Northport zone?

A couple of years ago, Khyaati Acharya and I put out a report arguing for policy trial areas. We called them "Special Economic Zones", but they weren't really like the little enclaves you'd see in parts of Asia. Instead, it was a way of devolving powers or regulatory responsibility down to local councils that had demonstrated a capability of handling them, along with a financial incentive mechanism to make it in Councils' interest to go for projects that would be both in their interest and the national interest.

For example, you could imagine an urban-focused RMA being applied to the Auckland area, along with tied funding lines that would rebate to Auckland Council a portion of the above-forecast tax revenues remitted from Auckland to central government. Or an investment zone for the Wellington area that would suspend the Overseas Investment Act for the greater Wellington area (no high country estates here), allow all kinds of investment, and provide a similar financial incentive for Wellington to play ball.

And a key principle of the thing was setting out success criteria in advance, and allowing the roll-out of successful zones to other councils wanting similar treatment. Every zone, in principle, had to be extendable to the whole country. So if you proposed a GST-free zone, that sure couldn't be rolled out to the whole country because then tax revenues would disappear.

Winston Peters' proposal doesn't really fit any of that:

Peters' new push

However, NZ First leader Winston Peters wants legislation to move the port's container operations to Whangarei's Northport by the end of 2027 if he in a powerful negotiating position with either main party after the end of the election.

He told the NZ Herald he would stop imported cars clogging up the city's wharves by the end of 2019 and free up Captain Cook wharf ahead of the America's Cup.

Mr Peter's plan would create a "special economic area" near Northport, which would be duty-free, GST-free and tax-free.

The ambitious plan would involve upgrading the Auckland to Northland rail line, including a new rail spur to Northport and KiwiRail has put the cost at billions of dollars.

As the council is the port's owner it is doubtful it will be railroaded into moving the port soon. Mr Goff favours the Firth of Thames for a new port in 20-30 years time, but Transport Minister Simon Bridges has already poured cold water on the idea saying the council would need to overcome funding, environmental and cultural issues. The cost of a new port has been put at about $5 billion and the government says it would not fund it.

A Northport tax-free zone would be highly distortionary. It couldn't be extended more broadly. There's a case for entrepot zones in areas handling lots of international transshipment, so that goods don't attract tax/duty unless they clear through to the other side of the zone - that makes it easier to handle international shipping and flipping containers from one boat to another without having to get customs involved. It is almost inconceivable that New Zealand could provide that kind of hub service given its location. Are ships going to go thousands of kilometers out of their way to hub here when they could just go to Singapore? I don't get it.

I'm very open to the idea that Auckland port could be moved; it seems ludicrous that the city's best real estate is tied up in unloading cars (would still need to see the CBA on any particular proposal). But the SEZ proposal ... I'm not convinced.

I prefer Peters' proposal to cover tourist costs by punting some of the revenue that central government collects from tourists down to the councils bearing substantial infrastructure costs in accommodating them to Labour's tourist tax idea though.

Naming things after politicians

Colby Cosh writes on the perils of naming things after politicians in a world in which standards change. 

I didn't know that Ontario has 10 schools named after Sir John A MacDonald. 

You should read the whole thing, but I enjoyed this snippet:

I personally think it would be terrific if we stopped naming things other than pub toilets and landfills after politicians, but maybe that’s just me. A politician’s contribution to the world is never certain, never too safe from appropriate revision or justified dissent. To me, it seems less deferential and creepy to honour artists, scholars, and innovators who definitely added to the happiness or knowledge of humanity, and especially if they did it in a way that went mostly uncompensated.

I would certainly name any number of schools after Walter Chell, the man who mixed the first Caesar, before I would name one after a prime minister. Sadly, naming schools after bartenders is not the usual rule where I live. But we follow another pretty reasonable one: we typically name new public schools after highly regarded schoolteachers.

We don't know how lucky we are in New Zealand: craft beer edition

Today's installment of The Outside of the Asylum covers some of the things in Manitoba that might have driven you to drink, and the barriers there to getting a decent drink.

Americans could get beer from other parts of Canada more easily than Manitobans.

Other regulations made it near impossible for craft breweries to emerge. Half Pints led the charge for craft brewing in Manitoba. When they wanted to expand their home-based brewery to a more commercial size, they phoned the provincial regulator, who just laughed and hung up.

Manitoba has been liberalising its rules since 2013, but the rules are still archaic and complicated by New Zealand standards. The rules are such a mess that the Manitoba government has had to consider subsidising small brewers to get the industry going. Ronald Reagan’s quip about government sums up Manitoba rather well: “If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidise it.”

New Zealand’s regime, by comparison, is pretty sane. But keeping it that way requires vigilance.

A lot of the piece is on how great it is that it's easy to go from home brewing - or even home distillation (legal here) - into commercial distribution. Because it's easy, there's a great craft beer scene, with new brewers and distillers turning up faster than I can keep track.

