The Costs of Poor Health Habits.

Reference

1. Pedersen, Jorgen. "Some Notes on the Economic Policy of the United States during the Period 1919-1932," in Money, Growth, and Methodology, edited by Hugo Hegeland. Lund, Sweden: CWK Gleerup, 1961, pp. 473-94.

The Costs of Poor Health Habits.

By Willard G. Manning, Emmett B. Keeler, Joseph P. Newhouse, Elizabeth M. Sloss and Jeffrey Wasserman. Cambridge, Massachusetts and London, England: Harvard University Press. 1991. Pp. ix, 223.

This book presents the framework and results of an extensive study to measure the externalities, or social cost, of three poor health habits; smoking, excess alcohol consumption and a lack of exercise. To be sure, these habits have direct costs to the user, both in terms of the cost of the product and its eventual effect on the user. The focus here, however, is the cost to others from an individual's choice of these habits.

Data are taken from two large surveys; the Rand Corporation's Health Insurance Experiment and the National Health Insurance Survey. The book examined the additional medical costs caused by these habits, as well as their effect on the timing of the user's retirement and probability of developing a disability. Since the habit can affect the user's length of life, there will be a difference in the length of publicly provided pensions (social security) and the use of nursing homes. Further, since the length of worklife is affected, there will be a difference in the amount of taxes paid in by those with different health habits. Finally, as the costs occur over time, they are discounted to arrive at an appropriate present value.

In viewing the results for the externalities associated with smoking, the primary ones are medical costs, pensions and reduced payment of taxes due to a shorter lifespan. Using a five percent discount rate, the authors estimate that each pack of cigarettes smoked will cost other members of society about 26 cents in additional medical costs beyond what the smoker will pay. The predicted decrease in work life will reduce the payment of tax revenues by roughly nine cents per pack smoked. The shorter lifespan, however, will reduce the amount that the smoker will draw from publicly funded pensions by 24 cents per pack. When these and other factors are calculated, the result is that each pack of cigarettes smoked causes about 15 cents in external costs to non-smokers.

The analysis for the consumption of alcohol was complicated by the fact that it is not the consumption of alcohol that causes external costs, but rather its excess consumption. Several studies have shown that up to two drinks per day will, on average, improve health, or at least have no adverse effect. The analysis focuses on heavy drinking, i.e., the external costs associated with consuming more than two drinks per day on average.

The major external costs per excess drink were 58 cents in the value of lives lost by the victims of drunk-drivers and 35 cents in crime and property damage. Further, the additional medical and pension costs add 26 cents per excess drink. When correcting for other factors, the result is an external cost With a present value of $1.19 for each excess drink, or 48 cents per drink. The third habit analyzed is that of a sedentary life-style. This life style results in a shorter lifespan, and greater medical costs. Every mile a person walks reduces medical costs to others by 24 cents and reduces the cost of sick leave to others by six cents. Those who exercise, however, will on average live longer and draw more publicly funded pensions and cause seven cents in externalities for each mile walked. When these and other factors are controlled for, the result is a negative externality to others of 24 cents for each mile not walked.

The results have important policy implications as both cigarettes and alcohol are subject to excise taxes. Excise taxes are levied for three reasons; a sumptuary (sin) tax to discourage use of the good, a source of revenue and a user fee to collect revenue from those who benefit from a specific government service, e.g., the gasoline tax which is used to fund highway construction. The usual rationale for the excise tax on cigarettes and alcohol may be found in the first two reasons. The authors of the study raise the possibility that these taxes could be viewed as user fees for the externalities caused by the poor health habit. If this is the case, then the current federal excise tax on alcohol is too low, especially for excess alcohol consumption.

The authors suggest raising the excise tax on alcohol and then tying it to the price of the product, rather than levying a fixed monetary amount per volume unit and proof as is currently the case. The result should be a reduction in negative externalities. The gap between the tax rate and the negative externalities caused by cigarette smoking is quite small. There is, however, no tax on a sedentary life style. (It should be noted, however, that anyone who would in fact walk a mile for a pack of Camels would generate a net positive externality.)

The analysis is a good use of survey data. The authors quite capably integrate medical models with the economics of externalities. Sensitivity analysis is employed to demonstrate the effects of changing various assumptions on the results. The results are particularly robust for excess alcohol consumption.

The only drawback to the book is that it is basically an article, or series of articles that grew into a book. The material is adequately presented elsewhere by the authors in two articles, and the net addition of the book is greater detail of the authors' previous articles. The question is whether the greater depth provided warrants presentation of the study as a separate book. In any event, the analysis is quite well done and comes up with an important policy conclusion in regards to the excise tax on alcohol.

Robert J. Gitter

Ohio Wesleyan University