Soda Taxes

• “The Impact of Sugar-Sweetened Beverage Taxes on Purchases: Evidence from Four City-Level Taxes in the U.S.,” by John Cawley, David Frisvold, and David Jones. October 2019. NBER #26393.

Regulation has published both articles (“Would Soda Taxes Really Yield Health Benefits?” Fall 2010; “Slim Odds,” Spring 2011) and Working Paper reviews (Winter 2017–2018, Spring 2019) on the effects of soda consumption on obesity and the effects of soda taxes on reducing soda consumption and body weight. The joint conclusion is that supportive evidence for the importance of soda consumption in weight gain is weak or non-existent and the taxation of beverages has not reduced soda consumption because of substitution of lower- for higher-priced soda or purchases outside the local jurisdictions that have imposed soda taxes.

This study differs in several ways from those previously discussed. First, it examines the effect of soda taxes in the four largest cities to enact them (Philadelphia, Oakland, San Francisco, and Seattle). Second, it examines the universe of retail purchases by a panel of households with children six months before and after enactment of the tax rather than the more commonly used data for soda sales at national chain stores. And third, it uses two control groups: a demographically matched national comparison group, as well as the households in each metropolitan area outside of each of the four cities that imposed the taxes.

Despite those differences, this study’s results mirror those of the previous studies. Across the four cities, an increase in the beverage tax rate of 1¢ per ounce decreases household purchases of taxed beverages by 53.0 ounces per month, or 12.2%. That may sound large, but the health effect is small: a reduction of 5 calories per day per household member and eventual reduction in weight of just 0.5 pounds after three years.

Even those small results require qualification. The consumption reduction arises only when standard errors are clustered at the household level, which adjusts for potential correlation in errors within households over time but does not adjust for correlation in errors across households within geographic areas. As a result, the standard errors could be biased toward zero. When standard errors were clustered by geographic areas, the standard errors increased, as did the confidence intervals: the estimate is no longer statistically significant at the 5% level because the 95% confidence interval ranges from a decrease in purchases of 93.35 ounces to an increase in purchases of 41.74 ounces.

The second qualification is that the decreased consumption was solely the result of the data from Philadelphia. Oakland, Seattle, and San Francisco showed no effect. And Philadelphia taxes diet sodas and teas and energy drinks along with regular soda.

Public Equity in Decline

• “Public versus Private Equity,” by Rene M. Stulz. November 2019. SSRN #3486578.

In 1975, the United States had 4,927 publicly traded firms. That number rose over the next two decades, peaking at 7,576 in 1997. But by the end of 2018 the United States had only 3,613 listed firms. In addition, public firms have returned capital to shareholders on net; from 1998 to 2016, U.S. firms repurchased shares in excess of share issuance by $3.6 trillion.

Over that time, the use of private equity has increased rapidly. The number of companies backed by private equity funds in the United States doubled from 2006 to 2017. Private equity net asset value has grown at twice the rate of public market capitalization globally.

This study argues these changes have come about because of the increased importance of intangible rather than physical assets in business. Public markets can value intangible assets. Many firms, such as Apple, have extremely high stock valuations relative to their tangible assets. But young firms with no track record whose success depends mostly on investments in intangible assets are likely to have difficulty raising funds in public markets. If they do succeed, they are likely to be constrained by public market investors who find it difficult to assess whether the firm is spending the money effectively. Thus, Instagram and WhatsApp — which had few employees or hard assets and yet large valuations — were privately bought, whereas Best Buy — which had just 24 stores and earnings of $7 million in 1987 — nonetheless went public that year.

Policy changes have also increased the supply of private equity. Securities Regulation D in 1982 allowed partnerships such as private equity funds or hedge funds to have up to 100 investors. In 1996 that cap was raised; by 2012, a private firm could have 500 shareholders without having to go public. That year, Congress passed the Jumpstart Our Business Startups (JOBS) Act that increased the threshold to 2,000 shareholders. So, both the supply of and demand for private equity have increased.

Smoking

• “E‑Cigarettes and Adult Smoking: Evidence from Minnesota,” by Henry Saffer, Daniel Dench, Michael Grossman, and Dhaval Dave. December 2019. SSRN #3503054.

Minnesota became the first state to tax electronic cigarettes in August 2010, implementing a tax rate of 35%. The rate increased to 95% in July 2013. This study examines the effect of that tax on smoking and e‑cigarette consumption using data from the Tobacco Use Supplement of the Current Population Survey for the years 1992–2015. The study compares smoking in Minnesota relative to a synthetic control group of all other states weighted to have consumption trends similar to Minnesota before 2010.

After the large tax increase on e‑cigarettes, the rate at which traditional cigarette smoking declined in Minnesota was reduced relative to the synthetic control group. Traditional smoking was 0.8 to 0.9 percentage points higher in Minnesota than in the synthetic control group. Almost all of difference was the result of a decrease in quitting among existing smokers rather than an increase in smoking initiation. In 2014 there were 600,000 adult smokers in Minnesota and the e‑cigarette tax deterred 32,400 smokers from quitting.

Using those findings, the study estimates that nationwide taxing of e‑cigarettes at the same rate as regular cigarettes would deter 2.75 million smokers from quitting over the next 10 years, which is around 25% of the estimated 11 million smokers that will quit over that time.

Risk Analysis

• “Be Cautious with the Precautionary Principle: Evidence from Fukushima Daiichi Nuclear Accident,” by Matthew J. Neidell, Shinsuke Uchida, and Marcella Veronesi. October 2019. NBER #26395.

The Precautionary Principle argues that “until safety is established through clear evidence, we should be cautious.” (See “The Paralyzing Principle,” Winter 2002–2003.) In accordance with that principle, the Japanese government shut down all nuclear power plants in Japan in March 2011 following the tsunami, loss of cooling capacity, and resulting nuclear core meltdown at a nuclear plant in Fukushima.

But the decrease in nuclear power came with an increase in electricity prices (38% in the Tokyo region) to cover the cost of imported fossil fuels used to substitute for nuclear generation. The increased electricity prices reduced electricity use and increased mortality from reduced heating in homes. From 2011 to 2014, higher electricity prices resulted in 1,280 additional deaths in Japan’s 21 largest cities. And 1,232 deaths occurred because of the massive forced evacuation of the Fukushima area following the accident. In contrast, the estimated cumulative deaths that will occur from excessive radiation exposure because of the reactor meltdown is 130.

Immigration

• “A Market for Work Permits,” by Michael Lokshin and Martin Ravallion. December 2019. NBER #26590.

Many people outside the United States seek to work here, but the legal right do so is very limited. The demand is so large that a vast illegal market exists to facilitate entry. Many U.S. citizens dislike illegal immigration and have elected national officials who favor tighter restrictions on immigration.

This paper proposes that Americans who do not wish to work could rent out their right to participate in the U.S. labor market to foreigners in a secondary market. The monies immigrants currently pay smugglers to enter the United States would instead go to U.S. citizens. This proposal would decentralize the decision of how much immigration there should be and would pay those Americans who perceive losses from immigration, thus reducing the politicization of the issue.