INSIGHTS: INCREASED E-CIGARETTE REGULATION INCREASES BARRIERS TO HEALTH
Guest Columnist: Carrie Wade, Senior Fellow and harm reduction policy director, R Street Institute. Reprinted with permission
The Food and Drug Administration has spoken, and its words have, once again, ruffled many feathers. Coinciding with the deadline for companies to lay out their plans to prevent youth access to e-cigarettes, the agency has announced new regulatory strategies that are sure to not only make it more difficult for young people to access e-cigarettes, but for adults who benefit from vaping to access them as well.
More surprising than the FDA’s paradoxical strategy of preventing teen smoking by banning not combustible cigarettes, but their distant cousins, e-cigarettes, is that the biggest support for establishing barriers to accessing e-cigarettes seems to come from the tobacco industry itself.
Going above and beyond the FDA’s proposals, both Altria and JUUL are self-restricting flavor sales, creating more — not fewer — barriers to purchasing their products. And both companies now publicly support a 21-to-purchase mandate. Unfortunately, these barriers extend beyond restricting underage access and will no doubt affect adult smokers seeking access to reduced-risk products.
To say there are no benefits to self-regulation by e-cigarette companies would be misguided. Perhaps the biggest benefit is to increase the credibility of these companies in an industry where it has historically been lacking. Proposals to decrease underage use of their product show that these companies are committed to improving the lives of smokers. Going above and beyond the FDA’s regulations also allows them to demonstrate that they take underage use seriously.
Yet regulation, whether imposed by the government or as part of a business plan, comes at a price. This is particularly true in the field of public health. In other health areas, the FDA is beginning to recognize that it needs to balance regulatory prudence with the risks of delaying innovation. For example, by decreasing red tape in medical product development, the FDA aims to help people access novel treatments for conditions that are notoriously difficult to treat. Unfortunately, this mindset has not expanded to smoking.
Good policy, whether imposed by government or voluntarily adopted by private actors, should not help one group while harming another. Perhaps the question that should be asked, then, is not whether these new FDA regulations and self-imposed restrictions will decrease underage use of e-cigarettes, but whether they decrease underage use enough to offset the harm caused by creating barriers to access for adult smokers.
The FDA’s new point-of-sale policy restricts sales of flavored products (not including tobacco flavors or menthol/mint flavors) to either specialty, age-restricted, in-person locations or to online retailers with heightened age-verification systems. JUUL, Reynolds and Altria have also included parts of this strategy in their proposed self-regulations, sometimes going even further by limiting sales of flavored products to their company websites.
To many people, these measures may not seem like a significant barrier to purchasing e-cigarettes, but in fact, online retail is a luxury that many cannot access. Heightened online age-verification processes are likely to require most of the following: a credit or debit card, a Social Security number, a government-issued ID, a cellphone to complete two-factor authorization, and a physical address that matches the user’s billing address. According to a 2017 Federal Deposit Insurance Corp. survey, one in four U.S. households are unbanked or underbanked, which is an indicator of not having a debit or credit card. That factor alone excludes a quarter of the population, including many adults, from purchasing online. It’s also important to note that the demographic characteristics of people who lack the items required to make online purchases are also the characteristics most associated with smoking.
Additionally, it’s likely that these new point-of-sale restrictions won’t have much of an effect at all on the target demographic — those who are underage. According to a 2017 Centers for Disease Control and Prevention study, of the 9 percent of high school students who currently use electronic nicotine delivery systems (ENDS), only 13 percent reported purchasing the device for themselves from a store. This suggests that 87 percent of underage users won’t be deterred by prohibitive measures to move sales to specialty stores or online. Moreover, Reynolds estimates that only 20 percent of its VUSE sales happen online, indicating that more than three-quarters of users — consisting mainly of adults — purchase products in brick-and-mortar retail locations.
Existing enforcement techniques, if properly applied at the point of sale, could have a bigger impact on youth access. Interestingly, a recent analysis by Baker White of FDA inspection reports suggests that the agency’s existing approaches to prevent youth access may be lacking — meaning that there is much room for improvement. Overall, selling to minors is extremely low-risk for stores. The likelihood of a store receiving a fine for violation of the minimum age of sale is once for every 36.7 years of operation, the financial risk is about 2 cents per day, and the risk of receiving a no sales order (the most severe consequence) is 1 for every 2,825 years of operation. Furthermore, for every $279 the FDA receives in fines, it spends over $11,800. With odds like those, it’s no wonder some stores are willing to sell to minors: Their risk is minimal.
