In defence of simplistic models

This post on methodology is related to recent discussions about the role of maths in economics (Matt has a good summary with the relevant links here), but is actually response to a comment by Chris B over at SciBlogs to my initialpost on Labour’s proposed ban on non-resident ownership of houses. (Yes, this post is long overdue. Events have conspired to keep me away from blogging for a couple of weeks.) 

Chris says: 

You know, the more I think on it, the more dissatisfied I am with this thought exercise. If only because Seamus has seen fit to call it a “very simple model of the New Zealand housing market”. It realy isn’t . It’s simply a fictional market with certain highly abstract asserted properties. No more realistic or useful than the various maths exercises from my own university level economics classes.

Fair enough. I should have said a simple model to help think about the New Zealand housing market. The point of this post is to ask whether simplistic models can be useful. Note that such models are unrealistic by design. If I were writing an academic paper, I would have used a much more complicated model, and if writing a problem set for an undergraduate class, something only a bit more complicated. But this was a blog post, so the model was designed to be easily solveable in your head. (I hope that the maths exercises from Chris’ university-level economics classes were more involved than this one; if not he was severely short-changed by his university.)

In general, a simplistic model is designed to make one or two points by stripping away every piece of reality except a specific thing that you want to highlight. Some of the assumptions one makes in doing this are simply removing irrelevant reality in order to focus attention on the key aspect of the question at hand. Others are more like dogs that don’t bark in the night; seeing what happens when you assume away some aspect of reality highlights how important that aspect is. Chris lists a whole bunch of assumptions in my model. I won’t go into these in detail, but I would argue that they all fit into one of these two categories. Some, like the assumptions about homogeneous preferences and housing quality are just assuming away irrelevant reality. Others, like the assumption of inelastic supply are non-barking-dog assumptions. As I noted in my original post, when you relax this assumption, you make the case against bans on foreign ownership stronger. 

The realism or lack thereof of a model is therefore not a criterion for judging a model’s success. A simplistic model can be criticised for one of three reasons: 

a) the intuitive point that is laid bare when all other reality is stripped away is so obvious that the point doesn’t need to be made;

b) the model doesn’t actually illustrate the point being made; or

c) the point is actually wrong, and the model fails because it stripped away some highly relevant aspect of reality.

The third is not necessarily a criticism. If a model’s intuition can be changed by adding in some relevant piece of reality, the process of starting with a simple model and then relaxing the assumptions lays bare what the crucial step is for generating a particular conclusion and informs where one needs to look for empirical evidence supporting it.

Now, in my post, I was looking to make two points: The first was that the price of houses depends on the current and future expected stock of houses and the current and future expected demand for housing (i.e. the willingness of people to pay to live in houses); changing the rules on who is allowed to be non-occupier owners of houses should not change the price of housing absent a mechanism for the policy to affect demand for occupancy or the stock. The second point was that if speculation is pushing up the price of houses, it is only because house prices are expected to increase in the future; attempts to restrict speculation without dealing with the underlying drivers only delay the issue.

Now I don’t think you can say that my model fails on the ground of being too obvious, as so much public commentary on housing policy simply routinely ignores these two points. Whether the model is successful in illustrating the point is very much in the eye of the beholder. For the third criticism, I certainly can imagine relaxing assumptions to generate different conclusions and inform a debate about what is the more likely state of the world. Chris, however, would prefer to eschew the simplistic model altogether. In his words:

Plainly the exercise does not remotely resemble the New Zealand Housing market. Why, then, should we have any particular faith in our ability to extrapolate from the though exercise to what will happen in the real-world economy.

In what sense does the model not resemble the New Zealand housing market? The model has both renters and owner occupiers. It has owners of rental properties who earn investment income from the ownership. It has a future expected increase in the demand for housing, and in that world has landlords earning a below-market rate of return. All describe exactly, say, the Auckland housing market. Yes, the real-world economy has other things as well, but it is important to understand the simple models before adding complications. What is the alternative?  Chris’ conclusion is as follows:

Perhaps a better approach to arguing against the policy on economic grounds would be to identify other places where it has been implemented and talk about the impacts which have resulted. Potentially tricky to isolate the impacts of the policy from other confounding factors, but if it can be done, there’s the advantage of being able to present some empirical evidence against it. 