It was a bit funny then that, over on The Spinoff's Facebook comments, somebody reckoned I was giving a Lion Breweries line.

The standard bootleggers and baptists model says that the big guys should want systems that lock up the whole market for a couple of big players and make it impossible for new entrants, while making it look like the regulation is done for reasons other than turning the industry into a cozy cartel.

New Zealand's system keeps all the players on their toes. It is worryingly easy to imagine an alternative where the big players strike an implicit deal with the Sellman-types to put strong restrictions on where things can be sold (knowing that it won't do much to sales) and restrictions on distribution and production that lock up a (slightly) smaller market for two big players.

I love that I live in a country where businesses learned in the 80s that the only winning move in that kind of game is not to play.

Here's Bruce Yandle explaining Bootleggers & Baptists.

We don't know how lucky we are: unarmed constabulary edition

The third installment of The Outside of the Asylum over at The Spinoff lauds New Zealand's unarmed constabulary as compared to the kinds of excesses that Radley Balko has been documenting in America. 

A snippet:

Balko contrasts SWAT strategies – no-knock drug raids in the middle of the night – with Winston Churchill’s (possibly apocryphal) quip, “Democracy means that when there’s a knock on the door at 3 a.m., it’s probably the milkman.” Culosi’s case attracted a reasonable amount of media attention, partly because people don’t expect peaceful, unarmed, middle-aged optometrists to be shot and killed by police for answering the door.

But police in America shoot and kill people all the time: 991 in 2015 and 963 in 2016; 2017 is on track to match those figures. Police officers are rarely charged; those charged are rarely convicted. While crime dramas feature situations where the best course of action for police really is using deadly force, they rarely feature cases like Culosi’s. Or Brian Claunch: a double-amputee, in a wheelchair, in a group home for the mentally ill, shot in the head by police because they found his pen threatening.

If the instructions on the side of a packet of toothpicks (see chapter one) are a sign of a civilisation gone mad, what should we think about American policing?

New Zealand has so far remained outside of the American policing asylum. From 1941 to 2015, police in New Zealand shot and killed 29 people. Adjusting for population size, police here take about 37 years to kill as many people as American police kill every year.

This is largely due to New Zealand’s unarmed constabulary. When police do not have immediate access to firearms in situations they view as threatening, they must use other methods while seeking armed assistance – if it is necessary.

I still love Police Commissioner Mike Bush's statement, after an officer was shot and there were calls again to arm the police:

The death of Senior Constable Len Snee was deeply felt by police officers of all ranks, all over the country. Our data on risk has been improved under my watch and it shows police frequently deal with people with weapons.

In Len’s case, the weapon was a gun. This has, quite rightly, led to public discussion about whether all field officers should be routinely armed. The majority of commentators say ‘no.’ That is in line with the public feedback Police received when we consulted on the Policing Act 2008; it’s also in line with the sentiments of police officers themselves.

Being unarmed is a unique and cherished feature of the policing style adopted by New Zealand Police – a style for which we are held in high regard internationally. Routine arming of the police would not erase this style of policing, but it would make the job of being a community police officer considerably more difficult…

So our strategies rely on officers’ good judgment. They are trained to identify risk and if they encounter an armed situation, to withdraw, cordon and contain until appropriately armed officers can be deployed. If the situation is equivocal, they have arms at ready resort with which to equip themselves.

This tactic has worked very well for over 40 years.

International evidence gives me no cause to think it is outdated. Literature on police experience and practice points to a high risk that officers can have their own weapons turned against them, having been overpowered in otherwise innocent situations.

There is also concern about the number of officers shot because they didn’t want to fire their weapons. People tend to join the New Zealand Police because they want to help people, not shoot them. 

But there are worrying signs on the horizon. The asset forfeiture rules that, in America, have driven perverse outcomes have gotten worse here - and could yet push in the same direction.

And there's the ongoing mess of police interfering in local bar and bottleshop licence renewals, and the joint mess of policy being happy to ask banks to 'voluntarily' produce records without a warrant and the banks just handing it over (and not the first time, though it's unclear when this newly revealed instance happened - it could have been around the time of the first one). Would happily flip my accounts over to whichever bank took a stronger line on only handing stuff over to the police if they were legally compelled to do so.

For those so inclined, The Spinoff's comments sections are over on Facebook [First installment; second installment; third installment]. Folks there seem to have liked the first two installments more than the third. Oh well.

Cursed policy wishes

I had fun in last week's column at the National Business Review. Our Executive Director really wishes that elections would be about policy rather than personality stuff. I get nervous when elections are about policy.

Our executive director at the New Zealand Initiative, Oliver Hartwich, has always had a strange antique monkey’s paw on his desk. I never thought much of it – perhaps a bit creepy but maybe it’s normal for Germans.

