Denmark’s fat tax fiasco

The Institute for Economic Affairs in London has released a new report by Christopher Snowdon on The Proof of the Pudding: Denmark’s fat tax fiasco. A summary of the findings of the study are:

• Denmark’s tax on saturated fat was hailed as a world-leading public health policy when it was introduced in October 2011, but it was abandoned fifteen months later when the unintended consequences became clear. This paper examines how a policy went from having almost unanimous parliamentary support to becoming ‘an unbearable burden’ on the Danish people.
• The economic effects of the fat tax were almost invariably negative. It was blamed for helping inflation rise to 4.7 per cent in a year in which real wages fell by 0.8 per cent. Many Danes switched to cheaper brands or went over the border to Sweden and Germany to do their shopping. At least ten per cent of fat tax revenues were swallowed up in administrative costs and it was estimated to have cost 1,300 Danish jobs.
• The fat tax had a very limited impact on the consumption of ‘unhealthy’ foods. One survey found that only seven per cent of the population reduced the amount of butter, cream and cheese they bought and another survey found that 80 per cent of Danes did not change their shopping habits at all.
• The fat tax was always controversial and it became increasingly unpopular as time went on. Objections came not just from business owners, but also from trade unions, politicians, journalists and the general public. It was widely criticised across the political spectrum for making the poor poorer. By October 2012, 70 per cent of Danes considered the tax to be ‘bad’ or ‘very bad’ and newspapers routinely described it as ‘infamous’, ‘maligned’ and ‘hated’. Mette Gjerskov, the minister for food, agriculture and fisheries, admitted in late 2012: ‘The fat tax is one of the most criticised policies we have had in a long time.’
• Denmark’s fat tax remains the leading example of an ambitious anti-obesity policy being tested in the real world. The results failed to match the predictions of the health lobby’s computer models and the failed experiment has since been largely swept under the carpet in public health circles. Ultimately, Danish politicians weighed the negligible health benefits against the demonstrable social and economic costs and swiftly abandoned it. Few mourn its passing.
• The economic and political failure of the fat tax provides important lessons for policy-makers who are considering ‘health-related’ taxes on fat, sugar, ‘junk food’ and fizzy drinks in the UK and elsewhere. As other studies have concluded, the effect of such policies on calorie consumption and obesity is likely to be minimal. These taxes are highly regressive, economically inefficient and widely unpopular. Although they remain popular with many health campaigners, this may be because, as one Danish journalist noted, ‘doctors don’t need to get re-elected.’

Taxing a product to reduce its consumption sounds all well and good, after all demand curves slope downwards, but the reduction in quantity demanded will be small when demand for the product is inelastic. And the results noted in the third point above suggest that for the Danish at least, unhealthy foods are inelastically demanded. Other methods should be tried if reducing consumption of these foods really is worthwhile.

In short, yet another failed piece of social engineering. Not that this failure will have any effect on the demands of public health campaigners. As Snowdon notes,

Despite the unambiguous results of this natural experiment, public health campaigners in the UK continue to lobby for similar policies. Just four days after the Danes announced the abolition of the fat tax, the National Heart Forum called on the government to introduce a tax on foods that are high in salt, sugar and fat. Two months later, a coalition of 61 organisations demanded a 20p per litre tax on sugar-sweetened beverages (or - as they call them - ‘mini-health timebombs’). Most recently, the Academy of Medical Royal Colleges called for a 20 per cent tax on the same soft drinks. The Academy sheepishly mentioned that Denmark had experimented with ‘a slightly broader plan’, but did not acknowledge that the experiment had ended, let alone explain why.

If one really believes in 'evidence-based policy' should not this evidence be taken into account. Should we not be concerned with what actually happens when policies are tested in the real world? Should evidence of job losses and the cost of living increases not be of concern in policy development? But will health campaigners in New Zealand respond any differently from those in the U.K. when they just ignored the Danish results?

Interesting blog bits

1. Victor Duggan, Sjamsu Rahardja and Gonzalo Varela on Service-sector reforms enhance manufacturing productivity: Evidence from Indonesia
   

   The ‘manufacturing matters’ movement has gained prominence on the policy agenda even as the nature of manufacturing continues to morph. This column discusses new research showing that opening service sectors to competition and foreign direct investment can be a powerful conduit for productivity gains in manufacturing. The gains depend on both the types of reforms and the specific services sectors in which these are implemented.

2. Daron Acemoglu and James Robinson on The Economic Nature of the Resource Curse: Evidence
   

   Is it true more generally that natural resource wealth, or perhaps more specifically oil wealth, has a negative effect on economic growth? If it does, via what mechanisms?

