Friday, April 30, 2010

Tobacco tax and the poor [updated]

Let's assume the SmokeFree Coalition's report on the effects of a tax increase are correct: 39,000 Decile 1 households paying $348 more per year.

Let's assume that every Decile 1 household earns at the very top of the Decile 1 income band: $20,100.

If GST is 12.5%, and that household spends all of its income, it pays $2512.50 in GST.
If GST rises to 15%, it pays $3015.

The proposed GST hike would have a household at the top of the Decile 1 band paying about $500 more in tax. National has proposed fully compensating poor households for the tax hike so they are no worse off. It is nevertheless strongly opposed as being the worst thing ever for the poor.

The enacted tobacoo tax hike will cost the average smoking Decile 1 household well over $350 after the second 10% hike -- the "well over" is because tax on loose leaf tobacco will rise by much more. None of this increase will be compensated for poor households. It is nevertheless strongly endorsed as being the best thing ever for the poor. Quitting households will be better off in financial terms, but there will be fewer of them than those that continue smoking.


Again, this is a tax on "not me", and I generally support taxes on "not me" by virtue of their being paid by "not me". Like a high GST that hits tourists as compared to an income tax that doesn't. But this does seem a tad regressive, even for my liking.

Update: I was wrong: The Standard (Labour Party blog) complains that the poor won't be compensated for the tax hike, but only to the extent that beneficiaries won't be compensated as they won't see a CPI adjustment taking into account the tobacco increase. Shame Labour voted for the tax hike then, ain't it?

Smoking costs

I noted earlier this week my prior piece reviewing the cost report produced by the Smoke Free Coalition. It's probably worth reproducing a fair bit of it here. That report found $1.7 billion in "social costs" of smoking; I'm guessing that an inflation adjustment of those 2005 figures are where the current $1.9 billion is coming from. There's a big difference between those "social costs" and actual fiscal costs to the public health system. Let's review:
Parts of the report are sound. If the goal is to stop people from smoking, increasing tobacco taxes are an effective means to that end. For now, let’s take the report’s desiridata as given and consider whether a package of increased cigarette taxes, coupled with spending on anti-smoking initiatives, is an effective way of improving the lot of current smokers, and especially that of current poor smokers.

The report notes that such a policy would make current poor smokers who quit better off while making worse off those who continue to smoke. If the goal is to reduce the amount of smoking while minimising the harm done to low-income people who continue to smoke, directing any additional cigarette taxes raised to reductions in the income tax rate facing low income earners would seem a more efficient means to that end than the proposed tax-and-programmes package. As cigarette taxes are highly regressive and disproportionately hurt poor people, poor smokers who continue smoking would most likely prefer to get some of the tax increase back via reduced income taxes rather than have it fund further browbeating about their consumption decisions.

The authors estimate that some 39,000 non-quitting decile 1 households would spend an extra NZ$348 per year with a 20% rise in prices and that 37,000 non-quitting decile 1 households would spend an extra $928 per year with a 50% rise. These are not insignificant figures for low-decile households.
So, according to the anti-tobacco folks, a 20% rise in prices would see 39,000 of the poorest households paying an extra $348 per year. Recall, though, that we're seeing much more than a 20% rise: the poorest households would be most likely purchasing the formerly lowest-taxed loose leaf tobacco which is seeing a much larger tax increase. Ballpark perhaps then an extra $450 per year for slightly fewer non-quitting poor households?
The biggest problems in the report are in the cost-benefit analysis. In my prior editorial, I emphasised the importance of noting the benefits of smoking as experienced by smokers. I do not smoke but I have it on good authority from smokers that they enjoy smoking. A supporter of the report, in response to my prior editorial, argued3 that I ought to discuss the benefits of smoking with a cancer patient. That one may suffer adverse health consequences from smoking does not mean that the smoker didn’t enjoy smoking. It’s perhaps reasonable to argue that smokers might be myopic and weigh too-heavily current pleasures against future pains, but we can’t assume away those pleasures. We have to have some way of measuring them.

The report makes some accounting for the benefits enjoyed by smokers, but, following Easton4 and Collins and Lapsley,5 subject to massive discounting. Collins and Lapsley deem those smoking more than 10 cigarettes per day to be addicted and, based on Australian figures provided in a 1989 study, tally 89% of tobacco to be consumed by addicts. They use this estimate to add up the costs of addictive consumption: the value of real resources used to produce tobacco destined for addictive use. Easton then adds that those in the addictive categories enjoy no utility from smoking; he counts 11% of cigarette expenditures in New Zealand as the benefits of smoking to smokers.

There are more than a few problems with this approach. First, total spending on a product necessarily comprises a lower bound estimate of the gross utility enjoyed by consumers. The standard economic approach is to estimate consumer surplus—that is to say, the utility one receives from consumption over and above the price one pays for the good consumed - based on the elasticity of demand and total purchases. The report estimates demand elasticity at -0.45, which means that a 1% increase in the price of cigarettes is associated with a 0.45% drop in consumption.

If per capita consumption is 1000 cigarettes with 25% of the population being smokers, we have average consumption among smokers being 4000 cigarettes per year. At a price of $0.21 per cigarette and assuming linear demand functions, consumer surplus then is about $933 per smoker: $1773 in total enjoyment less $840 spent on cigarettes. This seems to me to be a lower bound estimate of consumer surplus as I would expect demand to become more inelastic with price increases: the demand curve would then follow a hyperbola lying above the linear curve here estimated, with a correspondingly larger area beneath it.

If we have 750,000 smokers in New Zealand, consumer surplus from smoking then totals about $700 million, again as a lower bound estimate. This sort of measure of consumer surplus is far more consistent with the literature estimating the benefits of smoking.6–8
The extra numbers are footnotes; hit the link to get the original with cited sources. So, while the SFC report counts 11% of the total amount spent on cigarettes as the gross benefit to smokers of smoking - smokers almost literally then burning money - a more standard measure of (net) consumer surplus would ballpark benefits around $700 million.
After massively and inappropriately discounting the benefits of smoking, the report goes on to inflate the costs. The worst error here is including as a cost of smoking the real resources that go into tobacco production. If the report used a gross measure of consumer surplus, such an accounting would be fine.

Let’s take a simple example. Suppose that it costs $1 to produce an apple and you derive $1.50 in enjoyment from eating the apple. You pay $1 for the apple. We can then say that you receive $0.50 in net surplus or $1.50 in gross surplus. If we do a total accounting of the costs and benefits of apple eating and wish to include the $1 in apple production activities as a cost, we’d better use the gross measure of consumer surplus; it would be ridiculous to conclude that we’re worse off for the apple having been grown and eaten based on comparing a $0.50 net benefit to the consumer and a $1 cost of production.

In the case of cigarettes, consumers enjoy roughly $700 million in enjoyment from smoking over and above the $1.6 billion they spend on cigarettes. If we include $650 million in tobacco production costs on the cost side of the ledger, we have to use the gross measure of surplus on the benefits side: about $2.3 billion. You simply cannot honestly have a net measure on the benefit side and then double-count by including the resource cost on the cost side. In fairness to the authors, they seem here to have been led astray by Easton4 who uses similar method.

Similarly, we cannot count the health care costs on the cost side if we do not simultaneously include the tax revenues collected on the benefits side. While the tax revenues are a transfer and the health costs a real resource cost, the taxes were imposed precisely to offset those health costs. Indeed, tobacco taxes collected, at $980 million, dwarf health care expenditures of $350 million. As the report notes,
“it does seem reasonably apparent that the tax contribution of approximately $1 billion annually by smokers exceeds substantially the external costs of smoking which fall on non-smokers. If savings on pension costs from premature mortality were added as well the net fiscal contribution of smokers, to the fiscal gain of non-smokers, would be further increased.” (Vol 1., p. 46)
The remaining costs fall almost entirely on the smokers themselves. But, smokers already have weighed these costs against the benefits of smoking: that they smoke is evidence that they find the benefits to outweigh those costs. Mortality, morbidity, loss of production from each of those causes, smoking-induced fires—all of these are costs borne by the smoker. Again, if we wish to include these on the cost side, we’d need to weigh them against a more comprehensive measure of the gross benefits. Such a measure of gross benefits would be rather in excess of the $2.3 billion I highlighted above.

