As always, a question of elasticities

Keith Ng makes his case against petrol price gouging. To summarize: petrol demand is almost perfectly inelastic in a crisis because it represents demand for security, not just petrol; price gouging consequently would not induce the appropriate intertemporal substitution. Instead, it would piss people off and help erode the fragile bonds of community spirit that are critical in times of crisis.

So we have two elasticity estimates floating around. First, the elasticity of petrol demand with respect to price during a crisis. Second, the elasticity of public good provision [people voluntarily doing things to help neighbours and community] with respect to temporary price hikes that would likely be misunderstood and resented by customers.

For starters, petrol demand is and always has been relatively inelastic in the short term: around -0.3: a 10% increase in price results in a 3% reduction in quantity demanded. But those estimates will be calibrated around relatively small and expectationally permanent increases in the price of gasoline; we have good reason to expect a short duration, sharper price spike would induce a greater behavioural response.

We know that demand for security in general is fairly elastic. Why else would we see such price dispersion in the various grades of, for example, kid car seats? Some folks put a lot of value on it, others don't. It costs less to have a monitored security system in your house than a Sky TV subscription. I've not looked at the numbers, but I'm willing to give 3:1 odds that more homes in Christchurch have Sky TV than have a working monitored security alarm. Folks are willing to pay a premium for security, but not an infinite premium. Further evidence, more earthquake related? In the last earthquake, bottled water was security. This time around, Council was very quick to get tanker water out to Brighton. But not so last time. After the September earthquake, everybody was out of the bulk cheap water, but you could still sometimes find the fancy water at its usual crazy high price. Water was security. But not at any price.

But let's grant Keith's assumption for now: folks have inelastic demand for security. Whatever prior estimates we might have on demand for security get thrown out the window because security has understandably become rather more salient. But how much petrol constitutes security? It's not an infinite amount - folks aren't filling up a pile of jerry cans along with their regular gas tank. Is a full tank security? Or is a tank big enough to get you to Rakaia enough? A full tank in one or two of the family vehicles, for those with more than one car? I felt pretty insecure in South Brighton with a quarter tank in the car that wasn't abandoned on the other side of the bridge because I knew traffic getting out of Brighton could take hours; it also seemed impossible to tell which stations would have petrol once we got through the traffic bottleneck at Travis Road. Pretty high risk we'd wind up stranded if we went for groceries or tried getting to the airport. I'd have been happy enough with a half tank, damned nervous about trying to get anywhere on a quarter tank. So if a tanker truck had shown up in Brighton on Wednesday selling petrol at normal prices, I'd have been tempted to fill to the top absent quantity restrictions. At double prices, I'd not have filled beyond the half tank. From a check of StatsNZ data, we're in the upper ranges of the South Brighton income distribution. But I'm horribly cheap - at $5 per litre, I'd only have filled up with enough to get me through to prices dropping. Would everyone else be substantially less price responsive than me? Am I really that cheap?

Even if demand for security is very inelastic, if "security" can vary across individuals and can be anywhere from a half tank in one car, a full tank in one car, or a full tank in two cars, it's still very plausible that a temporary doubling of petrol prices would have reduced queuing and ensured that adequate supplies were available for folks who really needed them.

As for social solidarity - I totally agree with Keith that neighbourhoods coming together voluntarily to help each other out has been totally laudable. I can't imagine anybody who'd think otherwise. But would that spirit of community have been broken if, on Wednesday following the quake, the following message had gone out?

Our critical transportation infrastructure has been badly damaged by Tuesday's earthquake. We've strongly encouraged people to stay off the roads except in case of emergency. Unfortunately, many of our major roads remain completely congested, sometimes preventing emergency crews from getting through to where they're needed. At the same time, the temporary closure of the Port of Lyttelton's petrol terminal has resulted in a short term gap in petrol supplies. This will be solved in two days when the petrol tankers bound for Lyttelton have been diverted to Timaru and tankers have made it up from there. But we need people to show restraint during that gap. Despite our having urged such restraint, queues at those stations that have not yet run out of petrol prevail. We consequently have asked the major petrol retailers to impose a $2 per litre surcharge on petrol, with the surcharge earnings to be contributed to the earthquake relief fund. This measure will help to ensure that those who absolutely need petrol will be able to find it in a crisis. Only buy what you need to get you through the next two days. After that, the surcharge will be lifted. Know that your contributions are going to help your neighbours in Christchurch.

And so on, but with more PR. I just can't see that temporary charge ruining social solidarity. Especially in the case where folks can see that the extra charge is going to the earthquake relief fund.

This isn't a "screw the poor" thing. Is a poor person worse off having to spend $40 than $20 to get enough gas to get through a two day period, or worse off having to spend a whole lot of time in a queue for potentially no petrol at all? Recall that poor households are more likely to be single parent. Who's looking after the kids while Mom's queuing for petrol? Further, count the costs of uncertainty. Lots of folks had to be making lots of plans after the earthquake, many of which would be contingent on knowing whether fuel would be available and at what prices. Everybody who happened to have a quarter tank or less at the time of the quake had to bear a whole lot of uncertainty costs. Rationing by queuing effectively locked a whole pile of folks in a part of town with no services and no food because they couldn't know whether they'd be able to find fuel to get home should they have left. Is that better?

Neither is this some crazy Eric libertarian thing: it's technocratic. I'm positing a market failure - that it would have been socially efficient for the Christchurch petrol stations to have raised prices in concert, but that none would do it on their own because of hugely negative reputational effects because of public irrationality about the working of the price mechanism. Consequently, I proposed a policy solution that removes that reputation cost: government coordinating a temporary price hike with the collected excess revenues going to earthquake relief. I hate the idea of "targeted tax increase dedicated to some social project". All manner of ridiculous redistribution schemes can gain support that way. But government coordination in this case could have helped; toss me out of the libertarian club if you like. It's odd how the party lines have broken on this one. The libertarians have generally supported my proposed government intervention; the folks on the left who generally favour technocratic dirigiste solutions haven't liked it.

I think social cohesion is far more robust to a petrol price increase than Keith does, and especially in the case that I proposed: a temporary hike where the raised funds go to earthquake relief. Would you suddenly stop helping your neighbours because you thought the gas station down the road cheated you?

It's a bit of a shame that Keith's initial good points - the elasticity questions - get lost a bit at the end. The footnoted tirade against homo oeconomicus and the Austrian school, and the threatening to bash anybody who believes in a strawman form of the argument I'd put up, don't help his argument. Homo economicus maximizes a utility function that can and does include loving their families and helping their neighbours. And Austrians support anything that's voluntary; I'd expect a proper Austrian would oppose my proposal that government try to coordinate a temporary price hike.

But we economists are wary of relying solely on altruism to get the job done - and the job here is a big one. There's only so much altruism to go around. We have some evidence that folks behaving altruistically on one margin then feel that they've done enough and so can afford to be less altruistic on other margins. We strain altruism if we ask it to do too much. And it denigrates the altruism folks have shown and continue to show to argue that it would have disappeared had gas prices had gone up for two days last week.

I'd argued last time round in favour of gouging more generally. I stand by it. The dairy owner who's massively short on supplies shouldn't be excoriated for keeping enough on the shelf for emergency need by raising prices. But I also cheer those who, seeing that folks on the other side of town are having to pay multiples of normal prices, load up trucks with the items in obvious short supply and bring them over to give away. It never occurred to me that folks could interpret this as "he likes one, he must hate the other". I'd think rather that evidence of the former helps to encourage the latter.

Update: Rauparaha at TVHE seems to agree.

Quake entrepreneurship

While I write up a reply to Keith Ng's missive, do enjoy the following.

Grant Rigby, Manitoba raspberry wine baron and raconteur, sends along this helpful note suggesting that the Cramptons might have seen this as an entrepreneurial moment. As background, my parents, currently visiting, make home-style jam in Manitoba; Grant has long teased them about their labels.

If by fine luck residing in the area where water pipes and sewers no longer connect, then I reason that the elder Crampton may have set to building a quiet personal outdoor biffy, adapted from a design not remote in his memory. The younger Mrs. might have noticed how this improved the elder Crampton's public appearance at certain too frequent times of the day, and instructed his son to request the elder to build a second one for the neighbour to similarly enhance his appearance at certain times via the same proven principle of concealment. The neighbour would have likely then insisted on paying well in excess of material biffy costs, upon which the viability and need for this specialized enterprise would be evident. For material supply, the well honed arts of scavenge and salvage would have perfectly coincided to the timely regional need for such activity.

