Monthly Archives: August 2012

Lying without being technically wrong – an example from the headlines

Quoted material is from Ezra Klein:

On Sunday, Paul Krugman noticed Niall Ferguson writing something apparently false about the Affordable Care Act. Today, Ferguson responded to Krugman’s critique by saying, in effect, that he wasn’t wrong so much as he was very carefully trying to mislead his readers.

Ferguson wrote, in a cover story in Newsweek:

The president pledged that health-care reform would not add a cent to the deficit. But the CBO and the Joint Committee on Taxation now estimate that the insurance-coverage provisions of the ACA will have a net cost of close to $1.2 trillion over the 2012–22 period.

Klein observes:

The intended meaning is pretty clear. Ferguson is saying Obama “pledged” that the Affordable Care Act would reduce the deficit, “but” the Congressional Budget Office and Joint Tax Committee now say otherwise.  The problem, as Krugman pointed out, is that the CBO and the JCT do not now say otherwise. Ferguson is simply wrong.

Klein then goes on to suggest that the CBO reporting was rather confusing, so being wrong is possibly understandable.  This seems way too charitable toward someone who presumes to write paid commentaries in national forums.  But that turns out to be moot.

But Ferguson says he wasn’t confused. Rather, he phrased his original comments very carefully in order to deceive his readers. You see, Ferguson specified that he was only talking about the “insurance-coverage provisions,” and so, if you happen to be an employee of the Congressional Budget Office and you’re aware of the difference between these reports, you would’ve understood that when Ferguson wrote [the above quoted two sentences] that the first sentence and the second sentence had nothing to do with each other. Of course, most people are not employees of the CBO, and so they just got tricked. In the pages of Newsweek. Bummer for them.

 That is a nice summary of what happened.   Sadly, Klein then goes on to say:

But while the fact that Ferguson is trying to trick his readers about the facts of his case might be a reason to be skeptical of the rest of his piece, it’s not the main reason. After all, Ferguson’s careful misdirection is arguably evidence of a quick and agile mind. He might be cheating to strengthen his argument. But that doesn’t mean his argument is wrong.  Rather, the main reason to mistrust Ferguson is that, for years now, his argument has been wrong.

No no no no no.  No!  Bad, Ezra Klein, bad!  Most of the time when someone is trying to understand a technical analysis, they do not expertise like Klein or Krugman has here.  They will not necessarily be able to identify various other things that Ferguson gets wrong, and how the entire basis for his argument is faulty.  The same would be true if Klein or Krugman were trying to interpret a debate about, say, tobacco harm reduction.  The reaction should be “here is clear evidence this guy was trying to lie to me; in theory it is possible that everything else in the piece — all those bits that I just have to trust the author about — is true, but a safer bet is that the whole argument is not anchored in truth.” 

If someone is cheating that badly to “strengthen his argument”, then chances are his argument is wrong.  People who have good arguments to make do not tend to lie like that.  (Note this is different from saying that someone’s conclusion is wrong because he is lying or otherwise making bad arguments.  Clueless and/or dishonest people quite often write garbage in support of a conclusion that happens to be correct; but their arguments are not improved by the fact that they accidentally happen to believe the truth.)

Ferguson gleefully outed himself as a liar.  If he had really been confused, that would be a different sort of offense.  But trying to cause people to believe something that is not true is lying, whether it is done with a single false sentence or two true sentences that are juxtaposed in a way that is designed to create a false belief.  As Klein implies, careful misleading statements like this are evidence of intentional craftsmanship, and so there can be no excuse that it was an accident.  Indeed, Klein observes:

I actually can’t recall running into a piece in which the argument is so carefully written as to mislead the reader without, in most cases, being entirely untrue.

So he recognizes that when someone is carefully trying to mislead, their argument is almost certainly untrue.  But he still takes an attitude of “don’t leap to that conclusion; instead, look at all the other stuff that Ferguson got wrong, and furthermore, what is wrong with this entire political dogma”.  But as nice as it would be for everyone to understand enough about economic policy to see through the worst of the WSJ/Ryan faction’s absurd claims, it is not going to happen.  And while this was a major matter for Krugman and Klein, which they were certainly going to carefully review, most people — even most of their readers — need a more efficient strategy for figuring out when to stop believing someone.