Eliminating access to flavored products is the other arm of the FDA’s restrictions. Many people have suggested that flavors are designed to appeal to youth, yet fewer talk about the proportion of adults who use flavored e-cigarettes. In reality, flavors are an important factor for adults who switch from combustible cigarettes to e-cigarettes. A 2018 survey of 20,676 US adults who frequently use e-cigarettes showed that “since 2013, fruit-flavored e-liquids have replaced tobacco-flavored e-liquids as the most popular flavors with which participants had initiated e-cigarette use.” By relegating flavored products to specialty retailers and online sales, the FDA has forced adult smokers, who may switch from combustible cigarettes to e-cigarettes, to go out of their way to initiate use.
It remains to be seen if new regulations, either self- or FDA-imposed, will decrease underage use. However, we already know who is most at risk for negative outcomes from these new regulations: People who are geographically disadvantaged (for instance, people who live far away from adult-only retailers), people who might not have credit to go through an online retailer, and people who rely on new flavors as an incentive to stay away from combustible cigarettes. It’s not surprising or ironic that these are also the people who are most at risk for using combustible cigarettes in the first place.
Given the likelihood that the new way of doing business will have minimal positive effects on youth use but negative effects on adult access, we must question what the benefits of these policies are. Fortunately, we know the answer already: The FDA gets political capital and regulatory clout; industry gets credibility; governments get more excise tax revenue from cigarette sales. And smokers get left behind.
ON THE ECONOMY: 2019 JDA PREDICTIONS
John Dunham, Managing Partner, John Dunham & Associates
Greetings, my friends. We are all interested in the future, for that is where you and I are going to spend the rest of our lives. So began one of the great cult movie classics of all time, Ed Wood’s Plan 9 From Outer Space. The narrator of the film was a former radio announcer known as the Amazing Criswell. Criswell was famous for his bizarre predictions including a claim that the earth would be struck by a ray from space that would cause all metal to adopt the qualities of rubber, leading to horrific accidents at amusement parks. He also suggested that the end of the planet would happen on August 18, 1999. While Criswell never claimed to be a real psychic, and his bizarre prognostications were for entertainment only, many of those who make forecasts are not always so humble.
In our final Monthly Manifesto of the year we like to examine the predictions that were made through 2018. As usual, the year was full of incorrect predictions. Let’s start with the Stock Market. At the beginning of last year, most Wall Street analysts were very bullish, predicting that tax cuts and deregulation would buoy corporate profits. And while predictions seemed to be on track until October, uncertainty about trade policy and debt levels slammed the market at the end of the year. Rather than being up for 2018, the S&P 500 (at least as of 12/23) was down by over 9 percent. Back last December, Bank of America Merrill Lynch predicted that the S&P 500 would end the year at 2,636. The actual index as of this writing is 2,416 meaning that Merrill was off by 8.3 percent. This was much better than Goldman Sachs (off 15.2 percent) or UBS (off 16.7 percent). Forecasts for US GDP growth were not much better. If growth in the 4th quarter is average for the year (3.3 percent) then the IMF forecast was low by 22.2 percent, Kiplinger was low by 17.9 percent and the President’s forecast was high by nearly 50 percent.
Bad predictions abounded for 2018. Baba, the “Nostradamus from the Balkans,” predicted that a new form of energy will be discovered on Venus. MarketWatch suggested that the Republican party would continue to hold both houses of congress, Seeking Alpha.com predicted that Mike Pence would be President by now and that Amazon would continue to move into the supermarket business by acquiring Carrefour. Psychic Craig Hamilton-Parker, who successfully called both Trump’s election and Brexit, predicted that Kim Jong-un would be overthrown, and Mhoni Vidente, a clairvoyant from Mexico predicted that Prince Philip would die in 2018 and that the Queen would abdicate.
As we say every year, all of this suggests that we should all be wary of predictions, and particularly of the computer models that all of us rely on to make them. The fact is, as economist John Kenneth Galbraith has been quoted as saying, “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.” Then again, the Simpsons forecast back in 2010 that the US Olympic curling team would win a gold medal… which it actually did in the PyeongChang games.
With this in mind, how did JDA do in its predictions for 2018?
