Fishy

Not taking fish oil apparently costs Australia $4 billion per year.

The Deloitte study was commissioned by the Complementary Healthcare Council of Australia (CHC), a body which appears to be funded by the likes of Pfizer, Swisse Vitamins and Blackmores.
The press release which accompanied the research, and dutifully reported by the press, quoted CHC executive director, Dr Wendy Morrow, thus: "The report has found that the Australian community could be saving up to $4.19 billion, in terms of costs related to disease burden and premature life loss, through the preventive use of fish oils in Australians with heart disease. This research is of major significance to the industry, government and to the health and wellbeing of the Australian population."

Deloittes reckons that giving fish oil to every person with coronary heart disease would cost about $40 million per year. But a reasonable portion of the consequent benefits are in disability years avoided rather than costs avoided by the health system; it looks on a first cut that the measure passes cost-benefit on the basis of private benefits accruing to heart disease patients rather than from savings to the health system.

If the analysis hinges on benefits accruing to heart disease patients, then it's harder to make the case for that failure to take fish oil costs the country substantially. First, the people most likely to enjoy benefits from taking the supplement are likely already being advised to do so by their doctors; extending treatment to more people reduces the average efficacy of treatment. Second, while we can build a case for provision based on the private gains in monetized statistical life years, we also have to wonder why those who could benefit aren't already taking supplements. Is it because they can't afford it, or because doctors are less convinced than are Deloittes about the potential health benefits? If the former, don't we need to be sure that giving money to poor heart patients in form of subsidized fish oil does more good than giving money to other people in other forms?

I'm always a bit skeptical about studies claiming benefit to cost ratios of 39:1 - their base case result where net benefits are a billion dollars rather than the headlined $4 billion.

But if the Australian government had twenty seven million dollars to spend (the gross tallied cost in the baseline case), it probably does better buying fish oil on competitive markets and giving it to sick people rather than, purely hypothetically, throwing it at a company best known for making the kind of cars that increase Australia's need for a carbon tax.* So long as the fish is harvested sustainably I suppose.

* Update: It's actually unclear whether they do; cars that are more expensive to drive because they're worse on gas will emit more CO2 per mile but will be driven fewer miles. Net results then are ambiguous.

Oh not another one

UK Parliamentarians are throwing around aggregate social cost figures mostly consisting of costs borne by drinkers as representing costs to British taxpayers of harmful drinking. Nanny state Labourites? Nope. A Tory. Read the excellent Chris Snowdon for the details.*

This is the corruption that comes of social cost studies that disguise private costs as publicly borne unless you check their work more carefully than any journalist or parliamentarian ever will.

* I'll quibble with Chris on a couple minor points. Crime costs can be legitimate social costs, even if they're not a financial hit to the government. It's just that these studies utterly confound "committed a crime after having recently had a drink" with "crimes in which alcohol was causal and which would not have occurred but for the consumption of alcohol".

The market for dodgy

If a consulting firm is asked to produce a dodgy report, and delivers what the client wants, where's the harm? Bill Kaye-Blake asked that last week.

Monday's New Zealand Herald reports:

Crucial figures for the $68.5 million Claudelands Events Centre were influenced by city council staff who increased the number of events and inflated the revenue expected in the first three years of operation.

A $30,000 peer review of the original "overly optimistic" 2009 Claudelands business case has revealed Hamilton City Council staff told the original author of the business case, Campbell Consulting, to increase the already optimistic number of events in the business plan by up to 50 per cent. [Emphasis added]

Staff also used higher revenue projections than those provided in the business case in the council's 10-year budget - inflating the figures in the first three years by between 6 and 11 per cent. But at the same time they lowered the operating costs by 6 to 9 per cent, which made the budgets look more attractive.

Hamilton mayor Julie Hardaker said she was waiting for chief executive Barry Harris to complete his investigation into what happened and refused to speculate on whether the council had been deliberately deceived. Council staff had been unable to explain the variation.

So instead of turning a $1.1 million surplus, Claudelands returned a $1.5 million deficit.

