Unhealthful News 56 – Slumping toward feudalism and other economic observations

Today I noticed in the news that here in Pennsylvania, a state above the average in providing social services, a program to provide health care for the poorest adults in the state has run out of money.  Meanwhile, half of Americans do not realize that the new Congress has not actually repealed the “Obamacare” law, a lame excuse for a health financing system but currently the only hope of a first step in the right direction (i.e., the direction of healthcare not being a luxury for the rich and/or bankrupting the country).  And, “As Mental Health Cuts Mount, Psychiatric Cases Fill Jails”.

Yes, I know that at the outset of Unhealthful News I said I would not report much on financing, and I do have three good epidemiology posts in mind but unfinished.  Actually, I suppose I am not really seriously posting about financing, since all I am doing is listing depressing news about it with no further analysis. 

It has proven to be a very difficult day to focus on the type of health news I analyze when looking at the news today.  I am not just talking about Libya, which is horrifying but by way of being the usual story of people trying to extract themselves from feudalism.  There is also the American people letting themselves be drawn back toward feudalism.  It is a feudalism that has a much higher level of health and material well-being than the visions of castles and peasantry that the word usually evokes, obviously, but feudalism just the same.  For those who do not follow U.S. politics, there is currently a showdown about whether we continue to have functional government employee unions, one of the few remaining bulwarks against growing oligarchy (since the U.S., unlike most Western countries, lacks a strong welfare state, labor unions play a particularly critical role in offering a backstop against wage serfdom).

The tragedy is not even so much that the oligarchs are threatening what is left of the middle class, but that what is left of the middle class is helping them do it.  In a story yesterday about my hometown, a professor from my old haunts put it quite depressingly:

Richard Freeman, an economist at Harvard, said he saw the hostility toward unions as a sign of decay in society. Some working-class people see so few possibilities for their lives that it is eroding the aspirational nature that has long been typical of Americans. 

“It shows a hopelessness,” he said. “It used to be, ‘You have something I don’t have; I’ll go to my employer to get it, too. Now I don’t see any chance of getting it. I don’t want to be the lowest one on the totem pole, so I don’t want you to have it either.’ ”

Of course, I know that no one comes to this blog to read yet another bit of random punditry about the economic situation.  So, I will move on to a brief observation about the economics of health-affecting behaviors:

Yesterday, Chris Snowdon, with the contributions of some of his readers in the comments, offered the insight that price hikes, in the form of taxes on cigarettes, are not entirely unlike prohibition in their effects, especially for the poor.  In particular, they increase the demand for smuggling lower-priced (tax evading) alternatives.  To take that one step further, economists generally think of prohibition as simply a large price hike, and you will be able to much better understand prohibitions if you think of them that way rather that the way they are typically reported, as if they are some qualitative change that suspends the laws of supply and demand.  Imposing a serious risk of legal penalties for owning or selling a good makes it very expensive, but this is no different from something just being so rare or hard to make that it is naturally expensive.  If demand is great enough then the price will be paid.  Of course, fewer people will buy it at the increased price, but quite often some still will do so. 

Indeed, the equivalence of prohibition and price takes other forms too.  The effectiveness of a prohibition regime is typically measured by the street price of the good.  I.e., effectively enforced prohibition quite directly and literally means a higher purchase price, nothing more or less, and ineffective prohibition enforcement is evident in dropping prices, as has been the case with most street drugs over the last decade.  The fact that those who smuggle black market or divert gray market drugs are in jeopardy of arrest or violence means they charge more for their efforts than they would if the market were legal.  If their risks are low, the premium is less unless they can get monopoly pricing by restricting supply, creating a cartel through violence of their own.  If this sounds remarkably like the economics of any other good, that should not be surprising.

