Tuesday, July 19, 2011

Overstating tobacco costs

Remember how I've been banging on about how cost studies get used dishonestly to push illiberal policy? Here's the NZ Herald (HT: @CJSBishop):
Smokers may complain that they are being victimised, but their arguments about personal liberty founder on a fundamental point of principle: you don't have the right to hurt yourself if you are hurting other people in the process.
Three Act MPs voted against the law requiring products to be kept out of sight, because they supported "rational personal choice". But is it rational to avail yourself of a product which inescapably harms the user when used as directed? Certainly not, when that harm becomes a drain on the public health system and society as a whole.
The tangible economic costs of smoking - in health care and loss of production because of illness or early death - are of the order of $1.7 billion a year, almost twice what is collected in tax.

Anyone claiming the right to set fire to that sort of public money needs to come up with an argument more cogent than personal liberty.
To their credit, Maori MPs are driving this. Associate Health Minister Tariana Turia introduced the latest bill and Hone Harawira, when a Maori Party MP, forced a select committee inquiry into the tobacco industry.
I'd like to thank the Herald for making my argument for me.

IF smokers actually cost the health system substantially more than they contribute to the health system via tobacco excise taxes and to the fisc in general by drawing lower overall superannuation payments (due to premature mortality), there could be a case for increasing tobacco excise taxes. We'd need to do some analysis to make sure things held at the margin, but there'd likely be a good case for increasing taxes.

Here the Herald is citing not the MoH's bogus figure on the health costs of figure (fisked here). Rather, it's Des O'Dea's commissioned report for ASH and SFC. Here's the bit from the O'Dea study that the Herald didn't cite:
Leaving aside these difficulties, it is certainly reasonable to assume that most of the additional health-care costs caused by smoking are borne by non-smokers through additional taxes (smokers do pay some share of these taxes). Also it is reasonable to assume that most of the 'lost  production' costs of premature mortality and increased morbidity are borne by smokers and their households (though there is some loss of profits also, and of tax revenue to government). A considerable amount of work would, however, be needed to get precision on these matters.

Without trying to calculate a precise estimate of 'external costs' it does seem reasonably apparent that the tax contribution of approximately $1 billion annually by smokers exceeds substantially the external costs of smoking which fall on non-smokers. If savings on pension costs from premature mortality of smokers were added as well the net fiscal contribution of smokers, to the fiscal gain of non-smokers, would be further increased. [emphasis added]

To reiterate our point, however, our argument for continuing, and increasing, high taxation of smoking is not based on an 'externality' argument. It is based on the argument that the total costs of smoking are high, and that taxation is an effective means of reducing these total costs. By far the largest component of these total costs, however it is valued, is the 'health loss' experienced by smokers themselves – their lost years of life and diminished quality of life. (p.46)
Read that again: even without counting savings to the pension system, smokers cover their costs about three times over. Des O'Dea is dead honest in his work here: he's not trying to sell private costs as being social. ASH wanted a number that included private costs; he gave them one. And, he honestly said that the case for increased taxation is to reduce the costs that smokers impose on themselves. That's an honest paternalism.

Unfortunately, once these figures get out into the wild, they're interpreted as costs smokers impose on others. Here are the components of O'Dea's $1.7 billion figure (Table B.1, p.44); you judge for yourself whether the Herald's right to call these costs on the public:
  • Reduced production from mortality: $570m (I call private)
  • Reduced production from morbidity: $280m (I call private)
  • Resources diverted for tobacco consumption: $650m (I call batsh*t insane to consider this public: it's what smokers spend on their cigarettes net of excise taxes)
  • Resources required to treat induced diseases and other consequences: $350m (public external transfer cost. This is the real cost to the health system)
  • Smoking-induced fires: $15m (largely private, barely worth arguing about as such a small part of the overall figure)
So more than a third of the $1.685 billion is smokers' spending on cigarettes and only $350m are real external costs through the health system.

I wish that the Herald's editorial writers were just a bit more careful in how they present these things.

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