U.S. to Release Analysis Showing
Smoking Costs $130 Billion a Year

by David Wessel and Jeanne Cummings
Copyright 1998 Dow Jones & Co., Inc.
The Wall Street Journal (March 25, 1998)

WASHINGTON -- Smoking costs the U.S. about $130 billion a year in shortened working lives and added health-care spending, according to a new Treasury analysis to be released Wednesday as part of a Clinton administration campaign to push tobacco legislation through Congress.

Meanwhile, Senate Commerce Committee Chairman John McCain said negotiations over tobacco legislation are moving and he hopes to have a bill before his committee early next week.

Representatives of the tobacco industry, attorneys general and the administration were involved in the discussions, and the hope is to reach agreement on key provisions by week's end, said John Raidt, committee staff director. Mr. McCain also met with former Surgeon General C. Everett Koop and former Food and Drug Administrator David Kessler.

The Arizona Republican left the negotiations to conduct his last public hearing on the proposed tobacco settlement. Deputy Treasury Secretary Lawrence Summers told the panel that beyond the "heavy human costs of smoking, lie equally heavy economic costs for our nation."

Details of Economic Case

In a speech Wednesday at George Washington University, Mr. Summers is expected to provide details of the economic case for legislation to settle tobacco litigation and raise cigarette prices.

The Treasury analysis, certain to be attacked by the tobacco industry as incomplete, says the U.S. loses $80 billion a year of goods and services that would have been produced by Americans who either die prematurely or retire early because of smoking-related ills. In addition, the nation coughs up nearly $50 billion a year in medical spending on adult smokers and on babies born to women who smoke. "Successfully preventing people from acquiring an addiction they do not want to have -- by effectively combating youth smoking -- is a free lunch with real benefits for our economy ...." Mr. Summers is expected to say Wednesday.

The Treasury analysts ignore some of the economic benefits of smoking that other economists have quantified: Medicare and Social Security programs save money because smokers die prematurely. Although this affects the federal budget, the Treasury argues, it doesn't represent true savings to the economy. Similarly, the tally doesn't reflect taxes paid on cigarettes, which don't affect the value of goods and services produced in the U.S.

Neither does the Treasury place any value on the huge cigarette industry, implicitly assuming that capital and labor would be put to other productive purposes if fewer people smoked.

Administration Goal

The administration's goal is to reduce smoking among teenagers by 60% over 10 years, primarily by raising cigarette prices. For every 10 cents added to the price of a pack of cigarettes, Mr. Summers said, about 700,000 fewer teenagers will begin smoking, and more than 200,000 premature deaths will be avoided.

The president's budget anticipates that cigarette prices will rise from an average of $1.94 now to $2.09 a pack in 2003 without any legislation, and to $3.19 a pack in today's dollars if Congress acts.

Salomon Smith Barney analyst Martin Feldman told the panel that the program would yield a greater price increase and "spawn a sizable black market."

Some Democrats seized on that prediction, and the Treasury's suggestion that states and local governments would refrain from increasing their taxes on cigarettes, to question the comprehensive package.

Mr. Summers said cigarette prices in other countries would still be higher. He added that the legislation would allow the Food and Drug Administration to monitor cigarette production and also require that cartons be marked to foil smugglers.

Treasury economists didn't include two particularly hard-to-estimate costs that smoking imposes on Americans. One is the possibility that smoking reduces productivity -- or output per hour of work -- by $50 billion to $125 billion a year. The estimate is based on evidence that smokers, even after taking account of differences in education, experience, race and other factors, earn 4% to 8% less than nonsmokers.

The other is the value that Americans assign to living longer; based on economic research, the Treasury estimated that avoiding premature deaths from smoking could be worth approximately $120 billion a year, or $8 a pack.

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