Tobacco Policy: Economic Myths and Realities

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TC Online Presentations
www.tobaccocontrol.com
This presentation has been supported by a grant
to Tobacco Control from The Robert Wood Johnson
Foundation
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Economics of TobaccoMyths and Realities

• Kenneth E. Warner, PhD
• Avedis Donabedian Distinguished University
  Professor of Public Health
• University of Michigan, USA
• November 7, 2002

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Key to the myths

• TI tobacco industry myth
• TC tobacco control community myth

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Myth 1 (TI)(the industrys favorite)

• Tobacco is crucial to the economy. Without
  tobacco growing, cigarette manufacturing, and
  distribution and sale of tobacco products, a
  states or countrys economy will suffer job
  losses, falling tax revenues, and growing trade
  deficits.

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When and how the myth is used

• Whenever governments consider policy that would
  discourage tobacco consumptionespecially in
  non-tobacco states and countries.
• Intent to frighten officials into believing
  that, regardless of their health benefits,
  tobacco control measures would exact a huge
  economic toll.

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Message

• If government adopts policy x, cigarette sales
  will drop.
• People will lose jobs as a consequence (tobacco
  farmers, manufacturing plant employees,
  wholesalers, retail clerks).
• The economy will suffer from lost tax revenues,
  including (where appropriate) income and sales
  taxes associated with reduced spending by the
  newly unemployed.

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Reality...

• A significant economic presence does not imply
  significant economic dependence.
• Spending on tobacco is rarely important to an
  economy.
• Money not spent on tobacco will be spent on
  other goods and services instead, thereby
  creating a comparable number of jobs.

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• Real costs costs of transition to alternative
  products.
• Given the addictiveness of tobacco, the
  transition necessarily occurs very slowly
  (cigarette consumption declining 1-2 per year in
  developed countries).

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Case studies

• In Michigan, a non-tobacco state, employment
  increases as tobacco consumption declines.
  Warner and Fulton, JAMA, 1994
• In the U.S., employment would rise in all 8
  non-tobacco regions (44 states) if tobacco
  consumption fell. Warner et al., JAMA, 1996
• Only in the 6-state tobacco bloc would employment
  fall, and by a tiny fraction of state employment.
  
• Employment gains in Scotland, UK, South Africa,
  and Bangladesh falls in Canada and Zimbabwe.
  Jacobs et al., Ch. 13 in Jha and Chaloupka,
  eds., Tobacco Control in Developing Countries
  (Oxford, 2000)

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Principal transitional costin tobacco states and
countries

• Tobacco farmers not be thrown out of work.
• Rather, fewer children of tobacco farmers would
  go into tobacco farming.
• Schelling, Preventive Medicine, 1986

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An additional economic benefit of reduced
spending on tobacco

• Savings will accrue in health care spending, fire
  fighting, equipment maintenance and cleaning, etc.

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Myth 2 (TC)(tobacco control communitys
favorite)

• Tobacco imposes an enormous health care cost on
  society. Decreasing smoking will save billions
  of dollars in smoking-produced health care costs
  each year.

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When and how the myth is used

• Whenever governments consider policy that would
  discourage tobacco use.
• Intent to convince officials that the policy
  would produce major economic benefits at the same
  time that it benefits the publics health.

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Reality...

• Smoking-produced illness does account for a
  significant share of health care costs, e.g.,
  approximately 12 in the U.S. Miller et al.,
  Public Health Rep, 1998
• However, in the absence of smoking, the elderly
  population would grow, as would old-age chronic
  disease costs.

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Net impact

• On balance, costs likely would fall, but only
  modestly. Net savings would be small. Warner
  et al., Tobacco Control, 1999
• TC community should stick to the real reason to
  combat smoking its devastating health effects.

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Myth 3 (TI)

• A large tax increase is dangerous because it will
  reduce government revenues by decreasing legal
  cigarette sales. This will result due to
  decreased smoking and increased smuggling of
  lower-priced cigarettes from neighboring states
  or countries.

