New York Mayor Michael Bloomberg’s proposal to ban sugary drinks larger than 16 ounces from restaurants, street carts, movie theatres, and stadiums would seem to be a joke for hosts of late night shows were he not completely serious. Although the proposal makes little sense, and could even increase the consumption of these drinks, (see my later discussion), it does raise once again the question of how far governments should go in interfering with consumer choices?
On one side of the question are the libertarians who argue that individuals, in particular consumers, should have the freedom to make their own choices unless they hurt others. According to this view, consumers have the right to drink and eat what they prefer, but driving while drunk should be punished because drunk drivers are more likely to get into accidents that hurt others. One qualification is that when consumers do not have enough information to make good decisions, governments may help in providing that information. An example is the requirement that packaged foods show the amount of fat and certain other ingredients they contain.
On the other side are those who claim that many consumers are not able to make decisions in their self-interest. These consumers, according to this argument, can be fooled by the way choices are presented, may have limited self-control, may rely on inefficient rules of thumb, or for other reasons make bad choices. There is even a literature on “libertarian paternalism”, which argues that governments “ … should attempt to steer people’s choices in welfare-promoting directions without eliminating freedom of choice.” (Cass Sunstein and Richard Thaler, “Libertarian Paternalism is not an Oxymoron” University of Chicago Law Review, fall, 2003)
I agree that consumers do not always make choices in their own interest (even aside from having insufficient information). However, I question how pervasive such decisions are, especially for important decisions, but I leave that discussion for another day. Now I concentrate on concerns I have about using the government to try to improve consumer choices.
It is not clear that government bureaucrats generally understand why consumers make defective decisions, and even less likely that governments policies will help improve these decisions. As is well known, government officials, including regulators, legislators, and executives, are subject to powerful pressures from interest groups that often greatly affect public policies to the detriment of consumers.
To illustrate, consider subprime borrowers in the housing boom (or bubble) that came crashing down with the financial crisis. It is frequently argued that subprime borrowers were ignorant of the risks they were taking, and were fooled by lenders and others into buying houses with mortgages that they would be unable to handle financially.
Yet the decisions by subprime borrowers made a lot of sense in light of the very low, and sometimes non-existent, down payments that lenders required, and the low mortgage interest rates available. These borrowers had perhaps a once in a lifetime opportunity to be owners rather than renters. Sure, some families may not have bought their homes if they had known a crash would be coming, especially families that took out mortgages a year or two prior to the crash. But how could they reasonably be expected to know that when few housing market experts were predicting a crash? One should fault far more the banks that bought subprime and other mortgage-backed securities. They presumably were much more knowledgeable about housing markets than poor and first time homebuyers, yet along with homeowners, most banks suffered badly from the financial crisis.
Nor did the federal government, including the Federal Reserve, take actions that helped subprime and other homeowners. Leading members of Congress and other government officials pressured banks to offer mortgages on generous terms to consumers with bad credit histories and poor job prospects. The Fed contributed to the housing bubble through helping to keep interest rates low. Consumers made their housing decisions in an environment where both banks and governments actively promoted the purchase of homes with low interest rates and low down payment requirements.
Another example concerns the growing obesity of adults and teenagers that presumably encouraged Mayor Bloomberg’s proposal on sugary drinks, and related proposals by others. One argument behind these proposals is that many adults and teenagers do not know the health consequences of their diets and lifestyles. That may well be true for some consumers, but most consumers may be rationally trading off the negative long run effects on their health for more immediate enjoyment from French fries, cheeseburgers, and other weight-raising foods. One should require evidence that the great majority of obese adult individuals do not make the connection with health before trying to restrict their consumption.
This is even aside from the fact that many of the proposed restrictions, such as Bloomberg’s, would not reduce obesity by much, if at all. His proposal might even increase the use of sugary drinks. Suppose that drinks come only in 10 and 16-ounce sizes. If the 16-ounce size were banned, enough consumers might substitute 2 10-ounce drinks for 1 16-ounce drink to increase total consumption of these drinks. Of course, the drink market might respond with offering other sized drinks, but the main point would still hold that the ban could raise consumption of sugary drinks.
Children are less likely than adults to make an effective trade off between current pleasures and future costs. This is a traditional reason for distinguishing between children and adults in formulating policies. The implication in the case of sugary drinks would be to restrict access by children to these drinks. For example, these drinks could be banned from schools and other places where children congregate, or young persons might not be allowed to purchase these drinks. However, concern about children’s consumption does not justify restricting the choices of adults as well.
A different reason sometimes used to justify government policies to reduce obesity is that obese adults are less healthy, and thereby make greater use of a health care system financed mainly by taxpayers. There is merit to this argument, but it is tricky because no one would reverse this argument and say obesity should be encouraged if obese individuals spent less on health care over their lifetimes because they died sufficiently earlier. Note that the mortality effect does not per se enter into externality calculations since (rational) individuals consider the effects of their behavior on their own life expectancy.
In summary, even when consumer decisions are not in their self-interest, it is questionable whether that provides sufficient grounding for government efforts to regulate and tax these decisions.