In sum, the cost-benefit analysis presented is fundamentally unsound: its methods seem to have been chosen with the aim of maximising the monetised costs of tobacco use and minimising the monetised value of the utility derived by smokers from tobacco use. And why? The report explicitly states that the best case for increased tobacco taxes is that it reduces tobacco use and improves the health of those quitting (Vol 1., p. 46); it then argues that tax increases ought to be presented and justified as a public health measure (Vol 1., p. 76) rather than as a way of internalising externalities, recovering costs on the health system, or because of the prior cost-benefit analysis.

Why distort the numbers if the numbers aren’t the basis for the policy recommendation? All of the cost-benefit analysis could be excised from the report and replaced with the simple and honest, albeit contestable, assertion that the authors know better what’s good for smokers than do the smokers themselves.
The anti-tobacco lobby commissioned a report showing that the costs of tobacco smoking to the health care system are $350 million. Collected excise tax revenues are more than twice that. So a bunch of other costs borne by the smoker himself get added on to make it look like smokers are costing "society" a pile of money, which gives us an excuse to punish people for a habit we don't like.

Folks using the bigger billion-plus number on "social costs" either are confused about the difference between the "social cost" figure and the health care costs, or they're trying to confuse others.

Thursday, April 29, 2010

Sports and happiness

The economic benefits of hosting major sporting events are overblown at best. Today's BPS Research Digest suggests another motive: consumption benefits. They summarize work from the latest J Economic Psychology:
Kavestsos and Syzmanski looked for any changes in average life satisfaction scores in surveys that took place in the Autumn following the Olympics, Football World Cup or European Cup. Specifically, they wanted to know if a country doing better than expected in a competition had any benefial effect on average life satisfaction and/or whether hosting a competition had any benefits (the data available meant the latter question was restricted to the hosting of football events).

There was very little evidence that performing better than expected at a sports event had any positive benefit for the average life satisfaction scores of a country's citizens. The data moved in the right direction but with one exception the effects were not statistically significant. By contrast, there was strong evidence that hosting a major international football event boosted the life satisfaction of a host nation's citizens. Good news for South Africa.

Just how large was the life satisfaction increase for a typical citizen in a host nation? Kavetsos and Syzmanski said it was pretty big: three times the size of the happiness boost associated with gaining a higher education; one and half times the happiness boost associated with getting married; and nearly large enough to offset the misery triggered by divorce.

Is there a catch? Unfortunately, yes. By one year after the event, the benefits had gone, so the effects on people's happiness were extremely short-lived (the effects of marriage on happiness, by contrast, are long-lasting). There was also no evidence of a host country's happiness being boosted in anticipation of hosting an event.

'Most politicians calculate that hosting events can only enhance their political standing,' Kavetsos and Syzmanski said. 'This makes sense if the benefits of hosting are not derived through economic gains [which the research says don't exist], but through the feelgood factor, specifically associated with being the host.'
Consumption and fun do matter. I get disutility from these things but know that preferences vary. I just wish that these events would be sold as "hey, let's spend a pile of money and have a really big party" rather than on the basis of dodgy economic impact analyses that dress up consumption spending as investment.

Fun counts too

A movement I heartily endorse:
The drinking age should not be raised because getting drunk is fun and 18 and 19-year-olds are not the only problem drinkers, a spokeswoman for the Keep it 18 campaign says.

The reaction follows the release yesterday of the 500-page report by the Law Commission into reducing the harm caused by alcohol. The report made a number of recommendations, including raising the purchase age of alcohol to 20-years.

The Government was considering the report and its recommendations before saying what it would agree to.

Keep it 18 spokeswoman Jenna Raeburn, 22, said today it was a contradiction that 18 and 19-year-olds could work in a bar, vote, get married or become a prostitute and politicians were considering taking away their right to drink alcohol.

There were also benefits of drinking, which were not mentioned in the Law Commission report, she said.

"The fact that people like to drink speaks for itself.

"Going out and drinking, and even going out and getting drunk, can be a lot of fun."

Ms Raeburn said raising the alcohol purchase age would punish the majority for the actions of a few problem drinkers.
Their facebook page is here; were I on facebook, I'd sign on.

Roger Douglas's speech in Parliament on tobacco also was rather nice.

More on Ramsey Taxation

As Eric has noted, the Treasury implicitly invoked the idea of optimal Ramsey taxation in its letter to the New Zealand Law Commission, commenting on the Marsden Jacob report. The key paragraph in the letter is the following.

Treasury recognises the need to reduce taxes on capital and labour and supports funding these reductions through increases in taxes least likely to reduce welfare. Welfare losses from excises taxes on alcohol are likely to be lower than for many other forms of tax.

Now the idea of increasing taxes that produce lower welfare losses could be invoking either the idea of optimal Ramsey taxes (basing tax rates on elasticities of demand) or Pigouvian taxes (taxing goods that produce negative consumption externalities). The Treasury go on to note that:

More specifically, the report relies on recycling all revenue raised from increased excise taxes directly to taxpayers via a rebate or a reduction in
other taxes. By doing so, the report concludes that welfare can be enhanced despite conservative consumer sovereignty assumptions. This revenue
constraint needs to be clearly conveyed when
any policy recommendations to increase the excise rate are made. In particular, using any increased excise revenues as “tied taxes” to fund the costs to Government of alcohol consumption would violate this constraint.

Now if higher alcohol taxes is motivated by Pigouvian considerations, it is not necessary for the income to be rebated to achieve welfare gains (although doing so can make the gains higher), so the Treasury comment must be invoking Ramsey taxation.

As I noted here, the principles of Ramsey taxation are often misunderstood. The Ramsey result is also called the the “inverse elasticity” rule, which is sometimes taken to mean that higher taxes should be placed on goods whose demand is relatively inelastic. This is not strictly true for two reasons. First, the elasticity that is referred to is the elasticity of the Hicksian demands. That is, it refers to the effect of changes in price if at the same time income is changed to maintain spending power. Second, the elasticities referred to are the elasticities of goods with respect to all prices, not just the price of the particular good. The inverse elasticity rule is that the set of all taxes should lead to an equal percentage reduction in the Hicksian demands for all goods.

To take the second caveat first. Two goods might both have highly elastic demand because each is a close substitute for the other. But that doesn’t automatically imply that both should have a low tax rate. If both are taxed at the same rate, then the tax system will not induce substitutions between those two goods. In essence, the Ramsey rule is that uniform commodity taxation (in addition to any Pigouvian taxes for goods that generate consumption externalities) is optimal if all goods can be taxed. If there is one good, leisure, that cannot be taxed, then the highest tax rates should go on those goods that are most complementary with leisure. Furthermore, if most goods are generally complementary to leisure rather than substitutes for it, then optimal taxation is going to be approximately uniform anyway.

So, is alcohol a good that is more complementary with leisure than other goods? I would be interested to know how Treasury reasoned that it is. I am dubious about the ability of econometric models to answer that question, as it requires estimating a full general-equilibrium set of own-price, cross-price and income elasticities for all goods, with the income elasticities calculated from changes in incomes for the same person rather than cross-section differences across individuals. (This caveat is because income variation across individuals is highly correlated with individual characterstics including preferences.)

Given the data difficulties, I prefer to reason from introspective intuition. Consider the following thought experiment: Imagine there is a general cut in income taxes, thus increasing after-tax wages, but that at the same time, everyone has to pay a lump-sum tax to the government that will leave them with the same purchasing power if they don't change the amount they work. Would this lead to people chosing to work more? If your answer is no (either because of preferences or because work opportunities are lumpy and the opportunity to work an extra hour or two at the margin doesn’t exist), then you are arguing that the optimal Ramsey tax system is uniform. If you believe that people would on average choose to work more and thus have more income, there is a role for differential commodity taxation. The question then is which goods would see the greatest proportionate rise in expenditure. These are the goods that are the least complementary to leisure and are therefore the ones for which the optimal Ramsey taxation is the least. My intuition is that alcohol along with consumer durables would be in this category, with the highest Ramsey tax rates needing to go on goods consumed by the leisure classes, such as gym membership, cafĂ© expenditure. etc. I certainly find it difficult to believe that alcohol would be a good whose consumption increase would be unusually low.