 Alternatively, perhaps we might drop the thought exercise entirely as extraneous and talk specifically about how we expect foreign buyers will react to future restrictions on their activities, consequences for investment decisions and the like.

Not so fast. How do social scientists isolate impacts from confounding factors? They use theory. That is, they have a model or competing models in mind that would be consistent with some observed correlations but not with others. And how can you learn anything about how foreign buyers will react to restrictions on their activities and what impact that reaction will have for the housing market, if you don’t have a view about how their behaviour relates to conditions in the housing market, how other people will respond to that reaction, etc.? 

In other words, careful empirical and behavioural analysis rests on models, and complicated models rest on simplistic ones. Non-careful analysis, in contrast, rests on unstated models, models that are potentially self-contradictory or rest on assumptions that have assumed away relevant reality but have never been made explicit. 

DTC prescription drug advertising

John Pickering at SciBlogs' Kidney Punch recommends banning direct-to-consumer drug advertising in New Zealand. He writes:

New Zealand is one of the few countries in the world where pharmaceutical companies are allowed to advertise to consumers directly.  I believe this is detrimental to our health and I call on the government to ban the practice immediately.

I expect that the case against DTC advertising is weakest in New Zealand, precisely because of Pharmac. But let's walk through it.

Let's begin with the best case against DTC advertising. Brekke and Kuhn, 2006, argue in the Journal of Health Economics that DTC encourages manufacturers to provide greater detailing (lobbying physicians about their drug's particularistic benefits) and so better to segment the market; this allows manufacturers to increase the price of their drug with less harm to their drug's relative demand. Where consumers are not price sensitive, this can lower consumer welfare - if somebody else is paying for the drug, and the one on the ad seems shiny, why worry about the price?

Now let's think about the New Zealand pharmaceutical market. Pharmac is the government's drug-buying agency. They develop a schedule of drugs worthy of funding based on clinical effectiveness and cost; people can buy non-funded drugs, but it comes out of their own pocket unless they have private health insurance that covers non-funded medications. The cost jump in moving from scheduled to non-scheduled pharmaceuticals then is substantial.

And, physicians seem reluctant even to mention treatments that could be off-schedule. Based here on personal experience, we almost had to pry out of our physician a list of non-funded vaccinations that she thought worthwhile but that weren't on the funded schedule. Had we seen ads for a chicken pox vaccine, we would have been made (expectationally) better off; we didn't know one existed until we heard about it from friends in the States.

Consumers here will not be price sensitive among scheduled drugs, but they should be when going off-schedule. And all the drugs on the schedule have already been vetted for cost-effectiveness. Maybe there could be some second-order distortions where DTC could lead a consumer to ask for a scheduled drug for an off-label use for which it's less effective than some other scheduled drug. If we expect doctors here would fail to provide alternative advice, either because the kinds of patients who do all their research online before coming to the visit are a hassle to deal with, or because they've been lobbied by the manufacturers of DTC-advertised products already, then this could yield some losses. And maybe this could hold for some on-schedule drugs still here under patent, but losses will remain lower than in regimes without the kind of price controls that New Zealand has.

So, if there is a case for banning DTC advertising, it would seem weaker here than elsewhere.

It's also not completely clear that DTC advertising is all that bad. Calfee, Winston and Stempski (2002) find that DTC advertising of statins did not result in any increase in statin prescriptions but seemed instead to have increased the proportion of those on statins whose treatment was successful; they interpret this as that patients on statins were more likely to comply with doctor's orders on their statin prescriptions due to all the happy statin people on the ads. Further, de Frutos, Ornaghi and Siotis (2013) find that better drugs are advertised more heavily; likelihood of flipping to lower-quality drugs then is lower. Jayawardhana (2012) finds that DTC advertising, at least in cholesterol drugs, increases consumer welfare through its informative role: patients who hadn't realised that they ought to see a doctor about a condition turn up at the doctor's office.

In short, there's a pretty big literature on the actual effects of direct-to-consumer advertising of drugs. It's far from obvious that banning it is a good idea, and, in particular, that it would be a good idea here given the structure of our pharmaceutical market. A post on SciBlogs calling for such a ban could profit from some interaction with the literature; one online ad for a drug that could be less effective than some alternatives hardly seems sufficient basis for calls for such a broad policy change.

