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eCigs, The Tobacco Settlement & The Road That's Paved With Good Intentions: Oh My

Shane Brooks’s insight:

Money’s a crazy thing, and you know what they say about good intentions.

Back in the nineties, for those of you who don’t remember, the anti-smoking crusade was truly hitting its stride. Multiple states sued major tobacco companies, partially to recoup costs to health systems caused by smoking, partially to punish those companies for fraudulently selling products known to be addictive and harmful, and partially to impose the local emergent morality since smoking itself, even if taken up voluntarily, was (and still often is) seen as a personal failing that made one a bad person.

It was unfeasible to go after smokers directly, however, since they were also victims in this situation, so the idea was to get the truly culpable parties to pay out. This is, of course, fair and proper; those companies were indeed fraudulently selling products that they knew were harmful yet lied and said they weren’t, that they knew were addictive but offered no fair assessment of their risks, and their fraud had indeed stressed the American healthcare system and led to at least hundreds of thousands of premature deaths over decades.

As befitted the righteous, they were blessed with victory: the Tobacco Master Settlement Agreement of 1998, in which the major tobacco companies would stop fraudulent advertising practices, pay for anti-smoking advocacy groups, and dissolve pro-smoking advocacy groups. All of this was quite fair and has indeed paid off handsomely, and no fault can be found in it.

Those were all sidebars to the Settlement, however. They certainly didn’t get the headlines. The real victory, the real payoff, was quite literal: the major companies had to pay, in perpetuity, the governments of 46 states. While termed a settlement–mostly since it meant the companies were from that point on no longer liable for the harm caused by their products–this payment was, and is, surely equivalent to compensatory and punitive damages to the tune of at least 6 billion.

Let’s put that out there again, since text is a poor medium for sufficient emphasis: two-hundred-six-billion–that is two-hundred-six with nine zeroes–dollars American. That is a lot of money, and at the time (and still now) it was considered a triumph of justice. The bad guys were forced, are forced, to pay the good guys a princely sum. Combined with improved education, smoking as a social ill could be stamped out forever and people could live free and happy without risk (from this particular source).

In and of itself, this was not a bad thing. It would be silly to suggest otherwise. Every district attorney involved probably did have the public’s best interests at heart and was striving to do the right thing. They did, in the end, do the right thing. It wasn’t really their fault that the law of unintended consequences was waiting in the wings for its own opportunity to come into play.

As, of course, it did.

State governments being what they are in our country–slightly corrupt, slightly incompetent collections of populists, blowhards, and snake-charmers willing to offer voters everything for nothing–they took this windfall of a steady paycheck and promptly leveraged it on the market in state bonds. Bonds, for those of you not fully versed in financial markets, are fixed-term loans: I’ll gladly pay you Tuesday for a hamburger today.

This is again pretty normal, and a common way for governments to fund infrastructure projects and the like without increasing taxes, though it does have a bad tendency to just become a debt crisis since bonds issued by one government unwilling to raise taxes to pay for unfunded projects have to be paid off by a later one that is at least equally unwilling to raise taxes to pay for outstanding debts. Anyway, most of these bonds are not particularly specific as to how they will be funded: suffice to say, the government will pay the bondholders back from somewhere.

Not so with the tobacco money. The states figured that, since they had a regular paycheck, they could issue bonds directly tied to the tobacco money. Buy this debt, we’ll build our bridges and pay our teachers and maintain our roads, and we’ll pay you with tobacco settlement money when the bond comes to fruition. It was a cast-iron, absolutely foolproof hustle. A triumph for the free market and our (vaguely) representative form of government.

You also know what they say about what’ll happen if anything comes along that’s foolproof.

Maybe you’ve already spotted the issue, if you’re clever, but like Agatha Christie, I’ve left out a little detail: while there was certainly a minimum-over-a-quarter-century specified, anything beyond that was based on tobacco company revenues. Note that these are the same companies selling products that every right-thinking person wanted effectively banned. The entire purpose of an anti-smoking crusade is to ensure there are no more smokers, and if there are no more smokers, then no one is buying smokes, and companies that make smokes have no revenue, and…

“Well, crap,” went the state governments when tobacco company revenues started going down just like more or less everyone in the universe expected them to and thus the settlement payouts went down in like kind. Only so much cancer could be outsourced to the Third World, and the settlement itself was a watershed moment in the global retreat of the tobacco industry. It was no longer certain that the bonds could be paid off when they matured.