But, not long ago, I swear that one of the fingers on that paw curled inward.

And so I naturally started worrying about tax policy.

You see, that finger curled not long after Oliver had been fervently wishing, again, that the election turn away from personalities and sideshows to focus on policy.

That paw’s curled finger looked ominous.

And then election policy announcements started getting a little strange.

Then I go through some of what we got, when politicians started talking policy. I conclude:

But the scariest part of the whole thing is that Oliver doesn’t really have a cursed monkey’s paw. I made that part up. More accurately – I stole it from an old folk tale.

A couple asked the paw for £200; their son was killed in an industrial accident and the company paid them £200 compensation. They then wished their son’s return but thought better of it on hearing something shambling in the darkness towards their door. Their last wish sent it away.

Politics itself is the cursed paw. Voters wish for things they think they want, politicians promise to deliver and what comes out at the end is often as horrifying as that unseen thing that shambled in darkness.

Be careful what you wish for in elections. It can be hard to wish it away.

You can catch the whole thing here. ($)

GST and wealth

I thought it was common knowledge that implementing or increasing a consumption tax is a de facto wealth tax.

Suppose you saved $100,000 and expected to be able to fund $100,000 worth of consumption from that saving. If a 10% consumption tax comes in, you can fund 10% less consumption from that saving. The real value of that saving is then 10% lower than it was the day before the consumption tax came in. If that consumption tax then increases to 15%, the real value of the savings drops further.

It gets a bit more complicated if you bundle changes in consumption taxes with changes in other taxes. The 2010 tax shift did a few things simultaneously:

1. It provided an across-the-board income tax cut AND increase in benefits that was matched by an increase in GST. This part was neutral across incomes: you pay less in income tax on next year's earnings (or receive more in benefits), but pay more in GST when you spend from next year's income. The two wash out for those earning and spending in New Zealand.
   
   Those who spend in New Zealand and do not earn in New Zealand - tourists - wind up funding more of the government's budget. The GST switch was, in this respect, a tourist tax. Unfortunately, it's a tourist tax where the revenues accrued to central government while the costs of accommodating tourists through upgraded infrastructure largely fall on local government. Keep in mind that the overall incidence will be a bit more complicated, but GST loads some of the burden of providing government services onto tourists. The more the overall tax system relies on GST instead of income tax, the bigger this effect (well, within reasonable bounds). 


2. It also provided a real tax cut at the top. People on the left who prefer higher levels of government spending should restrict their anger to this part. Part (1) above was neutral, except for the increased tax on tourists. If you think that the overall shift made the tax system less progressive than you'd prefer, focus on adjusting things on this margin rather than messing around with GST. 


3. The increase in consumption tax reduced the real purchasing power of accrued savings. If I planned on withdrawing $10,000 from a savings account next year to fund consumption, I would be able to buy fewer things with that withdrawal. Same goes for using a reverse mortgage to eat my house in my retirement. Before the tax change, I would have paid 12.5% GST on things I purchased, so would have been left with $8,750 in after-tax expenditure; after the tax change, I would pay 15% GST on things I purchased, so I would be left with $8,500. The real purchasing power of my stock of wealth dropped by 2.5%. The GST increase was then, effectively, a wealth tax. This will matter especially for older cohorts running down their capital in retirement: the increase in NZ Super payments compensated for the GST on NZ Super payments, but not for the reduced value of any accrued wealth.


4. If your wealth is held in assets that pay taxable interest or dividends, then the tax on the returns to that wealth dropped because of the reduction in income tax. The real value of your stock of wealth dropped, because of (3) above. But the real value of the flow of earnings from your accrued wealth will depend on your marginal tax rate. If you were previously paying less than the top marginal tax rate, then this effect is a wash, for reasons stated in (1). If you were previously paying the top marginal tax rate, then you get a real tax cut on the flow of your dividend or interest earnings. The net effect between (3) and (4) will then depend on the extent to which you're living off the earnings from your savings, or eating the capital. 


5. There were other base-broadening changes that disproportionately affected richer folks. They're complicated, and harder to turn into soundbites than the leftie "But poor people spend all their money and don't take foreign holidays where they don't pay GST on their expenditures (and I'll conveniently ignore the increase in tax paid by rich foreign tourists)", but they're still real. 

So what to make of the whole she-bang? John Creedy and Penny Mok ran some microsimulations to look at what the changes would be expected to do to labour supply and income distributions. They found increases in hours worked because of the cuts in income taxes, and basically zero change to income distributions. Like, folks can shout "the tax change was regressive, the tax change was regressive" all they like, but here's what Creedy and Mok found:

Caveat: it's ex ante microsimulations rather than ex post work. But it's the best guess I've seen about the overall effect. Since there was basically no change in the Gini coefficient in after-tax incomes between the two systems, it didn't really affect the overall progressivity of the tax system. 