So why are we not always at the mercy of monopolies?  The simple economics tells us that in most cases if someone is making monopoly rents, then competitors will be attracted to the market.  One way to keep this from happening is the threat of violence from the government or organized crime, which incidentally are more similar than most people realize.  No, that is not a joke or some kind of ultra-libertarian slogan.  Governments effectively evolved from organized crime, which is little different from feudalism; it offers huge advantages for those in power, who take most of society’s surplus wealth, but offers just enough advantage for the rest of the population (compared to being at the mercy of invaders, non-organized crime, or even greater exploitation) that they do not rise up against it.

Anyway, the funny thing about cigarettes is while large companies can make them very efficiently, if the price is raised high enough, then small operations become competitive and face little risk of legal or illegal violence.  This is evidenced by the story of do-it-yourself growing of tobacco and cigarette making right in New York City.  It is a remarkably inefficient use of labor (as is smuggling).  But if changes to the remarkably efficient American economy that created the middle class in the 20th century force people into such inefficiency, growing crops in one’s back yard becomes the best option for many people.

Feudalism indeed.

One response to “Unhealthful News 56 – Slumping toward feudalism and other economic observations

  1. Smuggling in the UK and Ireland.

    The cost of treating smokers is �2.7 billion according to ASH however tobacco directly contributes �10 billion to to the Exchequer and indirectly another �10 billion through employment. It basically pays for 20% of the NHS. Going back to 1993 when Kenneth Clarke was Chancellor and confirmed by Gordon Brown during the Labour government escalated taxation, 3% by Clarke and 5% Brown. The prices of a packet of 20 have now reached �7.00 and for 50g of rolling tobacco �13.00, no wonder smokers are looking to both legal and illegal sources to carry on smoking. It is estimated by the Her Majesty's Customs and Revenue that the loss in taxation is �2 billion and the upper estimates are 24% of tailor made cigarettes and 63% of hand rolling tobacco.

    Legal purchases are 'booze cruises' and holidays within the EU especially to Belgium and Spain where everything is at least half the price. Customs guide lines are 3,200 cigarettes and 2kg of tobacco as long as they are for personal use or gifts, although people have brought in more. However UK Border Agency (UKBA) have intimidated British shoppers on entry in direct contravention of the Single European Act and a quick read of this blog would be useful. Much of this was due to a ruling by the European Court 23rd November 2006 which confirmed that the import of tobacco was permissable.

    The second is the burgeoning market in illegal sources. This market falls into two areas too, with plucky 'white van man' loading up his transit and returning to his or her home town. The second is a lot more pernicious, organised crime. The worst example is the Jin Ling brand. Manufactured in Kaliningrad in Russia the factories produce 24 billion cigarettes a year and probably have about 7% of the market share in Europe. Not one cigarette is manufactured, distributed or sold legally. I was offered a packet for �4 only the other day. Other gangs import Chinese cigarettes or popular brands are copied and sold out of the back of vans. Also there is evidence that criminals are manufacturing their own cigarettes which do not have the save levels of hygiene, with rat poison arsenic and horse manure present.

    Worldwide the gangs involved include Al Qae'da, the Taliban, Triads, Mafia and in Ireland the Real IRA. As remarked here “Al-Qaeda�s North Africa affiliate isn�t alone. After crackdowns on fundraising following the 9/11 attacks, terrorist groups worldwide have increasingly turned to criminal rackets, officials say. And smuggling cigarettes � either untaxed or counterfeit � has proved a particularly lucrative, low-risk way to fund operations. Hezbollah, the Taliban, and al-Qaeda are involved in smuggling cigarettes; so are the Real Irish Republican Army (Real IRA) and the Kurdistan Workers� Party (PKK). Terrorist financing through cigarette smuggling is �huge,� says Louise Shelley, a transnational crime expert at George Mason University and an adviser to the World Economic Forum on illicit trade. �Worldwide � it�s no exaggeration� No one thinks cigarette smuggling is too serious, so law enforcement doesn�t spend resources to go after it.�

    The world wide value of class A drugs is $135 billion with tobacco 3 times bigger at $500 billion, time for a rethink or criminal Armegeddon awaits.




    http://www.hmrc.gov.uk/stats/measuring-tax-gaps.pdf smug





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