Tobacco urgency

I'm a bit confused.

Last night, Parliament sat under extreme urgency to pass a tobacco excise hike. The reason for extreme urgency is to stop people from stockpiling in advance of the tax hike. I can understand that.

But the legislation also scheduled a 10% hike next year.

If we needed extreme urgency to stop folks stockpiling cigarettes this year, why are we telling them now about next year's increase? Am I missing something?

Wednesday, April 28, 2010

Ummm...didn't I just say....

...that the collected tobacco excise taxes, even by the admission of the healthists, are much much greater than the costs on the health care system from smoking?

Didn't I just post that? Ah, yes. And this isn't new news: it's been true for years.

But, their deal with the Maori Party will have excise taxes rise 10% this year and 10% next year, and bigger increases on loose-leaf tobacco to bring it into line with rolled tobacco.

Think ACT will ever get a 10% or 20% reduction in the tax on anything as a part of its coalition deal? Hmmm.

You know who I really feel bad for? The folks who voted National thinking they'd get less nanny-state as consequence. And, worse, the folks who campaigned for them on that basis. Think harder about it next time, guys.

Marsden Jacob review - continued

In the last post, I noted some problems with the Marsden Jacob review. Most annoyingly, from a personal perspective, they strongly critique the Crampton and Burgess work on two points that severely mischaracterise our work. Contra Marsden:
  • In actuality, none of our results depend on the cardioprotective effects of alcohol for serious drinkers;
  • their critique of our narrow focus highlights a small robustness check at the end of our work rather than the vast bulk of what we actually did - they take the robustness check as constituting the entire method rather than cursory treatment of an alternate method.
They then argue at paragraph 58 that we take a flawed conception of cost internalisation. Because some costs of drinkers' behaviour is borne by others, including friends, families and government, drinkers drink more than they would were they to bear the full costs. We did note the costs to government as a cost of harmful drinking, including costs to the public health system and policing costs. Since they seem to believe that our method discounted all fiscal externalities, presumably they missed that part.

On cost shifting to family and friends, I can't help but wonder whether their argument proves too much: all kinds of consumption decisions we make have effects on friends and family. I may spend too many late nights reading shonky alcohol policy reports and be grumbly the next day; if I had to bear all of the costs thereby imposed on my family, I might do less of that. But, of course, families have ways of internalising those effects: my wife rightly ensures as much. Marsden Jacob here are effectively launching a full assault on notions of consumer sovereignty: if we can't rely on intrafamily mechanisms for solving these problems, then there exists no consumption decision that isn't subject to their critique. This may well be a good argument to have in an economics journal as a critique of existing orthodoxy, but it has no place in a commissioned report that ought to be providing a mainstream economic approach.

This isn't the first time though that Marsden Jacob use their commissioned policy report to challenge the standing orthodoxy though. In their critique of the positive health effects of drinking, they give full weight to a few critiques of the "previously near unanimous orthodoxy" rather than to that orthodoxy. Again, sound technique would have had them accepting the best consensus of the literature in which they are not expert rather than the overblown critiques of a few anti-alcohol folks.

Let's now move on to the rest of the report.

They argue that the deadweight costs of alcohol taxation are 3% or less for a 50% increase in alcohol taxes. Since alcohol demand is fairly inelastic, the Harberger triangle is relatively small. They then invoke the inverse-elasticity rule. But as Seamus noted here and I noted here, the inverse-elasticity rule isn't as simple as the undergraduate version makes out. If supply is not perfectly elastic, then we need also consider reductions in producer surplus, not just consumer surplus. If there are cross-price effects between taxed goods - if inelastically demanded alcohol is a strong complement to elastically demanded restaurant meals, for example, then Ramsey doesn't reduce to inverse-elasticity. And, if taxed goods and leisure have cross-price effects, then we get the Corlett and Hague result. Higher alcohol excise tax doesn't flow automatically from Ramsey considerations. Neither does it necessarily flow from the inverse-elasticity rule: the McLeod report having argued that existing (lower) levels of excise taxation could not be justified on Ramsey grounds.

I'll leave it to Seamus to come in later with more comprehensive discussion of Ramsey taxation.

But, whatever efficiency claims - debatable though they may be - might be made for moving increasing alcohol taxes and reducing marginal income tax rates disappear when those alcohol tax revenues are instead earmarked for anti-alcohol advocacy groups like ALAC. It's consequently disingenuous at best, or blindingly stupid at worst, for Palmer to cite Marsden Jacob's numbers on efficiency gains while simultaneously advocating that some of the raised tax revenue be earmarked for anti-alcohol programmes. To re-iterate: the efficiency claims rely entirely on the consumer surplus that's turned into tax revenue either being rebated to consumers directly or being used to offset other taxes that impose higher deadweight costs. Palmer simply can't pair the efficiency claims with a call for some of those revenues to be earmarked.

Marsden Jacob is entirely correct however that proper Pigovean analysis seeks to equate the private marginal cost of consumption with the social marginal cost of consumption rather than equating total tax revenue with total external cost. To my mind, if total tax revenue roughly approximates total external cost, then things probably aren't far out of whack as a first cut. Their approach in simulation work from page 34 onwards requires that all excise taxes raised are rebated to consumers. Ideally, all collected alcohol tax revenues would be lump-sum rebated to all drinkers. Such a scheme could have pretty desirable characteristics: it effectively would induce progressivity into the alcohol tax schedule. Heavy drinkers would pay net taxes; moderate drinkers would receive net subsidy. The linearity of existing taxes is a pretty big problem: moderate drinkers are overtaxed while heavy drinkers are undertaxed relative to external cost imposed. The tax plus lump sum rebate to every drinker mechanism, noted at paragraph 64, is a pretty neat idea. I'd go so far as to say I could be convinced to endorse it if I believed that all raised revenue would be so rebated and wouldn't just wind up being earmarked for anti-alcohol advocacy. Of course, I'd only endorse it to the extent that the taxes reflected actual external harms rather than things like lost wages that are largely internalised: they're already part of private marginal cost, so putting a Pigovean tax on that part is double counting.

If on the other hand raised revenues just go into the general pool - or, worse, to projects like anti-alcohol advocacy that many drinkers find positively offensive - the MJ results hold only if the consumer derives the same enjoyment from a dollar's worth of tax-paying as he does from a dollar's worth of alcohol. That seems unlikely.

I continue to confess unfamiliarity with the Sheffield simulation approach here used. But I wonder about some of those results. I've not seen any good evidence that young drinkers are more responsive to prices than adults: the price elasticity of demand for young drinkers is not different from that of adults. Grossman, Chaloupka et al, 1998 Economic Inquiry, put it at -0.41: basically the same as for adults. And, we have good evidence that heavy drinkers' consumption is far less elastic than moderate drinkers' consumption. The simulation results show strongest effect of tax on young drinkers; they note at paragraph 95 that Sheffield estimates higher price elasticity for harmful and hazardous drinkers. Both of those make me more than a bit worried about using the Sheffield results.

Honestly, I'm a bit confused here. At paragraph 95 they claim Sheffield finds higher price elasticity for harmful and hazardous drinkers; at paragraph 82, they assume a uniform price elasticity of demand for all drinkers "for consistency with the University of Sheffield study". But, they're at best assuming uniform elasticity; at worst, they're assuming heavy drinkers are more price elastic. Neither one sits well with the best empirical results that heavy drinkers are far less elastic than moderate drinkers.

