that potato chip eaters are only harming themselves. Bad skin, weight gain and depression, they argued, are harms to others, because we have a public health system. ...

What interested me about this response was how "health" becomes a lens through which public policy issues are viewed, and a justification of policy choices. Perhaps, though, the students were just mislead by the wording of the question. Guessing that the specific details about bad skin, weight gain and depression must matter in some way, they figured that the question must be asking about health care. 

These are upper level undergrads in economics, and they're messing up the distinction between pecuniary and technological externalities. Costs through the public health system are only a transfer unless these consumers are eating more potato chips than they would in a private system; in that case, only the deadweight costs of the increased portion of consumption get to count as policy-relevant on an efficiency standard.

I hate to keep banging on about this [hit the fiscal externalities tab below]. There's no way that the folks at Carleton wouldn't have hammered home the distinction between technological and pecuniary externalities. But fiscal externalities - externalities that work through the budget constraint but via the tax system - keep seeming technological to students when they're really mostly pecuniary. Partially this is because folks don't start with Buchanan and Stubblebine, but I expect that it has more to do with that fiscal externalities have seemed perhaps an interesting sidebar not worth extensive class time.

We are graduating too many students who know that negative externalities are bad and that government should tax negative externalities, but who have little sense of which ones actually have efficiency consequence.

Nova Scotia reductio

I'd suggested mandatory ski helmets as the the absurd end of the logic requiring the internalization of costs externalized by the public health system. There was a brief subsequent push for mandatory helmets in New Zealand, but it came to nothing.

But Nova Scotia's going to go there. Here's Chris Selley at the National Post:

Nova Scotia bolted into the lead this week in the epic race among North American jurisdictions to make us slightly safer - barely overtaking King County, Wash., which in June banned swimming and wading in rivers without wearing a life jacket.

Bill 131, tabled Tuesday at the House of Assembly in Halifax, would make it illegal to ski or snowboard without a helmet, effective Nov. 1, 2012. A helmet cuts the risk of head injury by at least 60%, according to a news release from the Nova Scotia Department of Health and Wellness. And Minister Maureen MacDonald assures me there will, indeed, be helmet cops on the slopes. The minimum fine is $250.

Ms. MacDonald offers two justifications for this: brain injuries, and the terrible consequences they often entail; and the money it costs to treat them. According to the province, a "traumatic brain injury" costs roughly $400,000 a year to treat. And since 2000, 11 helmetless skiers and snowboarders have suffered such an injury on the slopes of Nova Scotia. Call it one a year.

Selley starts pushing to see how far Nova Scotia Health Minister Maureen MacDonald will toboggan down that slope:

People who slide quickly down mountains put a huge burden on the public health system, if you're inclined to look at it that way - I'm certainly not, but clearly many Canadians are - and that will still be true when the last dinosaur buys a helmet. Most snow sports injuries aren't head injuries anyway. All four people who died at Canadian ski resorts last season were wearing helmets.

So, aren't we trying to save lives? Aren't we trying to save the healthcare system money?

"This legislation doesn't ban skiing," says Ms. MacDonald, sounding a bit exasperated.

According to her own logic, and in her own words, I have to ask: Why not?

My short answer: social stigma doesn't yet attach to skiers. Politically disfavoured groups that impose costs through the public health system see taxation, regulation, and eventually bans on activity. Tobacco's nearing the end of that slope, alcohol's moving along, and fat people are next at the gate. Bans don't come until participants have been sufficiently stigmatized - anti-smoking ads don't just encourage people to quit smoking, they also do a nice job in painting smokers as antisocial people who hate their kids. Dodgy cost reports painting costs borne by smokers, drinkers, and the obese as costs to the country help fuel demand for greater regulation and taxation.

If every sort of risky activity that potentially imposed cost through the public health system merited tax or regulatory treatment, it is hard to think of any part of private life that would escape attention.

Fat taxes, food subsidies

Geoff Simmons is right that we oughtn't mess with New Zealand's clean GST system in pursuit of healthy eating initiatives that aren't likely to do much good. But I'll focus on the part where I disagree. He writes:

For the same cost as removing GST, every family could be given $5 for each child to spend on fruit and veges every week. This would make a much more sizeable difference to the food bill of the poor, not to mention their health.

