Thursday, 27 November 2014

A belated reply to the minimum pricing modellers (part one)

Quite some ago I wrote a short paper with John Duffy about the minimum pricing predictions coming out of Sheffield University. It was published by the Adam Smith Institute. Some of the Sheffield researchers later wrote a response to our points which, for one reason or another, I never got round to replying to.

It's a little late to pen a response now, but as John Holmes keeps saying that our critique has been 'rebutted', I'd like it to be known that it rebuts nothing. In this blog post and the follow-up post, I will address the points they raise. Although some of the views will, I hope, be shared by John Duffy, I should stress that I am speaking only for myself.

Price, consumption and harm in practice

The Sheffield response begins by stating that "it is consistently the case that when prices go up, consumption goes down" and that "it is consistently the case that when prices go up, overall levels of harm go down." The former statement is basically just the law of demand, whilst the latter is the law of demand plus the temperance assumption that harm is tied to per capita consumption (AKA the Total Consumption Model).

The former is a quite reasonable assumption upon which to base an economic model, but it is not an iron law. The second is much more debatable. Taking both assumptions as gospel and using them to make absurdly specific claims about minimum pricing reducing alcohol-related deaths by exactly 521 a year is just silly.

From the outset, my reason for wanting to write about the Sheffield model was my exasperation at the way in which its estimates were treated as settled science when they were really just elaborate guesses conjured up by people who support the policy. It is not that the above assumptions are necessarily wrong, just that there was a reasonable chance that they were wrong and there was a good chance that at least one of them was wrong. (And, of course, even if they are both right that doesn't mean their estimates are right, as we shall see.)

The hubris of the Sheffield model is exhibited in their response to us. Contrary to their bald assertions, it is not "consistently the case" that x follows y in the way the Sheffield team claim. You only need to look at the UK in the last ten years to see that a decline in alcohol consumption does not consistently lead to a commensurate decline in alcohol-related harm. I gave various other examples of x not following y in the ASI report, saying:

Moreover, the belief that reducing the affordability of alcohol will inevitably reduce both alcohol consumption and alcohol-related harm has frequently been confounded. Alcohol consumption has fallen in most of Europe and the USA (though not the UK) in recent decades despite rising incomes which have made alcohol more affordable. When the Institute of Alcohol Studies compared alcohol-related disease rates and alcohol prices across European countries, it found “no discernible relationship between affordability and harm” (Institute of Alcohol Studies, n.d.)

Dramatic reductions in the price of alcohol in Scandinavia in 2003-04 provided a natural experiment for price elasticity models to be put to the test, but the results were surprising. Denmark reduced the tax on spirits by 45 per cent in 2003 without experiencing any increase in alcohol consumption (Mäkelä, 2008; Grittner, 2009). Instead, there was a decline in alcohol-related problems (Bloomfield, 2010). Prior to the Danish tax cut, it was predicted that alcohol consumption would soar in southern Sweden because Swedes would cross the Danish border to buy cheap booze. Many did, and yet alcohol consumption in the south fell overall while consumption in the distant north rose (Gustafsson, 2010).

I then gave examples of price increases being associated with lower consumption and less harm before concluding that:

It would be quite wrong to assume that pricing has no effect on alcohol consumption, only that the effects of price interventions are highly unpredictable

That is the simple truth. The inherent unpredictability of people's alcohol consumption has profound and obvious implications for those who try to predict what will happen after any alcohol policy is introduced, let alone a policy that has never been tried anywhere in the world.

Total consumption model

We wrote a bit about the Total Consumption Model//Lederman Hypothesis/Single Distribution Theory in the ASI paper (we later wrote a whole report about it). Simply put, this theory says that if per capita alcohol consumption declines, heavy drinking and alcohol-related harm will also decline. In their response, the Sheffield team say that our reference to this theory is irrelevant.

Duffy & Snowdon are wrong when they assert and discuss over numerous pages that "at the heart of SAPM's projections is the 'single distribution' model, a theory first advanced by... Lederman in 1956". Our research is not based on this theory, which assumes a direct relationship between alcohol consumption in a population and rates of alcohol-related harm...

