In-depth
Easy Economics, Hard Politics
there is some dispute among economists who study this topic, I will assume that very high consumption taxes will dampen demand for the product. But more importantly, the simple economics of using “price elasticity” to influence the demand for tobacco and alcohol has not experienced much political backlash. Smokers surely grouse about the high taxes and I would certainly prefer a bottle of wine in Singapore to be less expensive, but one does not sense a huge political outcry over these taxes. (Of course, government media campaigns in addition to consumption taxes help the goal of reducing consumption.) So if it works for alcohol and tobacco (and there is still debate about whether it truly does), why not do the same for products that contribute to obesity? My home state of New York in the United States offers another interesting example. A couple of years ago, the then Commissioner of Health for the State of New York, the late Dr Richard Daines, proposed a tax on sugary soft drinks. Armed with a plethora of data and a top-notch PowerPoint presentation,
the Commissioner proceeded to argue the case for such a tax. His medical science was impeccable, and though no economist, his application of the taxing principle was solid and straightforward. He made two points: First, the tax would, in his estimation, dampen demand for sugary soft drinks which he deemed to be a scourge on childhood obesity, especially among the poor. Second, the revenues derived from the sugar tax would be earmarked for child obesity prevention programmes. Unfortunately, the Commissioner was better at public health advocacy and even amateur economics than he was at politics. His ideas landed with a big, dare I say it, “fat” thud. The soda lobby lambasted his proposal and sceptical legislators viewed his proposal as government paternalism. Some grumbled, “What will they ban or try to tax out of existence next?” and his proposed tax on sugary soft drinks went nowhere. But New York isn’t Denmark! Recently, the European country introduced a “fat tax” on products with saturated fats in a bid to
combat obesity – not actually a very serious problem yet in Denmark since only about 10 per cent of Danes are considered to be clinically obese. The tax is about US$3.00 for a kilogram of saturated fat so it adds a modest amount to foods such as butter, pizza, milk, chips or a hamburger. Will it have its intended effect? It is far too early to tell, but like the congestion price and the soda tax, it is based on the simple concept of price elasticity. Unlike those examples, however, it surmounted the more difficult political test. It is now law, and it is generating some interesting commentary if the various blog postings are anything to go by. So what is the takeaway from these examples? The simple point is that public policy proposals invariably include a mixture of economics and politics. There is an old joke that pokes fun at economists that goes like this: Three people were stranded on a desert island and had no food. One was a chemist, the second a physicist and the third an economist. A can of baked beans floated ashore. The chemist suggested that they rub two sticks together to start a fire which would then cause combustion to burst the can open. The physicist calculated a trajectory that would likely break the can open. The economist countered, “Assume we have a can opener.” Often the simple elegance of economic assumptions about behaviour is important to sketch out policy options. Students of public policy need to learn the concepts and assumptions and appreciate their power to sharpen their abilities to analyse public policies. Economics imposes discipline on our thinking so it is necessary and dare I say a crucial part of any policy analyst’s repertoire – but it is not sufficient. Politics is messy, it has rules but they are harder to discern than the simple elegance of a concept such as price elasticity, but this does not make politics less important in the policy process. So our challenge as teachers and practitioners of public policy is to apply the two logics at the same time if we are going to understand why some policy ideas are likely to succeed and when they are more inclined to fail. So, do you think Jakarta is ready for congestion pricing? Jeffrey D. Straussman is Visiting Professor and Faculty Director (Executive Education) at the LKY School. He was previously Dean of the Rockefeller College of Public Affairs & Policy, University at Albany, State University of New York, USA. · Oct–Dec 2011 · 53