But ultimately there is only so far that the "health-by-stealth" approach can go. Subsidising good food is certainly the most politically acceptable place to start, but it won't do the job alone.

Energy-dense, micronutrient poor food will continue to get relatively cheaper, and so the subsidy bill will have to grow to keep pace. Meanwhile, the health bill for obesity and diabetes will continue to grow.

The only way to arrest this shift is through a whole raft of other measures, the most unpopular of which will be taxing foods on the basis of the energy they contain.

After all, the biggest threat to our health now is no longer smoking, it is that we eat too much. This will no doubt raise even more fervent opposition than my mother faced at my 5th birthday party.

However, such strong actions will be the only way to deal with our biological programming to eat ourselves to death.

Astronomical excise taxes are now normal for cigarettes, and have played a huge part in getting smoking rates down in this country. A similar approach with fatty and sugary food is only a matter of time.

Where to start? First, I still don't get where the market failure is that justifies government intervention in individual diets. Bernard Hickey tweeted a potential one:

Do buyers of cheap fatty/sugary food have perfect information on the long term health costs? Is that info reflected in cost?

Nobody has perfect information about anything. So here's a short list of reasons why the information failure argument fails:

1. Information-based intervention in this kind of consumption behaviour doesn't really make sense unless information problems are greater here than elsewhere;
2. If information is the problem, interventions subsidizing information are a more direct solution;
3. It's unclear that people are choosing to eat tasty fatty things because they're ignorant about long term health consequences; it's at least as plausible that they're just weighing current consumption and making rational decisions trading off health against consumption benefits. This is consistent with the existing literature that providing health information and calorie counts has negligible effects on consumer choice

Geoff seems to be pointing to the fiscal externality argument for intervention. But most of these health-related fiscal externalities are just a transfer; further, the more efficient solution to any technological externality induced by cost-shifting would be setting actuarily fair health insurance premiums.

I'll agree with Simmons that pretty invasive measures would be needed to change behaviour; I'm just failing to see any good (by which I mean market failure) reason for them. I'll also agree with Simmons that such measures may only be a matter of time, though we may have different views on the normative aspects of the prediction.

And everything that Seamus said about GST on food also applies....

Fiscal externalities of population

Bryan Caplan's changed my mind again. I'd always expected that the overall fiscal externality of having more children was small and, perhaps, slightly negative. Public schooling isn't cheap and neither are the per student subsidies for tertiary education. But I'd not thought too hard about it. I choose to mood-affiliate with Julian Simon and consequently tend to expect that increased population is generally beneficial; I'd just not expected that the effect on the government's coffers was particularly positive on average.

Bryan cites Wolf et al's finding that replacing the average non-parent with the average parent provides a $217,000 net fiscal benefit: total taxes paid by the children less total government services consumed by the children. Since lots of government services like national defence are non-rivalrous, having a bigger population reduces the average burden. The average additional child confers $83,000 in additional net fiscal benefit. The greater is the proportion of spending on rivalrous rather than non-rivalrous goods, the lower will be the fiscal benefit: the numbers for New Zealand would have to be lower since more of our spending is on transfer payments relative to defence.

Bryan argues for child tax credits to encourage greater fertility. Relatively small baby bonuses can push folks at the margin into having an additional child - Bryan says about $9000 would do it, citing work by Kevin Milligan. If folks whose children are expected to have lower than average positive fiscal contributions were more responsive to the tax incentive, the policy's consequences would not be what Bryan's expecting. But the Milligan paper finds the opposite: richer couples' fertility was much more responsive to the Quebec tax credit. There's reasonable heritability of income generating capacity; the baby bonus would increase the average positive fiscal effect over time rather than reduce it.

There's still something weird in the Wolf et al paper.

Nonparents pay about $327,000 more in taxes than they receive in benefits, while parents pay about $278,000 more in taxes than they receive in benefits. The offspring of the parents, in turn, pay over $266,000 more in taxes than they receive in benefits. In each case, the excess of tax payments over benefit consumption results partly from the exclusion of pure public goods from the benefit side of the balance sheet: whereas all tax payments represent a reduction in private consumption possibilities, only the “excludable” part of public expenditures belong in these accounts.

