The failure of plain packaging: Australian evidence Sinclair Davidson

Economics, Finance and Marketing How to find me My Plain Packaging Resources page: http://catallaxyfiles.com/2016/04/01/plain-packaging-resources/ Google: Sinclair Davidson plain packaging resources Blog: www.catallaxyfiles.com Twitter: @sincdavidson Research Gate: https://www.researchgate.net/profile/Sinclair_Davidson SSRN: http://ssrn.com/author=290796 Institute of Public Affairs: http://ipa.org.au/people/sinclair-davidson Australian Broadcasting Corporation: http://www.abc.net.au/news/sinclair-davidson/31142 The Conversation: https://theconversation.com/profiles/sinclair-davidson-1598/articles RMIT University © 2017 Economics, Finance and Marketing

Economics, Finance and Marketing Plain Packaging RMIT University © 2017 Economics, Finance and Marketing

Economics, Finance and Marketing Take home message “The number of smokers in Australia has increased for the first time since anti-smoking campaigns ramped up a generation ago, casting doubt on the effectiveness of further taxes on cigarettes. An unexpected standstill in the national smoking rate since 2013, combined with rapid population growth, has pushed up the number of regular smokers by more than 21,000 to 2.4 million according to Colin Mendelsohn, an expert in public health at the University of New South Wales, who says Australia’s “punitive and coercive” policies to curb smoking have “run out of steam”. “For the first time ever, there has been no statistically significant reduction in the smoking rate, and an increase in the number of smokers in Australia,” he told The Australian, noting the nation’s smoking rate was now higher than in the US for the first time in a decade. “This is despite plain packaging and the most expensive cigarette prices in the world.” The Australian More smokers lighting up, despite ever-increasing taxes RMIT University © 2017 Economics, Finance and Marketing

The Theory of Tobacco Control Medical Perspective: Smoking is single largest cause of premature death. Smoking should be treated as a disease and eradicated. “Optimal” level of smoking is zero. Economic Perspective: Smoking has an asymmetric information problem. Public education. Smoking has an externality problem. Pigouvian taxation. “Optimal” level of smoking is not zero. RMIT University © 2017 Economics, Finance and Marketing

The Theory of Tobacco Control Three myths that underpin the Nirvana Fallacy: People will be different. The grass is greener on the other side. There can be a free lunch. First proposed by Harold Demsetz (1969). RMIT University © 2017 Economics, Finance and Marketing

People will be different Business satisfies demand it does not create demand. It is not the fault of the entrepreneurs that the consumers—the people, the common man—prefer liquor to Bibles and detective stories to serious books, and that governments prefer guns to butter. The entrepreneur does not make greater profits in selling “bad” things than in selling “good” things. His profits are the greater the better he succeeds in providing the consumers with those things they ask for most intensely. People do not drink intoxicating beverages in order to make the “alcohol capital” happy, and they do not go to war in order to increase the profits of the “merchants of death.” Ludwig von Mises RMIT University © 2017 Economics, Finance and Marketing

The grass is greener on the other side When at first you don’t succeed … Change the rules of the game. Cheat. The Tobacco Control Industry did both. RMIT University © 2017 Economics, Finance and Marketing

The grass is greener on the other side Smoking prevalence has been in long-term decline in Australia Depending on which measure you look at since the 1960s or 1970s. Primary driver of this decline is increased appreciation of the health risks associated with smoking. Secondary driver is high levels of tobacco excise. In Australia excise is indexed to Average weekly earnings and adjusted twice annually. Previously indexed to CPI. In addition there have been several ad hoc excise increases in recent years. RMIT University © 2017 Economics, Finance and Marketing

The grass is greener on the other side (2013 data) Adapted from Australian Government: Department of Health, Tobacco key facts and figures RMIT University © 2017 Economics, Finance and Marketing

The grass is greener on the other side (2016 data) Adapted from Australian Government: Department of Health, Tobacco key facts and figures RMIT University © 2017 Economics, Finance and Marketing

