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9. Economic Controversies Concerning Smoking
This section discusses various economic issues which arise in the discussion of the advantages and disadvantages of smoking. The conclusions drawn are that:
The benefits of smoking to smokers are far outweighed by its social costs. Only if smokers are fully informed about the effects of smoking, are rational in acting on this information and bear all their health costs themselves will the benefits to them of smoking exceed its social costs. These conditions are very strict and few smokers would meet them.
The assertion that the tobacco industry generates substantial employment, output and income relies crucially upon two implicit assumptions. These are:
If smokers ceased smoking they would not spend the money elsewhere;
The resources used in the tobacco industry have no alternative uses.
Both assumptions are unrealistic. It is doubtful if the tobacco industry creates more income and employment than would the alternative uses for the resources. It might quite possibly create less.
It has been suggested that smokers pay their way in countries where tobacco tax revenues exceed smoking-related public health expenditure costs. However, many types of smoking costs (for example, costs borne by business) are not reflected in public expenditures. Tobacco tax revenues are most unlikely to cover the full social costs of smoking.
The assertion that increasing tobacco taxes discriminates against the poor implies that the appropriate public policy would be to reduce tobacco taxes, which would have highly damaging health effects, not least among the poor. It would also impose substantial costs on the rest of the community.
In very few circumstances does the tobacco industry create balance of payments benefits for developing nations. Reducing tobacco consumption will almost certainly lead to a balance of payments improvement.
The lifetime health costs of smokers are very probably higher than those of non-smokers, even though smokers have significantly lower life expectancy, because smoking-related health costs are so high.
The arguments in favour of restrictions on tobacco advertising and sponsorship are very strong.
In public discussion of the pros and cons of smoking many of the arguments put forward are economic in nature. We proceed to review the main themes of the economic discussion concerning the advantages and disadvantages of tobacco.
(a) Benefits to smokers outweigh the costs to the community as a whole
It is often suggested by the tobacco industry that most of the costs of smoking are privately borne by smokers in the full knowledge of the damaging effects of their smoking. If decisions to smoke are rationally taken in the light of full knowledge of their future results, it must be assumed, they argue, that there are private benefits arising from the tobacco consumption which at the very least match (and probably exceed) the costs. These excess benefits are called "consumers' surplus". There are several serious difficulties with this superficially plausible argument.
First, it must be seriously doubted that smokers, at the time at which they take up their usually addictive habit, are fully informed as to the probable implications of their smoking. Once addicted, smokers generally continue smoking even though they may have considerable knowledge of its effects. It is well known that a very high proportion of smokers take up the habit in their teenage years, or even earlier. It is highly unlikely that these young people have access to, or have the ability to understand, all the relevant epidemiological information, which in any case is incomplete. As epidemiological information becomes more comprehensive, tobacco tends to become steadily more implicated as a cause of mortality and morbidity.
Smokers in developing countries are likely to have even lower knowledge of the health impact of smoking than those in developed countries, particularly where there are no, or inadequate, controls on advertising. Lower levels of schooling, health education and access to the media would all suggest this conclusion.
Even if smokers had full knowledge, the consumers' surplus theory necessarily implies the fact that smokers themselves bear the full costs, both health and other, of their smoking. People will adjust their behaviour in the light of the costs of a particular activity to themselves, not the costs to the community as a whole. In practice, smokers almost never bear their full social costs. Their health costs are largely borne by the rest of the community, either through the public provision of social insurance schemes, private health insurance or care provided by family and friends. Although the latter may not involve any actual outlay costs they still impose costs in terms of alternatives forgone (opportunity cost) or of suffering and stress. The costs arising from lost production or lower productivity are, in the main, borne by employers rather than by the smokers themselves.
It is likely that smokers in developing countries, compared with those in developed countries, either will bear a higher proportion of the social costs themselves or will impose them on their families rather than on the broader community. This is because the resources available for health care are considerably less in developing countries and so are less capable of providing interventions for some of the health effects of smoking. The burden will be largely borne by the smokers themselves, by way of poorer health and of income forgone through illness, and by their families, by way of the need to provide care for the smokers. Thus, at the present stage of development in many countries, the proportion of the costs of smoking which are translated into public expenditures is relatively low. As these countries reach higher stages of development these public expenditure costs will rise dramatically.
(b) Smoking generates employment, output and income
The tobacco industry frequently asserts that it generates substantial employment, income and output (value added). These are represented as very significant benefits to society in the sense that, if the industry ceased to exist, these social benefits would be lost. This assertion relies on two fundamental assumptions, neither of which is usually stated and both of which should be closely scrutinised.
