“Smokers: Strengthening the Economy from Beyond the Grave” or “The Limits of a Cost Benefit Analysis”

It’s not a common perception that the tobacco industry is a virtuous regime with public health at its helm, however a story from the early aughts was for many a new low. The Wall Street Journal describes how Philip Morris performed an economic analysis for the Czech Republic in order to demonstrate that having a high population of smokers benefits them financially, due to smokers’ “premature demise.” Essentially, many tobacco users die early, and it can be seen as a preventable tragedy, or millions of dollars in healthcare savings. Naturally, the anti-tobacco lobbyists couldn’t believe their luck; the case was publicized and indignation ran rampant – the ruthlessness, the cruelty of the numbers.

What struck me as so interesting about this story, which I heard about on This American Life (my favorite podcast), was how well it illustrated the implications of any sort of cost-benefit analysis. These are incredibly useful tools, made to weigh investments, economic opportunities, and the like, and can be calibrated depending on certain variables, such as the environmental impact of a project versus its projected profit. Of course, this calibration is often skewed in favor of whomever is conducting the analysis, or perhaps, more importantly, for whom the analysis is being conducted. What I mean to say is, the output, as with any system, depends on the input. If we weigh environmental costs heavily, then damaging projects will not “pass” the analysis. If we don’t weigh them at all, it’s a go.

Similarly, even if the analysis is run objectively, the outcome itself is subject to interpretation. How one sees unacceptable cost versus the marginal benefit is in the eye of the beholder. In the case of Philip Morris’ study, the numbers are there, but what the tobacco company sees as an positive, society is forced to see as inhumane. Regardless, it is an economic fact. So should we promote smoking in order to weed out future healthcare costs? Most would argue no.

In 2006, British economist Nicholas Stern published his review on the economics of climate change, urging, based on his conclusions, immediate and severe action to be taken against global warming, to the tune of 1% global GDP in order to prevent irreparable damages, the costs of which would be borne by future generations. In response, William Nordhaus, an American economist, reviewed his assumptions and recalculated the costs of climate change in the future with slightly different discount rates, and the outlook changed dramatically, allowing him to justify modest reductions in greenhouse gas emissions over time. In conclusion of his essay, Nordhaus writes,

“I am reminded here of President Harry Truman’s complaint that his economists would always say, on the one hand this and on the other hand that. He wanted a one-handed economist. The Stern Review is a Prime Minister’s dream come true. It provides decisive and compelling answers instead of the dreaded conjectures, contingencies, and qualifications.

However, a closer look reveals that there is indeed another hand to these answers. The radical revision of the economics of climate change proposed by the Review does not arise from any new economics, science, or modeling. Rather, it depends decisively on the assumption of a near-zero social discount rate. The Review’s unambiguous conclusions about the need for extreme immediate action will not survive the substitution of discounting assumptions that are consistent with today’s market place. So the central questions about global-warming policy – how much, how fast, and how costly – remain open. The Review informs but does not answer these fundamental questions.”

So there we have it – there will always remain two sides to every coin, and the one you choose depends on your personal beliefs, values, and education. Great strides are being taken, however, to introduce new norms and policies into the often rigid equations, and make room for new ways of thinking about our planet and our shared future.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s