Survivors’ Costs Gone Wild, Beverage Tax Edition

Mr. Gradgrind Catches Louisa and Tom at the Circus. Illustration by Charles S. Reinhart (1844-1896)

Gradgrind is alive and well, as this exchange on soda taxes explains:

This discussion between Greg Mankiw and David Leonhardt reads a bit like an economics textbook gone rogue. At issue is whether a soda tax makes sense. David Leonhardt says it does: There’s good evidence that it will reduce obesity, which will reduce health-care costs. Au contraire, says Mankiw: You have to “net out the appropriate budgetary savings from shorter lifespans.” In other words, maybe it’s not worth it, as the obese live shorter lives and so cost the government less.

Ezra Klein goes on to describe how the calculation of survivors’ costs (without offsetting valuation of survival benefits) “disadvantages the quality/value agenda as compared with the cost-control agenda.”

I would add a couple more points to complicate the analysis:

First, Mankiw may be interested in exploring the benefits of the “plus-size” clothing market. As the NYT reports, “The plus-size market increased 1.4 percent while overall women’s apparel declined 0.8 percent in the 12 months leading up to April 2010 versus the same period a year earlier, the most recent figures available, according to NPD Group, a market research firm.” Certainly taxes that discourage the development of this growth industry should be scrutinized carefully.

Second, for team Leonhardt, we might think of the tax as a way of deterring anti-beverage tax ads which have glutted the tri-state airways over the past few months. We could all do with a little less of the rent-seeking featured below:

Urgency, Medicalization, and Sick Days

Photo by NCReedplayer via Flickr

The US media have recently coalesced around a narrative asserting that US health care costs too much in the aggregate because citizens are demanding too much health care. But the “too much demand” narrative must be balanced by an awareness of high prices in the US, as Ezra Klein has pointed out on the provider side, and Uwe Reinhardt notes on the insurer side. Reinhardt cited a study that found that, in comparison with West Germany, “in 1990 Americans received $390 per capita less in actual health care but spent $360 more per capita on administration.”

Nevertheless, there are legitimate concerns that citizens of the developed world are demanding (or having foist upon them) “too much health care,” as Charles J. Wright argues in the Literary Review of Canada. For example, Wright observes that

The recent analysis of all the available evidence from multiple studies published in the British Medical Journal shows that if 2,000 women are screened with mammograms regularly for ten years, only one single woman’s life will be prolonged, but 500 will have at least one false positive and ten will be diagnosed with a “cancer” that would never have become a real disease if it had been left alone. . . . The diagnosis and treatment of non-disease is also popular in some areas of psychiatric practice. Among the hundreds of diagnoses listed in the Diagnostic and Statistical Manual of Mental Disorders (known as the psychiatric bible) published by the American Psychiatric Association, dozens would be considered by most people as normal variants of the human condition but for the relentless attempts by the pharmaceutical industry to have them known as common diseases treatable by drugs.

Wright examines many causes for overmedicalization, but I think he misses one very important one–health concerns as a trump card over other social needs. In the US particularly, shrinking middle class incomes, weak unions, and high unemployment make it extremely difficult for the average worker to demand much in the way of vacation time, and there is virtually no political movement to guarantee such time. But there is momentum on both the federal and the municipal level to get sick days, in part because of the public health consequences of “presenteeism“–sick workers who spread flu and other disease when economic necessity forces them to go to work. While laissez-faire business interests can smear virtually any other pro-worker law as an intolerable burden on business, it is intuitively obvious why stopping the spread of disease is in everyone’s best interest.

Whatever happens as a result of this year’s health reform debate, I believe it has done some crucial normative work. After a long campaign by advocates of “consumer-directed health care” to reframe health care as just another commodity, the reform debate has focused the nation on its uniqueness, and on the moral imperative of providing some baseline of care to all. By vigorously blocking so many other modes of achieving better work conditions, entities like the Chamber of Commerce and Club for Growth have, ironically, shifted progressives’ focus to conservatives’ bete noir, the health care system. I predict that, if other guarantees of humane working and living conditions decline, we will see ever more “medicalization” as a way of upping the urgency of demands made by an increasingly pressed middle class.

Cut money to the EPA, and the US’s toxic waterways grow, increasing the flow of carcinogens to the populace. Put workers in insecure and demoralizing environments, and don’t be surprised if there’s an upsurge in demand for anti-anxiety drugs. Decimate funds for roads and public transit, and turn a blind eye to dangerous driving, and watch the ER’s fill with accident victims. The closer we come to a “minimal state,” the more we’ll see the resulting externalities increase demand for health care. The mechanic in the old oil filter commercial speaks for the public at large: “Pay me now, or pay me later.” When we defer maintenance of the social determinants of health, we shouldn’t be surprised when demand for doctors and hospitals rises.

