9/22/04

NOBEL LAUREATES: FROM OBESITY TO CHINA WORRIES

Gary Becker, Daniel Kahneman, Myron Scholes, A. Michael Spence

Each year, Global Economic Viewpoint publishes excerpts from a panel of Nobel laureates in economics gathered together by the Milken Institute and moderated by American financier Michael Milken. This year’s panelists were Gary Becker of the University of Chicago and Daniel Kahneman of Princeton, along with Myron Scholes and A. Michael Spence of Stanford.

I. AMERICAN OBESITY: IS EATING JUNK FOOD RATIONAL?

MICHAEL MILKEN: There has been a lot of focus recently on American obesity. One of the main tenets of classical economics is that markets operate on rational decision-making by individuals who calculate risks and benefits. Therefore, the question: “Is eating junk food rational?” We all know that there’s a link between what we eat and our health. Yet Americans are getting heavier, and the incidence of diabetes is skyrocketing. Is this rational behavior?

DANIEL KAHNEMAN: I’m not sure we get a lot of mileage by labeling it irrational. Once food is in front of you, eating it is hardly a voluntary activity. But we do know there are large cultural differences in the size of portions. You go to a restaurant in the United States, and there’s 30 to 40 percent more food on your plate than you get in France. We don’t satiate immediately, so we don’t know when we are no longer hungry.

GARY BECKER: The weight gain has occurred since 1980, roughly. So the issue is what happened after that date that led to this change in eating?

One factor is that the cost of junk food has gone way down, partly because of technological improvements in preparation. You don’t need to take a strong stand on rationality to conclude that when the cost goes down, more will be consumed.

Second, the teenage population is much more sedentary at all income levels, in all social classes. First, it was the TV, then the computer. Work has also become more sedentary.

The third factor I would throw out is tricky, and I don’t know how much weight -- pun intended? -- to put on it. Think of the analogy of AIDS and safe sex. You’ve got bathhouses opening up again and less use of condoms. And the explanation seems pretty straightforward: HIV is not as bad as it was before because we had ways to postpone the onset of AIDS. Similarly, with regard to weight, I think people are anticipating medical solutions that will make weight gain less dangerous.

A. MICHAEL SPENCE: The underlying behavioral problem has been understood for about 30 years in the context of insurance: It’s called “moral hazard.” The idea is very simple. If you’re insured against the worst consequences of destructive behavior, there’s less incentive to avoid that behavior.

KAHNEMAN: You probably won’t be surprised that the psychologist (ITALIC) (Note: Kahneman was trained as a psychologist) (END ITALIC) on the panel does not agree with the economists. It is certainly true in the case of AIDS that when fear is reduced, unsafe behavior increases. But it is unlikely that the model applies to teenagers going to McDonald’s and super-sizing their fries.

It’s also important to note that it really isn’t rational to abandon condoms because of the availability of drugs to control AIDS. It means there is some reasoning going on, but it is hardly perfect rationality.

II. TERRORISM AND THE GLOBAL INCOME GAP

SPENCE: There’s a preoccupation right now with terrorism, at the expense of other concerns. The advanced countries need to pay attention to the incentives available to ensure development in poor countries. If we fail in this, I think we will ultimately fail in the security area, as well. We cannot have 80 percent of the world thinking their grandchildren will have very little chance of being better off than they are. Tons of people are doing good things in this area. What’s missing is a coordinated effort on the part of the advanced industrial countries to make those efforts effective.

The advanced countries deserve an enormous amount of credit for building the international trading system. Whatever its flaws, the system has produced enormous benefits for people out there. Now we need to crank up the dial up a bit to deal with economic development.

BECKER: Poverty is the most important problem facing the world. Now what’s the source of poverty? Take a country like India. For 40 years, India had significant population growth and very little per capita growth in income. There was continuous clamor during that period that India deserved more aid from the West. We gave aid. It didn’t do much good. India began to grow when it realized that its domestic economic policies were very unproductive. It wasn’t what the West was doing to India, but what India was doing to itself through Soviet-style central planning.

