RSE, MIQ, and WTF

Last week, the government announced it would allow 2000 seasonal workers into New Zealand's Managed Isolation and Quarantine system on Recognised Seasonal Employment (RSE) scheme, with workers to arrive from January to March 2021. 

There's just so much that's backward in all of this. 

The RSE scheme is open to workers from the Federated States of Micronesia, Fiji, Kiribati, Nauru, Palau, Papua New Guinea, the Republic of the Marshall Islands, Samoa, the Solomon Islands, Tonga, Tuvalu, and Vanuatu.

The most recent World Health Organization COVID-19 situation report for the Western Pacific notes that the Federated States of Micronesia, Kiribati, Nauru, Palau, Samoa, Tonga and Tuvalu have not reported a case to date - as of 25 November. Since then, Samoa has had two positive cases caught at their border. 

Meanwhile, Papua New Guinea has large-scale community transmission - you wouldn't want to restart RSE entry from there. 

Does it make any kind of sense that scarce MIQ spaces are being taken up by people who come from places that do not have Covid-19? Why couldn't we just admit RSE workers as usual from places without Covid, on an understanding that the gate would be shut if their Covid-status changed?

Does it seem plausible that the most valuable uses of scarce spaces in MIQ is for people coming in for fruit-picking, if those workers are coming in from places where Covid is prevalent? If it were the outcome of an auction for spaces, I'd take that seriously - I could too easily be wrong! 

The policy simultaneously plausibly lets too many RSE workers into MIQ, and too few RSE workers into the country. It seems unlikely that the highest valued use of an MIQ space is for someone who would come in to pick fruit at $22/hour, but it also makes no sense at all that they be required to be there in the first place. 

There are very reasonable concerns about Covid getting back to the Islands from NZ if we had an outbreak. But there are very reasonable ways of mitigating that risk that do not involve banning safe people from travelling here. For example, RSE employers could be required to provide isolation for workers before they went back to the Islands, with those returnees tested before departure. 

Surely the odds of catching Covid are higher in a NZ MIQ facility, including in transport to those facilities with people who are coming in from far riskier places, than in the Covid-free Islands. 

Recall the stakes on the RSE programme. Here's John Gibson and David McKenzie on it.

Their abstract:

Seasonal migration programs are widely used around the world, and are increasingly seen as offering a potential “triple-win”- benefiting the migrant, sending country, and receiving country. Yet there is a dearth of rigorous evidence as to their development impact, and concerns about whether the time periods involved are too short to realize much in the way of benefits, and whether poorer, less skilled households actually get to participate in such programs. New Zealand's Recognised Seasonal Employer (RSE) program was launched in 2007 with an explicit focus on development in the Pacific alongside the aim of benefiting employers at home. We present the results of a multi-year prospective evaluation of the impact of participation in this program on households and communities in Tonga and Vanuatu. Using a matched difference-indifferences analysis based on detailed surveys fielded before, during, and after participation in the RSE, we find that the RSE has indeed had largely positive development impacts. It has increased income and consumption of households, allowed households to purchase more durable goods, increased subjective standard of living, and had additional benefits at the community level. It also increased child schooling in Tonga. This should rank it among the most effective development policies evaluated to date. The policy was designed as a best practice example based on lessons elsewhere, and now should serve as a model for other countries to follow.

Here are some of the gains:

The results show that the RSE has had large positive effects on sending households in Tonga and Vanuatu. We find per capita incomes of households participating in the RSE to have increased by over 30 percent relative to the comparison groups in both countries, with per-capita expenditure also increasing, although by less than income. Subjective economic welfare is estimated to have increased by almost half a standard deviation in both countries, and households have purchased more durable assets such as DVD players, radios, ovens, and in Vanuatu, boats. In Tonga RSE households also doubled the rate of home improvement, and in both countries, households became more likely to have a bank account, likely reflecting more formal savings. School attendance rates increased by 20 percentage points for 16 to 18 year olds in Tonga, and community-level effects were generally modest, but positive. Overall these results show that the seasonal worker program has been a powerful development intervention for the participating households, and that the RSE policy appears to have succeeded in its development objectives in the short run.

I've bolded the most important bits.

