Can a good thing be turned into a bad thing. It appears that Americans are responding to the taxes, exhortations, health risks and other anti-smoking efforts and have actually been reducing their smoking at rates faster than experts initially calculated.
So what’s the problem?
Some of you are old enough to remember the tobacco boondoggle settlement from 1998. That was a $200 billion+ settlement from the tobacco companies to the states as downpayment on cartelization compensation for the damages that smoking had caused over the years. Of course, states being the patient fiscally responsible entities that they were, couldn’t wait for the dollars to flow in from the tobacco companies. So, taking their cue from the investment banks who can basically take any cash flow, package it up and sell it off as a bond (and I am sure at the urging of the investment banks), states and municipalities “securitized” these expected future cash flows. In other words, states took the money now (by raising it from investors) and sold the investors the rights to a fixed stream of future cash flows based on the expected future payments from tobacco companies.
These future payments were in part a function of how many cigarettes the tobacco companies sold, and hence how much people smoked. Oops. People are smoking a lot less than we anticipated 14 years ago, and even 9 years ago when studies were commissioned to estimate this.
What does this mean?
Well, the “securitization” means that the issuing entities (not all of them are states) are liable for any shortfalls. And it appears likely that the amount of cigarette settlement money expected to come in will fall short of what the issuers have promised to pay investors. Either the investors are going to lose (when the issuing agencies do not have the power to tax) or the taxpayers will lose (if the issuing agencies DO have the power to tax). Others may lose too. The point of course is that only in government can something like a reduction in smoking, something which has been front and center for public policy for 30 years, turn out to be a problem.
But are you surprised? Governments that find themselves in favorable fiscal positions are very much like those famous videos of kids sitting in front of the marshmallows. To be fair, this problem works in both directions. There is an embedded Hayekian point here, one actually that is made very well by Bob Higgs, and it is this: the various government entities in the US and the states have so vastly expanded the range of their interventions into our lives that it is impossible to foresee the impacts of current rules and regulations on future outcomes. One major reason for this is that each and every ruling we make interacts with some other existing ruling, even as most conscious homonids and beyond have no idea that most of them exist. In the case of the MSA, we should have at least have understood that raising federal cigarette taxes would eat into cigarette sales. The latter point is rather funny too, given the recent outcome in France wherein some pundits think you can just ramp up top income tax rates to 75% and not see people flee. Maybe in this case the states actually believed their own BS?
If you read the article I linked to, I think the authors leave out one potential option for the states. I used to think this was tongue-in-cheek, but not anymore. Maybe the Fed can create a separate credit facility for the states to tap. After all, the states themselves are not supposed to access the discount window (just as non-banks were not supposed to). But of course, the “common” justification for the Fed is to keep liquidity in the system, keep credit markets from collapsing and ensuring confidence in the financial system. So will it create Maiden Lane LLC IV in order to buy up these toxic assets to get them off the books of the investors who stand to lose? Will it instead just make loans directly to the states (on harsh terms of course, right?). Can you even speculate on what sort of facility the Fed may create if it wanted to intervene?
A final observation from this entire incident (and indeed there is a LOT more interesting stuff to learn here) is that we cannot even model out cigarette smoking a decade out, based on millions of observations about cigarette smoking and prices, yet the all knowing planners in Brussels, Washington, and beyond seem to think they can model out responses to a warming planet 100 years out.