Everything following in paragraph 96 assumes at best uniform price elasticities for moderate and heavy drinkers; at worst, that heavy drinkers are more price responsive. They also note their results may be sensitive to those assumptions. Writes MJ at paragraph 96.v:
Unless the price elasticities of demand for alcohol for heavy drinkers are substantially lower than for other drinkers, the higher price increases for heavy drinkers means that harmful and excessive (and likely) younger drinkers will face the largest reductions in consumption and therefore the biggest changes in harms to themselves – and to other parties.
Ok. So they have some results that depend on an assumption of at least equal elasticity and that, they admit, are sensitive to whether there are large differences in price elasticity of demand. The best numbers I've seen show youth drinkers' elasticity on par with averages, and heavy drinkers much less elastic (-0.28 vs -0.44). The Law Commission repeats those numbers throughout their report as well, so I'm not going out on a limb in relying on them.

At Paragraph 97, MJ cites the Sheffield results as strongly diminishing the risk highlighted in the Burgess Crampton submission to the Law Commission that "moderate drinkers respond to price increases by more than heavy drinkers." They quote us from our submission, then say:
Indeed, for England and Wales and for Scotland, the policy simulation models suggest exactly the opposite.
I can only laugh and shake my head at this point. In our submission, we were citing evidence that elasticity varies greatly between moderate and heavy drinkers (with heavy drinkers being far less elastic); their evidence against that is a policy simulation that assumes there to be no difference in demand elasticity between moderate and heavy drinkers and possibly assumes heavy drinkers to be more elastic!

And, if they had access to our submission to the Law Commission, they would have seen our extensive discussion there of how our results do not hinge on a narrow conception of rationality. Pages 7-9 discuss that in depth. But MJ simply asserts that our results are sensitive to assumptions about rationality. Again, I'd be happy for them to provide some reasoned argument about how our results were sensitive in a way we hadn't considered. I'd thought yesterday that they'd simply not seen our extensive discussions on the blog and in our submission to the Law Commission on rationality. But they're here citing that submission.

In summary: the only substantive result from the Marsden Jacob commissioned analysis is that an excise tax increase on an inelastic good, if the tax revenue is rebated to drinkers lump sum or offsets more distortionary forms of taxation, may be desirable. Even that result is questionable absent more explicit consideration of cross-price elasticities between alcohol and other consumption goods, and between alcohol and untaxed leisure. Moreover, the McLeod Report specifically rejected alcohol excise tax increases on Ramsey grounds.

Fortunately, Simon Power appears to have entirely rejected alcohol excise tax increases. iPredict's still giving a 16% chance of a 10% or more increase in the excise tax, but no real chance of anything higher.

Australian Reserve Bank trading

Peter Martin reminds us that the Aussies stopped Centrebet contracts on the Aussie Reserve Bank decision. But, apparently is still offering contracts: $1.20 for $1 on no change and $3 for a rate hike.

iPredict's contracts are at $0.67 for no change ($1 gets you $1.49); $0.31 for a 25 bp increase ($1 gets you $3.22); $0.02 for a 50 bp increase ($1 gets you $50). iPredict takes its 2% commission on profits at withdrawal.

Too bad the Australians aren't allowed to trade on iPredict; the prices are better.

Colby is annoyed

Colby Cosh is annoyed with a typical healthist report in Alberta noting the social costs of traffic accidents. Of course a world without traffic accidents would be preferable if we could simply wish it so at zero cost. But in the real world, we're typically trading safety against other goals like getting places in reasonable time. The latter has benefits, and if we base policy solely on the goal of harm minimization, we do violence to optimization.

Some day there needs to be a report on the harms of harm reports that reckon the costs of X against a counterfactual of costlessly avoiding X. The public hear the numbers, assume that they've accounted for benefits forgone, and public opinion shifts towards greater regulation.

No Logo: Ten Years On

Reason Mag has a very nice review of the tenth anniversary of Naomi Klein's book.
A decade on, there is no question who won that fight. From eco- to organic, fair trade to locally sourced, sweatshop safe to dolphin friendly, sales pitches that 10 years ago would have reeked of patchouli oil and set the red baiters on full alert are now thoroughly mainstream. Companies like Whole Foods (and its quarterly “5 Percent Day,” when each location donates 5 percent of its net sales to a nonprofit) or the Vermont-based Seventh Generation (a natural soap and detergent company devoted to all forms of sustainability, whose co-founder and executive chairman is known as the “inspired protagonist” of the firm) are massively successful operations.

Virtually every marketing book published in the past few years, from Martin Lindstrom’s Buyology to James Gilmore and Joseph Pine’s Authenticity: What Consumers Really Want, has stressed the primacy of authenticity as a selling point. Everyone agrees that the quest for authenticity is the contemporary advertising equivalent of the search for the Holy Grail, and being able to play the authenticity game is now a fundamental requirement of marketing, the standard against which all brand strategies are judged.

At this point you might expect Naomi Klein to raise her arms and declare victory. The days when Shell, McDonald’s, Nike, and others could bigfoot around the planet while ignoring their public responsibilities are gone, their behavior transformed, thanks to the efforts of a relatively small but highly vocal, motivated, and intelligent group of connected activists. The taming of the brand bullies is all the proof you need that corporations don’t own brands; consumers do.

Yet Klein is not happy. In a remarkably self-aware passage toward the end of No Logo, she points out that there has to be more to environmentalism than an Energy Saver sticker on your computer monitor and more to social justice than a Fair Trade logo on your coffee mug. If all politics becomes absorbed into consumer politics, she warns, you end up with the wholesale privatization of what was once the democratic responsibility of the public sphere.

That is why Klein is so unappreciative of what would appear to be a great triumph for her side. Her goal was never merely to change corporate behavior. It was to change the entire economic system. As she sees it, the newfound emphasis on selling authenticity is just further evidence of capitalism’s ability to co-opt dissent and exploit seemingly subversive niches. Reform is always the enemy of revolution, and any change that maintains the overall status quo is to be viewed with suspicion. Writing about branding was only an excuse to talk about politics, and what led Klein to re-engage with the discourse of marketing after 10 years was the emergence of Barack Obama, the first U.S. president who is also a “superbrand.”
For a nice academic treatment of the links between consumer products and expressive politics, check Cass Sunstein's highly interesting "Solidarity in Consumption".

Tuesday, April 27, 2010

Marsden Jacob on alcohol

The Law Commission commissioned Aussie consultants Marsden Jacobs to weigh in on the costs and benefits of alcohol. Marsden Jacobs previously issued this report which cited approvingly the Collins and Lapsley measures of the social harm of alcohol (including the amount that drinkers spend on their own booze as a social harm) and which dismissed reduced alcohol consumption in Australia and other countries post liberalisation by noting that, absent liberalisation, the reduction could have been even greater. But I suppose they're a step up from Brian Easton.

Some initial thoughts on the Marsden Jacob (available here and here) report:
  • The Marsden Jacobs report fundamentally mischaracterises our approach to rationality, following Easton in arguing that we require strong rationality assumptions. We don't. All we need is that the harms of irrational excess consumption on the latter portion of a harmful drinker's consumption, taken on average across all drinkers categorized as harmful, roughly balance the surplus they enjoy from the earlier portions of their consumption. Heck, MJ's graph at p. 18, figure 7, basically replicates the graph we have at the link above, except representing irrationality as shifting the marginal benefits curve inwards rather than the marginal costs curve outwards. Either one works.