You can argue that Campbell Consulting is entirely blameless. They were asked by Council to provide revenue forecasts under a few different scenarios and did so to the best of their ability. Or, you can argue that they were party to a fraud on predictably gullible Hamilton voters undertaken by the Claudelands's backers within Council; they either knew or ought to have known that the revised figures requested by the funders were hopelessly unrealistic and only really had evil applications.

Voters seem to love Councils putting up big stadiums and events centres - they want to believe the lie that the venue will either turn a profit directly or will stimulate sufficient indirect economic activity to cover its costs in the grand scheme of things. If Campbell hadn't provided the case, somebody else likely would have. There's a demand for dodgy ultimately because voters like it, at least in the short run. I still think we ought heap scorn on those supplying that demand to increase the reservation price for producing dodgy reports. But in a world in which voters have no individual incentive to sort out which firms specialize in dodgy and which ones turn down RFPs where the funders make pretty clear what kind of result they want, it probably doesn't do much to solve things.

HT: Fair Play and Forward Passes, where Sam Richardson writes:

It is a sorry state of affairs, but by no means an isolated event. Hamilton ratepayers don't have to look too far to see a similar story with the V8 supercar race a prominent example. Unfortunately the same story has been repeated all around the world - overstated measures of benefit, understated measures of cost and a projected bottom line that is much more palatable than what actually eventuates.

V8 Supercar Races, Events Centres, Stadiums, Monorails, Escalators to Nowhere...

Anti-paternalism

Dr. Michael Keane writes in the IPA Review:

Consider a low-socioeconomic status individual who is smoking, drinking, gambling, eating junk, spending on frivolous retail purchases (a ‘shopping addict’) and having indiscriminate sex (‘sex addict’). Does she or he really employ sophisticated risk management equations and decide that the benefits outweigh the costs?

Arousing public anger at those deemed unworthy of the privilege to make choices is a dangerous tactic. However, it is probable that many of the more vocal public health academics do genuinely believe that they, the elite, have a paternalistic duty to control the incapable masses.

As every dysfunctional behaviour can, without many inferential steps, be related to health expenditure, appeals to such imperative have few logical limits. The folly of enforcing interventions against peoples’ will on the basis of economic analyses of the cost to the state is obvious, and educated health professionals should know better than to use such divisive and emotive arguments.

If the growth of the Nanny State is to be curtailed, policy makers must have the confidence to stand firm against the mutton of opinion even when it is dressed up as the lamb of science.

Hear hear.

Even worse, most numbers cast as representing social costs, which most folks interpret as costs to them via the state, consist almost entirely of costs borne by drinkers, smokers, and gamblers themselves. The healthist beancounters don't just assume that the addicts fail to employ cost-benefit analysis; they rather assume that such consumption has no associated benefits. That's how they get to count private costs as being social. Any evidence of potential market failure through imperfect information or irrationality is taken as sufficient reason for dismissing all potential consumption benefits. The argument of course proves too much.

Gimmie some sugar

Ah, those nutty public health folks. Is it plausible that sugar is bad for your health and is one of the reasons for increased diabetes rates? Sure. But that sure isn't sufficient basis for this:

Sugar is so toxic it should be controlled like alcohol, according to new report that goes so far as to suggest setting an age limit of 17 years to buy soda pop.

It points to sugar as a culprit behind many of the world's major killers — heart disease, cancer and diabetes — that are now a greater health burden than infectious disease.

A little sugar "is not a problem, but a lot kills — slowly," says the report to be published Thursday in Nature, a top research journal.

And Count Chocula will be subject to plain packaging legislation? You think I'm kidding...

"We recognize that societal intervention to reduce the supply and demand for sugar faces an uphill political battle against a powerful sugar lobby," the researchers say, "and will require active engagement from all stakeholders." But such "tectonic shifts" in policy are possible, they say, pointing to bans on public smoking, limits on alcohol sales and condom dispensers in public washrooms. "It's time to turn our attention to sugar."

Ah yes. The powerful sugar lobby. They are indeed responsible for many real ills: sugar tariffs and subsidies in the US. But the public health guys, as usual, completely discount an alternative explanation for why people might oppose sugar regulation: that we enjoy eating it.

