Tuesday, June 30, 2009

Jim Mora on the BERL report

Afternoons with Jim Mora (Radio NZ) covers our critique of the BERL report. The podcast is available here (link updated). They invited Ganesh Nana on to defend himself. The BERL segment begins at 15:40 or so. My running commentary is below.

At 18:00, the panelists identify the nub of the critique as that BERL tallies all the costs, but includes no benefits. That's not quite how we'd put it. Even leaving all of the benefits issue to one side, BERL overstates costs by almost $2 billion through what we view as errors in method: inappropriate use of multipliers, double counting, and so on. The biggest portion of the difference between our figure and BERL's is their counting of internal costs as social costs; however, even leaving that to one side, there are big problems in the rest of the report.

At 19:05, Nana rightly notes that BERL was not asked to tabulate benefits. But that's somewhat beside the point. There are two basic approaches you can take for a study like this. Either count only externalities, in which case benefits really don't matter, or properly weigh internal benefits against internal costs if you want to weigh internal costs. They chose to count internal costs, but not to weigh against internal benefits.

19:30: Nana complains that his report has been criticized out of context for not having done something it wasn't meant to do: weighing benefits. But we weren't the ones that started down that route. Geoffrey Palmer of the Law Commission mistook the BERL report for a welfare study: not really his fault, since the BERL report conflates welfare with costs in numerous places. But when I called BERL on this very early on and asked that they warn Palmer that their study wasn't suited to that purpose, the principal author of the report said it was none of his concern how their study was used. So it's mighty rich to complain now that it's being taken out of context: they were happy for it to be used out of context by the Law Commission. The second sentence of our executive summary notes that BERL was asked to look at costs; we also note at page 10 the various reasons BERL gives that we should actually ignore benefits. Here's one: "We assume that it is irrational to drink alcohol to a harmful level and that harmful alcohol use has zero private benefit." p. 173 of the BERL report. BERL may have been asked to look only at costs, but they've gone further and explicitly set benefits to zero.

19:40: Nana claims we've complained his study wasn't peer reviewed. Actually, we've claimed that they've pretended to have a peer review: it was reviewed by the authors of its method.

20:49: Nana says adding up benefits is a murky issue. Of course it is; that doesn't mean it can't be done though. As a first cut, get total consumption for each of wine, beer and spirits, get a measure of the price elasticity of demand for each, assume linearity, and calculate the size of the triangle. I'm not saying that that's the best way to do it, but it's a lot better than assuming it to be ZERO.

21:00: Nana goes on again about "rational consumers", etc. I've demolished this argument before. He's also offering BERL's services if anyone wants to measure benefits. I'd be a bit nervous about giving them that contract.

21:51: Internationally accepted methodology. Ahem.

22:23: Nana agrees that it's net harm, not gross harm, that matters. But he didn't see fit to correct Geoffrey Palmer when the Law Commission read his report as measuring net harm. And we can't blame Palmer for that reading: BERL says "net" all over the place; it's just that they're netting out very minor things, and "net" means different things in different places.

22:30: Jim Mora nails the problem: there's no sense in producing a report that measures only costs.

I'll look forward to tomorrow's NZAE meetings; perhaps BERL will there offer some more substantive defense than they have so far.

Afternoon roundup

Monday, June 29, 2009

Of PageRank and International Standards

One nice feature of Google's Page Rank calculations is that it works to prevent circles of self-referencing. I can't boost my site's Page Rank by having a buddy or two build their own sites, then have each of us link to each other. While Google uses links to help to determine Page Rank, an incestuous circle like this would be self-contained -- no Page Rank flows in. And, Google actively works to penalize link farms.

BERL has made much of how its estimate of the costs of alcohol use in New Zealand is peer reviewed and follows international standards. Let's peel back the sheet a little.

Eric Single, in "Why we should still estimate the costs of substance abuse even if we needn't pay undue attention to the bottom line", Drug and Alcohol Review (March 2009), pp. 117-121, writes:
In May 1994 the Canadian Centre on Substance Abuse (CCSA) organised an international symposium in Banff, Canada, to discuss the issues involved in estimating the social and economic costs of substance abuse, and to seek a consensus on the most appropriate model. The purpose of the meeting was to explore the feasibility of establishing an internationally acceptable common method for estimating the costs of substance abuse. A working group was formed to explore the potential for developing guidelines on estimating the economic costs of substance abuse, consisting of [Eric Single], David Collins, Brian Easton, Rick Harwood, Helen Lapsley and Alan Maynard. These guidelines were finalised at a second International Symposium held in Montebello, Quebec, in 1996.

In June 2000, the Third International Symposium on Estimating the Social and Economic Costs of Substance Abuse was held in Banff. This meeting focused on ongoing methodological issues and the expansion of cost estimation methods to developing economies.This led to a second edition of the guidelines, authored by myself, David Collins, Brian Easton, Rick Harwood, Helen Lapsley, Pierre Kopp (France) and Ernesto Wilson (Colombia) and published by the World Health Organisation after extensive review in 2004 [2]. A new set of guidelines for estimating the avoidable costs of substance abuse has since been developed by yet another working group led by David Collins and Helen Lapsley [3]. These guidelines are now available from Health Canada.
So the basic method was devised by Single, Collins, Easton, Harwood, Lapsley, Kopp, Wilson and Maynard, and we shouldn't then view these as independent of each other in assessing the appropriateness of their devised method.

What are the most cited sources in the BERL report?
  • Easton 1997 (Wellington School of Medicine, U Otago monograph), which thanks Collins, Lapsley, Harwood, Maynard and Single
  • Single, Collins, Easton, Harwood, Lapsley, Kopp and Wilson 2001
  • Collins and Lapsley 2002, which acknowledges Easton
  • Single, Collins, Easton, Harwood, Lapsley, Kopp and Wilson 2003, World Health Organization
  • Collins, Lapsley, Serge Brochu, Easton, Augusto Perez-Gomez, Jurgen Rehm, and Single, 2006, Health Canada report
  • Collins and Lapsley 2008a, Australian government report, external reviewers Easton and Robin Room (Room coauthored with Single in 1999 on harm reduction)
  • Collins and Lapsley 2008b, Australian government report, which acknowledges Easton, Brochu, Perez-Gomez, Rehm and Single

And of course the external reviewers for the BERL report were David Collins and Helen Lapsley.

There's nothing wrong with using a method devised for a purpose and citing the various refinements of that method. But it wouldn't be right to view the varied iterations as independent of each other. And it would be somewhat misleading to describe the method as "internationally accepted" on the basis of a series of commissioned reports in different countries which all cross-reference one-another. If BERL has some other reason to cite international acceptance, it should say what it is.

So, arguments that the method has been used by folks all over the world only really mean that the same coterie of consultants has been successful in selling their method to a few different government health departments. In other words, BERL's page rank shouldn't be augmented by this kind of appeal to authority.

Sunday, June 28, 2009

Twit

For what it's worth, my Twitter feed is here. Not much there you wouldn't already know though.

Friday, June 26, 2009

Money quotes from Peter Bushnell

From the National Business Review
  • The BERL report into the social costs of alcohol doesn't look like it meets the "normal standards you would expect"
  • "I think the points they’re [Crampton and Burgess] making are sound about adding the costs of production into the cost of it, and not counting any benefits. In a market if you’re selling something that people are prepared to pay for, then they’ve at least got that much benefit, otherwise they wouldn’t have bought the stuff. So if you exclude the benefits then you’re clearly only looking at one side of the story."
  • “I can see the point being made in the [Crampton and Burgess] article – it [BERL report] looks pretty shonky"
  • "Geoffrey’s reputation is reduced [if] he’s putting weight on something that actually doesn’t stack up." [If the reputation of the Right Honorable Sir Geoffrey Palmer is hurt by relying on the BERL report, what of that of its authors?]
  • "What we’re saying is it’s your [Palmer's] reputation that’s at risk here. It doesn’t reflect well on the Law Commission if it ... backs [work], that doesn’t have a sound basis."

KITT works for the Reserve Bank of New Zealand

The latest RBNZ bulletin introduces the RBNZ's new DSGE model for forecasting and policy design: the Kiwi Inflation Targeting Technology (KITT).

KITT is providing our inflation forecasts. That's so awesome. I'm now imagining that the cluster of computers they have running the numbers has a front end with whooshing red lights showing that it's working, and the forecast being read by KITT in William Daniels's voice:
"Alan, reducing the interest rate further risks inflation outcomes well beyond my specified bounds."

