Friday, October 19, 2007

Oregon Econ Blog Comments & M50

This blog will be exactly one month old tomorrow. I was nervous about starting it - I spent six years as a professor in a state, Colorado, where the political climate was so toxic that even attempting a neutral blog could invite a barrage of trouble. So it was with much hesitation that I began this one. Part of my goal was expository, especially as a way to get my students thinking beyond the classroom. Part of it was to get people discussing policy in Oregon. I make no claim to have some monopoly on the truth and I am acutely aware of the limits of economic thinking. Nevertheless, I want to push economic arguments and have people dissect and push back with other economic arguments or arguments from other perspectives. However, I didn't really think the reality would live up to my aspirations.

I was wrong.

Though I have only had a few commenters on this blog so far, the comments have been better than good - they have been excellent. Every single comment so far has made me stop and think hard about the comment itself and my original argument. For that I thank all of you. I now have renewed energy and faith in this endeavor I am excited to get more students involved and to have more commenters from around the state sharing their perspectives with me, challenging me and the economic way of thinking, and discussing policy.

Two recent comments about my post on M50 really struck me as so good that I decided to reply in this post rather than in the comments.

First, 'keith' writes:

I don't understand, exactly, how smokers cost the state more than non-smokers -- certainly not the $11. I understand that smoking is associated with illness and a shorter life-span. By contrast, non-smoking is associated with a longer life-span; ending, of course, in illness at some point. I don't mean to be crude, but everybody eventually gets ill and dies; and being sick is expensive, and some of those costs are borne by the state. If smokers' illnesses are more expensive than others, I would think that at least some of these costs would be defrayed by the fact that they are likely to pull for a shorter time on social security, retirement insurance, and in general the social expenses of living old.

This is such an excellent point, I had to mull it over for a long time and I still do not have a good reply. My first response was, 'well yes, but smoking has direct costs associated with it that are not reflected in the price, living well does not.' But then I played devils advocate: if eating whole foods, leafy greens and exercising make you live longer, and if living longer is costly to society (and I agree it is in terms of health care for the aged) then why don't we impose Pigouvian taxes on whole grain bread, lettuce and health club memberships? From a pure economics perspective the answer is that the two are equivalent. A second answer was one of welfare economics: it is socially optimal to have people live as long as possible for this allows the highest 'utility' possible for a society (apologies for the econ-speak, but I have to indoctrinate you all in little doses...). Smoking lowers societal utility by shortening life-spans and is costly on top of that. This argument has some merit but largely fails by the counter argument that smokers are engaging in an activity of which personal costs are well known and yet since they do it, they must be engaging in a utility maximizing behavior including the lost utility from the extra years not lived (N.B. see addiction not below). So finally, I have only one good response (but no good data to back it up): it is very likely that living a healthy and active lifestyle saves as much in societal costs during the prime years as it is costly during the extended old years. Playing the devil's advocate again, maybe you could make an argument that nicotine makes people so extra-productive in their working years, that it compensates the extra costs from health complications in later years - but I personally doubt this very much (but maybe I have stumbles on an interesting research question: do countries that have a high incidence of smokers have higher overall productivity than low smoking incidence countries?).

Second, 'Chris Lowe' asks a more philosophical question about economic thinking:

Your discussion of externalities is interesting but the application to smoking reflects one problem I have with marginal utility economics at times. To me the greatest negative externality about smoking is the premature loss of human lives, not reduced to a balance sheet of income, productivity and costs, but persons and all the human ties that envelop them, cutting of which harms others. I've felt such smoking costs myself, observed it in others, and fear it for certain friends.
I have an interesting (and I'm going to guess very unsatisfactory) answer to this, again from an economist's perspective: I agree that there are deep emotional and I guess I'll say 'human' costs associated with smoking, especially for those who are close to someone who has smoked and then is stricken with a debilitating illness. But economists would call this an additional social 'cost' associated with smoking and as such should be included in the Pigouvian tax calculation. Of course it is impossible to measure (the thought experiment would be for an individual: how much would I be willing to pay to not have this person I care about stricken...). But the thing is, these costs are, I believe, internalized by smokers themselves, meaning a tax is unnecessary. To put this in personal terms, my father has smoked all my life and I worry constantly about what this will mean in the future in terms of my own pain and suffering (as well as his, of course). If I could put that into monetary terms (I can't) and if that could be reflected in the price of cigarettes through a tax, then his decision to smoke would be a decision based on how much enjoyment he gets from smoking versus the cost of the cigarettes plus the cost of my suffering. But of course he (I hope) already internalizes how much his loved ones will suffer from the increased likelihood of serious illness when he decides to buy that next pack of cigarettes - so the tax is, in a sense, there.

As a final note: there is a whole economic literature on addiction and 'time-inconsistent preferences' that argues that people start smoking making rational marginal benefit versus marginal cost calculations but fail to understand or fully internalize the nature of addiction (do any of us really know what it is like until you are there?). And so ex ante rational choices become quite irrational ex post. If this is true of many smokers than Pigouvian taxes do an even better job of leading to a socially optimal level of smoking.


Jeff Alworth said...

Both China and France, two countries famous for their smoking, spring to mind as pretty productive countries. But it seems like there are a lot of variables in the productivity calculation, and it would be hard to know how nicotine fits in. (France, for example, also abets nicotine with coffee, while China has relatively milder tea. So.)

As to the costs of a smoker versus a non-smoker, there are a couple of datasets you could look at which I instinctively believe must already exist: the cause of death and its costs in smoking versus nonsmoking populations and the cost of health care for the same two populations during life.

I don't know this, but I imagine that smokers suffer greater rates of illness and have higher health costs even during their productive years. Since many die of lung cancer, the costs associated with treating that could be calculated against all other costs associated with death.

But public policy must include factors beyond economics, even when we're talking about revenue. For anyone seriously considering an issue like the value to a society of early death versus longer, healthier lives, cost can only be one small consideration.

keith said...

I still think we need to take into consideration whether the tax is a fair tax. For people who have smoked for some time, it would seem to me exceedingly unlikely that they would quit because the price has raised 20%. Rather, the law makes sense as a source of revenue, because the lawmaker understands that the smoker won't quit. By contrast, a similar special sales tax on, say, brown shoes or a certain variety of tea would be far less successful as a source of revenue; people, lacking the factor of addiction, would simply stop buying the product. In this sense, this would be a punitive tax on a particularly vulnerable segment of society. In a political climate of antismoker sentiment -- in part, no doubt, an attack on a segment of the population with a minority appreciation of the utility of extreme old age -- this would seem to be a choice by the majority to shoulder a discreet minority with a heightened share of the tax burden.

I believe that taxation should, as a general rule, be progressive; that is, the share of taxation should shift somewhat in the direction of those most able to pay. I believe that this point of view, when considered on its own merits, garners a majority of support here in Oregon, and in part expresses our historical opposition to sales taxes. If we are not sure of the argument that smokers qua smokers are an exceptional draw against public funds -- and we accept the argument that, today, smokers are more likely than average to be poor persons (as will be observed passing by any area where homeless persons congregate) -- than, I think we arrive at a place where we are faced with a question of unfairness in the tax system. Poor children need health care, of course; but why is paying for this the special burden of people who smoke cigarettes?

Shawn said...

"maybe you could make an argument that nicotine makes people so extra-productive in their working years"

i only have anecdotal evidence to the contrary, but here it is anyway:

i work in a small office with 4 other people. i'm a non-smoker, but everyone else is. about every 30 minutes or so, the smokers head outside to take a "smoke break" wherein they are gone for 5-10 minutes (presumably, smoking). i, on the other hand, take no breaks beyond my 1/2 hour lunch break.

however, this may not be indicative of the average American workplace. just saying...