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Jun 23, 2014

Smoking out the truth in the Oz's plain packaging war

You can cherry-pick the data to prove the case either way, but it seems The Australian's war on plain packaging is self-defeating in the face of evidence.

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The Australian has launched another salvo in its bizarre war with Crikey, Media Watch, economist Stephen Koukoulas, the Australian Bureau of Statistics and common sense over tobacco plain packaging. The story thus far: the Oz published a highly dubious story using research funded by Big Tobacco arguing that the number of cigarettes sold in Australia had gone up since the introduction of plain packaging. Media Watch (and Crikey, days before) debunked the story. The Australian doubled down on its original claim, devoting five new stories to the claims. Since then, The Australian has continued the assault with articles by Judith Sloan and, over the weekend, a column from Henry Ergas:

“… basic economics shows that instead of lowering tobacco consumption, plain packaging may increase it, and the risk of cancer with it. “The reasons are straight­forward. Before plain packaging, at least some consumers were willing to pay a premium to consume, and be seen to consume, the higher quality brands. Moreover, each brand had its own, expensively cultivated, image and loyal clientele. With rivalry between brands focused on ‘look and feel’, the result was to mute price competition in the industry, thereby raising cigarette prices and lowering ­demand … “… as a result, by lowering prices, plain packaging may actually boost consumption, compared to what would have happened without it. And with teenagers’ demand for cigarettes about three times as price responsive as that of adults, the perverse consequence may be to enlarge the base of younger smokers [former health minister Nicola] Roxon pledged her policy would shrink.”

Note the “may” boost production, but it might not. It depends if price is more effective than other cultural influences over consumer behaviour, like “cool”. The argument is pretty theoretical anyway, given the tobacco excise increases are dramatically increasing the price. Here is the ABS data on aggregate spend, over the long term:

tobacco graph

And more recently:

tobacco graph

So who is right in this debate? Is plain packaging working, and does it matter? Well, in seasonally adjusted terms, spending did increase year-on-year to December 2013, so one could cherry-pick an argument to say it isn’t working. But over the same period in trend terms aggregate spending fell and trend is the more useful statistical measure. If you add another quarter then sales are crashing, after another tax hike. The Treasury last week released more qualitative data supporting the case that the policy is effective:

“The Commonwealth Treasury has further advised that tobacco clearances (including excise and customs duty) fell by 3.4% in 2013 relative to 2012 when tobacco plain packaging was introduced. “Clearances are an indicator of tobacco volumes in the Australian market”

Neither of these tells us which policy is working, though prima facie it looks like tax increases are probably having a more powerful effect, but it’s impossible to isolate plain packaging as a single policy at this aggregate data level. Treasury also released qualitative data:

“Recent figures released by the Australian Bureau of Statistics show that total consumption of tobacco and cigarettes in the March quarter 2014 is the lowest ever recorded, as measured by estimated expenditure on tobacco products i.e. $5.135 billion in September 1959, $3.508 billion in December 2012 and $3.405 billion in March 2014. See Table 8 at 5206.0 – Australian National Accounts: National Income, Expenditure and Product, Mar 2014 “The Commonwealth Treasury has further advised that tobacco clearances (including excise and customs duty) fell by 3.4% in 2013 relative to 2012 when tobacco plain packaging was introduced. “In April 2013, the CEO of a major tobacco company noted a decline in tobacco product sales: “‘As I’m looking at Asia Pacific, I should also mention Australia, we’ve had the first six months of the plain pack environment in Australia. We’ve seen the market decline roughly 2% to 3%, so maybe not as bad as we might have anticipated.’ Transcript of Imperial Tobacco half-year 2013 results – Interview with Alison Cooper, CEO, and Bob Dyrbus, FD

It looks like a reasonable circumstantial case to me, but at the end of the day does it matter all that much? There is a war on smoking, and it’s winning. It’s fair enough that the state does what it can to prevent smoking given it picks up the healthcare costs. And targeting the “cool” of smoking is a fair strategy. The same argument can be extended to other products, too. That’s economic rationalism as much as it is nanny-statism. In the name of disclosure let me say that I feel for smokers. I used to be one and would still be if it did not kill you. It’s a tremendous pleasure that non-smokers really don’t understand. I’m sure if you asked them if they prefer to be targeted by price hikes or plain packages they’d elect the latter! Over-simplification and data cherry-picking appears to be happening on both sides of the debate, but at the end of the day the perceived (or real) axis of evil constituting the tobacco-funded Institute of Public Affairs, the Labor-hating Australian newspaper and the tobacco industry is so self-defeatingly egregious that I’d recommend all three back away from an argument they are very clearly going to lose. *This article was originally published at MacroBusiness.

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