I will conclude by taking exception to his “evidence of a quick and agile mind” observation.  I have observed a lot of really poor thinkers craft technically correct lies like this one.  Ferguson’s particular tactic for lying without writing a false sentence, along with many others, is really quite simple and is frequently employed by lesser minds.  It is really quite easy.  Consider:  “Krugman accused Ferguson of making a false claim and Klein suggested it was an easy mistake to make.  But Ferguson’s representation of the CBO report was correct.”  That is structurally quite similar to Ferguson’s lie, and I just made it up off the top of my head.  And since it is late at night and I am drinking beer, you can be sure that my mind is neither quick nor agile at the moment.

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A bit more on the economics of cigarette (dis)branding

In my last post, I offered some analysis about how the efforts to reduce the brand equity of premium cigarette brands (via plain packaging) will tend to eliminate the existing incentives for social responsibility among manufacturers.  I have two additional observations:

First, I probably should have offered a motivating example, so here is the most obvious one:  Apple recently got a lot of front-page bad press about the working conditions in some of their subcontractors’ manufacturing facilities.  This mattered because it was Apple.  The largest of the subcontractors is a gigantic Chinese electronics assembly company that does similar work for a lot of Apple’s competitors.  Do you remember which ones?  Me neither.  But Apple got grief because part of what they sell when they collect a premium price for their products is a feeling of membership in their club, and people care about the social responsibility of the club they are a part of to an extent that does not extend products without premium brands.

Consider:  When the Asus/Google tablet is off of backorder and I am finally able to get one — a reward for resisting the iPad all this time even though I have pretty much all the rest of the Apple Club membership items — that device will quite likely have been manufactured under worse conditions than my Apple products were.  But I will not think much about that, and the story will likely not be featured on the front page of the New York Times.  I will just be buying an item, not a sense of identity that leads me to care about the brand and how those associated with the brand behave (no more than I care based on general concern about humanity, that is).

Second, a related point that I chose not to cover at the same time to avoid confusion.  From Snowdon:

The premium brands are about to lose much of their appeal and so people are going to turn to cheaper cigarettes. Pushing people onto cheaper cigarettes is not generally considered to be best practice in public health. But fear not, because [anti-tobacco industry leader and all-around muddled thinker, Simon] Chapman has the solution…

But the Australian government can simply raise tobacco tax overnight as often as it needs to effectively maintain a floor price for cigarettes that will deter smokers from buying more than they could have afforded previously.

The man’s a genius! Make cigarettes more expensive and fewer people will buy them. Why has no one thought of this before?! 

He is right (Snowdon, not Chapman, obviously) about the general effect of making cigarettes cheaper, and the point that he goes on to make that Chapman’s “solution” will just drive more people to the black market.  A bit more economic science about these points can help clarify what would happen and why:

The existing segmentation of the market creates a bunch of sub-markets that are for slightly different products (they are all cigarettes, but of different perceived quality) but whose prices still affect each other.  For example, if the price of the really cheap cigarettes were to plunge, it would exert downward price pressure on the premium brands also because people would still be willing to pay more for them, but not that much more.  (You may be thinking, “aha, that is why the makers of the premium brands work so hard to fight the black market.”  Exactly so.)  Similarly, if you drive down the price of the premium market because it does not seem so premium anymore, it will tend to push down the prices of all the other sub-markets because if the better brands get cheaper, they will take sales away from the cheaper brands unless they get cheaper too.

The result is that everything gets cheaper.  This was the conclusion of an independent consultant report produced for BAT about the Australia situation.  They mostly phrased it in terms of “if there is less competition based on image then there will be more competition based on price.”  This is basically saying the same thing, but I find it useful to consider the slightly deeper economic analysis of what is going on.