So, some bottom lines:

• It is stupid to hate GST for being regressive. In the first place, it's better to think of GST as being neutral over consumption over the life-cycle. That's what the Tax Working Group said too - maybe a bit regressive over current income, but neutral over life cycle in consumption. But that's the minor point. The major point is that GST is part of a tax system. Combining GST with a progressive income tax allows you to achieve any level of progressivity that you damn well want - with the added advantage that tourists pay GST but don't pay income tax. This isn't some right-wing-economist thing, it's a maths thing. At least at current margins. You could imagine pushing it far enough that the lowest income tax rate would have to go negative to compensate, but we're not anywhere near there. 
• It is stupid to hate the 2010 GST/Income tax shift as being regressive. See Creedy & Mok, above. The overall effect looks pretty flat. 
• It is not stupid to object to the part of the cut in the top marginal income tax rate that went beyond maintaining neutrality and did provide a real tax cut at the top. That's a point of fair debate around how progressive the overall tax system should be. You could have run the 2010 changes but with a smaller cut at the top and still have a better tax system than we had in 2009. I like the overall package they put through in 2010, but whether the top marginal tax rate should be 33% or 35% - that's more of a value judgment about what tradeoffs are worthwhile. If you think the tax system should be more progressive overall, do it by increasing income taxes at the top end rather than messing up GST.

Update: Mike Reddell, in comments, reminds me that the depreciation changes more than offset the drop in the company tax that also came in 2010. I didn't really hit on the company tax changes here since the imputation regime means that that just flows through into changes in the accompanying tax credits and then folks getting dividends wind up paying at their marginal rate anyway. But it would affect foreign beneficiaries of distributions who aren't able to use the tax credits. But, it's more than offset anyway by the depreciation changes. 

We don't know how lucky we are: tax edition

The second installment of my piece on The Outside of the Asylum is up at The Spinoff. It covers tax and airport security. A snippet:

America’s patchwork of state-level sales taxes are even worse. Every state can apply its own unique taxes. This is not limited just to deciding the rate of taxes, but also the definitions of what is and is not taxable. Some states apply sales taxes to candy but not to other foods, and different states have different definitions of what counts as candy. Wisconsin’s Department of Revenue even issued a 1,437-word memo explaining which types of ice-cream cakes, or slices thereof, are taxable or untaxed

The mess is just as bad at the federal level, where free tans at video-rental stores are taxable but not tans provided as part of a health club membership. A simple enough (albeit ludicrous) 10% tax on tanning services proved anything but.

The economic consequences of a system riddled with bread-deciders and jam-deciders and ice-cream deciders and tan-deciders can be staggering. Taxes become far less efficient not only because of the holes riddled throughout the system, but also the legal costs of producers trying to convince courts that their product is exempt rather than taxable.

When there are experts aplenty whose livelihood depends on complicated, messy and incomprehensible tax systems, with large penalties for anyone getting things wrong, it is difficult to make the tax system less complicated, messy, incomprehensible and punitive.

New Zealand’s GST is uniquely, and admirably, clean. It applies broadly. Every producer has an incentive to report honestly because they also report the GST they paid to their suppliers on every item when claiming GST on their inputs.

Were New Zealand to exempt healthy foods from GST, we would well be on the slippery slope. It is one of those things that sounds really easy, but would be an utter disaster in practice

What counts as healthy? Not only does the medical evidence keep changing, but there would also be a string of boundary cases needing adjudication. If beans are healthy, what about frozen beans? Beans in a can? Beans in a can with pork fat and sauce? How much pork fat and sauce before it is taxable? What if we use Jamie Oliver’s recipe and fly him in to say it’s good?

Even worse, think through the consequences of tax exemption.

The Spinoff also runs comments sections on their serialisation on Facebook. I'm not on the Book of Faces, but had a gander using the Initiative's account. If you're on the Book of Faces and are interested in such things, their thread on the first installment (published Saturday) is here; thread on the second is here.

Immigration targets

Infometrics has a new report out on immigration, suggesting that numbers should be cut to between 10,500 and 16,600 per year. I caught a phone call this morning from someone asking where they'd pulled that number from, so I had a look.

It's a bit odd.

Chapter 4 summarises the literature that's out there on effects of migration: hard to blame immigrants for house prices except perhaps in short-to-medium term; migrant networks mean that Auckland has a self-reinforcing draw; low-skilled migrants have worse outcomes than low-skilled Kiwis but better outcomes than they'd have had at home; higher net migration has no significant negative effects on employment or wages for native-born Kiwis but might reduce wages for recent migrants; and, there's little evidence that immigration has boosted productivity.

No particular disagreement with anything in there. But why then jump to wanting to cut immigration to a quarter of current levels? They argue that doing so would maintain New Zealand's population growth relative to world population growth - basically, setting as target New Zealand's fraction of world population. I have no clue why they chose that as a goal. Like, maybe they could have chosen New Zealand's fraction of the body weight of humans in the world, and then we could have more people if they were thin?