The Unemployable and the Unemploying

Well, which is it then? Are large hikes to minimum wages desirable because they transfer money to low wage workers with no real disemployment effects, or because they get rid of those jobs that shouldn't be there anyway?

Early American advocates of the minimum wage sought its disemployment effects, to make "unemployable" those whose employment was undesirable: immigrants who would "under-live" upstanding American workers, and women whose proper place was in the kitchen rather than in employment binders.

Most advocates of higher minimum wages in New Zealand point to recent American studies showing little disemployment effect of minimum wages. And they're right: the most recent American work does show little measurable effect. Minimum wages are far lower there; non-binding constraints largely fail to bind. The effects on poverty aren't that simple though: the products of minimum wage workers are disproportionately bought by poorer people; incidence analysis warns that a reasonable proportion of mandated wage hikes will be passed through to customers. And, in places like Canada where the minimum wage is higher and more binding, there's some evidence that minimum wage hikes increase poverty: the losses to families losing second-earners because of disemployment effects outweighed the gains to those families enjoying a small salary increase.

Here's Chris Trotter with an alternative take. After reasonably critiquing Labour Leader David Shearer's immigrant-bashing, Trotter reads the tea leaves:

This means that any Labour government led by Shearer is likely to shy away from direct interventions in the labour market. It will not pass legislation designed to reverse the flow of wealth from wage and salary earners to owners and shareholders. It will not, by substantially lifting the minimum wage, engineer a wholesale winnowing-out of New Zealand's most inefficient businesses. It will not pass legislation restoring universal union membership or the national award system. It will not use the government's ability to set wages and salaries in the public sector to provide both a guide and a goad for private sector employers. In short, it will not do any of the things required to raise the incomes of New Zealand's wage and salary earners. [emphasis added]

Is Trotter there really saying that part of the point of a minimum wage is to clear out firms employing low-cost labour? Where the old-school Americans wanted to make undesirables 'unemployable', Trotter seems to want to make lower productivity firms 'unemployingable'.

You can maybe build a model where this works. Specify that workers are really really sticky with a current employer: actual wage differences from shifting jobs have to be really high before they'll engage in any search or entertain new job offers. Other, more efficient, employers would love to hire them, but they can't. You'll also have to specify either that markets for corporate control are just broken, preventing the takeover of less efficient firms by more efficient management, or that the firms are in sectors that are simply inherently less productive. Killing those firms allows the workers to shift over to alternative, more productive, employment. It sure doesn't seem a plausible model though.

Further, it can often be the case that lower skilled workers are complements to higher skilled workers. Here at Canterbury, a few years before the earthquakes, the University got rid of some of the cleaners and started making staff empty their own waste baskets into central bins on each floor of each Department.* It saved on some low cost workers' salaries, but at a higher and unmeasured opportunity cost. For every low productivity firm that's killed by Trotter's prescription, how many lower productivity tasks in higher productivity firms are also ended? What do we do with those whose endowment of human capital means that their marginal revenue product will never be higher than the current minimum wage?

* The veneer: sustainability, we should be throwing less stuff out, etc.

The Shapley-Roth Nobel

Alvin Roth and Lloyd Shapley won this year's Economics Nobel.

The prize was awarded "for the theory of stable allocations and the practice of market design". The Swedish Academy has awarded a few prizes in game theory and mechanism design recently,* so this one came as a bit of a surprise to me. In the office pool, my three guesses were Shiller (likely in combination with Fama for financial markets); Tirole (industrial organisation); or, Gordon Tullock and Anne Krueger for rent-seeking. The last was mostly wishful thinking. 

Shapley is famous for the "Shapley Value"** - a solution for surplus-sharing among players in a cooperative game. The Shapley-Shubik power index occasionally shows up in applications in public choice. Shapley also is known for having developed matching algorithms with some rather desirable characteristics: the Gale-Shapley algorithm results in stable matches. A set of stable matches obtains when no pair, matched with other partners, would mutually wish to break their current matches for a new partnership. Roth extended the algorithm and applied it pretty ingeniously to help save lives. 

Here's Alex Tabarrok's roundup:

What Roth has done is extend the Gale-Shapley algorithm to more complicated matches and to actually design such algorithms to solve real problems. In the 1970s, for example, the medical residency algorithm began to run into trouble because of a new development, the dual career couple. How to match couples, both doctors, to hospitals in the same city? By the 1990s assortative matching in the marriage market was beginning to derail matching in the doctor-hospital market! Roth was called in to solve the problem and moved from being a theorist to a market designer. Roth and Peranson designed the matching algorithm that is now used by Orthodontists, Psychologists, Pharmacists, Radiologists, Pediatric surgeons and many other medical specialties in the United States.