They go on to say that it is "bemusing" that we write so much about the Lederman Hypothesis/Total Consumption Model/Single Distribution Theory. Whilst it is possible to argue for minimum pricing without reference to this theory - and it is certainly true that the Sheffield model is far more complex than the simplistic Lederman hypothesis - the problem for the authors of the rebuttal is that Tim Stockwell, one of the world's leading proponents of minimum pricing and co-author of Sheffield University alcohol pricing research, is on the record explicitly stating that the Sheffield Model is fundamentally rooted in the Total Consumption Model. He writes:

How was the Sheffield Model constructed?

... The model is based on two fundamental elements that are well established in the much larger literature on the relationship between alcohol consumption and alcohol-related harms:

(i) When the price of alcohol increases consumption by most drinkers goes down including, critically, consumption by hazardous and harmful drinkers;

(ii) When alcohol consumption in a population declines, rates of alcohol-related harms also decline.

All subsequent debate about the Sheffield has centred on the degree of certainty regarding the size of the effects.

As if to avoid any ambiguity, Stockwell makes the Sheffield model's debt to the Lederman Hypothesis even more explicit:

High quality reviews confirm that when total consumption of alcohol in the population declines, consumption among heavier drinkers is reduced and, further, rates of alcohol-related mortality also decline. The Sheffield Model applied these general principles specifically to the UK and provided numerical estimates of the benefits.

If Stockwell thinks the Total Consumption Model is at the heart of the Sheffield model, it's safe to say that it probably is.


The Sheffield researchers use the supposed 'Canadian experience' as real world evidence that minimum pricing saves lives:

A form of this policy exists in Canada and recent studies have begun to evaluate its effects. These studies have shown that increases in minimum prices are associated with falls in alcohol consumption and alcohol-­related deaths.  

This is a reference to a statistical analysis of data from British Columbia conducted by Tim Stockwell (yes, him again). Stockwell claimed that there was a large drop in wholly alcohol-attributable deaths in 2006-07 which roughly coincided with some (fairly minor) increases in the minimum price of some drinks.

Alas, this is entirely inconsistent with the established facts. Official statistics show that the alcohol mortality rate in British Columbia rose from 26 per 100,000 persons to 28 per 100,000 persons between 2002 and 2008. As the graph below shows, neither mortality (solid line) nor per capita alcohol consumption (dotted line) fell during this period.

Between 2002 and 2011, the number of deaths directly attributed to alcohol in British Columbia rose from 315 to 443 with the largest annual death rates occurring after the minimum price rises of 2006. Between 2006 and 2008, when further minimum price rises occurred, the number of deaths rose from 383 to a peak of 448. Moreover, the rate of hospitalisations for both alcohol-related ailments and acute intoxication both rose during this decade. According to the Centre for Addictions for BC - which is Stockwell's own institute:

‘Alcohol consumption in BC has been above the Canadian average for the last decade. The rates of hospitalizations in BC for conditions related to alcohol have shown a significant increase since 2002, reflecting an overall increase in alcohol consumption in the province’.

Quite how Stockwell manipulated these figures to portray a positive effect from minimum pricing remains a mystery, but there was never a fall in alcohol-related harm, there was never a fall in alcohol consumption and - for that matter - there was never much of a rise in the minimum price.

Heavy drinkers

One of our main criticisms of the Sheffield model is that they use price elasticities that have little support in the economic literature. Most economic studies show that heavy drinkers are less price sensitive than moderate drinkers and that addicted drinkers are - as common sense would dictate - least price sensitive of all. The Sheffield model assumes that the reverse is the case - that price increases will make heavy drinkers reduce their consumption more than moderate and light drinkers. This assumption means that their model shows a more profound effect on alcohol-related harm than is realistic.

In their response, they say this:

Since we first published our findings in 2008, we have observed that a common tactic used by those wishing to misinterpret the alcohol policy evidence base is to begin a sentence with one subject before subtly shifting to another subject. We observe a classic case when Duffy & Snowdon say "it is heavy drinkers who cause and suffer the most alcohol-related harm, but can we really assume that someone with an alcohol dependency is more likely to be deterred by price rises than a more casual consumer?" Note here the conflation of heavy drinkers (ie. those drinking above the NHS guidelines) with dependent drinkers (those who are addicted to alcohol).

Leaving aside the assumption of bad faith that runs through these (and many other) sentences, there was no attempt on my part to conflate heavy and addicted drinkers. I was using a dependent drinker as one example of a heavy drinker. Not all heavy drinkers are addicted but all addicted drinkers are heavy drinkers. By assuming that heavy drinkers have a more elastic demand, the Sheffield team are - by definition - assuming that addicted drinkers have a more elastic demand.