The grass is greener on the other side ff RMIT University © 2017 Economics, Finance and Marketing

The grass is greener on the other side Plain packaging objectives To improve public health by: discouraging people from taking up smoking, or using tobacco products. encouraging people to give up smoking, and to stop using tobacco products. discouraging people who have given up smoking, or who have stopped using tobacco products, from relapsing. reducing people’s exposure to smoke from tobacco products. Mechanisms to achieve those objectives: reduce the appeal of tobacco products to consumers. increase the effectiveness of health warnings on the retail packaging of tobacco products. reduce the ability of the retail packaging of tobacco products to mislead consumers about the harmful effects of smoking or using tobacco products. RMIT University © 2017 Economics, Finance and Marketing

The grass is greener on the other side In evaluating the evidence for and against the plain packaging policy I want to focus of three things: The 3.4% lie. The Cancer Council Victoria surveys. The post-implementation review study. RMIT University © 2017 Economics, Finance and Marketing

The grass is greener on the other side The 3.4% lie began in 2014 with a story in the Sydney morning Herald: The federal Treasury has entered the debate over cigarette sales, publishing previously secret information [tobacco tax data] that shows sales falling since the introduction of graphic health warnings and plain packaging. … the Treasury data shows 3.4 per cent fewer cigarettes were sold last year than 2012. But when you read the story: No Treasury official named. No Treasury official quoted. No Treasury document cited. Questions were asked in the Parliament by Senator David Leyonhjelm and the evasions began. Not the mention the freedom of information requests. RMIT University © 2017 Economics, Finance and Marketing

The grass is greener on the other side Treasury was required to release the “previously secret information”. An analysis of that information showed: When you adjust the timing of the analysis from a calendar year to when the policy was actually implemented, the 3.4% decline becomes a 0.8% decline. When you adjust for tax refunds that were paid for non-compliant tobacco products, the 3.4% decline becomes a 0.5% increase. The current state of play: Treasury have abandoned the 3.4% claim but are sticking with 0.8%. The Health Department told the Parliament: “We have no intention of suggesting that clearance rates are a direct measure of tobacco plain packaging effects”. RMIT University © 2017 Economics, Finance and Marketing

The grass is greener on the other side Compare the Australian 3.4% lie to the French experience: France will have to cough up €100 million to pay tobacconists for all the unsold branded cigarette packets after the new law about plain packaging came into play. When France made the switch to neutral cigarette packages in January this year, the government was forced to buy out all the branded cigarette packages that tobacconists had not sold. The Local, France to blow €100 million on lighting up unsellable cigarettes Since France introduced a ban on branded cigarettes in January 2017, more packets of cigarettes have been sold compared to last year when branding was allowed, according to the country's Customs Office (L'administration des Douanes). Blyth Brentnall, Smoking on the rise in France despite rollout of plain packaging It is early days but the French experience seems similar to the Australian experience. RMIT University © 2017 Economics, Finance and Marketing

The grass is greener on the other side The Cancer Council Victoria survey was “commissioned” by the Australian government to investigate the impact of the introduction of plain packaging. The research contract states: The Final Reports must also include: d) a discussion of the overall impact of packaging changes on key proximal outcome measures and more distal outcome measures including quit intentions, quit attempts and consumption; and e) a discussion of the independent and combined influences of plain packaging, health warnings, mass media campaign exposure, and any tobacco pricing and product changes. RMIT University © 2017 Economics, Finance and Marketing

The grass is greener on the other side Results published in 2015 Tobacco Control. Other government funded survey studies published in same issue. Conclusions: “Plain packaging in Australia has been a casebook example of effective tobacco control – a policy measure driven by evidence, carefully designed and implemented, and now rigorously assessed”. Hastings and Moodie (2015: ii2) “These results should give confidence to countries considering plain packaging that plain packs not only reduce appeal of tobacco products and increase the effectiveness of health warnings but also diminish the tobacco industry’s ability to use packs to mislead consumers about the harms of smoking.” Melanie Wakefield RMIT University © 2017 Economics, Finance and Marketing