    We noted that BERL was too quick to assume irrationality, but nothing we did required strong rationality. If you wanted to restrict the set of harmful drinkers to being only those for whom the total costs of consumption are higher than the total benefits, that would be different. But when the range of harmful drinkers is set so broadly as to include folks who occasionally have three or more pints, we really have to take seriously the consumption benefits that these folks get.
  • MJ then go on to conflate economically irrational consumption with epidemiologically harmful consumption. This is a serious error on their part. It's not crazy to count internalities where there are demonstrated irrationality issues. I don't like it much, and I'd argue against it, but it's not crazy. But taking consumption beyond an epidemiological threshold as prima facie evidence of irrationality is crazy. They move directly from the non-crazy "if people are irrational, they may well consume in excess of where they'd consume if they were rational; if irrational, some apparent consumer surplus needs adjusting downwards" to this:
    The above discussion highlights that, to assess the impact of policy measures, such as an increase in the rate of excise, it is important to know the proportion of total alcohol consumption that can be considered to involve high lifetime or high short-term risk. This is especially important when exploring and quantifying the implications of value judgements that allow for irrationality in consumption decisions on alcohol when intoxicated or over the longer term.
    For MJ, consumption beyond an epidemiological norm is irrational. Interesting value judgement. I wonder whether Palmer had a good idea about their particular values when he hired them.
  • MJ seriously and uncharitably misreads our report at paragraphs 55 & 56. At page 31 of our report, we noted that our measure of external costs also included some external costs that would be taken as pecuniary rather than technological were we to take the Buchanan and Stubblebine approach to delineating the two. All of our numbers provided the figure that included matters Buchanan and Stubblebine would have taken as being pecuniary, like costs to the public health system. We noted that revising things to remove all pecuniary externalities, both positive and negative, would have had little effect on overall results because we'd also then be knocking out tax revenues as being only a transfer. Net costs would be little changed.

    MJ then characterizes us as arguing strongly in favour of the lower "technological externalities only" position and only begrudgingly conceding the possibility that others might consider also the fiscal externalities that Buchanan and Stubblebine labeled pecuniary; they say this is out of line with Treasury and the Business Roundtable's prior work.
    Thus, Crampton and Burgess exclude from consideration lost output, alcohol production costs, costs of crime prevention, health care costs, most road crash costs and excise taxes collected.
    This is a serious mischaracterization of our work. At Table 2, we tallied costs of lost output due to harmful alcohol use: $173 million less consumption resources saved of $299.7 million. We did indeed deem alcohol production costs to be fully internalized: people do buy their own alcohol without subsidy. Costs of crime preventative expenditure we tallied as $24.7 million at Table 3. Section 4.5 lists external health care costs of $254.8 million. We did discount most road crash costs to include only the costs on innocent bystanders: $33.2 million. Finally, we counted collected excise taxes against the total measure of external cost. It's only in the one-paragraph: "Oh, if you want to follow Buchanan and Stubblebine instead, it won't make much difference" that we wipe all of those costs and benefits aside.

    It's not like we made a big secret about this; it's all laid out very plainly in the report, we released a spreadsheet with all supporting calculations, and I've blogged extensively on it. Marsden Jacob and Associates either is incompetent at basic reading comprehension, or deliberately promulgates lies. It would have taken considerably less than a month for us to fisk the BERL report had we been able to dismiss all of those costs out of hand. Rather, we adjusted them so they made some kind of sense, then gave our best guess at the portion that fell externally.
  • MJ's treatment of cost internalisation at paragraph 58 is interesting. They say our approach is flawed for assuming that drinkers internalize costs; they say rather that costs are imposed on family, friends and others.
    They do not bear the full costs because friends, families, partners and governments act to offset these costs. A rational fully informed drinker would recognise and anticipate this support when making his consumption decisions. If the subsidy from the welfare system and/or from the support of other individuals were removed, the individual would make different choices. This is a form of moral hazard since drinkers (even if perfectly informed of the costs and risks) know that they will not bear the full costs. The individual drinker does not count the cost of these subsidies since they are a benefit to him, but they are a cost elsewhere.
    Is there any consumption - cars, movies, anything at all - for which this would not be true? Do we say that the cost of McDonald's food is not internalized because people on welfare would buy less McDonald's food if they didn't get welfare payments? Do we reckon that Corvettes are horrible things because men in their late 40s buy them and impose those costs on their families? This is ludicrous.
  • Next in the list of items headed Marsden Jacob and Associates either is incompetent at basic reading comprehension, or deliberately promulgates lies: paragraph 59, where they claim that our results rely too strongly on assumptions of strong cardioprotective effects of alcohol. Again, this either is a deliberate lie or they're incompetent. Here's what we did say in our report:
    As noted earlier, Corrao et al (2000) provide reasonable evidence of health benefits of alcohol consumption extending well beyond the hazardous threshold used by BERL; no health benefits are counted by BERL. Net health care costs of “harmful” alcohol use will consequently be rather lower than those cited by BERL. However, putting a value on this would require serious research beyond what we here are able to do.
    We specifically said that we think the health costs are an upper bound because of the beneficial effects of alcohol for cardioprotection even on heavy drinkers (note that the benefits for moderate drinkers are left to one side as well): we do not tally them ever in our figures. Nothing in our results rely on strong or even ANY cardioprotective effects at high consumption levels. MJ is starting more and more to look like a deliberate hit piece rather than a serious piece of analysis.

    In Box 3, they go on to argue against the health benefits of moderate drinking, which was entirely beside the point for tabulating costs and benefits of heavy drinking. But, they raise every canard that I blew up here. It's hopeless. It seems as though there's a result that they were paid to find, and they were sure to find it. It does discredit to the Law Commission that they commissioned and endorsed this work.
  • Finally, they chide us for ignoring the work of the Sheffield team in cost simulation. I will happily confess to ignorance about that work. We were fisking a particular report on the costs of alcohol. If we'd been paid anywhere in the range that BERL were paid, or Marsden Jacob (oh, I'll look forward to getting that price by OIA), we might well have canvassed a bit more broadly.
  • Marsden Jacobs argue that tax increases on alcohol can be efficient: they argue that while it's true that moderate drinkers are more price responsive, the Harberger Triangle is small relative to the tax take, and the tax take is better than just a transfer, it's an opportunity to offset less efficient taxes. Seamus previously warned us of the problems in taking an undergraduate understanding of Ramsey taxation to policy: it isn't absolute price elasticity that matters so much as cross-price elasticity with untaxed leisure. In any case, the Law Commission goes on to undermine whatever efficiency case there might be by arguing that at least some of the excise tax take should be earmarked for alcohol harm reduction. Treasury explicitly reminds LC of this in their note preceding the Marsden Jacobs report.
  • MJ seriously downplay the health benefits of moderate drinking and make no attempt to estimate the reduction in those benefits with an increase in excise tax
Skimming ahead (haven't read the last third in any depth as yet), I see calls for scenario modelling of results where half to 80% of alcohol is irrationally consumed; I also see them arguing that the existence of alcohol advertising proves that consumer preferences are too malleable to be the basis for welfare:
the integrity of the concept [consumer surplus] can be questioned for several reasons including that the New Zealand alcohol industry believes it is profitable to spend substantially (more than $30 million a year) on alcohol advertising and promotions to shift consumer preferences;
Wow. Advertising means that consumer surplus is all wrong. Just wow. I need a drink.

Palmer report - initial thoughts

A couple of initial thoughts on the newly released Palmer report.

  • They apparently worry that while alcohol price increases have exceeded the CPI, price increases haven't kept up with wages. So alcohol has become more affordable relative to incomes. It's, of course, by definition less affordable relative to the other elements of the consumption basket if alcohol price increases have exceeded CPI. But measuring it against income increases lets them worry about the growing problem of alcohol affordability. (see section 17.5 onwards). Now, if alcohol is more income elastic than other goods, alcohol consumption could rise relative to other goods despite the relative price effect. But then we'd expect stronger movement in the aggregate consumption statistics, which remain pretty flat. And, we'd expect a lot of worries in the report about rich people are disproportionately represented in the harmful drinking stats.
  • They've fixed the nonsense of their prior view that heavy drinkers are as price responsive as moderate drinkers. That's good.
  • But, they worry a lot about harmful drinking instances by moderate drinkers. Recall, of course, that their threshold for a harmful drinking session is six standard drinks for a male: under three pints of 5% beer. It's no surprise that they find that a quarter of drinkers report meeting this rather low threshold. Sure, it's into the range where we start seeing increased mortality risk, but not crazy far into that range. If minimizing mortality risk is desiridatum, we all ought have a mandatory glass of wine per day.
I'm currently working through the Marsden Jacob report commissioned by LC on the economic costs of alcohol. Wishing I had a beer here ... egads.

