FROM THE OFFICE OF PUBLIC AFFAIRS

Thank you. It's a pleasure to be here at George Washington School of Public Health to discuss an issue of such importance to the health of our nation and of our economy.

We meet at an auspicious time, a time when the economic enemies of our past seem far from view. Inflation and unemployment are at their lowest in a generation. And the budget deficit -- the burden that so long weighed us down -- has been lifted. There could be no better time to adjust our sights and look to the future. Our economic good health provides us with a golden opportunity to invest in a stronger, richer America to bequeath to our children.

I would like to talk today about an issue the Deputy Treasury Secretary might not usually talk about but is a critical part of seizing that opportunity -- the need for a comprehensive approach to combat smoking. Smoking is still by far the largest preventable cause of premature death in the U.S. It is directly responsible more than 400,000 deaths per year -- more than all of the deaths associated with AIDS, alcohol, cocaine, heroin, homicide, suicide, auto accidents and fires combined. It is a fatal habit that 3,000 American children take up every day, 1,000 of whom will die prematurely as a result.

None of you will need reminding of these consequences of smoking. Today I would like to discuss the economic costs, as described in a new Treasury study released this morning; why combating smoking requires comprehensive tobacco legislation along the lines the President has called for; and the very real human and economic benefits that such legislation would bring.

Some would argue that when one is dealing with the outcome of individual consumption decisions, this kind of cost analysis is inappropriate. Yet it is questionable that viewing cigarette smoking as a consumer choice -- like dishwasher detergents or frozen pizza -- provides a helpful paradigm when nine out of ten smokers started when they were only teenagers, and when they substantially underestimated how difficult it would be to quit. By the time they are adults the vast majority of smokers wish they could quit. Yet while nearly half of adult smokers try to quit every year, only about 2.5 percent succeed.

I. Tobacco: The Price We Pay for Inaction

Policy makers -- no less than scientists -- are perhaps at their most persuasive when they focus on the counterfactual. In calculating the overall economic cost of smoking the Treasury study had to consider the full range of costs associated with smoking -- costs that we would continue to pay if we failed to take comprehensive action.

1. The waste of scarce medical resources

The Surgeon General recently testified that smoking-related illnesses cost our nation more than $50 billion in 1993. Adjusted for inflation, the figure today would be closer to $60 billion. Of course, if we eliminated smoking tomorrow the resulting savings would be partially offset by additional medical expenses incurred as a result of people living longer lives. Taking these into account, we estimate total net medical costs due to smoking of $45 billion.

To put this figure in perspective: a young woman who starts smoking today can expect to face an extra $14,800 in additional lifetime medical costs as a result of that decision. And if she smokes more than a pack a day, her additional lifetime costs could be well over $25,000. The tuition costs for a Master's Degree here at GW almost sound cheap in comparison -- a "mere" $22,500.

2. The extra costs when smokers give birth

On its own, smoking during pregnancy is estimated to cause 2500 fetal deaths every year and around $4 billion a year in additional medical and other costs due the greater severity of complications during pregnancy and delivery, and the higher risk of having a low-birth weight baby. Low-birth weight children have a much higher probability of missing grades and thus a higher chance of dropping out of school -- meaning lower earnings, a greater likelihood of committing crimes, and a much higher chance of needing social services than high school graduates or those who go on to college. The Treasury study only attempts to capture the costs incurred up to the age of sixteen. But have no doubt that those longer term costs are real.

3. The costs of smoking-related externalities

The fires caused by smokers cost this country some 2,000 lives, and more than $500 million worth of damage each year. The costs of second-hand smoking are more a matter for dispute. But for children it may result in about 15,000 hospitalizations with respiratory illnesses, exacerbate asthma in 200,000 to 1 million kids, and increase the number of new asthma cases.

4. The cost in reduced productive capacity of our economy

We know that smokers tend to die younger and retire sooner. Even without the added medical expenses, this would carry a price to our economy in lost output and lost wages, that careful analysis suggests could be as high as $80 billion a year. There is a further drain on the economy of around $500 million due the output lost as a result of additional days off work -- given that smokers have 50 percent higher absentee rates than their nonsmoking colleagues. Some studies have suggested that, other things equal, the lower productivity associated with smoking translates into 4 to 8 percent lower earnings for smokers. The Treasury study excludes these more speculative estimates, but it is worth noting that including it might add another $50- $125 billion to the economic cost of smoking.

5. The cost in shortened lives

No dollar total will ever do justice to the price of a life cut short. But obviously, from the precautions we all take and spend dollars on, and the additional wages we demand in return for taking on more hazardous occupations, we can see the precautionary value attached to reducing the risk of mortality. This should be taken into account when judging the costs of smoking given that it is an activity that directly results in an increased risk of a shorter life.

