Fizzy drinks and the US economy

A New York city health code petition aims to curb the large-scale intake of ‘unhealthy’ drinks. But how will the nanny state’s obsession with health affect the economy?

Vanessa Drucker 160 byline

Riding on the New York subway last week, I was invited to sign a petition against a new city Health Code regulation banning the sale of sugary drinks in containers of over 16 ounces. I hesitated, pen in hand. Had Mayor Bloomberg overreached this time, by imposing such nanny-state restrictions? Or was the effort an admirable tactic against obesity in a city where 58 per cent of adults and 40 per cent of school students are overweight? The epidemic accounts for 5,800 deaths a year and $4m in direct medical costs, according to the city’s Department of Health and Mental Hygiene.

As first of its kind in America, this initiative will be instructive. Bryan Bollinger, marketing professor at New York University, notes how New York’s prohibition will serve as a test case for the rest of the country. The regulation will take effect 12 March 2013, unless legal battles forestall it. The rule affects the sale of sweetened sodas from some restaurants, mobile food carts, delis, and concessions at cinemas or sports events. Alcohol and diet drinks are exempt. (Thanks at least for that, Mr Mayor.) So why target drinks, rather than other fattening treats? The answer is that food makes people feel fuller, allowing the body to regulate consumption. And sodas are an easily definable category – it is harder for legislators to specify pizza or confectionary.

Liz Berman, president of Continental Food and Beverage, an ethnic food distributor, opposes the new law as “arbitrary and inequitable.” She argues that it only applies to those businesses regulated by the Department of Health. So operators like food carts and street vendors bear the brunt. Customers may simply patronise a larger, unregulated store next door. The public has not embraced the ban either: a September New York Times survey found respondents disapproved, by 60 per cent to 36 per cent. The same poll also revealed that 70 per cent of blacks, and 60 per cent of Hispanics drink sweetened sodas, versus 40 per cent of whites, who favor low calorie versions.

To sign or not to sign

Should I join the list of subscribers against an infringement of personal liberties? Economists point to inherent drawbacks to soda bans. First, they caution against substitution effects. A basic problem with soda is that, unlike, say, junk food or cigarettes, people have to drink something.

“The hope is that they might switch to water, but it is not obvious they will,” says David Frisvold, professor of economics at Emory University. If adolescents drink fewer sodas, they tend to replace them with alternative beverages, particularly milk, which may result in higher caloric intakes. One Cornell University study even found that many adults might substitute with beer. “That raises concerns of trading one public health problem for another,” suggests Scott Drenkard, an economist at the Tax Foundation.

A sizeable component of cost derives from the container, not the liquid

A limit on portion size introduces other economic quandaries. As Coke and other Big Soda firms are well aware, a sizeable component of cost derives from the container, not the liquid beverage itself. Consumers will still be able to drink 16 ounces, although the cost of reordering additional items will become more expensive for them. For example, movie-going families will no longer be able to buy and share large sodas. Merchants, meanwhile, benefit through increased margins.

Taxes are another tool for limiting consumption. Drenkard regards the tax code as a “blunt, clumsy instrument for dictating something as complex as diet choices.” Food and beverage taxes are also regressive, and overwhelmingly impact lower income households. “The argument, however, goes that those are the very households that would benefit most from reduced obesity,” says Frisvold.

Taxes may be intended either to raise revenue or to change behavior or both. While nowadays they are often structured to reduced consumption, back in the 1920’s New York City imposed a soda tax only to attract revenues. Currently, only four US states set small taxes on sodas; in 2011, 14 states unsuccessfully proposed them. On 6 November, however, two California cities will vote on new excise taxes on soft drinks. In public policy, Drenkard explains, “as California goes, frequently so goes the nation.”

The moral crux

One principle is to use excise taxes to internalise economic externalities. Policymakers must decide whether obesity is an individual problem or a societal problem. The chain of causation works thus: soda has calories, which causes obesity, which leads to health problems, which are socialised through the healthcare system, of which the costs are shared. “It is a slippery slope, but where do you stop regulating?” Bollinger asks. Should one ban stressful occupations that cause an increase in blood pressure?

Information provision is a less invasive approach and can lead to the provision of healthier menus. Bollinger has conducted a study on calorie labeling in Starbucks restaurants, using cardholders’ data to track hundreds of millions of purchases over time. Although the conversion from caloric awareness to weight gain is indirect, it seems like a reasonable requirement, since the cost to chain restaurants is small. Unlike several other studies, which used smaller sample sizes, his 2010 research found that labeling led to a 15 per cent reduction in food calories per average transaction. “People overestimated drink items and underestimated food,” he reports. “They already knew the drinks were unhealthy.” In other words, the effect of calorie posting largely depends on prior beliefs. Bollinger believes an ideal approach would be to use labeling in conjunction with consumer education programs.

Drenkard says: “We live in a free society. Some people will do things you would not do – do you want to use government to dictate them?” Yes, it appears that the nanny state is asserting itself. That may still not be quite the right way to analyse the problem though. It is critical to think through the costs to society, and then to ask exactly what public policies would help improve social welfare and reduce those costs. How serious, in fact, is the externality, and what are the ramifications from obesity? Frisvold concludes: “If they are substantial, it would seem improper to ignore them.”

In the end, I have decided not to sign that petition.