Surplus staff would likely have been hired to run the tills, to force rigor on the fledgling enterprise to increase supply and thus more rapidly conceal more of the neighbours. Between sessions of cutting nearly round holes in boards to customer specifications, the elder would have found time to proudly apply the ladies' Maid in Zeal labels, ensuring each was slightly off perfect to convincingly convey that enduring indisputable home-made quality.

The younger would have commenced the important composition of the dissertation for which his career would become most remembered, being the final convincing evidence of the overwhelming folly of taxing private economies to enable governments to attempt to provide complex integrated vulnerable rigid infrastructure concealed in fractious mantle floating on bubbling molten iron, to merely deliver a primary service which privates such as the elder Crampton would have done more durably in the absence of tax. The need for existence of nation states to coordinate bureaucracies would have thus become an ever diminishing note of history, as a united anarchy of private economies would soon come to reign.

In fact, the builder just down the road from us had set about to building an old-style outhouse, using his construction generator for that laudable purpose. Being without power, we would be unable to seize the entrepreneurial moment.

Actually, that's far too quick. Hiring a generator is not impossible, and combining that with labour and capital could have produced outhouses aplenty. But selling them for profit might have resulted in a tarring and feathering given the mood around the place.

If someone had driven a petrol tanker to New Brighton on Wednesday and sold petrol at $5/litre from the truck, I would have welcomed him as a hero and thanked him profusely for the ten litres I'd have purchased from him. Had there been the potential for profit in it, some enterprising fuel company might have retrofitted a tanker truck to that end. But the potential for scorn and condemnation was too high, so anybody from Brighton needing petrol had to drive the only remaining road into and out of Brighton - Travis Road - and further deteriorate and congest that lifeline.

Grant continues, making the case for encouraging composting toilets instead of plumbed ones, with property tax reductions for those making the switch. It's not a crazy idea.

Grant Rigby really needs to start a blog. I'd read it. If he ever does, I'll point you to it.

It's the little differences.

Sue's boss goes into their building to get Sue's computer so she can keep working before the engineers check the building.

She was hard core on the VPN till late.

Canterbury bosses insist we keep all files on the university file server but won't let an IT tech in to reboot the server till God comes down and signs some form declaring the building safe. So eighty staff from the College at a standstill.

Pacific free trade

My guest blogging continued at Pileus during the quake with one queued post there appearing.

Is it better to have a serious free trade deal among a smaller set of countries, or a weaker deal that brings in the States?

I’d put decent money that, if America signs onto the deal, there’d be years of costly arbitration before New Zealand had any kind of increased access to American dairy markets. For starters, American dairy farmers would argue that failure of the New Zealand competition authorities to prosecute New Zealand dairy cooperative Fonterra as a monopoly constituted a subsidy under US law and justified counterveiling duties. Never mind that Fonterra has to rely on farmers voluntarily choosing to supply it with milk rather than supply one of its competitors, and that it’s legally required to supply some of its milk to some of its competitors, while the US dairy compacts and market orders are state-enforced cartels that do everything but shoot potential competitors. If the United States was happy to continue trade action against imports of Canadian softwood in the midst of Hurricane Katrina rebuilding, despite NAFTA, why ought we expect any better for New Zealand dairy?

In exchange for the illusion of access to American dairy markets, we’d likely get some pretty restrictive copyright and intellectual property rules. The hubub over investor protection provisions don’t much worry me – odds are that such provisions would only give a slap to the parts of our Overseas Investment Act regulations that need the slap.

Catch the whole thing at Pileus.

After I submitted the post to Pileus, the University's PR office called asking if I could handle an interview from Canterbury Television (at my office) on the Trans-Pacific Partnership and US/NZ trade. Serendipity! I accepted for 2 PM. I don't know whether the reporter was in or out of the CTV building when it collapsed at 12:50. I could have scheduled for one o'clock, which would have guaranteed out of office by 12:50, but I'd already booked in for a late lunch. And nobody knew what was coming.

Double petrol prices. Do it now.

The stylized facts. First, lots of petrol stations are closed for lack of power. Second, there is a temporary gap in supply such that if folks only filled up normally, all would be fine. But, if everyone is filling up all the time, the stations cannot handle the spike in demand combined with the temporary supply shock. And given that everybody else is behaving badly, it is optimal for each player in the game also to behave badly. If everyone expects that everyone else is panic buying, then everyone will rightly expect queueing and empty stations when they go to fill up. Moral suasion has been tried and has failed to break the bad equilibrium.

The very best way of solving this problem is a temporary price hike. Figure out when normal supplies will be restored. Announce that prices double until that day, at which point they drop by a quarter per day till back to normal.

The usual case for price gouging is it helps draw resources to the area. There is no margin for that here. They're already doing all they can. Instead, the point is purely allocation. Both to current users and over time. We want to make sure that the guy with a half a tank decides to wait instead of filling up. If he knows prices will be cheaper in two days, he will hold off.

And, even better, folks will also decide to cut back on discretionary driving when construction and emergency vehicles need the roads.

Some folks worry about these poor not affording gas. The gains of reduced queueing and reduced congestion massively outweigh equity considerations of this sort. Or, think of it this way. In a crazy emergency like this, are more people screwed by having to queue for hours for gas, or are more screwed by having to pay an extra twenty bucks for enough fuel to see them through the day?

Double petrol prices. Do it now.

So folks don't hate the petrol stations, call it a two dollar per litre earthquake surcharge with proceeds going to earthquake relief. Normally extra profits help bring more resources to the region. I can't believe there's any margin there this time round. Avoiding backlash then more important.

Note: apologies for hasty and likely typo-ridden post. Internet dodgy. Thanks to Bernard Hickey for posting the initial deck.ly version of this up on Interest.co.nz before I hacked a way into Offsetting.

Update: Response to Keith Ng.

Here we go again

A brief post for folks who haven't caught the Twitter updates.

I was in my office getting ready to meet Peter McCaffrey for a late lunch when the quake hit. It felt bigger than the boxing day quake but hard to tell as I was on the ground floor visiting Denis for that one; this time I was five floors up. Grabbed the laptop from the docking station and ran. Power was out. No sirens or alarms. Just folks exiting. Susan was at St. John. A bookcase fell between her and a coworker; she caught a ride home with another coworker who lives on this side of town.

Took more than four hours to get home where it usually takes half an hour. I took my usual route home through downtown as I didn't yet know if I was picking Susan up when I started out. And Radio New Zealand was utterly useless for a good fifteen minutes. Just regular programming. If they would have had any kind of warning up to avoid downtown at all costs, I would have. Things in Ilam didn't look too bad. Traffic was light. No crazy damage. Power out in a few places, like Boxing Day.

It would have been really helpful had radio messages to avoid downtown gone out before everybody was downtown.

Big mess at the house, now mostly tidied. Water and power out. Nobody knows when either will be back.

But we have plenty of emergency provisions and had stocked thirty litres of water. The council has parked a giant water tank across the road, which also has been helpful. The folks queueing there when it first came round had pretty obviously made no emergency provisions. Thought September would have been a better lesson.

Thanks for the emailed well wishes and offers of help. We have ourselves sorted out. Lots of folks in worse shape. I was scheduled for a 2pm interview with Canterbury Television about US NZ trade issues; hope the reporter left her office early. Their building collapsed in the quake, likely a hundred trapped and dead in there.

Beautiful day outside. Our neighborhood doesn't look much worse for wear. A few more chimneys down. A few neighbours reporting serious structural damage. But anybody who wasn't in a collapsed building came out lucky.

Email is spotty as I'm still without power. Catch me on Twitter if needed.

Econ Geek Envy

My grad school roommate was a few years ahead of me in the programme at George Mason. He went part time to work on the Hill shortly before I arrived there; the opportunity costs of finishing his PhD quickly became too high. He loved to tell the story of how David Friedman showed up for a barbeque at his house once after giving a seminar at George Mason. I always envied him that party.

In the New York Times via BK Drinkwater's shared items feed, Milton Friedman and Monopoly:

Monopoly was taken seriously in Shorey House at the University of Chicago in the late 1970s. A room was set aside as “The Monopoly Room.” But in that post-Vietnam, pre-Reagan era, all assumptions were questioned and a game our parents played was no exception. Rules were meant to be altered. The house even convened a “constitution convention” to change the official rules of the game to allow a person to build a hotel on a property without first having to own four houses. Mr. Zelenty, now a corporate lawyer in his native New Jersey, remembers holding a sign that said, “New Jersey Espouses / Hotels Without Houses.”

The other thing taken as seriously in that dorm was free-market economics or, more precisely, Milton Friedman, the University of Chicago economics professor. This was a house that frequently invited Professor Friedman and his wife, Rose, to sherry hours. House members ran a snack bar in the basement of the dormitory called Tanstafl, an abbreviation of a saying favored by Mr. Friedman, that “there ain’t no such thing as a free lunch.”