The grass is greener on the other side Three important studies: Responses to health warnings (Wakefield et al.). Quitting behaviours (Durkin et al.). Linking responses to behaviours (Brennan et al.). Problems (Davidson and de Silva 2016): Data mining. Different data across studies. Different time periods. Different variables. Does not test actual quitting behaviour before and after the policy introduction. All the (inconsistent) methodological choices made in the studies work to demonstrate that plain packaging was successful. When you untangle those choices, the results are not robust. RMIT University © 2017 Economics, Finance and Marketing

The grass is greener on the other side Cancer Council Victoria response (emphasis original): The NTPPS was quite explicitly not designed to assess quitting success or change in smoking prevalence but rather focussed on the immediate impact of the legislation on perceptions of the pack, effects of health warnings and understanding of product harmfulness. That seems inconsistent with their contractual obligations. “… of the independent and combined influences of plain packaging, health warnings …”. Davidson and de Silva (2017) examine those independent and combined influences of plain packaging and health warnings. RMIT University © 2017 Economics, Finance and Marketing

The grass is greener on the other side Brennan et al. (2015) report: RMIT University © 2017 Economics, Finance and Marketing

The grass is greener on the other side Case proven? We can all go home? Not so fast … … Brennan et al. (2015) limit their analysis to the period after the introduction of plain packaging … … Davidson and de Silva (2017) replicate the Brennan et al. (2015) study looking at what happened both before and after the introduction of the plain packaging study. RMIT University © 2017 Economics, Finance and Marketing

The grass is greener on the other side Source: Davidson and de Silva (2017) RMIT University © 2017 Economics, Finance and Marketing

The grass is greener on the other side Source: Davidson and de Silva (2017) RMIT University © 2017 Economics, Finance and Marketing

The grass is greener on the other side Graphic health warnings did not become more effective after the introduction of plain packaging. Graphic health warnings were first introduced in 2006. The joint effect of plain packaging and health warnings did not contribute to actual quit attempts. Smokers did dislike packs … No impact on quit attempts. Short lived. RMIT University © 2017 Economics, Finance and Marketing

The grass is greener on the other side The government must have known their survey evidence was weak, because the commission more original research for the post-implementation review. According to Mike Daube: “… it is especially rewarding that this meticulous independent analysis attributes part of that decline to plain packaging alone …” According to the actual post-implementation review: “… it is not possible to identify separately the effects of tobacco plain packaging and enlarged and updated graphic health warnings on smoking prevalence …”. RMIT University © 2017 Economics, Finance and Marketing

The grass is greener on the other side RMIT University © 2017 Economics, Finance and Marketing

The grass is greener on the other side After a freedom of information request the summary data was made available. RMIT University © 2017 Economics, Finance and Marketing

The grass is greener on the other side The post-implementation review also contained another modelling exercise. Model has 800,000 observations and 52 explanatory variables – but not price. Lindley’s paradox (large N makes it easier to find statistically significant variables at conventional levels). Unusual model base: an unmarried, Australian born, 14 – 17 year old, male, with a tertiary qualification, employed full time, but with an income less than $6000, and living in Victoria. 0.55% decline in tobacco consumption can be attributed to plain packaging. Sample error is 0.6%. Pseudo-R2 are all very small. Data not publicly available for replication. RMIT University © 2017 Economics, Finance and Marketing

There can be a free lunch Non-price competition was replaced by price competition only. RMIT University © 2017 Economics, Finance and Marketing

There can be a free lunch Increased criminality Source: KPMG (2017) RMIT University © 2017 Economics, Finance and Marketing