Note the attempt at putting words in my mouth by defining a heavy drinker as someone who exceeds the government's risible guidelines. That's not my definition. I was talking about genuinely heavy drinkers in the top five per cent (or so) of the distribution.

All of this is a diversionary tactic to avoid addressing the important point which is that heavy drinkers (whether addicted or not) are less price sensitive than moderate drinkers.

In the ASI report, I quote directly from one of the Sheffield reports which notes that "the 95th percentile of drinkers have an elasticity not significantly different from zero". This, in turn, is a reference to Manning et al. (1995) which concluded that "the very heaviest drinkers" may have "perfectly price inelastic demands". Although the Sheffield researchers acknowledge that this sort of evidence exists, they make the opposite assumption in their model, saying:

By contrast, the elasticity estimates generated here tend to show own-price elasticities with greater magnitude for hazardous/harmful drinkers compared to moderate drinkers.

This breezy assumption goes against the weight of evidence and has major implications for the numbers that pour out of the Sheffield model. As I explained in the ASI paper:

By wrongly assuming that heavy drinkers are more sensitive than the general population to changes in the price of alcohol as a product category, the Sheffield model not only overestimates the putative health benefits to be derived from minimum pricing, but also overestimates the drop in overall consumption that is likely to take place (since heavier drinkers consume a disproportionate quantity of alcohol). Moreover, it underestimates how much poorer heavier drinkers will be as a result.

In response to this, the Sheffield researchers say that they have conducted "further sensitivity analyses on these estimates (including analyses where heavy drinkers are assumed to be less responsive to price changes)". Taken together, the various Sheffield publications run to many hundreds of pages and it is true that if you look hard enough you can find alternative scenarios being modelled. These alternative figures have had no impact on the public debate, however. They have never featured in the various press releases and they have never been quoted in the media or by politicians. Nor do the researchers themselves ever quote them. They might as well be footnotes.

The figures quoted from the Sheffield models are invariably the headline figures from the mainstream model which assumes - wrongly - that heavy drinkers are more price sensitive than moderate drinkers and, therefore, that minimum pricing will have a larger and more positive effect than is likely.

Part two coming soon.

Wednesday, 26 November 2014

EU withdraws funding from BMJ hatchet job

Remember the ignorant hatchet job on opponents of minimum pricing that the British Medical Journal published at the start of the year? (Click here to refresh your memory.) I mentioned in March that this grubby journalism was funded by the European Commission via the neo-temperance ALICE-RAP project.

Thanks to a complaint by one of its targets, John Duffy, the European Commission has found out exactly how its money is being used and it's not very happy. So unhappy, in fact, that it has decided that it will not be ponying up for the 'investigative journalism' and has asked the BMJ to remove its credit from the articles.

From the IEA website:

The European Commission has refused to fund a series of articles published in the British Medical Journal (BMJ) which attacked critics of minimum pricing, the Department for Business Innovation and Skills has confirmed.

In January 2014, the BMJ published several articles by Jonathan Gornall, a freelance journalist, alleging that think tanks, including the Institute of Economic Affairs, were part of a campaign against minimum pricing that was funded and co-ordinated by the alcohol industry. Mr Gornall told interviewees that his project was “an EU-sponsored investigation” and the BMJ credited his funding to ALICE-RAP, a project that is co-financed by the European Commission. The Commission has since distanced itself from the articles and has now asked for its credit to be removed.

John Duffy, a statistician specialising in alcohol and health, was one of the academics discussed by Mr Gornall. He subsequently wrote to the Department of Business, Innovation and Skills (BIS), complaining that the articles “amounted to little more than an ad hominem attack”. Duffy, who has authored dozens of academic studies in peer-reviewed journals, said that Mr Gornall’s description of his career was “laughably biased” and “borders on the libellous”.

In June, BIS formally asked the European Commission to investigate and Mr Duffy’s complaint has now been upheld. Payment for the project will not come from ALICE-RAP, as previously expected, and the European Commission has requested that reference to their funding be removed from the articles. According to BIS, Mr Gornall’s research does not “fully correspond to the agreed deliverables” that were set when the grant was issued.

