Tobacco Documents Online

Sellers often have to work hard to get potential customers to try their products, for it is easy for people to stick with products with which they are satisfied. There are many ways vendors try to overcome such resistance and to get people to try their products. The issuance of coupons is one widely prevalent form. The shipment of free samples through the mail is an.other. Cigarette companies sometimes try to distribute samples to interested adults. Nebraska has banned the sampling of smokeless tobacco products, while Utah has severely restricted the ability to sample, limiting it to conven- tions and to retail stores (and then to people who have just purchased a tobacco product). Similar legislation is pending in eight states, having been defeated in two in 1989. And some observers anticipate that around half of the states could be considering such legislation bythe early 1990s. Advertising has long been a part of the tobacco battlefield. Cigarette advertise- ments have been banned from radio and television since 1971. Warning labels have been required on all advertisements for tobacco products in newspapers and magazines. Potential new sources of restriction are also continually being explored. For instance, tobacco companies sponsor a variety of sporting events, including tennis matches and automobile races. Some anti-tobacco activists have aimed their sights at these kinds of promotional activities, and are seeking to bring down the various tobacco banners displayed at these events.5 All of these efforts, and many more like them, seek to drive the presence of tobacco ever further into the dListant reaches of American society, and can be seen as part of a program to create, either through legislation or through intimidation, a smoke- free America. Myriad other regulations operate in the same direction, including various efforts to legislate restrictions on smoking in workplaces, restaurants, and other spaces CONFIDENTIAL: TOBACCO LITIGATION 1-5 TITX 0036862

labeled as "public." So too does; the imposition of extraordinarily heavy taxes on cigarettes. On a nation-wide basis the retail price of cigarettes averages about $1.50 per pack. Cigarette taxes average about 40 cents per pack, though with considerable varia- tion from state to state: residents of North Carolina pay a combined federal and state tax of 18 cents per pack while residents of Texas pay 57 cents. Absent taxes, cigarettes would sell for about $1.10 per pack, so the tax on cigarettes averages almost 40 percent of the pre-tax value of the product. Not only do existing taxes and regulations reveal a ferocious battle over smoking in America, and a battle that is being similarly waged in many other places throughout the world, but the continuing spate of proposals for even further taxation and regulation shows that the intensity of battle is still escalating. American Principles, Public Policy, and Tobacco Warfare The American system of limited government is clearly based on the premise that people as responsible adults should by and large be free to pursue their own interests and pleasures, provided only that they do not infringe upon the similar rights of others in the process. Government exists principally to preserve and protect people's rights; it exists to promote civil peace and order, and most certainly not to foment civil warfare. Where does government's participation in the ongoing war over tobacco fit within the central principles of American government? Proponents of the tobacco wars portray this participation as representing proper uses of governmental•authority within the context of our constitutional framework of limited government. For the battles in this war are portrayed as efforts to preserve the "rights" of nonsmokers in: the face.of abusive infringements of those "rights" by smokers. Should government serve as an agent for violating the "rights" of smokers for the advantage of nonsmokers, it would CONFIDENTIAL: 1-6 TOBACCO LITIGATION TITX 0036863

violate the American principle of constitutionally limited government. But should it use its authority to prevent smokers from doing things that would otherwise infringe upon the "rights" of nonsmokers, it would use its authority properly within our framework of limited government. An economic justification for governmental participation in the war on tobacco is expressed by the doctrine of "social cost," which claims that while smokers may pay for the cost of their cigarettes, there are many other ways in which the cost of smoking is borne by nonsmokers. This belief that a substantial share of the total cost of smoking is paid by nonsmokers is derived from the presumption that smoking is harmful to health: in light of estimates about the size of this health toll, an economic value is imputed to that health toll and an effort is made to determine the share of that toll borne by the nonsmoking portion of American society. For instance, in the 1985 report of the Office of Technology Assessment (OTA), Smoking-Related Deaths and Financial Costs, smoking was reported to be responsible for between 186,000 and 398,000 deaths in the United States in 1982, and with what OTA regarded as a'best" estimate being 314,000.6 The same OTA-sponsored study estimated the annual cost in 1985 dollars of these, health problems associated with smoking to have ranged from $40 to $100 billion in the United States, and with a "best" estimate of $65 billion, which is $2.17 per pack of cigarettes smoked. Such figures might seem to suggest that while smokers might pay the dollar or so it costs to buy a pack of cigarettes, about twice that amount is being paid by other people, predominately nonsmokers. Allegations about the harmful health effects of smoking, and the resulting costs to American society, have been at the forefront of justifications for the escalating war on tobacco. In this book we seek to assess these claims about the cost of smoking and to CONFIDENTIAL: TOBACCO LITIGATION 1-7 TITX 0036864

