From the Bad Economics file

Eric Crampton is a bright and energetic academic at the University of Canterbury.  One of his missions is to expose bad economics.  Last year he and Matt Burgess of Victoria University debunked a shoddy study by BERL on the social costs of alcohol use in New Zealand.  Their critique showed BERL’s cost estimates were grossly inflated (see Eric’s blog Offsetting Behaviour).  This did not stop the Law Commission, in full crusading mode, continuing to cite the discredited BERL numbers in its final report.

Eric was at work again last week, this time on a Ministry of Health study on tobacco.

He notes that:

the vast majority of estimates, both in New Zealand and internationally, conclude that smokers pay far more than their fair share in tobacco taxes.  W. Kip Viscusi’s work in the United States suggests smokers actually save the government a fair bit of money: they pay into the national pension system but die before receiving much in terms of benefits, so non-smokers benefit from their contributions.

Eric then cites a New Zealand study by Des O’Dea, an experienced New Zealand economist:

In New Zealand, Des O’Dea’s estimate, funded by Action on Smoking and Health and the SmokeFree Coalition – hardly members of any big tobacco conspiracy against the public – showed that the health costs of smoking were only a small fraction of collected excise taxes.  O’Dea concluded: “It appears certain that smokers contribute considerably more in taxes than the net ‘economic costs’ to the rest of the community caused by their smoking”.  O’Dea estimated costs to the health system on the order of $350 million per year; annual tobacco excise revenues total about a billion dollars.  His measured “social costs” were much higher, but mostly consisted of costs falling on the smoker himself.

So Eric was understandably taken aback when the Ministry of Health recently came out claiming that smoking costs Vote:Health about $1.9 billion a year.

Just how had MoH managed to provide a figure more than five times greater than the estimate previously provided by an anti-tobacco funded study, and seriously out of line with the body of international literature?  An OIA request and extensive correspondence with the officials behind the figure gave me the answer: they’ve essentially assumed that smokers would never have imposed other costs on the health system if they hadn’t died of smoking.

This is a totally bogus procedure, as Eric goes on to explain:

This isn’t a method commensurate with producing a sound figure that can form the basis for policy.  It’s a method best used for producing a politically convenient figure to rally support for measures to further stigmatize and punish smokers, like a doubling of the excise tax rate.

The full article is available here.

David Farrar commented on the article here.

Taxpayers’ money is being wasted on these worthless reports.  The BERL study on alcohol cost the Ministry of Health and ACC over $130,000.

Academics play a valuable ‘critic and conscience’ role when they expose bad economics.  Another egregious target is the numbers served up by economic consultants to justify government or council support for stadiums and events.  For a critique, see this study for the Business Roundtable by Tyler Cowen, Should Governments Subsidise Stadiums and Events?