Bastiat’s Bastions

I’m confused…

First, read the article, a comment from the democratic governor of New York. In the article, the Governor opines that he is favor of a tax on sugary beverages (think Coke and Pepsi). His argument is feeding Coke to kids makes them more likely to be obese. And this obesity leads to bad health outcomes on down the line. Thus, the tax on soda is called an “obesity” tax, perhaps by journalists and policy wonks that want to make it sound sexier. And just to be clear, I don’t thing the Governor is making a fiscal argument, but it is in the conversation.

In reading this article, I first thought I might have just something of a mild economic epiphany. But then as I kept writing, I’m only more confused. Perhaps you all can help me out?

First, some background on the economic arguments for taxation. There are (at least) two economic arguments for taxation.

The first is to raise revenue to fund legitimate governmental projects. Economists generally believe that the best goods to tax for this purpose are goods with inelastic demand curves (or inelastic supply curves). The idea is that with an inelastic demand curve, the tax can be absorbed with a relatively small change in quantity consumed and produced, resulting in the largest amount of tax revenue with the least amount of distortion or dead weight loss. This argument would explain why we might consider putting relatively high taxes on gasoline, liquor, and cigarettes. These goods tend to be inelastically demanded because there are few substitutes for these products.

Interestingly enough, its seems the demand for soda is not inelastic — actually quite elastic — anyone with a D or better in Econ 211 should be able to calculate if from the article. The elasticity shouldn’t be too shocking due to the fact that there are many alternative to sodas (water, juice, tea, kool-aid, beer, etc.). So if I am looking for a justification of this obesity tax, I have to keep looking…

The second reason to tax goods is to reduce the amount of some activity that generates what economist call “externalities”, or more precisely “external costs”. If person A does something, and person B is harmed, we say person A has generated an external cost. We call it an external costs because person B was external to the decision making — they are a victim so to speak.

Because in most situations, person A doesn’t have to pay for the harm caused on person B, there is too much of the activity pursued. As an example, think of smoking. It shouldn’t be too hard to figure out how person B is harmed (second-hand smoke). If we were to tax activity A, person A will do less of that activity, person B will suffer less harm, and we can get back to the optimal amount of that activity. (People who got a C in Econ 211 will also remember you could regulate smoking, say prohibiting it in certain places). In fact, the right sized tax is equal to the amount of suffering caused by 3rd parties. If the right size tax is imposed, the decision maker now truly faces the “full” cost of their actions, and the “problem” is “solved”.

While most people wouldn’t look at in quite the same way, many laws can be interpreted in the lens of external costs. If person A is, say Vince Marinello, and person B is his wife, and the activity that Vince engages in is killing his wife, the external cost is astronomical. While again it would take an odd person (such as me) to think of a prison sentence as a tax — it really is — you commit a murder and you have to pay, big time. They even take away your hair piece.

Ok, back to the obesity tax. We can’t justify it on revenue grounds…but can we justify it on the grounds of obesity causing external costs? Are there external costs associated with obesity?

Suppose I (at the writing about 6′4″ and maybe 175 pounds – make that 176 as I just had a 20 oz Coke), decide to slurp Crisco through a straw until I weigh 450 pounds. Are there external costs? Who else suffers as a result of my newfound obesity?

Nobody…right? Unless…I’ll get to the unless in a second. So there shouldn’t be a tax on obesity?

Is not being obese then just like, say, playing golf? Playing poker? Watching reality TV? It seems patently absurd that the government should tax golfers, tax reality TV, or tax gamblers (oops, scratch that last one – a post for another day). Is the governor wrong?

And finally to my almost epiphany.

Does the answer to external cost question about obesity change if we live in a world where the government has decided to pay for health care (or at least a faction of health care), and pays for it through taxing its citizenry?

I think it does. When I do the Crisco thing, your future tax bill rises due to my government funded health care expenditures, perhaps to pay for my hypertension pills.

My almost epiphany…

First the government decides to provide a service, paying for it by taxing — and then given that decision, it now makes economic sense to have further government intervention (taxes) to reduce the amount of money spent on the original service.

First, it is weird how government intervention in the first place leads to more government intervention as a result, no? The amount of invasiveness in our lives as a result of provided heath care to people is, in the end, much more ranging that simply providing health care to people, right?

Second, where does it stop? Say we were to change to a 100% inclusive government provided health care system, financed by taxes. In that world, wouldn’t any activity that might potentially increase the amount of spending on health care create an external cost? And thus, shouldn’t it too be taxed? Where does it end? A Soda tax? A chocolate cake tax? A pepperoni pizza tax? A rock-climbing tax? A failure to exercise tax? A pregnancy tax?