"Dammit KITT we're in a recession here! Gimmie all you got!" (and hits the Turbo Liquidity Boost button).

The happiest moment for an 8 year old Eric was when the World of Wheels car show came to Winnipeg and I got to sit in KITT. If it turns out that KITT is a macroeconomist, I might have minor regrets about having gone down the micro route. Oh well. Massive kudos to RBNZ for choosing such an awesome acronym.

Uniquely Canadian?

William Watson nicely points out two bits of "only in Canada" nonsense.

Item the first: Swine flu is spreading rapidly in Canada's Indian Reserves. Health Canada bureaucrats were then put in a no-win situation: send alcohol-based hand sanitizer and risk negative media coverage in the inevitable event that some of it is diverted to "inappropriate use" on dry reserves, or don't send it and be equally pilloried for not sending medical supplies.
The scandal is not that bureaucrats behaved like bureaucrats. The scandal is that people in Ottawa are signing off on whether people living thousands of miles away get hand sanitizer. If you go on eBay and look under “Soap Dispensers, Restroom Supplies, and Bathroom Supplies,” you get 183 hits on what look like the dispensers you see these days at every hospital entrance. We’re not talking nuclear isotopes here. There’s no worldwide shortage of sanitary hand sanitizer — if only because the private sector, not bureaucracy, produces it.
Update Colby Cosh weighs in here: apparently, Treaty 5 requires that the government keep intoxicants out of the reserve. But, if there are non-intoxicating hand sanitizers...

Item the second: well, I'll just turn it over to Watson. Recall though that it is illegal for parents simply to pay the doctors in this case: that would violate the sacred principles of the Canada Health Act.
To keep expenses down, Quebec’s Ministry of Health imposes surtaxes on physicians who make more than about $200,000 a year — gross of expenses. What with swine flu and all, it’s been a busy year for pediatricians. Some of those running the Tiny Tots Clinic apparently have already bumped up against their maximum income. As a result, they’re now going to be paid at 25¢ on the dollar for all the services they provide between now and the end of the year. Think of it as a kind of Tax Freedom Day in reverse. Tax Freedom Day is when you’ve earned enough in the year to pay all your taxes and can then start working for yourself. But if you’re a Quebec doctor, it works the other way around: As early as June, depending how hard you worked the first part of the year, you may start working almost entirely for the government.

Trouble is, 25¢ on the dollar doesn’t pay the clinic’s overhead. So the clinic has been restricting its hours while the doctors petition the Minister of Health for permission to be re-classified so they can keep working with full remuneration for the services they’re providing.
True North Strong and something or other.

Thursday, June 25, 2009

And Treasury weighs in

And so it seems that BERL also has a different "world view" from Treasury. Update: the original article had a minor error, now fixed and noted at NBR; corrected version now quoted below.

I'm very surprised that a very senior Treasury official has come out with a statement that says, in essence, that the Law Commission's reputation is at stake if it chooses to base policy recommendations on the BERL report.
The Berl report into the social costs of alcohol for the Law Commission is work that doesn’t look like it meets the “normal standards you would expect”, according to Deputy Secretary of the Treasury Peter Bushnell.
We of course agree.
“I think the points they’re making are sound about adding the costs of production into the cost of it, and not counting any benefits. In a market if you’re selling something that people are prepared to pay for, then they’ve at least got that much benefit, otherwise they wouldn’t have bought the stuff. So if you exclude the benefits then you’re clearly only looking at one side of the story.”
There is no defensible argument for setting benefits equal to zero.
“I can see the point being made in the article -- it looks pretty shonky”, said Dr Bushnell, “I think the fact that some work’s done that academic review says is pretty shonky is a problem by itself. But the question is what’s the best way to solve that?”

He agrees that an alcohol cost analysis Treasury did in 2002 is more consistent with Dr Crampton and Mr Burgess’s findings than the Berl report, which was jointly commissioned by the Ministry of Health and ACC.

However, the mere fact Law Commission president Sir Geoffrey Palmer is seeking out economic advice is positive, “because in the past lawyers often assumed that economics had nothing to do with it.”

That said, the onus should be on the Law Commission to be more rigorous Dr Bushnell said.

“Geoffrey’s reputation is reduced [if] he’s putting weight on something that actually doesn’t stack up. So the Law Commission ought to ... build in processes that give adequate QA and so on.

“What we’re saying is it’s your reputation that’s at risk here. It doesn’t reflect well on the Law Commission if it... backs [work], that doesn’t have a sound basis.”
I'm rather sure that Geoffrey Palmer would have seen, and utterly ignored, my early critique of the BERL report.
Dr Crampton goes further. He believes the Berl report belies a more general problem with economic consultancy reports, in that there needs to be somebody looking at the Requests For Proposals (RFPs) that a ministry sends out, and checking the results when they come in.

“We really need to have Treasury vetting RFPs going out from the Ministries checking that they’re spec’d up to actually measure what they need to measure, and Treasury vetting the reports coming back. Absent that, nobody does it, folks take reports at face value and policy is not formed on sound bases”, Dr Crampton said.

But there are two main reasons nobody does this: the primary one is a lack of resources.

“Treasury just doesn’t have the resources to look at every RFP that goes out and then check the results when they come back”, Mr Bushnell said.
I agree completely. Treasury should be better resourced for this kind of work. The costs of bad policy seem highly likely to outweigh the costs of improving policy.
The secondary one is the need to maintain the independence of bodies such as the Law Commission or Commerce Commission.

“There’s sort of a question as to what are the processes that respect that independence, which is what you set them up for, but also ensures that you’ve got enough rigor and quality in the advice”, Mr Bushnell said.

“But I don’t think we can expect to have a body set up that’s going to examine every economic claim made by any organisation in the public sector.”

Sir Geoffrey was overseas when contacted by NBR, and has declined to comment on the matter thus far.
Again, it was MoH and ACC that put out the report, not the Law Commission. I'm not sure that MoH needs to be independent of Treasury oversight. I'm also not sure what the best institutional solution is to prevent messes like this in future. It's a tough problem.

Save them by eating them

Boing Boing today points to the heartening story of the Mangalica pig, saved from the brink of extinction by a breeder rightly convinced that they could become a delicacy.
If you like ham, the Spanish food company La Tienda is betting you'll just love the meat from the Hungarian Mangalica pig, a rare breed that almost disappeared less than 20 years ago.

The distinctive Mangalica pig—known as much for its curly hair as for its fatty flesh—was saved so it can be sold and eaten.

At one time, only 198 purebred pigs remained in the world. Farmers preferred other breeds. "The corpulent Mangalica grows very slowly and cannot be kept in closed quarters. It is therefore poorly suited to modern industrial pig farms, and it has been gradually replaced by modern breeds," according to the Slow Food Foundation for Biodiversity in Florence, Italy.

The resurrection of the Mangalica has been the mission of Juan Vicente Olmos, the head of Spain's Monte Nevado ham company, and geneticist Peter Tóth, who tracked and purchased the last pigs from farms scattered throughout Hungary. After less than two decades of intense breeding, the Mangalica population has now increased one-hundred-fold, with 20,000 pigs living in Spain and Hungary.

If you're hungry for Mangalica ham, it’ll cost you, though. A nine-pound ham goes for $490.
Any endangered species that can easily be farmed and that tastes good seems up for salvation this way. I look forward to the day that New Zealand's Department of Conservation wakes up and allows weka farming. They look delicious.

Motorcycles

Patri Friedman will think less of you if you drive a motorbike: they're just too risky. He cites stats of fatality rates twenty times those of automobiles, corrected for miles driven.

But those numbers don't correct for agent type. What he really needs, and what I don't think exists, is data on relative fatality rates for risk-averse drivers in both types of vehicles. I'm sure motorcycles are still riskier, but twenty-times riskier, correcting for agent type?

Specify that there's an underlying distribution of risk-aversion running from highly risk averse to highly risk/thrill seeking. And, suppose agents sort across vehicle class by underlying risk aversion. So the most risk-averse agents buy a Volvo, the median agent buys a Toyota, and the most risk-preferring agent buys a motorbike. If we then find that motorcycles have higher fatality rates than cars, I don't know what portion of the difference comes from agent heterogeneity and how much comes from motorcycles being more dangerous.

