Friday, 19 March 2010

The Policy Exchange make fools of themselves


Smoking is, depending on your point of view, either an issue of health or an issue of liberty. It's not really an issue of economics. The two warring factions believe health/liberty to be priceless so economics go out of the window.

It has long been recognised that tobacco brings in far more in tax revenue than is spent on treating 'smoking-related' diseases. What is less well recognised—because few people are so indelicate as to say it—is that the government has a financial interest in seeing people die at the age of 65, or as soon as possible thereafter. It's not a nice thought, but it's simple economics. Between the ages of 16 to 65, most of us are net contributors to the state. Before and after that, we are an expense.

From a strictly economic perspective, the government's ideal citizen is someone who works all their life, pays a lot of tax and then dies not too long after retiring. Smokers, for instance.

This is an uncomfortable fact for tobacco control. Nonsmokers must be taught to believe that smokers hurt them both physically and financially. They don't, but they've done a good job of convincing them on the first count, and now it is time for the second.

Enter the Policy Exchange. This think-tank has released a report which makes the astounding claim that British smokers cost the state more than the £10 billion they pay in tobacco tax each year. They do so using the most appalling methodology.

The fundamental problem—and this is a feature of all such studies—is that they assume that if a smoker doesn't die from a 'smoking-related' disease, he won't die from anything. Or at least not anything that costs money to treat. This is, shall we say, rather counterintuitive. 

It also assumes that the money to treat these diseases shouldn't come from the 11p in the £1 National Insurance contribution that every Briton is compelled to pay, but from additional tax on tobacco. In effect, the smoker's National Insurance contributions are given to a nonsmoker. Again, this seems a tad unfair and is hardly in the spirit of the NHS.

Once you've swallowed all that, you are asked to believe that smoking costs the NHS £2.7 billion. This figure is often bandied around and the usual source is a 2008 ASH document called 'Beyond Smoking Kills'. This, in turn, cites another ASH document: 'The Cost of Smoking to the NHS' by C. Callum. But this document does not seem to exist. There is no trace of it on the ASH website and, for we know, the £2.7 billion was plucked out of thin air. All that is left is this vague leaflet, also from ASH. 

But it'll do for the Policy Exchange, who slap another £200 million on and...

Ker-ching: £2.9 billion in healthcare costs.

So far, so good. But a lot more is going to be required if we are to get beyond that pesky £10 billion mark. 

To that end, £4.8 billion is conjured up for 'lost output'. This is the contribution smokers would have made to society had they not died during their working life. Matthew Sinclair spots the problem with this at ConservativeHome:

That loss is clearly mostly to the smoker themselves (the income they miss out on), that means it isn't a societal cost but a private one and can't justify Pigovian taxation.

Quite so. Let's not forget that the government does not own its citizens' bodies or their lives. We do not have a duty to work for the state or to maximise our productivity. You would hope that a supposedly centre-right think tank might recognise that.

The Policy Exchange assumed that these smokers wouldn't have any other health problems (rather unlikely), and that they would have worked to the age of 74 (what?!!). This second assumption is crucial because only a fairly small proportion of smokers die before the age of 65. 

They did, however, find 757 smoking-related deaths amongst the 35-39 age group (really? Who are they?) who each 'cost' society £750,000 (!) by dying young.

Better still, they assumed that none of these smokers would have had a life on the dole or on incapacity benefit. As a result, they didn't have to face the awkward task of showing a smoker saving the state money by dying.

Nor do they mention any of the pensions, benefits, prescriptions, hip replacements, meals on wheels, geriatric care and operations that won't have to come out of the pot thanks to smokers dying prematurely. And that's a damn good job, because that amount alone would dwarf all the rest of the figures combined and lead the reader to the unpalatable, but truthful, conclusion that smokers are net contributors to the economy. 

Oh, and stick another £713 million for deaths from passive smoking, even though they only exist on an epidemiologist's lap-top.

Ker-ching! £4.8 billion

Then there's litter collection. Everyone in Britain pays to have the streets cleaned but, according to the Policy Exchange, smokers should pay twice. The cost of collecting cigarette butts is, they reckon, £342 million. Stick it on the price of fags.

Ker-ching! £0.3 billion

And what about those cigarette breaks? They must be costing the country a fortune, right? The Policy Exchange estimates that smokers spend 5 to 10 minutes smoking while at work. Just imagine all the wealth they could be creating in that time! It's not as if everyone takes a break at work, especially since two 15 minute work breaks are mandatory under European law. Nah, let's pretend it's unique to smokers and call it 'lost productivity'.

This is pure baloney, as Mark Wadsworth points out:

How on earth is a smoking break a 'cost to the taxpayer'? That's like saying that since most people don't work at weekends, weekends cost the economy about £400 billion per annum

Never mind. Call it a cost and let's get to that £10 billion. And let's slap another £2.5 billion on because smokers are supposedly absent from work for 33 hours more than nonsmokers each year. This 33 hour absenteeism might have nothing to do with smoking, and probably isn't. It might not even be true at all, but it's grist to the mill. Okay, someone else estimated that the cost was less than half of that, but let's go with the highest figure we can find. Hence...

