Thursday, May 31, 2012

Don't distort the beverage market just because the health insurance market is messed up

The Political Economy of Obesity

In the above article, Jared Bernstein argues for a Pigovian tax on soft drinks to fight the obesity epidemic. A Pigovian tax is economic jargon for a tax that is levied to remedy an externality. It does this by increasing the private marginal cost so that it aligns with the social marginal cost. More info can be found here.

Mr. Bernstein's argument is summed up by him as follows:

- The increased caloric content of sugary drinks has contributed to the epidemic;
- The epidemic is a significant contributor to the increase in health costs;
- There's a large price elasticity in play here.

Mr. Bernstein feels that this tax is necessary because obese people who drink "high calorie" soft drinks do not take into account the additional health care costs that they place on society and thus they consume too much.

But in my opinion the bigger problem is that we have a health care system that allows obese people to burden others, mainly because they are not charged correctly for their insurance. Mr. Bernstein anticipates this and counters with "But there are problems here -- what about low-income, overweight people who can't afford the higher premiums? What about the uninsured?"

But if low-income, overweight people could not afford insurance because of their weight problem, wouldn't that provide them with an incentive to lose weight? Simply saying that they could not afford it and thus this idea would not significantly reduce the problem is missing the point of incentives. If we subsidize their insurance through inefficiently priced premiums so that they can afford it, where is their incentive to change?

The insurance market is full of distortions such as the tax benefits given to employee provided insurance and coverage mandates for certain services (both of which lead to having an excess of uninsured). But just because there are distortions and inefficiencies in the health insurance market does not mean that we need to resort to a second best solution in the beverage market. What policy makers should do is remove the distortions in the health insurance market and let the marketplace work. In my opinion this would internalize a lot of the externality, eliminating the need for any Pigovian tax on "high calorie" drinks.


  1. So are you arguing if there were no distortions in the insurance market it still wouldn't make sense to have a Pigovian tax? Even if insurance markets were free of coverage mandates and employer provision (which I agree these should be eliminated), you still have the market distortion of uncertainty. This is what differentiates insurance from all other goods. The healthy are essentially subsidizing the unhealthy through otherwise higher premiums due to risk-pooling. The decision to consume unhealthy products can never be fully internalized because of Pigovian taxes can correct the unavoidable distortion of uncertainty.

  2. Uncertainty is a distortion? There is some level of uncertainty in every market. Information is costly and as such there are relevant marginal benefits and marginal costs that must be considered. But just because someone finds the costs greater than the benefits does not mean there is a distortion. There is uncertainty when I buy a house. What if a tornado comes and destroys it? Or a flood? But no one argues for pigovian taxes in the house insurance market nor do we look to the govt to run it. The same is true for car insurance. Should we use pigovian taxes to correct the uncertainty in the stock market? Commodities markets? What about the uncertainty that surrounds my IPad purchase? It may break next week, next month, or next year. If you want to label uncertainty a distortion then you could argue for Pigovian taxes in any market.

    Perhaps you meant to say that the health insurance market has some unique level of uncertainty unseen in any other market on the planet. But if this is so the burden of proof is on you. As for uncertainty itself, it is just as common as air and in my opinion no more of a distortion.

  3. I use the term uncertainty loosely, but it's a component of perfect information, which is a prerequisite for models of efficient market yes it's a distortion preventing the market from achieving the optimum. Just because it exists doesn't mean something can be done about it in every aspect of the world, such a your ipad example, but insurance markets are one instance where we can do better. There's an extensive literature on the externalities imposed by the high-risk insured on the low-risk.
    And no one argues for pigovian taxes in housing market because it's different by nature. There isn't much that can be done to make a house "less prone to a tornado". As for driving, the government does plenty to keep my insurance rates down. It's not exactly Pigovian, but what if tomorrow we said "no more speed limits, everyone can go as fast as they want." Now all of a sudden my chances of getting in an accident on the road are much higher thanks to everyone else driving more recklessly, even if I drive the same speed as before. You don't think my insurance rates will go up because of this?

    Besides all of that, there's a strong case for sin taxes without even having to talk about uncertainty, but my guess is libertarians would reject it on principle, despite it making perfect economic sense. Empirical evidence shows smokers are actually happier when cigarette taxes increase, likely due to their new-found better health. This then lowers demand for health care, since we have less smokers getting lung cancer and needing expensive treatment. So we have a Pareto improvement.

    1. Eliminating choice is never doing better. Providing more information to alleviate some of the uncertainty? I am all for it. But again, information is costly and we cannot have unlimited amounts without giving up something. I strongly believe that people in general are smart enough to navigate a world of private market insurance.

      And as for your tornado example, sure there is something that can be done namely don't build a house in tornado alley or the midwest where tornados occur. Ditto for preventing houses from flooding. Don't build near water. People do choose to build in those places though and weigh the appropriate benefits and costs.

