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.


  1. I'm not convinced Labour's GST stance is anything other than a cynical ploy to try and grab a few extra votes.

    I'm also not convinced that exempting fresh fruit and veges will even have the flow on effect promised by healthists. It is already cheaper to buy fresh produce and cook at home than it is to live on takeaways, yet there are plenty of people who choose to eat takeaways at least some of the time. People don't necessarily choose "unhealthy" foods because it is the cheap option, they do it because generally these foods are damned tasty and convenient, and bugger the consequences.

    In this scenario does it make sense to deprive the govt of valuable tax income just to pretend to the people that their welfare matters, while achieving nothing tangible?

    I heard Peter Dunne commenting on this earlier, saying that it was ludicrous that imported apples would be exempt from GST, but locally grown frozen peas wouldn't. Market protectionism arguments aside, the humble frozen pea is essentially unprocessed aside from freezing. An argument could be made that it should also be made GST exempt, given that the freezing process doesn't alter the inherent "goodness" of the product. If freezing them becomes an acceptable level of processing, how about other forms of preservation? Dehydrating? Aside from a little water removal that doesn't really alter the chemical composition of the fruit or vege greatly. So a grape is exempt, a sultana not? What sense does that make? As different food producing lobby groups try to exert their influence we will suddenly find that fresh milk and bread will be suggested for exemption because they can be seen as healthy foods. How about red wine and dark chocolate, they have proven health benefits in moderation, why not exempt them? It really is thin end of the wedge stuff.

    It is a stupid idea that will lead to inefficiencies and extra levels of bureaucracy to administer.

  2. I agree, Lats. Eric's earlier post on the bread case in Oz should be a cautionary tale for Labour.

    @ Eric: Even if food as a whole doesn't become cheaper, there are obvious income effects from decreasing the price of fruit/veges that could lead to an increase in "other food" consumption. Any reason why no one seems to be talking about this yet? Perhaps some studies have discredited the hypothesis?

  3. I agree, Lats. Eric's earlier post on the bread case in Oz should be a cautionary tale for Labour.

  4. this is the logical end result of having a GST. things like this are bound to happen sooner or later. I wouldn't be surprised if they lobbied to exempt baby food from it too