The first assumption is that, if smokers ceased to smoke, they would not spend the resulting savings on other forms of expenditure. If that happened, the result, it is implied, would be the total loss of the employment, output and income which the industry generates. The analysis is simplistic and this outcome is highly unlikely. It is much more plausible that ex-smokers would spend that money in other ways which would generate similar levels of employment and output.
Second, it is assumed that the resources used in tobacco growing and cigarette production would have no alternative uses. Above all in terms of alternative uses for capital, this assumption is quite unrealistic for both developed and developing economies. Developing economies in particular suffer from a shortage of capital, with the result that alternative uses would be readily available.
A substantial literature is now starting to emerge which examines the output- and-employment-effects of the tobacco industry on a more realistic basis. For example, a study by Buck et al (1995) estimates the impact of reducing tobacco consumption on employment in the UK, assuming that the money saved on tobacco expenditure was spent elsewhere in the economy. Not only is it unlikely that declining tobacco consumption would reduce employment, it seems perfectly possible that it would in fact increase employment. This is because the alternative expenditures might well be on goods and services whose production involved a higher use of labour than would the forgone tobacco.
A very similar result is produced by Warner and Fulton (1994) for the U.S State of Michigan, a non-tobacco-producing State. They conclude that a reduction in spending on cigarettes would bolster the State's economy. As consumers in Michigan switched their expenditures from cigarettes (which are produced outside Michigan) to other goods and services, many of which are produced within the State, more money would be recycled within the State and employment and incomes would consequently grow.
Warner and Fulton produce a telling quotation from a consultant firm's report to the U.S. Tobacco Institute referring to the net impact of tobacco on the entire U.S. economy:
"It can be argued, of course, that without the tobacco industry, the expenditures on, and resources devoted to, the production of tobacco products would simply be shifted elsewhere in the economy. That is, if consumers were faced with no available tobacco products, they would re-allocate their spending to other goods and services. This re-allocated spending would generate additional business opportunities in other sectors of the economy along with the associated employment and incomes. Therefore, except for transitional problems and differential industry levels of productivity, the aggregate economic results would be substantially the same ... [T]he compensatory responses that would occur automatically within the economy and within the Chase Econometrics U.S. Macroeconomic Model in a total impact-type of study were constrained from taking place within this analysis."
It may be that there is more substance to the argument if the economy under review has a tobacco growing industry. The issue then becomes whether the resources used for tobacco growing have any alternative potential use, that is whether substitute cash crops are available. There can be little doubt that, in developing countries, the capital resources devoted to tobacco growing and cigarette production have alternative uses, given the often chronic shortage of capital. The problems may well be greater in relation to the alternative employment of land and labour.
It is notable that industry-sponsored studies of the employment effects of tobacco never, to our knowledge, include the employment-generating effects of tobacco in the health care industry. It may be that it is here assumed that these resources have obvious alternative uses. Perhaps there is another explanation.
(c) Smokers pay their way
A third assertion frequently emanating from the tobacco industry is that it more than pays its way because tobacco-related public expenditures are exceeded by tax revenue from tobacco. This argument rests on a confusion between public expenditures and social costs.
It is probable that, in many countries, tobacco-related revenues do exceed the relevant public expenditures. This is probably true in most developed countries which, generally, tax tobacco heavily, as well as in many developing countries, which tax tobacco but which do not yet face heavy tobacco-related health expenditures. Furthermore, in some developing countries, some or all of the tobacco industry is publicly owned so that its profits, when returned to the government as dividends, are analogous to tobacco taxes in their effects on the government budget.
However, the fact that tax revenue covers public expenditures does not in any way imply that this revenue covers the full social costs imposed on the community as a whole. This is because many of the costs imposed on the rest of the community do not result in public expenditures. Many of the costs are inevitably borne by private individuals (other than the smokers themselves) and by the business sector. Even if tobacco-related revenues exceed relevant public expenditures, they are most unlikely to match the full social costs of smoking. Tax revenue from tobacco may well cover the relevant public expenditures but it most certainly does not cover the full costs imposed by smokers on the rest of the community.
(d) Tobacco taxes discriminate against the poor
It is often suggested that tobacco taxes are highly regressive, that is that they bear most heavily, at least in relative terms, on the poor. The poor pay a higher proportion of their incomes on tobacco than do more affluent community groups. Thus the use of high tobacco taxes should, it is asserted, be avoided because of the undesirable effects on the poor.
There is, indeed, substantial evidence that in many countries tobacco taxes are regressive. The difficulty with the above line of argument, however, lies in the implication which is drawn that tobacco taxes should not be increased, indeed that preferably they should be lowered. There is substantial empirical evidence to suggest that the tobacco consumption of the poor is more responsive to tax increases than is the consumption of the more affluent smokers. Commonsense would certainly indicate that the poor would be the group least likely to be able to absorb tax-induced price increases. However, the implication of this fact is that the poor would be likely to reap the greatest benefits, in health terms, from higher tobacco taxes.
