Smoking, said King James I in 1604, is “loathsome to the eye, hateful to the nose, harmful to the brain, dangerous to the lungs.” Three years later he planted a colony in Jamestown. Its tobacco enhanced the royal treasury until Virginia produced a bumper crop of revolutionaries, including the tobacco farmer George Washington.
King James might have been less censorious about “vaping,” which almost certainly is less harmful than inhaling chemicals produced by the combustion of tobacco. Users of e-cigarettes inhale vapors from electronic sticks containing a liquid with nicotine, which is addictive and perhaps particularly unhealthy for adolescent brains. Between 2013 and 2014 the use of e-cigarettes by middle- and high-school students tripled, and now exceeds that cohort’s use of traditional cigarettes.
E-cigarettes, sometimes flavored to tempt the immature (“Unicorn Puke,” “Stoned Smurf,” “German Chocolate Beefcake”), might be “gateway drugs” leading to tobacco cigarettes. Currently, however, e-cigarettes often are substitutes for them. So, prepare for regulations combining high-mindedness and low cunning.
E-cigarettes raise public-health issues, but also illustrate the unhealthy process by which public policy often is made. They illustrate a familiar phenomenon, the cooperation between “bootleggers and Baptists,” meaning merchants and moralists — those motivated by profits and those motivated by social improvement.
In 1983, Bruce Yandle, then a Clemson University economist who now is at George Mason University’s Mercatus Center, had an epiphany: Regulations often come from a counterintuitive convergence of pressures from two groups, the earnestness of one providing cover for the other’s avarice. In his example, Baptists wanted laws closing liquor stores on Sundays to promote piety, and bootleggers wanted such laws to create an unserved market.
Today, New York has the highest state cigarette tax ($4.35 per pack — plus a $1.50 New York City tax) and North Carolina has the sixth-lowest (45 cents), so naturally Interstate-95 is a corridor for smuggled cigarettes, which in 2013 were nearly 60 percent of New York’s cigarette market. Proclaiming morality while practicing cupidity, states have tried to hit the sweet spot of cigarette taxes — high enough to maximize revenue without excessively discouraging smoking.
States addicted to tobacco taxes need a large and renewable supply of smokers, so they wince whenever an e-cigarette displaces a traditional cigarette. As Yandle and three colleagues explain in the current issue of Regulation quarterly, state governments are now bootleggers masquerading as Baptists, and many are in a bind.
In 1998, acting on the dubious proposition that smoking costs governments substantial sums (actually, cigarettes are one of the most heavily taxed consumer products, and one in three smokers dies prematurely, before fully collecting government medical, pension, and nursing home entitlements), the tobacco companies agreed to pay 46 states $206 billion through 2025. Some states, impatient to spend their windfall, securitized the future revenue in tobacco bonds. Now, as vaping supplants some smoking, there is a new cadre of bootleggers — the holders of tobacco bonds. They are supposed to be paid from a revenue stream from smokers (disproportionately low-income and low-information people), so they will urge regulations that discourage e-cigarettes. Or that bring e-cigarettes under the 1998 agreement, perhaps by declaring them “tobacco products” because the nicotine can come from tobacco.
In exchange for the big cigarette companies’ payments, the 1998 agreement gave them tobacco marketing restrictions, which they welcomed. The restrictions impede the entrance of new competitors into the field, and hinder smaller companies from using cigarette advertising for its primary purpose, which is not to create new smokers but to capture a larger market share of existing smokers.
E-cigarettes can expect similar bootlegging regulations, couched in moralistic cadences. Also, manufacturers of nicotine-replacement therapies (e.g., nicotine patches and gum) will be bootleggers seeking regulations that will discourage people from thinking e-cigarettes are a relatively safe way to enjoy nicotine.
Yandle’s “bootleggers and Baptists” hypothesis is given many illustrations, from environmental regulations to Obamacare, in a new book of that title, co-authored with his economist grandson, Adam Smith. Yandle’s hypothesis expands “public choice” theory, which demystifies and de-romanticizes government by applying economic analysis — how incentives influence behavior — to politicians and bureaucrats. It rebuts the fiction that such officials are more disinterested than actors in the private sector. Yandle does the same thing regarding many of those who seek regulations.
Life would be sweeter if people would forgo the pleasures of inhaling smoke and vapors that do not improve the air, which is plentiful and untaxed. And government would be better if more people were clear-eyed about how Baptists and bootleggers collaborate.