On Consumer Competence-Becker

I believe that a Consumer Financial Protection Agency will hurt rather than help consumers. Despite the claim that ignorance induced many consumers with few resources to buy houses during the boom, consumers who bought a house then with almost no down payment and low interest rates were not displaying ignorance, but good sense. They put little of their own resources at risk, and annual mortgage payments were cheap, especially in an environment where housing prices were expected to continue to rise at a rapid rate. Lenders, the Fed, and others who made these loans, or helped keep interest rates low, made the mistakes and look foolish, not consumers who bought the houses.

 

In the vast majority of cases, consumers, even those with little education, know their own interests far better than government officials know them. Still, I have no objections to governments giving consumers information in situations where information is difficult to acquire, as perhaps in the restaurant food safety case cited by Posner. I can also accept putting information about the harmful effects of cigarettes on cigarette packages, although I doubt if that had much effect in reducing smoking.

 

Posner considers in most detail the issue of growing obesity that continues a discussion we have had in this blog and elsewhere. Obesity in the United States and other countries has been increasing for the past 30 years due to much lower costs of calories, as in fast foods, and also due to more sedentary activities, mainly due to the large amount of time spent watching television, using the computer and Internet, and speaking on cell phones. Giving consumers information about the adverse health consequences of obesity might be a useful government activity, but Posner wants to go much further by essentially taxing some of the sources of obesity, such as sodas and computer games. I do not agree with him.

 

Posner supports aggressive actions against obesity partly because he believes that consumer ignorance of the adverse consequences of being obese helps explain its high rate of incidence. He cites the fact that obesity is much more common among those with low income and low education. People with low incomes and education differ in many respects from others, such as their greater tendency to buy older used cars that are more likely to break down. No one would suggest they do this out of ignorance rather than from the constraints of low income. Similarly, fast foods, and fewer visits to health clubs, would appeal to low income persons without any need to stress ignorance.

 

That ignorance is not the main factor in the high obesity rates among low income and low educated persons is supported by the fact that while the rate of obesity is much higher among African-American women than among white women, it is not so much higher among African American men than among white males. It is hard to believe that African-American men are much better informed about the harmful effects of obesity than are African-American women. This racial-gender difference in obesity rates is most likely related to differences in the life situations of African-American men and women rather than to differences in their knowledge of the health cost of obesity.

 

Posner’s second main argument for taxing obesity is that it imposes an externality on taxpayers because they pay much of the higher cost of medical care due to obesity. The most frequently cited study of the extra medical spending due to obesity is by Finkelstein, et al. in the July 27, 2009 online issue of Health Affairs. It is a careful analysis of data for 2006 that looks at the higher spending on medical care of the obese, after holding constant income category, years of schooling, age, and many other variables. Overall, the authors find that about 25% of the population is obese, and that obesity increases medical spending by about 9%, which amounts to $147 billion (in 2008 dollars).

 

They also find that private payers, not taxpayers under Medicare and Medicaid, bear the majority of the additional medical costs due to obesity. Since private insurance companies are not allowed to charge higher premiums to the obese because that is considered discrimination, largely under the Americans with Disabilities Act, the higher cost of obesity paid by privately insured persons can hardly be called an “externality”, unless it is considered an externality from government policy.

 

If we take away more than half the total increase in medical spending due to obesity because it is not borne by taxpayers, we are left with a much more modest increase in health spending “externalities” due to obesity. Even that smaller percent is too large because it neglects the “savings” due to the fact that the obese die earlier than other persons. On this externality logic, that saving should be subtracted to get a net “externality”. Some analysts have even claimed that this net externality is negative, so that obese people actually reduce taxpayer spending on medical care. If that were correct, should we subsidize obesity?

