Taxing Your Free Choice: The Proposal for a Soda Tax

With obesity levels in the United States steadily rising and with the national desire for a healthcare plan that will reform healthcare and cut costs while expanding benefits and insurance to more of the population, President Obama and leaders in the Senate are considering a new tax on sugary soft drinks. The potential goals for such an excise tax would be to discourage the consumption of sugary drinks, make the population healthier by fighting obesity, and to help pay for a potential healthcare plan that could possibly cost between $750 billion and 1$ trillion. The logic works like this: taxing a certain good raises its price, and taxing a certain good relative to other goods will, all other things equal, lower the quantity demanded of that certain good. And so if the government were to place an excise tax on soda, the amount of soda Americans consume would most likely decrease, which could result in health benefits, assuming that the decrease in consumption in soda is not offset by some increase in a different unhealthy eating habit. Then, if the tax were enacted, it would raise revenue for the government, which could be put towards paying for increases in government healthcare. It is certainly a simple enough plan.

However, there is one serious problem with this proposal, and that is that there is no justification for forcibly punishing people’s decisions about themselves and what they decide to eat or drink. This excise tax would be economically destructive because any thing that changes people’s decisions from what they would do in the absence of coercion makes them worse off, assuming that the activity being decided on doesn’t adversely affect third parties. What people decide to eat or drink doesn’t place any costs on other people in a free market. People are free both to decide what they consume and other people are free from possible negative affects of those people’s decisions.

But this brings us to another problem: healthcare. When the government “provides” healthcare by taxing the people and then paying benefits to other people, the condition on which freedom works in this regard is suddenly destroyed, because someone’s decisions about the foods and drinks they consume can suddenly cost everyone in society because they will end up paying for the increased healthcare costs someone with unhealthy habits through their taxes. Suddenly, there is a reason for everyone to have an interest in controlling what everyone else does. No longer will freedom of choice be beneficial to those who live healthy lifestyles because they will pay for the poor choices of others. And so the freedom of people to decide what they want to consume based on the costs to their health their decisions can cause will be restricted. This is just one of the many costs of government-provided healthcare.

In a free market, the costs of unhealthy decisions are born by the individuals who make the decisions, and thus they have the freedom of making the decision themselves by weighing the costs and benefits of each possible decision being considered, and then choosing the best course of action. If an individual wants to consume large amounts of soda and sugary drinks and to bear the costs of poor health from high caloric consumption among others, then they are better off if their decision is not affected and they are allowed to consume large amounts of soda and sugary drinks, because they have determined that the most beneficial course of action and anything that changes their decision forcibly such as discouraging that through an excise tax on soda is putting them into a situation in which all of their potential decisions are worse off than the decision they could have made in the absence of that tax.

There is also the issue of insurance. One might think that through insurance, the costs of someone’s decisions that pertain to their health could be placed on others through the way that everyone pays into insurance and then the costs are born by the insurance company as a whole, paid for by the premiums of everyone who wants coverage. However, this is not so, because those who place higher costs than others on the insurance company are made to pay for their decisions through higher premiums. The purpose of insurance provision is to provide security from risk, not to socialize someone’s personal costs, and that’s how it works in a free market, through if the government gets its way by making it illegal for insurance companies to discriminate on the basis of pre-existing conditions, insurance could be turned into a method of partial socialization. Discrimination is not a bad thing when it applies to pricing for insurance, because it’s discriminatory pricing that protects our individual freedom when it comes to health decisions.

So it should be clear to just about anyone that the soda tax is not a straightforward way to fix the healthcare problem, but a problem in itself as a threat to economic welfare and freedom in general. Healthcare has its problems, and these problems have their solutions, put this particular proposal is not one of those solutions, simply another problem.

Obama Threatens Economy with Protectionism

Last Friday, President Obama made the decision to place a three-year tariff on imported tires for cars and light trucks from China, starting at 35%. The decision was prompted by a complaint from United Steelworkers and it is supported by the A.F.L.-C.I.O, the largest organization of unions in the United States. There is, however, absolutely no excuse for placing barriers on trade, particularly when the world economy has been shaky due to the financial crisis. Labor unions are just about the only organizations supporting such tariffs, arguing that the tariff will increase production of tires in the United States and will protect or create American jobs.