They wind up advocating countercyclical immigration policy that would restrict immigrant numbers when net migration from Kiwis (returning home, not leaving) is high, but that would also mean we only allow in migrants when New Zealand's economy is performing poorly; the mix of migrants we might then attract would not be as good as the mix we get during economic booms.

And while they noted the evidence that migration has no particular link to the wages of native-born Kiwis, they suggest that restricting immigration during booms would push up wages and force investment in labour-saving capital, which could boost productivity. But the general jist of the international evidence is that migrants, overall, don't really do anything to the wages of native-born workers - and there's more evidence for small positive effects than there is for any kind of negative effect. Restricting migration of low-skilled workers could goose the productivity stats in the same way as a $25/hr minimum wage: chop a pile of the least productive workers out of the system and increase measured average productivity, while doing nothing to help the productivity of anybody who's still working.

So I guess that they've shown that if your goal is to maintain New Zealand's fraction of the world's population, you'd need to cut immigration to do that. I agree with them on that. I don't know why that should be the goal though.

Quality matters: alcohol edition

I've noted John Gibson's work showing that standard demand estimation techniques overestimate the price elasticity of demand for sugary drinks, and consequently overestimate the effects of soda taxes.

Gibson shows that, because most empirical work uses household expenditure on the product category divided by some measure of average price, that work bunches together consumer shifts along both quality and quantity dimensions. If people mostly respond to price hikes by shifting to cheaper brands or cheaper packaging (big bottles versus cans, for example), then the demand estimates will mistake quality shifts for quantity shifts. Gibson uses Vietnamese data where there is both household expenditure data, and actual consumption data, to show the extent of the bias.

Turns out that the effect is pretty pervasive. John presented on some of this at the NZAE meetings; the paper with Bonggeun Kim is now up at RePEc.* They show that the Cox and Wohlgenant method, fairly commonly used, overstates price elasticities by a factor of three. Here's their abstract:

Consumers respond to price rises by reducing quantity consumed, but also by cutting quality. Most demand studies in agricultural economics fail to estimate quality responses to price. Instead, following Cox and Wohlgenant (1986), quality choice is dealt with by adjusting unit values rather than by treating quality as a valid consumer response to model. Studying a two-choice problem in this manner cannot identify either the price elasticity of quantity or the price elasticity of quality, and instead will yield some unidentified hybrid of the quality and quantity responses. We review 150 papers that cite Cox and Wohlgenant (1986) to see how widespread is the neglect of quality responses to price in the literature. Almost 90 percent of studies wrongly mix quality responses to price in with their reported quantity demand elasticities, thus, overstating by how much price rises can be expected to moderate the quantity consumed. Our empirical test, for 32 food and drink groups in Vietnam, shows that the Cox and Wohlgenant method exaggerates quantity responses to price by a factor of three, on average, and hardly differs from what naïve approaches with unit values show. These results cast doubt on three decades of reported price elasticities of quantity demand estimated from household survey data.

They have elasticity estimates on demand for beer. They show that, using the unrestricted method that allows for quality and quantity choices, the price elasticity of quantity demand for beer is close to zero and statistically insignificant, but the price elasticity of quality demand for beer is -0.96 and highly significant.

In other words, basically all of the consumer demand response to changes in beer prices in Vietnam is shifts along a quality axis rather than changing the quantity consumed. That suggests that hiking alcohol excise may do rather less to reduce consumption than you might expect, except among those who are already at the lowest per-unit prices. This cuts in a couple directions. Moderate drinkers show up as more price elastic than heavy drinkers in empirical work: heavy drinkers show up as about 60% as price responsive, going from memory in Wagenaar's survey.

This could be because of measurement error. If more of the heaviest drinkers are also on the lowest price point, then there's less confounding with the quality dimension because they're already at the corner. Moderate drinkers could then appear more responsive because they're cutting back on quality rather than quantity, but consumption drops among moderate drinkers would be less than the demand elasticity estimates suggest. That could mean that the health costs to moderate drinkers of alcohol excise increases are not as large as we might have feared (if moderate drinkers shift to being occasional drinkers, they lose the benefits of being at the bottom of the J-curve), because fewer might be actually shifting. But they would still be losing out on substantial consumer surplus by having to downshift on quality.

This all suggests using consumption survey data rather than price elasticity data for figuring this stuff out - something more feasible in alcohol work because plenty of health surveys will ask people how many drinks they have per week. I'll just have to remember to make sure to look at studies using reported real consumption rather than guessing at it from demand elasticities. Participation elasticities should be fine; consumption elasticities ... be careful where they came from.