Most famously, Roth has worked on improving kidney allocation. I first wrote about this in 2004 (see also these posts):

Your spouse is dying of kidney disease. You want to give her one of your kidneys but tests show that it is incompatible with her immune system. Utter anguish and frustration. Is there anything that you can do? Today the answer is yes. Transplant centers are now helping to arrange kidney swaps. You give to the spouse of another donor who gives to your spouse. Pareto would be proud. Even a few three-way swaps have been conducted.

But why stop at three? What about an n-way swap? Let’s add in the possibility of an exchange that raises your spouse on the queue for a cadaveric kidney. And let us also recognize that even if your kidney is compatible with your spouse’s there may be a better match. Is there an allocation system that makes all donors and spouses better off (or at least no worse off) and that maximizes the number of beneficial swaps? Inan important paper (Warning! Very technical. Requires NBER subscription.) Alvin Roth and co-authors describe just such a mechanism and show that it could save many lives. Who says efficiency is a pedestrian virtue?

Since that time we have seen many such swaps including this record of 60 people and 30 kidneys. Truly a noble match.

New Zealand is also looking to implement a version of this algorithm. 

Al Roth has been a bit on my mind lately as well. The University of Canterbury is considering mandating some kind of cultural competence requirements for students (maybe for faculty too, who knows); we're busily documenting how we're already incorporating cultural things into our courses.

In my Economics and Current Policy Issues course, we spend a week on the economics of organ transplantation. I there note the many ways we can improve upon the current system, ranging from presumed consent systems to compensation for cadaveric organ donation, then on to compensation for live organ donors (kidney, liver lobe), and, potentially, full but regulated markets in organs. And I touch on Al Roth's work on repugnance constraints. Even if we can prove that a well-designed, well-regulated market in organs would save thousands of lives, cultural constraints among voters make some of those those solutions impossible; Roth tries to design mechanisms that route around that inefficiency. I suppose I ought to add Roth's paper to the recommended readings for that week and tick the "cultural competence" box in a productive way.

Congrats to Shapley and Roth. And, hopefully next year, congratulations to Tullock and Krueger.***

* 2007 to Hurwicz, Maskin and Myerson (mechanism design); 2005 to Aumann and Schelling (game theory); 2002 to Kahneman and Smith (the Smith half was for experimental economics).

** The calculation of which was something I desperately hoped would not show up on my micro prelims. Fortunately, it didn't.

*** Tullock is a year older than Shapley - he turned 90 this year. If Stockholm is just waiting out the clock so they can award the prize to Krueger alone, I hope Tullock's ghost haunts them forever, pestering them with insults, derisive comments about their intelligence, and tangential remarks about ancient China whenever they're trying to concentrate on anything. 

Paying for earthquakes

Matt Nolan walks us through why quantitative easing to pay for the Christchurch Rebuild isn't particularly good policy. If we need a monetary push, the place to start is interest rates - and then only if RBNZ thinks we're going to be below the 1% lower inflation bound over the medium term. If we need a fiscal push, which is highly debatable, doing it through earthquake spending might not be as helpful as the Greens might like - especially as regulatory bottlenecks and regulatory capacity constraints in Christchurch seem to be holding things up at least as much as money.

Let's recall how standard public finance says to pay for things like earthquakes. If the status quo ex ante had about the right mix of spending and taxation, then you cut spending in non-earthquake areas, increase spending on earthquake rebuilding, perhaps slightly increase taxes in the short term but definitely take on debt to spread the rebuilding costs over the longer term. This is bog standard public finance. Paul Krugman and Steven Landsburg agree. I walked through the argument slowly a while back.