In order to prevent a trivial risk of Covid coming in from places that do not have Covid, the Labour Government is preventing the vast majority of RSE workers from coming in to do the seasonal work that they traditionally have done successfully. The consequence of that is, in all likelihood, a substantial decrease in incomes in affected households, declines in their subjective economic welfare, and reductions in schooling for those families' kids. 

I suspect, but cannot know, that the government is doing all of this deliberately, to kill the RSE programme. Sufficiently advanced incompetence is indistinguishable from malice. Are the relevant officials being purposefully obstinate when they refuse to see obvious safe ways of getting those workers here and preventing transmission back to the islands? It's hard to tell.

Back to the sweet sweet bog

For the past several years, the public health crowd has brushed off John Gibson's work on sugar taxes by saying that they don't worry about things that aren't in refereed journals.

It takes a lot longer to get things published in economics journals than in public health. Inaccuracies in public health work can then go around the world's newspapers several times before economics starts testing the more robust work in series of departmental seminars before sending the revised and improved draft off to a journal.

Gibson's paper with Bonggeun Kim is now up in the Journal of Development Economics and is ungated for the next month via this link. 

Here's the abstract, which won't be unfamiliar to those who've here been following the debate.

Estimating potential effects of price reforms is a key issue for many developing countries. Demand studies increasingly use household survey data on budget shares, which vary with quantity, price, and quality. If quality response to price is ignored, estimated price elasticities of quantity demand conflate responses on quantity and quality margins. Our review finds over 80% of published studies using budget shares from household survey data have this error. We use survey data from Vietnam, with prices and qualities observed over space, to directly estimate the price elasticity of quality. This is much larger than what is derived from the income elasticity of quality, based on the Deaton (1988) separability restrictions. Across the 45 items we study, the own-price elasticity of quantity demand is overstated by a factor of four, on average, if the response of quality to price is ignored.

The paper covers complicated technical issues in simple language. Economists are sometimes stuck with household expenditure data that only says how much a household spent in total on a product category over the past week, fortnight or month. If they want to know how demand responds to price changes, they have a problem because that data does not say how much was purchased or the price at which things were purchased. The data only says what total expenditure was. Total spending could change because quantities changed, or because

These issues were recognized, and potentially solved, thirty years ago in a set of papers by Angus Deaton (1987, 1988, 1990). Deaton derived the response of quality to price so as to isolate quantity demand elasticities, without needing price data. He assumed weakly separable preferences so that unobserved effects of price on quality could be derived from income elasticities of quality and quantity. Intuitively, by forcing the effect of price on quality to operate as an income effect, Deaton leveraged off what household surveys are good at – measuring incomes or expenditures – to get at what they are bad at or rarely do, which is measuring local prices.1 If one had a household survey with good measures of local prices, and with the usual data on food group expenditures and quantities, one could directly estimate the effect of price on quality by using unit values to indicate consumer quality choice (because the unit value is the product of price and quality). Indeed, Deaton (1990, p.302) concluded that it “would be extremely desirable to have direct measures of market prices against which this method could be tested.”

Gibson and Kim have data allowing this testing. And the testing shows us that weak separability fails, so back to the bog:

Our main title deliberately copies Deaton (1988) because in our view unidentified quality responses are still biasing price elasticities of quantity demand estimated from survey data. Our sub-title is from Gordon Tullock (1985, p.262) describing his role in an intellectual debate:

“… my role in this controversy is to watch people trying to get out of the swamp and then push them back in. Clearly, my role is not a constructive one, but nevertheless, I feel it necessary.”

Our contribution may be viewed similarly; before Deaton, economists used unit values as if they were prices when estimating elasticities of quantity demand. They were in a bog where quality and quantity effects intermixed. Deaton found a way out, pulling himself up just by the bootstraps of separability restrictions, with no firm ground (good price data) in sight.7Standing on firm ground now, with good data on local prices and on consumer's choice of quality, we are pushing people back into the bog by showing that these separability restrictions do not hold. More generally, any model that assumes that the price and income elasticity of quality are closely related is unlikely to hold. The necessary role we play, even if not a constructive one, is to show that we are still bogged down; many estimates of the effect of price on quantity are instead some murky mix of quality and quantity responses. Our defence for our role is that it is only by realizing that we are still bogged that the value of firm ground (good data on local prices and on quality) becomes clear. In our opinion, there will be little headway in using household survey data to accurately estimate quantity responses to spatial price variation until better data on local prices and qualities are collected, so that responses on both the quantity and quality margins can be directly estimated.

