Essay by Keith Rankin.
Fresh vegetables and fruit – quality foods – are what economists call a merit good, like primary health care, education and urban public transport. By contrast, ‘junk food’ – rich in sugar – is a demerit good. We in New Zealand and many other countries have a problem: too much unhealthy junk food is consumed, and too few quality foods are eaten.
Economics 101 has a simple textbook solution which I am sure all economists would agree with. To encourage increased consumption of vegetables and fruit, these foods should be subsidised. Just as we subsidise the other merit goods mentioned above.
We should note that subsidies incentivise production as well as consumption. Indeed it is entirely beneficial to society for such a subsidy to benefit market gardeners, orchardists and greengrocers (ie not only consumers). In particular, such a subsidy might have an impact on land use; a significant part of the ‘cost of living’ problem we face is the loss of good horticultural land close to our cities.
We could set a rate of subsidy at 15 percent, knowing that if the policy achieves its goals of incentivising consumption and production of fresh and unprocessed horticultural products, then there would be a future option to increase the rate of subsidy.
Instead of such an obvious and simple policy, we are having a restricted debate about a convoluted and inefficient ‘tax cut’. As an economist – albeit a retired economist – I agree with the professional consensus that the Labour Party’s tax policy is inefficient and regressive. Nevertheless, I found this item on RNZ this morning somewhat problematic: Tax experts slam GST-free fruit and vegetables policy.
The college of economists interviewed have downplayed the central ‘merit good’ issue. They emphasise the ‘income effect’ over the ‘substitution effect’, whereas tax specialists in the past have generally emphasised the ‘substitution effect’ over the ‘income effect’, especially with respect to labour supply. (This is manifest by their emphasis on marginal tax rates over average tax rates.) And they seem to think that the only suppliers of note of vegetables and fruits are supermarkets, who they insinuate will suddenly become even more greedy than they allegedly already are. They are being disingenuous. Most problematic was the suggestion by one of these ‘leading’ economists – a popular label used by much of the media applied to the people they talk to – that an economist who breaks rank from groupthink does not deserve to be called an economist.
Labour’s reasons for not subsidising vegetables and fruit are, at first sight, quite puzzling. But we must remember that party policy is discussed in a political context, and that groups of like-minded people in a committee tend to advocate partial rather than imaginative solutions. (While subsidising vegetables and fruits is hardly an imaginative solution, nevertheless almost nobody seems to have imagined it!) My guess is that the bigger reason why Labour have chosen their GST-meddling ‘tax’ policy is that it is needed as a fig-leaf to mask their absence of a tax policy.
Subsidise unprocessed vegetables and fruit! Such an incentivisation policy would be popular with both the public and the economists. Good economics and good politics.
Keith Rankin (keith at rankin dot nz), trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.