      As for the smoker example talk to Andy Swanson about that but any measure of "happiness" is likely fraught with error and attributing it to higher taxes is certainly incorrect just as you point out. It is the increased health that makes them happier and I am unconvinced that the ends justify the means in most of those scenarios. Besides if raising taxes on cigarettes is truly a Pareto improvement as you say then banning them outright along with alcohol, trans fat, corn syrup, and even laziness should also be a Pareto improvement. And if it is too hard to ban laziness how about mandating 45 mins of daily exercise? I am sure in a few months everyone would feel better.

      We could argue all day about the need for government intervention in the health insurance market but I don't think either of us will convince the other. And to be honest I am not even against government intervention per se. It is federal government intervention that I deplore. If NYC wants to implement soda taxes more power to them. No where does the constitution say they can't. That is a decision that can be left up to New Yorkers and if it turns out to work great but if people hate it and leave NYC because of it or vote it down that is also their right. I for one will not live in NYC and that is also my right. But if the Federal govt institutes these kind of bans and taxes then there is nowhere to go (well the cost gets incredibly high at least. But as English spreads and countries open their borders to attract talent it is not inconceivable that countries that are more free than the U.S. and western Europe will see an influx of ex-pats).

  4. To give you an example of what I'm talking about with insurance, in 1993 there was a huge flood here in St. Louis that covered about 1/5 of the city. Over the following years, property insurance rates went up everywhere in town, not just for those who owned property in flood zones. So choosing to live on higher ground did not keep a family from paying higher insurance rates. Regardless of an individual's ability to navigate private insurance it's impossible to escape the consequences of other's choices. This is a pretty close parallel with the insurance market in my opinion.

    You say eliminating choice is never better but that information is costly and something must be given up for not the same true of freedom? More freedom isn't a free lunch. You might not know it based on the way I argue on here but generally speaking I'm in favor of free choice. I just don't believe a blanket "absolute freedom" (within the bounds of protection of person and property etc.) stance is the best for society, and that's why I don't label myself Libertarian, because it seems to be a philosophy that only deals in absolutes. So for example, when you say "why don't we just outlaw cigarettes", there's a trade-off between freedom and better health. The optimal solution is almost never on the corner, it's much more likely society's best choice is to pick some tax in between 0 and infinity. Sure it's arbitrary and difficult, but that's why we have economists.

  5. I agree that I might have to give up some "safety" or "security", I assume that is what you mean, for personal freedom. But I gladly do it. What I disagree with is being forced to partake in a program that political people, i.e. those who pay attention to politics and the political game like special interests and politicians in general, coerce me into joining, hiding behind majority rule. What majority? The majority of voters? The majority of senators? Certainly not the majority of the entire country, many of whom are so disillusioned by politicians that they fail to even partake in the system.

    The idea that somehow, someway, some stranger that I have never met nor ever will can shed some light on the best way to live my life is just preposterous to me.

    Like I said before, if you believe some stranger who sits in a building in Jefferson City somewhere can help you live your life, let Missouri create its own socialized medicine and you can join and be a happy guy. Why are you and others who support nationalized health care so afraid of other states not doing it your way? I don't understand it. Certainly the 6 million plus people of Missouri are enough to create a viable insurance market, after all companies do it with much less. Why do you need to force your model on Texas, or Ohio, or South Carolina? What makes you or anyone else so omniscient about the best way to organize the health insurance market? There are several very smart people who disagree with you (Robert Barro, John Cochrane, Walter Williams, Thomas Sowell, Greg Mankiw, Tamura, Dougan, etc.). Are these people just too stupid to understand your argument or could it be that perhaps there are other viable alternatives?

    I do not know which way is best, I confess my ignorance. That is why I support local governments trying different things. But my hunch is that a monopsony buyer coupled with a 12 man panel is not the best alternative.

  6. You say you gladly give up some freedom for safety and security, but that's no different than being forced to participate in a health care program that you personally don't agree with. I'm sure there's plenty of people out there who'd like to take "security" into their own hands and refrain from doing so due to the chance of being arrested. Are their rights being trampled? And as for the "majority" in favor of health care, we live in a republic so it's not a pure democracy, but we voted in a president who promoted national health care, if we don't like it we can vote him out in November. And as for disillusioned voters, I don't really have any sympathy. If they don't want to put in the time and effort to vote according to their preferences then their voices don't deserve to be heard.

    As for the economists you list, I don't pretend to be as smart as any of them, but there's just as many on the other side of the spectrum. Sen, Stiglitz, Arrow, and Krugman would all be in my camp (all of which have won the Nobel too, and Arrow wrote an article on health care that's considered one of the top 20 AER).

  7. You ignored my main question. Why are you, krugman, and stiglitz so set on a national health care system? Are you that confident that you are right? If it turns out to be terrible then what? Can krugman or arrow guarantee its success? Can you?

  8. I already answered your question. This entire thread is my reasoning behind government intervention. Can I guarantee its success? No. Unfortunately I'm not God. Economic theory is all I can go on...and theory tells us the current system is inefficient, its bankrupting the country, and a more active government can alleviate both problems.