China is an equally good example. China grew erratically until 1978, when Beijing started agricultural reform. They discovered very simple things that they could do for themselves to spur growth.

What’s been missing is self-sustained growth in a Muslim country. Muslim intellectuals like to blame colonialism and the like. I think it is the fact that they’ve chosen planned economies, restrictions on private enterprise, restrictions on trade. What we can do for them is point to the way.

SCHOLES: Poland and other Eastern European countries are joining the European Union, which, in my view, is a death knell for growth. Consider the less developed countries of Ukraine -- Russia, Azerbaijan and other former Soviet Union countries that essentially took exactly the opposite route. Tax rates are low and governments don’t do much for people. So even though there’s corruption, there’s not much to be corrupt about. And their economic resurgence has been unbelievable.

III. DOWNSIZING ENERGY CONSUMPTION

SPENCE: There is no doubt that the U.S. could reduce consumption of energy by taxing it more. The real question is how to price the “negative externalities,” the security costs that create a gap between the market price and the efficient price of gasoline. I think we’ve got a hard measurement problem there. What makes sense is to move in the direction of more conservation, and maybe use the extra tax revenues to provide incentives to increase the safety of our energy supply.

SCHOLES: Individuals do respond to the price of gas. Where the price of gas is high -- in Europe -- they drive fewer SUVs than we do in the U.S. So if high gas prices are sustained, you’ll see substitution back to cars that are more efficient.

BECKER: I think there are two reasons why the U.S. should tax energy, and one reason we shouldn’t. Large-scale disruption of Middle East oil production would have important consequences for the United States. That means we should hedge by diversifying into natural gas, and maybe by investing more in fuel efficiency. And perhaps we need a much larger strategic oil stockpile so we can withstand short-term interruptions.

The second reason is damage to the environment. I’ll accept for the purposes of discussion that greenhouse warming is a real threat and therefore we should reduce fossil-fuel output. Taxes can do that in the short run. But the third reason -- the idea that we’re running out of fossil fuel -- is a non-issue. Markets will ration scarce fuels appropriately.

IV. WORRIES ABOUT CHINA, EUROPEAN MODEL, IGNORING AFRICA

SCHOLES: I have reservations about the prospects of China and Japan because both have based growth on exports. In Japan, the government tried to prevent the restructuring of industries in order to save the export base and, in the process, has almost ruined the banking system.

China has problems associated with the declining efficiency of capital use. There’s really no understanding of the cost of capital, and there’s excessive investment in some sectors, such as office buildings, steel and some manufacturing. Bad loans are accelerating. Yet if the country attempts to control inflation, it’ll have quite an effect on growth in the economy.

SARS had a huge unintended consequence: China did not want the epidemic to stop its growth. So the money spigot was turned on, and the banks were told to lend to anyone. The private sector is not getting enough capital from the banking system, while state enterprises are. So I am very worried there’s going to be a hard, hard landing in China. And that’s going to have an effect on the rest of us.

KAHNEMAN: I’d like to talk about Western Europe. My perspective as somebody who didn’t grow up in America is that Americans don’t think that Europe is relevant. So we managed to have the whole debate on health care without mentioning the European experience. We say Europe is stagnant and that its high living standard isn’t sustainable. But we’ve been saying that for a very long time.

BECKER: My pick is the 2 billion people who live in Muslim countries and in Africa. They’re subjected to backbreaking work and low life expectancy. Not one Muslim country has brought its people up to a very modest standard of living. AIDS is now spreading rapidly in much of this world. The frustrating part is that social scientists know what needs to be done to give them modest growth rates, significant improvements in medical care, significant improvements in welfare. But hardly anyone is listening.

© 2004, Milken Institute/Global Economic Viewpoint. Distributed by Tribune Media Services International.

For immediate release. Distributed 9/22/04