Mr. Zelenty owned the greatest of treasures any of us could imagine because it combined those two passions. He had asked Mr. Friedman to sign his Monopoly board at one of those sherry hours. The Nobel laureate did so, writing, “Down with” above the game’s name. We didn’t play on that board. No one ever played on that board. (Mr. Zelenty said he still has it and wants to donate the relic to the university one day. “It’s in a place of safety more than a place of honor,” he said.)

The precise details of our classic game are blurred by the alcohol consumed that night and the years that have passed since then, but this much is recalled. We decided that Monopoly was hostile to a free market because it restricted the number of houses or hotels one could buy. We voted that a player could buy as many hotels as a property could physically bear and rents would be raised proportionally.

Read the whole article to work through the effects on gameplay.

Zelenty got to drink sherry with Milton Friedman. And he has a signed Monopoly board memento. Econ geek envy.

But I got to play Dungeons and Dragons in an all economist D&D group where Bryan Caplan was Dungeon Master and William Dickens was a half-ogre named Grissumpf. David Mitchell was a gully dwarf. And Scott Beaulier was some kind of fighter. My Sage/Assassin, Dougal, had a charisma of 3 - I flipped the points over to other characteristics after a bad roll but really enjoyed role playing the lowest possible charisma. You might think it wasn't much of a stretch. You might be right. It was awesome.

If you ever get invited to Capla-Con, go. I can vouch for the "Punctuated Equilibrium" scenario; I generated the Dentist character in its inaugural playing.

Pileus

I'm this week guest blogging at Pileus. I've opened there by pondering the impossibility of the Maryland libertarian. Can freedom really not be worth a commute from Pennsylvania or Virginia, or just leaving?

You don’t have to move as far as New Zealand either. Just crossing a state line can make a difference: Virginia beats Maryland on every measure of freedom and is right next door. The ranking of states by respect for personal freedoms puts Virginia ninth of fifty and Maryland dead last. But Jason Sorens found there are about as many libertarian voters in Maryland as in Virginia. If libertarian voters won’t suffer a longer commute from Pennsylvania or Virginia to a job in Maryland, how much value do we put on freedom? And if we personally put little value on freedom in the personal sphere, our calls against eroding it in the political sphere might ring a bit hollow.

Nobody’s demand curve for freedom is or should be completely inelastic. New York and Boston are awesome cities filled with great amenities; that’s one reason their mayors can afford such awful policies. I can imagine living in unfree places if the compensation bundle were good enough – liberty matters, but so do wealth and other amenities. But I wonder how cheaply we’re trading freedom. Give me Liberty or give me … a one course reduction, an accelerated tenure clock and a corner office?

Raid the poor

Unfortunately, the main lesson the DEA will draw here is that they ought to focus enforcement efforts on poor neighbourhoods where their victims are less likely to be law professors.

When narcotics officers appeared at a Castro home shortly after 7 a.m. on Jan. 11, they had permission from a judge to search for "proceeds" from an illegal marijuana grow.

The SFPD and DEA found no piles of marijuana money at 243 Diamond St., one of six addresses raided simultaneously in San Francisco that morning. Instead, they found Clark Freshman, who rents the penthouse at the two-unit building. Freshman, a UC Hastings law professor and the main consultant to the television show Lie to Me, was put into handcuffs while in his bathrobe as agents searched, despite Freshman's insistence that they had the wrong place and were breaking the law. "I told them to call the judge and get their warrant updated," he says. "They just laughed at me — I guess that's why they're called pigs."

Soon they may be called defendants in a lawsuit. A furious Freshman has pledged to sue the DEA and the SFPD for unlawful search and seizure of his home.
...
"I've been on the fence for years about the legalization of drugs ... and now I'm a victim of this crazy war on drugs," says Freshman, who pledged to sue until "I see [the agents'] houses sold at auction and their kids' college tuitions taken away from them. There will not be a better litigated case this century."

Hard core. I like it. Has a "Conan, what is best in life?" feel to it.

But in the grand scheme of things, this story sounds like one of the least bad police misconduct cases. Did they seize what money he did have and invite him to sue to get it back under asset forfeiture? No. Did they shoot up the place? No. Did they kill his pets or his grandpa? No. Did they beat him up? No. Did they use a flash-bang grenade, burning down the house and leaving someone inside to burn to death? No. It could have been worse. Worse tends to happen in neighbourhoods where law profs don't live.

Bon mot

"Maintaining the crucifix is simply a way of letting everyone know that the religion in which Quebecers no longer believe is the official religion not to be believed in."

Barbara Kay in the National Post. I don't endorse the rest of the piece. But the quip above nicely sums up Quebec.

Whose dollar do you have?

Moe the Bartender objected to that his money, meant to be at the bank, was in Bill's house and Fred's house; punches followed.

But if most dollars are just ledger entries at a bank, who's to say that one of those accounting units didn't enter the banking system when, say, Bill Gates deposited his first Microsoft paycheque? Or maybe you have the dollar that payed the hitman who killed Jimmy Hoffa. Whose money is all in your account? Would you care? Is it better to have money that had a history?

Wondermark cares.

The alt-text on this one, at original source, says "A fiat currency deserves a fiat history". Go read the whole series.

It's a shame that the local newspaper has such terrible comics. The opportunity costs are high.

Rugby World Cup

I'm scheduled for Martin Devlin's show on Radio Live this afternoon to talk ticket scalping. If the econ department had ever had a vote on "most likely never to appear on a national sports programme", I'd probably have made the finals. Lack of knowledge about rugby probably helps me here though - I can make hypotheses behind the veil and see what the rugby expert says when I talk to him on the show.

Here are some things I want to know, and hope to find out this afternoon.

• What proportion of seats for the quarter-finals, semis and finals are allocated via the lottery rather than through the international pool?
  • The more that go through the lottery, the greater the potential revenue losses from underpricing and the greater the benefits of scalping
• What proportion of folks getting a lotto ticket will be invited to buy a finals ticket? Is it completely random draw, or is there some algorithm running in the background that tries to match folks up with the ticket they'd be most likely (or least likely) to want to get? Will we ever get stats on the number of lotto invitations extended and the proportion that were accepted?
  • The worse the match between the "invitation to buy" and the buyer's preferences, the fewer the number of acceptances we'll have. Consequences depend on what happens with the rejected invitations. If the stats never come out, that's probably not a good thing.
• Suppose I win the lottery but am given the chance to buy a ticket either for a game I don't want to see or for one that's more expensive than I'm willing to pay. What happens to the ticket I turn down? Does it go back into the lotto pool? Does it go into the set of normal-priced tickets or into the set for hospitality packages?
  • If it goes back into the lotto pool, potential losses are higher. If it goes to the international pool, where profits are higher, that reduces losses but also perhaps explains the bizarre lotto set up where you kinda think you've got a shot at a ticket, but you can't tell in advance for which game or at what price level. In this latter case, it strengthens support for my "the whole thing's a sham" hypothesis; in the former, it weakens it but also increases the benefits of scalping.
• Suppose I buy a ticket at regular prices for the semi-finals, but the team I wanted to see there gets knocked out in the quarter finals. I'm in deep despair; I can't leave the house, never mind go to see the team that kicked my guys out of the semi-finals. How can I sell my ticket without the buyer worrying that it's counterfeit? Is there any kind of legitimate resale market like StubHub or TicketExchange? If not, why not? The absence of one of these reduces the amount I'm willing to pay for the ticket in the first place in the same way that I'm willing to pay more for an airline ticket that allows cancellations.

Again, I'm behind the veil here. But suppose I were the RWC organizer and I were organizing things. How would I set it up if I knew I had to give the appearance of having some seats available at low price for regular Kiwis, but I wanted to minimize losses at the same time?

I'd run the lotto for lowish priced seats for the popular games. I'd make sure that people couldn't choose in advance what price ticket or what game they'd be offered the chance to purchase. I'd make it really hard for them to on-sell that ticket so they decline the offer [prohibit on-selling at higher than face value]. I'd then run a background algorithm that made it more likely that folks who bought the cheapest seats for games were given the chance to buy really expensive tickets that they probably couldn't afford - ideally in another city. So folks buying cheap tickets to games in Invercargill would get the option to buy expensive seats for final games up on the North Island. Then when they turned me down, I'd put those tickets into hospitality packs or make them available to international tour operators. Voila! It looks like locals have a fair go at tickets for the good games, but most of the seats actually wind up being sold at market prices.

Maybe Martin Devlin can tell me how close actual practice is to how I'd be doing things were I in that spot. Again - I want the lowest possible losses for RWC because the government's on the hook for it one way or another. If it's the case that the veneer of broad access is what maintains support for what's likely around a half a billion dollars in total combined subsidies for the world cup though - I'd sooner peel that veneer back a bit (if it is veneer).