I love Tullock references - this one's to Tullock's pushing people back into the bog by showing that explanations around the 'why so little rent-seeking' problem were wanting. Gibson and Kim show that Deaton's path out of the problem doesn't work.

Public Health critiques around hierarchies of evidence and that this is just one paper compared to dozens of other papers so we should look to metastudies - they completely misunderstand the nature of Gibson's contribution here, whether through ignorance or stubbornness, I don't know. Gibson and Kim show that the dozens of other papers that use the Deaton method for estimating price elasticities out of household survey measures are systematically incorrect. Doing a metastudy of papers that have a systematic error in method will not get you a correct answer.

These large biases, from either ignoring quality response to price, or from restricting that response to be what weak separability allows, are in line with the few prior studies on the quality response issue. In the first of these, quantity demand elasticities were inflated to an average of 250% of their unrestricted value, if quality response is ignored (McKelvey, 2011). While that evidence was just for six broad food groups, our results are much the same if based on broad consumption groups or narrower price survey items, so this magnitude of bias may hold more widely. A similar level of bias is seen in studies of soft drinks demand using the unrestricted method and the standard price method. In Melanesia, where spatial price variation is high and product differentiation of soft drinks more limited, the quantity demand elasticities are overstated two-to three-fold if quality response to price is ignored (Gibson and Romeo, 2017). In Mexico, where there is less spatial price variation and more quality variation the bias is four-fold (Andalón and Gibson, 2017).

These quality responses may undermine price policies that aim to reduce consumption of unhealthy items. For example, quantity demand elasticities that ignore the quality response to price are used by Grogger (2017), to forecast that Mexico's peso per liter tax on soft drinks will reduce steady state body-mass index (BMI) of Mexicans by up to 1.8%, which is enough to provide some health benefit. However, if quality downgrading in response to tax-induced price rises is accounted for, the average BMI will fall by just 1/200th (Andalón and Gibson, 2017). This is salient to Vietnam, where a special consumption tax of 10% on soft drinks, instant tea and flavored milk has been proposed by the finance ministry as a way to reduce the health burden of high sugar intakes. However, if adjustment to higher prices is on the quality margin and quantity consumed falls only a little, as in Mexico, this proposed tax will be largely ineffective in achieving health objectives.

The implications are rather broader than sugar tax.

Extrapolating from income effects to price effects may be unwise, as seen with failure of the weak separability assumptions, but a prior debate in development economics about effects of income on nutrition is germane to this discussion. Early studies derived indirect estimates of the income elasticity of calories from food expenditure data, assuming that higher spending on a food group meant proportionately more nutrients. This ignored within-group quality substitution, and later studies showed that extra spending on food as incomes rose went on attributes other than food quantity. Writing about poor people with rising income, Behrman et al. (1988, p.308) noted that:

“… at the margin they concentrate on food attributes other than nutrients – taste, appearance, odor, degree of processing, variety, status – that are not necessarily highly positively correlated with nutritive value.”

In perhaps the same way that policy makers learnt that effects of income changes on nutrients are mediated by within-group quality substitution, so too may they need to learn that effects of price changes on quantities can likewise be mediated by responses on the quality margin.

While Gibson and Kim don't cover it here, because it is obvious, the analysis applies whether a soda tax or sugar tax is ad valorem or a per-unit excise. Whatever you thought the demand response to your price increase was going to be, it'll be smaller to the extent that your elasticity estimates conflate quantity and quality adjustments.

The only case where this won't be true is for people who are already only consuming product that is at the lowest quality point - and you'd probably then want to have an elasticity estimate for that specific cohort anyway rather than assuming that the estimates that apply elsewhere also apply to that cohort. 

Overestimating soda tax effects

Waikato University's Professor John Gibson's letter in the Economist (18 August 2018):

Small effects

Here's Boyd Swinburn defending sugar taxes in the Herald, in his usual charitable style:

A report by the New Zealand Institute of Economic Research (NZIER) concluded that a sugary drinks tax by itself would not significantly reduce obesity. This has fuelled the merchants of doubt who are opposed to including it in a multi-strategy approach to reduce our appallingly high rates of childhood obesity and dental caries.

