Alcohol. The anti-alcohol lobby say just one drink increases your risk of cancer, and news yesterday was that cigarette-warning-style labels will start appearing on bottles of booze. The social costs of alcohol are often cited as an additional reason to crack down on it. Here, Dr Eric Crampton casts a sceptical eye over how that social cost is measured.
If I told you that surfing cost the Australian economy a billion dollars and that we consequently should make life jackets compulsory, you could be forgiven for thinking that the number represented some real cost to the community; perhaps the cost of rescuing surfers caught in rips or medical care for those injured in accidents.
But if you found out that the vast majority of that figure was the combination of surfers’ expenditures on their boards and the costs of holidays they took heading up to Yallingup, you might think twice about endorsing the policy recommendation. And you might wonder a bit why anybody would have thought those costs could matter for policy.
And so it is with the often-cited social costs of alcohol. In 2008, Macquarie University’s Professor David Collins and the University of Queensland’s Associate Professor Helen Lapsley estimated that alcohol consumption cost Australia some $15 billion for the 2004/5 fiscal year.
The figure proved popular, being cited dozens of times on Australian television and radio, more than 100 times in newspaper articles and op-eds and it’s been referenced on a dozen occasions in Australia’s Parliament by nine MPs. With one large number proving popular, others like Professor Robin Room went on to produce even larger figures.
But what isn’t widely understood is that these papers use a method that, like the surfing example, mostly counts the costs drinkers impose upon themselves. This “Cost of Illness” method varies considerably from standard methods of economic analysis. There are many ways of producing a cost figure, but once we stray too far from standard economic method, we cannot interpret the produced figure as being economically meaningful.
There has emerged a cottage industry of academics and consultants using this Cost of Illness method to produce large figures for Ministries of Health from Canada to Australia. When the method counts over a billion dollars that drinkers spend on their own alcohol in Australia, but dismisses that those drinkers just might have enjoyed having a drink, the practice borders on advocacy.
In its final report which was publicly released in May last year, the Henry Tax Review argued that alcohol tax is a blunt tool for addressing harms caused by alcohol, but that tax can address these spillover costs where marginal social costs otherwise exceeds the price of alcohol.
But methods that include private costs as public provide a distorted picture of the appropriate level of taxation; the Henry Review urged caution about relying on these methods used by Professor Collins and Associate Professor Lapsley. As the $15 billion figure includes a large proportion of costs which fall on the drinker, the figure is meaningless from an economic and policy perspective.
Together with Matt Burgess of the Institute for the Study of Competition and Regulation and Brad Taylor from Australian National University, I have had a close look at the $15 billion figure and compared it to the figure that would have emerged had more standard economic method been used in its construction.
The end result was that policy-relevant annual costs of alcohol consumption in Australia were no more than $3.8 billion. To provide perspective for examination of spillover costs, the total tax take from alcohol (excluding GST) for the same financial year was $4.1 billion.
In other words, alcohol consumers contributed more in tax than they cost others through the health system and traffic accidents. The new $3.8 billion figure is not the result of cost-benefit analysis – more work would need to be done to quantify the benefits of drinking. Rather, it is the figure that emerges when we apply standard economic method and count only the costs tabulated by Professor Collins and Associate Professor Lapsley that truly count as spillovers.
Unfortunately, political discussion of alcohol’s sometimes tragic costs is too often clouded by emotion. It’s not that we do not care when a drinker falls ill or, worse still, loses his or her life.
But if we are going to count the costs that some drinkers impose upon themselves through their consumption, a fair analysis would also have to count against those private costs the benefits that drinkers enjoy from a night out or from a quiet drink at home. Or, it would not present costs drinkers impose upon themselves as being costs to society.
On Thursday, I will be presenting to the Australian Conference of Economists in Canberra as part of the Conference’s annual “Dodgy” awards. I’ll be arguing that preventative health suffers from the worst application of economic analysis to policy, Professor Collins and Associate Professor Lapsley’s report and how it’s been treated in policy discourse will help me to make that case.
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