In 2012, Mr Duffy wrote about the flaws of a minimum pricing computer model in a report published by the Adam Smith Institute and co-authored with Christopher Snowdon. His criticisms went unanswered in the BMJ articles. Instead, Mr Gornall focused on what he described as Mr Duffy’s “collaboration with the alcohol industry” and on the classical liberal Adam Smith Institute, which he described as launching a “barrage of pseudoacademic shots from the far right”.

On hearing that European Commission funding had been withdrawn, John Duffy said:

“I am pleased that I have been able to prevent EU taxpayers’ money, including my own, being used by the ALICE-RAP project to finance personal attacks. It's very flattering to know that my work is so scientifically correct that all they can do is attack me personally rather than my arguments, but gutter journalism should have no place in prestigious medical journals.”

Christopher Snowdon, head of lifestyle economics at the Institute of Economic Affairs and John Duffy’s co-author on ‘The Minimal Evidence for Minimum Pricing’, said:

“The Institute of Economic Affairs complained to the British Medical Journal about the slurs and innuendo in Jonathan Gornall’s hatchet job earlier this year, but we have received no apology. It is most unusual for an organisation to ask for its name to be removed from the credits of a peer-reviewed article, but the European Commission is right to be embarrassed by its involvement with this project.”

No doubt the grant-junkies of ALICE-RAP will dip its hands into one of the taxpayer's other pockets to pay for this garbage, but will should still raise a glass to this glimmer of decency from the European Commission.

The myriad lies of 'public health'

As the years go by, I am increasingly of the opinion that Britain's single greatest public institution is the Office for National Statistics (ONS). It is an oasis for empiricists in a world of myths and lies.

In the fraudulent field of 'public health' lies are told so many times in echo-chamber conferences and comedy journals that many of the graduates who pour out of Britain's public health faculties probably think them to be truths. These people are - perhaps - merely naive, but it is harder to believe that those who devise and propagate these falsehoods are acting in good faith. More likely, as with prohibitionists throughout the ages, they are charlatans who know exactly what they are doing.

Via Dick Puddlecote, I see that the latest ONS data on smoking prevalence exposes a few of the myriad lies of the public health racket. A few simple graphs effectively dismantle arguments that the likes of Martin McKee, Anna Gilmore and Simon Chapman have relied on for years.

With regards to the supposed 'gateway effect' of e-cigarette users taking up combustible cigarettes, the graph below shows the conspicuous lack of interest that nonsmokers have in e-cigarettes.

The ONS notes that:

E-cigarettes were almost exclusively used by smokers and ex-smokers. More than 1 in 10 (12%) of cigarette smokers also used e-cigarettes, compared with 1 in 20 (5%) ex-smokers and almost none of those who had never smoked.

After several years of rapidly increasing e-cigarette use at the population level, non-smokers remain almost entirely uninterested in the product. There is no evidence that the tiny fraction of never-smokers who use e-cigarettes have the slightest interest in moving on to the more hazardous and (currently) much more expensive tobacco version.

 With regards to the claim that cigarettes are "more affordable than they were in the 1960s" (Deborah Arnott, ASH), the ONS has a graph that nicely exposes that pitiful and obvious lie.

As anyone who has made contact with planet Earth in the last forty years knows, the price of tobacco in Britain has risen at an eye-watering rate. See here for more evidence that the price of cigarettes has risen at a far faster rate than inflation and average wages. It is hard to view people who make the claim that cigarettes have become relatively cheaper as anything other than miserable liars. Confirming that cigarettes have become, by any measure, less affordable, the ONS notes that:

Smoking has become more expensive over this period, with tobacco prices increasing well above the rate of inflation as measured by the Consumer Price Index (CPI). Consequently there has been a gradual increase in the proportion of a smoker’s income that has been needed to fund their habit.

The inflation-busting tobacco duty rises that have taken place since 1980 have naturally hit the poorest hardest. The ONS report also contains figures which show that the poor are more than twice as likely to smoke that the rich. This undermines yet another public health lie - that the poor are more likely to give up smoking when taxes go up. In fact, they are least likely to give up.

The affordability claim about cigarettes and the gateway claim about e-cigarettes are just two of the countless lies that pour from the lips of public health shysters. They have been rebutted before and will be again. Empirical evidence will not deter them. Prohibitionists lie. It is what they do. If they had to tell the truth, even for a few hours, their careers would be over.

Monday, 24 November 2014

Plain packaging had no effect on sales - new study

A study published in the Australian National University's journal Agenda examines the government's official sales figures for tobacco before and after the introduction of plain packaging and finds no evidence that the policy had any effect.