The report drew the wrong conclusions because it dismissed the estimated changes of body weight as trivial when in fact, applied across the whole population, they are substantial. For example, an 800g reduction in weight from a 20 per cent tax would have an impact equivalent to halting the rise in population weight gain for three years.

I suppose that's the conclusion you get if you think the world's a Manichean struggle of heroic public health people against some evil conspiracy.

Let's leave the battles of good and evil and go back to the study. The NZIER report surveys a pretty wide literature.

The specific one that Swinburn is here citing in from John Gibson at Waikato. The Gibson study takes a prior simulation model of Grogger's and corrects an overestimate of the demand elasticity. Grogger doesn't really look at obesity though. Grogger rather estimates the effect on obesity of a reduction in soda consumption using models of energy intake and expenditure.

Gibson shows that Grogger massively overestimated the effect of tax on consumption, and so Grogger's modeled effects on obesity were too large. The steady state weight change should have been about 0.4kg, not Grogger's 2-4 pounds. The Mexican tax has been characterised as a 10% tax (close, but it's really a peso-per-litre excise), so I guess doubling that gets you the 800 grams.

Gibson corrects the demand elasticity part, but doesn't look at the soda-to-obesity part. He just says that if Grogger's model of the consumption-obesity relationship is right, then the effect of tax on obesity is much smaller than Grogger estimated.

NZIER cites a pile of studies that do try to get more direct links from consumption to obesity outcomes.

NZIER cites Maniadakis et al, 2013, a metastudy of 55 studies on sugar taxes. NZIER summarises:

The relationship between prices and taxes on food and beverage items and health outcome measures was found to be very weak. Results suggested that a 10 percent increase in prices (including by imposition of a tax) would be expected to reduce energy intake by a maximum of 50 calories per day, resulting in a weight loss of up to 0.3 kilograms per year, which was deemed to be insignificant.

But it would be a misreading to say they deemed it insignificant because 300 grams per year is small. They deemed it insignificant because it was the largest effect found in the eleven studies in that category, with other ones finding smaller effects or zero effect. Here's Maniadakis et al:

Moreover, six studies 28,29,31–34 and five studies 35–39 examined the association between beverage/food prices and taxes and energy and weight outcomes, respectively. These studies indicated that there is a very small impact of prices and taxes on energy intake and weight outcomes. These studies indicated that the caloric effect of a 10% increase in prices or a corresponding imposition of a tax reduces energy intake by a maximum of 50 calories per day, 450 per month, and up to 0.3 kilograms or 1.5 pounds per year, which cannot be considered significant. The specific studies also indicated the regressive nature of taxes and that their use is promoted mostly in order to generate revenue for the public purse.

NZIER also cites Backholer et al, another metastudy suggesting insignificant effects. Here's NZIER:

Backholer et al. (2016) reviewed studies estimating the effects of an increase in the price (or a tax) of sugar-sweetened beverages on purchases or consumption and weight outcomes regressivity, within high-income countries. Price elasticity estimates varied considerably across studies as did resulting consumption changes and weight changes. The review found that few studies statistically tested differences in outcomes between socio-economic groups. Seven studies reported on changes in weight outcomes for the total population following an increase in SSB prices. Studies either found no association between a tax on sugar-sweetened beverages and BMI or a very small association, with insignificant weight loss implications of up to less than 2kg over ten years. Some found similar reductions in weight for all socio-economic groups while others found greater reductions for lower income groups compared to higher income groups. A tax on sugar-sweetened beverages was associated with a wide range of estimated impacts on the population obesity rate: from a less than 0.1 percentage point decrease in obesity prevalence to a more than 10 percent (3 percentage point based on a 30 percent obesity rate) prevalence reduction. All studies that examined the average household tax burden reported that tax on sugar-sweetened beverages would be regressive, but with small differences between higher and lower income households (0.10-1.0% and 0.03%-0.60% of annual household income paid in tax by low- and high-income households, respectively). 

The problem isn't that 2kg over ten years is deemed small, it's that it's the largest effect in a field of either smaller effects or no effects.

Swinburn then goes on a bit of a rant about the inapplicability of rationality models, but I don't see the relevance - or at least I don't see that it goes the way Swinburn wants it to go. Whether people are wholly rational, or completely barking mad, the studies aren't showing any particular effect of sugar taxes on sugar consumption - at least in the ranges that have been tried so far.