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When and how the myth is used

• Whenever governments consider a cigarette excise
  tax increase.
• Intent to frighten officials into believing
  that a policy intended to increase revenue will
  do the opposite, and that it will introduce
  organized crime into the state or country.

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Reality,with regard to cigarette sales...

• Cigarette taxation will reduce cigarette sales.
• Increasing price is the most effective means of
  decreasing cigarette smoking, especially among
  children.
• 10 price increase will decrease cigarette
  consumption 4 in developed countries, 8 in
  developing countries.
• Smoking among children will fall by about twice
  as much.
• Chaloupka et al., Ch. 10 in Jha and
  Chaloupka, 2000

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Reality with regard to revenues...

• Increased taxes invariably increase government
  revenues.
• The percentage decline in cigarette consumption
  is smaller than the percentage increase in price
  that induces it.
• Further, tax is only a fraction of price, so a
  given tax increase will cause a far smaller
  decrease in cigarette sales.

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Reality with regard to smuggling...

• Function of many forces
• Price but one.
• Others likely far more important
• a states or countrys general tolerance for
  corruption
• its specific efforts to combat smuggling (use of
  unique tax stamps, enforcement, etc.).
• Informal cross-border purchases (buttlegging)
  accounts for a small share of in-state tax
  avoidance.
• Joossens and Raw, BMJ, 2000

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Myth 4 (TI)

• Even if a tax increase would raise government
  revenues and decrease smoking, it is
  fundamentally unfair because its burden would
  fall disproportionately on the poor.

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When and how the myth is used

• Whenever governments consider a cigarette excise
  tax increase.
• Intent to appeal to officials concern for the
  welfare of the least privileged in society, and
  to their basic sense of fairness.

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Reality...

• Cigarette taxes are regressive.
• A larger proportion of the poor smoke.
• However, a tax increase may produce a progressive
  impact
• because the rich decrease their smoking only
  slightly in response to a price increase
• the poor decrease theirs substantially.
• Townsend et al., BMJ, 1994

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Furthermore...

• Health benefit of a tax increase is distinctly
  progressive.
• States and countries can compensate in part for
  any tax regressivity
• e.g., by funding cessation services and
  pharmaceuticals for poor smokers.

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(Semi-)myth 5 (TC)

• While the health arm of the government tries to
  discourage smoking, the agricultural arm
  subsidizes it. This is hypocritical and damaging
  to the health of the nation. By subsidizing
  tobacco growing, the government is encouraging
  smoking.

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Reality

• Subsidy systems vary dramatically from one
  country to another.
• Each countrys system needs to be evaluated
  individually.

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Example of the U.S. system

• A complicated web of regulations, with two
  essential components
• setting annual quotas on tobacco production and
  minimum prices
• limiting growing to holders or renters of
  allotments (licenses to grow).
• The actual subsidy per se is modest.

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Impact of the system is...

• Direct effect raise the price of cigarettes by
  about one cent per pack, by raising the price of
  tobaccos.
• Will decrease smoking (very slightly).
• Zhang et al., 1997
• Indirect effect create and reinforce political
  constituency for tobacco in Congress
• Blocks federal tobacco control policies.
• Thereby increases smoking.

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Myth 6a (TI)

• Cigarette advertising and promotion have no
  effect on the amount of smoking. Their only
  function, and impact, is to permit the companies
  to vie for shares of a market of fixed size.

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When and how the myth is used

• Whenever the freedom of the tobacco industry to
  advertise is debated.
• Intent to convince officials that an ad ban
  would violate the right to free speech, as well
  as adult smokers right to information.

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Reality...

