Choice and Economic Growth
Fri 11 Feb 2011 by Infometrics Ltd.

Last week I heard a discussion about a book that has some fascinating epidemiological insights about the rise of obesity and accompanying illnesses such as Type 2 diabetes.  I defer to the epidemiologists’ expertise in these matters.  As an economist I don’t feel qualified to argue about epidemiology.  What concerns me, however, is epidemiologists making ill-informed assertions about economics.  The book makes the intriguing claim that economic growth is to blame for obesity.  It also links greenhouse gas emissions to obesity.  In short economic growth is to blame for some of the biggest problems in the world.  Is there any validity to this view?

There is certainly a correlation between economic growth and obesity.  Increasing wealth has enabled us to eat more, but blaming obesity on economic growth confuses opportunity with choice.  The book’s authors go further, claiming that economists like obesity because the production and distribution of lots of processed food, and the medical costs of treating obesity all count as positive contributions to Gross Domestic Product (GDP). It is true that these activities do count as part of GDP, but I do not know any economists who therefore advocate such activities as a means of increasing GDP. Such claims totally misunderstand economic growth.

From one perspective GDP is just a measure of the value of payments to labour, capital and resources.  Increasing technological progress means that we can achieve higher GDP with the same amount of those inputs, or alternatively we may wish to keep GDP the same by reducing say the labour input and taking more leisure.

On the expenditure side of the account, however, what we choose to spend that income on is a matter of choice.  With our potentially higher income we might buy a new television and forsake some of the extra income for more leisure, which we might use to watch our new television.  And while we are glued to the television there is no time for cooking so we buy fast food – and get it delivered of course.

Food production is a greenhouse gas (GHG) intensive activity –methane is produced by cattle and sheep, carbon is emitted in producing processed food and it all needs to be transported from farm to factory to supermarket and fast food outlet, burning oil and generating more emissions.

So up goes obesity, up go GHG emissions, and up goes GDP – really? Obesity probably does rise.  And if we eat less we might indirectly produce fewer GHG emissions.  It all depends though on what else we do with the income that we don’t spend on (fast) food.  Other goods and services that we buy also emit GHG – air travel, cars, concrete to make the roads, and electricity from fossil fuels to name a few examples.  Greenhouse gas emissions rise only to the extent that those activities (producing televisions and fast food) are more GHG intensive than other activities.  The income that is spent on the television and the fast food is counted as part of the income measure of GDP.  The expenditure side is merely an accounting identity.  It would hold no matter what the income was spent on.

It might be better for our health and for the health of the atmosphere if instead of watching more television with our extra income and leisure time we instead tended a garden, played tennis or took a less GHG-intensive (but more time consuming) mode of transport to work.

The point is of course, that those options are available, but they are not chosen to the extent that some people think they should be.  An economist would never try to dictate what other people should do with their time and money.  All an economist would advocate is that people understand the implications of their decisions and that the prices that guide people’s choices should reflect true social costs.  Almost most everything we consume produces emissions, whether we consume in moderation or excess.  An appropriate price on emissions – a carbon tax – ensures that the prices of goods and services better reflect their relative GHG emissions.

Fast and processed foods, however, are different.  Consumption immoderation is not really a problem, so taxing fast foods is too crude.  This is the subject of another article – but suffice to say here that education, user pays in healthcare and more attention to industry regulation are all part of the solution.  While the claims that fast food is cheaper than fresh fruit and vegetables, and that soft drink is cheaper than water, may not withstand close scrutiny, it is no coincidence that industries such as fast food are very competitive, while primary food production around the world is distorted by subsidies, perverse incentives and protection.

So don’t blame economic growth itself for the ills of the world. Blame the reluctance of those with economic and political power to reform markets so that prices better reflect the negative health and negative environmental effects of economic growth, brought about – by and large –  by people making choices on the basis of incorrect prices and inadequate information

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