Tariffs, though they are often supported in the name of jobs, always have the effects of destroying trade, specialization, international cooperation, and ultimately economic wealth for all nations. The extent to which they “create jobs” is really their effect of creating a need for more work to produce the same amount of goods and services as the economy was producing before the tariff was enacted. This creates waste, inefficiency, and poverty, while also being entirely unnecessary and counterproductive with respect to employment levels; and when one considers the fact that tariffs are often responded to with retaliatory tariffs from other countries, the effects often end up being much more devastating than one would predict from the enactment of a single tariff. Such “trade wars” can devastate the world economy or make existing economic problems even worse, such as the one which occurred after the Smoot-Hawley Tariff was passed in the US in 1930 during the Great Depression. In response to the current act, for example, China has made threats that it might respond with retaliatory tariffs on chicken and auto parts. If a trade war were to break out between the US and China, it would probably be the end of the modern economy and would truly bring about another Great Depression.

The reason why tariffs result in lower economic productivity and welfare is that they reduce trade by placing additional costs, added by the government enforcing the tariff, on trading certain goods or services between certain countries. When trade is reduced, economic welfare follows because trade is the basis of virtually all of the wealth that we enjoy in our modern economy. Trade increases when specialization through the division of labor increases, because when two individuals specialize in certain productive activities, they become more productive than they could if they could not specialize and had to produce more of what they needed for themselves. And once two individuals are more productive through specialization, trade enables them to have the variety of goods and services they desire while also benefiting from the increased production acquired through specialization. In addition, David Ricardo’s Theory of Comparative Advantage shows how an individual or country can gain from trade even when much less productive overall than a potential trading partner.

However, this still leaves the question of employment unanswered. Even if we know that economic productivity is higher with unrestricted trade, that doesn’t necessarily mean that it is desirable if it means high unemployment and no gains for a significant part of the population. However, the causes of unemployment are separate and unrelated to how much trade occurs in the world economy. Long-term unemployment is caused by restrictions imposed by the government on the movement of labor in the economy, and cyclical unemployment, which accompanies recessions and depression, is caused by government distortions in the economy’s structure of production, which eventually have to correct, causing many people to be unemployed. There is no reason, however, why these unemployed people should be so for long. Like all goods and services, the supply of labor in the world is limited, and uses for it unlimited, as human wants are not bounded. Therefore, a market emerges for the exchange of labor. In this labor market, there is both the supply of labor and demand for that labor. And also like other markets, the price of labor adjusts to clear the market, because consumers of labor (the firms) have an interest in using more labor, while providers of labor have an interest in selling their labor. No one benefits from being unemployed when they want to sell their labor, and the price paid for labor adjusts so that producers can fully utilize the available amount of labor. If there is a large surplus of labor, or unemployment, then the price of labor is too high for producers to value employing more labor, and if there is a shortage of labor, then producers raise prices for labor to attract workers to their businesses. Regardless of trade, so long as people value goods and services that require labor (and all of them do), there will be a market for labor and there will be pricing system, which can ensure full employment. And so the labor unions have no ground for claiming that tariffs are needed to “protect jobs.” The argument is absurd on its face. Their real interest in supporting these tariffs is because the workers who work in industries that get special tariffs on the goods they work to produce can benefit at the expense of all of the consumers of the product the tariff is on.

However, there is yet another fatal flaw in the arguments in support of this tire tariff. Even if the United States enacts a tariff against China, that does not mean that suddenly American companies and workers will get more of the market for tires, the reason being that there are many other countries other than China that would be willing to produce tires for less of a cost than the United States: Brazil or India, for example. And so there would be absolutely no benefits, not even the supposed benefit of protecting American jobs.