How could you tell? Well, one way would be to check the proportion of motorcycle riders with health insurance as compared to car drivers. David Hemenway's propitious selection story suggests that risk preference is correlated across different types of behaviour, so adverse selection stories in insurance are overstated: he finds that motorcycle riders in accidents without helmets are more likely to be uninsured than those who wore helmets. In other words, folks who like risk take more risks. So, get some measure of risk preference derived from health insurance status (or life insurance, or credit rating, etc), use it in probit estimation for the likelihood of being in accident, then adjust the motorcycle stats for underlying agent type. It would be a big job, and I'm not going to do it, but it would be a cool paper for somebody who had ready access to the data.

So, to the extent that Patri is right to cast aspersions on motorcycle riders, it's because it might be an efficient signal of underlying agent type. But Patri, if you already have all kinds of other signals about somebody's underlying type, perhaps don't downgrade an otherwise risk-averse person quite as much as you otherwise would: it's highly unlikely that they're facing a 20X average risk.

Wednesday, June 24, 2009

Afternoon roundup

  • Boing Boing points us to The Giant Pyramids of North Dakota. You can find them here on Google Maps.
    Giant Pyramid near Nekoma, North Dakota USA - part of the Antiballistic Missile system constructed over eight years for approximately $6 Billion and operational for not more than three days. Upon closure, the giant tunnels beneath were flooded with water.
    When I was a kid in the early 80s and you didn't need a passport to toodle on down to the States for an afternoon, we spent a day driving around randomly in rural North Dakota and came across the pyramids; we figured they were missile silos but didn't have all the details.
    The concept was to detect and shoot down incoming nuclear missiles over Canada where presumably no one would mind.
    We did worry about this kind of thing, or at least I did.

  • Swine flu numbers in the US. Note that New Zealand is fully in epidemic mode, with school closures and my University making arrangements for missed exams. The public health folks are projecting that up to half of Canterbury (the region) will catch the flu over the next few weeks. Fortunately, it's Ensign Trips rather than the Cap'n.

  • More on the dangers of religion: mass hysteria and dancing plagues edition. I'd always thought it was ergot; seems not. Long story short: a mystical, anti-rational mindset combined with hard times combined with the strictures of life in the nunnery can produce mass hysteria.
    Studies of possession cults in hundreds of modern cultures, from Haiti to the Arctic, reveal that people are more likely to experience dissociative trance if they already believe in the possibility of spirit possession (Rouget, 1985). Minds can be prepared, by learning or passive exposure, to shift into altered states. The anthropologist Erika Bourguignon (1991) speaks of an ‘environment of belief’, the set of accepted ideas about the spirit world that members of communities absorb, thus preparing them later to achieve the possession state. It is not necessary, however, to be formally trained. The dancers of 1374 and 1518 occupied an environment of belief that accepted the threat of divine curse, possession or bewitchment. They didn’t intend to enter trance-like states, but their metaphysical beliefs made it possible for them to do so.

    Similarly, it is only by taking cultural context seriously that we can explain the striking epidemiological facts that possession crises so often struck religious houses and that men were far less often the victims of mass diabolical possession. The daily lives of nuns were saturated in a mystical supernaturalism, their imaginations vivid with devils, demons, Satanic familiars and wrathful saints. They believed implicitly in the possibility of possession and so made themselves susceptible to it. Evangelical Mother Superiors often made them more vulnerable by encouraging trance and ecstasy; mind-altering forms of worship prepared them for later entering involuntary possession states. Moreover, early modern women were imbued with the idea that as the tainted heirs of Eve they were more liable to succumb to Satan, a misogynistic trope that often heightened their suggestibility.
    For the Enlightenment, let us give thanks....

  • Isn't it cool that Google runs these kinds of experiments?
    All other things being equal, more usage, as measured by number of searches, reflects more satisfied users. Our experiments demonstrate that slowing down the search results page by 100 to 400 milliseconds has a measurable impact on the number of searches per user of -0.2% to -0.6% (averaged over four or six weeks depending on the experiment). That's 0.2% to 0.6% fewer searches for changes under half a second!

Sunday, June 21, 2009

The Kiwi accent

The Christchurch Press's weekend magazine has an extensive discussion of the Kiwi accent (sorry, no link).
Mangled vowels and muddy tones are accusations hurled at us. Want to talk like a Kiwi? Easy. Put a peg on your nose. Now, change the vowel sounds: A to E; E to I; I to U. Talk in a monotone, and finish each sentence with an upward inflexion, like a question.
They forgot to mention that "aw" becomes "or". And so I almost ran off the road listening to the radio and hearing an ad for what I thought was "New Zealand's Largest Porn Shop", enthusiastically describing how they could cater to every taste and every need. Once they mentioned they had bicycles, I figured out that it was an ad for a pawn shop. But it took me a minute. I asked some of the Kiwis at lunch that day to repeat the following sentence: "I went to the pawn shop to buy some porn." I couldn't tell the difference between the two words. They claimed it didn't much matter as it would usually be clear from context.

Strange place.

Update: Ira's copy of Hairy McLary's Bone rhymes "Southerland's Sauce" with "Hercules Morse". Everyone surveyed in the Department agrees that this is a perfectly acceptable rhyme.

Sauce == source. Strange strange strange.

Saturday, June 20, 2009

Afternoon roundup

Finally, a break from blogging the BERL report. Apologies for the tedium for those not interested in that thread.
  • Will Wilkinson nails the "green avatar" signaling issue
    So folks on Twitter have been turning their avatars (little profile photos) green to show solidarity with the protesters in Iran. There are websites to help you do this. But why do this? How does it help? I want the Iranian people to live in freedom, just as I want all people to live in freedom. But the point of the gesture eludes me, unless the point of the gesture is to be seen making the gesture by others who will credit you for it. Like so many political gestures, it is vanity dressed up as elevated moral consciousness. It doesn’t help. Is it harmless?
  • Radley Balko in The Atlantic (part 2) (part 3)
  • Harford on retrospective voting
  • More reasons to not to ban genetically engineering crops

Friday, June 19, 2009

Correcting the BERL report part 3: Alcohol Production Costs

After yesterday's marathon post summing up our adjustments to BERL's costs of lost output, this one will be pretty quick and easy. We now take on the costs of resources "diverted" to harmful alcohol consumption.

BERL says that half of the alcohol consumed in New Zealand is consumed by harmful drinkers (one Kiwi adult in six). Recall that BERL's threshold for harmful drinking is less than two pints of beer for men (two glasses of wine for women) per day on average. At that point, they say not only that all consumption is irrational but that it also provides zero benefits: not just for additional consumption, but also for all prior harmless consumption. So they count as costs half of all spending on alcohol in New Zealand, less GST.

Ganesh Nana has argued that differences between our analysis and his come down to differences in world view and that we're too willing to assume rationality when it comes to harmful drinking. But BERL does more than just step outside of the rational addiction model: they drive gross benefits down to zero for all consumption, including all below-the-threshold consumption, the instant your consumption exceeds their epidemiological threshold.

Reasonable people can argue about the extent to which the rational addiction model holds. But a reasonable application of a non-rational addiction model wouldn't assume zero benefits as soon as the two pint per day threshold were crossed: instead, it would say that once some threshold were crossed, benefits would be exceeded slightly by costs and that the difference between the two would increase the farther from the threshold you went until asymptotically reaching zero at some point far out on the consumption axis.

Instead, BERL threw in a step function that I cannot believe is consistent with any plausible utility function: prior to the threshold, benefits at least equal costs; after the threshold, benefits don't just equal zero, they're sufficiently negative to precisely offset all of the gross benefits from any prior consumption. Now, I've conducted an unscientific poll of members of the Department of Economics here at Canterbury. Half of those providing a response say you can't build a utility function that has these characteristics. The other half say that believing any model consistent with those characteristics would itself be evidence of the irrationality of the model's author. The best utility function (in my view) of the ones we've come up with has a discontinuity at the harmful threshold that jumps down towards negative infinity for the epsilonth unit after the threshold but then jumps back up to zero for all subsequent units. Or, in discrete terms, benefits are positive and match costs up to the 40th gram of alcohol for men; the 41st gram has very large negative benefits that just offset all of the benefits from the prior 40 grams, and then consumption from the 42nd gram onwards provides zero benefits. Fortunately, I don't believe this model.

And Ganesh thinks we're the ones with the strange world view? I don't think so.

So, half of all alcohol consumed is consumed by harmful drinkers and so BERL counts half of all household expenditure on alcohol, net of GST, as pure waste.

There are two big problems with this, even leaving aside where they set the threshold.