Suppose that the "non-excludable" part of public expenditures totals $300K per capita, giving a slight overall deficit. If those expenditures are invariant to new persons' entry, then we're right to exclude that portion since the benefits received by the new persons come at zero marginal cost. The bulk of the new entrants' taxes help defray the average cost of providing a fixed set of public goods.

But why should we expect that government expenditure on nonrivalrous goods is invariant to population? If spending instead is elastic, then we'd need to count the new spending on rivalrous goods for which the new person's entry were responsible. Depending on that elasticity, we could quickly get back into the world where the fiscal effect is ambiguous.

I'm generally very nervous about taxes intended to rectify fiscal externalities. If the numbers came out showing a negative fiscal effect of additional children, would Bryan recommend per-child taxes? Suppose that more disaggregated data showed that the negative fiscal externalities of children born to poor unwed mothers were large and that abating subsidies for such births weren't sufficient to counteract the negative effect. Taxes? Regulatory measures? Note that the Wolf paper shows a much smaller positive fiscal effect for parents with less than a high school diploma; the required responsiveness of government spending on nonrivalrous goods to increased population need not be large to there flip the sign of the effect.

The permissible boundaries of taxation, regulation, and subsidy effectively disappear if policy needs to correct fiscal externalities.

The problem with reductio

I'd thought mandatory ski helmets and "social costs of skiing" an appropriate reductio to including the private costs of a drinker's drinking as socially relevant. Then The Herald started pushing for mandatory ski helmets.

I'd also suggested a sex tax as another reductio: if STDs put costs on the public health system, doesn't the state have a compelling interest in what you get up to and with whom?

And here, from the loonier parts of the US:

Politicians are always talking about taxes. Some of them want to “soak” the rich; others want to raise “sin” taxes on alcohol and cigarettes. But I can think of one “consumer item” we’ll never see a tax on: sex. But maybe we should. Sex—the wrong kind of sex, that is—is driving up the cost of government.

In a recent column, marriage expert Mike McManus explores the high cost of out-of-wedlock sex. For instance, over 7 million American couples live together. Four out of five of those couples will break up without ever tying the knot. But, McManus writes, if they’ve had a baby, many of those mothers and children will be eligible for Medicaid, housing and day-care subsidies, and food stamps.

Second, even when co-habiting couples DO marry, according to a Penn State study, they suffer a higher divorce rate than couples who don’t live together first. On average, each divorce involves one child. And like the never-married mother, the divorced mom is often eligible for many government benefits. According to the Heritage Foundation, McManus writes, “13 million single parents with children cost taxpayers $20,000 each, or $260 billion in the year 2004.” The total probably comes to $300 billion today, McManus says.

And that’s just the beginning.

A child born out of wedlock is seven times more likely to drop out of school, become a teen parent, and end up in prison. They are 33 times more likely to be seriously abused.

And we’ve all heard of the high rates of STDs affecting America’s teenagers—diseases that cost billions of dollars to treat.

So maybe we SHOULD consider a tax on non-marital sex—everything from one-night stands to living together arrangements. It’s costing us a lot of money. And such a tax might indeed pay off the national debt.

He goes on to propose, rather than taxes on sex per se (which he seems to oppose less because they're invasive than because they're impracticable and unpopular), a bunch of pro-marriage initiatives.

If we let fiscal externalities determine the appropriate range of government regulatory activity, there isn't much that's out of scope.

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.

Getting the sign right

As I've noted more than a few times, tobacco excise revenues tend to more than compensate governments for whatever health costs smoking might impose on governments.

New Zealand's anti-tobacco zealots at MoH seem pretty determined to use whatever dodgy method will get them the contrary result: counting all the excess costs imposed by smokers against a counterfactual that smokers would never otherwise have had any end-of-life costs. The response I've gotten from MoH boffins is that MoH doesn't keep stats on what dead people would otherwise have cost the system. Seriously. Never mind that anti-tobacco folks seem more than happy to produce estimates of what dead people would earned so that their lost tax revenues can be counted as a cost of smoking. Rest assured that I'll be pursuing alternative channels on this one. I view MoH's continued use of the $1.9 billion cost figure as tantamount to fraud; they, of course, disagree.

But who does get the sign right on the fiscal externality? Russia. Here's the Russian finance minister:

Speaking as the Russian government announces plan to raise duty on alcohol and cigarettes, Alexei Kudrin said that by smoking a pack, “you are giving more to help solve social problems such as boosting demographics, developing other social services and upholding birth rates”.