I'll copy below extensively from their conclusion:

Consequently, what many studies report as a price elasticity of quantity demand is some unidentified hybrid of the price elasticity of quality and the price elasticity of quantity. About 90% of studies in our review mix quality responses to price in with quantity demand elasticities. This overstates the rate that quantity demand falls as prices rise, and overstates the likely efficacy of fiscal-food policies that tax and subsidize certain foods so as to induce a switch towards healthier diets. Our empirical example from Vietnam shows that standard approaches used with household survey data overstate the magnitude of quantity demand elasticities by a factor of three, on average. This gross exaggeration is irrespective of whether budget share equations use prices or unit values. A similar degree of overstatement by the standard methods is found in the few existing studies that also use the unrestricted method, where households can freely adjust quality in response to price changes (McKelvey 2011, Gibson and Kim 2016 and Andalón and Gibson 2017).

Notably, there are no studies in agricultural economics that use the unrestricted method, and few even cite the intellectual origins, in Deaton (1990). Instead, Cox and Wohlgenant (1986) is cited by agricultural economists to justify how household survey data are used to get elasticities. Our results show that this method is flawed, in the sense that it grossly overstates the response of quantity to price. Indeed, Cox and Wohlgenant elasticities hardly differ from those of the standard unit value method, where budget shares are directly regressed on unit values without any prior regression to get ‘quality-adjusted prices’. The flaws in the Cox and Wohlgenant method are not just an empirical matter – which would leave open the possibility that it might work somewhere else – they are inherent in the way that quality responses to price are treated. Rather than model a two-choice problem with an equation for quantity (or budget share) and one for quality, a dubious identifying assumption that quality is chosen first is made, and it is further assumed that quality effects can be purged by regressing unit values on household attributes. This method also ignores measurement error in unit values and ignores the community-wide response of quality to price.

Relying on Cox and Wohlgenant (1986) also contributes to the ongoing misuse of unit values as a proxy for price. Unit values should always be expected to be a bad price proxy, due to the Alchian-Allen effect; the relative price of quality will vary over time and space due to storage and shipping costs (Gibson and Kim 2015). With relative prices varying, the composition of demand within a survey group will not be constant. Thus, unit values will not refer to the same quality mix over time and space and therefore cannot consistently indicate the group price level. However, if one has local price data, then, conditional on prices, the unit value can be informative about consumer quality choices. Yet the demand put on statistical agencies to provide local price data is diminished by so many studies opting to use unit values to measure price, and some responsibility for this again falls on Cox and Wohlgenant (1986). Looking backwards, 30 years of price elasticities estimated from household survey data are likely to be wrong because they have mixed together quality and quantity responses to price. Going forward, only once databases have both market prices and unit values are we likely to correctly estimate how price changes lead to demand responses on both the quantity and quality margins.

It's a pretty broad critique.

* Note that the pdf download link from RePEc wasn't working for me at time of writing; John kindly emailed me the paper. If you have download problems as well, note in comments and I'll pass it along.

The Outside of the Asylum

The Spinoff's syndication of The Outside of the Asylum started on Saturday, with Joe Bennett's foreword, and the introduction.

A snippet:

On arriving in Christchurch for my job interview with the Economics Department at the University of Canterbury, Associate Professor Jeremy Clark took me for a drive around Port Hills. Driving on roads that would have sent council lawyers in America into apoplexies over the lack of guardrails (and over the sheep occupying the roads), I started to have a feeling that I had stumbled on something substantial.

But I knew it for sure when Jeremy took me to Cave Stream.

In the middle of Arthur’s Pass, a river had carved an underground channel through the limestone. At the head of the trail by the Department of Conservation’s parking lot was a sign.

The sign had instructions that were the opposite of the ones on John Watson’s packet of toothpicks. The instructions were a sign of a sane civilisation, a society I yearned to join.

The sign read, essentially, as follows. I wish I had taken a picture of the sign; this is just my paraphrase.

“Welcome to Cave Stream. The cave is dark and cold. We do not provide any lights. The ladder at the end is very slippery. If you enter the cave in winter without proper clothing, you may die of hypothermia. Have fun.”

We had fun.

Confronted with the reality of the world, Douglas Adams’ John Watson did the only sensible thing. He changed his name to Wonko the Sane, built a wall around his beachfront property, decorated the outside of the wall, and put a sign welcoming visitors to his Outside of the Asylum.

Adams’s book was published only in 1984, so for Wonko the Sane escape to New Zealand was not an option. New Zealand was only just coming out of the Asylum. It would soon show its brilliance to the world, but it was still too late to be able to help poor Wonko.

I was far luckier. The University of Canterbury offered me the lectureship, and I moved to New Zealand. The sign at Customs when I arrived might have said, “Welcome to New Zealand.” What it really meant was, “Welcome to the Outside of the Asylum.”

This isn’t an essay on the madness of Canada. Or, not just on the madness of Canada, or America, or even the rest of the world.