3. Jon Danielsson on Iceland’s post-Crisis economy: A myth or a miracle?
   

   Icelandic voters recently ejected its post-Crisis government – a government that successfully avoided economic collapse when the odds were stacked against it. The new government comprises the same parties that were originally responsible for the Crisis. What’s going on? This column argues that this switch is, in fact, logical given the outgoing government’s mishandling of the economy and their deference towards foreign creditors.

4. Richard Posner on Security Surveillance Cameras

   Many businesses (notably banks) and even homes have surveillance cameras nowadays. Usually they are pointed at the interior of the building though sometimes also or instead at the entrance to or the grounds of the building. These uses of surveillance cameeras are uncontroversial. But there is controversy over surveillance cameras that are owned by or form part of a network of surveillance cameras that is accessible to government, especially when, as is increasingly common, the surveillance cameras are technologically sophisticated and can for example enlarge the photographed images, take pictures at night, enable face recognition by matching facial features of a person photographed by the camera with a database of facial features, and even follow a vehicle or pedestrian as it or he goes out of the range of one camera and into the range of another.

5. Gary Becker on The Internet, Surveillance Cameras, and Misuse of Big Data

   Surveillance cameras, tax reporting, Internet-based data, emails, mobile phone records and their cameras are some of the more salient modern ways that provide information on individuals and organizations. Few object when banks and other organizations use surveillance cameras on their premises to deter theft and robbery. There is much greater concern when Internet companies like Google and Facebook use their vast stores of data to learn about the interests and other personal information, of the millions of individuals who use their services. Probably, however, the most serious threat is the misuse of “big data” by governments, including democratic governments.

6. Kristian Niemietz on Poor people in rich countries – a new approach to measurement and policy

   Relative poverty measures are deeply flawed, but that does make absolute measures any better. Poverty is not absolute. Perceptions of what is a ‘necessity’ and what is merely a convenience change over time. Our great-grandparents would not have considered a washing machine, a central heating or an indoor bathroom to be necessities. To us, they are necessities, and this is simply because we live in societies where virtually every household has these items.

7. Chris Dillow On Terrorist Probabilities

   Why aren't the Scots doing more to combat their culture of violence? Why aren't its community leaders doing more to rein in their violent minority? Don't we need tougher laws to protect us from the threat posed by men of Scottish appearance? You might think I've lost my mind. From a statistical point of view, though, I haven't.

Why is there no Milton Friedman today?

Why Is There No Milton Friedman Today?

A symposium co-sponsored by the Mercatus Center at George Mason University

Imagine that someone with all the endowments of a Milton Friedman were born in the 1960s or 1970s. Is it conceivable that such a person would develop into a ‘Milton Friedman’ like we know the actual Friedman to have been, including his academic eminence and his eloquent and influential advocacy of classical liberalism? Here leading economists address the question: Why is there no Milton Friedman today?

Contributions:

• John Blundell
• David Colander
• Tyler Cowen
• Richard Epstein
• James K. Galbraith
• J. Daniel Hammond
• David R. Henderson
• Daniel Houser
• Steven Medema
• Sam Peltzman
• Richard Posner
• Robert Solow

Well worth a read.

How to increase prices and profits in the U.K. retail energy market

This piece from the Adam Smith Institute website should act as a warning to countries wanting to reregulate their energy markets. Stephen Littlechild, Professor emeritus at the University of Birmingham, fellow of Judge Business School at the University of Cambridge and a top regulator from 1983 to 1998, explains how politicians and regulators have, by misunderstanding how markets work, regulated to boost energy firms' profits at the expense of higher bills for consumers. Markets may not be perfect but it helps to understand how they work before setting out to "fix" them.

Britain’s competitive retail energy market was the first in the world, and for many years the most competitive. It had the most active suppliers, and the most active customer switching. This competition and choice brought better offers for customers. It may not seem like it because of recent energy price increases. But these reflect increases in fuel costs like gas, higher costs of renewable energy and other obligations on suppliers, not a lack of retail competition.

In fact, retail competition was sometimes too fierce, witness the problem with doorstep mis-selling. But Ofgem took action to fix that problem.

Retail profits in the domestic sector used to be minimal; Ofgem calculated that many were negative. New entrants came into the market, but until recently most found it tough to survive.

Retail competition has been enhanced by a dozen switching sites. Each seeks the best way to attract users, to offer the simplest calculations, to include the most relevant information and the clearest comparisons, to facilitate subsequent switching. No other country can boast as lively, innovative and effective market for information and assistance to energy customers as Britain.

What you may ask is wrong here? Energy prices were increasing and someone had to be blamed. Ofgem (Office of Gas and Electricity Markets) the U.K. regulator for energy markets, was unable to find evidence of market failure and thus it concluded that the problem was customer failure. Customer failure being a nice way of saying "consumers are stupid"!. Customers were paying high prices because they were unable or unwilling to understand suppliers’ offers and thus the market had to be simplified.