“People should understand: Those who drink, those who smoke are doing more to help the state,” he told the Interfax news agency.

Boosting demographics means "dying earlier so there are fewer pensioners relative to young people"; developing other social services means "you're paying way more in tax than you're costing us, so we can use the difference to fund other things"; "upholding birth rates" presumably means that smoking and drinking are complements to procreational activities.

I love Russian candor.

HT: Snowdon

Costs of smoking

I'd noted a couple of months ago that it seems likely that MoH has substantially overestimated the costs of smoking borne by the public health system.

The folks at MoH have punted the number back to the analysts who produced the number to see whether my read of the figure is correct, or at least according to the email I got back from them two months ago. But I've not heard anything back from MoH on repeated request; I've emailed the Minister's office for assistance.

Ashley Bloomfield, one of the tobacco control folks at MoH, was on National Radio end June, still citing $1.5 billion in costs to the public health system. And the figure (this time $1.9 billion) is still on their website, here. I'm not sure if that means that they stand by their number but are refusing to tell me why, or if they haven't checked their figures yet.

But is a $1.9 or $1.5 billion cost figure even plausible? The tobacco excise tax take is about a billion dollars, so they're reckoning more than a half a billion dollars in annual net cost in a country of 4 million people.

The infographic here shows tobacco excise taxes by US state: New York's rate is the highest, with a combined state and local tax of $3.75 per pack: about NZ$5.36. The average rate is under $2 ($NZ 2.86) per pack.

NZ's duty of $345.87 per 1000 cigarettes works out to $6.92 for a pack of 20.

Viscusi shows pretty convincingly that American smokers save the public purse a whole lot of money. Our tobacco taxes are much higher than even the highest American excise tax rate. Yes, we have a public health system. But so too do the Americans: Medicare will wind up catching a whole lot of the health costs accruing to smokers over the age of 65, and Medicaid will catch the health costs accruing to younger poor people. Is it really prima facie plausible that tobacco has net very large costs to the public purse in New Zealand? I don't buy it.

Fiscal externalities and personal choice

I'd previously raised sexual behaviour as a bit of a limit case of where interventions can wind up taking us if we want to tax or regulate any activity that imposes costs via the health system. I'd also worried that greater socialization of health costs leads to greater calls for such interventions.

And now Half Sigma's worrying about the public health costs of homosexual activity. There, the argument is explicit. Because of the public health system, whether ObamaCare, Medicaid, or prior restrictions on insurance company ability to set actuarily fair prices, we all have an interest in otherwise private risk-taking activities.

He previously linked to some evidence of relatively high rates of HIV among DC's gay community.

Of course, there's only an insurance externality here in private markets if the insurer were prevented from charging actuarily fair rates prior to disease onset; such regulations are one way that the costs of individual activity can be socialized.

In a Crampton-ideal world, we never would have had a publicly funded health system but rather income transfers to the poor coupled with mandates to purchase minimal catastrophic insurance coverage. Moral hazard problem solved. But if the political process has decided that it's better to socialize the costs of risk-taking because it's somehow unfair to charge actuarily fair insurance rates, then why is it not also unfair to charge Pigovean taxes on behaviour that would wind up effectively replicating, at rather high transaction cost, the actuarily fair insurance premiums? Or, worse, that we start taxing or regulating only those risk-taking behaviours that garner social disapprobation? I still hold that second best is to leave the fiscal externalities off the table. There is no obvious stopping rule that keeps us from moving from "people who smoke cost me money and should be taxed" to "people who have risky sex cost me money and should be heavily regulated as a per unit tax would be unfeasible".

I worry that calculations like Half-Sigma's are far more likely to lead to anti-gay sentiment than they are to lead to actuarily sound health insurance policies. It's not all that hard to imagine aggregate health spending figures on HIV/AIDS coming up in election campaigns in the redder parts of the US map a few years down the line....

And more on the new paternalism

Robin Hanson links to Megan McArdle's interview with Paul Campos on the war against obesity.

Short version of the interview: there's really not much that can be done to permanently make fat people thin; most current campaigns are fueled by moral panics about the need to do something about associated health care costs and by disdain for folks who become obese. Being thin is a marker of high status, and anti-obesity campaigns do a lot to reinforce that kind of social hierarchy while being utterly ineffective in improving health outcomes.