Ker-ching! £5.4 billion

The only problem is the tobacco industry's undoubted contribution to the economy. British American Tobacco alone turned over £33.9 billion in 2008 and is a significant employer. Without smoking, these people won't have a job, won't pay tax and will be claiming benefits. The same is true of their suppliers, distributors and retailers. This is a tangible economic benefit and the Policy Exchange does not want benefits eating away at their figure. So how to skirt around it? 

Smoking impacts on business in a variety of ways, and, when viewing our current paradigm, losses should be considered alongside benefits.

Agreed. Off you go then.

Previous studies have demonstrated that, were people not to spend money on cigarettes, they would direct their expenditure elsewhere. Other leisure industries support greater workforce, and have a significantly lower tax profile. This leads to an aggregate increase in employment, with consequent economic benefits. Indeed, they estimate that the benefits of to be derived from leisure spending going elsewhere would significantly outweigh the detrimental effects.

In other words, ex-smokers will spend their money elsewhere, thereby helping other industries which will then create new vacancies for those redundant tobacco execs and newsagents to fill. Well, yes, probably. But there is no guarantee that those industries will be in the UK. 

More to the point, the fact that people might find work elsewhere (though doubtful with over 8 million unemployed) is not a reason to ignore the costs of unemployment. I don't seem to recall many people in the 1980s telling the miners that their plight didn't matter because new industries would emerge. Nor have I noticed UNISON telling their members not to worry about mass redundancies because the money saved will be spent elsewhere.

A cost is a cost. Any financial spreadsheet needs to show that.

For these reasons we exclude the role of business from our calculation.

How very convenient. We wouldn't want the "role of business" to intrude on an economic analysis, would we?

And that, my friends, is how the Policy Exchange does its sums. They get to a figure of over £13 billion and want a 5% increase in the price of cigarettes which, by a remarkable coincidence, is exactly what ASH were demanding two weeks ago. 

Its lead author, Henry Featherstone, seems to be rather chummy with ASH, as Dick Puddlecote has noted. He is already utilising the fallacious arguments of that 'charity', turning up with a false dichotomy at ConservativeHome where he accuses his many critics of "defending smoking"—ie. anyone who criticises the 'good guys' must be helping the 'bad guys'. 

It's not defending smoking, Henry, it's defending reason.

Funnily enough, I was at the Policy Exchange last night. They were talking bollocks then as well.


UPDATE:

Mark Littlewood (Institute of Economic Affairs) attacks the notion that it is our duty to maximise our productivity for the state here.



9 comments:

Mark Wadsworth said...

Ta for link. But no doubt this £13.7 billion figure will become common currency, just like all the other made-up figures.

Dick Puddlecote said...

Just a note on the £2.9m healthcare costs. Henry took a view based on the ASH 'Smoking Kills' £2.7bn and the BHF sponsored £5.2bn. I couldn't be bothered to look for it but I believe the BHF study included cost to the economy as well as healthcare.

So Henry has double-counted.

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Anonymous said...

Reminds me of those maths questions i used to do in school.

If you have a series of numbers from...

2.7 upto 5.2 upto 13.7

What is the next number in the sequence?

Ann W. said...

Beautiful Chris!!!
I have several cost reports detailing very similar calculations for Canada.

In the study "UPDATE ON SMOKING COSTS TO SOCIETY" January 15th, 2004 for the Québec Coalition for Tobacco Control.

The report dismissed the industry's benefit with a little footnote near the end "Taxes paid on tobacco manufacturers’ profits and their employees’ revenues were voluntarily excluded from our analysis, since the tobacco industry’s profits would have been transferred to other sectors in the absence of this industry. Similarly, tobacco workers would have worked in other sectors, and we have no reason to think that they would not have paid equivalent taxes."

On absentee, they don't match their own figures.

"The average number of sick days for current smokers and former smokers was estimated at 13.5 per year" yet in detailing the cost of decreased productivity, they only use 7 days?
"Since the calendar year consists of 365 days, we excluded 104 days for weekends, 10 for holidays, 15 for vacation days, and 7 for sick days, thus leaving 229 workdays."

One of their best slight of hand is calculating that every worker in Canada receives company benefits including life insurance. Very few low paying jobs pay anything but min wage and since smokers are suppose to be at the lower education range...........

DaveA said...

Mark Littlewood Director General of The Institute of Economic Affairs picks up the gauntlet on Dr Henry Featherstone's ramblings and the Policy Exchange Debacle.

http://blog.iea.org.uk/?p=1990

Anonymous said...

As usual, great stuff, Chris.

While we've been busy fending off direct attacks in the form of ETS and "third hand smoke", perhaps we've missed the larger and more commonly cited myth that tobacco users (or that matter, the "obese") cost society and increase the costs of health care.

An economist named Kip Viscusi disproved these ideas years ago.

Put simply, it's all a smoke-and-mirrors myth.

WS.

Ann W. said...

WS, the anti's have discounted Kip Viscusi's with........

http://www.sourcewatch.org/index.php?title=W._Kip_Viscusi
"In October 1994, the National Bureau of Economic Research (NBER, an organization which received support from Philip Morris) issued a paper by Viscusi called "Cigarette Taxation and the Social Consequences of Smoking" in which Viscusi argues that smokers actually save society money by dying earlier than nonsmokers."

vanzare apartamente cluj said...

Very interesting...hmmm... cigarettes are a business ... health is a business, but I didn't think that even death is a business. I don't think that is natural.