Friday, 31 July 2015

Like Uber, but for dairy

There could be a lot of opportunities for Canadian dairy in opening up their markets to foreign competition, and in having foreign markets opened to their products. But there would be transitional costs.

The Globe and Mail reports on some relevant aspects here. But they miss the supply management angle. One important reason that Canadian dairy farmers oppose changes to the system is that they own a lot of quota rights. Under the Canadian system, the right to milk a cow costs money. And just like taxi permit owners in regulated markets hate Uber, Canadian dairy farmers hate New Zealand. But who can really blame them? If you were sitting on a big regulatory asset somebody proposed wiping out, wouldn't you object? 

There is a way around it though. In simplest form, it requires:
  1. The Canadian government buys all the dairy quota from all the dairy farmers. It'll be very expensive. Probably close to $30 billion.
  2. Canada gets rid of all the tariffs on dairy products at the border. It can maintain whatever sanitary requirements it wants - if some dairy practices in the US result in stuff being in milk that the Canadian government views as unacceptable, they could still ban whatever it is being in milk. Arguments around some kind of adulterated US milk coming over the border are really a separate issue: Canada can put whatever quality controls it wants on milk sold to consumers. It just can't do it in a way intended to set up a trade barrier.
  3. Since tariffs at the border are around 300%, prices on dairy products would plummet. Rather than let them plummet, the government would put in place taxes, applied neutrally regardless of country of origin, that are proportionate to the amount of price reduction you would expect with the change in the system.
  4. Why taxes? Because you need revenue to pay off the bonds you'd have to issue to pay off the farmers in step 1. You retire the taxes as the bonds are paid off.
  5. Since the price of milk to consumers is no higher, and likely a bit lower, than it was before, consumers are better off. They'd see it most in product diversity and quality. Since the farmers are paid off for their quota, they're not much worse off, though some get a lot of value from the lifestyle that comes with farming under that kind of system only some of which might be capitalised into the price of quota. And since freeing up dairy would get Canada into the TPP, if the TPP is of net value, Canada would be better off.
CD Howe had a different plan a couple years back.

Other things you should know: Fonterra is not a monopoly. I know that's the first thing that Canadians and Americans would point to. It's the second comment on that Globe and Mail piece:
New Zealand's milk supply is a monopoly. Fonterra controls almost 90% of the market and set the price according to a private formula. Fonterra includes farmer-owners (over 10,000) who hold shares that they can only sell back to Fonterra (although they are now experimenting with allowing farmers to sell/trade shares among themselves). As well, there is now a proportion of public non-voting "shares" that is legally separate from the actual company ownership.
Essentially, a form of supply management, and the retail price of milk in New Zealand is comparable to Canada.
Some of this is right. I'm not going to check the percentages or numbers - Fonterra is by all accounts the dominant local player. They set prices paid to their farmer members based on their forecasts of the results of the coming dairy auctions. A farmer who doesn't like Fonterra's pricing can join up with somebody else, or start their own processing company. Synlait is one of the bigger alternatives to Fonterra, but there are others. 

Fluid milk prices here are not cheap, but do vary with international prices. Where you see the real differences is in prices of processed goods: excellent ice creams and cheeses, and baby formula, are very reasonably priced compared to North American alternatives. Canada's system runs a really complicated set of protective tariffs and differential pricing on industrial versus consumer milk so that the costs of the whole apparatus remains opaque to consumers. If your cheese is not so hot and very expensive, do you blame supply management? Too many steps in the production chain for consumers to know where to pin the blame. 

Anybody in New Zealand, if they wanted to, could start a dairy farm asking nobody's permission - and certainly not Fonterra's. They could do on-farm processing of their own product, subject to the usual health regs, and then sell it to anybody who wanted it: again, no permission needed other than the check that you're running a sanitary facility. A farmer and his neighbour could write whatever contracts they wanted for the former to supply the milk and the latter to process it.
Fonterra is a big part of the New Zealand market. But if you milk a cow without their permission here, nobody cares. If you milk a cow in Canada without the dairy board's permission, they'll throw you in jail. 