How long until some dodgy outfit comes up with a Cost of Sugar to Society study that puts together a table of aetiological attributable fractions for the burden of various diseases due to sugar consumption, tallies the costs to the public health system of sugar-related illness (80% of total dentistry expenditures, 50% of diabetes, etc...), adds to that all of the subjective intangible costs experienced by those incurring downside consequences from eating sugar (and all of the costs of growing "harmfully-consumed" sugar), assumes zero private enjoyment from eating tasty sugary snacks, and publishes a massive social cost figure for sugar use that will help fuel demand for sugar regulation?

HT: @JoelWood

Update: Here's Barbara Kay in the National Post on sugar taxes:

Taxes are justified as a deterrent for any substance we know to be harmful in quantities, because we all pay for the health care of people who are negligent of their health in the over-consumption of stuff they know is bad for them.

There is no logical end to that argument.

Kreskin, again

Last week I pointed to Richard Edwards' plenary address on tobacco control:

He cites increased "social smoking" among young adults - folks that might have a cigarette while out drinking, but otherwise don't smoke. I'd find it a bit surprising if that level of smoking resulted in substantial negative health effects. Says Edwards "The frequency of XS alcohol consumption, and its role in promoting uptake and maintenance of smoking and undermining quitting, suggests co-interventions may be needed and that we cannot tackle smoking in isolation." So anti-alcohol policy may be part of anti-tobacco policy...stay tuned. [emphasis added]

And today the excellent Chris Snowdon points to TV3:

"The problematic aspect is that since most smokers want to quit, and here, because of the high occurrence of hazardous drinking in the New Zealand situation, they have difficulty quitting," Associate Professor Wilson told NZ Newswire.

Smoking is estimated to cost $1.9 billion in direct costs to the health sector, but the social cost has been estimated as high as $22.5bn.

The researchers recommend lawmakers explore:

• Higher alcohol taxation, given some evidence that tobacco consumption has been found to decline with higher alcohol taxes.
• Raising the legal alcohol purchase age. US evidence shows this reduces adolescent smoking.
• Explore policies to further decouple smoking and drinking by making the outdoor seating areas around cafes and pubs smokefree.
• Consider additional funding health services to to address both heavy drinking and smoking cessation together.

Where to start. First, smoking does not cost the health system $1.9 billion. Here's the post where I summarized things. Long story short: MoH effectively assumed that smokers would live forever and never impose any end-of-life costs on the government if they weren't smokers. Surprisingly, I can no longer find the $1.9bn figure on the MoH website. The best I can now find is their 2010 submission on the proposed excise changes where they wrote:

The social costs of smoking have been estimated at 62,800 life years lost to tobacco-related premature deaths, and 19,000 quality adjusted life-years lost to tobacco-related illness [¹] . A 2007 estimate put the cost of smoking to the health system at $300 to $350 million per annum; however current work within the Ministry of Health suggests that figure may be as high as $1 to $1.6 billion per annum [²].

...

2. Please note that this analysis is work in progress and methodological issues are currently being addressed.

I'm not sure of the source on the $22.5bn figure. But there's no way you can get a number that high without including smokers' spending on tobacco and a rather long list of other costs borne by smokers, with little consideration of that at least some smokers enjoy smoking.

But last week's prediction was right. I hate being right. I hated it last time too.

$139,000?

Ah, the lazy summer season, when lobby groups can sneak pretty much any kind of rubbish into Radio New Zealand's Inbox and have it be treated as news. Here's the latest:

Cigarettes rose in price on 1 January, for the third time in 21 months.

The price of a packet of 20 cigarettes is now about $14 and a pouch of loose tobacco is about $31.

The Quit Group estimates each smoker costs the economy $139,000 per year in health and other costs.

Chief executive Paula Snowden says the group returns $38 to the economy for every $1 it is funded, but has had no increase since 2007.

She expects the price increase to save the economy up to $73 million.

Let's start with what's right about the piece. I have no reason to believe that they've lied about the price of a packet of cigarettes. The rest isn't so good.

Recall that GDP per capita in New Zealand is somewhere around $45,000*. So Snowden is claiming that a smoker costs "the economy" three times per capita GDP. And recall that median income is less than per capita GDP, which also includes payments to capital. Snowden's number is three times that. It's utterly implausible.