The details of calculating the loss involved here are complex and economists differ as to the best way to capture it. But the more standard studies suggest that reduced mortality risk can be valued at around $3 million. For illustrative purposes, the Treasury study includes a calculation based on a more conservative estimate of the cost of mortality risk. With each cigarette smoked taking 7 minutes from the average smoker's life, this leads to an estimated, smoking-induced cost of reduced mortality -- over and above the lost productive output I mentioned earlier -- of around $120 billion per year, the equivalent of $5 dollars for every pack sold.

6. Counting the cost

Putting together the least disputed costs of smoking -- adult medical costs, the pregnancy and neo-natal care associated with smoking while pregnant, the cost in smoking-induced fires, in lost workdays and overall lost output from shortened work lives -- yields a net cost of smoking to the United States economy of upwards of $130 billion annually.

It is important to recognize that all of these represent, in the language of economics, real resource costs. That it is to say, the $130 billion that smoking costs is much more burdensome to our economy than the same amount levied in taxes, which impose a cost on consumers, but provide offsetting revenues to our government. It is proverbial that there is no such thing as a free lunch. But in a sense, successfully preventing people from acquiring an addiction they do not want to have -- by effectively combating youth smoking -- is a free lunch with real benefits for our economy as well our nation.

II. Today's Urgent Priority: a Comprehensive Attack on Smoking

The costs of inaction make the case for action. The question is how best to proceed. The broad approach that we in the Administration have supported and that many in Congress are working to craft is based on two premises.

The first is that we have to start with young people. I noted earlier that 90 percent of smokers began when they were teenagers. That is to say, it is a problem of people who became addicted to smoking when they were young, under-informed and generally below the age of consent. Nearly half of teen daily smokers think they will not be smoking five years later. Yet only one fifth actually manage to quit.

The second is that a comprehensive approach is required. Price increases are helpful but they are not sufficient. Studies in Massachusetts and California suggest that while increasing the price of cigarettes is one of the most cost-effective short-term strategies for cutting tobacco consumption, the capacity to sustain that reduction is greatly enhanced when the price rise comes with a comprehensive anti-smoking campaign. What is being contemplated is a radical transformation in a major American industry. Thus, a whole range of adjustments need to be considered and -- history suggests -- insurance mechanisms need to be devised to allow for the possibility that behavior may not change as readily or as quickly as we now anticipate.

What is required is a coordinated, comprehensive approach based around the five core components that the President outlined last fall.

1. A combination of annual payments and penalties on the tobacco industry designed to achieve targeted reductions in teen smoking by raising the price of a pack of cigarettes by up to $1.50 over 10 years.

A significant price increases is integral to any comprehensive plan to reduce youth smoking because, quite simply, the best way to combat youth smoking is to raise the price. Young people are much more price sensitive than adult smokers, both because they have fewer financial resources, and because they are not (yet) as addicted. Consensus estimates suggest that every 10 cent increase in the price of a pack of cigarettes leads to approximately 270,000 fewer teenagers becoming smokers between 1999 and 2003 -- more than 90,000 of whom will no longer die prematurely.

2. Full authority for the Food and Drug Administration to regulate tobacco products.

The Administration has worked to give the FDA the authority it needs to act effectively against teen smoking, but its use of that authority has been hampered by a number of recent court actions. If we are to win the battle against youth smoking we must lift this cloud of uncertainty and reaffirm the FDA's rightful position in the front line.

3. Real changes in the way the tobacco industry does business, including an end to marketing and promotion to children.

Real restrictions on youth access and marketing will likewise be integral to a successful solution. For years now the dangers of smoking have been known and widely publicized, yet 90 percent of six year-olds recognize Joe Camel as instantly as they do Mickey Mouse. And studies have shown that teens are much more likely than adults to buy the three most heavily advertised brands of cigarettes.

Once again, what is being called for here is a fundamental change in the way tobacco companies and retailers do business. No-one can be certain how quickly such a change can be achieved. Yet we cannot and will not let our success in this effort depend on the accuracy of today's best estimates. That is why the President has called for strong youth lookback penalties to be included in the legislation to provide additional insurance that the Administration's targets for reducing youth smoking will be met.

4. Progress toward other public health goals, including biomedical and cancer research, a reduction of second hand smoke, promotion of smoking cessation programs, and strengthening of international efforts to control tobacco.

Finding the best ways to reduce teen smoking, and help older smokers quit is an urgent challenge for public health. We need to marshal the combined resources and expertise at the national, state and community level to expand our knowledge of the causes and effects of smoking and use what we already know to better effect. Across the country, experiments in second hand smoke reduction and smoking cessation programs have been yielding important lessons on what works and what does not. But we need to find out more. And we need to make sure that those lessons are being applied.

5. Protection for tobacco farmers and their communities

Finally, a comprehensive approach to reducing youth smoking can and must take account of the legitimate concerns of the 124,000 farmers who are involved in tobacco production and the families who depend on them. A commitment to compensating these communities for a new nationwide approach to tobacco is integral to our search for a comprehensive solution.

