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.

Congratulations Ruth!

Ruth Richardson, former NZ Finance Minister and largely responsible for pushing through the second necessary set of economic reforms in the early 1990s, is to be awarded an honourary doctorate at Canterbury's graduation ceremonies this year.

The only graduation ceremony of any kind that I've ever attended was my high school grad. Circumstances and lack of interest kept me away from the others, though I really regret having missed Denis's awarding of the Canterbury Research Medal last year; I'd forgotten that that award was tied to grad rather than being a separate event.

I will be attending this year's ceremony. And I hope that the Gnomes of Canterbury do something suitable to celebrate.

At the Australian Conference of Economists last week, I enjoyed Judith Sloan's presentation on the horrors of Australian labour market regulation. I understand that Ruth takes a reasonable amount of the credit for sorting out our equivalent messes. And, for the most part, those reforms have stuck: the current Employment Relations Act isn't as clean as Ruth's Employment Contracts Act, but the main features are still there. All of New Zealand effectively remains a "right to work" state; there are no closed shop unions, and union membership remains voluntary.

Congratulations Ruth! And excellent that the University of Canterbury is extending her this well deserved honour.

Offsetting effects: food police

According to foodservice consultancy Technomic, consumers are also being driven to excess by cultural moralizing over nutrition. That is, as expanding waistlines make more headlines (in Canada, 62 per cent of people are considered overweight, with a quarter qualifying as obese), proselytizing over healthy eating has led many folks to do the opposite.

"Most consumers, when polled, say they follow their 'own diet.' That could mean that they're good Monday through Friday, and then on Saturday and Sunday say, 'To hell with it!'" says Ron Paul, president of Technomic. "They're rejecting the food police, in effect."

Some of the more punk-rock offerings this summer include the aforementioned doughnut burger; pancake breakfast ice cream, featuring maple syrup, chunks of buttermilk pancake and bacon; deep-fried Pop Tarts; mac-and-cheese pizza; and a Monster Burger -- one kilogram of beef, half a pound (0.2 kilogram) of bacon, spiced cheddar cheese and all the fixings -- big enough to feed a family of eight.

From the Winnipeg Free Press, HT: Mom.

Sorting out causality on this one would be tough; I don't know how you'd instrument around that places with more nanny messages are likely the places with worse eating habits ex ante. But fun nevertheless.

And the deep-fried butter discussed in the article does sound tempting....

Not comforting

From Saturday's Christchurch Press.

The light green box is my guess about where our house is relative to the three main fault lines. I love that there's a new one that seems to run North-South down Pine street, next block over from us.

The Press reports the chances of another 6.0-7.9 quake run 23%; 94% chance of a 5.0-6.

Labour’s Tax Policy:

There were few surprises in the policy announced Thursday, as much of it had already been announced or clearly foreshadowed. The key policies are

• zero income tax on the first $5,000 of income;
• an increase in the top marginal tax rate to 39% for incomes over $150,000;
• exempting fresh fruit and vegetables from the GST (technically, zero rating them);
• a 15% capital gains tax.

I would stand to benefit quite nicely from these changes, but I still don’t like the policy. Let’s take each item in turn.

 

In principle, I don't mind the $5,000 tax-free policy. There are fixed costs to working compared to not working, which are not recognised when one has to pay tax from the first dollar earned. I could see a tax-free bracket having a non-trivial effect on decisions on whether to enter the workforce part time or not at all, particularly if the tax-free threshold could be lifted over time. A tax-free bracket is also a much more moral way of ensuring that workers receive a living wage than would be an increase in the minimum wage. I find it difficult to believe, however, that the other policies in the package could make up for the cost of exempting the first $5,000 of income from tax for every taxpayer. This is the unpleasant arithmetic of tax policy: Tax cuts at a particular income level only have an efficiency-relevant impact on the behaviour of those taxpayers whose marginal income is at that level, but they give a tax reduction to anyone whose income is at that level of higher; cuts in tax rates at the lower end, therefore come at a large fiscal cost for a only a small change in reduced disincentives.

 

The proposed increase in the top rate is silly. There is such a small proportion of the country’s income earned at those levels that the policy can hardly be expected to bring in a significant amount of revenue, but will surely lead to the usual tax avoidance games. It is hard to escape the conclusion that this is a purely symbolic policy designed to make people with incomes less than $150,000 feel good that those with more income are being taxed more. If so, it is appealing to a rather ugly side of human nature.

