Youth Parliament and fixing the housing market

New Zealand's Youth Parliament called me in to provide testimony about policies that could improve economic growth without worsening disparities in wealth. 

I suggested that they take a close look at housing markets - as well as regulatory structures that work to stymie competition and entrench existing interests. The Committee of the Youth Parliament took up some of my recommendations in their report - along with some of the recommendations from the presenter from Living Wage Aotearoa.

The hearing was a lot of fun. Since the witness from Victoria University of Wellington failed to show up, the Committee prodded me and the other witness into arguing with each other - I had a blast.

I went through the case on housing in my inaugural fortnightly column over at the Dom Post; I expect it's running more broadly across the Fairfax/Stuff stable.

New Zealand's income inequality statistics, by the Ministry for Social Development's figures, have been roughly flat for 15 to 20 years, depending on the measure.

But concern about inequality, at least as measured by the number of newspaper headlines, followed the rise in Auckland house prices rather than the flat inequality statistics.

The real experience of inequality comes in household budgets strained by too-high housing costs and in worries about whether they or their kids will ever be able to afford a home. The latest report from the Ministry of Social Development tells us that almost 40 per centof our poorest renting households are now spending more than 50 per cent of their income on housing costs.

Fixing the housing mess will directly work to mitigate those inequities. Doing so will also improve, rather than hinder, economic growth. Here is why. 

Read the whole thing!

I should be showing up there fortnightly; Oliver or someone else on the team here may jump in in my place from time to time depending on other commitments.

More letters....

This time to the DomPost consequent to Olivia Wannan's article on alcohol minimum prices. Olivia's piece is one of the better summaries I've seen out there. But I did want to make a couple of points. Here they are.

Thank you for Olivia Wannan's reasonably balanced piece on alcohol policy.
 I would make one note of correction. In 2009, Matt Burgess and I released a report critical of BERL's $4.8 billion estimate of the social cost of alcohol in New Zealand. That report was entirely uncommissioned; we simply did not like that what we viewed as a bad statistic was influencing policy. We concluded there that social costs were instead on the order of $760 million. Late in 2010, Matt and I were commissioned by an Australian alcohol consortium, NABIC, to produce a similar report examining the Australian study that formed the basis for BERL's report. In doing so, we discovered a substantial error in our prior work on BERL: one not noted by BERL in its response to our critique, by Brian Easton in his paid report for the New Zealand Law Commission evaluating our work, or by Australian consultants Marsden Jacob and Associates, who were paid $60,000 by the New Zealand Law Commission for their report critiquing our unfunded paper. We consequently updated our estimate of the social costs for New Zealand to roughly $967 million. NABIC did not request this addition to the paper we produced, but we did not want the error in our prior work to stand once we discovered it. The net effect of our doing funded work on alcohol was to increase our estimate of the social costs of alcohol in New Zealand.
 Aggregate social costs are a poor basis for policy. We can easily imagine worlds in which alcohol's harms are tiny, but where particular measures could reduce those harms without offsetting costs to others; we can similarly imagine worlds in which alcohol's harms are enormous but where no measure could reduce harms without doing even more harm to moderate consumers' enjoyment of alcoholic products. A more relevant assessment would consider the benefits of any particular policy along with the harms imposed on moderate drinkers and others by the policy and simply recommend those policies doing more good than harm. 

Can't kill a bad stat

I thought I'd put a stake through the Ministry of Health's estimate that smoking costs the health system $1.9b per year. But, the Dominion Post cites it again this weekend.

Of course, reducing tobacco sales will reduce the $1 billion a year the Government gets from taxing it, but that needs to be weighed against the nearly $2b a year smoking-related illnesses cost the health sector and the untold cost of lost working hours and productivity.

The Ministry of Health figure seemed to assume that smokers, if they never smoked, would never impose end-of-life costs on the health care system; their figure counted the brought-forward end-of-life costs as a cost of smoking but didn't net from the figure the end-of-life costs that otherwise would have obtained a decade or so later.