An increasingly crackpot series of proposals and directives has emerged from Ofgem, Government and now Which? magazine for dumbing down the retail market. All are well-intentioned, none shows any understanding of competitive markets, none will increase customer engagement, and all will make customers worse off.

First came ideas from Ofgem,

It noticed that suppliers based in one area were offering lower prices to customers in their competitors’ areas. In 2009 it decided that requiring suppliers to charge the same price to all customers would bring the benefits of the lower prices to all customers - Right? Wrong. Suppliers predictably found it more profitable to raise their low prices to new customers than to lower their prices to existing customers.

Customers suffered because the low-price offers were withdrawn. They also began to lose interest in switching supplier: the switching rate has since fallen by nearly a half. But suppliers did not lose out from this reduction in competition. Quite the opposite: Ofgem’s calculations show their retail profit margins increasing to an all-time high: from minus £10 per dual fuel customer in May 2009 to about £50 from 2010 to 2012 to £100 now.

In 2011 Ofgem proposed that all suppliers should offer the same monthly standing charge – which Ofgem itself would specify. It overlooked – or didn’t care – that this prohibited tariffs with no standing charge, which are popular with pensioners. And that Ofgem would now be jointly responsible for setting energy prices. Ofgem withdrew its proposal.

Meanwhile, suppliers found other ways to compete – for example by offering lower prices online. Customers benefited – until Ofgem decided that this made the market too complicated. In October 2012 Ofgem proposed that suppliers would be allowed only four tariffs per fuel. This of course is tough on customers with minority tastes, like green tariffs, or even tariffs with no standing charge. And innovation will cease if a supplier can only innovate by withdrawing an existing tariff that supplies about a quarter of its customers. But now it’s simplicity that counts, not the availability of products that customers want.

There are other petty restrictions. Discounts must be the same each year, expressed in pounds not percentages. If this restriction had been in place, it would have banned the best offer in the market earlier this year. And in future it may not be viable for suppliers to offer discounts that don’t use percentages to tailor the discount to the size of bill. But the availability of good offers is no longer a relevant consideration.

Then ideas from the government,

At the same time, another bright idea popped up at Prime Minister’s Question Time. Just in time for the County Council Elections. The campaign leaflet says “Conservatives in Government have forced energy companies to put customers on the lowest tariff”. Leave aside that this is not yet enacted, and still just an idea that Ofgem might reluctantly trial. Leave aside too why Conservatives in Government and not Ofgem are now regulating energy companies. Let us just ask: what does it mean and is it a good idea?

If it means that energy suppliers will be forced to put their own customers on to the lowest tariff offered by their rivals, is there the remotest chance of this working? Suppose it means that energy suppliers will be forced to put customers on the lowest tariff they themselves offer. But if a supplier offers a discount on its standard tariff coupled with an exit charge of £50, do we really want to force that supplier to put all its customers on a tariff that locks them in? And if a supplier wanted to offer a discount for new customers, but was forced to put all its existing customers on the same discounted tariff, isn’t it obvious that it would be more profitable not to offer the discount in the first place? Once again, the proposal will drive out the best offers.

And finally ideas from Which? magazine.

It says that Ofgem’s proposals for simplifying the market don’t go far enough. The government should require single unit prices for each energy tariff, like petrol prices on a garage forecourt. Simplicity is flavour of the month, and petrol is a competitive market, so what’s wrong with this? Lots.

First, Which? seems to be asking for a single uniform price across the whole of the country. But distribution network charges vary considerably across the country. To impose a uniform retail price or network charge would require massive geographic cross-subsidisation between network operators and between customers that would be neither workable nor obviously equitable.

Second, forcing all tariffs to have a zero standing charge would mean that suppliers would not be allowed to offer a lower unit price to larger customers that are more economic to serve, and suppliers would no longer be interested in attracting smaller customers. The likely impact on different kinds of customers has not been considered.

Third, limiting the variety of energy products so that customers are faced with only one price per supplier would enable and encourage suppliers to coordinate prices. If one supplier breaks ranks then other suppliers will either follow or that supplier will fall back into line. Customers will find that suppliers offer similar prices almost all the time. Where then is the incentive to engage in the market?

Littlechild's conclusion,

All these schemes assume that regulators and governments know more about customers than those who make a living by discovering and providing what customers want. These schemes won’t really simplify the market and they won't persuade customers to engage more. But they will restrict competition, and customers will be worse off because the best offers will disappear. Suppliers will find it costly to comply with the proposed 126 pages of new regulatory red-tape, but the costs will be passed through to customers and the suppliers will grumble all the way to the bank.

EconTalk this week

Richard Epstein of New York University and Stanford University's Hoover Institution talks with EconTalk host Russ Roberts about the U.S. Constitution. Topics covered in this wide-ranging conversation include how the interpretation of the Constitution has changed over time, the relationship between state and federal power, judicial activism, the increasing importance of administrative agencies' regulatory power, and political influences on the Supreme Court.

