08/29/2014 01:25 pm ET Updated Oct 29, 2014

For Policy Discouraging Smoking, FDA Defies Common Sense in Weighing 'Lost Pleasure' Against Health Benefits

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The ability of the Food and Drug Administration to regulate tobacco products is under threat -- from the FDA itself. Intended to ensure that federal regulations are economically defensible, an executive order mandates that agencies conduct cost-benefit analyses of proposed and final rules having an economic impact of $100 million or more. Accordingly, in April the FDA published an analysis of a 2011 rule requiring graphic warning labels (GWLs) on cigarette packaging. It included a calculation that many experts fear could severely limit the government's efforts to reduce consumption of substances -- like tobacco, sugar, and salt -- that are linked to diseases that lead to the premature deaths of hundreds of thousands of Americans each year.

Among the costs weighed against the health benefits from the decreases in smoking, the FDA counted the smoking pleasure "lost" by people induced by the GWLs to kick the habit. In fact, the FDA's estimate of "lost happiness" is so large that it canceled out about half of the policy's estimated benefits. If, despite the controversy, the FDA's analysis stands, that will make it much harder for the FDA to demonstrate significant benefits from tobacco regulations, weakening its position against legal challenges from the tobacco industry. And it would no doubt invite the food and beverage industries to demand that cost-benefit analyses of policies encouraging Americans to adopt healthier diets include as a cost all gustatory gratification forgone by consumers influenced by the policies to improve their eating and drinking habits.

You don't have to be a public health advocate to be alarmed at the seemingly absurd prospect of federal agencies having to prove that the benefits of clearly useful regulations exceed the amount of satisfaction people would enjoy if not for the effects of the regulations. (Should evaluation of government restrictions on advertising to children have to treat as a cost the "fun" of which children are "deprived" by those rules? What about the pleasure of smoking forgone by people who, because of the GWLs, never become regular smokers? Should that be counted as a cost of GWLs?) Ordinary citizens can recognize that, even apart from its potentially hamstringing federal public health initiatives, there is something seriously wrong with policy analysis that allows pleasures from unhealthy behavior to be weighed against -- and possibly outweigh -- the health benefits of ceasing that behavior.

What is perplexing about the FDA's reasoning is partly explained in a critical report submitted to the FDA in July by nine prominent economists, including a Nobel Prize laureate. The economists point out that the FDA calculation of the cost of GWLs to the smokers who quit misapplied a standard concept in economic theory, "lost consumer surplus." As the report explains, "For fully informed, rational consumers, consumer surplus reflects the difference between their willingness to pay for a product and the actual price they pay in the marketplace... Regulatory actions that reduce demand for a product... will lead to reductions in consumer surplus, reflecting the lost satisfaction that results from reduced consumption."

But the assumption of "fully informed, rational consumers" does not apply to most smokers, whose continuing to smoke displays "insufficient reason" because they are addicted to tobacco and began smoking as minors, when they did not appreciate the risks of addiction. (The authors cite a survey that found that over 90 percent of adult smokers wish they had never started smoking.) As for people who take up smoking as adults, the economists state that research suggests that most of those smokers would like to quit but are afflicted by biases --favoring present over future desires -- that undermine self-control, impeding rational choice.

With regard to the GWL rule, then, the report speaks for common sense when it observes that "to the extent that labels are effective in moving some smokers to quit... the reductions in smoking that result should be treated as a benefit rather than a cost that offsets the health benefits that result from quitting." As these eminent economists argue, the FDA erred by overlooking the fact that most smokers want to quit and every year over half try to do it, indicating that smokers generally exhibit impaired rationality. Moreover, the report notes, "new research demonstrates that smokers do not fully understand the health consequences of smoking," and that studies continue to uncover health risks from smoking means that "it is impossible to say that existing smokers are making fully informed decisions."

However, that smoking can rarely, if ever, be considered rational, informed behavior does not fully account for our unease with cost-benefit analyses that include as a cost of health-enhancing policies the pleasure from unhealthy behavior the policies help consumers to stop. What about behavior -- such as excess consumption of sugar, salt, and fat -- that is not strictly addictive but contributes significantly to health problems in this country? Given the risks to public health, surely the government has an interest in helping people change such behavior. But when it enacts policies for that purpose, since -- unlike tobacco -- the products consumed are not addictive, should the cost-benefit analyses treat as lost consumer surplus the pleasure given up by people who change their behavior in response to the policies?

To answer this question, consider again the economists' criticism of the FDA's analysis of GWL impacts. They argue that any satisfaction from smoking relinquished by smokers prompted to quit by the GWLs should not be counted as a cost to those smokers because this choice made them better off, as judged by them. In fact, the same point holds generally for policies, like the GWL rule, designed to influence -- but not compel -- consumers to make choices they themselves would agree will improve their lives. Such "nudging" policies were advocated in the best-selling 2008 book, Nudge, by Richard Thaler and Cass Sunstein, who from 2009 to 2012 headed the office overseeing implementation and review of federal regulations. (Thaler now advises the British government on nudging policies.) These policies are "libertarian," Thaler and Sunstein explain, in that they "maintain or increase freedom of choice," which makes them more appealing politically than policies -- such as raising taxes -- that coerce consumers to change behavior. At the same time, the policies are "paternalistic" by seeking to "influence choices in a way that will make choosers better off, as judged by themselves."

For policies that embody libertarian paternalism, such as the GWL rule and other regulations that nudge consumers to eliminate unhealthy habits, there is no theoretical basis for including as a cost of the policies the pleasure consumers no longer receive when, aided by the policies, they rationally choose (as Nudge puts it) "to make their lives longer, healthier, and better."