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:

Soda & Diabetes, How Much Does That Can of Soda Really Cost? Part II

Photo by Michael Reeve

Diabetes. In a brief but interesting interview on NPR’s Marketplace, Kaiser Permanente CEO George Halvorson had this to say:

HALVORSEN: …. Right now, when you look at diabetes, 32 percent of the cost of Medicare is diabetes. It’s the number one cost of blindness, it’s the number one cause of amputations, it’s the number one cause of kidney failures. And when you look at the care delivery patterns in America, we only get care right for diabetics 8 percent of the time. If we got care right for diabetics 80 percent of the time, we’d cut the number of kidney failures in half.

A few days ago we began to ask, “How Much Does that Can of Soda Really Cost?” We considered cost in terms of external or social cost (not price for the actual can of soda, but that which results incidental to the primary transaction and may be borne by other than the buyer or seller), and noted that a recent study shows that obesity plays a prominent role in health care expenditures, and that many believe that soda and other sugary soft drinks play a prominent role in obesity. We noted that the Wall St. Journal reported that

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.

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

Obesity is a key factor in Type 2 diabetes. And  32% of Medicare costs are attributable to diabetes. It is no stretch to say that if we have a Medicare cost problem in this country (we do), what we really have is a diabetes problem (and, considering Halvorsen’s “we only get it right 8% of the time” figure, a diabetes treatment problem as well).

But first things first. 32% is a mere scooch (yes, that’s the technical term) away from ONE THIRD. That’s an enormous number. If one were to relate this portion of Medicare expense to houesehold expenditures, it occupies a place similar to a mortgage– but an expensive mortgage in a house that no one wants to live in.

In addition, according to the American Diabetes Association (ADA)

The total annual economic cost of diabetes in 2007 was estimated to be $174 billion.  Medical expenditures totaled $116 billion and were comprised of $27 billion for diabetes care, $58 billion for chronic diabetes-related complications, and $31 billion for excess general medical costs. Indirect costs resulting from increased absenteeism, reduced productivity, disease-related unemployment disability, and loss of productive capacity due to early mortality totaled $58 billion.  This is an increase of $42 billion since 2002. This 32% increase means the dollar amount has risen over $8 billion more each year.

Importantly, the ADA believes those numbers may be understated:

The actual national burden of diabetes likely exceeds the $174 billion estimate because it omits the social cost of intangibles such as pain and suffering, care provided by non-paid caregivers, excess medical costs associated with undiagnosed diabetes, and diabetes-attributed costs for health care expenditures categories not studied.

Read more

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.