We believe that all five of these components are critical to a solution. They are all mutually reinforcing in the sense that the effectiveness of any one is substantially increased by the presence of the others. In particular, the more we are able to coordinate our efforts across state and county lines, the more effective such an approach will be. While it has long been recognized that higher prices means fewer teen smokers, the federal tax on cigarettes has barely kept pace with inflation in the last three decades. Indeed, the real level of federal and state taxes combined that existed in 1964 -- when the surgeon general first warned of the dangers of smoking -- will not be restored until 2002, when the historic increase in the federal excise tax that was enacted in last summer's budget agreement is fully implemented.

III. The Prize: Potential Human and Economic Benefits of a Comprehensive Approach

The Chinese language, we are always told, sees an opportunity in every crisis. So must we. The flip-side of the enormous economic cost of smoking is an opportunity to generate equally large benefits for our society and our economy by reducing it.

Our estimates suggest that a comprehensive approach to combating smoking -- combining the price increase anticipated in the President's budget and tighter restrictions on youth access and marketing -- would lead to dramatic reductions in youth smoking with substantial positive effects for our economy. Between them these measures would:

• reduce teenage smoking by 42 percent by 2003;

• reduce the number of youths smoking each year by as many as 1.6 million by 2003;

• lower the cumulative number of youths who smoke between now and 2003 by 3 million;

• and, ultimately, prevent roughly 1 million premature deaths.

Of course, even if smoking were eradicated tomorrow, the effects of past smoking would linger on. But the eventual gain to our economy would be substantial. Our longer term goal is to reduce teen smoking by a minimum of 60 percent in 10 years. Over time this should lead to benefits of 60 percent of the costs of smoking. That would mean a real gain to the economy of $78 billion.

To generate the same annual stream of real resources, we would have to invest $780 billion at a rate of return of 10 percent -- significantly more than the entire amount the American corporate sector invested in machinery and equipment last year.

The long run return to a reduction in smoking of this magnitude would come in a variety of ways:

• in the $27 billion that would have been spent treating smoking-related diseases that can now be spent on other medical priorities -- or anything else;

• in the $2.4 billion freed from meeting avoidable costs due to smoking while pregnant;

• in the $300 million that will not be spent mending the damage caused by smoking-induced fires and $300 million in additional output produced on the days that smokers would previously have been off sick;

• and the $48 billion in reclaimed productive capacity due to so many longer, more productive working lives.

While our main purpose is furthering the public health, we should not forget that comprehensive legislation consistent with the President's proposals would also make it possible to make critical public investments in our nation's health and other pressing priorities. These include:

• funding research into tobacco-related and other diseases through the National Institutes for Health and a cancer clinical trial demonstration project for Medicare beneficiaries;

• providing support for smoking prevention efforts by the Centers for Disease Control and smoking cessation programs;

• strengthening the FDA's enforcement programs and supporting America's tobacco farmers;

• promoting State child care and development programs, efforts to reduce class sizes and Medicaid child outreach reforms.

IV. The Challenge Internationally

I have concerned myself with the consequences of smoking for the United States. But it will be critical in all these efforts to bear in mind the global perspective. We must not forget the threat posed to people in developing countries, many who do not yet smoke but soon will if recent trends in global cigarette sales continue. On present patterns of tobacco use, the World Bank has estimated that one in ten deaths worldwide in 2025 will be attributable to smoking-related illnesses -- more than the predicted deaths due to AIDS, Tuberculosis and complications in childbirth combined.

Just what steps the United States can take here is something that will have to be debated in the context of legislation. Clearly it is appropriate that as part of development assistance efforts we work with and support other countries as they find the right approach to discouraging marketing of cigarettes to young people and to discouraging young people from starting to smoke. But there are other important questions as well.

We need to work with the multilateral development banks to ensure that their economic development activities are not having adverse effects by promoting the production and distribution of tobacco products. And we will need carefully to consider our own commercial development: on the one hand, we do not want to peddle dangerous products; on the other, American companies should not be put at a disadvantage in markets that are going to exist whether they participate in these markets or not.

V. An Historic Opportunity

The mix of historic achievement -- and opportunity -- that I described earlier with regard to the American economy is nowhere more apparent than in our health sector. Here and around the country, we are making enormous strides to solve previously unsolvable medical problems. And we are doing this while effectively restraining the underlying growth in costs that once threatened the stability of the system. But here especially, we can no longer turn a blind eye to the one area where the solution is so straightforward -- reducing smoking.

Just in the time that I have been speaking to you, about 40 children have started smoking, and 14 of them will die prematurely as a result. We cannot afford to delay one child longer. By passing comprehensive legislation that meets the targets laid out in our budget, in five years' time around 40 percent fewer American children will be smokers. In 10 years' time, the number will have been more than halved -- and down the road, roughly 1.5 million fewer will have died prematurely as a result of smoking. Finally, nearly $80 billion per year that our economy would have lost with those lives can instead be used to add to their lives and the lives of other Americans. The stakes are high. The right path is clear.