A corollary of the tobacco tax regressivity line of argument would be that tobacco taxes should be reduced in order to benefit the poor. This benefit would most likely be in the form of assistance to an early grave, given the wealth of evidence on the damaging effects of smoking on life expectancy. It would at the same time impose substantially increased costs on the rest of the community. From the perspective of government, tax revenue would fall while health expenditures would rise.
(e) The tobacco industry provides balance of payments benefits
These balance of payments benefits are usually expressed as the benefits of greater exports or of reduced imports resulting from import-replacement. At first sight the issues here appear to be relatively complex but, once again, it is possible to clarify them fairly readily.
The fundamental question to be asked is not "Does the tobacco industry yield balance of payments benefits?" but "What would be the balance of payments effects of reducing domestic consumption of tobacco?" There is, in practice, no prospect that smoking can be completely eliminated. There is, however, every prospect that appropriate public policies could reduce tobacco consumption very substantially.
There are five broad possible effects of the existence of a tobacco growing and/or manufacturing industry on a nation's balance of payments accounts:
Import of tobacco leaf and/or of manufactured tobacco products leading to a current account deterioration;
Export and/or import substitution of tobacco/tobacco products leading to a current account improvement;
Import of capital equipment by the tobacco industry leading to a short-term current account deterioration;
Foreign investment in the domestic tobacco industry leading to short-term capital account improvement;
Foreign ownership in the domestic tobacco industry leading to profit repatriation and a current account deterioration.
In almost all situations a reduction in domestic tobacco consumption will lead to a balance of payments improvement. Reduced consumption will usually lead to a reduction:
in imports of tobacco and tobacco products;
in imports of capital equipment; and
in profit repatriation by foreign-owned or -controlled tobacco companies.
There would appear to be no reason why exports of tobacco or tobacco products should fall as a result of a decline in domestic demand. There could well be a decline in foreign investment in any domestic tobacco industry, but this will be at least partially offset by declines in both imports and profit repatriation.
In summary, reducing tobacco consumption is likely to be an effective way of producing a balance of payments improvement.
(f) The lifetime health costs of smokers are no greater than those of non-smokers
This line of argument asserts that, even if it is accepted that smoking causes increased health problems, the premature deaths of smokers reduce the call on health care resources. Non-smokers use health resources for non-tobacco related conditions and over a longer period of time, because their life expectancy is significantly higher.
Collins and Lapsley (1996), in an Australian study, have estimated both the smoking-related health costs in a given year and the health "savings" in that year which have resulted from premature smoking-caused deaths occurring in earlier years. They estimate that the health "benefits" in any one year represent less than one half of the extra costs. This is largely because smoking-related morbidities are on average much more expensive to treat than non-smoking-related morbidities.
The fallacy of the lifetime health costs line of argument, in its wider community context, becomes clear if we examine its corollary-that smoking should be encouraged in order to reduce health care costs. This policy would involve encouragement of higher death rates in order to reduce health care costs.
(g) Advertising does not increase tobacco consumption
Much of the thrust of public policy towards smoking in developed countries has been to prohibit tobacco advertising and one of its offshoots-the sponsorship by tobacco companies of sporting, cultural and community functions. The tobacco industry has responded by asserting that advertising and sponsorship influence market shares but not market size. That is, advertising determines the share of the total market which is gained by each brand, but any increase in the demand for one brand will be at the expense of a countervailing reduction in demand for other brands. Thus, it is asserted, since they do not promote higher tobacco consumption, there is no case for control of advertising and sponsorship.
The question of whether advertising promotes increased tobacco consumption is an empirical one. It is, however, not possible to assert with complete authority from empirical studies that tobacco advertising controls lead to reductions in tobacco consumption. This arises probably because of the technical difficulties involved in empirical work testing the links between advertising and tobacco consumption. In the absence of conclusive empirical evidence, a priori reasoning leads to support for controls on advertising and sponsorship.
It is clear that advertising does not reduce the overall demand for tobacco. Its effect must be either neutral (as the tobacco companies claim) or to increase tobacco demand. If advertising increases market size, the justification for advertising controls is clear, in terms of the health and other costs which the community will incur. If it does not increase market size, the industry gains no net benefits from advertising and the resources used in advertising can be seen to be wasted from an industry, let alone a community, viewpoint. Even in these circumstances, advertising controls are still justified.
In developing nations, advertising is likely to divert skilled resources from more productive uses. It will probably also have adverse balance of payments effects since there is likely to be a high import content in advertising campaigns undertaken by multinational companies.
