I used to think that the chap who writes the Clearing the Air blog was a little crazy for correlating economic downturns with smoking restrictions and bans, but I am beginning to change my mind. In an already slow economy I think the impact on pubs, bars, restaurants, tourism and places of entertainment is probably enough to tip the balance such that an already difficult situation becomes seriously bad.
Others agreed, and Jax added a carefully-considered comment, the gist of which was that the US sub-prime market which lent money to low-paid workers, and which collapsed in 2008, had been around for 20 years, and it collapsed because the low-paid workers with sub-prime mortgages were losing their jobs, and many of them would have worked in the hospitality industry that was taking a hit from smoking bans that were multiplying across America after 2000. She also points out that smoking bans are like on-off switches; they aren’t introduced gradually. They come in hard.
I was wondering about this (again), and wondering whether there was any data around anywhere on the economic impact of smoking bans, when I remembered my own personal ISIS social impact survey that I’m currently conducting. Two questions in it – Do you go to pubs, etc, more or less? And do you stay home more or less? – were questions from which economic consequences might reasonably be inferred. If smokers go to pubs and restaurants less, they’ll be spending less. And if they stay home more, they’ll be spending less too (unless they buy a lot of stuff online, or throw money out of their windows).
So I leafed through the responses I’d got to these two questions, and found that while about half of my respondents (all smokers found outside English pubs) reported no change, and 10% reported spending more time in pubs, and less time at home, over 40% reported spending less time in pubs and more time at home, and half of these said they were spending a lot less time in pubs, and a lot more at home.
My survey, furthermore, underestimates the numbers of smokers who go a lot less to pubs, because by only surveying smokers I find outside pubs, I don’t encounter the smokers who never go to pubs now (which includes a fair number of the commenters on this blog). I’ve no idea what the numbers of such people are, but 10% of smokers seems a plausible number, and so while 10% of smokers go to pubs more, probably about 50% go less (and the same with staying home).
So that means that, on balance, 40% of English smokers are most likely spending less. However, people like ASH’s Deborah Arnott say that if they’re not spending money in pubs, then they’ll be spending it elsewhere. That’s possible, but in my case I can’t really think of anything on which I’ve spent money instead. Over the past few years I’ve become something of a skinflint, hating to spend money at all, and even buying bargains in shops (something I never used to do). And other people are reporting the same. So I’m going to assume that some smokers have indeed been spending less.
Nevertheless, smokers won’t have entirely stopped spending. They still need food, electricity, gas, water, etc. So what happens if their spending has fallen by just 25%? Well, with British smokers making up about 25% of the population, when 40% of them spend 25% less than they used to, then 2.5% of consumer demand drops out of the economy.
This didn’t seem like much, until I remembered the multiplier, and dug out one of my elementary economics textbooks:
The reason why wars cured slumps was that they injected purchasing power into the economy: the demand for guns, ships, and uniforms raised aggregate monetary demand. It didn’t have to be wartime demand: any demand would do. The more massive the unemployment, the more massive the injections of extra monetary demand that would be necessary to cure it; but however much extra spending power was injected there would be a multiplying effect, because the money injected would be spent several times over.
To begin, let us consider Mr Average, who earns a low wage and has a high propensity to consume, while Mr Well-To-Do earns a very high wage and has a low propensity to consume. Suppose Mr Average receives a pay rise of 1.00 per week. He will promptly spend it, and aggregate monetary demand (AMD) rises by 1.00. Suppose the person he gives it too is also rather poor, and promptly spends it. AMD has now risen to 2.00. If the third person also spends it, AMD will have risen to 3.00. If this went on fast enough and often enough, the single 1.00 would multiply around the economy an infinite number of times….
The marginal propensity to save is the inclination of the individual to save any extra income that he happens to receive. The multiplier is the fraction
1 / marginal propensity to save
Thus if the nation on average saves half of an increment in its income, the multiplier is 2. If the nation saves one-third the multiplier is 3, and if it saves 1/20th the multiplier is 20. The multiplier is the amount by which any injection of spending power into the economy will be multiplied round the economy by people passing the extra income on to others, who pass it on to third persons, etc.
Now, if I understand that right, then when people spend less money, there must also be a multiplying effect. A spends less, so B spends less, and consequently C spends less, and D, and so on.
So when 2.5% of demand gets pulled out of the economy, that must get multiplied up.
By how much does it get multiplied? Well, we might notice that it’s the less-well-off in the example above who tend to spend rather than save, and since smoking bans tend to hit the less-well-off (the middle classes having largely quit smoking) the multiplier is likely to be large rather than small. Furthermore, I’ve been hearing in recent years how lots of people are borrowed to the hilt. And borrowing, in my book, is the opposite of saving. So that increases the multiplier too.
So if the multiplier was 10, the 2.5% drop in consumer demand by banned smokers would multiply to a 25% drop in aggregate monetary demand (AMD) across the whole economy. And that really would be a deep slump.
So if you take Jax’s arguments, and my survey estimates for the fall in smokers’ demand, and factor in a large multiplier, you maybe could indeed produce a deep slump.
At the end of her essay, Jax wrote:
And quite apart from all of the above, there is no other single large change in terms of legislation, regulations, employment, social habits or social circumstances which coincides with the timings, the type and the nature of the collapse of the sub-prime mortgage market so perfectly. So, when asked, no “expert” economist, anywhere, can actually come up with another reason as to why the collapse happened when it did after two decades without any significant problems, and – more importantly – as to why it was so sudden as to take everyone by surprise. Because there isn’t one.
I beg to disagree. Because I’ve never heard any economist ever mention smoking bans as a likely cause of the economic down-turn. The only person who did mention it (just once) was Gordon Brown’s short-lived Chancellor Alistair Darling. And if it’s the only explanation, why isn’t every single economist pointing to it? As far as I can see, none of them are!
And there are some good reasons why they can’t see it. And the first of these is that smoking bans aren’t in the economic textbooks. They’re very unusual, and so the effects of them are unlikely to be well understood. And the second reason is that there is a powerful lobby of antismokers – ASH and co – who are insisting that smoking bans have zero negative economic impacts, and actually increase productivity. And their word is law throughout government and the media. So I doubt that economists are considering smoking bans as possible culprits for the slow-down. Everybody knows they’re absolutely wonderful!
Anyway, my principal point is that if you factor in the effects of the multiplier to any fall in demand from excluded and demonised smokers, a small drop can become magnified into a much larger one. And particularly in a time when the marginal propensity to save is small. So I’m now much more inclined to think that smoking bans can cause recessions. Although I’m still very far from convinced that they have.
And I wonder whether all the current Quantitative Easing can help very much. I don’t really understand how it works, but I think that central banks’ purchases of bonds pump more money into the system, and increase liquidity, and help to kickstart the stalling economy. But it won’t help at all if the lost demand from smokers (who have now effectively become savers) isn’t somehow re-introduced into the economy: you’re just cranking the handle of an engine which is starved of fuel. It’s not going to work.