Strange country, New Zealand. I do rather a lot of work on topics like alcohol, minimum wages, voter knowledge - all using NZ data in an NZ context - tumbleweeds roll by. Niko Kloeten from the NBR calls me up Wednesday morning asking for the standard econ view on ticket scalping. I emailed him a few paragraphs a half hour later. Got a call that afternoon for TVNZ's breakfast show that afternoon for the next morning, then Larry Williams's Newstalk ZB drivetime show Thursday afternoon, and now this.

Folks coming in from Devlin's show would probably find these sets of posts of interest. Each one will bring up the posts with those tags.

• Ticket scalping
• Sports economics
• Economics of stadiums
• The kinds of things I find fun (perhaps too nerd humour, who knows)
• The merits and economics of alcohol

Otherwise, hit the "greatest hits" links over at the top on the right to see the more typical fare here. And who knows. Maybe someday Seamus Hogan will start blogging here again, in which case you might expect more sports economics posts.

Update: Martin thinks the lotto tickets stay in the lotto pool if they're turned down. Would be interesting to know for sure.

Ex post predictions?

Roger Bowden writes in the print edition of the National Business Review:

The reason economics is called the dismal science is a purported predilection for making ex post predictions, or being wise after the event.

A bank economist should be able to rationalise at the drop of a hat, with a different story from one day to the other. But one test of a good economist is that he or she calls it right in advance, even when the world really wants them to be wrong.

We have had an example recently with the explosion of youth unemployment from 2008 onward, even relative to other OECD countries.

Eric Crampton, of the University of Canterbury, has claimed that this is fallout from the previous Labour government's realignment of the youth minimum wage and ratified by the National-led government. The argument is based on a threshold effect: things don't matter very much when times are good; but when they're bad, it's last in, first out. Moreover, the young who lose their jobs never quite catch up thereafter.

I'm not sure whether I'm here meant to be one who's ex post predicting or who called things in advance. I wasn't blogging in 2008. But I think the students who took my Economics and Current Policy Issues course in 2006, when I spent a week on labour markets and spent time covering the youth rate elimination proposals then on the table, wouldn't find any inconsistencies between what I was saying then and what I've been finding now.

I'd quibble on a couple of points with Roger Bowden. I think it's more than just "last in, first out"; I'd expect firms are also failing to hire young workers when positions are created and are creating fewer positions that could be filled by young workers. I doubt Roger would disagree with that though.

As for why economics is called the dismal science...here's the secret history. Nothing to do with forecasting, or with the Iron Law of Wages (the usual explanation). Anyone who doesn't know how the dismal science got its name ought read David Levy and wear the badge with pride.

Is the game rigged? Or is the world?

Monica Potts despairs that when she plays Civilization, The Sims, and SimCity, she always winds up using strategies she finds ideologically offensive. The (US) liberal has to play as a (US) conservative to win.

There are plenty of other games of which conservatives should approve as well. Sim City, which preceded The Sims, has players create a virtual metropolis instead of a virtual family. As a Sim City expert, I can tell you that things function much more smoothly if taxes are low and city government caters to corporate interests.
...
Those cities also always end up polluted: Wind energy is fine in theory, but old-fashioned petroleum and coal facilities really make them run.

I'll leave to one side for now that the SimCity style games ignore Hayekian insights - I've covered that before. But don't we have at least some evidence that cities function more smoothly if taxes and regulatory burdens aren't too onerous?

I wonder whether Potts's problem is less with the games and more with the world.

I blame some of my right-of-center leanings on the structures of the games themselves. Having children has the added bonus of extending game time in The Sims, because I get to continue to play the same family as the generations roll by. Maternity leave is mandatory for pregnant Sim women because of a long-standing technical issue within the game, but that replicates a long--standing real-world assumption about which partner should care for newborn children. The result is that my Sim women often leave work permanently because they've taken more time off than their Sim husbands, which actually mirrors the results of gender discrimination in the real world. If the game were set up in a less traditional way, I would likely play it in a less traditional way.

I'm not sure that it's rigging the game to have maternity leave of at least some short period be a necessary counterpart to childbirth. Would it be at all realistic to have the game coded to allow female Sims to have the baby in the morning and be back at the office that afternoon?

Then again, she might just not be all that good a gamer:

Civilization was not created by Wright but is similarly rigged. While, historically, there are plenty of Alexander the Greats who amassed power through conquest, there are also countries like Switzerland that became economically powerful by remaining neutral and pacifist. The conventional wisdom, however, is that war games sell--and Civilization is designed to be a war game. I can opt to commit my resources to building trade alliances and public libraries, but I don't have a choice about building an army to defend my cities against barbarian attacks. Once I have an army, I might as well use it to destroy my competitors. Waging war is the only way I've ever won the game. (It seems important to note that pulling off a "cultural" victory is extremely difficult.) The lesson: Getting results from liberal policies takes a tremendously long time. It's also, frankly, much less fun to have a scripted dialogue with Catherine the Great than to watch a samurai fall to a pikeman's ax.

I've never won through war and have only won through diplomatic and cultural victories. But I've only pushed that high through the computer player difficulty settings. Maybe things flip to advantage warmongering on the higher levels.

HT: @Isegoria

Farewell Sir Roger

Sir Roger Douglas has announced he won't be standing for re-election.

It's a tragedy that this is optimal.

Douglas's reforms were critically important in fixing the country in the 1980s. The best argument that can be made against them is that had reforms proceeded more slowly, public support for the reforms might have been built and we'd have had less backsliding around 2005-2008. I'd put less than even odds on the critique being right, but it's defensible. Other critiques I've been seeing around the traps subsequent to the retirement announcement are a little uglier.

The costs of the restructuring were unavoidable. Policy has a hard time turning on a dime; entrenched business practices can be even slower. A whole lot of firms had to learn how to operate in a deregulated and internationally competitive environment. Arnold Kling's recalculation story is probably the best explanation for the prolonged downturn - we don't jump from one equilibrium to another, and the path can be painful. It took a long time to figure out that the best use of some sheep paddocks was grape growing, dairy irrigation for others. You don't move from requiring government permission to get a foreign magazine subscription (currency controls) to a dynamic free trading economy without adjustment costs. The move's still worthwhile.

The country's a better place for Douglas having served. I can't think of many other politicians, here or abroad, about whom that's true.

The last term has had to have been frustrating for Sir Roger. Having National shoot down his bill on the youth minimum wage had to have stung. National voted against Labour's elimination of the differential youth rate, but Douglas couldn't get National onside for a policy move consistent with National's prior position and not ruled out by Key in the election campaign. And about 10,000 kids are now unemployed who otherwise likely wouldn't be. Sad fact is that most voters associate Sir Roger with the pain of the reforms rather than the worse pain avoided and the prosperity that ensued, like the kid that blames the doctor for the medicine's bad taste. And that's enough to poison the well against anything he might propose, regardless of how well grounded it might be in economic theory or how consistent it might otherwise be with the kinds of policies the National party might otherwise support. And so it's time to retire.

It's a good thing that economic reformers aren't in it for the kudos. The hipsters on the left might daydream about what reform package they might have implemented had they had their fingers on the button back in '84. But the risks of currency crisis, debt default, and the country being taken under statutory management weren't trivial. We can armchair quarterback now about whether it would have been possible to implement a superior alternative reform path. It's pretty unclear even now whether it would have been possible. If I put myself where he was in '84, I have a hard time seeing an ex ante better path than the one he took: fix as much as you can as fast as you can and hope the damned thing sticks. And most of it has stuck, despite serious backsliding since 2005 or so.

One of the profs back at Mason told us that perhaps the best any of us could hope for would be to delay the implementation of some bad bit of regulation by a week or two, but that even that would be worth doing - the benefits of those two weeks, aggregated over everybody, could be substantial. Sir Roger did a fair bit more than that. Enjoy the break!

Stifling innovation

Kiwis often express incredulity when I tell them how much worse regulation can be in the States as compared to here.

Kiwi vodka company 42 Below started out when a guy named Geoff built a still at his house and started distilling his own vodka. He started inviting friends around, then started selling to friends who owned bars. That turning out well, he decided to go pro: quit the day job and focus on vodka. About eight years after starting up his home brew still, he's bought out by Bacardi. Awesome success story.

Now consider how things would have turned out had he started in the States.

I was talking with a buddy of mine last night: a lawyer currently working for the state, getting his MBA on the side. He’s been researching the possibility of setting up a distillery firm, and we talked about it for close to an hour. Very interesting stuff, and he’s got some great ideas for how to break into the market and his unique angle.