First, BERL's headline cost figures includes excise taxes paid to the government. Yes, you read that correctly. While these taxes are certainly a private cost to the drinkers, they're also an external benefit to the government. But these tax revenues are never netted out from BERL's headline costs of harmful drinking, though they're discussed in a separate tabulation of costs to government (more on that later). The headline costs of harmful drinking, according to BERL, include half of all excise taxes paid to the government. And then Geoffrey Palmer finds fault with New Zealand's excise tax regime because excise taxes are so much less than BERL's measure of the social costs of harmful drinking which include half of all excise tax revenues.

It's a rigged game folks. Increase the excise tax, and the social costs of drinking increase by half of the amount of the increase in collected taxes. BERL had to have known this when Palmer was commenting on the social costs of alcohol and they, to the best of my knowledge, did nothing to correct things. I took an early swing at the report back in April, then chided BERL in discussions over at The Visible Hand blog for not protesting Palmer's use of its report. I hadn't at that point caught that tax revenues were in there as a cost, but BERL would have known. Adrian Slack, principal author of the report, commenting in a personal capacity, replied
First in response to “BERL should have made the LC very aware of…”. We didn’t prepare the report for their consumption. As with anything that enters the public domain, it is the consumer’s right to interpret it as they see fit and for them to take responsibility for their reaction to it, not for the author to manage their response to it.
It was about at this point that I decided to head in hammer and tongs on the BERL report. In contrast to BERL, I've been doing my best to prevent my numbers from going wild. There's such a thing as professional ethics.

So, the first adjustment we make is to cull excise tax revenues from this figure. We bring excise taxes back as their own separate line item later on, where it shows up as a private cost to drinkers but an external benefit to government.

Next, we think a little harder about the relevant counterfactual than BERL did, or maybe we're just bigger fans of consistency (see below). BERL is trying to add up the costs of being in a world where there's harmful drinking compared to a world where there's no harmful drinking, but they here employ a counterfactual that assumes zero drinking by harmful drinkers rather than moderate drinking by harmful drinkers. In short: they say that we should count all of the alcohol consumed by harmful drinkers, and we say they should count only the portion above the appropriate gender threshold. I tediously backed out the proportion of alcohol consumed beyond BERL's threshold as compared to the proportion below the threshold and counted only the above-threshold consumption as a cost. Netting out excise taxes reduced BERL's figure from $698.7 million to $440.7 million; netting out consumption below the threshold reduced the figure further to $215 million. And not an ounce of that reduction - about half a billion dollars - depended on my having a world view consisting of anything other than sound economics.

Here's another fun fact. When BERL separately tabulates the cost to government of getting rid of harmful drinking, they correctly try to net out only that portion of excise tax revenues paid on alcohol consumed above the harmful threshold, assuming that drinkers will scale back drinking just to the threshold. This minimizes the costs to government of getting rid of harmful drinking. When they tabulate their headline costs of drinking, they include all alcohol consumed by harmful drinkers, not just the portion above the threshold. This maximizes the social costs of harmful drinking. I suppose that's consistent with a particular world view. Just not mine.

Wednesday, June 17, 2009

Correcting the BERL report part 2: Lost output

In Part One, I provided an overview of our critique of the BERL report on the costs of alcohol. We now hit into a rather large cost item: lost output.

This is going to be a long one, so apologies. There's a lot packed into this section, and a lot that we found needed revision. The condensed version for those of little patience: in this single line item, BERL's estimate of social costs exceeds our measure of net external costs by more than $1,500,000,000.

BERL estimates the number of labour hours lost due to premature mortality, excess unemployment, absenteeism, reduced productivity, injuries, road crashes, crime, and imprisonment. They assume that forgone labour would have earned wages matching the average for the worker's age and gender. BERL calculates forgone earnings under those assumptions, then multiplies the total by 1.87: the ratio of GDP to earnings.

Our first adjustment looks at the multiplier. BERL's multiplier makes sense in a world where a missing worker cannot be replaced by another worker or by adjusting the production process to make it more capital intensive. In that case, all of a missing worker's output arguably disappears with the worker. But is that the world we live in? And, in particular, is it the world most likely to apply to workers most likely to be subject to severe problems with alcohol abuse? Rather than apply a multiplier that requires both full employment and that there is no substitutability between capital and labour, we look instead to empirical estimates of labour "value added" and apply a multiplier of 1.1 in place of BERL's 1.87: we reduce costs of lost labour output to 59% of BERL's initial values. We note that in one category, losses due to injury not elsewhere included, it appears that BERL has not applied its 1.87 multiplier. In that case, we inflate BERL's estimate by ten percent for consistency. Ganesh Nana argues that differences between BERL's findings and ours depend on differences in worldview; we're curious what worldview is consistent with the 1.87 multiplier, though Matt discusses his suspicions at section 5.1.3 of the report.

Second, we believe BERL has overestimated excess unemployment due to harmful alcohol use. BERL cites Rayner et al (1984) as showing excess unemployment due to alcoholism as being 10% and interprets this as indicating that alcoholics have an unemployment risk ten percentage points higher than average. We believe the more accurate interpretation of Rayner is that overall unemployment rates may be ten percent higher than they otherwise would be: in other words, the difference between an unemployment rate of 4% and 4.4% for the population as a whole. BERL argues that excess unemployment due to alcohol use affected more than 30,000 workers; total unemployment in 2004 was 92,000. Is it plausible that a third of the unemployed are hard core alcoholics? We don't think so. If our interpretation of Rayner is correct, then unemployment in 2004 was ten percent higher than it otherwise would have been: 9200 workers count as excess unemployed, not 30,000. We reduce BERL's listed costs on this item proportionately.

Third, we adjust BERL's estimate for losses associated with lost output from prisoners and home detainees. BERL uses a survey of prisoners, to which we do not have access, which asks prisoners to what extent alcohol use contributed to their current incarceration. Possible answers include "not at all", "a little", "some", "a lot", or "all". BERL then argues that, if there were no harmful alcohol use, all crimes listed where alcohol contributed at least "some" would disappear. This seems implausible. Of course, if there were no harmful use of alcohol, crime rates would drop. But surely not each and every crime where offenders were willing to say alcohol contributed at least somewhat to their offending. We here make a somewhat arbitrary adjustment, but one that we think makes more sense than BERL's estimate that one hundred percent of these crimes would stop. We say instead that only two-thirds of non drink-driving offences would be stopped if we could eliminate harmful drinking; for drink-driving, we make no adjustment. Crime costs overall then drop by 20%.

Next, we adjust lost output figures for underlying heterogeneity. All of BERL's wage figures depend on the assumption that, but for alcohol, hard core alcoholics and prisoners would have labour force characteristics identical to the rest of the population. The biggest adjustment here is in the crime category. Australian data suggests that the prison population is, unsurprisingly, fundamentally different from the overall population. Giles and Le (2007) find that, a month prior to incarceration, prisoners had labour force characteristics consistent with output levels less than half of those of the rest of the population: in particular, they suffer from much lower employment rates - 47% of rate for the general population. If those incarcerated have much lower employment rates than the rest of the population, we overestimate their forgone earnings if we assume them to have average labour force characteristics. We scale back BERL's estimate on prisoners' forgone labour accordingly. We believe that our number remains an overestimate of the costs of prisoners' forgone earnings: many prisoners work while in prison, and the value of this labour is nowhere counted. BERL says we do not need to worry about this as prisoners are not paid very much; however, we would not expect what is essentially slave labour to be paid anywhere near its marginal product. The value of prisoners' output could easily change the sign of this cost item.

We also scale back forgone earnings from non-incarcerated harmful drinkers. If it is the case that underlying personal characteristics correlate with both adverse labour market characteristics and with severe alcohol misuse, then we cannot assume that forgone labour hours would have been of value equal to the average for age and gender. There's very good evidence from the psychological literature of comorbidity between alcoholism and other mental disorders, with reasonable evidence that mental disorders are prior to alcoholism. We conservatively look only at the likely effects of comorbid depression because that is where we can find reasonable studies with both alcohol comorbidity and effects on employment status. Why does this matter? If harmful alcohol use disappeared, those currently using alcohol harmfully would not suddenly share average labour market characteristics: for many of them, alcoholism is a symptom of deeper psychological problems that themselves seriously adversely affect employment. We follow Pirkola (2005) and assume that twenty percent of harmful alcohol users have a comorbid depression, anxiety, or combined depression and anxiety disorder, and that those individuals would have median incomes 19% lower than average if employed and unemployment rates six times higher even in the absence of alcohol use. The adjustment makes little difference in the overall figures: about $55 million all told. But we thought it important to give more serious consideration to the counterfactual.

