26 Dec 2011
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Both economic and political logic need to be applied at the same time when assessing the viability of public policy proposals, argues Jeffrey D. Straussman.


Both economic and political logic need to be applied at the same time when assessing the viability of public policy proposals, argues Jeffrey D. Straussman.

Economics imposes discipline on our thinking so it is necessary and dare I say a crucial part of any policy analyst’s repertoire – but it is not sufficient. Politics is messy, it has rules but they are harder to discern than the simple elegance of a concept such as price elasticity, but this does not make politics less important in the policy process.

The first time I arrived in Singapore I did what most people do at Changi International Airport. After clearing passport control and getting my baggage, I took a taxi to my destination. Nothing out of the ordinary so far. I noticed that the taxi meter had two portions, the main part and a smaller part in the lower right-hand corner of the meter. Watching the two was intriguing, especially when the driver drove under a contraption with the big letters, ERP. I later learnt what ERP meant and, after some discussion with my colleague Paul Barter, a specialist in urban transit, I received a primer on how the system worked.

ERP, or Electronic Road Pricing, is Singapore’s version of “congestion pricing”. The concept is deceptively simple and has its origins in the theoretical work of the late Columbia University economist, William Vickrey, who received the Nobel Prize in Economics for his scholarly contributions to applications of price theory to achieve public policy objectives. People who have been caught in massive traffic jams in large cities, such as Jakarta, Bangkok, New Delhi, Peking, New York, London or Paris can appreciate the simple logic behind congestion pricing. Here is the economics in a nutshell: When you are stuck in traffic in your own car, you do not only expend personal time and money but also increase the cost to others simply by being there at the same time – in other words, you are creating congestion. Economists call this a “negative externality”. So how do we encourage people to change their behaviour? Quite simply, we make it more expensive to use the roads at certain times of the day. In Singapore, this applies to taxis, too, so you, the passenger, will actually pay more during peak times. Both economic and political logic need to be applied at the same time when assessing the viability of public policy proposals, argues Jeffrey D. Straussman. The assumption is that the price mechanism – the extra charge during the peak periods (that lower right part of the meter if you are in a taxi) – will encourage some drivers to alter their work times and shift away from the peak period because they do not want (or cannot afford) the extra charge. Some might car-pool and others would use mass transit instead. The whole point is to get drivers to internalise the negative externality cost of congestion and thereby shift their behaviour accordingly.

So if the concept is simple and based on straightforward economic reasoning, why haven’t more cities followed Singapore’s lead? My home town of New York City is instructive. Anyone who has taken a taxi from John F. Kennedy International Airport to central Manhattan and has been stuck in traffic for an hour and a half for a distance that is not very great might wonder why congestion pricing has not been introduced in NYC. While traffic in NYC is nowhere as heavy as Jakarta, it can get quite heavy especially during peak hours. The Mayor of New York, Michael Bloomberg, introduced the idea a couple of years ago and it was a resounding failure. The economics remained simple but the politics was positively brutal. His proposal was heavily criticised by various groups and he was unable to muster enough support from state legislators who were crucial to the proposal’s success. In the end, his proposal died. Simple economics but hard politics.

Consider a much different example of easy economics but hard politics. Obesity is on the rise in many countries around the world including Asia. I am not a health policy specialist but I know that there are many reasons offered to explain rising rates of obesity and one needs to look at which groups in society are especially prone to obesity. Health professionals point out that childhood obesity is especially worrisome. So how does economics help? Consider what many governments do to discourage certain types of consumption – they make the cost of the product more expensive by adding a hefty consumption tax to its price. Tobacco and alcohol immediately come to mind and anyone who has purchased either or both in Singapore would know exactly what I am referring to. Economists have studied the impact of these taxes on consumption, and while I am sure there is some dispute among economists who study this topic, I will assume that very high consumption taxes will dampen demand for the product. But more importantly, the simple economics of using “price elasticity” to influence the demand for tobacco and alcohol has not experienced much political backlash. Smokers surely grouse about the high taxes and I would certainly prefer a bottle of wine in Singapore to be less expensive, but one does not sense a huge political outcry over these taxes. (Of course, government media campaigns in addition to consumption taxes help the goal of reducing consumption.) So if it works for alcohol and tobacco (and there is still debate about whether it truly does), why not do the same for products that contribute to obesity?

My home state of New York in the United States offers another interesting example. A couple of years ago, the then Commissioner of Health for the State of New York, the late Dr Richard Daines, proposed a tax on sugary soft drinks. Armed with a plethora of data and a top-notch PowerPoint presentation, the Commissioner proceeded to argue the case for such a tax. His medical science was impeccable, and though no economist, his application of the taxing principle was solid and straightforward. He made two points: First, the tax would, in his estimation, dampen demand for sugary soft drinks which he deemed to be a scourge on childhood obesity, especially among the poor. Second, the revenues derived from the sugar tax would be earmarked for child obesity prevention programmes. Unfortunately, the Commissioner was better at public health advocacy and even amateur economics than he was at politics. His ideas landed with a big, dare I say it, “fat” thud. The soda lobby lambasted his proposal and sceptical legislators viewed his proposal as government paternalism. Some grumbled, “What will they ban or try to tax out of existence next?” and his proposed tax on sugary soft drinks went nowhere.

But New York isn’t Denmark! Recently, the European country introduced a “fat tax” on products with saturated fats in a bid to combat obesity – not actually a very serious problem yet in Denmark since only about 10 per cent of Danes are considered to be clinically obese. The tax is about US$3.00 for a kilogram of saturated fat so it adds a modest amount to foods such as butter, pizza, milk, chips or a hamburger. Will it have its intended effect? It is far too early to tell, but like the congestion price and the soda tax, it is based on the simple concept of price elasticity. Unlike those examples, however, it surmounted the more difficult political test. It is now law, and it is generating some interesting commentary if the various blog postings are anything to go by.

So what is the takeaway from these examples? The simple point is that public policy proposals invariably include a mixture of economics and politics. There is an old joke that pokes fun at economists that goes like this:

Three people were stranded on a desert island and had no food. One was a chemist, the second a physicist and the third an economist. A can of baked beans floated ashore. The chemist suggested that they rub two sticks together to start a fire which would then cause combustion to burst the can open. The physicist calculated a trajectory that would likely break the can open. The economist countered, “Assume we have a can opener.”

Often the simple elegance of economic assumptions about behaviour is important to sketch out policy options. Students of public policy need to learn the concepts and assumptions and appreciate their power to sharpen their abilities to analyse public policies. Economics imposes discipline on our thinking so it is necessary and dare I say a crucial part of any policy analyst’s repertoire – but it is not sufficient. Politics is messy, it has rules but they are harder to discern than the simple elegance of a concept such as price elasticity, but this does not make politics less important in the policy process. So our challenge as teachers and practitioners of public policy is to apply the two logics at the same time if we are going to understand why some policy ideas are likely to succeed and when they are more inclined to fail. So, do you think Jakarta is ready for congestion pricing?


Jeffrey D. Straussman is Visiting Professor and Faculty Director (Executive Education) at the LKY School. He was previously Dean of the Rockefeller College of Public Affairs & Policy, University at Albany, State University of New York, USA.

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