Talking about excise

Again, Matt and I found last year that collected alcohol excise tax revenues exceed tallied external costs of alcohol misuse, which include the public health costs. It's consequently pretty depressing when we keep reading folks claiming that alcohol tax increases are a good idea because of the costs of drunks to the emergency room system. Those costs can be good reason for doing something like punishing actual behaviours that lead to costs while drunk, like drunk and disorderly or fights or drink driving. But they're not reason for hiking the tax: the tax already covers those costs.

While this is true for alcohol, it's even more true for tobacco. Even the study commissioned by the anti-tobacco lobby agreed; I included this quote from their report in my review of the study in the New Zealand Medical Journal a couple years ago:
it does seem reasonably apparent that the tax contribution of approximately $1 billion annually by smokers exceeds substantially the external costs of smoking which fall on non-smokers. If savings on pension costs from premature mortality were added as well the net fiscal contribution of smokers, to the fiscal gain of non-smokers, would be further increased.
Moderate drinkers are over-taxed relative to the costs they impose; drinkers on average pay about the right amount of tax if we want collected taxes to match external costs. For tobacco, smokers are grossly overtaxed relative to the costs they impose on the public health system; this is true in every country where I've seen the numbers tallied. Any sensible review of excise taxes as a whole would reduce the excise tax on tobacco.

And some iPredict kudos

Congrats to Matt and team! From Computerworld:
Among the finalists in the Duncan Cotterill Innovative Software Product Award category is Wellington startup iPredict. The product can be described as a place to buy and sell predictions of future political, economic and social events, according to iPredict CEO Matt Burgess.

The software harnesses the “wisdom of crowds” by offering a way for companies to tune into the thoughts of staff. By getting staff to bet on the success of current or planned projects, managers can see what people really think.

“iPredict is a way to cheaply aggregate and quantify opinions on any factual question,” says Burgess. “We use iPredict to aggregate opinions on politics and economics — who will win the next election, how high will interest get this year, and so on — but almost anything can be asked on iPredict software.”

The software can help companies figure out what combination of features on a particular product will maximise sales. Or you can ask for a prediction whether your largest competitors will merge this year, he says.

Market prices on iPredict emerge from the buying and selling of people, and as such reflects the wisdom of crowds, says Burgess. “That is the special sauce that iPredict uses to beat pollsters in elections and official forecasts in companies,” he says.

The company, which is owned by Victoria University and the Institute for the Study of Competition and Regulation, launched in September 2008. The team is now close to rolling out a product where customers can set up their own markets from scratch online in minutes, Burgess says.

Burgess is honoured to be a finalist, he says, and he is hoping that the awards will give the startup exposure.

He sees great opportunities for his company’s technology, both locally and overseas.

“For example, right now there is no forward market in meat and wool commodities in New Zealand. This has real information and hedging costs for farmers, which can be solved with iPredict’s technology in combination with our Securities Commission authorisation to operate these markets,” he claims.

He is aiming to start exporting the technology later this year.

Popularity and taxes

Matt's today also launched some pretty interesting conditional contracts.

Right now, trading suggests there's a 74% chance of National setting the top marginal tax rate to the 33-34.9% range for next year; there's also a 90% chance that the GST is increased by the end of this year.

Matt's launched conditionals on National's polling outcomes in the first Roy Morgan poll of June 2010: the contracts pay out at $1 if National polls in the specified range AND if the budget sets the top personal tax rate equal to or below 33% and if National has scheduled a GST increase before the end of 2010.

The sum of bids across the unconditional contracts is 0.97: just a bid-ask spread.

The sum of bids across the conditional contracts is 0.6871. So, about a 30% chance that the condition doesn't obtain. There's about a 70% chance that the top marginal tax rate drops to 0.33 or lower and that GST goes up before end-year. If we divide the high bids by the sum of all bids for each set, we get the following:
Very low (less than 46.5%)10%16%
Low (46.5% - 48.5%)28%21%
Mid (49% - 51%)32%35%
High (51.5% - 53.5%)24%21%
Very high (over 53.5%)6%7%
The market's saying that there's some reasonable downside polling risk from the tax reform package. Recall that the price difference between these two markets understates the risk: the left hand column is unconditional, not conditional on the opposite. So the chance of the tax package being implemented is already built into the former price.

Alcohol policy

Palmer's report comes out this afternoon; Cabinet will then take a few months to decide what to do. So, what will they do? iPredict launched some contracts this morning. How are things looking?At those prices, I'm shorting excise tax increases of 30% or more. There is absolutely no economic case for increasing excise rates by more than an inflation adjustment; Treasury knows it. I can imagine their mucking about by putting in differential levels for low-strength beer. I can imagine their bumping up the rates on high strength beer, which will be bad for the craft brewers. I can imagine their going after RTDs because it looks like doing something. But I can't see the set of those bumping average excise tax rates up more than 20%.

I can see them dropping the drink driving rate. There's little point in doing it as I've seen zero evidence suggesting that drivers in that range are responsible for any particular increase in accidents; moreover, it'll hurt the hospitality industry where risk averse folks cut their drinking a lot to avoid the small risk that a light meal or a bad day results in blowing over 0.05: aim at 0.03 to avoid hitting 0.05 by accident (where folks currently aim at 0.05 to avoid blowing over 0.08). But I can see them doing it: it would be consistent with their recent reduction in the youth drink driving limit. I'll short it a bit at current prices, but I'd be nervous about building up too big a short position here.

Hawking's watched Avatar too many times

That's what I'd figured when I saw the headlines about Stephen Hawking's worries about aliens wanting to take our stuff. Unless Earth has particular elements in abundance that are rare elsewhere, wouldn't it be easier just to mine it out of unpopulated asteroids? Surely a species seeking to master interstellar travel would have worked out how to mine non-class-M planets.

Dan Drezner comments more thoroughly:
2)  Carried to its logical extreme, isn't Hawking making an argument for rapidly exhausting our natural resources?  If Hawking is correct, then the sooner we run out of whatever might be valuable to aliens, the less interest we are to them.  Of course, this does beg the question of which resources aliens would consider to be valuable.  If aliens crave either sea water or bulls**t, then the human race as we know it is seriously screwed. 
3) Why would aliens go after the inhabited planets?  Ceteris paribus, I'm assuming that aliens would prefer to strip-mine an uninhabited planet abundant with natural resources than an inhabited one.  Three hundred planets have already been discovered in the Milky Way, and there are "likely many billions."  Even rapacious aliens might try some of them first before looking at Earth, since we are mostly harmless
There is a counterargument, of course.  Over at Hit & Run, Tim Cavanaugh tries to assuage fears of aliens by observing, "Why would a race of superintelligent jellyfish or blue whales even take notice of us, let alone want to conquer us?"  This cuts both ways, however.  If those jellyfish fail to notice us but notice our abundant amounts of salinated water, they could decide to come without a care in the world for the bipedal inhabitants of Earth.

Patents as trade weapon

The National Business Review (subscriber link, sorry) today notes a reasonably serious patent problem for smaller non-US firms that rely on the US market. Recall that patent litigation can take a while and is reasonably costly: whether something is infringing is often pretty unclear.

Suppose that you're a small tech firm outside of the US. You come up with something you think is new and you start marketing it in the States. Things are going well. Then, one of the big US firms notices you and finds a patent in their armory that they can allege you're infringing. The firm then asks the US International Trade Commission to investigate you for patent infringement. The ITC can bar your access to the US market. The big US firm then offers to take you over (or offers a disadvantageous settlement), with the treat of looming trade action as alternative. Think that's an offer you can refuse?
Smart Technologies’ suit reminds me of that taken by US audio giant Bose in 2007-2008, targeting New Zealand’s Phitek.

Bose alleged Phitek - which numbers US airlines among its many customers - had infringed its noise-cancelling headphone technology.

In the end, Phitek settled, with terms not disclosed. (Switzerland’s Logitech also settled a similar dispute with Bose.)