Next, BERL lists an offsetting benefit of premature mortality: those dying early consume fewer resources that then are available for use by others. This is, of course, purely a pecuniary externality: the benefits to others are matched by costs to the person suffering premature mortality. We adjust BERL's figure downward slightly to account for cohort heterogeneity as discussed above, then add an internal cost equal in magnitude but opposite in sign to the external benefit.

Finally, we split the corrected costs between those that are internal to the drinker and those that are truly external. As noted in part one, we have good reason to worry about external costs; policy measures aimed at reducing internal costs are far more contentious. We count as external costs the "value added" component of earnings (our 1.1 multiplier) and all earnings forgone by crime victims. Splitting the costs of forgone earnings by those killed in drink-driving incidents is a bit more difficult. If a drink-driver kills only himself in a single-vehicle accident, his lost future income is a cost to himself. If a drink-driver kills only an innocent pedestrian, that pedestrian's lost future income is an external cost. But we know of no New Zealand data showing the proportion of deaths from drink-driving that accrue to drink drivers and those accruing to parties entirely external to the vehicle. So, we instead turn to US data. The NHSTA says that 17% of those killed in drink-driving accidents are persons outside of the vehicle. We consequently apportion costs of drink-driving fatalities as being 17% external and 83% internal.

On this single line item, correction for incorrect multipliers, cohort heterogeneity, and inaccurate interpretation of excess unemployment reduces BERL's listed costs by a billion dollars: from $1,478.4 million to $416.6 million. If we then add back in consumption forgone as a cost to those not enjoying the consumption, total costs rise to $716.2 million. External costs: the costs that are relevant for policy, are -$126.7 million: in other words, an external benefit. For this line item, if we consider only externalities (as we ought to), we find a net benefit rather than a net cost. In short, the external costs of harmful alcohol use are exceeded by the pecuniary externality of consumption forgone.

If we worry about social costs - the costs imposed on others by harmful drinking - BERL overstates things on this single line item by $1.6 billion: the difference between their $1,478.4 million in costs and the more likely external benefits of $126.7 million.

Correcting the BERL report part 1: overview

I took the lead in Section Four of our fisking of the BERL report on the costs of alcohol and other drug use. Section four examines each cost item reported by BERL, adjusts it to correct for what we view as deficiencies in BERL's method, then apportions those costs between those borne privately by the drinker and those borne externally. In doing this, we were somewhat hampered by not having access to BERL's underlying workings; all of our underlying workings are available here. We open our report with an epigram from Mishan's classic on cost-benefit analysis:
'In view of the existing quantomania, one may be forgiven for asserting that there is more to be said for rough estimates of the precise concept than precise estimates of economically irrelevant concepts.'
Some of our calculations are necessarily a bit rough and can be improved upon; however, each one is our fair best approach given the data available to us. A somewhat rough estimate of the policy-relevant external costs we view as more useful than BERL's estimate of an economically irrelevant concept.

We considered only the costs that BERL attributes to alcohol alone. There's no particular reason that similar fisking couldn't apply to their costs of other drug use, or combined use of alcohol and other drugs, but we simply didn't have time to take on the whole thing before the Law Commission was due to report back with policy recommendations about alcohol use.

The biggest source of difference between our result and BERL's is that we focus on costs that are external to the drinker. Economists generally view the state as having a legitimate role in mitigating the external costs of individual behaviour. If I undertake an activity that imposes costs on you, I might well decide to do more of it than I would if I were bearing the costs. So, we say that these externalities have efficiency consequences: they distort behaviour. The government may well have an interest in preventing individuals from doing themselves harm even if there is no cost to anyone else; however, paternalistic policies of this sort really are best justified by arguments coming from outside of economics.

BERL argues that all consumption by men who drink more than two pints of beer per day (one pint for the ladies) is harmful and consequently has only costs. They add up these costs - including the costs of alcohol consumed - to get a very large figure. It's obvious that many who drink two or three pints of beer per day derive at least some enjoyment from their consumption.

If BERL had produced a cost-benefit analysis that weighed the benefits to drinkers, or if BERL had focused only on external costs, there would be much less distance between our result and theirs. But by bringing in privately-borne costs with no offsetting benefits, and deeming all such costs to be "social costs", BERL essentially has begged the question: they chose a method that could do nothing but produce a very large number. And so I'm reminded of the old joke with which I prefaced my earlier post.

In subsequent posts, I'll walk through exactly how we approached each cost item reported by BERL, in the order in which they're treated in our paper. On deck: the costs of lost output.

The price of everything and the value of nothing: final report on BERL's cost study

Update 18 June: For folks coming in from elsewhere, do note that I'm slowly blogging my way through our whole critique of the BERL report. Follow the BERL tag for all the latest. Original post follows below.

There's an old joke about economists.
A business executive interviewed three candidates for the position of quantitative consultant to his company. One was a mathematician, one a sociologist, and one an economist. He invited them one by one into his office, saying he wanted some insight into how they’d perform on the job and had a question for them: "What’s two plus two?" The mathematician answered, "Why, four, of course." The sociologist responded, "Well, it all depends. We have to look at the context of the question, its antecedents, the general view in the population as a whole of this sort of question, and many other things." The economist moved close to the executive and in a furtive voice said, "What do you want it to be?"
With that in mind:

MEDIA RELEASE
17 June 2009

FOR IMMEDIATE RELEASE

Reported costs of alcohol abuse "grossly exaggerated" according to economists

A widely publicised $135,000 government report on the cost of drug and alcohol abuse has been slammed by two economists, who say the report’s findings are grossly exaggerated.

Economists Eric Crampton and Matt Burgess have released a research paper which examines the report, by Wellington economics consultant Business and Economic Research Limited (BERL), after Law Commission President Sir Geoffrey Palmer cited its findings in support of proposed new regulations on alcohol.

“What we found shocked us. BERL exaggerated costs by 30 times using a bizarre methodology that you won’t find in any economics textbook,” Dr Crampton said.
The BERL report was commissioned in 2008 by the Ministry of Health and ACC, and put the annual social costs of alcohol at $4.79 billion. Crampton and Burgess said the net social costs instead amounted to $146 million – 30 times lower than that calculated in the report.

“BERL has virtually assumed its answer. The majority of the reported social costs rest on two very strange assumptions which BERL has asserted without any reason or evidence,” said Dr Crampton said.

“The report assumes that one in six New Zealand adults drinks because they are irrational; that is, they are incapable of deciding what is good for themselves. BERL further assumes that these individuals receive absolutely no enjoyment, social or economic benefit from any of their drinking,” Dr Crampton said.

“These assumptions allowed BERL to count as a cost to society everything from the cost of alcohol production to the effect of alcohol on unpaid housework. That’s bad economics.”

Among other serious flaws, Dr Crampton said the report’s external peer review was done by the authors of the report’s own methodology, important findings in academic literature that alcohol had health and economic benefits were ignored, BERL did not properly warn readers about the limitations of its methodology, and used language in the report that was frequently misleading.

The BERL study caught the economists’ attention when it was cited by the Law Commission as the basis for supporting proposed new taxes and regulations on alcohol.
“We’re doing this because we don’t want to see legislative decisions being misguided by bad research. In our view, the Law Commission should give no weight at all to the findings in the BERL report,” Dr Crampton said.

Dr Crampton stressed their review wasn’t an attack on the “very real” issues of alcohol and drug abuse. “These are deep problems, but rather than being taken seriously they have instead been trivialised by numbers that beg the question,” Dr Crampton said.
/ENDS

The review of BERL’s report is available for download here; supporting calculations available here. The BERL report is available here.

Eric Crampton is Senior Lecturer in Economics at the University of Canterbury. Matt Burgess is a Research Associate at the Institute for the Study of Competition and Regulation. The views expressed solely reflect those of the authors, and do not necessarily represent those of the institutions with which they are affiliated or their constituent members.

Tuesday, June 16, 2009

Auckland Supercity - Part Two

Rheema Vaithianathan, Auckland University economist, worries that the Auckland supercity will lead to job losses and in particular will hurt the suburbs.

I'm worried that the opposite will happen.

Let's turn it over to Wendell Cox, in interview with Winnipeg's Frontier Centre for Public Policy
FC: You have written eloquently about urban amalgamations – can you summarize your views on that subject?