 

I have not accepted such externality arguments related to medical care ever since several economists showed that smoking cuts down medical (and retirement) spending because heavy smokers usually die early, and do not collect much in the way of social security and Medicare benefits. Surely that would be a foolish justification for subsidizing smoking. Yet the same logic applies to attempts to justify taxes on obesity because of any medical costs obesity imposes on taxpayers.

 

Since even ignoring their earlier deaths, the obese raise government medical spending by rather modest amounts, that “externality” provides a weak case for taxing goods like soft drinks with sugar, fast foods, and ice cream, or taxing computer games, watching television, and other sedentary activities. As Posner recognizes, taxes on these types of foods and time use activities would be a shot gun approach to reducing obesity since the great majority of these foods and activities are consumed by men and women who are of normal weight, or merely overweight (an earlier Rubenstein, et al study does not find increased medical spending for men and women who are simply overweight). Higher taxes on these items would cause a reduction in the consumption of these items, and hence an unjustified loss in welfare, by the 75% of the population who are not obese.

 

To the extent that obesity imposes costs on others, it would be far better to let private health insurers price coverage based on obesity and related risk factors.  This would target the desired group, and not impose inefficient costs on non-obese persons by taxing the foods they eat or the activities they choose to engage in. 

 

Providing information about the negative health consequences of obesity will do no harm, and might help prevent some persons from getting or staying obese. Doing more than that, however, has little justification from externality arguments, and hence is a weak basis for public policy.

Comments

[Robert Wiblin]

"Surely that would be a foolish justification for subsidizing smoking."

Why is that? It seems like a good reason to me, unless you think people are already biased towards smoking and against a long life for some other reason.

[TGGP]

Karl Smith thinks the ideal "positive externality" citizen is a smoker, precisely because he/she subsidizes others through cigarette taxes:
http://entitledtoanopinion.wordpress.com/2010/01/27/the-forgotten-perhaps-non-existent-man/

[Alena]

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[darkmonohue]

Professor Becker does not wish to tax soda. Perhaps we could agree, though, that it would be a good idea to end the massive agricultural subsidies that make unhealthy foods (such as sodas made with high-fructose corn syrup) cheaper than healthier alternatives?

[Talib Haqq]

I've just discovered this blog, and I am enjoying it.

One comment: I do not believe that insurance companies are prevented by law from requiring overweight consumers from paying higher premiums. I believe it is actually the case that certain plans do, in fact, charge higher rates for those who are overweight. Perhaps Professor Becker could please look into this to verify if this is the case. I do not believe that the ADA prevents this kind of resonable "discrimination."

[Brian Davis, Austin, TX]

ADA has a safe harbor for discrimination that an insurer can defend as actuarially sound. That's why Congress was driven to pass yet another law prohibiting genetic and family health history discrimination. Be that as it may. The larger fact is that MOST workplace-based health coverage in America today ISN'T "insurance." It's the employer or labor union self-insuring under ERISA to control costs and to bypass State laws that require more from insurance policies than States can require from employers and unions. The verdict is still out on how the ADA will affect NON-insurance ERISA health-welfare plans. Apart from being an observable, measurable characteristic, is obesity a "disability," specifically, a substantial impairment (physical or mental) of a major life activity? Backtrack about 15 years, HIV+ wasn't a disability until medical community opinion tied it to impairment of procreativity. Bingo, ka ching.

[mike]

It does not follow that because we do not subsidize smoking, we should not regulate unhealthy activities. Costs and savings are not the only variable. The fact that obesity creates costs is merely an additional reason to regulate it, not the only one. The main reason is its danger to an individual. You are dismissive of subsidizing smoking precisely because of this moral intuition.

