July 15, 2010

TAX WHAT YOU DON'T WANT:

Economics Behaving Badly (GEORGE LOEWENSTEIN and PETER UBEL, 7/15/10, NY Times)

As policymakers use it to devise programs, it’s becoming clear that behavioral economics is being asked to solve problems it wasn’t meant to address. Indeed, it seems in some cases that behavioral economics is being used as a political expedient, allowing policymakers to avoid painful but more effective solutions rooted in traditional economics.

Take, for example, our nation’s obesity epidemic. The fashionable response, based on the belief that better information can lead to better behavior, is to influence consumers through things like calorie labeling — for instance, there’s a mandate in the health care reform act requiring restaurant chains to post the number of calories in their dishes.

Calorie labeling is a good thing; dieters should know more about the foods they are eating. But studies of New York City’s attempt at calorie posting have found that it has had little impact on dieters’ choices.

Obesity isn’t a result of a lack of information; instead, economists argue that rising levels of obesity can be traced to falling food prices, especially for unhealthy processed foods.

To combat the epidemic effectively, then, we need to change the relative price of healthful and unhealthful food — for example, we need to stop subsidizing corn, thereby raising the price of high fructose corn syrup used in sodas, and we also need to consider taxes on unhealthful foods. But because we lack the political will to change the price of junk food, we focus on consumer behavior. [...]

The same pattern can be seen in health care reform itself. The act promises to achieve the admirable goal of insuring most Americans, yet it fails to address the more fundamental problem of health care costs. Instead of requiring individuals to pay out of pocket if they choose to receive expensive and unproven interventions, the act tries to lower costs by promoting incentive programs that reward healthy behaviors.

Prevention is certainly a worthy goal; it is much better to prevent a case of lung cancer than to treat it. But efforts to improve public health, even if enhanced by insights from behavioral economics, are unlikely to have a major impact on health care costs. Studies show that preventive medicine, even when it works, rarely saves money.

Posted by Orrin Judd at July 15, 2010 6:31 AM
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