WC: Virtually all urban amalgamations have been justified on the basis that we are going to obtain economies of scale and lower costs in the long run, and everything will be better because things will be better coordinated. I don’t see any evidence whatsoever that places that are amalgamated, whether we talk about Toronto or Montreal or Indianapolis or Miami, are better governed than places like Paris, for example, that has 1,300 local governments. Or Chicago that has about 200 local governments or more, depending upon the special districts you might include. The basic problem with amalgamation is that the last thing it does is reduce costs. What ends up happening is you need more bureaucracy. You have conflicting labour contracts of the previous organizations. The previous municipalities get merged in such a way that the worst provisions and the most expensive provisions become the controlling provisions for all of the labour contracts. Again. if you look at the real experience on the ground in the United States where we have marvelous data, you find that the larger municipalities tend to have higher costs per capita than medium-sized municipalities. The smallest municipalities also have high costs, but probably the optimal size for a municipality is somewhere in the 50-100,000 population range, which says that Winnipeg ought to be six cities – not one.

FC: You have written that some of the most successful cities are the ones with the most municipal government units. Why is local or neighbourhood control so crucial?

WC: It is crucial because we tend to treat people we know and walk by on the streets more reasonably than people we don’t know. It just so happens that we are much more responsible in how we treat our neighbours and our friends and our relatives than those we don’t know. That is just human nature. The closer we can have City Hall to the people who live there, the more responsible the public policies are going to be and the more in-tune the interests of the residents are going to be with public policies.
So instead of getting efficiencies, we get ratcheting up of expenditures to those of the worst districts.

Cox goes into more detail here and cites my old home town of Winnipeg as case in point:
In 1972, Winnipeg merged 13 smaller municipalities into one large entity called Unicity. These municipalities had previously co-operated on a number of common issues, like arterial roads and water projects, through a Metropolitan Corporation, but had
reserved to themselves a wide range of municipal functions. They competed with each other to attract development and residents, a fact that exerted pressure to keep municipal costs down. Evidence shows the merger removed that bias and municipal costs “leveled” up to the highest spending level, the one reported by the central, core city, with about half of the urban area’s population. Reduced accountability on spending brought higher property taxes, soaring debt levels and less responsive government units. These factors contributed to Winnipeg’s relative decline against other cities, falling from Canada’s third largest city in the late 1960s to the eighth largest today.

Critics suggest that amalgamation stamped the soul out of neighbourhood communities when it moved decision- making power and local service-delivery choices into the hands of distant, more unconnected, politicians who responded in the new structure to the tightly organized provider groups that dominated the new organization. One result was higher property taxes. Prior to a dramatic reorganization of city government under city manager Gail Stephens, city staffing and compensation levels peaked among the highest in Canada (see Manitoba has Larger Public Sector than Most, Frontier Backgrounder No. 3, December 2000, www.fcpp.org)

Did Unicity otherwise meet expectations? University of Western Ontario Professor Andrew Sancton, author of the book “Merger Mania: The Assault on Local Government (McGill University Press, 2000, p. 62), summarized Winnipeg’s Unicity amalgamation
project as follows: “What is the lesson of all this? It is that 30 years after Canada’s most dramatic and comprehensive municipal amalgamation – in which virtually all the residents of the Winnipeg city-region were included – the area now confronts the same problems as everyone else: most of the growth is occurring outside the
municipal boundaries and there is need for new mechanisms for regional co-operation. No one is recommending further amalgamations.”
BK Drinkwater comments more on the report. I share his generalized concern about multiplier effects: surely there then are offsetting divisor effects. But that's all beside the point if the spending cuts never actually happen.

Monday, June 15, 2009

The revolution is being tweeted

I've assiduously avoided joining FaceBook, Twitter, or any of these other newfangled social media services. I kinda have a LinkedIn page, but I've not touched it in months.

And now I find the only way to find out what's going on in Iran is to get a Twitter account.

So I join, and I see that Tehran University is under attack. There's no excuse not to get Twitter now. Go do it. Update 1:Photos from the dorms. Update 2: Photos of the revolution

Let's hope the Iranians are able to overthrow the Mullahs. I wish there were something we here could do to help.

mabs0 RT @persiankiwi: students being killed in tehran uni dorm in amirabad right now. this must stop, ahmadinejad must stop. #Iranelection
less than 10 seconds ago from web

WordMarvin RT @persiankiwi: have lost mobile contact in university dorm. cannot recoonect. cannot get info. #Iranelection
less than 10 seconds ago from twhirl

Robot117 RT @bashix: Tehran University dorm is heavily under attack... people need HELP.. spread the word #iranelection
less than 10 seconds ago from web

paris1909 Un-uniformed police with knives PIC http://i40.tinypic.com/o8sy78.jpg #iranelection RT @ghattavi
less than 10 seconds ago from web

jangogh RT @oxfordgirl tehran uni students calling for help - very bad attacks here #iranelection #iranelection s
less than 10 seconds ago from web

Sunday, June 14, 2009

Won't someone protect us from the wee fishes?

I think there was a footnote somewhere in Locke about how the point of having government wasn't really to have an impartial arbitrator who could resolve disputes and enforce judgments but rather to make sure that we'd not have fish-based pedicures.
Until Mr. Ho brought his skin-eating fish here from China last year, no salon in the U.S. had been publicly known to employ a live animal in the exfoliation of feet. The novelty factor was such that Mr. Ho became a minor celebrity. On "Good Morning America" in July, Diane Sawyer placed her feet in a tank supplied by Mr. Ho and compared the fish nibbles to "tiny little delicate kisses."

Since then, cosmetology regulators have taken a less flattering view, insisting fish pedicures are unsanitary. At least 14 states, including Texas and Florida, have outlawed them. Virginia doesn't see a problem. Ohio permitted fish pedicures after a review, and other states haven't yet made up their minds. The world of foot care, meanwhile, has been plunged into a piscine uproar. Salon owners who bought fish and tanks before the bans were imposed in their states are fuming.

The issue: cosmetology regulations generally mandate that tools need to be discarded or sanitized after each use. But epidermis-eating fish are too expensive to throw away. "And there's no way to sanitize them unless you bake them for 20 minutes at 350 degrees," says Lynda Elliott, an official with the New Hampshire Board of Barbering, Cosmetology and Esthetics. The board outlawed fish pedicures in November.
The New Hampshire Board of Barbering, Cosmetology and Esthetics?! The fish ban is currently front-page news on their website. The State Motto is curiously missing. Wonder why.

Sometimes, moral panics explain ridiculous regulations. Sometimes, collusion between a cartel of regulated firms and the regulatory agency explains ridiculous regulations. And sometimes we just have Vogons running things. On no account should you allow a member of the New Hampshire Board of Barbering, Cosmetology and Esthetics to read poetry to you.

HT: Book of Joe.

Saturday, June 13, 2009

Chutzpah

If a reality TV show sent you to a tropical island filled with gorgeous women (and men), you'd probably not be too happy about being voted off the island. But would it occur to you to sue for wrongful dismissal? It never would have occurred to me, but perhaps I'm insufficiently Gallic.
Reality television faces a bleak future in France after contestants who spent 12 days flirting with the opposite sex on a sun-drenched island won the right to be treated as salaried workers.

In a ground-breaking ruling, the supreme court in France awarded three contestants on the French version of the programme Temptation Island compensation of about €11,000 (£9,500) each. The judges ruled that the trio were entitled to full employment contracts — including overtime, holidays and even damages for wrongful dismissal upon elimination from the show.
...
The case was brought by Anthony Brocheton, Marie Adamiak and Arno Laize, who said that their participation in l’Ile de la Tentation amounted to a job in terms of French labour laws, which stipulate that no one can be made to work more than 35 hours a week. The programme involves scantily clad men and women testing the faithfulness of competing couples with massages, dances and beach walks on an island off Tulum on the Mexican coast.
...
The supreme court upheld the lower tribunal judgment, which said: “Tempting a person of the opposite sex requires concentration and attention.”

There's a reason economists make fun of French labour laws.

Friday, June 12, 2009

Assorted updates

  • I'd previously noted the sad case of Janet Moses, drowned by her family in a ritual exorcism. The jury verdicts are now in: one uncle and four aunts found guilty of manslaughter; three others acquitted. All acquitted for the similar (but not fatal) treatment accorded to a 14 year old girl in the same incident. The TV news reports howls of outrage from the public galleries; the audience seems to have thought all should have been acquitted. We'll see what the Court deems appropriate for sentence.