Despite our econometric efforts, the data refused to yield any indication this policy has been successful; there is no empirical evidence to support the notion that the plain packaging policy has resulted in lower household expenditure on tobacco than there otherwise would have been. There is some faint evidence to suggest, ceteris paribus, household expenditure on tobacco increased.

This will come as no surprise to readers who have seen the Australian Bureau of Statistics' data laid out on a graph. It is as clear as a bell that the secular decline in tobacco sales came to a virtual halt in the first year of plain packaging. No amount of sophistry and statistical jiggery-pokery can alter that (although there will no doubt be plenty of both in Simple Simon's new book).

The study - by Davidson and de Silva - tests the data from every angle and discusses plausible mechanisms whereby sales could rise or fall as a result of plain packaging. Ultimately, however, they come out empty handed:

Ronald Coase famously argued that if you tortured the data long enough they would confess. In this paper we have tortured the data, but there has been no confession. At best, we can determine the plain packaging policy introduced in December 2012 has not reduced household expenditure of tobacco once we control for price effects, or the long-term decline of tobacco expenditure, or even the latent attributes of the data.

To the contrary, we are able to find a suggestion that household expenditure of tobacco has, ceteris paribus, increased. In our forecasting exercise the actual data come close to breaking through the 80 per cent confidence interval. While we do not want to over-emphasise these results, we do conclude that any evidence to suggest that the plain packaging policy has reduced household expenditure on tobacco is simply lacking.

Can we say 'we told you so' now?

As the truth begins to sink in that plain packaging has been a flop, the tobacco control industry is looking for new ways to justify their existence. Nearly two years ago, I asked the question:

What fresh lunacy will follow? Warnings on individual cigarettes? Smoking licences? All out prohibition?

Smoking licences and all out prohibition have already been mooted and this shamelessly partisan puff piece from the BBC's superfluous 'magazine' section gives an indication of which part of the barrel is going to be scraped next:

Moodie is the last person to underestimate the tobacco companies. Their flair for innovation, and the sheer size of their budgets makes it "very hard for public health to compete," he says.

He adds: "While tobacco companies exploit the entire cigarette pack, including the cigarette, as a sophisticated communications tool, policy makers are less creative [cigarette design hasn't changed one iota since filters were invented in the 1930s - CJS]."

The same techniques the tobacco companies use to attract consumers should be used by governments to dissuade them from smoking, he argues. Since the companies stamp their brand name on each cigarette, he asks, why not put a health warning there too?

He has even mocked up an example of a cigarette carrying the words "Smoking kills".

Watch this space.

Watch this space indeed. That should keep the grants rolling in for another couple of years.

Friday, 21 November 2014

Prohibitionists forced to retreat

The anti-smokers of Westminster, Massachusetts had to demand prohibition before the townspeople finally realised that they were dealing with prohibitionists, but when the penny finally dropped it was bedlam.

Firestorm erupts in anti-smoking US town

The fury – and make no mistake, it is white-hot fury – went way beyond the ordinary wrath of offended citizenry. A plan to ban the sale of tobacco has ignited a call to arms in Westminister, Massachusetts.

The outrage is aimed at a proposal by the local Board of Health that could make Westminster the first town in the United States where no one could buy cigarettes, e-cigarettes, cigars and chewing tobacco.

The uproar stems not from a desire by town residents to smoke: only 17 per cent do (a smidge higher than the statewide average). Many say they have never touched tobacco and find the habit disgusting. Rather, they perceive the ban as a frontal assault on their individual liberties.

...As shoppers come and go, they feed one another's fury.

"They're just taking away everyday freedoms, little by little," said Nate Johnson, 32, an egg farmer who also works in a car body shop.

"This isn't about tobacco, it's about control," he said.

"It's un-American," said Rick Sparrow, 48, a house painter.

Nearly 500 people packed a hearing at a local elementary school held by the three members of the Board of Health. Passions ran high, and the hearing became so unruly that the board chairwoman could not maintain order and shut down the hearing 20 minutes after it began.

The crowd started singing God Bless America in protest as the board members left under police protection. Angry residents circulated petitions demanding a recall election for the board members.
The crowd listened, but once the hearing was opened for public comment, people began to hoot and holler.

"You people make me sick,” one man growled at the board as the audience cheered.