What do we get if the government prints earthquake bonds and RBNZ prints money to buy them? Here's Nolan:

Now you may believe we should fund the rebuild with a one-off tax – that’s fine, in that case get the government to put a tax in place directly (or to directly cut spending from other place).  However, taxation by stealth of this sort is likely to be worse in multiple ways:

1. We have betrayed RBNZ independence for virtually no reason … understandably a sneak tax by the RBNZ would make people less likely to believe them in the future about holding to their inflation mandate.  As a result, we run into the time-consistency issue in monetary policy again, and it will become more painful for economy when the RBNZ tries to commit to its inflation mandate again.
2. We have a relatively rough redistribution of resources due to this.  By putting in our sneak tax through QE, we transfer resources to those with assets, those doing the rebuild, and those who can easily adjust prices/wages – while hurting those on fixed income, and those who have saved.  It is an inflation tax – pure and simple – and as a result, it will initially transfer resources from those who can’t protect themselves (generally the poor) to those who can (generally the rich).  If we introduce the tax through fiscal policy instead we can sort out these distributional issues a little better.
3. A country that is willing to introduce QE as a clear fiscal transfer – when there is no monetary policy reason – will destroy its credibility with international lenders.  People will scoff at this, but such a policy will increase the level of “inflation insurance” lenders ask for – increasing the cost of credit in New Zealand.

These are obvious and true costs, that have been seen from similar policies around the world for hundreds of years.  QE really isn’t anything new, and if we want a fiscal transfer of this sort just say it (as the Greens previously have to be fair), and do it through fiscal policy – it has nothing to do with the RBNZ.

I suspect Matt's "that's fine" at the start is more recognition that the policy at least is honest rather than that it's a good idea. Borrowing for major one-off capital expenditures is far better than a one-off tax.

Matt's also a little harsher about those peddling crank economics than he's usually willing to go:

The constant banging on about the exchange rate and the RBNZ shows a fundamental misunderstanding of the “issues” NZ faces.

The Greens, and Ganesh Nana, are wrong in stating that the RBNZ has failed.  Distinctly and totally wrong.

I approve.

Bernard Hickey was calling on Twitter last week for a review of the desirability of central bank independence. Matt and I got a bit testy. This is one of those issues where re-politicising whether the central bank should be independent has almost the same effect as removing independence: if RBNZ believes that its independence is conditional not on meeting the PTA but rather on making a mob of monetary cranks happy, then it might be tempted to start skewing its policy. And even if it doesn't, if people think it might be, that also starts wrecking expectations. There's reasonable latent public demand for bad monetary policy. Feeding and encouraging the trolls is a remarkably dangerous game. It's fine to debate what optimal monetary policy is. But suggesting that because RBNZ isn't following your preferred one, we ought reconsider central bank independence... that's intellectual vandalism on par with saying we should do away with Pharmac because you didn't like the Herceptin decision. In sum:

• Good: trying to convince RBNZ of your views on monetary policy.
• Bad: whipping up the hooples to break central bank independence.

Banning the bulb - the information critique

I'd noted a few problems with banning incandescent lightbulbs. First, we can't be sure that one bulb is really friendlier than another without very comprehensive information on how they're manufactured; second, where New Zealand's ETS has things roughly right, at least when it comes to power generation, it's pretty hard to make a case for banning lightbulbs.

Bryan Walker notes a couple of studies suggesting that the cheaper-to-run bulbs are also friendlier to manufacture:

However I had a look to see what I could find, and came across this assessment of CFLs from a writer initially inclined to be sceptical about them, and this report on LEDs. It doesn’t look to be an issue.

A commenter at Offsetting found this one too.

I've no particular dog in this fight; if CFLs and LEDs are friendlier to manufacture, so much the better. But I'm still not sure that it's actually knowable. For example, Bryan's first link provides this table:

Here's a summary of the embodied energy in a light bulb (all numbers represent energy in kWh):

	CFL	Incandescent	8 Incandescent bulbs
Glass	0.17	0.11	0.88
Plastic	0.68	0	0
Electronics	0.66	0	0
Brass	0.18	0.18	1.44
Operation*	120	60	480
Recycle**	1.69	0	0
Total	123.38	60.29	482.32

* This assumes the CFL bulb operates for 8000hrs and the incandescent bulb operates for 1000hrs
** This assumes that the energy required to recycle a CFL bulb is equal to its production 

Let's think about the plastics in the CFL and assume that the table has everything right about the direct energy costs of making plastic. But what about the energy costs of the machines that had to be bought to make the plastics? What about the costs of the machines that made those machines? We'd need to know everything about all the materials that go into all of the pieces of equipment that make the machines that make the machines that make plastics, and then everything involved in the materials used in making that prior set of machines, and so on all the way back.