develop their implications, primarily for the nonsmoking majority of Americans. With respect to the $65 billion figure noted above, we ask who in particular pays this bill if we accept this figure for purposes of our analysis. It is commonly said to be a cost to "society;' but society cannot pay bills, only individuals can. With respect to smoking we seek to examine whether the cost of smoking rests with smokers or with nonsmokers. If the $65 billion cost attributed to smoking rests with the 50 million or so adult smokers, they are on average sacrificing $1,300 per year, in addition to the price of tobacco products, to satisfy their desire for those products. In a society that remains true to the foundations of the American republic, however, the bearing of any such costs should be the business of smokers and few if any issues of public policy would seem to arise. But if, by contrast, that cost rests on the 100 million or so adult nonsmokers, they are on average sacrificing $650 per year to subsidize smokers. To be sure, the American polity is replete with income and wealth transfers of all kinds, each of which involves one set of people gaining at the expense of others. Nonetheless, assuming the claims about the cost of smoking were correct, within the normative framework of the American republic there would be a plausible basis for seeking to make smokers more fully bear the costs, if any, of their choices to smoke. Organization o f this Book Our primary purpose in writing this book is to examine the various allegations that have been advanced about the ways in which smoking imposes costs on the mem- bers of society generally and not just upon smokers in particular. We do not address the validity of the belief that smoking is a source of harm to health, for to do so would get us far outside our areas of competence. Our interest and competence lie rather in ascer- CONFIDENTIAL: TOBACCO LITIGATION 1-8 TITX 0036865

taining the extent to which the costs commonly associated with smoking are paid by nonsmokers instead of by smokers. This book is concerned with the proper articulation of public policy toward smoking in a nation such as the United States founded on principles of responsible individual liberty, according to which people should be largely free to pursue their personal interests, save to the extent they infringe upon the equal rights of other people in the process. Chapter 2 lays out the standard economic approach to public policy which derives from the branch of economics called "welfare economics," and then seeks to portray how public policy toward smoking might fit within this framework. The primary point of this chapter is to describe circumstances under which various public policy initiatives in the war on tobacco might be seen as means for protecting rights and promoting the general welfare, as against redistributing rights and promoting the welfare of some people at the expense of that of others. At base, the claim here is that smoking is a source of significant cost to the nonsmoking members of society, and that taxation and regulation are means by which those nonsmokers can protect themselves from the burdens that smokers would otherwise impose on them. While arguments grounded in the principles of welfare economics can be used to justify or rationalize various measures for the taxation or regulation of tobacco, such arguments generally portray, often implicitly rather than explicitly, public policy essen- tially as being made by disinterested philosopher-kings. But public policy is made and implemented by politicians and bureaucrats, and not by philosopher-kings. Once this is recognized, arguments grounded in welfare economics cannot be accepted so facilely as they might otherwise be. For once a dose of political realism is applied to the examina- tion of public policy, which Chapter 3 provides, it is easy to see that actual public policy CONFIDENTIAL: 1-9 TOBACCO LITIGATION TITX 0036866

choices, including those concerning the taxation and regulation of tobacco, may diverge sharply from those envisioned by the principles of welfare economics. For instance, tax policy toward tobacco might have less to do with traditional normative concepts of efficiency and equity than with the practical politics of finding comparatively easy sources to tax. In terms of empirical magnitudes, the largest alleged source of social cost from smoking is the lost production. claimed to result from smoking. This claim has two main components. The larger of these derives from the claim that on average smokers die earlier than nonsmokers, and that the resulting loss of earnings because of earlier death is a cost to society. Relatedly, it is claimed that smokers miss work more often than nonsmokers, and that this loss of earnings is also a cost of smoking. The validity of these claims is critically examined in Chapter 4. The second-largest alleged source of social cost of smoking is the cost of medical care attributed to the treatment of purportedly smoking-related illnesses. Starting from the presumption that smokers incur higher medical expenses than nonsmokers, the claim is made that these higher expenses indicate that smokers are able to place part of their medical costs on nonsmokers. With the bulk of medical expenses being financed through insurance programs, it is claimed that premiums paid by nonsmokers are higher than they would otherwise be, to cover the added costs incurred by smokers. These claims about social cost are examined in Chapter 5. Not all medical expenses are paid through private insurance programs or per- sonal payments by patients. About one-quarter of medical expenses are financed through Medicare and Medicaid, the former being a governmental program to cover medical expenses for the elderly and the latter being a similar program for the indigent. CONFIDENTIAL: 1-10 TOBACCO LITIGATION TITX 0036867