But the funny part is that probably 45 minutes of that hour was spent talking about his strategy in light of the manifold regulatory hoops and tax laws he has to navigate. Between licensing and taxes, which as you can imagine for hard liquor are absurd, his business model is 100% dominated by meeting the requirements of the state. Some examples: before you can boil an ounce of alcohol, you need local, state, and federal licensing in place. You can’t get the federal until you have the state and local in place, and getting all three takes anywhere from 8-24 months. The problem is that to fill out the paperwork you have to have the facility, equipment, stock, etc. all in place and ready to go; you can’t fill out paperwork for a nonexistent distillery. So he’s looking at having to hold a facility with the equipment for two years while the feds sit around.

Sure, things vary state by state. And Maryland is pretty bad. But you have to break the law if you want to start up as a distiller in Maryland:

While he’s got some good ideas for recipes and techniques, he’s never actually distilled liquor himself because that’s also very illegal in MD. Here’s the one place where he will probably have to break the law, though, because if he’s not allowed to distill until he’s got a permit, and if he can’t get a permit unless he’s got everything ready to go (and is thus paying for it), just when is he supposed to get the knowhow to produce a decent batch of alcohol? So I think he’s going to get some equipment, put it in his basement, and during the two years it takes to get official approval get a few recipes and techniques perfected.

Bootleggers and baptists. In this case, the big guys get regulations that keep out new entrants; the baptists get their usual jollies.

We don't know how lucky we are in this country! We don't know how luuuuccckkyyyyy we areeeee....

Lowering transaction costs

They could both be right:

Biderman is quick to explain why his business isn't hurting anyone. "You eradicate Ashley Madison, you're not going to eradicate infidelity. That's what allows me to sleep at night," he says. "If you think that all affairs happen on Ashley Madison, you're very naive. The majority happen in the workplace. People are thrust together, that's where they happen." In that context, Biderman likes to argue, affairs can be much more damaging, by causing meltdowns at work, becoming public, and blowing up marriages. Ashley Madison and its clandestine, more transactional approach, he says, is actually a marriage saver, a public service of a kind. "Do you think if you stop allowing divorce attorneys to advertise, we would stop people from getting divorced?" he says.

According to Justin Wolfers, an economist at the Wharton School of the University of Pennsylvania, Ashley Madison provides liquidity to an illiquid market, which may make the market bigger. "The labor market is all about workers trying to find jobs and jobs trying to find workers," Wolfers said. "In the romance market, technologies like the Internet are helpful in making those matchings more efficient, so if it makes it easier to find a mate, presumably it would create more of these ventures."

Ashley Madison reduces transaction costs by matching married folks with other married folks; incentives for discretion are ideally then the same for both parties. I'd expect this to be an otherwise fairly large barrier to trade; the folks at Ashley Madison saw the deadweight costs imposed by information asymmetries as potential profits to be earned.

It would be very surprising if innovations of this sort didn't increase the number of transactions. I'd expect the market otherwise to be rather illiquid; determining who's in the market could prove rather costly.

I'd also expect that the success of Ashley Madison will help out other online ventures.

I love the data that OK Cupid regularly puts out. It would be even more interesting if Ashley Madison started doing the same.

FOR THE LOVE OF GAWD NOOOOOOOO!!!

Departmental email:

Ann is starting to prepare a schedule of earthquake remediation. Every office on this floor will be affected whether it is earthquake damaged or not. It has been decided that those offices that do not require earthquake repairs will be completely repainted. The worst-case scenario is that it will take two weeks to complete this work with a best outcome prediction of 10 days. All furniture will be pushed to the centre of rooms so obviously no-one will be able to work in their office while it is being worked on. Bookcases will also have to be cleared. The offices down the end of the corridor (that is the end from the kitchen!) will be worked on first.

Staff with laptops will be encouraged to work from home. Those who can’t will have to be housed elsewhere but where that is hasn’t been decided.

This means that courses and tutorials taught on this floor will have to be rescheduled elsewhere. There is talk that PhD students and Hons students will be housed in a prefab.

There is ONE crack in the paint in my office. It extends from the ceiling down to the window, then from the window down to the floor. I really don't mind its being there. My bookcases are overflowing. This will cost me half a week, minimum.

SERENITY NOW!!!!!

An upcoming engagement

Coming up next week at The Christchurch Press:

Eric Crampton, Senior Lecturer in Economics at the University of Canterbury, will present an educational workshop for editorial staff on understanding "Basic stats, inference, and the social sciences" . In particular, he will pick apart press releases to query how accurate their assumptions are.

Eric's challenge to us is: "The Press has played pretty close to the researchers' press releases, especially when those press releases make claims that aren't really substantiated by the underlying studies. There are a few simple(ish) things to watch out for and a few easy questions that reporters can ask that can really help them to sort out whether the press releases match what the researchers have found. I know that journalists work under pretty tight time pressure and that it's pretty unlikely that they'd be reading the original source papers. However, we've got to be able to do better than quotes from the press releases followed up by reaction quotes from lobby groups in the area."

This is a great opportunity for us to learn skills that will provide better, more accurate stories for our readers.

I'm giving a three hour session, two sections. Here's my draft outline. Have you any better suggestions of examples I should cover? I don't think I can cover more material - I have about an hour and a quarter for each half, with a break in the middle. I'd far sooner take a sledgehammer to two big problems than throw pebbles at a bunch of smaller ones.

Causation and inference

• The basics of correlation
• Ways that correlation isn't causation:
  
  • Reverse causation
  • Spurious correlation: an underlying omitted causal variable
• How can you tell if the relationship is causal?
  
  • Methods that get closer to showing causality (don't worry - intuitive explanations only, no real statistics - just enough to know what the terms mean if somebody uses them):
    
    • Panel fixed-effects studies
    • Instrumental variable studies
    • Regression discontinuity design
    • Natural experiment
  • If the press release doesn't say anything about how causality was determined, ask the researcher before going out for the reaction quotes! Look how Reuters did it on Sally Casswell's latest piece.
  
  
  
  • If all there is is correlation, think of all the ways that correlation isn't causation. Is there something big and obvious lurking around that could be driving the results?
    
    • Pokies and crime rates: could results here be due to pokie machines being situated in bars? Other neighbourhood characteristics? Let's look at the press release and find the clues that they really haven't established causality.
    • Marriage and mental health: if married people are less likely to show onset of new mental illnesses, is that because marriage prevents mental illness? Or, is it because folks who have had a prior mental illness are more likely to develop new ones and are less likely to get married?
    • Does watching TV really kill you? Or, does having a more sedentary lifestyle correlate both with TV watching and increased mortality?
    • Substance abuse and crime: what does "alcohol-related" or "drug-related" mean in the police stats? About as much as "Oxygen-related": the offender had consumed the substance prior to the offence.
• Workshop time: I propose some correlations: you tell me whether they seem plausible or if something else could be driving things.

Social costs and social benefits
Folks wanting to have a pet project subsidized, or a pet hate regulated or taxed, will commission social benefit and social cost studies to help push their case. They're usually terrible. How?

• Obvious dodginess: ridiculous crazy assumptions. Example: PriceWaterhouse Coopers on Adult and Continuing Education. Is it really plausible that anyone taking a night course in Indian Cooking enjoys a fifty percent reduction in his likelihood of committing any crime?
• Social versus private costs and benefits: why the difference matters
• Are the stated benefits gross or net? Do they confuse stocks and flows? Do they account for the deadweight costs of the taxes needed to fund the project? Do they rely on and abuse multiplier effects?
• Also be careful that the study is counting everything it ought to count. If a study claims to show health benefits of $(big number) if we ban, say, tricycles (kids have accidents on them), have they weighed the cost to kids of not being able to ride around on tricycles? In other words, are they only assessing the benefits on one side while ignoring the costs of implementing the policy - not just the costs to the government, but also the costs falling on those subject to the regulation or policy? This is especially prevalent in public health research that counts as zero all the fun people have doing somewhat risky things.
• How to guard against being abused:
  • Ask about the biggest contributors to the costs and benefits. Do they seem plausible? Are they benefits that mostly accrue to the public at large, or to the person undertaking the activity?
  • Have a sense of scale: what does a $4.8 billion dollar cost or a $6.3 billion dollar benefit really mean in per capita terms? Does it seem plausible? Remember that there are only about 4 million people in the country. Any number around $4 billion means about $1000 per person for every man, woman and child in the country. If the benefits are that high, how is it that we're not already doing it? Your first reaction on seeing a really huge number shouldn't be "Wow, this is a really big problem!" It should be "That number smells bad."
  • Have there been prior estimates of the same thing? Are the current numbers very different? Why? Example: tobacco.
    