Read Leonard Reed's I, Pencil. If a pencil's that hard to figure out, an LED bulb isn't going to be easier.

That's just the information problem on the supply side. What about heterogeneous customer demand based on their having very different uses for lightbulbs in different places? In large parts of the country in large parts of the year, waste heat from incandescent bulbs is not waste. It's just a less efficient way of partially heating your house. When I spend a dollar in power heating my house with my lightbulbs, I'm wasting about fifty cents if my heat pumps are twice as efficient as radiant heat; I'm not wasting the whole dollar. I don't want CFL bulbs in some outlets because they take just too long to wake up and provide light; in other spots in the house, it doesn't matter if it takes a couple of minutes to get useful lighting levels. A ban says there is no possible reason for a consumer to prefer an incandescent bulb that can outweigh the difference in power cost, and that just isn't true.

Walker continues:

Crampton’s second point was that an ETS which is functioning well removes the need for any regulatory interference in the market. “If power prices incorporate carbon charges via the ETS, then there’s no real economic case for pushing consumers to choose bulbs they don’t want.” He goes on to say that if the ETS isn’t producing the desired effect the answer is to improve the ETS, not make piecemeal interventions. It crossed my mind when I was writing the post that if the ETS was functioning at a level designed to drastically reduce carbon emissions there mightn’t be a need to bemoan the Government’s action on incandescents. But it is not functioning at that level, and the Government seems determined to ensure that it never will, or will only so far in the future as to be much too late.

If the ETS is broken and unfixable, then you can start making second-best cases for all kinds of stuff. But I'd thought it was least broken when it came to electricity generation.

But should New Zealand's ETS really go beyond that which everybody else is doing? "Drastically reduce" seems a pretty tough standard. Maybe it's the right one if everybody does it at the same time and agrees to be bound by it, but surely NZ going it alone in pushing for drastic reductions does a lot more to ruin the NZ economy than to delay global warming; we'd have to expect the rest of the world to be remarkably strongly swayed by New Zealand's example to expect otherwise. And that's just not going to happen so long as the mess in Europe and the looming potential economic mess in China are the headlines.

Walker continues:

Reining in carbon emissions has become a matter of high urgency, far outweighing concerns about government intervention in the economy. For that matter the ETS itself is an intervention, designed in its original intention to make markets assume the environmental costs which left to themselves they ignore. I see no reason why it should not be accompanied by other government directives which ensure that markets are not permitted to operate in areas that clearly slow the transition to a decarbonised economy.  We accept government mandates in many parts of the economy such as the compulsory insulation of new buildings and we rue failures in regulation such as allowed the emergence of leaky buildings.

Banning incandescents does not to my mind invoke the spectre of a centrally planned economy. It’s simply part of boundary setting for markets to operate within, a proper function of government and one buttressed by the urgency of the climate crisis.

The terms of the argument I think here have shifted a bit. First, my critique of lightbulb banning wasn't that it was interventionist; rather, that it was a worse regulation than having a working ETS. If the ETS were working correctly, there would be no efficiency case for banning lightbulbs; I'm not even convinced that there is a case for banning lightbulbs given the problems in our actual ETS.

I was hardly making the case that banning bulbs leads to a centrally planned economy. Rather, the knowledge requirements for assessing whether a ban is desirable and being really sure about it aren't far from the knowledge required to make central planning feasible.

If we want a shot at drastic reductions, though, we could do well to take another tack entirely. The ETS imposes some costs on the economy. Not huge ones, but they're real. Ditch the ETS and pour money into ag biotech research into improved pastoral systems for low methane; provide a free licence for anyone to use the resulting research. If it does nothing, then we've hastened global warming by maybe a day a century from now relative to NZ's having kept the ETS.* If it works, we substantially abate global agricultural methane emissions. A small country in the middle of nowhere with little influence might do better with the high variance play


* My baseline assumption here is that if New Zealand as a whole were shot into outer space tomorrow, with no further emissions of any kind, we'd at most delay whatever carbon concentration or temperature milestone we'd have otherwise achieved a century from now by at most two or three days. We're a pretty small dot.

Sell or lease?

Greece may lease some of its sovereign islands to help pay the bills:

As international inspectors in Athens scrutinise the country’s fitness to receive the latest aid payment, Prime Minister Antonis Samaras has said commercial exploitation of some islands could generate the revenue lenders need to see to continue funding the country.