The responses to that report from the ANTZ were (a) “those evil cigarette companies are threatening to start dumping cheap product in our market if we do this!” and (b) what Snowdon quoted above.  Point (a) reflects basic illiteracy (no one was saying anything of the kind, as anyone who could read could see), as well as economic innumeracy:  Anyone who understands basic economics knows that producers cannot just pick the price they want to sell something for.  They want to charge as much as possible.  More precisely, they want to profit as much as possible, selling at a high price that has lots of profit, but not so high that they lose profit by driving customers away.  A monopolist would shoot for the sweet spot that such that any additional profit from raising the price would be lost because of losing too many customers.  But market competition pushes the price down from what the monopolist would charge (which is why competition is good for consumers).  The analyses of what will happen (either my brief analysis here which I am giving away free, or the one from the consultants that probably cost six figures) identify how the ability to charge more will be eroded and the competition will drive the price down.

The raising taxes idea is equally innumerate:  Taxes on cigarettes in most places are already about as high as they can be without tipping a large portion of consumers who buy at the cheap end of the legal market into the black market instead.  In some places (e.g., Canada, New York City) the taxes are even higher than that level, and so the black market is really thriving.  In most places there is little room to raise taxes any more.  This is presumably what Snowdon was pointing out with his response to Chapman.

But it gets worse (for the likes of Chapman):  Recall that I said that due to competition, companies cannot just set the price at the level where they would make the most profit.  They are not allowed to collude to avoid the effects of that competition.  But the government can do what companies are prevented from doing by antitrust laws:  They can raise the price to the monopoly price and keep the premium for themselves — and that is basically what they do.  To a large extent, this is because branded cigarettes offer a lot of room for monopoly profits before consumers will exist the market in favor of perceived-inferior substitutes (the black market, but also roll-your-own, grow-your-own, and anything else that avoids some or all of the taxes in a particular jurisdiction).

In most jurisdictions that have sufficient government to enforce tax collection, government makes a lot more from the sale of cigarettes than do the manufacturers or the retailers.  Indeed, in places like Australia and Britain, the taxes are intentionally pushed to about the maximum the market will bear — before too many people exit to substitute sources of smokes — to maximize revenue and to a lesser extent to discourage smoking.  Raise the taxes any more, and revenue would drop, but also many smokers would switch to an alternative that is a lot cheaper, thereby losing the anti-smoking effects of the higher prices.

The segment of the legal market that competes most closely with black market is at the lowest end, where brands are not worth much.  That is where the marginal customers are right on the cusp of switching to the black market, and where most of the switching would occur if taxes were increased.  The premium brands are much less vulnerable to this competition because they offer something more than the commodity.

So with that in mind, the story is:  Those who are motivated by their hatred of cigarette companies want to drive the price of the premium brands down and ideally make the whole legal market look like the current market for the cheapest brands.  It is that cheap end of the market that is the constraint on current tax rates, to keep from driving those consumers to the black market.  Since under the de-branding plan the entire market will look like that end of the market, there will be even more switching to the black market at any given tax rate.  Anywhere the taxes are already at the estimated sweet spot (driving many, but not too many, consumers to the black market) where raising them any more would tip too many people into the black market, the optimal response to the situation is to decrease taxes.  If the taxes are already on the verge of tipping too many people into the black market (etc.), thereby losing revenue and the anti-smoking incentive effect, then eliminating brand premiums will make the current taxes higher than the optimum, requiring a decrease to get back to the optimum.

And so the plan is to raise the taxes for the legal market even more.

Really?  Did I miss something there?

I am pretty sure not.  But someone sure did.  I assign the blame in equal parts to poor basic education about economics and the even poorer education in graduate-level public health, sociology, and related fields, where science is treated as decoration to dress up ideological conclusions.

[Update: More on this here.]

Cigarette plain packaging – understanding some of the basic economics of branding

For those who are not aware, the latest “make it look like the billions we are spending are actually accomplishing anything” effort by the anti-tobacco industry, particularly in Australia and Britain, is to remove the branding from cigarettes (and presumably eventually from low-risk alternatives also — except those made by their patrons in pharma, of course).  The claim by the industry’s puppet masters to their legions of useful idiots is that this will reduce the appeal and thus the uptake of smoking, and indeed that this has been proven.  The anti-tobacco useful idiots can be counted on to not exercise enough scientific insight to think “how can it have been proven if it has never even been tried?”, let alone show enough understanding of their pet cause to think, “um, no one smokes because of what appears on the packages”.

