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.