It is an essay about the sanity of New Zealand – and the importance of keeping it that way.

A pessimist might say New Zealand is only going mad far less quickly than the rest of the world. But it is still just about the only sane place left.

We don’t know how lucky we are in this country.

Wednesday's instalment will cover the beauty of New Zealand's tax system and GST, and necessary warnings about places that have been daft enough to try doing this kind of thing:

New Zealand First will lower the family food bill by removing GST on basic
essential food.

— Winston Peters (@winstonpeters) August 18, 2017 

Stay tuned.

More evidence on the J-curve

Another study out on the alcohol-health J-curve. This one uses 13 linked waves of the US National Health Interview Survey series, 1997 to 2009, to look at all-cause mortality, cancer, and cardiovascular disease (CVD) and drinking.*

Lifetime abstainers are taken as baseline, so there is no sick-quitter confound. There could be confounding if those with poor health never begin drinking, but the authors run a sensitivity test excluding those with poor medical histories.

Here's the main table. Model 2 has all the covariates; Model 1 just has demographic covariates.

What do we see here?

Former drinkers have worse characteristics than abstainers - so there's something to the sick-quitter hypothesis. But we already knew that. DiCastelnuovo & Donati showed that the J-curve isn't as deep if you exclude former drinkers.

Light (less than 3 drinks per week) and moderate (3-14 drinks per week for men, 3-7 for women) drinkers, in this study, see a reduction in all-source mortality - their relative risk is just under 0.8 where a lifetime abstainer is 1.0. All-source mortality is the only one we should really care about unless you have particular family histories that you want to factor in. But it is interesting to note that they only find increased cancer risk for heavy drinking - cancer is the one that's had most recent coverage. And note too that they find a stronger J-curve for women than for men - again, the opposite of what you might have concluded from all of the shouting about breast cancer risk.

And here's the more granular J-curve. Again, just what we'd expect.

The Herald covered the study, but neither linked to the study nor contrasted it with prior Herald stories about how a drink will make you get cancer and die.

Time covered it as well (linking to the study), and wrote:

In an accompanying editorial, researchers from the Mediterranean Neurological Institute in Italy wrote that the new findings “supported the conclusion that the J-shaped relationship between alcohol consumption and mortality risk cannot be dismissed, and should guide the formulation of public policies.”

The editorial also addresses the fact that women are sometimes advised to limit alcohol to very low levels because it’s been linked to increased breast cancer risk. While younger adults may not see substantial health benefits from moderate drinking, the editorial argues, “for most older persons, the overall benefit of light drinking, especially the reduced [cardiovascular disease] risk, clearly outweigh possible cancer risk.”

Nigel Latta was giving me heck the other day for defending the J-curve against his preferred anti-alcohol advocate, Jennie Connor. He wondered why the cancer risk isn't listed on the bottle. I'd be pretty happy for it to be - if it followed what the quote above. "For most older persons, the overall benefit of light drinking, especially the reduced cardiovascular disease risk, clearly outweigh possible cancer risk." Like he said, let's see them put that on the bottle. I suspect it would be illegal for them to do so as it's a health claim, but it's nice to think about.


* Note that the National Health Interview Survey is open data. They de-identified it, and anybody in the world can download it just by clicking the link. It is here. You cannot do that for basically any New Zealand health data. The Otago longitudinal survey is closely held by the Otago people. The Ministry of Health's Health Survey has some cross-tabs up, but you can't download the underlying data series. There are Confidentialised Unit Record Files available for the NZ Health Survey, but you have to go through a cumbersome application process to get access - and it would be near impossible for someone not based in New Zealand to get it without having a NZ-based coauthor. I love how American practice is just to de-identify things and put 'em up. I hate how New Zealand's default is "Well, maybe somebody might be able to re-identify, so we won't release anything."

The Outside of the Asylum

For rather a while, I've argued that New Zealand is Douglas Adams's Outside of the Asylum.

In the Hitchhiker's Guide to the Galaxy, John Watson read the instructions on a packet of toothpicks, decided the world had gone mad, built a wall around his beachfront property, decorated the outside of the wall for the inmates of the asylum, changed his name to Wonko the Sane, and declared his home to be the Outside of the Asylum.

I feel like I'm walking through the door to Watson's property whenever I clear customs to come home to New Zealand. In a world going increasingly mad, New Zealand is, at worst, growing mad more slowly.

I've put together an essay drawing together some of these themes. We'll be releasing it as a fun report for the Initiative at the end of the month. But we're doing things a bit differently with this one. The good people at The Spinoff will be serialising it in five installments - one for each of the books in the inaccurately named Hitchhiker's trilogy.

And, for your listening enjoyment, you'll also be able to catch an audio version of it on Soundcloud, narrated by yours truly.