  • Treasury's handbook on cost-benefit analysis is an excellent resource. Their section on "Tips and Traps" ought be essential reading for journalists writing stories based on cost-benefit analyses.
  
  
  
• In a perfect world, we'd have only disinterested researchers. In the current world, we have commissioned consultants selling products, academics whose universities' PR offices are trying to sell stories to papers to get the university's name out, and bureaucracies that are trying to build public support for their preferred policies. Guard against all of them!
• Workshop time: I'll give press releases for example cost or benefit studies, you tell me what's wrong with them.

Anything I'm obviously missing?

In defence of scalping [updated]

Niko Kloeten cites me in defence of ticket scalping over at the National Business Review.

Rugby World Cup ticket scalpers are being used as scapegoats to excuse the greed and incompetence of the government and the New Zealand Rugby Union.

The deluge of scalping-related stories has already started, with Trade Me removing listings for semi-final tickets.

You’d think scalping was illegal or something. Well, it is: the Major Events Management Act 2007, which might as well have been called the Pork the NZRU Act, imposed a maximum penalty of $5000 for this activity.

But far from being a crime, ticket scalping is a market response to under-priced tickets, as economist Dr Eric Crampton from the University of Canterbury explained.

The best argument for setting a binding price ceiling for sporting event tickets is that allocation by queuing may give you a more enthusiastic crowd than allocation by prices. And for a private firm, that's a fair enough decision. The increase in value of broadcast rights might be worth it.

But it's a lot harder to make that kind of case for a publicly funded event like the Rugby World Cup. The New Zealand government is to be on the hook for a fair few RWC costs; Christchurch City Council has wasted a ton of money improving the stadium to handle crowd numbers that it will never ever see again. Instead, it looks more like a transfer to rugby fans from those less keen.

Fortunately, the losses from the inefficient allocation mechanism are somewhat limited. Here's my best understanding of the ticketing mechanism.

A big chunk of tickets are set aside for distribution through Rugby World Cup Limited, many of which are sold through Official Travel and Hospitality Packages. I'd be surprised if that allocation weren't sold at market clearing prices. They can take up to half of the tickets for each match, and seem to focus on getting tickets for the higher demand games.

So a big chunk of the tickets for the most popular games are taken away. How to boost demand for the less popular games? Start by selling tickets in venue pool packs - folks willing to buy a ticket for every match played by a team or for every match played at a venue get early call. Suppose you're not willing to pay some high price, say $1500 - the website says nothing - $795 for the pool match of your choice ($6395 per person for a set of tickets to the semi-final and final games) (as part of a hospitality package) but you would be willing to pay say $1000 for a set of tickets including decent seats for bad games and bad seats for good games. If there's enough value in filling up the venues for the low expected demand games, then this isn't crazy; it's just bundling a good with a bad. They might then expect that the sunk cost fallacy will kick in and folks won't just throw out the ticket for the expected-to-be-boring games.

Half of the good seats for the good games are taken up by RWCL and sold likely at close to clearing prices. The bad seats get bundled with seats for boring games. How to get folks to buy more of the seats for the boring games? Give them a lottery ticket for seats in the best games - the finals.

But this still doesn't seem consistent with profit maximization. I know the debates around a la carte pricing in cable tv markets (here here here) but my impression had been that results there were somewhat specific to the cable TV industry: zero marginal cost of offering a larger rather than a smaller bundle of channels to a particular subscriber. The marginal cost for bundled rugby seats is the revenue that could have been derived from selling the bundled but unwanted seat to someone else. It just doesn't seem plausible that the gains from having a few more people buy tickets to games they don't wish to attend outweigh the losses from forgoing some higher revenues on the premium matches.

So why does the RWC set its pricing structure like this? It's not impossible that the structure is somehow profit maximizing even in the absence of an external political game. Concert tours used to sell tickets well below market clearing prices when those tickets were loss leaders for CD sales. But I'm having a hard time seeing for what the RWC tickets could be serving as loss leader.

It seems more likely that the pricing structure is targeted at an external political game. This would be consistent with Porter and Thomas's findings about sports ticket pricing in the US. It's hard to believe that the government would shell out about a half a billion dollars to support the RWC unless there were at least the impression given that regular folks would be able to buy tickets for some of the more important matches. Having a relatively smaller portion of tickets allocated through oddball lottery mechanisms tied to buying tickets for earlier matches gives everyone some chance at getting a ticket and so increases public support, or at least attenuates opposition, to the vast public subsidies.

That also would explain why the government would step in to make scalping illegal for these events. If most of the few seats allocated through this system wound up being on-sold to folks who could afford market clearing prices, voter support for the "tax (mostly the rich but other folks too), give us cheap rugby tickets" plan would erode; "tax (mostly the rich but other folks too), provide big subsidies so rich people could go to rugby games" is less popular.

And so I come out on the side of the scalpers. I'm most convinced that there should be no legislation banning on-selling. If the RWC wants to print customers' names on the tickets and to require photo-id at the gate, that should be up to the RWC. But there's no reason the state should be involved in helping to prop up the pricing mechanism other than by not forcing RWC to honour tickets that were sold outside of its stated contractual guidelines.

I also can see no particularly good reason that somebody with a ticket that somebody else values more shouldn't be able to make a buck in the transfer. Why should all the surplus go to the buyer? In that world, many tickets are bought up early by folks intending to on-sell at a profit and some poorer rugby fans who otherwise would have attended a game would instead watch it on Sky. But consider:

• Even the "cheap" tickets for popular games are going to cost a lot: tickets for the finals start at $400, at least for the tickets now available. Is it really horrible that we transfer a bit of utility from folks able to afford $400 tickets to folks who can afford to pay $1200? What would stop the person who would otherwise queue for his own tickets from queuing to buy tickets to scalp? In that case, everyone's better off.
• The RWC might then instead move to market clearing prices for all games, in which case it could afford to take on a bigger share of the overall costs of the event. The savings could be directed towards other things that make lower income rugby fans happy, if it's their utility you care most about.
• I also have a hard time seeing why the social welfare function should weight so highly the utility of rugby fans relative to everybody else.

Why the lengthy post on Rugby World Cup and scalping? Niko Kloeten over at NBR asked me this morning for a short bit on scalping in general - I gave him the standard economic case in favour of scalping, linked to at the top of the post. But now I'm scheduled for five minutes on Thursday morning's TVNZ Breakfast programme on the same topic. And the best preparation for that kind of thing is hashing things out in a Blogger window.

Update: video here.
Update 2: Fixed a couple of links, added some pricing info.

Baby got Stat

I love that the same day I put up a post giving the .dta and .do file for a very simple little regression, this bit of awesomeness shows up from @heidactyl via @stata .

Excess unemployment

Here's the data and program I've been using to generate measures of excess youth unemployment in New Zealand since the abolition of the differential youth minimum wage. [note - the files may still be coming up 404. Our new-and-consequently-worse-than-the-old server doesn't recognize odd file types like .dta and .do, but they're working on it.]

I've modified things a bit since the last time I posted on it. As we have more and more quarters under the new regime, including those quarters' data in the estimation of parameters starts messing with the estimates if the point is figuring out what youth unemployment would look like if it had followed its prior trend relative to the adult rate.

It's a very simple model. I take the youth unemployment rate as a function of the adult unemployment rate and the square of the adult unemployment rate (to capture non-linearities) for all quarters prior to Quarter 90: June 2008. I then ask Stata to predict the youth unemployment rate given the estimated parameters (and the adult unemployment rate) and to measure the difference between the predicted results and the observed results in all quarters. Then, I ask it to tell me what the largest difference was in any quarter prior to June 2008. I subtract that difference from the residuals from June 2008 onwards and call that excess youth unemployment. That tells me how much worse youth unemployment is now, relative to the adult rate, than it was in the worst possible quarter prior to mid 2008. I multiply that excess unemployment rate by the youth labour force in each quarter from June 2008 onwards to get the number of kids unemployed who would have been employed had the youth unemployment rate been no worse relative to the adult rate than it had been in the worst quarter prior to June 2008.

The table below has the number of kids, in thousands, who were unemployed and who would have been employed had the youth unemployment rate performed no worse relative to the adult rate than it had in its worst quarter prior to the abolition of the differential youth minimum wage.