  • Another update on ticket scalping, from Slate:
    But even economists who think that tickets are badly mispriced can have problems with ticket scalping. In his Offsetting Behavior blog, economist Eric Crampton discusses another theory of scalping in a post that's probably the only essay in which you'll see an economist turn to an analysis by Trent Reznor of the Nine Inch Nails. Crampton argues that one of the reasons that scalping persists might be because venue operators find shady ways to share in the profits at the expense of fans and performers. Crampton notes that Reznor gives one very good piece of evidence that there's something shady going on here: Ticket sellers could end scalping tomorrow by just printing names on the tickets.
    Surely other economists have turned to Reznor before. No?

  • I'd previously argued against two Canterbury philosophers in defense of sweatshops; here's a nice argument from a U San Diego philosopher in favour of sweatshops.
    Abstract:
    This paper argues that a sweatshop worker's choice to accept the conditions of his or her employment is morally significant, both as an exercise of autonomy and as an expression of preference. This fact establishes a moral claim against interference in the conditions of sweatshop labor by third parties such as governments or consumer boycott groups. It should also lead us to doubt those who call for MNEs to voluntarily improve working conditions, at least when their arguments are based on the claim that workers have a moral right to such improvement. These conclusions are defended against three objections: 1) that sweatshop workers' consent to the conditions of their labor is not fully voluntary, 2) that sweatshops' offer of additional labor options is part of an overall package that actually harms workers, 3) that even if sweatshop labor benefits workers, it is nevertheless wrongfully exploitative.

Thursday, June 11, 2009

Cover of the Weekly Standard

This is likely the closest I'll ever come to being on the cover of anything. I'm apparently the one in the speedboat.
HT: Denis Dutton

Wednesday, June 10, 2009

Morning roundup

It's not easy being green

Art Carden recently released a paper basically applying the socialist calculation debate argument to environmental calculation. In a world without comprehensive Pigovean taxes on environmental externalities at their sources, it's well-neigh impossible for the green consumer to know whether he's helping or hurting the environment through his consumption decisions. It's the Mises argument in reverse. In the socialist calculation debate, Mises says socialism fails because we can't impute prices to capital goods without prices for consumer goods and consequently we can't rationally allocate capital across sectors. In the environmentalist calculation debate, we can't rationally allocate an environmental price to a consumer good without having environmental prices on capital goods.

In the fully Pigovean world, prices fully convey information about costs including environmental costs. Outside of that world, we probably still do best by looking only to prices as the best potential aggregation of knowable costs.

And so Patri Friedman today points us to a rather nice article on the fallacy of locally-grown produce.
Locally grown produce is rarely efficient. Apply a little mathematics to the problem, and you’ll find that the ugly alternative of giant suburban distribution centers accomplishes the same thing - fresh produce into stores on the same day it’s picked - but with much less fuel burned.

This even extends to local farmers’ markets like you may have in your town, where all the family farmers personally bring their produce to the market to sell. Imagine a map with the market in the center, and the round-trip routes driven by all ~20 vendors radiating out from the market, like the arms of a starfish. Applying our Traveling Salesman model to this map, it’s clear that the farmers’ market is the least efficient model possible, if you are measuring efficiency in terms of delivery miles driven and gallons of diesel burned. To properly restructure this model to be as efficient as its proponents believe it to be, you’d drive a single truck in a calculated route to visit each farm in the morning, sell all the goods in a single store, and then discard or donate the leftover food (why double the driving miles to return perishable goods to the farmers?).

Don’t get me wrong, I love farmers’ markets. We go to our local one sometimes and it’s a fun family event for us. We love the giant, wonderful tomatoes and strawberries that you can’t get at the supermarket. I’d hate to see the experience replaced by the efficient alternative I just described, but then, I understand that farmers’ markets are more of a premium boutique community experience than an efficient (or “green”) way to buy food. The real reasons to enjoy your farmers’ market have nothing to do with it being somehow magically environmentally friendly. It’s the opposite.

Too often, environmentalists are satisfied with the mere appearance and accoutrements of environmentalism, without regard for the underlying facts. Apply some mathematics and some economics, and you’ll find that a smaller environmental footprint is the natural result of improved efficiency.
To a first approximation, we do best simply by using existing price signals about relative scarcity and ignoring worries about food miles or other such considerations. Firms in private markets have every incentive to economize on costs. So long as external costs are positively correlated with internal costs - like how carbon emissions correlate with how much you spend on petrol - it's risky to second-guess prices.

I still frequent the farmers' markets in Christchurch (Lyttelton or Riccarton Bush on Saturdays, Riccarton Market on Sundays), but only because we tend to get better produce there than we do at the supermarket. Of course, if I were in Winnipeg, I'd be going to the rather nice market at the corner of Waverly and Bishop Grandin instead and would especially be trying out their new ice cream shoppe. Information contained in the price of airline tickets is sufficient to keep me shopping at Lyttelton, New Zealand instead -- the carbon costs of flying to Winnipeg are pretty second order considerations.

Tuesday, June 9, 2009

Afternoon roundup

Google and Antitrust

The Washington Post lays out the issues nicely.
But that raises the question: "Why bother?" There's no law against trouncing your business competitors. Ever since Judge Learned Hand's landmark decision in U.S. v. Aluminum Co. of America 64 years ago, the court has recognized that under certain circumstances a company may come to dominate its field through "superior skill, foresight, and industry."

It's hard to see Google as anything other than a model example of such a company.

Moreover, nobody's come up with a particularly good case that the company has been stifling other companies. ...

Still, Google has reason to dread the perception of even benign dominance. Just ask Gary Reback, an attorney for Carr & Ferrell who played a big role in pinning monopoly status to Microsoft in the 1990s. Even if U.S. antitrust law allows for justly earned monopolies, it's rare that a high-profile company ever gets to enjoy that status in peace.

As Reback puts it, the government's approach has traditionally been: "We won't punish you for being successful. But if you're a monopolist and you spit on the sidewalk, we'll break up your company."

Thus monopoly Google could expect a relentless stream of litigation. Historically, this has been a nightmare for the target companies, hemming in their management and constraining their business decisions. It was an antitrust problem that forced AT&T to license the transistor in 1956 at no cost. And as Reback notes in a recent book, "Free the Market!," advocating for more interventionist competition policies, it wasn't a government monopoly lawsuit that broke Standard Oil's power -- it was Texas regulators' decision to hound Standard Oil with litigation. With Standard unable to exploit major new oil discoveries in the state, new competitors such as Texaco arose.

Substitute tech fields for oil fields and you've got an approximation of Google's potential problem. Many routine parts of the company's growth, such as buying small companies to stake out a position in search-related fields, could potentially be construed as anticompetitive if Google is already deemed to have market dominance.

"I think they're going to have trouble with damn near any acquisition, including acquiring your local dry cleaner," Reback said.

How times change. Seven years ago, Don Boudreaux and I gave Google as a counterexample to claims of Microsoft lock-in. If the lock-in story about Microsoft dominance were true, then surely Microsoft also would dominate search: versions of Internet Explorer then in existence would redirect browsers to Microsoft Search in cases of mistyped URLs. Since most folks chose Google despite Microsoft's lock-in advantage, we might similarly view skeptically other claims of lock-in induced dominance. Now Google's the target, simply for having done search better than anyone else. And of course Google will have to redirect productive resources away from innovation and towards protecting itself from FTC, the EC, and others. Depressing.

Monday, June 8, 2009

Vote-buying deal of the day: Mattresses!

Latest reports from Tanzania indicate that both the government and the opposition bought voter cards in areas where they were likely to face greater opposition. The going currency? Mattresses. Trade in your voter card for a new mattress. Reports the Guardian on Sunday:
While CCM was quick to accuse opposition party Chadema of buying voter cards, inside information shows that the ruling party also participated in the dirty politics especially in the areas where it faced stiff opposition.

“I gave them my card in exchange for the new mattress on the condition that after the voting they would return my ID card,” one voter told The Guardian on Sunday. “I didn’t establish whether they were agents for the ruling party or opposition.”

Eyewitnesses from Geita told The Guardian on Sunday that the night before the by-election; hundreds of mattresses were being distributed to voters in exchange for voter cards.

One mattress dealer from Geita town admitted that he had sold more mattresses during the campaign period than he had sold in all of 2008, but he said he couldn’t be sure he had been selling his stock to party strategists.

