Unintended Consequences Can Sting

06/15/2009 12:01 pm EST

Focus: MARKETS

Terry Savage

Author, The Savage Truth on Money

Sometimes when you get what you want, you also get some unintended consequences. 

Take the tobacco legislation that passed the Senate this past week, after a similar measure passed the House of Representatives. The president, who has fought his own battles to quit smoking, is expected to sign the bill. 

It would give the Food and Drug Administration far more control over the cigarette industry—to curb advertisements, require stronger warning labels, and potentially even outlaw sales of tobacco products in certain locations and in vending machines.

Health advocates cheered the bill, which passed with rare bipartisan support. 

But the bill is not without its consequences—and one of them is a likely hit to the budgets of many states, which count on tobacco tax revenue to fund their budgets. In fact, after a huge settlement of litigation in 1998, the tobacco companies agreed to pay more than $200 billion to the states to cover health care costs. Many states actually sold bonds on which interest would be paid out of anticipated tobacco tax revenues. 

The states, while bitterly complaining about the cost of caring for indigent smokers, actually became “partners” with the tobacco industry and dependent on revenue from cigarette sales! If the FDA restricts sales, many of those health programs will go unfunded.

And the bill may have a few other unintended consequences that may be good for Big Tobacco.  Shares of tobacco companies Altria Group (NYSE: MO), Reynolds American (NYSE: RAI), and Lorillard (NYSE: LO) moved slightly higher when the bill passed. Why? With limited new advertising, their more established brands will benefit. 

And since the FDA is unlikely to ever approve new cigarettes, existing brands will benefit. Plus, the government will have the power to crack down on counterfeit cigarette sales, driving buyers into the hands of the big companies.

Tobacco companies have long been known as recession-proof. People who are hooked are unlikely to give up their smokes in hard times. A Merrill Lynch research report says tobacco companies have outperformed the Standard & Poor’s 500 index by an average 12 percentage points during the last six recessions!

So, here’s the irony: Restrict advertising, limit new smoking opportunities, and states have less money for health care, while tobacco dividends are perpetuated, making the stocks more attractive.

Talk about unintended consequences!

Here’s another example: Predictions of higher oil prices are once again outdoing reality—as everyone from Goldman Sachs to Russian exporters weigh in on the likelihood of higher energy prices. The Russians, talking their position, have even said crude could hit $250 a barrel!

Crude oil traded over $73 a barrel at one point on Thursday, and gasoline prices are up more than $1.00 a gallon since the first of the year. The national average is now $2.63 a gallon for regular. But if you live in the state with the highest gas tax, as I do—Illinois—you’re paying a lot more, at $2.85 a gallon.

Higher gasoline prices led to a “good news, bad news” economic report on Friday. The good news is that retail sales are finally moving upward. The bad news is the increase came mostly from higher gasoline prices.

The great irony is that the incipient economic recovery is now causing higher gasoline prices, draining spending power from consumers at the very worst time. In fact, if prices rise too much, the recovery could be nipped in the bud. And higher gas prices are not good for General Motors’ new owners—the unions and the US government (you and me).

One other hidden irony: Some states collect gas sales taxes on a percentage of the total sale.  So, they make more money when pump prices rise. It goes out the door, though, in unemployment benefits as higher energy costs hit the job market.

I’m sure you could think of some unintended consequences of recent government programs and proposals. There are bound to be egregious examples as we come to “health care reform” especially. Please have your say and join the conversation.


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