I’m not a fan of laws restricting tobacco use, except in government buildings. So I might be expected to look favorably on a change in FDA regulations that led to a boost in the prices of tobacco stocks.
But this particular stock market reaction leaves me concerned:
Tobacco stocks surged Wednesday after regulators threatened to pull e-cigarettes from shelves if manufacturers do not control “widespread” teen use.
Shares of Altria rose more nearly 7 percent to their best day since November, 2008. Philip Morris International increased about 3 percent. British American Tobacco shares increased nearly 6 percent to their best day since December, 2008. In London, Imperial Brands rose 3 percent. . . .
Investors welcomed the regulatory crackdown. E-cigarette sales have threatened Big Tobacco companies.
I do realize that stock market reactions can be tricky to interpret, but it seems to me that this stock market response should be viewed as a cautionary signal. While there are some health risks associated with e-cigarettes, the risks are believed to be dramatically lower than for regular cigarettes. If tobacco stocks soared due to a perception that the FDA’s action would boost cigarette sales, then the action could very well end up harming health (despite lower e-cigarettes sales), as well as restricting consumer choice.
Again, I’m not saying that the stock market should drive policy, but I’d be interested in commenter perspectives on why stocks rose in value on this news. Am I missing something?
READER COMMENTS
Nick
Oct 18 2018 at 2:00pm
One potential counter is that the regulation could boost cigarette sales relative to the expected rate, but such increase is still less than the aggregate drop in e-cig sales. Whether the net effect on health is positive or negative is unclear. If, for example, Altria brought back 10,000 old customers (hence higher revenue) but 100,000 other e-cig users stop altogether (e.g. first time smoking teens), you probably increased life expectancy on net.
Unintended consequences of well-meaning policy should still be evaluated. And you might feel bad about the 10k who went back to tobacco under my example.
andy
Oct 20 2018 at 2:53am
My understanding is that the harm rate of e-cigs is rather unkown despite the substance effects being studied quite well, so instead “probably” there should be “improbably, though possibly”. Did I miss something?
Scott Sumner
Oct 18 2018 at 3:13pm
Nick, You said:
“If, for example, Altria brought back 10,000 old customers (hence higher revenue) but 100,000 other e-cig users stop altogether (e.g. first time smoking teens), you probably increased life expectancy on net.”
In principle you might be right, but the reports I’ve read seem to indicate that tobacco is far more than 10 times more dangerous than e-cigarettes. I’d be interested in the FDA’s estimate of the relative dangers of each product.
Matthias Goergens
Oct 19 2018 at 7:28am
Compare Gwern’s write up on nicotine https://www.gwern.net/Nicotine
The discussion should not be purely in terms of risks. Nicotine also has upsides. (And don’t confuse nicotine with burning tobacco. Inhaling smoke is mostly bad for you, no matter the source.)
Scott Sumner
Oct 19 2018 at 12:16pm
I agree that it also has upsides. I was thinking in terms of net risks, weighing both pros and cons.
Benjamin Cole
Oct 18 2018 at 7:51pm
Perhaps the stock market was showing it respects the muscle of cigarette manufacturers in relation to the FDA, given the Trump administration.
Larry Summers recently ponders the Federal Reserve, as a regulatory agency also.
I served a stint in Washington DC. My conclusion is that regulatory capture is the norm, not the exception.
Rui
Oct 19 2018 at 9:23pm
The article mentions that some of the big brands are planning to compete in the e-cigarette market. Higher regulatory scrutiny may be seen as an advantage for large companies over start-ups, increasing the probability that Philip Morris will eventually out compete Juul in the e-cigarette for example.
It’s also possible that the FDA actions will be net beneficial to teenage health, since the regular cigarette brands don’t target teenagers (right? right?), while at the same time boosting total cigarette consumption amongst adults, to the detriment of adult health but economically beneficial to the big brands.
Keenan
Oct 21 2018 at 10:46am
Scott,
You are exactly right. The e-cig business is a HUGE threat to tobacco producers, so the stocks will trade with negative correlation to the success of the e-cig industry.
TMC
Oct 21 2018 at 11:10am
E-cigarettes are a direct competitor to, and a method of weaning oneself off of, cigarettes. Any attack on them is a win for tobacco companies in both the short and long run.  I don’t support any government restriction either (except the one you cite) on cigarettes, but also none on the E-cigarettes.  You are correct that the restrictions on them will have bad effects on health in the long run.
TMC
Oct 21 2018 at 11:13am
Also, stock prices reflect what benefits a particular company, which maybe a net good, or loss to society. There is no overall value judgement built into them. Never reason from a price change!
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