Next, she expects the price increase to save the economy up to $73 million. If flipping a smoker from smoking to non-smoking saves those costs, then she's expecting about 525 people to quit. If only a fifth of costs are avoidable and the rest are sunk, the price increase results in around 2600 people quitting smoking. But the last survey numbers I'd seen have about 22% of the population aged 16-65 smoking. Again, see asterisk below, but there are about 4.5 million people in the country. Let's be conservative and say 300,000 smokers; 2,600 quit. This is all ballpark, but it suggests maybe one percent of smokers are expected to quit with the price hike. And, that's with me granting the $73 million. I'd really need to see the workings to figure out what they're doing here.

Finally, let's aggregate up for a final plausibility check. Say there are 300,000 smokers in the country. If they each cost $139k, that's about $41 billion that Paula Snowden claims smokers are costing the country. And even the ridiculously high Collins & Lapsley numbers have smoking costing all of Australia only $32 billion. And there are just a few more people in Australia than in New Zealand.

Every decent journalist should have a few of these numbers just rattling around in the back of his head to give numbers like Snowden's a rough plausibility check. It's not plausible that a smoker costs the country three times per capita GDP. That's the first bit of stink. If the implied participation elasticities are as suggested by a quick ballparking, then we'd wonder about the costs imposed on poor people who continue to smoke even if everything else is right. That's the second bit of stink that should have been queried.

But the biggest howler is that Snowden claims a 38:1 benefit to cost ratio for her organization's work.

When did they stop teaching scepticism in journalism school? Radio NZ, you've been pwned by The Quit Group. You can do better.

*Please note that I'm working off memory for a lot of these figures. No Internet at the guest house in Nelson where we've been avoiding earthquakes for the last week, so I'm burning through Vodafone Pay-As-You-Go data. Back in quakeland tomorrow.

Previously: Bogus MoH figures on smoking costs.

Update: Sarah Woods of The Quit Group advises that the $139,000 figure is the present discounted value of costs, with the estimate based on Des O'Dea's prior figure (which included a raft of costs borne by smokers that don't really count as costs to "the economy") and with ROI calculations undertaken by BERL. I'll have a look through their report. But Radio NZ has inflated The Quit Group's figure by an order of magnitude by transforming a present discounted value figure into an annual cost figure. At an 8% discount rate, the PDV of $139k is about $1.7 million. And let's remember exactly what the O'Dea report concluded about the costs smokers impose on "the economy":

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]

Costs of Smoking: Auld edition

Chris Auld makes the very sensible point that we cannot tally smokers' costs to the public purse by simply adding up the cost of treating smokers; rather, we need to compare the total lifetime costs of smokers with the total lifetime costs of non-smokers. I'd add that we'd also have to adjust for that smokers would likely be greater health risk takers even absent smoking. That's at pretty strong variance with the procedure that New Zealand's Ministry of Health used.

But Auld raises the more interesting question: what happens if leading a healthy lifestyle winds up costing the government more because you spend longer as a superannuitant and you wind up dying of prolonged aging-related diseases rather than the quicker and cheaper vice-related diseases?

If healthy behaviors wind up increasing lifecycle health care costs, we should either subsidize less than we otherwise would, or perhaps even tax, healthy behaviors. Healthy behaviors in this scenario benefit the person exhibiting the behavior but impose costs on everyone else, and this logic demands that we discourage healthy behavior relative to whatever policies we would otherwise have enacted.

This argument does not sit well with me. I dislike the argument that we should penalize smokers because of the health care costs of treating smoking-related illnesses, and I dislike the argument that we should penalize non-smokers because of the health care costs of treating smoking-related illnesses. These external effects smack of standard pecuniary externalities—externalities that operate through market mechanisms and do not require policy to fix, although they are not conventional pecuniary externalities per se. The perverse aspects of arguing that we need to control externalities which are artifacts of government programs is illustrated more forcefully by studies which treat the cost of investigating, arresting, and imprisoning illicit drug users as external costs of drug use itself! (“We are arresting you for this doobie.” “Why?” “Because the costs of arresting you are a negative externality!”)

Cost of drug use figures that count the costs of enforcing prohibition regimes are best deemed police agitprop.

