Monday 29 July 2019

Economic illiteracy in 'public health'

Anna Gilmore can turn any academic discipline into junk, none more so than economics. As Carl Phillips remarked some years ago...

It is not entirely clear whether she is in the subset of liars who know they are disseminating disinformation or the subset who claim to be experts but simply have no idea what they are doing.  My assessment, based on her previous foray into economics (see my analysis of it) is that while she seems to be intentionally misleading about epidemiology, in economics she probably never read so much as a first-semester textbook before writing her unintentional comedy.

 She had another stab at the dismal science last week and generated a few headlines like this...

Tobacco companies raise prices more than required by tax changes, despite claims

Study undermines industry claims to be concerned that making cigarettes too expensive will push people towards illicit tobacco products

Why would anti-smoking campaigners be complaining about high cigarette prices? Because they think it shows something it doesn't.

For reasons that will soon become clear, Gilmore's latest study would never be published in an economics journal, but it was good enough for the comic Tobacco Control. You can read it here. The problem is evident from the first paragraph.

Higher retail prices, often created by tobacco taxes, are one of the most effective ways of reducing tobacco use and hence the associated harms to health. However, as part of their lobbying effort against tobacco tax increases, the tobacco industry claim [sic] the resulting higher prices will force smokers into buying illicit tobacco. The tobacco industry also claim [sic] they want to combat illicit and if the industry were truly concerned that high prices increased it, they would only increase retail prices in line with changes in taxation, particularly given their already high level of profitability.

Gilmore and her five chums then proceed to work out what proportion of tobacco price rises was due to tax hikes between 2010 and 2015 and what proportion was due to the tobacco industry raising prices. They don't even get this right. Instead, they attribute any retail price rise above and beyond the rate of tax to the tobacco industry, presumably because they don't realise that retail prices are generally set by retailers, not manufacturers.

Leaving that aside, they find that in nearly every case, the 'tobacco industry' raised prices above the rate of inflation, adding between 13p and 53p per pack every three years (while tax rises ranged from 43p to 93p - all figures in real terms).

They then triumphantly conclude:

...for all price segments (apart from the FM subvalue segment in 2013–2015 when this was seemingly being promoted by the industry) the tobacco industry was overshifting taxes, indicating that the industry was not concerned sufficiently about its alleged threat of illicit to avoid price increases. This implies that the industry does not believe their own argument that higher taxes/prices encourage illicit tobacco purchasing.

This is bollocks. It would only be true if the tobacco industry's sole aim was to minimise the size of the illicit trade. Even Gilmore et al. must realise that it isn't. The aim of any business is to maximise profit, and the tobacco industry is only interested in minimising the illicit trade insofar as it affects profits.

A very large proportion of illicit tobacco is produced by the tobacco industry abroad and imported by smugglers and booze cruisers, so it doesn't have much effect on industry profits overall.

A smaller proportion of illicit tobacco is produced by unlicensed manufacturers and criminal gangs. This does have an effect on industry sales, but that doesn't mean that it makes sense for the legal industry to minimise pricing to minimise this traffic.

If you sell 100 million units of something that has a profit margin of 50p per unit, you make more money than if you sell 120 million units with a profit margin of 30p per unit. You could always make more sales by slashing prices, but it doesn't necessarily make economic sense to do so.

As far as the government is concerned, however, revenue is lost regardless of the nature of the illicit trade. From the government's perspective, the optimal size of the illicit trade is zero, and that's why the industry makes this argument to government. It is a perfectly valid argument to make, and it is true that higher prices drive illicit activity, but that does not mean that it is in the industry's interest to minimise its profit margins.

This is really basic stuff. You'd think that at least one of the six authors would have spotted the fallacy.

You could turn their stupid argument on its head to make an equally stupid anti-anti-smoking argument:

Public health campaigners claim that higher retail prices, often created by tobacco taxes, are one of the most effective ways of reducing tobacco use. However, our study shows the industry deliberately increases cigarette prices and is therefore not concerned about consumers quitting or cutting down to avoid price increases. This implies that the industry knows that higher prices do not lead to lower consumption.

This would be mistaken and for exactly the same reason. It is the combination of margin and volume that counts, not one or the other.

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