Canadians need to stop seeing the quota management system as this big friendly thing protecting Canadian consumers from bad American milk. Truth is, Canada could set whatever quality controls it wanted on milk for sale to consumers. Some growth hormone that the government doesn't like in milk? You can ban its being in milk for sale to consumers, and you don't need supply management to do it. The dairy system instead is a lot more like the New York taxicab system. It needs a little Uber. 


Police benefits

More evidence that the elasticity of crime with respect to police numbers is around -0.3.

Klick and Tabarrok previously used terror alert status changes to identify the effect of police numbers on crime in Washington, DC. This time, MacDonald, Klick and Grunwald use a geographic regression discontinuity design to identify effects where, on one side of the line, you have only regular policing and, on the other, you also have policing by the University of Pennsylvania.

Their result?
Personnel estimates from both the Philadelphia Police Department and the UPPD indicate that approximately twice as many officers patrol the Outer Penn Zone than the surrounding University City District. The area covered by Philadelphia Police in the relevant area is twice as large as that covered by the Penn Police, suggesting an effective increase in police presence on the order of 200 percent. Our estimate that UPPD activity is associated with a 60 percent reduction in crime suggests that the elasticity of crime with respect to police is about -0.30 for both violent and property crimes. These elasticity estimates are strikingly similar to those found in the modern literature on police and crime. Chalfin and McCrary (2012)'s recent paper provides a helpful summary of these previous estimates. Klick and Tabarrok (2005), Draca, Machin, and Witt (2011), and Di Tella and Schargrodsky (2004)—all of which use an exogenous shock in police deployment resulting from terrorism-related events—find an elasticity of approximately -0.30. Our results are also similar to those presented in Berk and MacDonald (2010) who examine a police crackdown in Los Angeles and find similar elasticities. The results from our investigation respond to concerns that short-term gains from police crackdowns are not sustainable. Instead, our results suggest that these crackdown studies may be generalizable if increased police presence becomes a permanent tactic in specific areas. 
A ten percent increase in the number of police reduces crime by about 3 percent. I expect that the American estimates would be a lower bound on the elasticity of crime with respect to police presence in New Zealand. If crime reduces with policing but at a decreasing rate, then places with fewer officers (per population) will see stronger effects from additional hiring.

The back-of-the-envelope estimates I'd run for my current policy issues class a few years back had a dollar in new police expenditure saving about two dollars in crime costs.

I expect you could find similar benefits in shifting police out of policing cannabis and into policing real crimes; it looks like that may already be under way.

Wednesday, 29 July 2015

TPP Drug Trade-offs

I don't think that the extensions to drug patents hinted at under TPP are for the good. But it isn't obvious that they aren't.

Let's run the story.

Most new drug development happens in the US and EU, with more coming in now from China as well. It is ridiculously expensive to develop new drugs. Some of that is because the FDA makes things harder than they need to be, but a lot of it is real cost. The US has pretty strong drug patent protection to encourage investment in new drug development: nobody will spend hundreds of millions, or more, on drug research that might lead to one or two commercially viable breakthroughs if they can't reap the rewards on the ones that pan out.

On that story, New Zealand and others have been free-riding pretty hard. Don't get me wrong - this is great for New Zealand. We get a pile of generics out of India when they come off-patent here and the drug system saves tons of money. But we're contributing rather less to the general "let's develop more new drugs" effort. Price controls on pharmaceuticals do discourage new development (and here's similar EU evidence), and new pharmaceutical innovation saves lives.

You could imagine an international convention, agreed to by everybody, that would reduce global free-riding on research done in the EU and US in order to get more new drugs developed. We in New Zealand would pay more than we're paying now, but we'd also be paying a fairer share of the development costs of new drugs. Optimal pricing should still involve poorer countries paying less than richer ones, but you'd also have expected things like iPads to sell for less in New Zealand than in the US on the same kind of grounds - so that part might disappoint.

But think about the rhetoric on "doing our part" on global warming, and wonder why the same "doing our part" arguments haven't been made about pharmaceutical innovation to save lives.