So How Much Does that Can of Soda Really Cost?

Photo by marlith

Externalities. The concept is, rather simply put, that “an externality or spillover of an economic transaction is an impact on a party that is not directly involved in the transaction. In such a case, prices do not reflect the full costs or benefits in production or consumption of a product or service.”

Which is to say, there’s a cost beyond the price–and that cost may be borne by someone other than the buyer or seller.

Smoking and drinking alcohol are often given as prime examples, as the affect of such can have social costs outside their price. Beyond the health costs, numerous studies have shown, for instance, a high incidence of arrest and incarceration to be alcohol related. It costs approximately $39,000 per year to imprison someone in New Jersey. The cost of incarceration, if the incarceration is caused by, or sufficiently related to, alcohol consumption, is an externality, or more precisely, an external cost. A cost which is simply not reflected in the price of a bottle of booze. With external costs taxes are often imposed upon products which produce such to both help defray what are commonly known as the social costs, and to inhibit use.

In New Jersey, the total tax on each pack of cigarettes amounts to $3.58 ($2.575 state/ $1.0066 federal). A portion of the federal tax goes to fund SCIP.

And the question is: What about soda and other such sugary soft drinks? A growing number conclude that soft drinks bear such a cost.

The Wall St. Journal reports that:

New research shows medical spending averages $1,400 more a year for an obese person than for someone who’s normal weight.

Overall obesity-related health spending reaches $147 billion, double what it was nearly a decade ago, says the study published Monday by the journal Health Affairs.

The higher expense reflects the costs of treating diabetes, heart disease and other ailments far more common for the overweight, concluded the study by government scientists and the nonprofit research group RTI International.

RTI health economist Eric Finkelstein offers a blunt message for lawmakers trying to revamp the health-care system: “Unless you address obesity, you’re never going to address rising health-care costs.”

Obesity-related conditions now account for 9.1% of all medical spending, up from 6.5% in 1998, the study concluded.

I am not suggesting that soda and sugary soft drinks bear sole responsibility for obesity or the doubling of obesity-related health spending over the last decade.

But as CBS News reports,

“Americans consume roughly 250 more calories every day than they did in the 1970s — and half those calories come from sugary drinks.”

“We’re not saying that calories from sugared beverages are different than any other calories,” said Dr. Kelly Brownell of Yale University. “There’s just too many of them.”

Brownell says a 10 cent tax per can could yield $140 billion in revenue over ten years.
But the beverage industry is pushing back.
“This is no time for Congress to be adding taxes on the simple pleasures we all enjoy like juice drinks and soda,” trumpeted one industry-backed TV ad.

(While researching this article, this ad from “Americans Against Food Taxes” popped up.)

According to the California Center for Public Health Advocacy:

Soft drink consumption has more than doubled since 1971. The average teenage boy drinks two 12 oz sodas per day or more than 700 cans per year. The average teenage girl drinks 1.4 twelve oz sodas per day or more than 500 cans per year. (CSPI, Liquid Candy, 2005 — based on 1999-2002 National Health and Nutrition Examination Survey)

Further:

Despite the first-ever per-capita declines in soft drink sales, companies still sold more than 14 billion gallons of calorie-laden soft drinks in 2008. That is equivalent to about 506 12-oz. servings per year, or 1.4 12-oz. servings per day, for every man, woman, and child.  Those drinks include regular (non-diet) carbonated sodas, energy drinks, sports drinks, fruit drinks, ready-to-drink teas, and vitamin waters.

CBS reports that the plan to tax 10 cents per can, amounting to approximately $140 billion over 10 years, to help pay for healthcare costs has failed to gain “traction” in Congress. The plan, understandably, has met staunch opposition from soft drink manufacturers and their lobby.

The argument against such taxes is that they are regressive and fall more sharply upon the poor than they do the affluent. I understand the argument–and at times I have understood it intimately. But I’m not at all sure it holds up here, as some simple math will show.

First off, because of the variety of sizes in which soft drinks come, a per ounce tax makes more sense to work with. 10 cents per 12 oz. can = .8333 cents per ounce. If the average consumption is 1.4 cans per day, or 16.8 oz, we’re talking about an average tax of roughly 14 cents per day. You simply cannot buy anything with 14 cents– but in the aggregate it can get you a little closer to funding universal healthcare. And perhaps, if the spectre of that 14 cents did cause some to consume slightly less soda, perhaps we as a country would not be the worse for it.

UPDATE: Professor Frank Pasquale on the latest in beverage tax utilitarian calculus.