Mutant smoking statistics [updated]

TVNZ reports:

Australia's Cancer Council said the Senate should end the political delays and get on with passing the legislation, with authorities estimating smoking now kills 15,000 Australians each year and costs the health system $32 billion.

Oh please. What's the source on the $32 billion? Almost certainly Collins & Lapsley, who found that the total costs of smoking in Australia were $32 billion. How much of that $32 billion was health? $318.4 million. Is that much much less than the aggregate tobacco excise tax take? Certainly. I'm just going to copy Collins & Lapsley's tables here.

Here we have tangible costs divvied up by category (intangible costs of premature death and the like make up the bulk of the purported costs of tobacco and aren't in this table). Note that we've disputed the alcohol figures rather strongly. But what do we see? By C&L's figures, tobacco costs the Australian health system $318.4 million. That's somewhat less than the figure claimed by the Australian Cancer Council, assuming that they're quoted correctly [Update: see below]. Two orders of magnitude less. The costs to the health system are ONE PERCENT of the costs cited by TVNZ.

As for overall costs to the country, here's Collins and Lapsley again:

So tobacco leaves the Australian federal government up $2.7 billion and state governments up $833 million.

But the Australian Cancer Council gets to build support for beating on tobacco by helping to make folks think that smoking costs the health system $32 billion, again assuming that they've been correctly cited or that I've not missed their post clarifying that they'd been mis-cited. [Update: see below.]

And, this isn't the first time that the total C&L tobacco cost figure has been cited as a cost to the health care system; here's Chris Snowdon fisking a May story from The Age.

I wish TVNZ would check its sources from time to time. But, they've provided my nomination for Stat of the Week.

Update: Paul Grogan of the Australian Cancer Council emails noting that they're not the source of the $32b figure: "I am not aware of any Cancer Council Australia document that claims tobacco costs $32b in annual healthcare costs." Excellent news. The TVNZ / Reuters story linked then either is misleading or misquotes and ought to be updated. I trust that the Cancer Council will soon be issuing notice to Reuters that the annual health care costs of smoking are one percent of the figure Reuters quoted. They might also note the billions in tobacco excise tax revenues that swamp any fiscal cost smokers impose on the health care system.

More things that aren't externalities

Roommates impose costs on each other; the decision to flat with someone and the agreements governing that arrangement internalize those costs. Nuisance costs roommates impose on each other are not an externality of any policy relevance.

I hope they don't come up with a policy solution to this one:

Using census data and analysis of an informal pricing survey of 114 users of [excised].com (a “share bills” app for roommates which I co-founded), I estimate that solving the loud sex problem alone would be worth $1.1-1.9 billion per year to the US market. Mitigating all unpleasant noises would represent a market of around $12 billion per year for the population we considered.

Ok, maybe they're just thinking of how much they could earn selling noise-reduction devices and taking a pretty high upper bound. But:

What is to be done about this cacophony of copulation? Noise machines and comfortable headphones would probably be the cheapest way to solve to problem, but these solutions are unlikely to be sufficient. Improved building codes in areas with high population density would put the burden on developers, but perhaps construction could be stimulated with tax incentives. Or perhaps creating a standardized rating system would be a good way to bring sound isolation issues out of the closet and let the market decide how much peace and quiet is worth.

Or, we could just leave people to choose their roommates based on a broad bundle of characteristics and to sort out amongst themselves how to deal with disputes.

Again, as helpful reminder: building owners install any feature, including noise-proofing, up to the point where the discounted value of the increase in expected rental flow matches the cost of the building feature. Tenants sort based on cost and on disutility of noise. If asymmetric information between landlord and potential tenant on noise issues were sufficiently large and if enough potential tenants cared, buildings would already be third party certified for noise characteristics.

It's a bit embarrassing that Forbes gave space to what's effectively an advertorial for the roommate bill-splitting website on the hook of a big dodgy cost number extrapolated from 114 users of a website designed for folks who can't otherwise figure out how to split their own bills without rancor.