There can be a free lunch “Retailers claim their revenues are being "devastated" by more than 600 organised crime-backed illegal cigarette and tobacco shops costing up to $4 billion a year in lost profits and taxes. Gangs' profits for distributing the tobacco increased by up to 17 per cent on September 1 because they will be evading the annual increase in tobacco excise tax and related fees paid by lawful businesses.” Australian Financial Review 600 illegal tobacco shops are 'devastating' retailers, industry warns http://www.afr.com/news/policy/tax/600-illegal-tobacco-shops-are-devastating-retailers-industry-warns-20170831-gy7w7a#ixzz4rn8Dimdp “ RMIT University © 2017 Economics, Finance and Marketing

There can be a free lunch “The Department of Immigration and Border Protection said in answers to the parliamentary committee on illicit tobacco, seen by The Australian Financial Review, that the department only issued 24 fines for illegal tobacco smuggling and excise evasion since 2012. Other than one individual who was issued a $7.9 million fine for multiple counts, most smugglers received only a small fine, with the amount ranging from $500 to $70,000. The median fine for tobacco smuggling and tax evasion was only $17,000. This is far below the maximum $210,000 penalty for a single count of tobacco smuggling. The document also shows the department has not seized any profits from illicit tobacco under the federal proceeds of crime laws in the last five years.” Australian Financial Review Tobacco smugglers pay median fine of $17,000 http://www.afr.com/news/policy/tax/tobacco-smugglers-pay-median-fine-of-17000-20170824-gy35xo#ixzz4rn9Fkyib RMIT University © 2017 Economics, Finance and Marketing

There can be a free lunch Criminality is a “gateway drug” to further criminality Criminals do not pay taxes. Criminals do not pay dividends. Criminals engage in violence (kidnapping attempt). Criminals increase insurance costs. Criminals subvert societal institutions. Criminals compete unfairly with legal business. RMIT University © 2017 Economics, Finance and Marketing

There can be a free lunch Alliance of Australian Retailers: Small business retailers like those we represent are already under additional pressure due to excessive tobacco regulation. In addition to ensuring all tobacco products comply with far-reaching retail regulations, our members are exasperated by the consequences of plain packaged products and extreme tax rises that has led to illicit tobacco being so easily sold. Threatening not only the safety of our local communities, the barefaced sale of illicit tobacco encourages customers away from legitimate retailers on the basis of price and within the environment of the now undistinguishable differentiation of tobacco products. Australian Retailers Association: There is no evidence that recent plain packaging moves have worked and consumers have sought illegal product instead with the loss of brand loyalty the illegal market has grown to the magnitude of 14.3% of consumption. RMIT University © 2017 Economics, Finance and Marketing

There can be a free lunch Regulatory confusion Liberal senator Eric Abetz says pinning down the authority or regulator responsible for the trade in illicit tobacco is like trying to catch a "greasy pig". Senator Abetz, who sits on a parliamentary committee running an inquiry into illegal tobacco, reserved his harshest criticism for the Department of Health. "The health department denies that it is responsible for coordinating the government response, but it seems to be a bit like a greasy pig," he said. "When you try to pin down a department or group they tend to be able to slip out of your grasp and go 'that's somebody else's fault'. Hence the greasy pig analogy.“ Australian Financial Review Responsibility for illicit tobacco as slippery as a 'greasy pig': Eric Abetz http://www.afr.com/business/legal/responsibility-for-illicit-tobacco-as-slippery-as-a-greasy-pig-eric-abetz-20170824-gy36g7#ixzz4rnAYLDwf RMIT University © 2017 Economics, Finance and Marketing

Economics, Finance and Marketing More Information Australian Financial Review – www.afr.com search “tobacco” My plain packaging resources Davidson, Sinclair and de Silva, Ashton, Stubbing Out the Evidence of Tobacco Plain Packaging Efficacy: An Analysis of the Australian National Tobacco Plain Packaging Survey (May 17, 2016). Available at SSRN: https://ssrn.com/abstract=2780938 Davidson, Sinclair and de Silva, Ashton, What the Government Demanded As Proof for Plain Packaging Efficacy: An Analysis the Public Health Lobby Did Not Perform (May 3, 2017). Available at SSRN: https://ssrn.com/abstract=2962216 RMIT University © 2017 Economics, Finance and Marketing