Why am I still sceptical? The overall system still seems broken. First order gains in getting new drugs would come not by pulling a few more dollars out of places like New Zealand but rather by fixing the FDA so developing new drugs weren't so expensive in the first place. If there were an overall deal that improved processes at the FDA* while also making sure that everybody paid their fair share, that would be a winner for me.

At least that's my point estimate - I put a pretty wide confidence interval around it though.

* On that, I generally agree with Alex Tabarrok. See here here and here, for example. And Doug Bandow.

Tuesday, 28 July 2015

Returns to education and the decline of the Marines

Oh, folks will have fun working out explanations for this one.

Brookings suggests that increasing college graduation rates could be behind it, where a college degree is required to become an officer. The drop in the IQ threshold for getting a college degree then is reflected in the chart above. But that can't be all of it, as the Marines could increase the GCT requirement for admission if the parchment no longer signals ability and if ability really matters more than parchment. It seems more likely that they're just not able to draw as well from higher ability cohorts.

Other plausible candidate explanations, though without data. They're all testable though:

  • Higher opportunity costs for high IQ people since the 80s.
  • Greater cultural disparaging of the military in elite circles, so it is not aspired to by those of higher ability.
  • Decreasing trust in that military is a force for good or really much needed (see the decline as the Soviets turned friendlier under Gorbachev, the levelling off and rise around Gulf War I, and the resumed decline after that).
  • Fewer smart but lower income kids needing to use ROTC to afford college with expansions in student aid. 
I'd bet on the first and last being most important. 

A Hogan Compendium

Here's the complete list of posts by Seamus Hogan. Blogger doesn't make it easy to sort things by author, so I've just pulled them all into this post. I've bolded some of my favourites. They're sorted by category, then by date, with the most recent ones first. If I've missed any, let me know.

Cricket and Sports Economics:
Capital Gains Taxes. Seamus's argument against capital gains taxes, as best I'm aware, remains unanswered by NZ's CGT proponents.
Electricity markets
NZ Policy and Politics more generally.
The move to Wellington
The merits of the programme-that-was at Canterbury
Oh, Christchurch.
It all counted for, as Seamus might have put it, three-fifths of five-eights of bugger all for PBRF, but there's some great stuff in there.

And I will particularly miss his habit of emailing me pointing out errors in posts I've had in draft. I'll have to rely more heavily on post-posting review by readers leaving comment.

My NBR column on Seamus is here; the post of 18 July is here. His family are collecting memorial notes here

And here's Seamus's lecture on cricket, economics and the WASP.

Monday, 27 July 2015

Glass Mountain

We always kept a sharp eye on the ditches when I was a kid riding in the back seat. Why? The glint of a beer bottle meant $0.10. Collect a dozen of them and you've got a $1.20. So Mom and Dad would have to keep a foot hovered over the brake just in case one of us saw a bottle - or even better, an abandoned case of empties. Then off to the Altamont Hotel to turn them in.

The Canadian system worked because all the bottles were standardised. There were two dominant brewers who used identical bottles. State-run liquor outlets combined with a bit of distribution through licensees like rural hotels meant a very limited number of distribution outlets: the trucks that dropped off the bottles could presumably pick up the empties for the run back to the distribution outlet.

I don't know whether the economics of the Canadian set up stacked up, but it was a system that could have made sense given the way the rest of it ran. In all cases, you have to weigh up the costs of picking bottles up, making sure none of them were chipped or damaged, cleaning them, and getting them back to the bottler, against the costs of making new bottles. If you don't like monetary calculations and prefer some kind of environmental accounting, there's carbon costs from picking up old bottles, from the hot water needed to clean the old ones, the cost of the water itself, and of the detergents that then go out into the sewers.

Radio New Zealand reported on a pile of broken glass bottles in an abandoned quarry down in Southland. It looks like Invercargill does not have a great sorting facility, so Auckland's glass recycler doesn't want the product.
The director of Invercargill's recycling contracter, Southland DisAbility Enterprises, Ian Beker says even if OI would take the glass in Southland, the cost of freighting it there is not economic. He told New Zealand Geographic that the best thing Southlanders could do is put their bottles into the general rubbish bound for the landfill.
This prompted some twitterings about how New Zealand needs to move to a deposit scheme like the one I grew up with in Canada. But that's really unlikely to be a good idea.

