Tragedy of the Commons in State Tobacco Revenue

Following years of battle that consumed millions of dollars in legal fees, "Big Tobacco" signed an agreement with the states in 1998 that promised money to state governments as compensation for the health care costs associated with smoking. The fascinating aspect of the agreement was that it didn't merely cover costs already incurred and some static agreement about the future. Rather, it promised payments to states in perpetuity. An escrow account currently receives 18.8482 cents per cigarette sold, divided among the signatories to the Master Settlement Agreement. Forever.

Here's where your classic tragedy of the commons kicks in: the more cigarettes sold nationwide, the more money an individual state accrues. Yet states often rely on tobacco taxes to help backfill their general funds. And because cigarettes are easily vilified in the political and media spheres in the 21st century, this is just about the easiest tax lawmakers can impose. These taxes, combined with increased health concerns, legally curtailed advertising avenues, and a general shift in societal attitudes, have greatly reduced the incidence of tobacco use in the United States.

It's impossible to know what impact cigarette taxes alone have played in the decline of active smokers. And some of the tobacco tax revenues are dedicated to anti-smoking campaigns. But peel away everything else, and you're left with a classic bit of game theory:
A state can heighten its tobacco revenue by increasing taxes, but but in doing so reduces cigarette sales. A reduction in cigarette sales decreases overall payments to the national escrow account that pays out to signatories of the Master Settlement Agreement. Of course, reduced escrow payments can be compensated for by further increasing cigarette taxes, which further reduces cigarette sales, which reduces escrow payments...

Some lawmakers truly wish to see the elimination of smoking. This desire has led to the proliferation of smoking bans, advertising restrictions, and commercials with people talking through holes in their throats. Others prefer to use tobacco as a cash cow. For these policymakers, there's a fascinating intellectual exercise out there just waiting to be picked: Is there a cigarette tax that maximizes revenues (escrow account receipts plus individual state remittances)? Variations in smoking rates among the states would complicate such a calculation, but there could be an answer. And if every state signed on to an agreement not to raise taxes by more than this amount, they could all be profit maximizers. Of course, it just takes one financial crunch to make a lawmaker in New Jersey propose a $1/pack increase, and then the tragedy rears its ugly head.

*A fascinating development in the public bond market has rendered this idea mute. Several states immediately went out and sold their future revenues for some upfront cash in agreements that made about as much sense as calling J.G. Wentworth as soon as you win the lottery. They've already spent their escrow payments, and have little concern for what happens in the future. Tobacco bonds truly are fascinating - and ProPublica has done a solid job covering them. Click here if you have even the faintest interest in learning more.

The prospectus Bear Stearns sent New Jersey to acquire their tobacco settlement funds.

T-PAW!

I feel like people should be screaming 'T-Paawwww; what, what!' after his name is announced when he walks onto stage.

I also think I hate him more every time I listen to him on a Sunday talk show. Given that I developed a strong distaste for him in 2009, he's sunk pretty low by now. It's not just that he says dumb things - everyone spouts bullshit on these shows (the reason Tim Russert was so great was the pushback he gave). David Gregory is ok about forcing people to be honest, but just seemed to give Pawlenty a free pass. Chris Wallace did a better job, but still let T-Paw get away with quite a bit. Problem is, whenever this man is interviewed, it seems as though he says something stupid, and the interviewer just lets him get away with it because it will take too much effort to explain the fallacy, and even if you did explain why he's wrong, Pawlenty would just double down on stupid. Kind of like Joe Wilson. And Bachmann. And, really, boiler plate Tea Party in general.

The awesome thing Pawlenty suggested was fixing Obama's approach to Libya by approaching it the way Reagan would. Gregory suggested Reagan pulled out of Lebanon, which runs counter to Timmy's "Obama isn't tough enough" mantra. T-Paw counters that Reagan used other methods to dispose of dictators. Awesome: Presidential Candidate Tim Pawlenty just went on national tv and suggested Iran-Contra was a good idea. Or maybe he just supported the way Reagan dealt with Libya. That was a time when our country was run by a strong, military-minded President who wasn't afraid to take on Gaddafi. So he engaged in a bombing campaign while refusing to send in ground troops and eventually called an end to hostilities without ever taking out Gaddafi. Which, oddly enough, seems to be what everyone is accusing the current weak, pinko president of doing...

For the record, Reagan on the debt ceiling:
Denigration of the full faith and credit of the United States would have substantial effects on the domestic financial markets and on the value of the dollar in exchange markets. The Nation can ill afford to allow such a result. The risks, the costs, the disruptions and the incalculable damage lead me to but one conclusion: the Senate must pass this legislation before the Congress adjourns.

I wonder what it's like to exalt a man as your infallible guide to policy and politics, yet disagree with most of what he stood for and did.

The Search for Courage in D.C. Continues

The media is shooting its load all over the House dissent over the continuing resolution vote. The Times, Huffpo, Drudge, Politico, et. al. can't print enough stories about how Boehner needed Dem votes to pass the continuing resolution. The Teabagger Representatives opposed the deal on the principle that there simply weren't enough cuts embedded in the 11th hour deal.

The experiment we'll never get to run is how these legislators would have voted if their votes mattered. What if the House Dems didn't care about the White House and acted as a true opposition, refusing to vote with Boehner? What if the vote was tied 217-217, and one more Representative was required for that final vote? How many Representatives would have still opposed the Continuing Resolution on principle and truly been willing to shut down the government? (Side question: how many actually appreciate what this would mean?) You have to think some of these Congressmen would have abandoned their stance in order to prevent such a scenario.

Courage is defined by the beholder. Some would consider courage being willing to stand on principle, even if it means shutting down the feds and the economic destruction this would entail. Others would consider this idiocy, and define courage as willing to compromise in the face of radical political pressures. The ability to change one's vote means that there can never be a situation wherein only one person dictates the outcome by their vote, so this remains a theoretical game. It's still an interesting one to play.

And for the record, Paul Ryan is not courageous. Smart guy? Sure. Good guy? Yeah - Paul Ryan truly wants to help his country. But courageous? His Road Map wasn't back in 2009, and the only thing I've seen change over the past two years has been Committee Chairmanship.