Bose’s secret weapon: it could enlist the support of the US government’s International Trade Commission (ITC).

On November 29, 2007, Bose asked the ITC to investigate the importation of Phitek product to the US, alleging the New Zealand company's headphones infringed two Bose noise-reduction patents.

On December 27 the same year, the ITC voted to institute an investigation under the Tariff Act, and consider Bose's application to halt Phitek imports until the patent dispute was resolved.

It’s no wonder Phitek (which has since decamped most of its operation from NZ to Europe) then moved quickly to settle the case.

Phitek simply could not afford to be barred from the US market - and, more, barred for the mere suspicion it had violated an American company’s patents.

Monday, April 26, 2010

NBR on Palmer Report

Friday's National Business Review on the forthcoming Palmer Report:

Puritanical nonsense

As is usually the case with Sir Geoffrey Wowser, these recommendations combine a love for finger-wagging nanny state with a desire to tax “undesirable” behaviours out of existence.
How fair is it to ban 18 and 19 year-olds, who can legally vote, drive cars and get married, from buying some beers?
The anti-alcohol zealots keep using the “cost of alcohol to society” to justify their assaults on freedom.
But the only reason alcohol costs “society” and in particular the taxpayer so much is because New Zealand has decided to privatise the benefits of alcohol while socialising the costs through ACC and the public health system, which is clogged up by drunken idiots with stupidity-related injuries and who refuse to be treated.
Here’s a novel idea – if people injure themselves or damage property or other people while in a drunken stupor, make them liable for the cost of the damages.
Bankrupt those who can’t pay. Maybe then these incoherent inebriates won’t be able to afford any more nights out on the town on the taxpayer tab.
I'd disagree slightly.  As Matt and I showed last year, the costs to "society" only tally up to really sizeable figures if you're happy to include a raft of private costs as social.  Under normal economic method, external costs roughly match the tax take.  So drinkers are already, on average, paying their way through the health system; moderate drinkers are heavily subsidizing the right tail of the distribution, but that's always going to be the case with a linear per unit tax that can't vary tax levels with the amount consumed. The sad bit is that an alcohol tax increase will do more to punish moderate drinkers than to curtail the problem end of the distribution given relative demand elasticities.

NBR is right that putting more focus on punishing the activities that generate negative externalities is likely to be more helpful than putting a tax on an activity that correlates only weakly with generating negative externalities.

I'll look forward to reading the report....

Saturday, April 24, 2010

Tax certainty

Labour leader Phil Goff has warned the wealthy he's got next month's planned income tax cut in his sights – National is lining up a treat for the top earners. But Mr Goff told TV3's The Nation if he is elected, he would turn the tax cuts around to help everyone else.
It has not even happened yet and the Labour leader is already limbering up to counter attack.
It's no secret that National are eyeing up a cut in the top income tax rate in next month's budget; the best guess says it'll go from 38 cents to 33 cents.
But it won't stay that way if Phil Goff ever becomes prime minister.
“Thirty-eight, I'm very comfortable with and I see no reason to cut the top tax rate below that.”
From TV3.
Recall of course that the proposed tax reduction is mostly being funded by some changes that would hit wealthy property investors.  So tax cuts for the moderately rich are being paid for by tax increases on the moderately rich.  Take out the first part, and we're back to soaking the rich.

I'm just glad they're seeming unlikely to be introducing a new land tax that would be added to a later Labour income tax increase....

Friday, April 23, 2010

Striking down tariffs

Sir Roger Douglas's office helpfully provides a list of line item tariff collections in New Zealand running through the 2008/2009 year.  The first sheet gives line item accounts; the second, some aggregations.

In many cases, the tariffs collected couldn't cover the cost of categorizing the classified items. For example, we collected $70 in tariff revenues in 2008/9 from "Fruit and nuts, provisionally preserved (for example, by sulphur dioxide gas, in brine, in sulphur water or in other presdervative solutions), but unsuitable in that state for immediate consumption". Is it possible that it cost less than $70 to categorize the items generating that revenue? New Zealand earned $5 in tariff revenues from "artificial graphite; colloidal or semi-colloidal graphite; preparations based on graphite or other carbon in the form of pastes, blocks, plates or other semi-manufactures". About 300 line items list revenues less than $10,000.

Total collections in 2008/09 were $1.7 billion, but the vast bulk of that revenue came from excise equivalent duties on alcohol, tobacco, and oil products that would remain in place if tariffs were eliminated. Eliminating those excise equivalent duties while maintaining domestic excise taxes would be a rather bad idea.

So, where do we get most of our tariff revenue? Clothing at $116 million, followed by footwear at $31.8 million in 2008/09. Maybe there's a reason so many Kiwis go barefoot. Does any possible benefit from protecting whatever domestic shoe manufacturing remains outweigh the costs on poor people trying to buy shoes for their kids? $18 million on food products. More than $20 million on producer inputs - raising the cost of manufacturing other goods here. All these numbers are pretty rough cut tabulations from the supplied spreadsheet and I don't guarantee that I have them all in the right categories.

It looks like the total of non-petroleum, non-tobacco and non-alcohol revenues was about $270 million in 2008/09. Getting rid of the remaining tariffs would not be particularly costly; holding on to them for later use as bargaining chips in free trade negotiations doesn't seem to have much value. Whatever trade gains we might get through negotiation are highly uncertain and a fair way down the track; gains from eliminating tariffs would be immediate.

Alcohol - let's review

TVHE reminds us of a few things we ought remember in alcohol policy.

I'll summarize and add a few more.

First, LC reportedly recommends increasing the alcohol excise tax by 50%. Recall that the price elasticity of demand for heavy drinkers is -0.28; for moderate drinkers, -0.44. That means that if the price of a unit of alcohol goes up ten percent, moderate drinkers buy 4.4% less alcohol while heavy drinkers by 2.8% less. Moderate drinkers enjoy consuming alcohol, both because it's inherently enjoyable, and because there are health benefits. Heavy drinkers also enjoy consuming alcohol, but let's grant the healthists' premise that they drink more than they would were they fully rational and fully informed.

Now, without some tedious digging into national income accounts, I can't put precise numbers on it. But let's ball-park things. A half-litre of 5% beer has $0.63 in tax; low end beer sells for about $1.90 for a half-litre. So the tax currently is about a third of the price of low end beer. If the tax rises from 0.63 to $0.94 and there's full pass-through, tax rises to 42% of the price of beer, now priced at $2.21 per half-litre. The price of beer then rises by about 16%. At stated elasticities, moderate drinkers reduce their beer consumption by 7%; heavy drinkers, by 4.6%. If there were one harmful drinker for every moderate drinker, and if we normalize the costs to the moderate drinker of lost consumer surplus to 1, then the heavy drinker needs to enjoy benefits of at least 1.5 for the policy to pass cost benefit. If there are two moderate drinkers for every harmful drinker, the ratio rises to 3.

Recall further that the benefits to heavy drinkers from reducing consumption, even granting the assumption that they're irrational or ill informed, is only the area below the marginal cost curve and above the marginal benefit curve for the portion of consumption that's forgone with the tax increase.

An increase in the excise tax will reduce consumption. But, it will reduce consumption by more among moderate drinkers than among heavy drinkers, and will almost certainly fail cost-benefit analysis.

Second, recall that the estimates of the costs of harmful alcohol use are grossly overstated. The estimates use a method designed to inflate the costs of harmful use by counting all private costs as social costs, by attributing to alcohol all of the costs involved in activities to which alcohol was only inframarginal rather than decisive, by assuming that heavy drinkers enjoy zero benefits by their consumption, and by assuming that an alcohol-induced absent or unemployed worker can never be replaced by another worker. It's complete nonsense. A rough, but methodologically sound, accounting puts the external costs of alcohol consumption slightly below the tax revenue. Anybody wanting to cite BERL's shonky old number on the costs of harmful alcohol use would do well to re-read our critique, their reply, and our rejoinder.

If the government wants to tighten up alcohol regulation, I hope that they'll use an honest paternalistic argument rather than a dubious economic one.

