David R. Henderson  

Jack Calfee, RIP

Some Health Care Tidbits... Systematically Biased Beliefs ...

I hadn't known until reading Arnold's post this morning and then the Wall Street Journal article that he referenced that Jack Calfee, a health economist at AEI, had died. I didn't know Jack well--we talked on the phone only about three times in 20 years and we testified together in front of an AEI panel in 1995--but I knew his work well. He was not just a first-rate economist, but also he was a first-rate economic historian. He died just shy of his 70th birthday.

My favorite study of his ever--and a beautiful piece of economic history--was his study of how the Federal Trade Commission in the 1950s legally prevented cigarette companies from advertising the dangers of smoking. Yes, you read that last sentence right. He did the study in 1985 while at the FTC and condensed his 79-page study down to a shorter article in Regulation. The whole thing is worth reading.

In 1997, when the federal government reached its historic agreement with the major tobacco companies, I called Jack to see if he was planning to write a piece retelling his story. I urged him to do so but he was busy with other things. So I got his blessing to tell it in the pages of Fortune. Some highlights from my "Joe Camel, Brought to You by the FTC," follow:

Last month's sweeping tobacco settlement appears to herald a new era in which heavily regulated cigarette makers must disclose the true health hazards of their products and make do without popular mascots like the Marlboro Man and Joe Camel. Sounds like a clear case of government acting to fix a problem that free markets could not, right? Not quite. Until the 1950s, cigarette companies advertised some of the dangerous health consequences of smoking, and it was the government--specifically, the Federal Trade Commission--that stopped them. This all-but-forgotten story is a fascinating account of how the market was ahead of the government in publicizing the dangers of smoking, and of the damage done by government regulation. Because regulation has prevented the cigarette companies from discussing health, they have settled for emphasizing glamor and hipness. Joe Camel is a monster the FTC helped create.

Fear of the dangers of smoking did not begin with the Surgeon General's report of 1964. For decades before that, people had referred to cigarettes as "coffin nails." Cigarette companies dealt with these fears by claiming that their products did not cause medical problems. "Not a single case of throat irritation" went the ad for Chesterfield. "Smoking's more fun when you're not worried by throat irritation or smoker's cough," said a Philip Morris ad. Jack Calfee, an economist at the Washington-based American Enterprise Institute who has studied the issue, points to an ironic side effect of all this advertising: While each company's purpose was to distinguish its brand from the competition's, consumers were constantly reminded of the nasty symptoms that came with smoking.

But the FTC's view back in the 1940s was that all major brands were essentially identical and did not pose a health risk. In 1950 the FTC, stating that "the smoking of cigarettes...is not appreciably harmful," banned comparative health claims.

The 1950 ruling left a loophole, however: It applied to specific existing brands, not new ones. After two epidemiological studies published that year found a strong link between cigarette smoking and lung cancer, a few cigarette companies rushed to exploit that loophole. In 1952, Lorillard, with only 6% of the market, introduced Kent, whose "Micronite" filter reduced tar and nicotine. Kent ads noted pointedly that "the difference in protection is priceless."

Industry observers worried that such advertising would hurt business. It did. Per capita sales, which had risen continuously since 1931, declined by 2.8% in 1953 and a further 6.1% in 1954. Why did the companies do something that so obviously hurt their industry? It wasn't altruism--just an attempt by smaller companies to grab a bigger share of the market. By the end of 1954 filtered cigarettes made up more than 10% of industry sales, up from under 2% in 1950. Brown & Williamson, the only company that concentrated on filter brands, was also, in 1954, the only one to gain sales. The two largest cigarette makers, American Tobacco and RJ. Reynolds, with a combined market share in 1952 of 59%, avoided fear advertising, but they did introduce filtered brands as a response to the competition. The big winner in all this was the consumer, who was told nightly on TV, courtesy of the smaller cigarette companies, that smoking could be harmful.

This just wouldn't do. So in 1955 the FTC struck again, publishing rules to prohibit references to the "throat, larynx, lungs, nose, or other parts of the body" or to "digestion, energy, nerves, or doctors," and to explicitly permit advertising of taste and pleasure.

Health-related cigarette advertising had one last gasp in the late 1950s, when medical experts began claiming that reducing the tar content of cigarettes would reduce the risk of lung cancer. This set off the great "tar derby," in which cigarette companies reduced tar and nicotine content and advertised the fact. Between the middle of 1957 and the end of 1959, tar and nicotine levels drooped nearly 40%. According to Calfee, about half of all the improvement in cigarettes since 1957 occurred during this 2 1/2-year period.

Just days after his death, his article, as Arnold noted, appeared in the Wall Street Journal. My friend, Bob Helms, a fellow health economist at AEI, told me this morning that Jack has been busy writing critiques of the FDA's policies on medical devices. As the late Paul Samuelson said admiringly about the late Harry Johnson, he died with his boots on. My condolences to his family. I will miss him.

UPDATE: Chris DeMuth, former head of AEI, sent me his moving tribute to Jack Calfee.

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The author at PointOfLaw Forum in a related article titled Jack Calfee's last op-ed writes:
    With the assistance of his daughter, the late Jack Calfee's last op-ed makes it into the WSJ ($), and its analysis of MassCare is bad news for Mitt Romney—as well as the rest of the United States if the same... [Tracked on March 3, 2011 6:36 PM]
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Daniel Klein writes:

Oh, no! I am so sorry to hear this.

Calfee was a great economist.

I know especially of his work on the control of pharma speech (broadly defined) -- the "pre-market approval" dimension of the FDA that gets less attention. Much of this work was coauthored with (the also great) Paul Rubin. One of the key insights to be gleaned from this work is that the speech controls, too, suppress drug development: Even if you develop a great new drug, and it gets "approved" (i.e., permitted), you may not be able to profits sufficiently because of the speech restrictions. If the potential beneficiaries don't know of the opportunity, you don't sell the drug. Not only are those now-extant opportunities not fulfilled, but, thinking about the whole system, some drugs thusly never get developed in the first place.

Calfee wrote sensibly and beautifully. I especially like his little book Fear of Persuasion: A New Perspective on Advertising and Regulation (Agora, 1997).

The book is strong on esteem mechanisms in science and industry, in ways that connect to Terrence Kealey's work.

David R. Henderson writes:

Thanks, Dan. It was the restrictions on advertising off-label uses that we both testified against.

Eric Falkenstein writes:

A similar thing goes on currently in tobacco, in that if smokers switched to chewing tobacco, cancer would definitely decrease, yet smokeless tobacco providers cannot make this claim. They simply all cause cancer; 'less lethal but not safer' is their term.

It's stupid zero-tolerance that prevents the marginal benefits that make all the difference.

David R. Henderson writes:

@Eric Falkenstein,
Good point, Eric. Jacob Sullum gives some interesting numbers on this in his book, For Your Own Good.

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