• Brand-share argument runs contrary to much
  empirical evidence and makes no sense.
• Especially in a highly concentrated market, as in
  the U.S., much brand-share marketing merely
  cannibalizes a companys own brands (e.g., Philip
  Morris controls half the market).
• If the industry truly believed its own argument,
  it would have leapt at opportunities to ban ads.
• In the U.S., it would save gt 10 billion/year.

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Myth 6b (TC)

• Cigarette advertising and promotion constitute
  one of the principal direct determinants of
  smoking, especially initiation of smoking by
  children.

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When and how the myth is used

• Whenever the freedom of the tobacco industry to
  advertise is debated.
• Intent to convince officials that the crucial
  issue is the seduction of children, who are not
  legal consumers of tobacco products. TC also
  challenges the idea of a right to commercial free
  speech.

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Reality...

• Advertising and promotion (A/P) likely do
  increase smoking, including encouraging
  experimentation by kids.
• No evidence points to A/P as a principal direct
  determinant of smoking, however.
• Peer and parental behavior and role modeling by
  music and movie stars likely more important.

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• A/P may increase smoking through indirect
  mechanisms, as well as direct.
• E.g., media dependence on tobacco company ad
  revenues discourages coverage of the importance
  of smoking in disease. Warner et al., New Engl.
  J. Med., 1992
• A complete ban on A/P would be expected to
  decrease smoking by about 7. Saffer and
  Chaloupka, Journal of Health Economics, 2000

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Myth 7 (TC)

• The tobacco companies have moved into developing
  countries in recent years to compensate for
  declining markets in affluent nations. Tobacco
  control progress in rich countries will come at
  the price of increasingly aggressive invasion of
  poor countries by the multinational tobacco
  companies.

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Reality...

• Multinationals have moved into developing
  countries, but not because other markets are
  declining.
• They see a market expansion opportunity in
  developing countries, due to
• growing affluence in those countries
• reductions in trade restrictions and
• bulging treasuries the companies want to invest
  profitably.

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• Recent movement into developing countries would
  have occurred even if sales were not falling in
  developed countries.

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Impact of declining U.S. market on global sales
and profits

• U.S. is home to only 4 of the worlds smokers
• Sales here declining only 2/year.
• Therefore, U.S. sales decline represents about
  1/10th of 1 in global sales each year.
• Further, profits in the U.S. are rising.

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Implication

• Tobacco control advocates in developed countries
  need not feel guilty that successes at home will
  impose a burden on people in poor countries.
• To the contrary, tobacco control success in the
  developed nations is likely to serve as a model
  for future tobacco control in developing
  countries.

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Conclusion

• The tobacco industrys economic arguments are a
  bait-and-switch tactic.
• Deflect attention from the health consequences of
  smoking.
• Find a receptive ear in this domain.
• TC community feels compelled to fight back on the
  economic battlefield.

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• Each sides economic arguments contain
  self-evident grains of truth, making them quite
  compelling.
• Each sides arguments distort (sometimes destroy)
  the far more complicated reality.

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Irony

• To economists, the economic issues in tobacco are
  interesting but not fundamentally important.
• Arguments are most important to people who do not
  understand them
• politicians
• government officials
• journalists

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but if one wants to lend credence to the
industrys numbers

• Compare 400,000 tobacco jobs per year in the
  U.S. to 400,000 deaths caused by tobacco
• Each tobacco job, for one year, comes at the cost
  of one smokers losing 15 years of life.
• The job is replaceable. The life is not.

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True bottom line

• is measured not in dollars and cents, but
  rather in the grief of injured smokers and their
  loved ones.

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Recommended general readings on the economics of
tobacco

• Warner, Tobacco Control, 2000.
• Curbing the Epidemic Governments and the
  Economics of Tobacco Control (World Bank, 1999)
• Jha and Chaloupka, eds., Tobacco Control in
  Developing Countries (Oxford, 2000)
• Chaloupka and Warner, Ch. 29 in Culyer and
  Newhouse, eds., Handbook of Health Economics,
  vol. 1B (Elsevier, 2000)