Tuesday 1 February 2011

Assuming retailers are idiots...

Oh, what passes for economics at the Ministry of Health. I was curious to find out whether Treasury had been consulted about the MoH's recent $1.9 billion estimate of the cost to Vote.Health of smoking-related illness. And since I was putting through the OIA anyway, I thought I might throw in an additional question. Did the Ministry of Health think that a ban on the retail display of tobacco might increase profits for tobacco retailers?

Turns out that MoH never asked Treasury for any advice about its $1.9 billion figure; Treasury was not asked and intends to provide no review of the estimate. But they did note to MoH that they would be interested in better understanding the data and method given how far above prior estimates that figure was.

The throw-away question proved the far more interesting. Witness below how someone at Treasury finally excised one small bit of stupid that otherwise would have appeared in the Cabinet Papers.

MoH first highlighted the experience of some retailers who'd given up tobacco and found they then had space for higher margin products: see paragraph 35 of Document 3, 1 September. They also note "improved security" as a benefit of removing tobacco displays.

MoH builds on this in the document of 9 September at paragraph 69 (Document 7)
Some retailers have already made their own commercial decision to remove tobacco displays, and with retail margins on tobacco beginning to decline as our excise increases start to bite, there is potential for retailers to replace tobacco displays with shelf space for more profitable items.
They drop the note about retailers' security concerns also motivating the removal of tobacco items as it might have dawned on them that increased armed robberies consequent to the tax increases they pushed wasn't exactly something they might want to highlight. But Health here seems to think that the ban is the critical factor needed to get small retailers to make more efficient use of their shelf space. Interesting. Ok, maybe it just didn't occur to them that retailers are profit-maximizing.

Treasury replied 10 September enquiring whether MoH's $1.9bn health cost figure were net of smokers' reduced life expectancy (perhaps Treasury reads the blog!). Treasury notes further:
As I've raised previously, I think the argument made in paragraph 69 that retailers may be able to replace displays with more profitable items is inconsistent with the actions of retailers currently (i.e. if it was profitable to do so, why haven't they already removed displays in significant numbers?)
This isn't rocket science economics - this is Econ 101. Treasury gets it right. MoH doesn't. I don't know what "previously" means as this is the first note on it released by Treasury; perhaps it was in a meeting at which notes weren't taken.

MoH tones things down a bit by 29 September (Document 9, para 37) by saying
...there is likely to be further potential for other retailers to replace tobacco displays with shelf space for other possibly more profitable items.
That the space would otherwise sit vacant seems unlikely. That other items would be more profitable - well, they'd already have made the change in that case. Treasury told them once this isn't much likely. Repeating the error sounds more like trying to get it in to convince Cabinet.

And Treasury replies again, Document 8 of 30 September, noting:
The argument made in paragraph 37 that retailers may be able to replace displays with more profitable items is inconsistent with the actions of retailers currently (i.e. if it was profitable to do so, why haven't they already removed displays in significant numbers?) and inconsistent with the point made elsewhere in the paper that the number of retailers selling tobacco is increasing.
The Ministry of Health repeatedly tried to assert that retailers banned from displaying tobacco products would have recourse to more profitable product lines. Treasury repeatedly reminded them that if such products existed, the stores would already have made the switch.

And Treasury seems to have won that battle. Here's the final paragraph from the now-published Cabinet Papers:
53. The process would also provide an opportunity to further educate retailers and explore business opportunities from being 'part of the solution', eg. selling nicotine replacement patches, lozenges and gum to help smokers quit. This would enable people to choose between an expensive product that harms them, and an inexpensive product that helps them quit, and could provide retailers with a new line of business to replace tobacco.
Congrats to the anonymous (name redacted in OIA papers) and hitherto unsung hero at Treasury who bludgeoned one small bit of stupidity out of the Cabinet Papers.

None of it much mattered though. The policy seems set to pass regardless of its merits: Tariana's payday. But it's instructive on the relative merits of Treasury and MoH when it comes to basic economics. And it's instructive on how far MoH will stretch to justify its preferred policy outcomes unless bashed about the head repeatedly.

I've put up all the OIA documents below in case others might enjoy trawling through for howlers. I'll only highlight one more: MoH asserts that "smoking imposes a large (>$10bn) health, social and economic burden on New Zealand" in an early draft of the Regulatory Impact Statement (doc 5). Note that O'Dea's prior report had tangible costs, including a bunch of private costs, at $1.7 billion. There's no cite on the $10bn figure and I can't see it elsewhere in the reports. Very strange. Perhaps a foreshadowing of really big numbers to come.

Tobacco OIA 2011


  1. Ooo... easy there Eric...

    The MoH has some very good Economists. Their work on funding, pricing and investment in the National Health Board, together with their advice in the MoH Policy section on industry structure, efficient contracting and regulatory designe are top notch. And I'd like to think my little corner of the National Health Board's Workforce are has been supported by quality advice under-pinned with solid economic foundations (well, we'll find out at the next PR time, aye? ;) ).

    The bulk of our work goes unnoticed externally because its in the nature of advice to decision-makers further up the food chain.

    Having said that, not all policy advice is developed by Economists. That's probably what's happened in this example.

  2. @James: As I understand things, there are sharp differences in quality control between folks reporting ultimately to Ryall and folks reporting ultimately to Turia.

  3. Interesting ongoing discussion on tobacco costs. What staggers me about NZ is that someone is encouraging the Associate Minister to claim NZ costs of treating smoking related illness and disease are three times the Australian estimates with a population 4+ times that of NZ. Either NZ health care is outrageously wasteful and expensive or the figures are being fudged for NZ. It seems the latter is the case. Even renowned tobacco control advocate Simon Chapman from Sydney University last year said that the $5 billion (Australian) taxes collected on cigarettes would outstrip the purely medical costs of treating smoking induced disease (see SMH 5 May 2010).