In two previous posts I commented on a calculation that purported to show that the total cost of a pack of cigarettes, considering the costs of everything including the material, medical, disability, and premature death, is about $40. Some people might claim that it is impossible to put some of those in terms of dollars, but as I explained in those and other posts, it is possible and necessary to do. It is implicitly done every time we make a policy decision that trades off market-traded resources (or, put another way, money) against health and longevity. However, I argued, that particular calculation was wrongheaded, but offered some useful lessons for putting dollar numbers to those goods and some legitimate criticisms about doing so.
I pointed out that about half of the $40 in that calculation consists of the smoker’s own value for living longer and most of the rest is the cost of the cigarettes and foregone future income. All the rest, the external costs, is covered by excise taxes, again paid by the smoker. So this is basically a market decision, which makes this kind of calculation – based on a lot of shaky assumptions about assigning numbers to the “invaluable” – inappropriate. Such calculations are needed when we do not have markets, like for infrastructure or regulations, but not for consumer market choices where the externalities are minimal or paid for. Since these calculations are a basically a very rough, kludged substitute for a real market, it makes no sense to use them if the market is functional. As I explained in the first of my posts, the numbers for the “invaluable” do not really have a meaning apart from their role as a substitute for a market, and so the calculation represents the mistake of treating the numbers for having existential meaning.
In the second post I pointed out some apparent flaws in the calculation, including some apparent double counting. Most of that came from including a “value” for a person’s own value for losing a life-year of $100,000, and then adding in secondary effects of that, like lost income. As I pointed out, when using a number like that, it is a practical necessity to include the secondary, tertiary, etc. effects. So the numbers we use are a bundle of positives (enjoying life, producing, being there for your family) and negatives (consuming resources) rolled into a single number because it is impossible to sort them all out. So taking such a number and then adding back in some, but not all, of the secondary effects makes no sense; it would have been fine to pick a bigger number since that one is on the low side, but the partial adding up is rather a mess. For example, it makes no sense to count someone’s lost income as a cost without counting their foregone consumption as a benefit.
That leads to the promised biggest problem with the whole exercise, failure to use a consistent level of analysis. An ideal cost-benefit analysis, assuming a CBA is appropriate at all, includes all costs and benefits: expenditures, opportunity costs, health costs, mortality costs, time spent, pain, pleasures, etc. Many partial analyses do not look at all of this.
Some look only at impacts on government or other budgets. These are fine for what they are, but are often mistaken for having greater meaning. For example, it is reasonable to figure out how much, on net, it costs a health system to pay for a cancer screening test, which costs something up front and causes treatment, but occasionally averts greater treatment costs. But this is often badly misinterpreted, such as if the result shows that there is a net increase in expenditure and someone says “it is therefore not worth doing”. But the calculation did not consider how many people’s lives were saved, and other health outcomes. The expenditure calculation might come out on the negative side, but for most medical interventions the resource cost (money spent) is a negative consequence that is justified by the health benefits. So these “budget-based CBAs”, which are not really CBAs at all, are an ironic construct wherein the CBA ignores most of the B, and health economics (the name of the subdiscipline that focuses on such calculations) ignores health.
Another place where we sometimes draw the line is in terms of market resources, ignoring health and happiness. Again, this should not be mistaken for a full CBA. Only a communist or fascist government, or a very impoverished society that is desperate about survival, would want to make public health decisions based only on consumption and production. That is how we decide about spending money to make crops healthier, where we do not care about the crops’ for their own sake. Still, the results might aid thinking about a choice, so long as they are not over-interpreted.
One place that is tempting to draw the line, but that does not work, is between costs and benefits. It may seem that effects of a policy are pretty easy to classify intuitively, and some are. But since costs and benefits are just the same thing with or without a minus sign in front, the distinction is technically arbitrary and makes a mess in many cases. An obvious example in the cigarette calculation is characterizing the exercise as counting up the costs, but still subtracting foregone pension payments from the sum. This is the right way to do a CBA – it certainly makes no sense to include some of society’s expenditures on a person (extra medical consumption) but not the equivalent offset (less other consumption).
Aside: This is something that seems to elude those who believe that demands like the one behind the Master Settlement Agreement are reasonable. The claim is that smoking costs the government money because it increases someone’s medical costs. This ignores the fact that smoking contributes quite a bit more money to the government in the form of taxes and foregone retirement benefits, so there is no legitimate complaint about “costing society money”. The only way someone gets to that conclusion is by arbitrarily ignoring some of the effects of one type while counting others. That makes no more sense as counting the just the costs of taking a new job (“I will lose the $60,000/year I make from the other job and have to commute ten miles to work”) rather than netting out each category (“I will make $10,000/year more, and my commute will be shorter”). That analogy may actually be charitable, and perhaps it is more like a shopkeeper complaining about having customers because all of them walk away with some of the inventory (which obviously ignores the fact that they leave money in exchange).
This brings us to the fatal flaw in that analysis of the full cost of a pack of cigarettes. As I noted, they properly netted out some of the benefits, like subtracting pension savings. But they ignored others, a smaller example being inclusion of lost productivity from smokers (from smoke breaks and sick leave) but not the offsetting increased productivity (by making some people more functional). The big and fatal example is the authors including the loss of the value of a life year to the smoker himself, but not the offsetting benefits of making the years that are lived better. If the analysis is going to go beyond budgets and include what people care about, it has to include everything they care about. Cherrypicking some preferences does not lead to a legitimate analysis. This is well established in the field. For example, analyses like this are used to assess the net value of a treatment (say, cancer chemotherapy) that increases longevity but imposts other non-market costs, like making someone feel terrible for their remaining months. While some such decisions can and should be made based on an individual’s personal tradeoffs, sometimes a policy decision needs to be made, and anyone who knows how to do this right knows we must put numbers to all of these considerations. What the authors have done is arguably even worse than treating people like crops, because instead of cleaning treating people only as producing and consuming engines, they arbitrarily count some of what people care about but not all of it.
There actually is one reason you might want to calculate everything paid by the smoker (which they basically do since taxes pay for what would be externalities), leaving out the benefits of smoking: It allows us to estimate the minimum value that smoking must have for the smoker herself. If she is willing to suffer $40/pack in costs, then the benefits must be greater than that. Of course, someone might then argue that the true minimum must really be lower than that because people do not understand how harmful smoking is (though this is pretty clearly false in educated societies) or that people discount the future too heavily (which is probably true, but requires some arguments and calculations to quantify – it is not good enough to just observe it is true). Or perhaps there is just some difficult hump to get over to quit that people cannot handle, even though they have decided the benefits are not as great as the costs (which is probably what most people mean when they say “addiction”, notwithstanding the attempts to misdefine it in terms of biology).
The generalization of this point is something that I do not have to explain to anyone who has thought about nanny state issues: The “health promotion” types (the extremist loose-cannon storm-trooper wing that is often mistaken for all of public health) engage in political manipulation by adding up only an arbitrary subset of costs and benefits. Generally they ignore everything people care about in the world other than market expenditures and longevity/productivity, and effectively tell people that they are not allowed to care about anything else. This is the right analysis for agricultural scientists, but is indefensible for social scientists. The economists who did the cigarette study are respected researchers not political hacks like most nanny state supporters. But this particular analysis is fundamentally flawed, and that is perhaps most easily seen because it might cause an honest observer to think like a health promotionista.