Rugby Benefits

The latest Rugby World Cup benefit estimates has this gem:

If New Zealand is able to capitalise on their hosting of RWC 2011 to attract more events, as well as developing its reputation as a destination for sports tourism, combined with continued development of domestic involvement in sport related activities, the longer term impacts could be:

Consumer expenditure in the New Zealand sport economy by the end of the decade:
     US$1 billion (NZ$1.2 billion)
Sport-related economic activity in the New Zealand sport economy by the end of the decade:
     US$11.7 billion (NZ$14 billion)
Number of people working in sport-related occupations in New Zealand by the end of the decade:
     Between 52,000 and 58,00

You sure can pack a lot into conditional statements. If we make a whole pile of other investments of unquantified cost, the long-term benefits of the Rugby World Cup (ignoring the costs of those ancillary investments) could be huge!

The big numbers have been getting a fair bit of press. Note that they're aggregated over a decade with no hint about whether any kind of time discounting's been used. Maybe that's the expected horizon of effects, or maybe it's just a convenient period for getting a big number. And never mind that "economic activity" doesn't have any particular connection with benefits: you have to net costs from measures of international visitor spending to get the activity's benefits.

They say international visitors, net of substitution and time switching, will provide consumer spending of $411 million that would not otherwise have taken place. But again, that's not net of the cost of providing services. And, if it includes visitor spending on tickets, the only way it counts as a benefit is by defraying the costs of hosting the thing; in the absence of the RWC, that portion of spending would disappear but so too would a not unreasonable quantum of cost.

Intervening for the surplus

Paul Walker asks whether consumer surplus can ever justify government intervention. Arguing against Sam Richardson's contention that consumer surplus from the Rugby World Cup can justify government intervention, Walker notes:

Three question came to mind for me: 1) If CS is a reason for government involvement in a project then isn’t this a reason for government involvement in almost everything? I meant the CS generated by computer software, for example, must be huge and thus should the government not subsidise Bill Gates?! 2) If there really is enough CS to justify government involvement doesn’t this tell us that that real issue here is one of the pricing of the event? If the council priced in such a way as to capture the CS, e.g. some form of price discrimination, then evaluation of its investment would be easy, just look at the profits generated. 3) If there is a large amount of CS to be captured then why have the council involved at all? Why not just let the private sector run/build the event/stadium, pricing in such a way as to capture the CS, and let the event stand on its own economic feet? No government involvement is necessary.

What's Walker missing? If there's a market failure preventing the realisation of potential consumer surplus. Imagine that the local folks putting together a bid for the RWC set up their bid optimally with respect to maximal extraction from those who could attend games: lots of tiered pricing, lots of tied sponsorship arrangements, lots of merchandising. And the bid were just shy of making it. And, suppose further that each and every Kiwi got $10 in warm fuzzies just from pride in knowing the event were here being held. If there's no market in which they can express their preference for the event's being held, and if the event wouldn't be held absent the contribution from those folks who'd never attend a game but who would enjoy benefits, then that can be an argument for government intervention.

Now, the warm fuzzies can be internalized through sponsorship arrangements: if those not attending the game get warm glow from the games, sponsors may capitalize on that warm glow. But we'll specify that the $10 per person is over and above any amount that can be capitalized on by sponsors.

In that case, you could argue for government involvement. You need a market failure of some sort to make the CS argument for intervention hold. It's not nonsensical on first principles. But it's rather unlikely that we've been made better off by the investment. Why?

First, we'd have to know that the potential CS made it worth the cost.

Second, we'd have to ask why alternative mechanisms for solving the coordination problem among those experiencing warm glow weren't attempted. KickStarter is an awesome mechanism for this. You put up your project and your required funding threshold; folks pledge money and are only called on for funds if the collective willingness to pay is high enough. Sure, there could be free rider problems, but there are ways of turning assurance contracts into dominant assurance contracts. If RWC never even bothered trying KickStarter and went instead immediately to the guys who can use guns to force your contribution, we might be sceptical that they really believe that there are net gains to the public (or that the latter is just easier for them).

Finally, we'd have to weigh up whether the losses from bearing the market failure - the forgone benefits - really justify the costs of intervention.

I'd put 20:1 against that the NZ government's investment in RWC meets any kind of sane cost-benefit analysis. There are states of the world in which such investments can be optimal; we're just rather unlikely to be in that world.

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.