Controls Over consumer Choices- Becker

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.

 

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[Terry Bennett]

Once again, I agree with Dr. Becker. This particular intrusion upon market freedom is unwarranted and ill-conceived. Not even close. The Quakers say, "Do not presume to know what is best for someone else, lest you find someone else presumes to know what is best for you." If I were seeking dietary advice, Mayor Bloomberg would not pop into my head as a primary resource. His totalitarian arrogance deserves the late night ridicule it has received, in spades.

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[Jack Walton]

One martini at "Maloney and Porcelli" in NYC has almost as many calories (350) as a 26 oz soda (380), and I can guarantee that the cracklin' pork shank in the same gin joint has more calories than a 6-piece McNuggets. What will Nanny Bloomberg regulate next?

[NEH]

Really? Then perhaps we ought to shut down the ATF, DEA, and FDA (think of the cost savings). Remember, every American has the "Right of Free Access" to any product. Whether it be Alcohol, Tobacco, Firearms, Illicit Drugs of all types, Food and Drug products that are detrimental to the Health and
Well being of the public.

Boy, I wish we could still purchase, Original Recipe Coke laced with cocaine, Laudanum, Original recipe Rootbeer that used sassafrass oils as a flavoring and known carcinogen, homemade "Pop-Skull" guaranteed to drive one mad or blind, and other adulterated Food, Drug Products or other products that are known too be hazardous to life and health.

Yep, the world would be a Utopia if there were no controls over any products and the "Free Market" reigned supreme...

[Christina]

I also agree with Dr. Becker. If people want to drink sugary drinks, they should be allowed to. If people want to know more about what they put in their bodies there are tons of ways to find out. The information is out there, you just have to go looking for it. That being said, I think people know that MCD and soda is bad for you. But if they are more concerned with short term happiness than with long term longevity.
The way mayor Bloomberg is going about trying to limit sugary drinks is not very effective for the reasons Dr. Becker mentioned. I think that people should be rewarded for good behavior (eating healthy, exercising, etc) instead of punishing bad behavior. In the long run, I think this strategy would be much more effective. Or the government spcould just left taxes on bad food :) of course, this would really be an overstepping of the governments boundaries.

[TANSTAAFL]

Becker is right. Posner correctly notes that personal consumption choices may impose negative externalities on others, but neglects to acknowledge that such reasoning underpins Marxism and its various ideological offshoots that rest on the premise that governments know better what to do than individuals exercising free will. Even more to the point, until the emergence of large national governments committed to pervasive regulation of hitherto private activity, and coercive wealth redistribution to that end, there was no practical way for persons with supposedly unhealthy habits to impose the resultant negative externalities on their neighbors. Rather, persons with unhealthy habits died sooner, on the average, than their clean living neighbors, who may have briefly mourned but otherwise were unaffected.

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[NEH]

affl, Anarchism again as the solution to all our problems? Like any Contract, especially the Social Compact, in order to get something one has to give something. Otherwise, Life becomes nasty, brutish and short. Such was the underlying rational for the creation of the State, Society and Civilization.

Btw, how about a little "Pop-Skull" or better yet some un-pastuerized
milk flavored with a little White Snake Root. Or how about some fresh Beef Burgers direct from herds affected by Mad Cow disease...

[TANSTAAFL]

NEH, have you been reading Alinsky again? To my knowledge I've never advocated anarchism on this blog or any other occasion.

More to the point you raise, rather than complain about "Pop-Skull" or "White Snake Root" or "fresh Beef Burgers direct from herds affected by Mad Cow disease," why don't you consider the damage to the human mind caused by adherence to the Democratic Party agenda?

Put simply, to all appearances, you would sacrifice individual liberty for the sake of stealing wealth from people who earn it and redistributing it to the lazy. QED

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[NEH]

affl, The facts are the facts jack, just as history is history. Unless of course, one is trying to muddy the waters by the use of revisionism or other techniques to advance an ideologically biased agenda. That in the end will result in an "Aristocracy", "Oligarcy" or Plutocracy coming to the fore by driving the Nation into Anarchy.

As for the issue of "Liberty", remember, "Liberty is not License".
A principle fully articulated in Anglo-American Law and the Constitution...

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[Gordon Longhouse]

Becker's point around US sub-prime mortgages is well taken: they were far more toxic to lenders than they were to borrowers.

Mortgages in the US are extremely risky instruments for lenders because the lender does not simply lend money secured by property, it also agrees to accept the property in lieu of the loan.

This is economically identical to the lender granting a put option over the property to the borrower with a strike price equal to the value of the loan. Where the property is acquired without down payment this means that the put option as at the money.

Such an option ought to be very expensive and this expense ought to have been reflected in the interest rate on the loan. It wasn't and so the promoters of these products and those who financed them were doomed.

The borrowers had to suffer the trauma of being thrown out of the house, but in a financial sense they were much better off than the lenders. Politically speaking it is impermissible to say so.