First, we have beautiful diversity in packaging styles. Tuatara won awards for its lizard-themed bottles. Some brewers use a standard bottle, but lots of the bigger ones have their own custom bottles. That means that a deposit scheme would have to sort the bottles before they could be returned to their homes. The costs would not be low. Different shapes and sizes would mean a harder job cleaning them all properly. Further, you'd have to store small-volume niche bottles until you'd accumulated enough to send back to the brewer.

Second, any brewer who wants to run his own deposit scheme can do so. Some of the craft brewers with more expensive glass did so in Christchurch, but I've lost track of the state of play on that one.

If it is more expensive to clean and reuse a bottle than to press new bottles, we waste resources in recycling them. And I can't see any plausible externality story around it. Landfill operators have to buy land in competitive markets; if old quarries were more valuable as something else, somebody else would have bought it instead. Councils typically charge for rubbish collection. If they have the marginal cost of rubbish collection wrong, that's a bigger issue than just glass bottles. But think about it more carefully: glass is about the safest, easiest thing in the world to put in a landfill. It doesn't leach or leak. Nothing dangerous. No smells and nothing to blow away in a stiff breeze to inconvenience neighbours. It won't emit methane while decomposing. It eventually will turn into coloured sand.

It would be very easy to waste a pile of resources by requiring Invercargill to upgrade its facilities, just because some folks don't like the idea of that there is an old quarry full of old glass.

There's no shortage of land in New Zealand that can be used for storing old glass. If there ever were, the price of it would bid up, the cost of dumping would increase, and things that today aren't worth recycling would be. When I lectured on environmental economics as part of my current policy issues course at Canterbury, I'd figured that if Christchurch went through a Kate Valley sized landfill every year instead of every thirty, and if they were built on prime dairy land instead of scrub wasteland, it would still only cost about $2 per person per year in land costs for landfill.

Bottom line:

  • Landfills should charge tip fees that reflect the cost of building, maintaining and running them. There can be reason for undercharging to reduce littering, but the resulting mild subsidy to landfill will be general across all waste streams, not specific to glass, and glass is one of the less harmful things to have in landfills.
  • If it is cheaper to dispose of a glass bottle in a landfill than it is to clean it and return it to the bottler, or to use it as feedstock in making new bottles, that typically means we would be wasting real resources if we forced it to be recycled. Since transport costs matter and since small centres can't afford expensive sorting facilities, it can make perfect sense for some places to recycle glass and others to use landfill.


Saturday, 25 July 2015

Prohibition's horrible tradeoffs

You grow pot in an illegal market; your toddler daughter eats a lot of it. If you take her to the emergency room, you'll likely be arrested. If you don't, very bad things could happen.

I applaud Shain Iperen for finally making the right choice.

But we should condemn prohibitionist approaches for making that a hard decision.
A drug expert has called on Northlanders to keep all drugs out of children's reach after an 11-month-old girl became seriously ill from eating cannabis her drug-dealing father left in the kitchen.

The father, Shain Iperen, was a drug dealer who only sought medical help for the girl 24 hours after she ate the dope, but initially denied any exposure by the child to drugs when questioned by doctors.

The 27-year-old only admitted what happened to her after toxicology results at Whangarei Hospital showed an extremely high level - at the upper most limit - of screening undertaken for tetrahydrocannabinol (THC, the active ingredient in cannabis) present in her urine.

The toddler was semi-comatose, unresponsive to voice, and only responsive to stimuli by movement of her limbs when brought to the hospital on February 27.

Iperen pleaded guilty in Whangarei District Court to two charges of dealing with cannabis oil, one of ill-treatment of a child, and a representative charge of manufacturing cannabis oil.
In how many US states must marijuana be legalised before New Zealand finally figures out that the UN convention is a bit less binding that it's thought?