Wayne R. Walker, a town selectman, said that the selectmen had voted unanimously to oppose the ban. “I detest smoking and tobacco in all its forms,” he told the health board, but such a “unilateral and radical approach” as banning all sales would “create a significant economic hardship.”

A resident named Kevin West said that smoking was “one of the most disgusting habits anybody could possibly do,” but added: “I find this proposal to be even more of a disgusting thing.” The shouts after his statement prompted Ms. Crete, who had issued several warnings, to declare the hearing over.

I love it when 'public health' meets the public.

Opponents of the ban blame "outside groups" that want to make the town a test case, conjecturing that because it is so small, no one would care.

By Jove, they've sussed it out. That is exactly what's been going on. As Walter Olson explains, 'grass roots' tobacco control in Massachusetts has long been driven by government sock puppet groups (sound familiar?). Why else would a tiny town of 7,400 people have its own Tobacco Control Officer?

In other words, an extra reason for the townspeople of Westminster to be angry is that they have been paying to lobby themselves. And it’s worth knowing exactly how the game plan works, because similar ones have been rolled out to localities in various states not only on “tobacco control” but on “food policy,” environmental bans and other topics. Grass roots? If so, most carefully cultivated in high places.

Alas, for prohibitionists testing the water, Americans are not yet ready for the 'endgame', the 'tobacco free generation', 'abolition' or any of their other euphemisms and so a hasty retreat has been beaten.

Westminster drops proposal to ban tobacco sales

The local board of health on Wednesday abruptly dropped a controversial proposal to ban all tobacco sales in this small central Massachusetts town, one week after hundreds of angry residents forced a public hearing on the plan to come to raucous close.

Opponents had said the proposed ban, which would have been the first of its kind in the state, was a sign of excessive government interference in private life. Some also expressed concern that a ban would harm the local economy. Board member Edward J. Simoncini Jr. made it clear the reaction had affected his vote.

“It’s no longer under consideration -- thank you, you made the difference,” Simoncini said after a brief meeting Wednesday in which the three-member board, without opening the question to the public, voted 2-1 to kill the proposal.

The audience of about 40 offered muted round of applause.

“It is obvious the town is against it and therefore I am against it,” Simoncini said. Board member Peter M. Munro also voted to withdraw the proposal. He made no public comment.

Have a good weekend.

Thursday, 20 November 2014

The cost of obesity again (already)

From the Telegraph:

Cost of obesity 'greater than war, violence and terrorism'

Obesity is a greater burden on the UK's economy than armed violence, war and terrorism, costing the country nearly £47 billion a year, a report has found.

... The report found the economic impact from smoking in the UK was £57 billion in 2012, or 3.6% of GDP, while the country suffered a £43 billion annual loss from armed violence, war and terrorism or 2.5% of GDP.

The report in question - by McKinsey and Company -  doesn't go into much detail about how these astronomically high figures were arrived at, but they do admit that 70 per cent of the cost is due to lost productivity and that 71% of that is due to premature mortality. This is, at best, an opportunity cost for individuals. It does not represent a bill that has to be paid by anybody, least of all the government which typically makes savings from the lower healthcare costs of people who smoke or are obese.

You might as well say that early retirement or refusing to work at the weekend - or, for that matter, not having children - incurs a cost on society. Furthermore, their cost of each life year rises in line with GDP thereby putting a higher value on the life of people in rich countries than in poor countries and making it a mathematical certainty that costs will rise as societies get wealthier.

The authors are aware that they're on thin ice:

Some critics may argue that lost productivity should not be included, as it does not generate a direct cost. 

That's right, it doesn't - unlike the war, violence and terrorism that you directly compare it to.

However, we believe that, while not a direct cost to society, it should be included because it has a negative economic impact.

Weasel words. How much of a negative impact does it have and who picks up the tab? Alas, they give no answer to this question.

Monetising lost years of life and then collectivising them as if they belonged to society is one of the public health lobby's more ingenious methods to make it appear that personal behaviour - such as getting fat, which is none of the government's business - should be a matter of public policy. It's a bluff and McKinsey and Company's report isn't actually a cost study at all. It's a policy paper about reducing obesity which happens to contain a few unexplained tables with big numbers on it. They were shrewd enough to realise that they would get blanket news coverage if they came up with a Trojan number. This is a phenomenon I have previously termed 'bullshit inflation'. It doesn't matter how the figures are arrived at so long as it produces a scary number that is bigger than the last scary number.