Quarter	Adult unemployment rate	Expected youth unemployment rate	Actual youth unemployment rate	Excess youth unemployment, in thousands
Jun-08	2.9	15.8	15.4	-0.7
Sep-08	3.2	16.2	15.7	-0.8
Dec-08	3.3	16.2	17.9	3.0
Mar-09	4.5	17.8	19.1	2.2
Jun-09	4.5	17.8	22.9	8.2
Sep-09	4.9	18.3	25.1	10.5
Dec-09	5.3	18.8	26.5	13.2
Mar-10	5.2	18.7	25.2	10.5
Jun-10	5.4	19.0	24.7	8.7
Sep-10	5.1	18.5	23.3	6.8
Dec-10	5.3	18.8	25.5	10.4

Excess youth unemployment peaked at just over 13,000 youths in December quarter 2009, dropped to just under 7,000 at September quarter 2010 and rose again to over 10,000 in December quarter. And again, excess here is defined relative to the worst possible performance of youth unemployment (as compared to adult) experienced between 1986 and 2008, including more than a few periods in which adult unemployment rates were far in excess of those currently experienced.

Any reasonable explanation has to say why things are so different this time than in prior recessions. The abolition of the youth minimum wage seems the most plausible explanation.

Amnio expected value

@TimHarford points to Slate on the risks and benefits of amniocentesis. In short, the standard recommendation is all wrong: it should be more recommended for younger than for older women. Why? Even though risk of genetic defects among older women is higher, the costs of a miscarriage are also higher because it gets harder to have a new pregnancy if the amnio fails.

I'd put together some expected value tables for amnio in case it were needed our last time round. The obstetrician seemed a bit surprised, but it wasn't the first or the last time I'd do something shockingly economistic.

I'm not going to here reproduce the expected value tables lest I attract pitchforks and torches. The Slate article covers most of it and helpfully links to an economics working paper that uses a rather fancier model than I worked up: they use a dynamic model that incorporates the chances of amnio on a replacement pregnancy where I simplified by just assuming an average expected value replacement. It's nice that this working paper's out there though - it'll save others from having to hack out their own simpler versions and might help improve doctors' recommendations.

Maker!

Our College IT head honcho, Adam Pethig, is a maker! Here's what he's been up to in the evenings - building rather nice looking old-style arcade machines.

He's selling them on TradeMe. I wonder how long 'till Ira's old enough to give me an excuse to buy one to enjoy playing Pac-Man.

Explaining quantities without prices

However, the peculiarity is the way young people seem to be so discriminated against in the statistics. Our adult rates fall back to just 4.5 per cent once youth are washed out of the figures.

There appears to be a structural flaw, an age fault line, that has lain concealed in the New Zealand economy during better times and which the recession is now bringing to light.

So why is New Zealand at the extreme when it comes to the difficulties its young now seem to face? The answer turns out to be unusually complicated.

Here's the list of candidate explanations in John McCrone's lengthy feature article:

• A growing group of "disaffected 15 to 24-year-olds who are "not in employment, education or training""
  • But if they're not in the labour force, they won't be in the unemployment stats.
  • Youth labour force participation rates are well down - this means the problem is worse than the unemployment stats would suggest. Youth labour force participation rates have been below fifty percent for five of the last eight quarters; they'd previously dropped below fifty percent once in 1999 and in four quarters between 1992 and 1994.
• The recession has a bigger effect on marginal groups like youths and especially minority youths
  • But the effect has been far larger in this recession as compared to prior recessions - youth unemployment has gone up by rather more relative to the adult unemployment rate this time around.
• Skill matching problems: graduates with good skills nevertheless have a hard time matching their skills with employer demand during tight labour markets
  • True. But unemployment in the 15-17 year old cohort is very very high and won't fall into that category.
• A glut of kids has come onto the labour market due to demographics
  • Oh yeah? HLFQ.SAZ3AA says otherwise. That series gives total labour force (employed and unemployed) aged 15-19. The average number of persons of that age category in the labour force, March quarter 2008 through September quarter 2010, is 164k. The average for the entire series going back to March quarter 1986 is 161k. Let's look to the period when unemployment was lowest for 15-19 year olds: September quarter 2004 through December quarter 2005. During that period, there were on average 163k kids in the labour force. There is no way that changes in the number of 15-19 year olds in the labour force is what's driving current youth unemployment rates. Maybe there's something there if you consider the slightly older group. But it's the 15-19 year olds who are having the roughest time on the labour market [the unemployment rate for 20-24 year olds is less than half of that for the 15-19 year olds].
• It's a shift in industry demand: firms now demand tech-savvy workers for service employment
  • Did that happen all of a sudden part way through 2008? No?
• Firms may be more "risk adverse" in taking on young kids.
  
  • Now we're starting to get somewhere. But why - WHY - might firms have just suddenly started becoming so "risk adverse" starting around third quarter 2008 - and to a far greater extent than in prior recessions? Can we think of anything? Anything at all?
• Firms just aren't hiring as much - they're keeping on existing workers
  • Ok, if this is happening, then it would more greatly affect folks coming into the labour market for the first time. But why is it worse this time for folks in the 15-19 bracket than it was in any prior recession going back to 1986?
• Industries hit worst by the recession - retail, hospitality and construction - tend to employ more youths
  • Aren't those the industries that usually get hit in recessions? And this time around's been rather worse for 15-19 year olds
• Wait, this looks promising:

  Finally, O'Reilly says, there is probably the most frequently cited reason for soaring youth unemployment - Labour's 2008 abolition of youth rates.
  
  Employment laws were changed so that even 16 and 17-year-olds had to be paid the adult minimum wage.
  
  O'Reilly says this removed any incentive for traditional youth employers, like supermarkets and fast- food restaurants, to take on young staff.

  The abolition of the differential youth minimum wage.
  
  • Finally! The first three times I read the story, I missed this part. I just can't see how any of the other tendered explanations fit the data.

Here is the picture that a candidate explanation has to be able to, well, explain. Again, and as before, this is a plot of the residuals of a dead simple OLS regression where the youth unemployment rate (15-19 year olds) is the dependent variable and the adult unemployment rate (20 and up) is the independent variable. This one's now updated with December quarter 2010 results. The residual in December quarter was 8.5 (9.3 if we restrict the model to quarters prior to the regime change). The highest value prior to the abolition of the youth minimum wage was 2.5 in June quarter 2003. There's a six point difference. Something happened in 2008 that resulted in current youth unemployment rates six points higher, relative to adult rates, than was the trend through prior recessions. I can't see how any of the other provided explanations explain why things are so much worse this time around.

O'Reilly and Paul Dalziel both point to government programmes to fund industry training courses for youths as potential solution. We might also want to consider not pricing them out of the market.

Arbitrage Now!

I blame Newman:

A memorable "Seinfeld" episode features Kramer and Newman taking thousands of cans and bottles to Michigan so they can get a nickel more per container than they would in New York, but beverage distributors say there's nothing funny when it happens for real.

In Maine, which has a more expansive bottle-redemption law than neighboring states, three people have been accused of illegally cashing in more than 100,000 out-of-state bottles and cans for deposits, the first time criminal charges have been filed in the state over bottle-refund fraud, a prosecutor said.

A couple that runs a Maine redemption centre and a Massachusetts man were indicted this week for allegedly redeeming beverage containers in Maine that were bought in other states.

Thomas and Megan Woodard, who run Green Bee Redemption in Kittery, face the more serious charge of allegedly passing off more than 100,000 out-of-state containers - with a value of more than US$10,000 (NZ$13,221) - as if they had been purchased in Maine.

That's just the tip of the iceberg.

An estimated 90 million cans and bottles are fraudulently cashed in each year in Maine, costing beverage distributors US$8 million to US$10 million, said Newell Augur, executive director of the Maine Beverage Association.

The whole article's full of win, like this:

In the 1996 "Seinfeld" episode, Kramer and Newman hatch a plan to drive a truckload of cans and bottles to Michigan, because the redemption fee there was 10 cents, double New York's nickel deposit.

Kramer laments it can't be done. "You overload your inventory and you blow your margins on gasoline," he says at one point. But Newman offers up free space in a mail truck he has to drive to Michigan before Mother's Day - "the mother of all mail days," he calls it - and the pair head off. (They end up aborting the trip while chasing down Jerry's stolen Saab.)

"That was a very funny episode," Augur [exec director of Maine Beverage Association] recalls. "But this is not a laughing matter."

Officials estimate that up to one billion beverage containers are sold in Maine each year. Containers sold in other states, however, carry the Maine deposit stamp because it's not cost-effective to change labeling for each state.

The Seinfeld episode is one of my favourites. It's a shame that our students can't now be expected to have seen the canon; otherwise, I could just point to that episode when explaining arbitrage.

It's a tough crime to prosecute: they'll have to prove that the alleged arbitrageur didn't actually collect the cans in the appropriate jurisdiction.

I hope the same AP reporter gets assigned to the next story on overdue library book fines. Mr. Bookman could be referenced....