Megan: An economist recently pointed out that we don't encourage people to move to the country, even though rural people live more than three years longer than urban people, and the diffefence in their healthy life expectancy is even more outsized. Nor do we encourage people to find Jesus or get married. We target "unhealthy" behaviors that are already stigmatized.

Paul: Right, as Mary Douglas the anthropologist has pointed out, we focus on risks not on the basis of "rational" cost-benefit analysis, but because of the symbolic work focusing on those risks does -- most particularly signalling disapproval of certain groups and behaviors.In this culture fatness is a metaphor for poverty, lack of self-control, and other stuff that freaks out the new Puritans all across the ideological spectrum, which is why the war on fat is so ferocious -- it appeals very strongly to both the right and the left, for related if different reasons.

Nice.

Smoking, fiscal externalities, and harm minimization

Colby Cosh points me to still more examples of very bad analysis of the costs of drugs: in this case, smoking. The Canadian study seems to have tried to tally up the costs to government of tobacco, but didn't note that smokers' deaths reduce government pension costs and avoid the health system having to deal with the other ways they would otherwise have died (as we all do, eventually).

Two things worth noting.

First, Kip Viscusi and others have found that when the costs are tallied correctly, smokers save the government money: they die earlier of cheaper diseases.

Based on surveys of smokers in the United States and Spain, for instance, he demonstrates that smokers actually overestimate the dangers of smoking, indicating that they are well aware of the risks involved in their choice to smoke. And while smoking does increase medical costs to the states, Viscusi finds that these costs are more than financially balanced by the premature mortality of smokers, which reduces their demands on state pension and health programs, so that, on average, smoking either pays for itself or generates revenues for the states.

Second, it's unclear whether these "cost the health system money" effects really are inefficiencies. They're called fiscal externalities, and are of pretty dubious status regardless of the direction of the sign. If we take Buchanan and Stubblebine's (1962) categorization of pecuniary and technological externalities, fiscal externalities don't get to count as the kind that cause inefficiencies. In the Buchanan-Stubblebine framework, pecuniary externalities affect others via the budget constraint while technological externalities enter directly via the utility function: only the latter has efficiency consequences. In short, under that view, we should be no more worried about inefficiency caused by somebody smoking more and costing the health system money than we should be worried about inefficiency caused by somebody bidding against you at a house auction.

Even if you want to count fiscal externalities as technological, it's well-neigh impossible to tell where to stop. If the existence of a public health system induces me to smoke more than I otherwise would, imposing costs on you, the taxpayer, it will also have effects on all kinds of other things I might choose to do. Folks will take on more risks on many margins and will invest less in avoiding health costs. At what point does the State get to tell us we're forbidden from risky sexual practices because of the costs of STDs on the health care system? As Edgar Browning so nicely showed us, the full set of taxes and subsidies that would eliminate all of the incentive effects inherent in the public health system would have an incidence similar to an actuarily-fair private health insurance premium, but with massive transactions costs.

Finally, Reason points me to an FDA campaign against electric cigarettes, which deliver nicotine vapor to smokers. While these electronic delivery mechanisms are far safer than regular cigarettes, the anti-tobbac folks worry that they'll prove the gateway into regular tobacco for non-smokers. Or, at least that would be the rational version of the argument. Arguments against harm-minimization devices of this sort often seem more akin to the Pope's reaction to a campaign promoting masturbation over pre-marital sex. Consider the position of the anti-tobbac lobby here in New Zealand with respect to chewing tobacco, or snus, which here is banned.

Snus is an addictive tobacco product that contains nicotine. The risk of developing cancer is far less among snus users than it is among smokers. However, it cannot be said that snus is an entirely safe product nor can it be claimed that it has been proven to be an effective cessation aid for smokers who want to quit. ...Rather than deregulating the use of oral tobacco in New Zealand more substantial health gains are to be had from the regulation of all tobacco products.

In other words, even though it could well improve health outcomes for smokers, it's still tobacco, and tobacco is evil, and suffer not tobacco to live among you.

It's an empirical question around elasticities on the extensive and intensive margins, but I'd be extremely surprised if either electronic cigarettes or chewing tobacco proved net harm increasing. It's a shame that the onus isn't on the pro-ban folks to prove harm.