Economics of Tobacco Myths and Realities

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Economics of Tobacco:Myths and Realities

Kenneth E. Warner, PhDAvedis Donabedian Distinguished

University Professor of Public Health

University of Michigan, USA

November 7, 2002



Key to the myths

TI = tobacco industry myth

TC = tobacco control community myth



Myth #1 (TI)(the industry¶s favorite)

T obacco is crucial to the economy.

Without tobacco growing, cigarettemanufacturing, and distribution and

sale of tobacco products, a state¶s or

country¶s economy will suffer joblosses, falling tax revenues, and

growing trade deficits.



When and how the myth is used

Whenever governments consider policy

that would discourage tobacco

consumption«especially innon

-tobacco states and countries.

I ntent: to frighten officials into believing

that, regardless of their health benefits,tobacco control measures would exact a

huge economic toll.



Message

I f government adopts policy x, cigarette sales

will drop.

People will lose jobs as a consequence

(tobacco farmers, manufacturing plant

employees, wholesalers, retail clerks).

T he economy will suffer from lost tax

revenues, including (where appropriate)income and sales taxes associated with

reduced spending by the newly unemployed.



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.



R eal 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).



Case studies

I

n Michigan, a non-tobacco state, employmentincreases 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 tobaccoconsumption 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., C h. 13 in Jha and C haloupka, eds., T obacco

C ontrol in Developing C ountries (Oxford, 2000)]



Principal transitional costin tobacco states and countries

Tobacco farmers not be thrown out of work.

R ather, fewer children of tobacco farmers wouldgo into tobacco farming.

[S chelling, Preventive Medicine, 1986]



An additional economic benefit of reduced spending on tobacco

Savings will accrue in health care spending,

fire fighting, equipment maintenance and

cleaning, etc.



Myth #2 (TC)(tobacco control community¶s favorite)

T obacco imposes an enormous healthcare cost on society. Decreasing

smoking will save billions of dollars in

smoking-produced health care costseach year.




Whenever governments consider policy

that would discourage tobacco use. I ntent: to convince officials that the

policy would produce major economic

benefits at the same time that it benefitsthe public¶s health.



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, theelderly population would grow, as would old-

age chronic disease costs.



Net impact On balance, costs likely would fall, but only

modestly. Net savings would be small.[ Warner et al., T obacco C ontrol, 1999]

TC community should stick to the realreason to combat smoking: its devastating

health effects.



Myth #3 (TI)

A large tax increase is dangerous because it

will reduce government revenues by decreasing

legal cigarette sales. T his will result due to

decreased smoking and increased smuggling of

lower-priced cigarettes from neighboring statesor countries.




Whenever governments consider a

cigarette excise tax increase.

I ntent: 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.



Reality,

with regard to cigarette sales... Cigarette taxation will reduce cigarette sales.

± Increasing price is the most effective means of

decreasing cigarette smoking, especially amongchildren.

± 10% price increase will decrease cigarette

consumption 4% in developed countries, 8% in

developing countries.

± S moking among children will fall by about twice as

much.[ C haloupka et al., C h. 10 in Jha and C haloupka, 2000]



Real cigarette prices & per capita consumption

US, 1970-2000

1500

1700

1900

2100

2300

2500

2700

2900

3100

1970 1975 1980 1985 1990 1995 2000

Year

C i g a r e t t e s p

e r c a p i t a

60

80

100

120

140

160

180

P r i c e

( 1 9 8 2 / 8

4

c e n t s )

consumption price



Realitywith regard to revenues...

Increased taxes invariably increase

government revenues.

± The percentage decline in cigarette consumptionis 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.



F e d er al ci g ar e t t e t axr a t e &

c

i g ar e t t e t axr ev en u e

1 9 6 0

-2 0 0 0

0 . 0 0

0 . 0 5

0 .1 0

0 .1 5

0 .2 0

0 .2 5

0 . 3 0

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

Y e a

ea ga e e ax a e pe pa k

(1982/84 cen )

C i g ar e t t e t ax r a t e

C i g ar e t t e t ax r en en u e



Reality with regard to smuggling...

Function of many forces

± Price but one.

± Others likely far more important

a state¶s or country¶s general tolerance for corruption

its specific efforts to combat smuggling (use of unique

tax stamps, enforcement, etc.).

