Big Government, Bad Policy, and Rising Health-Care Costs

Call it the war on supersizing. Mayor Michael Bloomberg wants to restrict the size of New Yorkers' soft drinks. He's been on the vanguard of public health policy before, with a 2002 indoor smoking ban and a trans-fat fight in 2006. Later efforts -- including an attempt to restrict food stamp recipients' ability to buy sugary drinks and a failed soda tax -- have been decidedly less successful.

There are logical governance reasons for this nanny-state meddling. Obesity is a major health issue, and New York State has one of the costliest health-care burdens per person in the United States. Controlling obesity would help control out-of-control health-care spending, or so the argument goes. However, banning soda may be the wrong way to rein in rising obesity rates and control out-of-control health-care spending -- but not for the reasons you might think.

Don't tread on my waistline
Americans love their freedom of choice. Many were vocal on the issue after news broke of Bloomberg's soda crackdown. "How dare the government infringe on my right to suck down an entire toilet tank's worth of high fructose corn syrup?!" they cried. What most failed to realize is just how influential the government really is on its citizens' health choices, directly and indirectly. It's the indirect influence that I'd like to talk about. The source of our modern obesity epidemic, a plague of cheap corn, can largely be laid at the government's feet.

The cost of commodity corn ranged near $2 per bushel for decades before its recent spike, and about 10% of that cost was subsidized by direct government payments to farmers. From 1995 to 2009, corn farmers received an average of $5.3 billion a year in direct and indirect subsidies. That amounted to about $0.48 of total subsidies per bushel of corn in 2005. In this last "cheap" year for corn, subsidies made up a quarter of corn's total commodity price.

Michael Pollan explains the history and effects of the American government's role in corn production with far more depth and detail than I ever could. The best distillation of his why-we-eat-what-we-eat best-seller, The Omnivore's Dilemma, is this: "When food is abundant and cheap, people will eat more of it and get fat." And corn, easy to grow, easy to store, and extremely nutrient-dense, makes an ideal starting point for all manner of inexpensive byproducts.

Amber waves of really cheap grain
Modern American agricultural policy goes back to the early '80s, when major grain buyers Cargill and Archer Daniels Midland (NYS: ADM) began to directly influence the language of congressional farm bills. Commodity corn has been sold at the same low levels, roughly $2 per bushel, ever since, with the exception of a wide-ranging commodity price spike that began in 2007. The primary reason for this recent price increase is a massive surge in exports to China, which means we're now effectively subsidizing a future Chinese obesity crisis, too. Still, the cost of commodity corn remains only a small part of our final food costs.

Cheap corn has made its way into about a quarter of the groceries found in most supermarkets, almost all of it processed. A box of cereal is worth about $0.08 to farmers. It's "magically delicious" thanks to science, not farm labor. The industrial-scale mass production of cheap meat is possible because there is always enough cheap corn for feed -- over a hundred million tons of the stuff is gobbled up by farm animals each year.

The hidden health costs of corn
American waistlines were largely under control before the plague of cheap corn. Obesity trends changed very little from 1960 to 1980, but from 1980 to 2000, American obesity rates doubled. In 2010, more than 78 million adults, and 12.5 million children, were obese. This obesity epidemic costs the country about $190 billion a year, or 21% of all health-care spending, according to a Cornell University study released earlier this year.

People who choose to drink that jumbo Slurpee do affect you when you pay higher taxes for Medicare and Medicaid. These programs combined to cover 93 million people in 2010, and it's worth noting that the poor and elderly are more likely to be obese than the general populace.

A chart put together by my colleague Morgan Housel shows the impact cheap corn has had on the nation's youth, though he might not have intended it to:


Source: Morgan Housel.

It costs more to raise a kid today than it used to, but that money is spent in different ways. A typical child of the '60s cost his parents $44,600 in 2010 dollars to feed over the course of his youth, and $7,400 to keep healthy. Today's child costs his parents $36,300 to feed, but $18,200 to keep healthy. The prevalence of childhood obesity has more than tripled over this time frame, with most of that increase coming after 1980.

Time to shape up
Obesity clearly has an impact on America's health-care spending. We spend more on health care per person than any other country by a wide margin, but we also happen to be the fattest industrialized country in the world by a wide margin. There are certainly many other factors behind rising health-care costs, but obesity is such a big part of the picture that ignoring its impact can only result in an incomplete response to the problem.

So what's the solution? Bloomberg would outlaw unhealthy food to force healthier behavior. The U.S. tobacco industry's long battle with the government is proof that government pressure can work. In the decades after the landmark 1964 surgeon general's report on smoking created widespread public awareness of smoking's health costs, cigarette use has been cut in half. Overall rates of lung cancer have been in decline since the early '90s.

The benefits of corn subsidies ultimately flow to hundreds of powerful food companies, whose continued success rests largely on their ability to get the public to eat more cheap corn byproducts each year. McDonald's (NYS: MCD) wouldn't have gotten far without cheap corn. Even its french fries, when fried in corn oil, owe much of their final calorie content to corn. Pepsi (NYS: PEP) and Yum! Brands (NYS: YUM) couldn't have teamed up to bring you the Doritos taco, which can barely be called "food" except for its small amounts of unprocessed vegetable toppings.

There are billions -- perhaps trillions -- of dollars at stake on both sides. If the government wants to reduce health-care costs, hindering our access to unhealthy food is weak and hypocritical as long as public money supports big corn. A much better option would be to attack the problem at its source, changing and removing wrongheaded subsidies so that American farmers have reason to produce healthier foods at costs the American public can handle. Let's admit that government can and often does influence consumer behavior, and use that knowledge to craft better policy.

Will that ever happen? Somehow I'm doubtful. But it may be the only way that works.

At the time this article was published Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services have recommended buying shares of McDonald's and PepsiCo. Motley Fool newsletter services have recommended creating a diagonal call position in PepsiCo. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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