This was bad for the states, obviously: financial default can cripple sovereign nations (just ask any Argentinian) and the last time U.S. states defaulted on their debts was in 1841. The only way they got out was through uncomfortable legislation and, yes, increased taxes. The buyers’ side of things was arguably worse: the people who originally bought the bonds sold them to others for a profit, who did the same, who did the same, and the origami that is modern finance inflated the bonds’ worth. Someone would be left holding the bag, and it wouldn’t just be the states’ problem.

This is about when the Great Recession happened. The bonds hadn’t matured, but with everything else in the financial world going up in a ball of fire and smoke like a luftgas-filled Hindenburg, someone sat down and ran some numbers and figured out just how little the bonds were worth, since their ratings had been artificially inflated. Their value collapsed, which was bad for the people and banks (and the customers of those banks) that held them but good for the states, since they’d been given time to sort things out.

Give you three guesses as to what they didn’t do.

Now three guesses as to what they did.

Yes, there are now more tobacco settlement-backed bonds on the market. Yes, they are again at extreme risk of being overextended, to the point that banks are leaning on ratings agencies to give them artificially high grades

“Get to the point,” I hear you cry.

Here’s the point: the same governments that are responsible for regulating tobacco companies are fiscally dependent on those self-same tobacco companies in order to avoid default. If they’re forced to default on anything, their credit collapses and then they cannot fund anything beyond their artificially low tax rates: if you’re of one political persuasion, that means they cannot fund schools, infrastructure, or healthcare systems; if you’re of another, that means they cannot fund tax rebates and credits for job creators.

For everything else they can find money elsewhere, even if it means borrowing more of it–and, like Greece, that’s pretty much what they do–but tobacco settlement bonds are intrinsically linked to tobacco settlement money and can’t be paid with anything but.

These states need tobacco companies to not only make money, but make more money. Hand-over-fist money. The more money those companies make, the more solvent those bonds become and the less likely a state’s financial doomsday is.

Problem: they can’t reverse the progress of anti-smoking campaigns, nor should they. Smoking was perhaps the public health crisis of the twentieth century, and this is in the same century that polio and measles were still a thing.

Even now the CDC says that one out of five deaths in America are smoking related. Smoking is not only bad, it is wrong, with all the moral valence that carries. The states could just as well start involuntarily inseminating nuns and selling their babies as minced dog food for the sort of wobble-headed swivel-eyed pants-on-head evil that a “Hey, Kids, Smoking Really Is Cool!” campaign would be.

Opportunity: e-cigarettes. A lot of market watchers think that e-cigs are accelerating the decline of the big tobacco companies. If that’s true, then it’s in a debt-ridden state’s interest to try and either ban the new technology or regulate it in such a way that the tobacco companies can move in, making profits (and thus improving the bonds’ outlook) without selling the anathema cigarettes. This puts quite a bit of recent things, from million-dollar test requirements to outright bans, into a different perspective.

Cui bono (“who benefits?” for all you non-Latin types) is not the end-all-and-be-all argument in figuring out motivations and agendas, but it can be informative. With e-cigarettes looking to be the next big anti-scientific health scare regulatory requirements well in excess of probable risk, market closures and captures, and propaganda leading to nonsensical arguments that vaping is a gateway to smoking tobacco and (gasp) marijuana are all going to mix together to make a very interesting “informational” landscape in the near future.

The well-meaning but paranoid health activists will mix freely with the moral crusaders and those whose interests are purely pecuniary. Everyone else will be saying they obviously have your best interests at heart; occasionally, this may even be true. All this means it’s up to you to do research and carefully judge the facts to decide what’s best for you.

To be honest, though, that’s how you should live your entire life in a free country: politically, morally, and ethically thoughtful and self-determinant. This just happens to be another little facet of life where the smoke and mirrors may get particularly dense.  

Regards,
Secret Agent: Timperator of Man
Clandestine Vapes 

eCigs, The Tobacco Settlement & The Road That's Paved With Good Intentions: Oh My
Source: Electronic Cigarette News

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