Tuesday, 10 April 2012

Getting tobacco costs wrong

Jason Krupp screwed up the burden tobacco imposes on the New Zealand health system. But it's not entirely his fault. A comment on my prior post finally twigged me to how he screwed up - it should have been obvious. Again, here's what Jason wrote.
According to the World Health Organisation's Economics of Tobacco Toolkit, health costs attributed to smoking account for between 6 per cent and 15 per cent of national healthcare expenditure in developed countries.

In Australia, smoking costs equated to between 2.1 per cent and 3.4 per cent of gross domestic product.

New Zealand was not featured in the report but, if the results were comparable here, it would mean Kiwi taxpayers fork out about $7 billion a year to treat smoking-related diseases.
The first figure is a WHO estimate of the burden borne by government healthcare systems. The health budget here is a bit under $14 billion. So extrapolating from that value would give you a range from $840m - $2100m. That's well in excess of prior estimates from either the Cancer Society or Des O'Dea, but it's only 3-8 times larger than those figures. And far far less than Krupp estimated. But, with Treasury's site down as much as it has been lately, the health budget might not have been readily available.

Krupp's second line is almost certainly an estimate from the Australian Collins & Lapsley report into the social costs of smoking. I have banged on, repeatedly, about how it's easy to conflate these social cost measures with costs to the government. And that's what I think Krupp's done. He took the 2.1-3.4% of GDP estimate, read it as "costs to the health system" rather than as "costs to the country, including costs borne by smokers, and likely including some double-counting as value of statistical life estimates and productivity costs overlap." And he uses that to generate the third line. GDP is around NZD$200 billion.* Multiply that by the 3.4 upper end of the "percent of GDP" figure from Oz and you get a number that, with some upwards rounding, hits $7 billion.

I really really hate "Social costs of Blah" studies. Because it's just so easy for somebody who doesn't know the term of art employed to read it as equating to costs on the taxpayer. Just like Krupp did. "Smoking costs" turned into "Kiwi taxpayers fork out ... to treat smoking-related diseases".

The social costs of social cost studies, in screwing up how the public views the distribution of the burden of various activities and consequently making folks think a paternalistic policy is really a Pigovean one, are not insubstantial.

* I wish Stats NZ would report the actual GDP figures in its quarterly updates. It's surprisingly hard to find "What is the GDP of NZ" anywhere on the Stats NZ site. You'd think it'd be in the "Top Statistics" page; nope. Just growth rates. How about on the GDP page? Lots of link there to estimates on growth rates; can't see a "This is the GDP of NZ" one. Maybe over on National Accounts for year-end? Nope. Latest quarterly update? No. Press release on that update? No.  Why do I have to go to the IMF website and divide by the exchange rate to do this, or add up quarterly numbers from the RBNZ? Stats NZ has the number buried in Tab 6.1 of an Excel sheet here (thanks, Diana, for the pointer!), but shouldn't that be up front somewhere?


  1. "The social costs of social cost studies, in screwing up how the public views the distribution of the burden of various activities and consequently making folks think a paternalistic policy is really a Pigovean one, are not insubstantial."

    Sounds like ripe potential for a satirical paper. Use as many dodgy CBA practices as possible to come up with a multi-billion dollar social cost for social cost papers. Although if you prefer subtlety, consider making it for an innocuous "merit good" instead.

    1. In my 224 class, I come up with a dodgy cost-benefit analysis making the case for a 50 foot gold statue of me in Cathedral Square.

    2. How much would it actually cost to erect a 50' tall Crampton in Cathedral Square? And have you updated the estimate of benefits to allow for the much reduced public access to the square post-quake? Presumably a decent chunk of the public good resulting from said erection would be the warm-fuzzy factor for all those viewing the work, the adulation/adoration it evokes, and the number of tourists it would attract.

    3. I gave an assumed cost number. Then value to those gazing on the statue. Then option value among those who haven't yet gazed on it. And multiplier effects from spending from increased tourist trade to the square. Then existence value. Dodgy stuff all the way through as stuff to watch out for in dodgy consultant reports.

    4. Good, but that's more specifically a criticism of studies that exaggerate benefits for special interest projects rather than those that exaggerate costs for what puritans disapprove of.

      If you're trying to get the attention of the masses, I suggest claiming that rugby has massive social costs. If you're trying to get the attention of the puritans, I suggest claiming massive social costs on something most puritans probably support subsidies for - maybe opera? Imagine the lost productivity by people who attended rugby games or operas rather than working overtime...

  2. I too have noticed how they bury the GDP statistic. They seem to emphasise the percentage change from period to period instead. I wonder if they do this because the GDP figure is not very accurate, and they think that a lot of the errors are systematic and don't vary much from period to period, so that the percentage change is more accurate. Or perhaps they just don't like to be pinned down to an actual dollar amount if it is inaccurate. Perhaps they think it would be harder to prove that a percentage change is wrong.

    1. The number is in there, if you drill down deeply enough. It's just a pain for anybody who wants to be able to work back from "% of GDP" anything to how big that number is in absolute terms.