Wide range of economists criticise FDA application of a consumer surplus discount in deeming rule: Reuters

On June 2, 2014, Reuters published a long article about the FDA's application of a 70% consumer surplus discount to account for the "lost pleasure" due to any health benefits generated by the proposed deeming rule because people smoke less.  (The FDA had discounted the health benefits of its failed warning labels by 50%.)
 
Not a single outside economist Reuters contacted supported the FDA's decision, including several conservative economists and Jonathan Gruber, whose work the FDA quoted to justify what it did.
 
Here is what they said:

 
John Graham, who headed the White House Office of Information and Regulatory Affairs, which vets agencies' cost-benefit analyses, under President George W. Bush, said he could "not recall a specific instance" during his 2001-to-2006 tenure "where lost enjoyment played a significant analytical role."
 
Loss of pleasure had occasionally been used when analyzing proposals to ban products, Graham said, but was not treated as a deduction from benefits, as the FDA is doing.

It may seem counterintuitive that sellers would not charge the maximum tolerable price. But whatever price they pick, there are always consumers willing to pay more, explained economist Stan Veuger of the American Enterprise Institute, a conservative think tank in Washington, D.C.
 
The additional amount is the consumer surplus, which economists interpret as the dollar value of the extra utility, or enjoyment, users get. Calculating the precise size of the surplus is not straightforward and economists often debate how large it is, Veuger said, but he added that the 70 percent used by the FDA "feels really, really difficult to justify.”
 
More problematic, he and others argue, is applying the idea of consumer enjoyment to an addictive product like nicotine.

Once a product becomes addictive, rational consumer choice goes out the window, said economist Ken Warner of the University of Michigan. The consumer surplus concept "should never be applied to an addictive product," he argued.
 
In addition, nearly three-quarters of smokers say they would like to quit. Their frustration at their inability to do so means many experience “incredible levels” of displeasure, said Warner, a leading cost-benefit scholar. He said that means the concept is not relevant to the vast majority of tobacco users.

In the FDA document published online, the staff economists cite a 2002 paper by health economist Jonathan Gruber of MIT as a source for their 70 percent assessment. After Reuters called the analysis to his attention, Gruber said the fact that a majority of smokers pick up the habit as teenagers and become addicted before they are fully aware of the consequences, meant the FDA was wrong to invoke the "consumer surplus" concept.
 
"I think this is really a misapplication of my work," Gruber said.

 
The full story is available here.
 
Our paper on the inapplicability of the concept of applying consumer suplus, published in the American Journal of Public Health, is available here. 
 
Our public comment submitted to the FDA on this issue is available here.
 
I have submitted this information, together with the full Reuters story, as a public comment to the FDA; the tracking number is 1jy-8cfq-goh0.