But it's worse than that. The rationality assumptions are what make sugar taxes a plausible intervention in the first place. If people are completely irrational, there's no necessary relationship between demand and prices except through an income effect. And in that world, why would we even be thinking about sugar taxes?

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.

Brexitunity

If the UK is set to kick out a pile of highly skilled academics working there on EU passports, maybe New Zealand should look to the Brexitunity. 

I don't know how many of them would move to New Zealand, and I don't know which Departments have holes that need filling. But I'd expect that invitations to apply coming from New Zealand university departments, accompanied by a friendly welcome letter from Immigration New Zealand about our Skilled Migrant Visa system and how they'd all qualify, could be welcomed.

It at least seems worth a shot.

Here's the LSE's blog on the situation over there.

I arrived at a meeting a couple of weeks ago and noticed one of my academic colleagues was visibly distressed.

When I asked what was wrong, they said they’d just had a very alarming letter from the Home Office. Having lived and worked here for more than two decades (they’re a national of another EU country) they decided to play it safe after the Brexit vote and apply for leave to remain. Big mistake.

They received a threatening letter from the Home Office saying they had no right to be here and they should “now make arrangements to leave”. The letter was obviously wrong – they had every right to be here under existing UK law – but that didn’t lessen the emotional impact for my colleague, whose whole future was suddenly thrown into uncertainty.

I had read similar stories in the press, and wondered how many other academics might be affected, so I turned to Twitter to ask for any similar experiences. The tweet I posted asking for examples was retweeted – mostly by concerned academics – over 1,000 times. People started writing to me with cases and I began digging into the issue.

There aren't many places where the Immigration Service are actually accommodating and friendly rather than focused on trying to keep people out. We have nothing but praise for our experience with New Zealand Immigration in first getting our work visas, then permanent residence. In the US, it's like a branch of the police. Here, it's customer service.

Oh - and to be perfectly clear, don't go and assume that I only want rich professor-types and Peter Thiel here. I favour reasonably broad increases in immigration including increasing the refugee quota and including adopting Canada's sponsorship regime for accommodating even more refugees. Heck, we organised this event on it. Migrants make a valuable contribution, that migration is good for the migrants, and that both New Zealand and migrants could do well by having more migrants come here.

The Economist highlighted some of John Gibson's work with David McKenzie on how New Zealand's seasonal employment visas were fantastic development aid for Tonga and Vanuatu; I think that's awesome too and that it could be expanded. The Economist notes a similar scheme in America didn't work out so well because they made it just too bureaucratic and hard for Haitians to take up the scheme: again, US Immigration is a police service; here it's customer service.

I'd like to think that not being dicks to immigrants is one of New Zealand's comparative advantages; that has been eroding a bit with a lot of the political talk bashing migrants. Our report on immigration comes out on Monday; watch for that as confronts some of the populist migrant-bashing with the data.

Previously: Nobel Visas?

The Gibson Critique - sugar tax

Waikato's Professor John Gibson last week delivered at Motu what has to be the most devastating critique of the empirical estimates on sugar tax effects that I've yet seen. Gibson's slides are here.

Minister of Health Jonathan Coleman has been holding off on sugar taxes, saying that he needed to hold on the results of a couple of forthcoming studies, one of which is Gibson's. Julie Anne Genter and the Greens have been arguing that his opposition relies on one industry-linked report; I'm not sure how they missed Gibson's work, as I've pointed Julie to it many, many, many times. 

Gibson's presentation at Motu goes beyond what I'd seen him present at the Ministry of Health a few months ago, and which we cited in Jenesa's report The Health of the State. 

He walks slowly through the problems of demand elasticity estimation where there can be consumer response on the quality as well as quantity dimension when all you have is household expenditure data. Price variation on the quality dimension is huge. If you infer consumption by how much people spend, but people respond to price changes by downshifting in quality, you will overestimate the price elasticity of demand. And even more so if people stockpile when things are on sale for later consumption. He shows how Deaton's method of inferring price elasticity by restrictive assumptions on cross-brand shifting fails. 

Here's Gibson on the Mexico studies:

He later shows that hardly any of the existing papers out there deal reasonably with quality substitution, and that there are other substantial problems out there.

But the more interesting part comes at the end, where Gibson contrasts how economists read a literature and how public health people do. 