The shortlist includes islands ranging in size from 500,000 square meters (5.4 million square feet) to 3 million square meters, and which can be developed into high-end integrated tourist resorts under leases lasting 30 years to 50 years, Mr Taprantzis said.

Legislation needs to be passed to allow development of public property by third parties and reduce the number of building, environmental and zoning permits needed before the plan can proceed, Taprantzis said.

Outright sales have been ruled out because the returns for the Greek state wouldn’t be higher than a leasehold arrangement, he said. Greece will attract more investment if an island is turned into a resort, he said.

I believe the explanations later in the story that complete sales would be politically difficult. But I sure don't believe that leasing out the islands would raise as much as selling them. As I'd written back in March:

Greece has somewhere around 6000 islands in one of the most beautiful parts of the world. Islands of legends and Greek Gods and stuff. Islands that, you'd expect, would be worth something to somebody. Some of them are privately owned and do trade. Here's one place you can go to buy one.

But all those islands are encumbered with Greek sovereignty. Own the island, own the  entanglements of the Greek state that make development, well, hard.

First of all, to date it is rather hard for someone to develop a private island because of the Greek state bureaucracy and the domestic Archeological Agency, which is stringent in its examination of every case that involves an island that may have antiquities of any kind lurking under its soil. 

And that's just for setting up the island as a holiday home. If you have to provide a stool sample to get through the regs letting you set up a web-based business, a Greek Island isn't going to be your first pick for doing anything innovative.

Imagine being able to bid on an island in the middle of the Mediterranean within a short flight of Europe, the mid-East, and northern Africa where Greece wouldn't just hand you title, they'd hand you sovereignty? There has to be a ton of value locked up in those islands that could be released by Greece being willing to relinquish sovereignty. Restrict it to the uninhabited islands to keep things simple, for starters.

Seasteading is cool. But imagine kickstarting it by letting a thousand sovereign islands bloom in the Aegean Sea? 

Leasing out islands with fewer regulatory encumbrances adds some value where the regulatory abatement is credible. But hasn't recent experience suggested that bare-land Greece would be worth more under alternative ownership?

Tobacco plain packaging, if we cared about evidence

The Science Media Centre provides an expert round-up of commentary on a new paper finding, unsurprisingly, that people like branded tobacco packs more than they like plain packs. What's more relevant for policy, and what we really have no clue about, is whether changing the branding on packages has effects on aggregate sales or whether it works instead to break brand loyalty and move consumers to lower-cost no-name packs. As Professor Richard Edwards noted in his plenary address to the Oceania Tobacco Control Conference in Brisbane last October:

Plain packs have not been implemented, so evidence of the probable population impact must come from experimental studies, focus groups, surveys and so on; rather than rigorous controlled studies of the impact of the actual intervention in the real setting, as would be the ideal.

If we cared about knowing whether tobacco plain packaging has any effect, we could find out pretty easily. Set the whole thing up as a randomized policy trial. Some parts of the country get plain packs, some parts don't, and watch what happens over the subsequent few years. I'd sketched out a framework for that kind of trial back in April. Even better: if Australia is implementing the same policy, run the trial across both countries.

Instead, we're designing policy to avoid ever being able to find out whether it's had any effect. In Oz, they're bundling plain packaging with a simultaneous national increase in tobacco excise taxes. The effects of price increases will be hopelessly confounded with the effects of plain packaging unless there's reasonable ex ante state level variation in tobacco prices.

The price of cigarettes would rise to $20 a pack under a Gillard Government proposal that would reap an extra $1.25 billion a year in taxes.

The West Australian understands the Government is considering a 25 per cent rise in tobacco excise that would raise $5 billion over four years.

The plan emerged from a Treas- ury reconsideration of so-called "sin" taxes. It would repeat the financial windfall from an identical move in 2010.

The proposal is in line with long-standing advice from the National Preventative Health Taskforce and would lift the price of a pack of 30 cigarettes by $2.62.

Peter Jackson 30s, now about $18.30, would cost almost $21 under the measure and the price of Dunhill 25s would increase $2.18, taking the retail price to more than $19.50.