Interesting blog bits

1. Sam Richardson asks Events capital = big returns, right?

   The New Zealand Herald today is reporting that Auckland is a more successful city than Sydney at attracting and hosting major events. Auckland Mayor Len Brown says: "Major sporting events are big business and bring substantial economic benefits to the host region, so there is fierce competition globally to secure events." There certainly is fierce competition all right - but not a whole lot in the way of compelling evidence that the economic impacts of events are as substantive as commonly thought.

2. Matt Zwolinski asks Should You Buy a T-Shirt Made in Bangladesh?

   Recent events in Bangladesh have brought moral questions surrounding sweatshops into the spotlight again. And many consumers are wondering whether they might be doing something wrong by purchasing goods that are made in Bangladeshi textile firms.

3. Mario Rizzo on Bangladeshi Garment Workers and the Perversion of Ethics

   This is another instance of the simplistic pseudo-morality of those who can only see what is right in front of them at the present moment. This attitude is closer to a sympathetic reflex than a reasoned moral judgment.

4. George Hall and Thomas J. Sargent on Fiscal prioritisation: Lessons from three wars

   Can we learn from previous instances of fiscal prioritisation? This column surveys the US Treasury’s response to three wars – the Revolutionary War, The War of 1812 and the Civil War. Contemporary advocates of engaging in fiscal discrimination might ponder the actions of previous US Presidents Madison and Grant, who honoured all existing federal obligations despite challenging fiscal conditions.

5. Chris Dillow on Adam Smith on Immigration

   UKIP claims that its tax policies are derived from Adam Smith. But what would the great man make of its anti-immigration policies? I suspect the answer is: not much.

6. Klaus Desmet and Stephen L. Parente on Unleashing growth: The decline of innovation-blocking institutions

   Innovation is the beating heart of modern growth. This column argues that innovation-blocking institutions weaken when markets expand and competition intensifies. The rise and decline of medieval Italian crafts guilds offer valuable insights into this process. Policies that promote greater market integration and stronger competition are key steps in lowering the barriers to innovation.

7. John Taylor on Why Title II of Dodd-Frank Has Not Reduced the Likelihood of Bailouts

   Today the House Financial Services Subcommittee on Oversight and Investigations held a hearing on whether the Orderly Liquidation Authority (OLA) in Title II of the Dodd Frank Act has reduced the likelihood of bailouts of large financial firms. I was one of the witnesses. Here is a summary of my 5 minute opening statement.

8. William Kerr on Cuddly or not, the design of worker insurance is critically important

   Do economies’ social policies affect their innovative outcomes? This column uses the case of venture capital investors to argue that it may. Countries that protect workers rather than jobs – and thus avoid employment-protection laws – developed stronger venture-capital markets over 1999-2008, especially in highly volatile sectors like computers or energy.

9. Gary Becker on The Rise in College Tuition and Student Loans

   Many commentators have criticized these large tuition increases. Colleges and universities are said to be too greedy and are charging what the traffic will bear, or colleges are claimed to conspire together to increase tuition. Although colleges do conspire on some financial issues, such as agreeing through the NCAA to prevent payments to college athletes, conspiracy is not likely to be important in determining tuition since over 4000 colleges and universities compete fiercely for students, faculty, and funding.

10. Richard Posner on College Costs and Quality
    

    I graduated from Yale College in 1959. Tuition, room, and board at Yale in the late 1950s was $2000 a year; this year it is $60,000. Adjusted for inflation, this is a more than threefold increase. Average salary for a full professor at Yale went from $13,000 in 1959 to $186,000 this year (excluding medical school faculty), which after correction for inflation, an almost twofold increase. The rates of increase in these two variables varies from college to college, but I believe it is generally true that college costs have risen significantly faster than faculty costs. One thing that has depressed the increase in faculty costs is the increasing use of graduate students and other part-time faculty in lieu of tenure-track faculty. In addition, the administrative staffs of colleges have grown rapidly, in part because of increased legal regulation of education. Also, colleges have increased the quality of student housing and provided other amenities for students, in an effort to compete more effectively for rich kids. In addition, greatly reduced state subsidies for state colleges, in the wake of the economic depression that began in 2008, have forced state colleges to increase tuition.

EconTalk this week

Austin Frakt of Boston University and blogger at The Incidental Economist talks with EconTalk host Russ Roberts about Medicaid and the recent results released from the Oregon Medicaid study, a randomized experiment that looked at individuals with and without access to Medicaid. Recent released results from that study found no significant impact of Medicaid access on basic health measures such as blood pressure and cholesterol levels, but did find reduced financial stress and better mental health. Frakt gives his interpretation of those results and the implications for the Affordable Care Act. The conversation closes with a discussion of the reliability of empirical work in general and how it might or might not affect our positions on social and economic policy.