MoH has been pretty quiet about that number lately. I can't find reference to it on the site - my previous links to their documents that had it are now deprecated; website restructurings build memory holes. They didn't cite it in their documents listing what would be necessary to achieve the Smokefree 2025 goal; we might have expected to see it in the preamble listing the harms done by smoking.

Where can I still find the figure, or something close to it? The RIS on last year's excise changes:

A 2007 estimate put the cost of smoking to the health system at $300 to $350 million per annum; however current work within the Ministry of Health suggests that figure may be as high as $1 to $1.6 billion per annum [²].
...
2. Please note that this analysis is work in progress and methodological issues are currently being addressed.

I'll point again to O'Dea's estimate: smoking costs MoH about $350 million. And the Dom is lazy and wrong when they say the costs of lost productivity are "untold". They're very extensively tabulated in the O'Dea study. His "social costs" figure has gotten a reasonable amount of attention in the press. Here's his breakdown, my editorialising:

Here are the components of O'Dea's $1.7 billion figure (Table B.1, p.44); you judge for yourself whether the Herald's right to call these costs on the public:

• Reduced production from mortality: $570m (I call private)
• Reduced production from morbidity: $280m (I call private)
• Resources diverted for tobacco consumption: $650m (I call batsh*t insane to consider this public: it's what smokers spend on their cigarettes net of excise taxes)
• Resources required to treat induced diseases and other consequences: $350m (public external transfer cost. This is the real cost to the health system)
• Smoking-induced fires: $15m (largely private, barely worth arguing about as such a small part of the overall figure)

So more than a third of the $1.685 billion is smokers' spending on cigarettes and only $350m are real external costs through the health system. [Note: O'Dea nets from the $1.865 cost $180m in presumed benefits to smokers of smoking.]

So the "untold" cost are maybe around $850m, largely borne by smokers through lower earnings. If that's a social cost, deciding to work part time and enjoy more leisure instead of working very hard, or deciding to take vacations, would also impose social costs.

I expect that MoH is a bit stuck. Associate Health Minister Tariana Turia would be angry if they publicly backed away from the figure. I suspect that at least some at MoH don't trust the figure and don't want to have to defend it. So they're just not saying much about it. And that's fine where the number isn't already floating around being cited and building public pressure for policy measures that would enjoy less support if voters didn't think that smokers were imposing net costs on the tax system.

By MoH's last published note, they've retreated from their prior $1.9b estimate to $1-$1.6b: much lower than the Dom's cited number. I'd be curious whether MoH ever completed the work in progress and addressed the methodological issues.

Meanwhile, the South Australian government wants to bring suit against tobacco makers to compensate them for smokers' health care costs.

That's an interesting one. The 2008 Collins & Lapsley report finds very high "social costs" of smoking, mostly consisting of things like smokers' expenditures on tobacco, the presumed valuation of reduced mortality, and deceased smokers' forgone household production. But actual medical costs aren't all that high.

Here's Table 42 of the Collins & Lapsley report.

Even if you include reduced taxes paid by smokers* due to excess mortality and morbidity, tobacco excise dwarfs everything else. Counting GST here is a bit tough; in the absence of smoking, smokers would instead spend their money on a mix of products some of which attract GST and some of which don't. But even ignoring the GST entirely, it seems hard to find much merit in suing the tobacco companies for health care costs incurred by state governments. You could maybe fault the federal government for not kicking back part of the collected excise revenues to defray state-level health care costs, but that's hardly the fault of the tobacco companies.

* I am not endorsing their numbers here; I've not examined them closely. We found problems in their estimates of reduced productivity due to alcohol use, but haven't looked at their similar tobacco estimates.

Check my sources

Today's Dom Post has a piece I wrote on youth minimum wages. I've copied the text of it below. Folks coming in from the Dom can check my work by hitting the links embedded in the text below. Here's my best response to minimum wage "denialists".

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Stop pricing young workers out of the labour force

When youth minimum rates were scrapped in 2008, unemployment of young people rose, writes Eric Crampton.

IF THE Government said that the minimum price for a new car were $50, nobody would expect it to affect sales. Neither would an increase to $65. But it would certainly start mattering if the Government applied a minimum price of $5000 to all cars, new and used.