Sugar tax advocates in New Zealand need to stop pretending this work isn't going on. Gibson's final report isn't due out in a while. The sugar tax people can't continue claiming that all the opposition to sugar taxes is somehow motivated by Big Sugar. There are serious empirical issues in the literature and I have pretty big doubts that any of the sugar tax proponents have been able to wrap their heads around those issues. 

Soda taxes when discount brands exist

Which of the following sounds more like the real world?

In world A, you walk down the grocery aisle. You want to buy some soda. You see that the price of your favourite brand of soda has gone up. You decide not to buy any soda and you consequently drink less soda.

In world B, you walk down the same aisle with the same intention. On seeing that the price of your favourite brand of soda has gone up, you look around to see if it's available at a lower price point in cases of cans, or if a different comparable brand is available, or you give the discount brand a second look. Or, you decide to hold off that week because you still have some stored in the cupboard from last time it was on special and you can buy a few cases next time it's on special. Either you spend a bit less to drink the same amount of a discount brand, or you don't spend anything this week but still drink about as much as you otherwise would have because you're drawing down your stocks.

Turns out that most of the studies that try to estimate the effects of soda taxes assume we live in world A. I live in world B, and suspect you might too.

Waikato Professor of Economics John Gibson provided a superb presentation on the problem at the Ministry of Health at lunchtime today.

How effective a fat or soda tax is at curbing consumption depends on how responsive people are to changes in prices. If people are not very responsive to changes in prices, taxes will not do very much to change consumption.

Most measures of price responsiveness depends on very poor data. For example, in New Zealand, studies will use the Household Economic Survey's measure. The HES provides an income share measure: what proportion of your weekly family expenditure went to fizzy drinks, or to meat, or to any of a wide variety of other categories. That, combined with a price series on the average price of sodas, is used to get an assumed measure of quantities consumed. So when average prices go up, total family expenditures on the fizzy drink category get divided by a higher average price. The change in quantity consumed then comes out of that.

But while that can work well if the product is very specifically defined, like "6 pack of 330mL cans of Coke Zero", it stops working if the category is "fizzy drinks". Why? People respond in two ways to price hikes. They can reduce the total quantity consumed, but they can also change what they buy: shifting from more expensive products to packaging that costs less per unit (say, an 18-pack of cans instead of a single can for a lower unit price), or shifting from a more expensive brand to a store brand. All of the HES-derived figures assume zero change in the quality of what is purchased and consequently assume all of the movement is on the quantity side.

John points out that this is hardly a problem unique to New Zealand. Hundreds of studies do this and consequently overestimate the actual responsiveness of quantity to prices. Economists at least are typically well aware of the problem: it's been pointed out at least as early as 1955.

Deaton proposed a potential solution - which was about as good as you could get without direct observations on all of unit values, prices and quantities. Under a few restrictive assumptions, you can estimate quality changes by looking at the unit prices paid by households of different incomes.

Gibson uses data from Vietnam where they have unit values, budget shares, and prices for 45 food and beverage groups to look at how biased price elasticities are when they don't control for changes in quality. Using the standard method, Gibson found price leasticities around -0.8. Correcting properly for quality changes, which his data lets him do, measured elasticities dropped to about -0.20. In other words, the true price elasticity of demand is a quarter of what typically gets reported. And while the Deaton solution helps somewhat, remains pretty far off.

Here's the key slide. The "Unrestricted elasticity of quantity with respect to own-price" shows Gibson's elasticity estimates that recognise quality shifts - again, this is only possible where you have all the data, and we typically don't. The second line shows the price elasticity you'd get if you used the standard method which assumes that nobody makes changes along a quality dimension when prices change. The third line gives the elasticity measure you'd get using Deaton's method.

 

Here are John's slides from his presentation.

Your bottom line: sugar taxes will probably do about a quarter as much as you might have previously thought in changing consumption. Sure, this is data out of Vietnam, but note that opportunities for quality shifting are larger in richer and more developed economies, because there will be more brands at more price points. And where opportunities for downshifting stop if you're already on the lowest possible price point because you're very poor, that constraint will bind less in richer places.

And worry too that all of this still overestimates the price responsiveness of consumption as compared to purchases where people can store durable goods like soda.

Jenesa pointed to these problems in her report, citing Gibson's then-in-progress work. There's a lot of wishful thinking in the public health sector. One prominent public health researcher/activist (Chatham House) argued at the MoH presentation that even if taxes didn't change behaviour that much, they still could be worth trying as they can't really do harm. Where do you start....