The authors do mention that their cost figures relate to the 'social burden' rather than a monetary cost but, as discussed yesterday, there is no chance of the media picking up the subtle (read: enormous) difference between a social cost to individuals and a financial cost to the taxpayer.

There's a lollipop for the first person to find a politician claiming that obesity costs the taxpayer £47 billion a year and two lollipops if you find someone claiming that smoking and obesity costs the NHS £104 billion (ie. virtually the entire NHS budget). It will happen.

By the way, the favoured policy of McKinsey and Company is something they call 'portion control'. A natural successor to gun control and tobacco control?




Cathy Newman in The Telegraph:

This isn't about giving obese people an easy way out. It's about looking at the bottom line - no pun intended - and realising that surgery is the most financially astute option.

This might sound odd, given that a gastric band operation costs £6,000 a pop, and the NHS is in the grip of a financial crisis. The health service faces a £30bn annual deficit by 2020. But consider the astronomical cost of obesity, and that £6,000 looks like money extremely well spent.

It's only a week since those number-crunchers at McKinsey and Company declared that obesity is a greater burden on Britain's economy than armed violence, war and terrorism. It costs the country a hefty £47bn a year, which really puts the £30bn deficit in the shade.

Wednesday, 19 November 2014

The Wages of French Sin Taxes

If you wanted to mislead without actually lying you could do worse than create a list of ‘social costs’ and present them to the media as the price paid by society for any given activity. No matter how explicitly you state that your study only looks at costs - not benefits or savings - and no matter how clearly you state that many of your costs are paid by individual consumers - not by the government - you can be sure that politicians and journalists will assume that you are talking about net costs to the taxpayer.

I have written at length about the various claims about smoking, drinking and obesity ‘costing’ the UK and US governments eye-watering sums of money. Upon closer inspection, the underlying figures invariably show that the bulk of these multi-billion dollar ‘costs to society’ are dominated by direct costs to the consumer, such as lost productivity and forgone income, but neglect to offset the costs with benefits, such as the heavy taxes paid by consumers. They are squeamish about the cold fact that premature mortality often results in significant savings to the government (by reducing pension payments and elderly healthcare, for example). In short, they are a one-sided assessment of a balance sheet, focusing on the debit side without acknowledging the credit side, and they treat costs to individual consumers as costs to society.

There is nothing technically wrong with compiling a list of costs that excludes savings, benefits and consumer surpluses. Nor is there anything wrong with including private costs to individuals as part of a ‘cost to society’ estimate. The authors of such studies usually make it plain that this is what they are doing. The problem is that very few people will ever read the study. They will only hear that alcohol, for example, ‘costs society’ $100 billion a year and assume that this is a direct cost to the state that should be paid for by drinkers. The conclusion is obvious: alcohol duty should be increased until it can raise $100 billion a year. Obvious, but wrong.

This confusion is not confined to English-speaking countries. Last month, a group of French MPs claimed, contrary to all evidence, that taxes on tobacco do not cover the costs of smoking and even a peer-reviewed journal has published the insupportable assertion that ‘France spends €47 billion a year treating smoking-related illnesses’. Both claims are based on a misreading of a 2006 study by Fenoglio et al. which estimated that the ‘social cost’ of tobacco was €47 billion, the ‘social cost’ of alcohol was €37 billion and the ‘social cost’ of drugs was €2.8 billion.

The Fenoglio study was based on data from 2000 when smoking prevalence was higher than it is today, but that is the least of the problems with using it as a guide to tobacco’s cost to the government in 2014. The €47 billion grand total is dominated by an €18 billion sum for healthcare and another €18 billion sum for lost productivity. The €18 billion cited in this study is much higher than the £2.7 billion (€3 billion) that smoking is said to cost the British healthcare system, but it is true that there are significant costs incurred by smoking-related diseases on publicly funded healthcare systems. The question is whether smokers require more healthcare - or more expensive healthcare - than nonsmokers.

This question has been repeatedly answered in the academic literature over the last thirty years. Van Baal et al. (2008) found that the lifetime healthcare costs of smokers were 21 per cent lower than those of nonsmokers. Similar conclusions have been drawn in many other studies from around the world, most recently by Kampen et al. who confirmed that ‘Elimination of diseases that reduce life expectancy considerably increase lifetime health care costs.’ This is true of smoking-related and obesity-related diseases, although there is much less evidence about alcohol-related diseases.