–CT

Why don’t you invest in America’s car industry? The simple reason, I am sure, is that the American car companies don’t tend to respond to conditions to make the cars that Americans or anyone else in the world want in sufficient numbers to produce competitively. So, American investors, or investors from anywhere else, people who have money to invest, do not want to put their money into these companies–they are seen as a bad investment. 

Why is it, then, that Congress thinks that this is a good place to put the money of Americans, some of whom might have been investors and some who don’t have enough money to invest, into these uncompetitive firms?  It is the money of the same unwilling investors.  What we as individuals were unwilling to invest in, Congress will make sure we invest in.  Congressmen are supposed to act as stewards of taxpayer money, but they seem to be failing in that role.

We must not think solely about the jobs lost in Detroit if these companies fail, but also about the failure of firms that taxpayer/investors would have put their money in, had they not been forced to put their money into failing firms. 

A recent book by journalist Amity Shlaes, The Forgotten Man: A New History of the Great Depression, makes the point that we need to look beyond the immediate impacts of policies, the benefits of the policy, and look to the impacts on people beyond the intended beneficiaries, to the forgotten (I should point out that Ms. Shlaes unpolitically correct title comes from speeches of FDR–see her book web site).  This was the same point that Bastiat made in his famous essay, “What is seen and what is unseen” (also see About Bastiat’s Bastions, and that Norber Michel and I in or original post here at Bastiat’s Bastions, “Break all the Windows”). 

One “forgotten man” is the person working at a Nissan or Honda auto plant in the south somewhere, who is being asked, about to be forced, to invest in his competitors.  And of course, there are the workers at Honda Dealerships and Nissan parts suppliers.

If the American big three are such great investments, why aren’t the big three’s CEO  completely invested in their companies? And why aren’t UAW funds completely invested in these companies?  We are being asked to place our money in a place that these executives and the auto union are unwilling to put all of their funds.   

If American and foreign investors are unwilling to put their money in these companies, why should American taxpayers be forced to?

Perhaps, in dealing with the current recession, we should think of the wisdom of “Chance” (Peter Sellers) in the movie, “Being There,” who suggested that in the winter (what people took as a metaphor for recessionary times) is a time of retrenchment, where the unviable die out so that there is room that is made for the more viable. 

Instead of just listening to those who are grubbing for tax payer backing in Congress, the CEO beggars, we should also listen to Chance, to Bastiat and to the Forgotten Man.

-MC

One of the important points made in an introductory economics class concerns a measurement of demand, of buyer behavior, called the “elasticity of demand.”  Elasticity of demand measures how buyers respond to price changes by reducing their purchases.  Here are two possibilities to consider:  1) buyers respond so much to price changes, that when the price of the good increases, total spending on that good goes down;

2)  buyers cut back some when the price goes up, but not by much, so that price increases lead to more spending on the good.

The first case occurs when buyers can easily buy replacement good usually referred to as substitutes.”  An example of this first type of good might be something like chicken thighs, as there are other parts of chicken available, other types of meats and other types of foods, all of which substitute for chicken thighs to some degree.  This type of good is said to have an “elastic” demand.  The second occurs when there are few substitutes for the good under question, such as with an addictive substance, like tobacco or heroin, which are said to have inelastic demands. 

A way that some economics instructors drive home the importance of understanding elasticity of demand is by using the example of heroin and effectiveness of U.S. drug policy.  Heroin, being highly addictive, has a highly inelastic demand.  Higher prices lead users to cut back some, but by such a small amount that overall spending on heroin rises when prices go up.  When the U.S. DEA is able to reduce the supply of heroin into the country, the price of heroin naturally increases.  Since heroin has an inelastic demand, higher prices lead to increased spending on heroin.   Heroin addicts seldom have great jobs and so much of an addict’s source of spending is from money-making criminal activities, from prostitution and pornography production to thefts, ranging from car theft to burglary to mugging. 

What all this means is that higher heroin prices because of more effective interdiction of heroin imports leads to higher rates of money-making crimes even though the amount of heroin flowing into the country is reduced, because the street value of heroin coming in increases.  This suggests that giving heroin away, instead, would cause crime rates to fall. 

Well, that is exactly what happens.  In this article about legalizing heroin in Switzerland, it is noted that crimes by heroin addicts “have dropped 60 percent since the program began in 1994….”  In addition, if the government is supplying safe heroin, so that there is no possibility of running a profitable heroin trade, there will be no wars among rival heroin suppliers.That certainly should give us something to think about.-MC