± Informal cross-border purchases (³buttlegging´)

accounts for a small share of in-state tax avoidance.[ Joossens and Raw, BMJ, 2000]



Myth #4 (TI)

E ven if a tax increase would raise government revenues and decrease

smoking, it is fundamentally unfair

because its burden would fall disproportionately on the poor.




Whenever governments consider a

cigarette excise tax increase. I ntent: to appeal to officials¶ concern

for the welfare of the least privileged in

society, and to their basic sense of ³fairness.´



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.[ T ownsend et al., BMJ, 1994]



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.



(Semi-)myth #5 (TC)While the health arm of the government

tries to discourage smoking, theagricultural arm subsidizes it. T his is

hypocritical and damaging to the health of

the nation. By subsidizing tobacco growing, the government is encouraging

smoking.



Example of the U.S. system

A complicated web of regulations, with two

essential components:1. setting annual quotas on tobacco production

and minimum prices

2. limiting growing to holders or renters of

allotments (licenses to grow).

The actual subsidy per se is modest.



Impact o 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).[Z hang et al., 1997]

Indirect effect: create and reinforce political

constituency for tobacco in Congress ± Blocks federal tobacco control policies.

± Thereby increases smoking.



Myth #6a (TI)

C igarette advertising and promotion haveno effect on the amount of smoking. T heir

only function, and impact, is to permit the

companies to vie for shares of a market of fixed size.



Reality...

Brand-share argument runs contrary to muchempirical evidence and makes no sense.

± Especially in a highly concentrated market, as in

the U.S., much brand-share marketing merely

cannibalizes a company¶s own brands (e.g., PhilipMorris controls half the market).

If the industry truly believed its ownargument, it would have leapt at opportunities

to ban ads.

± In the U.S., it would save > $10 billion/year.



Myth #6b (TC)

C igarette advertising and promotion

constitute one of the principal direct

determinants of smoking, especially

initiation of smoking by children.




Whenever the freedom of the tobacco

industry to advertise is debated.

I ntent: 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.



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.



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 E ngl. J. Med., 1992]

A complete ban on A/P would be expected to

decrease smoking by about 7%. [S affer and C haloupka,

Journal of Health E conomics, 2000]



Myth #7 (TC)

T he tobacco companies have moved into

developing countries in recent years to

compensate for declining markets inaffluent nations. T obacco control

progress in rich countries will come at

the price of increasingly aggressiveinvasion of poor countries by the

multinational tobacco companies.



Reality... Multinationals have moved into developing

countries, but not because other markets are

declining.

They see a market expansion opportunity indeveloping countries, due to

± growing affluence in those countries;

± reductions in trade restrictions; and ± bulging treasuries the companies want to invest

profitably.



Recent movement into developing countries

would have occurred even if sales were not falling in developed countries.



Impact of declining U.S. market

on global sales and profits

U.S. is home to only 4% of the world¶s

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 .



Implication

Tobacco control advocates in developedcountries need not feel guilty that successesat 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 amodel for future tobacco control indeveloping countries.



Conclusion

The tobacco industry¶s economic arguments

are a bait-and-switch tactic.

± Deflect attention from the health consequencesof smoking.

± Find a receptive ear in this domain.

TC community feels compelled to fight

back on the economic battlefield.



Each side¶s economic arguments contain

self-evident grains of truth, making them

quite compelling.

Each side¶s arguments distort (sometimes

destroy) the far more complicated reality.



Irony

To economists, the economic issues intobacco are interesting but not fundamentally

important.

Arguments are most important to people who

do not understand them:

± politicians ± government officials

± journalists



«but i one wants to lend credence

to the industry¶s numbers«

Compare 400,000+ tobacco jobs per year in

the U.S. to 400,000+ deaths caused bytobacco:

± Each tobacco job, for one year, comes at the

cost of one smoker¶s losing 15 years of life.

The job is replaceable. The life is not.



True ³bottom line´

«

is measured not in dollars and cents, butrather in the grief of injured smokers and

their loved ones.



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 inDeveloping Countries (Oxford, 2000)

Chaloupka and Warner, Ch. 29 in Culyer and Newhouse, eds., Handbook of Health Economics,vol. 1B (Elsevier, 2000)

Economics of Tobacco Myths and Realities

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