Tuesday, 2 December 2014

Information failure?

Last week's column for Insights argued against Obama's new regulations mandating calorie counts on standard menu items at large chains. A snippet:
The costs of mandatory calorie counts are pretty obvious. In addition to the usual labelling costs, they also make menus a lot more rigid. For places like McDonald’s, it’s pretty easy.

Standard menu items across thousands of locations make it easy to spread the fixed costs of assessing calorie counts and changing the menus. But what about smaller chains that like to encourage their chefs in a bit of experimentation? Trying out new dishes gets a lot harder if you then have to run a nutritional analysis on each one before serving.

And it isn’t just restaurants: a scoop of ice cream at the dairy counts too, if the dairy is part of a chain of 20 or more; movie-theatre popcorn also counts.

It’s always possible that, despite the costs, the information is sufficiently valuable to consumers that the policy makes sense. But there are two pretty big problems.

First, if customers really wanted calorie counts, they’d already have them. Restaurants are highly competitive: they run on thin margins and have to work really hard to draw customers. Most restaurants offer well-labelled options catering to vegetarian or gluten-sensitive customers, helping them to make choices. And some restaurants, like Subway, provide calorie counts.

Second, if customers really found the information valuable, it would show up in changes in the choices they make when presented with calorie information. Instead, field experiments show consumers don’t change their behaviour.

I hope that when people predictably ignore the calorie counts, the government won’t move from labelling nudges to harsher shoves; I also hope New Zealand remains outside of this particular asylum.
A correspondent suggests that I've missed the information market failure that could have motivated the regulations, and suggests that, since OIRA requires cost-benefit assessment, the policy is likely fine. Since we've had a bit of back and forth on it, I thought I'd post my reply here in case others might wish to see it.
There can be an information-failure case for public education campaigns explaining how calories work, what recommended daily calorie limits are, and how extra calories turn into fat. So generalised ad campaigns like “Did you know that eating 10% more than the daily recommended calorie intake will make you x kg heavier by the end of the year?” – I can see a case for that. And if that then has consumers asking restaurants for more calorie information, that’s all fine.

But I remain entirely unconvinced that there exists any real market failure in restaurant information provision to customers. The FDA’s case here is really weak.

In the FDA’s cost-benefit assessment, they note that restaurants are highly competitive, they have to respond to consumer needs, and that if customers really valued nutritional information, restaurants would provide it. I agree entirely. Then this:

“Notwithstanding this point, and although many of the usual market failures that justify regulatory action, such as the existence of market power or public goods, cannot be found here, the primary support for government intervention is an absence of sufficient nutritional information, produced by an inadequate incentive for restaurants to produce that information on their own. An absence of adequate information is of course a standard market failure, justifying disclosure requirements or provision of information in many contexts.”
This isn’t a market failure case; it’s a merit-goods argument! People aren’t demanding as much information as FDA would like (as restaurants would be providing it if customers did want it), therefore market failure? That just doesn’t hold.

They try to hang the whole thing on consumer time preferences being too high at point of sale (discounting future health costs) and argue that presenting the information would increase its salience and promote informed choice.

In the absence of market failure, it’s a lot harder to run the cost-benefit assessment. We can’t presume that consumers find the information valuable, either in gross or net terms. It isn’t at all inconceivable that some consumers in some circumstances have a preference for not being presented with calorie information, like when going out to a fancy dessert place for a celebration. Neither can we conclude from consequent changes in behaviour that the information was valuable, though I think we can conclude that, in the absence of any change, the information likely wasn’t valuable.

When the FDA runs the numbers, the cost-benefit assessment proceeds as though there are nothing but benefits from consumers’ having changed behaviour consequent to seeing the information: otherwise, they’d count some lost consumer surplus against health benefits to get a net. The only tallied costs are costs falling on firms for compliance; there’s no estimation of reduced consumer surplus from menu items that cease to exist because of labelling hassles. On the benefits side, they don’t even try to calculate it – they just say that the policy pays for itself easily if a small fraction of the obese cut their consumption by 100 calories per week. There is no real cost-benefit analysis anywhere in here. Meanwhile, the grocery council estimates that costs on them alone (since they also fall under the regs) would be a billion up front – double FDA’s estimate for the entire regulation. Sure, the grocery council will have had incentive to overestimate compliance costs, but the FDA’s assessment of $1,100 per covered establishment seems really low relative to the constantly-changing menus at grocery delis.

This isn’t so much an ideological point as a methodological one, though I suppose you could say the two link up. When we overturn voluntary consumer decisions in the absence of real market failures other than assumed “they’re not weighting the future enough” and without the ability to see into consumers’ utility functions, any cost-benefit assessment is fraught with difficulty. We can’t just assume information-based market failures where consumers don’t demand the information, and where there are plenty of existing ways for consumers to get the information if they want it. Heck, Samsung provides a free calorie-estimator app as part of the S5’s bundle, and plenty of other free ones already exist.

I really need a convincing story here explaining the market failure and justifying the mandatory provision of information that consumers might not find to be worth its cost. FDA really just points to the potential reductions in obesity and says that any trivial reduction would be sufficient to cover their estimate of the costs of the regulation; where those benefits are borne by individuals who could, right now, choose either to run a calorie-counting app or to frequent restaurants providing calorie information, and who are not doing so, I’m pretty sceptical. If there were some complementary market failure in the restaurant sector – say high barriers to entry and lack of competition, I could start seeing how it works. But that isn’t the restaurant sector. The story requires some fundamental underlying assumption of consumer stupidity or irrationality: I think it’s the kind of policy suitable for those inside the asylum, not those outside of it.
For those interested, here are the FDA's analysis and the OIRA statement.

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