Sunday, January 1, 2012

U.S. BUDGET | How Candy Cigs Hike the Deficit

Exhibit A. Candy Cigs 
for Sale
Gawker in 2010 said farewell to candy cigarettes. But the death of these products was exaggerated—they are still for sale. I argue they have a high social cost and contribute to the U.S. budget deficit. Bear with me. Follow the dots, 1... 2... 3... 4.

1. Candy Cigs Are Still Sold to Children

Candy-cigarette promotions are clearly targeted at children, and are packaged for stores that sell to them, on several sites via Amazon, accessed in December 2011. Grade school children are pictured smiling at "World's King Size Candy". (See Exhibit A at left.)

Candy cigs are wrapped in packs that look just like packs of cigarettes, with external markings that imitate those of regular cigarettes. The product is a box of 24 packs of candy cigs in three layers of eight. It weighs two pounds and costs about $5, sometimes more.The candy is not allowed to have the red tip that you may remember from your childhood, according to a "Government ruling".

2. Health-Care Costs Loom Large in the U.S. Budget

Now let's look at the U.S. budget. Dr. Peter R. Orszag headed the Congressional Budget Office (CBO) in 2007-2009. Then he headed the Office of Management and Budget (OMB) in Washington. He presented his views on the cost of medical care in a speech in New York City on November 15, 2011 to the New York Association for Business Economics (after leaving OMB he became Vice Chairman of Global Banking for Citigroup in New York City).

Exhibit B. How Health Care Costs Drive the 
Deficit. (Source: CBO.)
Orszag shows that medical care costs are almost entirely responsible for  worrisome long-term federal budget projections.

CBO data from 2007 make clear that as a share of GDP, projected Federal spending on activities other than health care has not been growing much. (See Exhibit B at left.)

Projected higher federal spending comes almost entirely from one spending sector, health care. Health care took 20 percent of GDP in 2007 but is projected to rise to one-third of GDP in 2082. The growth is all in the top layer of spending, i.e., Medicare and Medicaid.

NYU Professor William Baumol warned 20 years ago  that the cost of education and health care have been growing unsustainably because of the "cost disease" of high-labor-input activities such as teaching and medical care. Technological innovation and overseas manufacturing have saved money, but many labor inputs in health care have been harder to reduce.

To bring down the cost of health care, governments can:
  • Target excessive use or cost of individual health-care procedures. Newspaper stories about excessive Medicare charges for specific procedures help focus public attention on them.
  • Ration "elective" procedures. The British National Health Service has long had a queue for elective (for non-life-threatening illnesses) surgeries or other procedures.
  • Limit demand for health-care services by providing more education to the public and doctors about the potential for making healthy life-style choices.
  • Develop incentives for the public (consumers of health care services) to make better lifestyle or health-care choices.
These last two options lead to the relevance of candy cigarettes to health-care costs.

3. Kids Get Addicted to Cigarettes and Over-Eating

Two of the big drivers of higher health-care costs are cigarette smoking, which is usually begun during teen years, and obesity, especially an epidemic of childhood obesity

Private health and life insurers recognize the need to rein in these costs, and many give discounts to nonsmokers. The State of Arizona is probably the first state government to propose charging childless adults on Medicaid who smoke a $50 fee as partial compensation for the extra burden they impose on the state's health system. Here is Arizona's rationale, which includes a reference to medical problems caused by obesity.
Since the beginning of the recession, unemployment increased, State revenues decreased and enrollment in Arizona’s Medicaid program increased by more than 30%. The Medicaid program now makes up nearly a third of the State’s budget – second only to K-12 education. According to the Centers for Disease Control (CDC), 49% of Medicaid recipients smoke, in sharp contrast to the approximately 16% of Arizonans overall who are smokers; 25% of all Arizonans are obese. But what do those figures mean in terms of the cost of our health care? In 2004, taxpayers spent $377 million on smoking-attributable expenditures for the Medicaid population. Meanwhile, annual per capita medical spending for an individual who is considered obese is 42% higher than for someone who is of normal weight. That percentage translated to roughly $148 billion nationally in obesity-attributable medical spending in 2008.
The big problem with smoking and obesity is that they are easy to start and hard to stop:
  • Smoking cigarettes is addictive. 
  • Obesity, it turns out, is hard to reverse. A child that is obese is almost certainly going to be an adult that is obese. Pounds are easy to add and hard to shed.
A child that is eats poorly and does not exercise and becomes obese may as a teenager take to cigarettes in the misguided belief that this is a good way to lose weight, because smoking doesn't add calories. Not a good tradeoff. The United States needs to tackle both teenage obesity and teenage smoking.  