Crossposted from The Sandpit

Chinese data

Everybody knows there are problems in Chinese official statistics. But John Gibson and Chao Li have found what I think is a new one. Anything that's using regional per capita figures is a bit suspect.

Here's their abstract:

Hundreds of studies in economics misinterpret China’s sub-national population and per capita data. The most widely used population counts are of hukou registrations from each province, prefecture, county, or city rather than of the people living in each place and generating local GDP. Over 220 million people have left their place of registration, while almost none had when reforms began, creating time-varying errors in estimates of per capita income of sub-national units. We survey empirical articles in blue ribbon journals, in development journals, and in regional and urban economics journals that use China’s sub-national data. Over 80 percent of articles use these data erroneously; most commonly the wrong population or employment counts are used to measure the size of sub-national units, and per capita data are calculated with the wrong denominator for the interpretation placed on variables. We provide examples of errors from each group of journals, and a critical test of one highly-cited study. Specifically, we show that if hukou registrations are erroneously used to measure the local population, following existing practice, conclusions about driving forces for urban area expansion are reversed. We give recommendations for more careful use of China’s sub-national population and per capita data.

Time varying errors are... not good. They don't wash out in fixed effects.

Careful out there...

Eagle vs Whale

Whaleoil took aim at my former colleague John Gibson.

John received a Marsden grant for some work looking at the elasticity of soda consumption to soft drink taxes. When I saw that John had received the grant, I knew he had to be up to something really interesting, so I dropped him a note asking about it. He told me that a lot of current estimates of the effects of taxes on consumption are confounded by that we use data on total spending as a proxy for consumption, and where consumers can substitute down a price/quality ladder with an excise hike, total consumption may be rather more inelastic than we might have estimated from data based on a consumer's change in spending after a tax: what can look like a drop in spending after a tax hike could be a maintenance of ex ante consumption at a lower price point. Interesting stuff indeed. I hadn't blogged on it yet due to the busy. I wish I had hit it earlier now that I see Whale went after John.

I supposed Whale guessed from the project title that this would be another publicly funded attack on consumer freedom. John's project isn't that, as John later explained in a "right of reply" post. Good on Whale for posting it.

Zone wars

Auckland's battle over school zoning gives some hint as to the magnitude of the value at risk. 

Adrien de Croy, who lives with his family in a home zoned for EGGS and also within the proposed One Tree Hill College zone, understood there was significant pressure on the rolls at AGS and EGGS.

"They can't really reduce the zones unless there's an alternative in place, and [the proposed One Tree Hill College zone] basically gives them the opportunity to reduce their zone. We see it as the first step to removing us from the Auckland Grammar and EGGS zones."

Mr de Croy, whose eldest child is 7, said at this stage his main concern was for the value of their property. A real estate agent had told him a typical premium someone would pay to get into the "double Grammar zone" was about 20 per cent.

Last year the Herald reported one Mt Eden home just 750m outside the area went for $516,000 less than a house up the road, valued the same but situated 250m within the zone.

One Tree Hill College principal Nick Coughlan said he understood such concerns, but they were unfounded.

The zone, and any overlaps, was informed by the need to not divide areas and homes around contributing schools. There was no intention to realign zones in the future, Mr Coughlan said.

We can do better than this, though, to gauge the effects of school zoning. For that, we turn to Waikato's John Gibson and Geua Boe-Gibson. They've estimated the effects of school boundaries in Christchurch pre-quake. From their abstract:

School attendance boundaries are a contentious issue in New Zealand, and have been relaxed and re-imposed depending upon political sentiment. Critics contend that a supposedly egalitarian state school system becomes one of selection by mortgage, with the value of ‘free’ schools capitalized into property prices. Attendance boundaries restrict the schooling opportunity set facing a student, who typically is unable to study at nearby high-performing schools if they live outside their boundary. We relate schooling opportunity sets to sales prices of over 8000 houses in Christchurch, controlling for dwelling attributes, neighborhood characteristics and geographic accessibility to a wide range of services. Our model explains over three-quarters of the variation in prices and we use this model to predict property prices if there were no attendance boundaries. Abolishing boundaries expands most schooling opportunity sets and predicted house prices generally rise. But prices would fall in some higher income neighborhoods with highly educated residents, who are likely to oppose reform of school attendance boundaries.