Watch for the report's first installment at The Spinoff on Saturday. The full report will be released at the end of the serialisation.

I've also set up a separate Twitter feed for this kind of thing.

I rather like the header image I threw together for the Twitter feed.

Apologies for light posting of late. I have a long queue of many things I've wanted to blog about, but a few reports have stood in the way. 

Trailblazing to the Outside of the Asylum

Last year's documentary on New Zealand, hosted by Johan Norberg, is now available online. It's a great story, featuring the likes of Roger Beattie. We don't know how lucky we are in New Zealand.



Here's Dan Mitchell on New Zealand, and the documentary.

Full disclosure: the Initiative helped out a bit in putting the documentary makers in touch with some of their interviewees and providing a bit of background detail. I show up briefly towards the end.

As America gets ever-crazier, remember to check back on that list I told you to make back in 2013.

A couple of months ago, when Alex Tabarrok complained of his son's school being turned into a police camp, I noted some of the differences between American schools and the ones here, concluding:

You can choose to live like this too. Sure, New Zealand is getting worse, and it's definitely worse than some parts of the US if marijuana freedom is an important part of your bundle of liberties. But NZ is starting from a much better spot than the US, and it seems to be getting worse slowerthan other places.

Things aren't bad enough to leave yet? Fine. Freedom's a value, but so too are other things like distance from family and wealth differentials and access to Ethiopean restaurants. But write down today some bright-line rules that you think should trigger your future exit; it's easy to acclimatize to gradual changes for the worse.

If you really want to live free, write down your list of things that would actually be sufficient to trigger your emigration, then think about the places you might go that offer the best deal on the bundle of freedoms that matters most to you.

If you're instead happy getting consumption benefits from ranting about the deterioration of freedom in America, or from imagining that you'll be able to change things there, carry on.

Have any of the "Yeah, I'd emigrate if any of these bad things happened" things on your list happened yet?

There are no answers only tradeoffs

Fundamentally all welfare systems have to answer one basic question: is it better to target a lot of funding to those in most need, or to provide universal benefits at a far lower level of support?

Both options suck, they just suck differently.

Targeting systems are intrusive. They invade privacy. They create distortions in people's choices. But it is the only way of making sure that those in the most need have access to the most resources. If you want to make sure that kids with a single destitute parent receive a lot of support, you have to make sure that the parent is destitute. If there are other sources of financial support for that kid, and you want the next dollar of government money to go to the kid in the worst circumstances, then you need to know whether about it. Otherwise that next dollar goes to the wrong kid.

The system has perverse outcomes. It breaks families apart by financially penalising parents for living together. It encourages lying to the extent that lying is a successful strategy and isn't caught and punished. Where lying is a successful strategy and isn't punished, the targeting system morphs into the universal system, except with everybody lying about their circumstances and substantial financial penalties for truth-telling.

The universal system sucks too. It is impossible to provide every family with the support the government would like to provide to the worst off family: if it gave that much to everybody, the budget would blow out. Here's a quick ball-parking for you. The government takes in about $80 billion a year in revenue. There are about 4.7 million people in New Zealand. Suppose you decided to put every person in NZ on the equivalent of NZ Super, with no monitoring of living arrangements, so $900 per fortnight or $780 per fortnight net of tax for those with no other income. That's $95 billion. The net costs would be less than that because people on higher income would face a higher tax rate on that payment, but come on. There will also be plenty of people with complex needs receiving benefits in excess of NZ Super who would be hurt even by this arrangement.

It is strictly impossible to make a universal payment that is generous enough to help those in the worst circumstances without bankrupting the country. And the second you start layering a targeted welfare scheme on top of a universal scheme, you bring back all of the incentives to lie. Maybe the incentives aren't quite as strong, but they're still there, and there'll still be special pleading for those caught lying that is every bit as compelling as that which we currently hear.

So, which system sucks least? They're both awful. The current system ties a lot of cost around the receipt of benefit, and especially around receipt of more generous levels of benefit. All the monitoring I talked about. And high effective marginal tax rates because of earnings clawbacks. But it is able to deliver focused and targeted assistance to those in most need.

Shifting to a more universal scheme means everybody faces higher effective marginal tax rates, and only partially mitigates the incentives to lie about your circumstances - unless you go to a fully universal system and bankrupt the place (or have the universal payment at a very low level and get turfed from office on the first John Campbell special on kids in households with complex needs seeing a massive cut in benefits).

I prefer the current system, combined with the emphasis under the investment approach in trying to find ways of getting people out of dire circumstances. And that requires actual policing and punishment of those who lie about their circumstances to draw money intended for kids in greater need.

Those defending lying for higher benefits should work out the fiscal implications of moving to the system they implicitly prefer. You can agree with every critique of the current system's perverse incentives and unintended consequences - I do! But you've gotta think through the alternatives, because they just suck differently - and arguably suck more.