- FAMRI Center
FDA puts economic theory over empirical evidence in its cost-benefit analysis; undermines sensible public heath regulation
As part of the process of issuing regulations, the FDA (or any other agency) conducts a cost-benefit analysis of the proposed regulation to make sure it is worth doing. The FDA's ill-fated regulation on graphic warning labels was no exception. The Agency's cost-benefit analysis did find a very small net benefit, but that small showing was not enough to convince the courts that the warning label rule was legal in the face of a constitutional challenge.
Last month Jidong Huang, Frank Chaloupka, and Geoff Fong published an excellent paper showing that the FDA gross underestimated the benefits that graphic warning labels would have on cigarette consumption and made the point that this severe underestimation undermined the FDA's ability to defend the warning labels in court as necessary.
Today we published a paper in American Journal of Public Health that shows how the FDA grossly overestimated the costs of reducing smoking by counting, as a substantial cost, the lost pleasure people would experience if they were not smoking.
To do this, the FDA counted the lost "consumer surplus," a concept based on classical economics in which the value of something is completely captured by how much money people would pay for it. Because nicotine is highly addictive people will pay a lot of money for cigarettes, so, according to the FDA's logic, will be deprived of a lot of value if they stop (or don't start) smoking.
While this idea may seem reasonable to some economists, it completely flies in the face of a huge amount of empirical evidence, evidence that the FDA simply ignored.
By so radically underestimating benefits and overstating costs, the FDA's own analysis (supported, I am told, by the Office of Management of Budget), is making it particularly difficult to justify any regulation designed to protect public health.
Here is the abstract from our paper, "When Health Policy and Empirical Evidence Collide: The Case of Cigarette Package Warning Labels and Economic Consumer Surplus":
In its graphic warning label regulations on cigarette packages, the Food and Drug Administration severely discounts the benefits of reduced smoking because of the lost “pleasure” smokers experience when they stop smoking; this is quantified as lost “consumer surplus.” Consumer surplus is grounded in rational choice theory. However, empirical evidence from psychological cognitive science and behavioral economics demonstrates that the assumptions of rational choice are inconsistent with complex multidimensional decisions, particularly smoking. Rational choice does not account for the roles of emotions, misperceptions, optimistic bias, regret, and cognitive inefficiency that are germane to smoking, particularly because most smokers begin smoking in their youth. Continued application of a consumer surplus discount will undermine sensible policies to reduce tobacco use and other policies to promote public health.
We raised many of these issues in our public comment on the original warning label rule; clearly the FDA chose to ignore these issues then.
Last January I had some email correspondence with the FDA economist who prepared the cost-benefit analysis in the final rule in which I asked him to provide citations to the empirical evidence that supported what the agency did. He could not point to any.
Given the FDA (and OMB most likely) refusal to consider the empirical evidence that its approach is wrong, I expect to see a similarly self-defeating cost-benefit analysis when the much-delayed deeming rule on e-cigarettes is finally released.