[Gordon Longhouse]

The reason for regulation in a free market economy is make certain things off limits to competition. Airlines are not permitted to compete for passengers or capital by saving money through skimping on safety. Likewise for restaurants and food producers.
Passengers are not able to inform themselves of an airplanes airworthiness prior to boarding and the cost of acquiring information on an airline's safety practices -air crashes- is too high.
I do not see the same issues housing finance arising in respect of housing finance so long as borrowers are given the appropriate information.
Here in Australia most home loans are ARMs as most borrowers are unwilling to pay a premium to lock in interest rates for a period of years. Interest Only mortgages are employed by property investors seeking to maximise cashflow. Equity Release loans are a recent innovation being marketed mostly to elderly cash poor-asset rich people. Even the despised Low LVR loans have a place though that place is less than 10% of the market by value (around 8%).
All of these products have a place and people are capable of managing them in the absence of outright deceit.
It appears from this -admittedly long- distance that there is considerable blame shifting and finger pointing going on here.
The property bubble and subsequent collapse was caused by excessive easy money, the information disconnect between borrowers and ultimate lenders in securitisation structures, and lax banking regulation. As Becker says the only thing borrowers did not know about the property bubble is that it would end.
If the regulators are serious about turning around debt markets they will end requirements that mortgage loans be non-recourse. Non-recourse lending takes away an incentive on the part of the borrower to not borrow too much or deceive the lender with false information about income and asset value.
If they were REALLY serious they would end mortgage interest deductibility for the acquisition of private assets, a subsidy for and incentive to borrow.
If securitisation is to continue, the information asymmetries -and especially the agency problems of credit rating agencies- will need to be sorted. Banks must not be permitted to carry securitised assets off-balance sheet.

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Smoking per se (if we consider this as inhalation of smoke from burning plants) is known for a long time. Frescoes in the Indian temples depict the holy ascetics, inhaling the smoke of aromatic incense. Smoking pipes were found during excavations of tombs of the nobility in Egypt, dating from the XXI-XVIII centuries. BC. Oe. Great Herodotus, describing the life and customs of the Scythians, wrote that they have a habit of inhaling the smoke burning plants. As argued by the German ethnologist Hugo Obermeyer, smoking cannabis by means of pipes were known to the ancient Germans and Gauls in the I century BC. Oe. It is said in ancient Chinese literature.

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But, Did you know that the fast food and casual dining restaurants you eat in every day have secret menu items? A select few are in on the secret and now you are a part of this culinary elite. We aren't just talking about the barely secret In-N-Out Burger "hold the bread, lettuce wrapped burger,” oh no. We have items all over town, including an unhealthy smoothie at Jamba Juice and a San Francisco-only Mc10:35. The Consumerist is all over this, and now you can be too, right?

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I believe that On a Consumer Competence-Becker Agency will hurt rather than help consumers.

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It does not follow that because we do not subsidize smoking, we should not regulate unhealthy activities. Costs and savings are not the only variable. The fact that obesity creates costs is merely an additional reason to regulate it, not the only one. The main reason is its danger to an individual. You are dismissive of subsidizing smoking precisely because of this moral intuition.

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There are many foods that increase cholesterol levels and you should avoid them as most of them are also bad for your figure. For example, butter and similar fatty products we use for cooking. These products have a high concentration on fat that together with other fat we take during the day can increase the total fat levels very much.

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Alena

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This racial-gender difference in obesity rates is most likely related to differences in the life situations of African-American men and women rather than to differences in their knowledge of the health cost of obesity.

[milton]

The property bubble and subsequent collapse was caused by excessive easy money, the information disconnect between borrowers and ultimate lenders in securitisation structures, and lax banking regulation. As Becker says the only thing borrowers did not know about the property bubble is that it would end.
If the regulators are serious about turning around debt markets they will end requirements that mortgage loans be non-recourse. Non-recourse lending takes away an incentive on the part of the borrower to not borrow too much or deceive the lender with false information about income and asset value.
If they were REALLY serious they would end mortgage interest deductibility for the acquisition of private assets, a subsidy for and incentive to borrow.
If securitisation is to continue, the information asymmetries -and especially the agency problems of credit rating agencies- will need to be sorted. Banks must not be permitted to carry securitised assets off-balance sheet.
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