The tariff on tires, or tariffs of any kind for that matter, have no benefits and can end up costing a lot, mostly to consumers. Free trade and a free market would maximize economic welfare and ensure full employment for all people in all nations, where protectionism breeds poverty and want for nations. Obama’s move against trade has set the nation back economically in the midst of a recession and has damaged trade relations with China, all to please the unions, who themselves hurt the economy and cause unemployment. The damage could be prevented, but to hope for such an outcome would be optimistic to the point of foolishness.

Is the Recession Over?

While Bernanke might want the recession to be over more than just about anyone else, it's only by the government's skewed methods of measuring such things that the economy appears to be getting better. In reality, we are still very deep in recession, and are very likely to stay here for quite a while because of the government’s attempts to create an artificial recovery through interventionist, Keynesian methods which involve government stimulus plans, government spending, and government restrictions on the market.

The first thing wrong with their determination of whether the economy is in a recession or experiencing economic growth is that they only look at whether or not economic growth is positive or negative. Had the economy not gone into recession, economic growth would be much higher than just the fraction of a percent that is expected in the near future. But the government, through the NBER, will claim that the recession is over the moment that GDP starts to increase by any amount. Whatever this small percentage gain will be, it won’t be anything like pre-recessionary levels, and it only makes sense if we consider a recession over once its effects are gone, which should mean a return to full productivity.

The second thing wrong with this determination is GDP itself. Gross domestic product is a very poor measure of economic welfare, particularly because it includes government spending. So naturally, if the government simply passes a large "stimulus bill," then GDP will increase, all other things equal. However, this spending doesn't actually increase economic output or improve the economy, and therefore does nothing to help the economy recover from a recession. In fact, it accomplishes the opposite. By spending money for the purpose of spending money, valuable resources in the economy are wasted and the structure of the market is prevented from changing to fit consumer demand, making certain aspects of the recession illiquid and thus prolonging the economic pain. And of course, any money the government spends is money the government must eventually take from taxpayers, making everyone other than the government and those who gain its favor worse off.

There is, however, one thing which typically frustrates the government's attempts to cover up a recession, and that is unemployment. Although the government has a faulty measuring system for unemployment to make the figures look better (reported currently at 9.6%, it is most likely around 16%. For example, if the economy is so bad that people give up on finding jobs, then that causes unemployment to go down by the government’s determination), and although government spending bills typically have provisions to use the government money spent to create jobs, the effect of trying to freeze the economy in the position it was in by propping up failed businesses and jobs by reducing the hours workers actually work is to perpetuate a non-equilibrium in the economy which means massive unemployment. Until a recession liquidates the whole of the malinvestments made during the economic “boom,” businesses won’t start growing and raising the employment level. In Europe, where interventionist measures have been taken farther, the unemployment problem is even worse than here in the US.

For the recession to be over, government bailouts need to stop, restrictions on labor mobility need to be destroyed, the Fed has to stop trying to keep the interest rate at zero, the government has to stop spending money like they’re going to pay with everything with the printing press, and of course, the printing presses at the Federal Bureau of Engraving and Printing need to be shut down for a good long time.

A Brief Introduction

Greetings. My name is Eric Perkerson; I am a first-year student at the University of Georgia in Athens; I am an economics major and am a follower of the Austrian School of Economics, which supports a very laissez-faire approach to economic policy. I discovered this school of thought just over a year ago, right before the financial crisis hit, and the financial crisis confirmed to me that the Austrian School had a better understanding of how the real-world economy works, as Austrian Business Cycle Theory predicted the crisis. The most well known Austrian economists today are Ron Paul and Peter Schiff. The best source of information that I have found to date on Austrian economics is the Ludwig von Mises Institute, which has hundreds of articles on recent events, journals, academic papers, and just about every book ever written from the Austrian perspective. And so on this blog, I hope to educate people and promote public policy based on the Austrian School of Economics, while both commenting on recent events in politics and in the economy and while also discussing economics in general. Hopefully, you will continue to read until you begin to accept this rational approach to economic problems. And with this brief introduction, we begin......