4. The Social Costs of Candy Cigs Far Exceed Their Price

Given the role of health care costs in the economy, and the role of smoking and obesity in Federal, state and local government health care budgets, the true cost of candy cigs exceeds the price that consumers pay of $5 per carton or 20 cents per pack. The additional social cost is called a "detrimental externality" or a "negative externality" to the product. It is the cost of attaching glamor to cigarettes, of getting children used to something pleasurable continually in the mouth.
The connection created between cigarettes and candy goes both ways:
  • It gets children used to taking long thin sticks out of convenient branded packs and putting them in their mouth for pleasure. This creates a predisposition for cigarette smoking among teenagers.
  • It lends the stimulus of widespread advertising of cigarettes to candy. This encourages consumption of candy.
Remedies

If you are with me so far, the three approaches to changing public behavior are (1) a ban on candy cigarettes, (2) a Pigou-type tax, (3) an exhortation to parents not to buy this product.

I'll start with #3. Maybe individual educational action might work. So I put my head into the lion's den and posted some negative comments about candy cigarettes on the review page of a candy-cigarette product offered on Amazon. I asked: "What is the point of the candy cigarettes?" and I answered: "The point seems to be to get kids used to having a cigarette in their mouths..." Here is a summary of the responses to this post:
  • Of the 56 people who had commented on my review when I last looked, all of whom were presumably looking to buy candy cigarettes, none of them found my review helpful. That should not be a surprise, since some of the commenters may have an interest in sales of the candy cigarettes and the rest are at the site because they want to buy the product and are looking for information on choices among the available options.
  • Some of the commentators took the trouble to think up names to call me, such as "candy cig police", someone "looking for something to blame". Most broadly I was tarred and feathered for hijacking a quality-assessment site to question the social responsibility of the product itself.
  • But one person went beyond that and said that candy cigarettes are good for people who are trying to stop smoking because they need something to put in their hands while they go through nicotine-withdrawal symptoms. This user can't be the target market, given that packaging is designed as a counter-top appeal to children, but no reason why an adult can't find a product designed for a child to be useful or fun.
  • A person who identifies herself as the mother of two young children says she had no intention of buying the product for her children — it is for adults ("I'll eat my candy smokes and love it. Get over it. I ain't shoving them down your kid's throats.").
  • A late post asks plaintively: "Do we really need to ban everything?"
Individual action doesn't seem promising.  So let's move on to public policy. The three basic options are:
  • Educate the public on the health effects of smoking. These programs work. Television advertising about the health effects of smoking is effective. 
  • Ban candy cigarettes. This may be too harsh — conceivably some grown people really do need something to hold in their hand or put in their mouth while they are trying to quit smoking. The United States tried prohibiting alcohol and the experiment was not a big success. But some countries (Finland, Norway, the Republic of Ireland, Saudi Arabia and Turkey) have reportedly banned candy cigarettes. 
  • Tax candy cigarettes.  A ban equates to an infinite tax. A tax (a "Pigou tax"), is preferable because it uses the marketplace to make the price of candy cigarettes reflect its social costs. Tax them the same as cigarettes. Teenage smoking has fallen because cigarettes are so expensive, so why not try the same approach to candy cigarettes? Make them expensive. Do our kids a favor, and help close the budget deficit!
What do you think?