People respond to incentives Tuesday, Mar 23 2010 

Some readers might remember I wrote about obesity and wealth a couple of months ago. One of the conclusions I came to was that there is an inverse relationship between a state’s GDP and the rate of obesity in that state. In other words, richer states have fewer obese people (relative to their total population) than poorer states do. Some people may disagree with regards to how significant or even causal the relationship is, but I believe there is a general and visible trend that can be explained in part. One reason that I surmised is that poor people have fewer choices, namely because they have less money. One thing that this implies is that poor people will be forced to buy cheaper foods. The cheaper foods, however, tend to be the unhealthier foods. Of course, it’s not impossible to buy cheap and nutritious foods. However, if we look at just a few statistics regarding food and prices, we can begin to see the perversity of the current situation. For example, in my previous post, I cited the fact that the real price of vegetables and fruits have increased 40% between 1985 and 2000, while the price for soft drinks have declined 23%.

This is partly the consequence of government interference in the market. Most of this interference comes in the form of subsidies. Government subsidizes some foods to a great amount, such as corn, and subsidizes other foods to a very little amount or not at all, such as vegetables and fruits. This has an effect. One effect is that certain foods such as corn are overproduced and prices decrease. This is why soft drinks, which use a great deal of subsidized corn syrup and sugar, can remain cheap while more nutritious foods and drinks become more expensive. That’s just one example, but it holds across the board.

Effectively, this means government is subsidizing the consumption of unhealthy foods. Poor people that lack choices are thus more likely to be unhealthy due to their eating habits. The reason I’m bringing this topic up again is because of something Professor Nathan Hampton of the economics department at SCSU said. I had Dr. Hampton over last summer, but not this semester. However, my roommate currently has him for principles of macroeconomics and he forwarded Dr. Hampton this chart about government subsidies to certain foods vis-à-vis nutrition guidelines that are recommended by the government. The chart is supposed to explain why salads cost more than Big Macs. According to the chart, it’s because dairy and meat are heavily subsidized while vegetables and fruits are hardly subsidized at all. Thus, unhealthy foods like Big Macs are cheaper than healthier foods like salads.

Dr. Hampton’s response, however, was that this chart is misleading. He essentially called it a lie and told my roommate to sharpen his critical thinking skills. The reason, Dr. Hampton says, is because meat is not subsidized the U.S. government. While dairy is highly subsidized by the government, it is misleading (“pathetic” even) to group “meat and dairy” together to make it appear as if Big Macs are being subsidized by the government. Thus, the argument that Big Macs are cheap due to subsidies is “only for the simple minded and the weak.”

Perhaps Dr. Hampton’s response wouldn’t seem so berating if there were any merit to his claims, but there is none. The fact of the matter is that meat is being subsidized by the government. Though there may not be any direct subsidies, as Dr. Hampton claims, it is being subsidized indirectly. Exercising some of those critical thinking skills Dr. Hampton implored, it’s not very difficult to see that what’s being subsidized to a rather large extent is feed crops. What are feed crops like corn doing? They’re feeding livestock—the same livestock that eventually ends up in your Big Mac. The Institute for Agricultural and Trade Policy concludes in a rather interesting study, “corporately owned, vertically integrated, industrial animal factories have reaped major gains at the expense of U.S. farmers and taxpayers.” The reason? Subsidies. If you subsidize that which is necessary for the production of meat, you also (indirectly) subsidize the production of that meat. So, yes, when you subsidize feed crops like corn, you also subsidize the production of meats, which are used in Big Macs. It doesn’t take a great deal of critical thinking to see this fact.

Dr. Hampton says the first principle of economics is that everything has an opportunity cost. Maybe so, but it’s also true that people respond to incentives (according to Greg Mankiw‘s fourth principle of economics). When government subsidizes feed crops, it’s an incentive to overproduce meat and to lower the price of Big Macs. People respond to those incentives.

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Re: SuperFreakonomics & global warming Sunday, Oct 25 2009 

A little while ago, I wrote about the “the globe is currently cooling” myth, which, unfortunately, was propagated in Steven Levitt and Stephen Dubner’s new book, SuperFreakonomics. As I explained earlier, I was big fan of their earlier book, Freakonomics, which is why I was disappointed to learn of their unfortunate mistake. I also linked to two criticisms of Levitt and Dubner’s chapter on global warming (which can be read here). A lot has happened since then.

Most recently, Dr. Levitt wrote a blog post at the Freakonomics blog defending the chapter. Mr. Dubner also wrote a post defending the chapter and going after one of the main criticizers, Joseph Romm. Dr. Romm wrote one of the original critiques (which I linked to in my previous post, along with Dr. Connolley’s), pointing out errors and Levitt and Dubner’s misrepresentation of the main scientist they used for their chapter. The links I’ve just provided here provide plenty of background to the controversy as well links to other posts surrounding the ill-fated chapter, including responses by Nobel laureate Paul Krugman, Union of Concerned Scientists, Tim Lambert, Gavin Schmidt of NASA, and plenty others.