Clearly, there are many reasons why governments would want to reduce the prevalence of disease, but saving money is not one of them. It may be true that the treatment of smoking-related diseases costs France €18 billion, but the evidence strongly suggests that healthcare costs would be even higher in the absence of smoking. Smoking cannot, therefore, be said to create an excess cost that requires a Pigouvian tax.

The €18 billion cost of lost productivity would also not feature in a calculation of net costs to government. In the case of premature (working age) mortality, the government loses a taxpayer who was paying into the communal pot, but also loses someone who was taking from the communal pot. There is, on average, neither a net gain nor a net loss.

In terms of absenteeism or sub-standard work (as a result of alcohol or drug use), there is a cost to employers, but it is a cost that is ultimately paid by the employee. As Crampton et al. note:

‘Employer and employee are bound by a contractual nexus; the worker’s reduced productivity is internal to his relationship with his employer. A less productive employee is less likely to receive future promotions and salary increases; he bears the burden of his reduced productivity. Firms that fail to detect worker productivity and promote workers beyond their worth will eventually go under.’

Since wages are closely linked to productivity, the cost of lost productivity is already dealt with by normal economic mechanisms without the need for Pigouvian taxes which would, in any case, go to the government rather than the employer.

It could be argued that lost productivity incurs a cost on government by lowering wages and therefore lowering income tax. The logical extension of this argument is that if citizens do not work as hard as they can for the longest possible hours, they are a burden on the state. This is a morally dubious claim, but even if it were true the cost of lost productivity would be a tiny fraction of the figures cited in the Fenoglio study (€18 billion for tobacco, €16 billion for alcohol and €812 million for drugs).

The other major cost of tobacco and alcohol in Fenoglio et al., which makes up €8 billion and €7 billion respectively, is ‘loss of consumer revenues’. The authors provide no explanation of what this consists of but it seems that most of it is incurred by the users of the product and therefore cannot be an externality. Other costs cited, including ‘insurance spending’, ‘private associations’ and ‘other private costs’, are obviously private costs which are not paid by the government and, in most cases, are paid by the consumer of the product.

The study also includes substantial figures under ‘loss of tax’ (€3.7 billion for tobacco, €3.5 billion for alcohol). It is unclear what this refers to, but it is wrong to count lost tax without balancing the ledger with received tax. Tax revenues from alcohol and tobacco (but not, of course, from drugs) are very substantial. France receives €14 billion in tobacco duty and €3 billion in alcohol duty. Tobacco duty certainly exceeds any reasonable estimate of the net costs to the government from smoking and it is possible that alcohol duty does likewise.

This leaves only a small number of costs to the state. €1.78 million is cited as the cost of smoking-related fires, but most of these take place in the smoker's own home and are therefore private, internal costs. The external cost of smoking-related fires to the state is confined to the cost of publicly funded fire services. A further €87 million for alcohol and €740 million for drugs is listed as costs of administration. Although these figures are not explained in the text, they may involve the public sector and could therefore be considered worthy of Pigouvian taxation.

€2.8 million is listed as the cost of tobacco prevention. This could be interpreted as a legitimate cost of smoking, but could equally be seen as a cost of anti-smoking policy.  Similarly, the cost of enforcing drug laws is given as €145 million. The authors note that this is higher than the cost of enforcing alcohol laws (€56 million) and it could be argued that these higher costs are a consequence of drugs being illegal, rather than drugs being consumed. Regardless of whether these costs are seen as genuine costs of tobacco and drug use, they remain a very small part of the overall cost estimates.

It summary, many of the costs listed in the Fenoglio study are not externalities incurred on government by the users of tobacco, alcohol and drugs. Some of the costs, such as healthcare, are genuine costs to public services, but they disappear once savings, benefits and existing Pigouvian taxes are accounted for.

To be clear, there is nothing necessarily wrong with the way the authors have conducted their research. They explicitly state that they are studying gross costs, not net costs, and they make it plain that they are including costs to smokers/drinkers/drug users as costs to society. The problem lies with the way the study has been interpreted. Politicians and journalists routinely confuse ‘gross societal costs’ with ‘net costs to the taxpayer’. Whilst their confusion is understandable, it cannot be said too often that there are vast differences between the two.