In this case the argument is advanced that smoking increases the claims made under these programs, which in turn means higher tax payments on everyone to finance those higher claims. Chapter 6 will explore this component of the charge that smokers place costs upon the nonsmoking portion of American society. The thrust of our argument in Chapters 4-6 will be to explain why smokers do not impose any of those alleged costs on nonsmokers, principally because our economic system itself operates in such at fashion that smokers themselves bear the costs of whatever ill health they might suffer. But even if it were acknowledged that smokers do bear the costs we discuss in these chapters, it could nonetheless be argued that there are other forms of cost that are borne by nonsmokers. For instance, it is commonly claimed that smokers are more costly workers to employ than nonsmokers, in part because they are less productive due to such things as time spent in smoking breaks, and in part because they increase business; costs associated with such things as cleaning and ventila- tion. These claims about cost are examined in Chapter 7. Relatedly, and more significantly in terms of the intensity of controversy, it is charged that the tobacco wars are justified because smokers impose costs on non- smokers through the environmental tobacco smoke (ETS) that results from smoking. Even if it is assumed that smokers pay the full costs that might arise from the smoke they inhale, it could be claimed that significant costs are associated with the smoke that nonsmokers are exposed to because they must breathe air which contains ETS. Chapter 8 seeks to untangle the complex arguments surrounding ETS, explaining in the process why even in this case the arguments for taxation and regulation are ill-founded when they are based on grounds of controlling the costs that smokers supposedly impose on the remainder of society. CONFIDENTIAL: TOBACCO LITIGATION TITX 0036868

But these cost components are not the only elements in the claim that smoking imposes costs on American society. It might well be acknowledged that smokers bear the aforementioned costs, for the reasons we explain in Chapter 8, and yet taxation and regulation might be advocated nonetheless. It is claimed with increasing frequency these days that smokers cannot be said truly to have chosen to smoke, primarily because advertising and addiction both impel people to smoke despite their better judgments and prevent their quitting once they have realized the error of their ways. Chapter 9 examines this line of argument that seeks to portray the tobacco war as a just war. The argument through chapter 9 will have explained why there is no justification for a war on tobacco groundedt in any principled argument that such a war is necessary either to protect the "rights" of nonsmokers from infringement by smokers or to get smokers to cover their full "costs" of smoking. We could end the book here, but to do so would leave unexamined any of the possible avenues of economic explanation for the tobacco wars which the body of contemporary public choice scholarship, discussed briefly in Chapter 3, suggests may exist. Chapter 10 explains that there is an economic logic to the various legislative efforts to tax and regulate tobacco. This logic largely sees the legislature as a market place where interest groups compete, both to secure special treatment and to avoid bearing the burden required to provide those favors for other groups. Much of the legislative activity concerning tobacco can be explained in this manner. Chapter 11 looks upon medical and health organizations from this same economic perspective, and explains how their advocacy of anti-tobacco positions is congruent with their economic, self interest. In short, there are several reasons why reducing smoking will promoi:e the economic interests of prominent anti-smoking CONFIDENTIAL: TOBACCO LITIGATION TITX 0036869

groups. Tobacco is not alone in being faced with claims for taxation and regulation, based on arguments that those claims are justified because of social costs. The same arguments about social cost can be applied to numerous other cases--for instance, to a breakfast of bacon and eggs, hash brown potatoes, and coffee. Chapter 12 concludes the book by exploring how all such arguments reflect a misuse of social cost arguments and by explaining how the resulting policy implications imply an excessive use of governmental authority that it is the proper function of constitutionally limited govern- ment to constrain. CONFIDENTIAL: TOBACCO LITIGATION 1-13 TITX 0036870

FOOTNOTES TO CHAPTER 1 1See the informative discussion in "Anti-Smoking Groups Ask Universities to Sever Ties with Tobacco Industry," Chronicle of Higher Education (June 20, 1990), p. Alff. 2 Of course, divestment coupled with political action against the tobacco in- dustry can depress the prices of tobacco stocks and make the returns from "ethical investments" positive. 3 On this theme see Walter Williams (1989, esp. pp.125-44). 4 Secretary Louis Sullivan of the Department of Health and Human Services recently called for federal legislation to regulate more tightly the sales of cigarettes through vending machines. 5 These efforts extend to the sublime. Recent attention has been focused on claims concerning the positioning of tobacco billboards in baseball and football parks so as to catch major camera angles, thereby associating tobacco and sports for the viewers, some of whom are minors. So, now, the call is to ban the billboards! 6 The 1989 Report of the Surgeon General, Reducing the Health Consequences of Smoking: 25 Years of Progress, attributed around 390,000 deaths to smoking in 1985. CONFIDENTIAL: 1-14 TOBACCO LITIGATION TITX 0036871