The gist of the controversy, from I found sifting through the countless attacks and defenses of the chapter, is that Levitt and Dubner misrepresented Ken Caldeira, the main climate scientist they refer to in their chapter; make several errors in their analysis of the science; and advocate geo-engineering (pumping sulfate aerosols into the atmosphere) as opposed to greenhouse gases reductions as the preferable way to mitigate the effects of anthropogenic global warming. For a more thorough understanding of the controversy, visit some of the links I’ve posted above as well as the links the authors of those posts provide. From my perspective, it seems that Levitt and Dubner have chosen the contrarian position and pushed forward shocking conclusions because, frankly, that’s one way to become bestsellers. Unfortunately, there was a not a lot of room for mistake and errors were certainly made. The barrage of criticism across the Web has been unrelenting as a result.

But what is the core issue, particularly as the book deals with it? The core issue here, as I see it, is the best way to deal with the climate crisis (which everyone agrees exists). Levitt and Dubner advocate geo-engineering as the solution, as a means to reflect sunlight and thus reduce global mean temperatures. They say it is a quick and cheap solution. On the other hand, they disagree with lowering emissions because it is a long and difficult process that could cost what they say is thousands times more than their solution. (Part of the disagreement is that Dr. Caldeira is very much for eliminatation of carbon emissions and supports research into geo-engineering, which is not reflected in the book.) As Dr. Levitt points out, the question they’re answer is, What is the cheapest and fastest way to cool the Earth? He says environmentalists and scientists are asking other questions: “The sorts of questions they tend to ask are ‘What is the “right” amount of carbon to emit?’ or ‘Is it moral for this generation to put carbon into the air when future generations will pay the price?’ or ‘What are the responsibilities of humankind to the planet?’

Is it the case that geo-engineering is the correct solution while reducing greenhouse gas emissions is not? It’s doubtful. Dr. Caldeira argues that our emissions are necessarily wrong: “I compare CO2 emissions to mugging little old ladies … It is wrong to mug little old ladies and wrong to emit carbon dioxide to the atmosphere. The right target for both mugging little old ladies and carbon dioxide emissions is zero.” So already we see that Dr. Caldeira is very much opposed to greenhouse gas emissions, though SuperFreakonomics claims, “Yet his research tells him carbon dioxide is not the right villain in this fight.” Quite preposterous. Dr. Caldeira continues in his e-mail to Dr. Romm:

I am in favor of fire insurance but I am also against playing with matches while sitting on a keg of gunpowder. I am in favor of research into geoengineering options but I am also against carbon dioxide emissions.

Carbon dioxide emissions represent a real threat to humans and natural systems, and I fear we may have already dawdled too long. That is why I want to see research into geoengineering — because the threat posed by CO2 is real and large, not because the threat is imaginary and small.

The problem that Levitt and Dubner fail to account for is that greenhouse gas emissions are responsible for many changes besides just temperature increases. That’s why “climate change” is becoming a more popular term than “global warming.” Warming is just one aspect of it. The effects our actions have on climate are broad, including ocean acidification, changes in rainfall patterns, extreme weather events, and so on. While pumping sulfate aerosols into the stratosphere may take care of the temperature problems, it neglects a whole host of issues that are caused by human activity. Furthermore, the proposals Levitt and Dubner make are likely to have their own negative effects as well as technical and strategic issues. Writes Dr. Schmidt, “if the planet was a single column with completely homogeneous properties from the surface to the top of the atmosphere and the only free variable was the surface temperature, it would be fine. Unfortunately, the real world (still) has an ozone layer, winds that depend on temperature gradients that cause European winters to warm after volcanic eruptions, rainfall that depends on the solar heating at the surface of the ocean and decreases dramatically after eruptions, clouds that depend on the presence of condensation nuclei, plants that have specific preferences for direct or diffuse light, and marine life that relies on the fact that the ocean doesn’t dissolve calcium carbonate near the surface.” Add to that “unknown unknowns” and it seems the geo-engineering proposal is not the cheap or desirable solution it was made out to be.

What about reducing emissions? Claims Dr. Levitt, “a third problem with reducing carbon emissions, which is that it requires worldwide behavioral change, which will be hard to achieve.” Why is that the case? Mr. Dubner explains, “We discuss how it’s a very hard problem to solve since pollution is an externality – that is, the people who generate pollution generally don’t pay the cost of their actions and therefore don’t have strong incentives to pollute less.” Well then… make them pay the cost of their actions! I wrote earlier that global warming represents the greatest market failure ever. The solution is that you correct for that market failure, meaning people pay for the consequences of their actions. Dr. Stern explains, “People would pay a little more for carbon-intensive goods, but our economies could continue to grow strongly.” Dr. Levitt, I’m sure, knows that behavioral change is not that hard, especially when we realize that people respond to incentives—a core economic principle (and the center of their first book). Right now, the cost of emitting greenhouse gases is far less than the actual cost of doing so, meaning there is little (economic) incentive to stop engaging in carbon-intensive activities. As Dr. Schmidt points out, the problems of lead in gasoline and CFCs in spray cans were solved by increasing the costs of these things, which has led to the elimination of both. Nothing says we can’t do the same for greenhouse gas emissions.

Update: Indeed, Dr. Levitt is fully aware. Here’s a quote from Chapter 3: “People are people, and they respond to incentives. They can nearly always be manipulated — for good or ill — if only you find the right levers.”

Update2: Brian Dupuis has a collection of links that may be helpful in following the controversy.