 

The zero-rating of fresh fruit and veg might just about be the most appallingly cynical election bribe the country has ever seen. I am not saying that it would be the most costly election-bribe policy enacted; that mantle would have to go to either National Superannuation or interest-free student loans. Rather, I suspect that this policy would have the highest cost relative to benefits, with benefits defined according to a policy’s proponents’ underlying preferences. Consider first the costs of the exemption: of relatively small importance is the lost revenue that will need to be made up elsewhere. More important, is the additional transactions costs in compliance, enforcement, and definitions that the policy would introduce. Much worse, is the erasing of the line in the sand that currently stands between a clean GST and one with messy exceptions; once we start on this slippery slope, there will be no clear line left to defend against creeping exemptions and tweaking of the GST system likely to be proposed in the future. Against this, are two putative benefits. First is the idea that the exemption will make the GST more progressive. I haven’t seen any data on this, but I would extremely surprised if taxing fresh fruit and were not a progressive tax; if one wanted to use the tax system to redistribute from poor to rich, I suspect the proposed exemption would rank second only to high cigarette taxes as a method for achieving that objective. The second supposed benefit is the health benefits from eating more fresh fruit and veg. The trouble is that nutritionists tell us there is no nutritional advantage to fresh over frozen or canned, so unless someone can show some convincing data giving a significant elasticity of demand for fresh fruit and veg that does not result from a substitution away from preserved fruit and veg, we would need to dismiss this benefit as well.

 

Finally, there is the proposed capital gains tax. I have never been a fan of taxing capital gains, but this is a complicated area that needs its own post. There are certainly good economic arguments on both sides. I do hope, however, that media commentators are careful to check the devil in the details. Just because famous economist X is in favour of a capital gains tax, calibrated in a particular way, does not mean that he or she is in favour of any capital gains tax. Neither statements like (“Treasury is in favour”) or government responses made before the details are known (“dagger through the heart of growth”) will move the debate along very far here.

 

Offering the other kid’s bat.

“Offering the other kid’s bat” is a metaphor I use in my welfare economics class for a certain type of government policy. The reference is to an experience I had way back when I was in Standard 3 (translation for younger New Zealanders, Year 5; translation for North Americans, 4th grade). We used to play schoolyard cricket at lunchtimes. The two key things to understand about our version was that, like real cricket, there were two players batting at any one time, and that, unlike real cricket, the way you get to bat was by being the person who made the decisive move in getting a batsman out, by taking a catch, effecting a run-out, or bowling the ball that hit the stumps. In this meritocracy, those of us who were not well endowed with sporting talent rarely got to enjoy the sought-after activity of batting. But I did get my chance one day when a ball got hit irretrievably onto a classroom roof and one of the boys who was batting at the time offered to let me bat if I let them use a ball I had brought to school that day. There was no cost to me from this trade, so I thought it more a generous act of social welfare from the boy making the offer rather than a market trade. To my horror, however, he promptly went over to the other boy who was batting, wrenched the bat out of his hand gave it to me and continued batting himself. (To my embarrassment, I have to admit that I accepted the stolen property.)

Many years later, I noticed how often public-policy rhetoric, particularly in election years, plays out essentially the same exercise of offering the other kid's bat: Group A are asked to demonstrate their commitment to social justice by agreeing to take from Group B to give to Group C.
I am reminded of this whenever I see calls for a higher minimum wage. Forget the debate about whether the minimum wage is an effective anti-poverty measure (probably not), or whether there are offsetting employment effects (probably true, but probably generally small), what is the morality of placing the burden of anti-poverty measures only on employers?
And I see echoes of offering the other kid’s bat today in the Labour Party’s tax policy, which according their leader is “bold”, will allow the government to “keep our assets, pay off debt, and create a stronger economy”, and yet will see “the overwhelming majority of kiwis paying less tax not more”. As far as I can see, this combination is not the result of a rosy scenario projection of the impact of the policy on growth, but rather an indication of the expected tax increases on the underwhelming minority.
Note that this is not a comment on Labour’s tax policy per se. I happen to think the policy is awful (more on that in later posts), but each of the component pieces can be reasonably debated on its merits. It is the packaging of the policy with the word “bold” while saying that the majority are getting a tax cut with no downside that is grating on me. And to be fair to Labour, the offering the other kid’s bat rhetoric is not unique to them but is a universal feature of political discourse. But it still makes me grumpy. (So grumpy that I am reduced to starting consecutive sentences with a conjunction!)

The Cost of Cost Studies

Here's the presentation I gave at the NZAE meetings in Wellington. I'm tidying a few typos in the paper there delivered; it'll be up on the site soon enough.

The Cost of Cost Studies on Prezi

I'm today speaking at the Australian Conference of Economists' Public Policy symposium. They there run the annual Dodgy Awards: A half dozen economists each are charged with making the case that his area of work sees the worst application of economics to policy. I'll be arguing that preventative health is the worst of the lot; I'll be drawing a fair bit on the talk I gave at the Mont Pelerinmeetings and on the material presented in Wellington at the NZAEs. The session should be a lot of fun.