I think a servant of the Enemy would look fairer and feel fouler

The reverse of Frodo's quip often runs through my head when I run into people who tell me of their time volunteering abroad. Scott Gilmore agrees in a delightful rant (HT: @TimHarford):

The fact is I’m not a fan of volunteers going overseas for four reasons.

You get what you pay for. Volunteer staff are never as effective as paid employees. Yes, please, regale me with tales of the group down at the local church who get together every other Sunday to sew dresses for poor African girls. But let me ask you this: If you lived in earthquake country, would you rather your kids went to class in a school built by volunteers, or one built by certified, paid professionals?

Volunteers are actually expensive. Sending a group of bankers and lawyers oversees to help out at an orphanage costs money.
...
Don’t tell me it’s “about the kids”. I hate that line. Some self-satisfied volunteer comes back from Africa...
NO NO NO NO! It’s about you. It’s about you beginning to realize that at 55 you’ve got precious little to show for your time on the planet except for an ex-wife, a daughter who won’t talk to you, a four-year-old Mercedes, and a membership to the third most exclusive golf and country club in town. So you decide to volunteer in the hopes that you’ll be fulfilled. It’s not about the kids. If it was never about the kids. If you thought for a second it was about the kids you’d man up and mail a $5410 cheque to the orphanage.
...

Now there is a big caveat to this. If you actually have a unique skill that is actually needed and there is no one there who could deliver it, then yes go. But this caveat is limited to very few folks. Doctors, engineers, and eye surgeons, for example.

Gilmore's right. The first commenter on his post asks for the argument from the other side. I gave my best shot at it when arguing about charity races over at EconLog a while back. If the donor doesn't actually care about doing good but actually cares about the vacation, and wouldn't donate anything if he didn't get to go on the vacation, then the opportunity cost of his activity isn't the opportunity costs of his time plus what it cost him to get out there, turned into the number of local professional builders that could have instead been hired. It's zero. They enjoy a lot of smug for not really doing very much, but that still is hopefully more than zero.

You're doing harm in donating money to help these folks go on overseas holidays relative to what you could be doing by donating to effective charities working in those areas. But if what you're doing is just showing that you're friends with the guy (and you otherwise wouldn't have donated anything), then some small fraction of your donation for his vacation helps that area.

The whole "I'll go overseas to pretend to help people and you'll give money to avoid offending me" drill translates some small fraction of the total cost into benefits for the purported beneficiaries. Gilmore's right that it's not about the kids. The best argument for the whole farce is that a tiny fraction of some large cost might be better than the zero that would otherwise obtain. But the disutility of the smug weighs too heavily for me.

Birthdays

Nine years ago, I was walking with Gordon Tullock from Carow Hall over to Buchanan House for a talk. I'd been invited to his 80th birthday party and consequently found out that he and I shared a birthday - the 13th of February. So I said, "Gordon, I hear we have something in common." Gordon replied in a threatening tone, "Well, we'll have to do something about that then, won't we." The rest of the story is here, along with links to other Tullock tales.

This year I've an additional reason to celebrate: I've joined him as a member of the Mont Pelerin Society.

I expect if the news reached Gordon, he'd speculate about whether it would be easier to have me expelled or shot. Or maybe he'd resign in disgust at the declining standards.

Driving your friends to drink

Sally Casswell's latest piece shows that if your friends are more depressed and in worse health, you're more likely to be a heavy drinker. Your friends and family can drive you to drink. Or at least that's the conclusion I drew from her correlations showing that individuals with worse health and lower reported personal well-being were more likely to report knowing heavy drinkers.

She of course frames it as heavy drinkers reducing the quality of life of those around them. But there's no way of sorting out the direction of causation's arrow.

I'd also worry a bit about selection on unobservables - a bunch of demographic covariates also affect the various well-being scores. Such results aren't reported in the paper, but I'd like to know the extent to which the correlation between knowing a heavy drinker and the well-being measures is attenuated by adding in the various covariates. If a big chunk of the correlation is explained by observable differences between cohorts, we'd have to wonder whether other unobservable things that correlate both with hanging out with heavy drinkers and having a generally poor life might explain the rest. For example, suppose that you have very poor personal characteristics such that the best mate you can attract is a heavy drinker. Is your poor reported life satisfaction due to the mate's heavy drinking? Or are your underlying characteristics, only some of which are observable, driving results?

Fortunately, TVNZ sourced its report from Reuters, who seem to know that they need to ask about causality. And so they note:

Casswell acknowledged, however, that the findings do not prove that being around a heavy drinker was the root of study participants' problems, noting that the study is just "a snapshot at one point in time".

"So...some other explanation is possible," she told Reuters, adding that people with poorer well-being may be more likely to attract heavy drinkers into their lives.

Always always ask how the researcher established causality.

HT: Ed.co.nz.

The Coalition for Fun

What do I need to do to be a founding member of Sorens's Coalition for Fun?

Formerly a discipline devoted to research on sanitation and epidemiology, public health is now more or less an explicitly ideological field devoted to ginning up panic over freely chosen, private behaviors and to cheerleading for paternalist government action to prohibit or discourage them. Take any fun activity enjoyed by those who are not urbanized, (generally) white, middle-aged, highly educated professionals – smoking, shooting, drinking, eating tasty food, calling a friend in the car, generally exercising “personal freedoms” – “public health advocates” are agin’ it. (Of course, you don’t see them agitating against marathon running or rock climbing or bungee-jumping or long-distance hiking or extramarital sex. Fun, risky things that urbanized, highly educated professionals like.)

...

The politics behind today’s public-healthery are sinister. They are driven by loathing of the poor, the overweight, people who shop at Wal-Mart and eat at fast-food joints, people with a Southern accent (who probably own guns and might even smoke) – the list goes on. Otherwise, why aren’t progressive-dominated governments trying to ban colorful local diners and casual-dining chains the way they are fast-food chains – even though the former often have higher-calorie food and don’t even report calorie counts to their customers? Of course, it’s the white middle classes who frequent quaint diners and TGI Friday’s.

So – I raise a glass of whisky and a cigar to the hope of a backlash against “public health,” a new Coalition for Fun.

Jason Sorens at Pileus nails it. I'll be guest blogging over at Pileus later this month; it looks like I'll be in very good company.

I've a piece in today's New Zealand Medical Journal taking another swipe at the healthists. The page proofs are at the end of the post for folks without a subscription.

Let’s begin with CHB’s [Peter Crampton, Hoek and Beaglehole] case against efficient markets. They argue that because models of perfect markets require a set of conditions not found in the real world, extensive and comprehensive government intervention in individual health choices is necessary. You could just as reasonably argue that because Earth has an atmosphere, we needn’t worry about falling off of cliffs: theories of gravitational acceleration of 9.8 metres per second squared are derived for a vacuum and so do not here apply.

The conditions under which markets can be shown to maximise efficiency—the benchmark case against which market failure is measured—are sufficient rather than necessary. We can be at an optimum even if the conditions fail.3 Under those idealised conditions, it is impossible to make any person better off without simultaneously making someone else worse off.

Where the idealised conditions fail, we have some guidance about policies that may improve outcomes, but do not necessarily do so. The market failure is necessary but not sufficient for policy to meliorate outcomes. Proving a particular failure does not give us carte blanche to implement any intervention we like; rather, it tells us where an intervention might be targeted. And it also tells us when intervention isn’t warranted.

As case in point, consider the potential for market failure caused by imperfect information about calorie counts. If consumers are mistaken about true calorie counts, they might eat more or less than they would under conditions of full information. Perhaps. Let’s leave aside for the moment the ease with which any consumer could investigate calorie counts at most fast food restaurants simply by checking their websites— if he actually cared. But experiments making calorie counts really salient at point of fast food purchase show no effect on purchases.4
The rather mixed evidence on the effects of information provision suggests to me that there was no real information market failure. If your reaction to the evidence is “well, let’s try a different intervention then and claim a different market failure as justification”, you’re no longer making the case based on market failure; you’re just being paternalistic. Public health activists have been abusing market failure theory to give a sciency flavour to what is actually just paternalism.5

I get really irritated at the claim that, if we have any kind of market failure, we can throw standard economics out the window. The claim's made a lot in the alcohol social cost literature - from the early Single et al papers through to Collins and Lapsley. If we take a straight neoclassical line, the failure tells us the type of interventions that might be warranted. If you still don't like the outcome after the correction's been made, that's too bad. If we take a more Austrian line, it's the presence of these failures that opens up market opportunities for entrepreneurs to come in and transform deadweight losses into profits.

I don't know whether the "any failure justifies any intervention" line comes from a deliberately opportunistic reading of principles-level texts or if we've screwed up as a profession in teaching principles of micro.

Cursed Rhetoric Page Proofs