“It might be true because suddenly the demand for mattresses surged dramatically during the months of April and May,” said the salesman, who spoke to The Guardian on Sunday on condition of anonymity. “I can assure you that, what I sold during that period was more than my annual sells for last year.”

Buying voter cards is not a new trend in Tanzanian elections, but the tactic has been spreading rapidly as of late, and has apparently gone unnoticed by election officials.
While I'd be more than happy to stay home from voting in exchange for a mattress or even a ham sandwich (conditional on quality of course), careful observers would know that this would be pure rent: payment isn't required to induce the desired behaviour. Such ever is the case for the inframarginal non-voter.

Why mattresses though? Isn't cash both less obvious and more fungible?

HT: Jeet Sheth, faithful graduate of my Public Choice class.

On the sensitivity of rankings when N is small

It's a bit of a running joke how sensitive economics department rankings can be to the location of the author of the ranking. David Anderson and John Tressler have found a different kind of sensitivity in rankings of New Zealand economics departments: how you treat the contributions of regular departmental visitors. This matters in small countries. Peter Phillips is a regular visitor at Auckland. Depending on the weighting scheme used for ranking the various journals, Peter Phillips personally accounts for between 9.6% and 56.8% of the total output of quality-adjusted pages produced in New Zealand economics departments (139 economists in total). If Phillips is not included in per capita output rankings, Auckland counts as 4th overall. If he counts at 10%, Auckland rises to 3rd. At 40%, Auckland rises to 2nd. If all of Phillips' contributions count for Auckland, Auckland moves up to first.

Long story short: it's not great to be graded on a curve that includes Phillips. I'll avoid other Phillips curve puns as William Phillips != Peter Phillips.

Canterbury comes in second in the per-capita rankings, with Otago in the lead. But we've made some very nice hires since the survey.

Friday, June 5, 2009

Afternoon roundup

  • Radley Balko continues to provide reasons for us to stay angry
    The blood-boiling story of the day comes from San Francisco:
    He sleeps under a bridge, washes in a public bathroom and was panhandling for booze money 11 months ago, but now Larry Moore is the best-dressed shoeshine man in the city. When he gets up from his cardboard mattress, he puts on a coat and tie. It’s a reminder of how he has turned things around.

    In fact, until last week it looked like Moore was going to have saved enough money to rent a room and get off the street for the first time in six years. But then, in a breathtakingly clueless move, an official for the Department of Public Works told Moore that he has to fork over the money he saved for his first month’s rent to purchase a $491 sidewalk vendor permit.
    It just gets worse from there.
  • Cory Doctorow continues to be the best thing happening over at BoingBoing, today pointing us to this obscenity, which he'd previously considered for a sci fi story before finding out it's already fact:
    Richard W. Fields says he has come up with a win-win financial strategy for the downturn. He is investing in lawsuits.

    Not in trip-and-fall cases, mind you, but in disputes that are far larger, more costly and potentially more lucrative, often pitting major corporations against each other.

    Mr. Fields is chief executive of Juridica Capital Management. which runs a fund that invests in one side of a lawsuit in exchange for a share of any winnings.

    “It’s always a good time to invest in litigation,” Mr. Fields said, though he added that the weak economy helped. “When the recession started to bite, the phones started ringing off the hook. Last year, we looked at 122 cases and we made 17 investments.” A small but growing number of investors are exploring this idea, helping companies avoid some of the risks and costs of litigation in exchange for part of any money paid out when the case is settled or resolved by a court. After all, it can be costly to hire lawyers, who may charge close to $1,000 an hour at the most elite firms.
    In a sane tort system, this would be efficiency-augmenting. But we're not in that world.
  • Brad Taylor continues to remind us of the dangers posed by landlubbers' meddlesome preferences for any proposed Seasteads.

Wednesday, June 3, 2009

Offsetting behaviour: Rush edition

Did a fiction article in Road and Track (1973) predict the Peltzman Effect before Peltzman?

Denis at ALD today points us to a brilliant piece by PJ O'Rourke.
America’s romantic foolishness with cars is finished, however, or nearly so. In the far boondocks a few good old boys haven’t got the memo and still tear up the back roads. Doubtless the Obama administration’s Department of Transportation is even now calculating a way to tap federal stimulus funds for mandatory OnStar installations to locate and subdue these reprobates.

Among certain youths—often first-generation Americans—there remains a vestigial fondness for Chevelle low-riders or Honda “tuners.” The pointy-headed busybodies have yet to enfold these youngsters in the iron-clad conformity of cultural diversity’s embrace. Soon the kids will be expressing their creative energy in a more constructive way, planting bok choy in community gardens and decorating homeless shelters with murals of Che.

I myself have something old-school under a tarp in the basement garage. I bet when my will has been probated, some child of mine will yank the dust cover and use the proceeds of the eBay sale to buy a mountain bike. Four things greater than all things are, and I’m pretty sure one of them isn’t bicycles. There are those of us who have had the good fortune to meet with strength and beauty, with majestic force in which we were willing to trust our lives. Then a day comes, that strength and beauty fails, and a man does what a man has to do. I’m going downstairs to put a bullet in a V-8.

O'Rourke nails it exactly. Regulation has forced the car to become utilitarian; Japan does utilitarian better than does Detroit. Read the whole thing.

The O'Rourke article, of course, drew to mind Rush's (to my mind) best song: Red Barchetta. I hadn't known that the song was based on an old fiction article from Road & Track in 1973. Wikipedia informs me:
The song was inspired by the futuristic short story "A Nice Morning Drive," written by Richard Foster and published in the November, 1973 issue of Road and Track magazine. The story describes a similar future in which increasingly-stringent safety regulations have forced cars to evolve into massive "Modern Safety Vehicles" (MSVs), capable of withstanding a 50-mile-per-hour impact without injury to the driver. Consequently, drivers of MSVs have become less safety-conscious and more aggressive, and "bouncing" (intentionally ramming) the older, smaller cars is a common sport among some.

Note the year: 1973. Peltzman's seminal article, The Effects of Automobile Safety Regulation, came out in the JPE in 1975. I wonder if Peltzman read Road and Track. The Road and Track article, "A nice morning drive", outlines the argument perfectly:
Despite the extent of the safety program, it was essentially a good idea. But unforeseen complications had arisen. People became accustomed to cars which went undamaged in 10-mph collisions. They gave even less thought than before to the possibility of being injured in a crash. As a result, they tended to worry less about clearances and rights-of-way, so that the accident rate went up a steady six percent every year. But the damages and injuries actually decreased, so the government was happy, the insurance industry was happy and most of the car owners were happy. Most of the car owners - the owners of the non-MSV cars - were kept busy dodging the less careful MSV drivers, and the result of this mismatch left very few of the older cars in existence. If they weren't crushed between two 6000-pound sleds on the highway they were quietly priced into the junkyard by the insurance peddlers. And worst of all, they became targets . . .

I'd always thought the gleaming alloy aircar in Red Barchetta was a police car trying to chase down a forbidden gas-powered car; Foster's article (above) suggests rather a post-regulation griefer car. I prefer the former; it's less depressing. In any case, Foster is picking up the basic Peltzman mechanism. More accidents as folks take less care, fewer deaths per accident, but external costs for folks outside of the safer vehicles. Should we really call it the Foster Effect?

Some days, I really miss my old 350-4bbl '69 Skylark Custom. It waits for me in Manitoba. Sigh.

Ignorance and current events

Pew recently released a report on American public knowledge about current events. Respondents were asked some questions about the current state of the economy and about current political matters. You can try the survey here and rate yourself against the public at large. Summary results, without spoilers, below: I missed the one asking about number of troops killed in Iraq, but my answer was adjacent to the correct one.



Pew notes in its report that Republicans are more knowledgeable than Democrats, and that most of this advantage lies in greater knowledge of economic matters, but that controlling for income, age and education wipes out the party effect. They also find that men know a lot more about both politics and economics, with greater gaps in economic knowledge. My work in New Zealand finds that left-wing political ideology correlates with knowing more about politics but less about economics, controlling for all kinds of personal demographic characteristics; men know more about both, with bigger gaps in economic knowledge than in political knowledge.

Always interesting to find results that are consistent across countries and methodologies.

Apologies for the lack of posting of late: I've been rather busy doing up a more formal breakdown of the BERL report on the costs of alcohol use. It's looking like net external costs are about 10% of BERL's cost figure. More on this in a few days.