Regulations and Subsidies = Long Term Growth?

Japan, similar to most of the industrialized world, suffered large losses following the onset of the economic crisis in late 2007. Just like the rest of the nations with suffering economies, Japan considered various forms of economic regulations, including but not limited to: increased taxes on cigarettes and even subsidies for hybrid car purchasers. According to an article in the Financial Times, the above regulations combined with Japan having it's hottest summer in over a century created massive increases in sales for large firms (Stigler would have predicted this) which in turn seems to have increased Japanese GDP significantly - but the question remains, for how long? Stigler made it quite clear in his paper regarding the "Theory of Economic Regulation" that he determined that economic regulation is both designed by industry and used primarily for their benefit. Said theory, also known as 'Capture Theory' (referring to resources/monetary rewards captured by industry once Govt. has established regulations), refers to three main reasons why a Government would choose to regulate a previously unregulated industry - for public interests sake, due to their ability to benefit from firms competing to 'capture', or last but not least due to some complex or random variables. Specifically speaking, I don't think Japanese law makers could attribute too many of their recent decisions to a desire to serve the public, as any specified tax such as a cigarette tax simply increases the cost of a frequently consumed item, thus passing this cost onto the consumer. Interestingly enough, the 1% increase in GDP witnessed in Japan this quarter (now at 2.9%) from previous quarter is mainly attributed to consumers increasing their consumption of cigarettes in anticipation of the upcoming increase in cigarette taxes as well as the increase of consumption of hybrid vehicles, due to a Japanese Government subsidy on hybrid vehicles ending shortly. Even though the outcome of these regulations appears to be positive, influential economists are stating that onlookers should not be overly positive or optimistic due to the temporary increases. They said that when the cigarette tax actually comes to fruition, as well as when the hybrid car subsidy comes to an end, a massive recoil effect is going to occur, where those who were previously purchasing cartons of cigarettes as well as those who were purchasing multiple hybrid vehicles will both slow down considerably, due to increase in taxes and loss of subsidy incentive, respectively. Thus, what caused a huge boost this quarter may actually cause a huge backlash in the time to come. One thing, however, it appears is certain - economic regulation in this case served industry more than anything, even though this point is deceptively difficult to see when you look at the stats.

FDA De-Lights

This past summer, smokers may have noticed a change in some of their cigarette packages. For example, popular varieties such as “Marlboro Lights” and “Newport Lights” have been re-branded “Marlboro Gold” and “Newport Menthol Gold.” This is due to the recent Family Smoking Prevention and Tobacco Control Act that has restricted the use of labeling cigarettes with misleading terms that might suggest those varieties cause fewer health problems. In an effort to educate all smokers on the health risks of smoking, the FDA has prohibited the production of tobacco products labeled “light,” “low,” and “mild.” Some packages even include notices inside, such as the one depicted, elucidating any false impressions of the “light” varieties.

On the surface, it is easy to identify the affects of packaging regulations like these; bluntly stating that these cigarettes do not help in quitting smoking and that they are not any healthier is a way of making sure consumers are fully informed and are not being mislead by the advertising. This appeals to the public interest and may dissuade potential smokers from taking up these risks. However, these regulations may also help the companies that are producing them. New firms trying to jump into the tobacco industry must find a way to appeal to consumers, but with so many restrictions on what they are allowed to advertise, it is difficult to get their name out to potential consumers. Because established companies like Phillip Morris already have multiple cigarette brands out, consumers have no incentive to switch to other cigarette brands, especially if the clearly stated risks are going to be the same. This regulation protects the few companies already in the oligopoly of the tobacco industry from competition, and allows them to charge higher than optimal prices to consumers.

In my opinion, this regulation hurts more than it benefits the tobacco companies. If the FDA does its job effectively, they could deter potential consumers, not only through the explicit caveats, but because of the higher cost of taking up smoking.