Gibson and Boe-Gibson use a year's worth of house sales in Christchurch, October '04 through October '05, to check the effects of school zones on prices after accounting for land and building area, building age, materials, parking, garage, and whether there was a deck, slope, or view. I hadn't known that QV data included information on the latter three. Importantly, they link in Census meshblock data on neighbourhood ethnicity, immigrant status, education, and employment, and meshblock crime. Some of the work on school zone effects will confound "good school"  with "seen-as-desirable (ie no rednecks) neighbours".

They simulate the effects of a standard deviation increase in NCEA Level 1-3 pass rates on median house prices and find that, all else equal, having access to a school with a standard deviation better NCEA pass rate is worth between $14,300 and $19,900 for the median house. This gives a few implications.

First, the market value of policy innovations that improve school quality is very high: a policy that improved NCEA pass rates by a standard deviation is worth about $42 billion.

Second, locking poorer people into poorer schools seems a pretty bad policy. Gibson calls it "selection by mortgage", and worries it can reduce social mobility especially among minority groups.

Finally, while abolishing school zones would increase the total value of the housing stock because gains to those getting access to better schools exceed losses to those currently sitting on regulatory rents, it's unlikely to happen because those earning the rents are more effective at protecting turf. While the average goes up in value by about $25,000, houses in preferred zones drop in value by about $20,000. I expect this is an upper-bound estimate as other forms of rationing would have to come in for the better schools in the absence of mechanisms allowing them to grow, and as I'd expect that those with current access would find ways to maintain such access.

Rich people can afford to pick their preferred public schools; poor people get locked into whichever schools service poorer neighbourhoods. The problem is worse in much of North America, where schools are funded from local property taxes rather than from general revenues, ensuring that poor places can't afford good schools; New Zealand's decile funding system works to provide equitable funding across schools. But zoning still causes problems.

Gibson and Boe-Gibson conclude:

...the property market becomes the main schooling selection mechanism for New Zealand parents who are ambitious for their children. Even though schools may nominally be ‘free’, students from poorer households face more restricted schooling opportunities than do wealthier students, being constrained through the housing market.

Almost two decades have passed since New Zealand’s brief experiment with relaxing school attendance boundaries in the 1990s. The frequency of reselling houses makes it likely that most home-owners have paid a price for their dwelling that includes the expected value of access (or exclusion) from particular schools. Consequently there will be windfall gains and losses if future policy reform allows a weakening of attendance boundaries and an opening up of school enrolments. Nevertheless, the wide variation in school performance and the contribution of attendance boundaries to reducing social mobility suggests even difficult reform is worthwhile.

I would love to see a replication of this work in Wellington. In particular, I'd love to know the relative magnitudes of school zone and all-source earthquake risk on property values. Is there a bigger difference between moving from Wellington College zone to out-of-zone than from moving from a low-medium quake-risk property to one that will fall off the side of a cliff in an earthquake? I suspect so, but it would be nice to know.

A real pay equity challenge

The New Zealand unions have been pushing hard for pay equity: that people doing equivalent jobs are paid equivalent amounts. Here's their Pay Equity Challenge website, highlighting the gender wage gap.

Three years ago, Waikato University economist Professor John Gibson released a paper (ungated) showing another pay gap: public servants earn a lot more than folks in the private sector doing equivalent jobs. And where the gender pay gap gets smaller once you start controlling for characteristics that vary by gender and also affect pay, like education, work experience and the like, the private-public pay gap gets bigger when you adjust for confounds like education and on-job satisfaction.

What did the unions say at the time about that pay gap?

But Public Service Association national secretary Brenda Pilott said the study had "no value".

"He calls public servants fat cats because a surgeon working at a public hospital earns more than a teenager working at McDonald's," she said.

"Of course the surgeon earns more because society places a higher value on saving lives than selling hamburgers."

Ms Pilott said the biggest pay increases in the state sector in recent years had been for doctors, nurses and teachers.

"Why? Because our society can't function without them and because we've struggled to hold on to them because they've been able to earn more overseas.

"I note that Professor Gibson is a public sector worker. Does he include himself in the fat-cat category?"

So Gibson's careful study, adjusting for confounds, is of "no value", but differences in average wages across genders, with no controls for confounds, demands legislative action? Interesting.