Ok, it could have been worse. Remember, all economic predictions are made with the overriding assumption of ceteris paribus, which is Latin for with other conditions remaining the same. Out 2018 forecasts were driven by a very bullish view about tax reform. We believed that the corporate tax reforms were significant enough to drive corporate investment to much higher levels, and that remittances would be large and would come quickly. Unfortunately, the IRS only came out with rules regarding remittances late in the 2nd quarter, and the incentives for investment growth were offset by an unnecessary round of tariffs and other trade restrictions.
All of this is our excuse for a really massive overestimate of GDP for the year. Outside of our Q2 number we were way off, and our average growth of 4.9 percent, while not as bad as the President’s, is still off by about 30 percent.
That GDP forecast drove most of our other bullish predictions. Consumer spending was up just 2.7 percent (using an average of the past 4 months for Q4), not the 5.2 percent that we forecast. Inflation is up just 2.2 percent while we predicted 3.1 percent.
On the financial side, we thought that the increased growth would force an additional rate increase on the part of the Federal Reserve, so our predictions for the 2- and the 30-year Treasuries are also way off.
Our unemployment rate forecasts were much closer with our average 3.7 percent rate matching the current level.
The bottom line is that we totally missed with our 2018 forecast. That’s not great, but then again, Goldman Sachs missed as well, so we are in pretty good company.
So, with our tail between our legs, we take a look at our forecast for 2019.
This year’s forecast begins with a qualifier. One of the big issues with the tax reform was that personal income taxes were really not cut. In fact, over the life of the legislation, they were increased significantly. That said, for 2018, the withholding tables were jiggered so that take home pay would be up substantially. Because of this, there is likely to be a lot of shock come April of 2019. Depending on how bad the withholding shortfalls are, there could be a very large downturn in the 2nd quarter. One thing for certain, taxpayers in high tax states like New York, California, and New Jersey will be in for a pretty dramatic shock.
With this caveat, and assuming a pretty significant downturn in Q2, we have really tempered our growth forecasts for 2019. We still forecast growth for the year, but foresee a pretty weak 2nd and 3rd quarter. Higher personal income taxes will put a huge damper in consumer spending during the middle part of the year, and a continued push by the Administration to enact trade restrictions will keep corporate investment in check. In addition, in spite of weak demand for capital, problems in debt markets via higher corporate defaults, consumer borrowing and a ballooning Federal deficit will continue to force interest rates up. We are now forecasting that GDP in 2019 will grow at a rate of about 2.7 percent for the year, with baseline growth of about 3.3 percent offset by a hiccup beginning in April. We do not foresee this leading to recession, but the risks of this happening are not negligible.
Our models continue to forecast significant job growth; however, the large forecasts that many economists made for 2018 were not met, mainly because there has not been a rush of people into the labor force. Low labor force participation levels have led to an increase in the number of unfilled positions to over 7 million, even as growth in employment has settled in at about 200,000 jobs per month. At this rate it would take about 3 years just to meet current demand for labor. This means that unemployment rates should continue to stay quite low through 2019, likely not moving above 4 percent.
Consumer spending has been growing at a fairly quick pace through 2019, but will likely see a sharp pull-back beginning in February or March. Overall, consumer spending will not be the driving factor of the economy in 2019. Soft demand will also help keep prices in check, particularly during the early part of the year; however, inflation on a year-over-year basis should tick upward, particularly in the 4th quarter, as the effects of the rapid decrease in energy prices in 2018 makes its way out of the statistics.
Deregulation will also continue to be an important factor in keeping prices down, but as we said last year, its effects will be felt slowly. It takes a long time to pass rule changes, and there will continue to be states like New Jersey and California that pass onerous regulations on business and higher minimum wages.
On the monetary front, as we mentioned earlier, a bump in economic activity will add stress to an already shaky debt market, and this will likely lead to an uptick in defaults, leading to higher short- and longer-term interest rates. We expect to see the Federal Reserve follow the market and raise the target Federal Funds Rate three times in the coming year. In spite of a 50 basis point decline in the 30 year yield since November, interest rates should begin to normalize and we expect to see long-term rates rise to at least 4 percent, and short-term rates reverse course and move toward 3.5 percent.
All in all, we think that the economy will continue to grow at a faster clip than it had been prior to tax reform, with continued strong demand for labor and moderate inflation pressures. We are concerned that a softening during the middle of the year will put pressure on companies that are over leveraged and that this could have some impact on businesses over the course of the year.
Based on these general findings, our most recent forecasts for 2019 are presented in the following chart.