Farrar in the NBR (ungated) faults the Law Commissioner:
The crusading was not restricted to New Zealand. Sir Geoffrey even went to Australia, and spoke at an Australian Drug Foundation conference. Not the Minister., ot the Director-General of Health, but the Law Commission President. The 68 year old Sir Geoffrey decried the fact that people put photos from parties up on Facebook. He wants an end to people getting drunk – an endeavour that would be as likely to succeed as prohibition succeeded in the 1930s.
I've only talked once with Sir Geoffrey. He didn't come across as a teetotaller wanting to eliminate everyone's fun but rather as placing very high weight on the costs imposed by a tiny minority of drinkers and next to no weight on the benefits of moderate drinking to moderate drinkers; consequently, reduced consumer surplus among moderate drinkers doesn't enter his social welfare function with the same weight as reduced harms from the few bad guys. I worry that his overestimating of the harms and discounting of the benefits leads him to advocate welfare-reducing policies. I hope Parliament is sensible enough to weight his recommendations appropriately.

Best meta evah!

Mitch Hall points to the best Downfall parody ever: Hitler upset by the copyright infringement notices against the Hitler Downfall parodies.

Hitler reacts to the Hitler parodies being removed from YouTube from Zacqary Adam Green on Vimeo.

I've embedded it here, but if it goes dark, do check Mitch's site as he's more likely to be keeping it updated. He also usefully points to YouTube's weighing in on fair use, parody, and the Hitler mashups.

The folks who made Downfall have to know that they've earned tons of free publicity from the parody videos and that millions who otherwise never would have watched the movie found out about it via these parodies. Either they're complete idiots in wanting them taken down, or they're reckoning that the additional publicity from the take-down notices is worth the reduction in parody videos.

Of course, Peter Cresswell presumably will refrain from watching the video above as the owner of copyright wishes that his IP not be used in this way. Sorry you're missing out, Peter; this one's hilarious.

Update: That last bit wasn't entirely fair. Peter supports fair use provisions.

Thursday, April 22, 2010


The Christchurch Press this morning quotes Janice Langlands from Organ Donation New Zealand as saying that LifeSharers and Andy Tookey are "misleading" New Zealanders:
A Christchurch man is "misleading" people into thinking they can skip waiting lists for organs, experts say.

Andy Tookey set up LifeSharers three years ago to help improve New Zealand's organ donation rate, which is among the lowest in the Western world.

Members sign a contract saying they want their organs to go to LifeSharers members first.

The organisation was founded in the United States as a non-profit national network of organ donors.

Tookey says there is a shortage of organs and it is not fair to give them to non-donors when there are donors who also need organs.

Organ Donation New Zealand donor co-ordinator Janice Langlands said the LifeSharers model could not work because it did not have the transplant service's support.

"It's unfortunate, because he's misleading the public," Langlands said.

"Allocation of organs should go on medical emergency, and not disadvantage those who haven't signed up to be LifeSharers."

New Zealand Liver Transplant Unit clinical director Professor Stephen Munn said most organ donation organisations around the world had decided that no-one should be able to decide who their organs went to, unless it was to a family member. "The problem is that the assignment of organs to a particular category of people makes it very difficult because families could start saying, `I only want my organs to go to people who are Catholic or white'," he said.
Aha. So Jonah Lomu's kidney came from a family member then? Or is the particular category of "rugby players" more protected than "organ donors"?

First, neither Andy nor LifeSharers are misleading anybody. Unless the Organ service starts blackballing transplants to members, then members are no worse off by joining; and, should the doctors agree to respect donor wishes, then your chances improve by joining. If you're at worst no worse off and at best a bit better off, then it's not misleading to say you're overall better off.

Second, I've never seen Andy say anywhere that joining lets folks skip waiting lists. LifeSharers is far more marketed towards potential donors by encouraging them that their organs are more likely to go to organ donors; moreover, LifeSharers puts an explicit waiting period for new members before they become eligible for receipt to give folks a strong incentive to sign up while they're healthy.

Third, Munn brings up the old "Oh, racists may insist on donating to racists; we all hate racists, why do you want to make life easier for racists?" Red herring (see here). First, the service could always independently disallow racist bequests. Second, we have no evidence that directed donation elsewhere leads to problems with racist bequests. Third, even if it did, a racist who'd be unwilling to donate unless it could go to a member of his preferred race still brings a new organ into the system if he makes his repugnantly constrained bequest. Fourth, allowing racist bequests is categorically different from allowing LifeSharers requests: every person who joins LifeSharers gives every other person in the country a stronger incentive to be an organ donor and to join - for free - LifeSharers. You don't get that effect with racist donation.

Push comes to shove, the Organ Donor Service will eventually have to choose between respecting a donor's wish to donate to other donors via LifeSharers, or confront a grieving family telling them that they refuse to respect their loved one's wishes, that they'd sooner let the organs be buried, and subsequently face a lawsuit. I hope that I don't get to be the test case.

Lloyd Cohen's declaration is looking better all the time....

I really hope this is the last bit of angry for the day....

One down, one to go

Sir Roger's youth minimum wage bill was defeated, but today's ballot drew his Tariff Act 1988 Repeal Bill which, if I understand it correctly, would either abolish the Tariff Act or set all tariff rates to zero. While New Zealand is a relatively free trading nation, we still have a few tariffs. Footwear gets a 26.5% tariff, for example. No Right Turn reported on the bill back in November, noting that National opposes the move. Odds National will support this one through first reading?

Open liquor is deadly

Well, at least it can be if it's illegal.
Ian Bush was killed in October 2005 during a struggle in the Houston [British Columbia] RCMP detachment after he was arrested with an open beer outside the northern B.C. town's arena during a hockey game.

The officer was never charged.
Bush's mother has just dropped her civil suit against the RCMP:
Bush said she did not want to relive the "anger and despair" a civil case would have rekindled and that the cost of continuing the legal battle given B.C.'s user-pay regime was too heavy.

"(The court costs) put it out of reach for ordinary people," she said.

Bush estimated well over $130,000 raised through donations across the country had already been spent on fighting for justice in her son's death.

"I know many people, including some who are very close to me, will be very disappointed with the decision," she said.

"I do, however need to make the decision after considering what makes the most sense . . . Nothing we can do will give Ian's life back to him, so the only thing we truly want is not within our reach."

Bush said she felt much more "comfortable" with the Mounties now than she did 4 1/2 years ago and couldn't say whether that was from "forgiveness or maybe a form of acceptance."
Ian Bush was shot in the back of the head by the RCMP.

Just another isolated incident I'm sure. All is under control. There's no chance that the new mechanism where RCMP malfeasance is investigated by BC municipal police departments will just turn into mutual whitewashing. No chance at all.

Angry day continues....

Not a good day [updated]

And the second bit of angry for the day: Kiwiblog reports on some leaks from the forthcoming Palmer report on alcohol.
I understand the Palmer Report proposes:
  1. A massive 50% increase in the excise tax on alcohol. This would result in an extra $500 million of revenue to the Crown at the expense of everyone who drinks.
  2. Banning the sale of liquor at off licenses after 10 pm. So if you pop into New World at 10.30 pm to do your shopping (which I often do), you won’t be able to buy a bottle of wine.
  3. Forcing bars and nightclubs to refuse to allow people to enter after 2 am.
  4. nationwide closing time for all outlets, probably at 4 am.
  5. An increase in the purchase age for alcohol from 18 to 20, criminalising 130,000 18 and 19 year olds if they buy alcohol.
Will Sue kill me if I bring the LC report into the delivery room next week? Is there wifi at Christchurch Women's? At least then we can both be doing the "scream in pain" thing, at least until her epidural kicks in. After that, it'll just be me...

Update: Simon Power sounds lukewarm to the proposals; by contrast, he was outright hostile to the suggestion that the Law Commission might consider recommending loosening up the rules around marijuana use. Paraphrasing, then it was "no way, not on my watch"; here, it's "well, that's what LC thinks and we still need to decide what to do."