This is the situation in New Zealand with youth minimum wages, which were abolished in 2008 in favour of adult rates for all workers over 16 years old. This increased the youth minimum wage by 25 per cent (barring the first few weeks’ work for new entrants).

The latest youth unemployment figures are very bad. The unemployment rate for kids aged 15 to 19 is 27.5 per cent; worse, the youth labour force participation rate (those actually engaged in the job market) also has dropped.

Whereas the participation rate was above 50 per cent for the decade before 2009, it has since been dipping and now sits at 47 per cent.

If youths hadn’t been discouraged from entering the labour market because of poor job prospects, the measured youth unemployment rate would be even higher.

This isn’t just the recession. Unemployment rates for adults are higher than they were in the boom of the mid 2000s, but the recent downturn has not hit adult workers the same way that it’s hit the kids. The current adult unemployment rate of 5.6 per cent is only three points higher than its low mark in the mid 2000s. Meanwhile, youth unemployment rates are a staggering 15 points higher.

Both rates usually track each other, reflecting the overall strength of the labour market. Changes in the adult unemployment rate explain a high proportion of changes in the youth rate.
But in late 2008, this relationship began to break down. Compared with a previous trend, the current youth unemployment rate is eight points higher than we could have expected given the adult unemployment rate. That’s about 12,000 kids who, given the current adult unemployment rate, we would have expected to have jobs. The results aren’t simply due to the Canterbury earthquake – the trend started well before last September.

Neither can they simply be due to the current downturn: when adult unemployment hit 10.2 per cent in 1992, the youth unemployment rate was 23.4 per cent – three points lower than today – and youth labour force participation rates were higher. Bear in mind that adult unemployment today is nowhere near 10.2 per cent.

No, the sharp increase in youth unemployment from late 2008 appears to have been caused by the abolition of the youth minimum wage in early 2008. Such a result isn’t surprising. Economist Stephen Gordon summarised Pierre Fortin’s work on this effect in relation to minimum wages: when minimum wages are below about 45 per cent of the average wage, they have little effect on employment; above that, they present a danger to employment.

By contrast, New Zealand’s minimum wage of $13 an hour is about 50 per cent of the average hourly wage – well into the range in which we expect negative employment effects, particularly for young workers.

Internationally, only 13 per cent of labour economists surveyed disagree that minimum wages increase unemployment among young and unskilled workers, although some studies find contrary results.

Of these studies, the best New Zealand study, by Dean Hyslop and Steve Stillman, found that youth minimum wage changes in the early to mid 2000s had no effect on youth unemployment. It was a quality study, but it spanned a period during which overall unemployment was at record lows and businesses were desperate for any workers.

The increase in the youth minimum wage during that period had little binding effect. New Zealand labour unions also like to cite an excellent paper by Arindrajit Dube and co-authors showing no effect of minimum wages on workers in the American restaurant industry.

But it’s a lot harder to outsource waitresses than call centre operators, or factory machinists, so this finding isn’t likely to be representative of a country as a whole. Also, in this case, minimum wages in the United States were low compared with average wages.

SO WHY do economic studies find differing results on the employment effects of minimum wages? One reason is that, in many places, minimum wages are well below the level at which we would expect that they would have serious effects, like the $65 dollar minimum price for a car. But when minimum wages for youth jump to New Zealand’s $13 an hour, you get a problem.

The effects of minimum wages on young and unskilled workers are well known. It is a shame that minimum wage ‘‘denialists’’ let the few contrary studies outweigh the dozens of papers finding that minimum wages hurt employment prospects for the people they’re intended to help.

In 2010, the Organisation for Economic Co-operation and Development published research supporting the majority theory and pointed out that half its member countries (including Australia) had minimum youth rates.

Reinstating a youth minimum wage well below the adult rate wouldn’t eliminate youth unemployment. But it would let employers start creating new jobs that young workers could productively fill while gaining experience. It’s time to stop pricing young workers out of the labour force.

Eric Crampton is senior lecturer in Economics at Canterbury University and Visiting Fellow at the Centre for Independent Studies, www.cis.org.nz. Full references to reports in this piece can be found at his website www.offsettingbehaviour.blogspot.com