The leaders of the industry — at least the ones who are not bright enough to lie consistently — have basically admitted that this is not motivated by any real hope of reducing smoking.  Rather, the goal is merely to make it more difficult for manufacturers to charge a premium price for some brands, or put another way, to confiscate the value of the major cigarette companies’ high valued brands.  E.g., see what Snowdon and Puddlecote have written about this.

Almost every honest commentary about the topic notes that rigidly-defined simple plain packages make counterfeiting considerably easier.  Commentators often further observe that black marketeers, unlike legal branded manufacturers, do not care about such niceties as not selling to children or product purity.  Actually, to say that more precisely, it does not actually matter what the relative degree of caring is (e.g., many ANTZ apparently think that people who work for tobacco companies are morally worse than people who work for organized crime).  Rather, it is that they have no incentive to worry about those niceties.  And it is there that the economics gets a little more subtle and a little more interesting.

A recent article by an expert on branding fleshed out this thought with this observation:

why spend on corporate social responsibility (CSR)? Brands empower and enable consumers to select those companies they approve of. The environmental policy of a company or how they treat their employees influences my decision to buy a given branded product. Without the brand, however, that power is removed and, by default, the business’s interest in CSR. The business’s fear factor and liability is reduced substantially.

Take that concept and circle back to the discussion of the black market.  It is actually an application of the same principle.  Manufacturers of non-monopoly, branded consumer goods have the incentive to behave well, sponsor good causes, not break marketing laws, etc. because they get more business by appearing to be good citizens.  Of course, many of these friendly “good” “citizens” still support all kinds of policies that are bad for 99% of the population, so do not mistake this for praise of big corporations at their core.  Rather, it is praise for one way of making them behave a bit less like the purely selfish rapacious entities that they otherwise would be.

Manufacturers who do not sell to the public do not face these constraints because few business-to-business transactions hinge on warm feelings about anything beyond the product being purchased.  Monopoly seller do not have to worry about being responsible either (how often does someone avoid buying a pharmaceutical due to seemingly constant deluge of news about pharma’s bad behavior?).  But those who sell to the public and have competitors need to care, at least as long as they have an identifiable brand.

As further elucidated in the linked article, creating a brand with equity is not an easy thing.  It requires a lot of advertising, among other things.  Since tobacco produce manufacturers cannot effectively advertise anymore, there is almost no chance of creating a new high-equity brand.  (And, no, as any non-idiot will know, just putting graphics on a package does almost nothing to promote brand equity.)  For comparison, consider the efforts of e-cigarette makers to create brand equity — sometimes including efforts to position themselves as more socially responsible — and how they have largely failed.  If the existing high-value brands lose their value, there will be no more high-value brands.

There will be no more sponsorship of events or high-profile donations that provide some social value while supporting these brands at the expense of their low-end competitors.  Oh, wait, that value has already been taken away.  What will be newly lost is much of the incentive to support corporate responsibility initiatives and units, harm reduction research, and the like.  Indeed, the profits that support those come from the high-value brands.  Some cigarette makers spend a lot on these things, and some spend basically nothing at all.  Guess which ones benefit when the brand reputation value goes to zero? 

It is the black market that benefits the most, though, since they have none of the expenses of maintaining a respectable brand.  This includes the costs of obeying the laws, but also the costs of not being seen as hateful — even if they do something despicable, it will not follow them because there is no brand.

Of course, the anti-tobacco industry would probably respond to that paragraph by claiming that all manufacturers are equally despicable and that no cigarette brand can be respectable.  But this is because they only ever talk to other members of their fringe clique, and are bizarrely unaware that most of the population — including those who matter, the consumers of cigarettes — do not share their view.

Their narrow vision also does not extend (except when begging for more money to fight the “global epidemic”) to the vast majority of smokers who are not in rich countries like Australia.  Thus, there seems little chance that they have ever asked the question, “once we provide a training ground for manufacturers of low-quality-control unbranded or counterfeit products who avoid taxes and other constraints, whose lack of branding saves them from having to worry about their brand reputation, just what do you think they are going to do with their new found skill and infrastructure?”  If the anti-tobacco industry succeeds in their present efforts, there seems little doubt that they are building the low-value, low-quality, cheap, and criminal brands that will come to dominate the cigarette market for many poor populations.

[Update:  Some more on this in my next post.]