When is it proper for government to try to protect people, in their capacity as consumers of goods and services, from themselves? And not just children or people with serious mental problems, but normal adults. Can’t normal adults protect themselves? And if they can’t, won’t competition among sellers protect them?
These questions are acutely raised by the proposal, now before Congress, to create a Consumer Financial Protection Agency that would protect consumers of financial products such as mortgages and credit cards and payday loans not only from misrepresentations by sellers of these products, but also from their own ignorance or poor judgment. The proposal draws on behavioral economics, which teaches that cognitive and psychological limitations frequently lead consumers to make mistakes, even when there is no fraud by sellers.
The specific proposal seems to me misconceived. Its premise is that the housing bubble and ensuing financial collapse were due in significant part to reckless borrowing to finance home purchases or borrow against home equity in order to obtain cash to buy other goods and services. The argument is that people didn’t realize the risk involved in buying a house with very little (sometimes zero) equity, especially if they financed it by an adjustable-rate mortgage, which might become unaffordable by them if interest rates rose.
No doubt some people didn’t realize they were taking a risk, but I don’t think that that is the explanation for the housing bubble. Almost no one, including sophisticated economists and financiers, realized that the steep increase in housing prices that ended in 2006 was a bubble phenomenon. If it was not, then homebuying wasn’t really risky, because one could anticipate that the market value of one’s house would grow, and this would create sufficient equity to be able to refinance one’s mortgage on attractive terms. There was a speculative element but it did not seem extreme because so few experts believed there was a housing bubble. Among these experts notoriously was Ben Bernanke.
I want to contrast with the proposal to curtail risky borrowing by consumers two types of consumer protection that seem to me justifiable, and this regardless of the insights of behavioral economics. One is requiring cigarette labeling and advertising to carry warnings of the health hazards of smoking. This regulation is not very important today because everyone knows about these hazards, but it was important in the 1960s when the existence and gravity of the hazards were first confirmed. Obviously individual consumers were not in a position to study the health effects of smoking—which cigarette manufacturers were busy denying—but one might think that advertisers of competing products would have had an incentive to frighten consumers away from smoking. But this would not be a realistic expectation. What would consumers think if a manufacturer of chewing gum advertised that chewing gum, unlike smoking cigarettes, does not cause lung cancer? Nor would cigarette manufacturers whose cigarettes contained less tar and nicotine than the average be strongly motivated to advertise the fact, because they would be telling the world that cigarettes are hazardous, at a time when this was not generally realized. Automobile manufacturers were slow to offer seatbelts, perhaps fearing they would be advertising the dangers of driving—and charging a higher price (to cover the cost of the seatbelts) at the same time.
My second example is inspections of restaurants and food processors by government inspectors, to prevent food poisoning. One can imagine leaving food safety to the market, reinforced by tort remedies against the sale of unsafe products. But solvency limitations would make market and tort remedies ineffectual against many sellers, especially small and new ones—so the inspection regime actually facilitates new entry, which is a dominant feature of the restaurant industry. Food poisoning can cause death, indeed multiple deaths, and when the consequences of a market failure are very grave, there is an argument for preventive regulation.
Now I want to discuss an important intermediate case, where the argument for consumer protection seems to me stronger than the case for consumer financial protection (other than against fraud), but not so strong as in the cases I just gave. That is the case of obesity. According to the Weight Control Information Network, which is part of the National Institutes of Health in the Department of Health and Human Services—and I believe reputable—two-thirds of American adults are overweight and one-third—an astonishing percentage—are obese, defined as having a Body Mass Index (the ratio of a person’s weight in kilograms to the square of his height in meters) of more than 30. So, for example, a woman 5 foot 6 inches tall would be deemed obese if she weighed 180 pounds, and a man 6 foot 1 inch tall would be deemed obese if he weighed 227 pounds.
Obesity is measured differently for non-adults, but 17 percent of young children and 17.5 percent of adolescents are estimated to be obese.
These are startling figures, and considerably higher than in virtually any other country in the world. My esteemed colleague Becker has argued, however, that American obesity is not excessive in an economic sense. Obese people may simply have traded off the pleasures (and economy) of eating cheap, tasty, and nutritious food against the costs in disagreeable appearance, impaired mobility, the greater danger of and longer recovery time from surgery, and the much greater incidence of Type II diabetes and joint problems; there is also a greater risk of heart disease and possibly of dementia. Becker believes that the long-run expected costs of obesity may be small if continued advances in medical technology eliminate or greatly reduce the health problems that obesity creates, and that the realization of this possibility is one of the factors that people consider in deciding whether to allow themselves to become obese.
I am skeptical. The problem of obesity is concentrated in the poorer segment of the population, among people with limited education who may be unable to assess the health risks of obesity and as a result are unwilling to incur the slight added expense (or cost in diminished eating enjoyment of a diet less rich in sugar and butter). They may also be imperfect agents of their children; and a person who becomes obese as a child will find it more difficult to avoid obesity than people who were thin children. Governmental paternalism when directed to children is less problematic than paternalism toward adults.
There is also an externality, which is a nonpaternalistic justification for government intervention. The government, meaning ultimately the taxpayer, now pays for half of total
But whether it would be desirable for the government to try to reduce obesity depends on the cost and efficacy of the measures it might take. Some of the common proposals are likely to have only modest effects, such as requiring restaurant menus to disclose calories. People who are motivated to avoid obesity know or can easily discover the approximate caloric content of the various foods, and people have most of their meals at home rather than in restaurants.
Somewhat more promising measures are: instruction in nutrition and the dangers of obesity in elementary and high schools; healthful school-lunch programs; expanded compulsory physical education in schools; restrictions on foods that can be purchased with food stamps; a tax on advertising fast food; a tax on video games; a ban on food advertisements aimed at children; a relaxation of regulations of health insurance that discourage charging higher premiums to the obese (and that thus subsidize obesity); a tax on soft drinks that contain sugar; and a calorie tax. All would be relatively inexpensive measures that would have a good chance of paying for themselves. The last, the calorie tax, which would probably be the most effective measure, would be a Pigouvian tax—a tax designed to internalize an externality, and, as such, defensible on standard economic grounds if I am correct that obesity creates an externality.
Still, such a tax can be criticized on two grounds. One is that it would be strongly regressive. But its regressive effect could be offset by a more generous food-stamp program. The second objection, emphasized by Becker, is that a tax on calories penalizes people who are not obese, and they are the majority. It is the same objection that can be made to alcohol taxes as a means of curtailing drunk driving: most of the people taxed are not drunk drivers. A more efficient anti-obesity tax, in principle, but utterly infeasible politically, would be a head tax measured by weight.
I am not much impressed by “fairness” objections to taxes. Taxation is inherently arbitrary, because it doesn’t match the taxes paid by a person to the services he receives from government or the costs he imposes on society. A calorie tax would raise considerable revenue, because like most Pigouvian taxes it would result in only limited substitution away from the taxed good, and the government at present is in desperate need of additional revenue.
A more efficient tax would be a tax on producers of food, based on the difference between the cost of the ingredients before processing and the price for the finished product. The tax would therefore fall more heavily on highly processed foods, which tend to be higher in calories, than on lightly processed ones.
More study is necessary, however, before the costs and benefits of a well-designed program of obesity reduction can be responsibly assesssed.