The excise increase may be timed to coincide with the introduction of mandatory plain-packaging for tobacco products on December 1. [emphasis added]

International research has found there is a 4 per cent fall in smoking rates for every 10 per cent increase in price. Anti-smoking crusader and Curtin University Professor Mike Daube said higher cigarette prices would discourage children and people on low incomes from smoking. "An excise increase sooner rather than later could also prevent tobacco industry efforts to subvert the impact of plain packaging by lowering prices," he said.

There are non-crazy reasons for wanting to bundle excise increases with plain packaging. If, absent brands, smokers see there being less difference between low cost off-brand cigarettes and higher cost branded cigarettes, they may substitute down to the lower cost cigarettes and then smoke more - I expect this is the main worry of the tobacco industry as they make their returns on the branded product. Consumption goes up but margins go down more than proportionately. Countering this with excise increases isn't entirely nuts if you want to curb smoking rates, but it makes it awfully hard to tell whether plain packaging does anything other than destroy the value of the tobacco companies' brands.

I still think a randomized policy trial is what's needed if we care about finding out truth rather than just beating up on Big Tobacco.

Why ban lightbulbs?

You could make a case for mandating energy efficiency requirements for lightbulbs and banning less-efficient incandescent bulbs in a country without an effective carbon tax or emissions trading regime.

But can you make the same case where we already have emission trading? It's a bit more difficult.

Bryan Walker hopes the government is ashamed of having failed to ban incandescent bulbs. He writes:

It’s hard to make any sense of the reversal of former Government policy on incandescents other than in the most cynical of political terms. It is in direct contradiction to any concern they express to tackle climate change. Lighting has been estimated to use nearly 20% of the world’s electricity and six years ago the International Energy Agency produced a report which concluded that a global switch to efficient lighting systems would trim the world’s electricity bill by nearly one-tenth. It is a low-hanging fruit in the reduction of carbon emissions. Even the US is to phase out incandescents.
Many people are making the switch to efficient bulbs without Government direction. It makes economic sense to do so after all, in addition to the clear environmental benefits involved. But Government also has a responsibility to advance energy efficiency by appropriate regulation, as other free market economies have recognised.

Let's go back to first principles.

A lightbulb has three sets of associated cost. The first is a fixed cost for the bulb; the second is the ongoing cost of electricity to run it. A third and today largely ignored cost is disposal at end-of-life: some of the fancier lightbulbs come with greater risk of leaching nasty stuff into landfills and so either impose that cost or impose the cost of more careful disposal.

Power generation has some associated external cost to the world through carbon emission. While most electricity generated in New Zealand comes from renewable sources, the marginal unit often comes from coal-fired generation. And so emission abatement has some external benefit. Absent the full costs of power generation being internalised into the price of electricity, you can make a second-best case for regulatory interventions to push people to the choices that they would have been making in a full-carbon-costing world. Now, there's a problem in that electricity is also used in the production of lightbulbs, and if the non-priced carbon embodied in the production and distribution of more efficient bulbs sufficiently outweighs the non-priced carbon embodied in incandescent bulbs, the result could reverse. I have no clue about either, but it would be awfully surprising if fluorescent and LED bulbs did not have more carbon emissions associated with their production than comparable incandescent bulbs - I would expect that differences in embodied non-priced carbon would be proportionate to differences in the cost of the bulbs. But let's stipulate for now that the ongoing flow of carbon is lower for the more modern bulbs, especially as they have a longer replacement cycle. Always keep in mind that it's not easy being green: when prices don't fully incorporate costs, alternative methods of calculation have non-trivial associated problems.

But this doesn't hold when we already have a reasonably comprehensive emissions trading scheme. Electricity is in the system, even if farming isn't quite there. If the permit system is working well, there is absolutely no case for banning incandescent bulbs. Even if incandescents are less efficient at producing light, they're not all that bad at producing heat. And for two thirds of the year, at least here in the South Island, that isn't all waste. 

If power prices incorporate carbon charges via the ETS, then there's no real economic case for pushing consumers to choose bulbs they don't want. If the ETS isn't working well, then all kinds of consumer and producer decisions will be out of kilter and we do far better by trying to make the ETS as clean across the board as possible rather than mucking about in individual markets. You're then forced into a political second-best argument that it's impossible to fix the ETS but perhaps possible to get political support for pushing on a few important markets. But, again, it's awfully hard to tell in any of those individual cases whether we're doing net good in doing so. The UK thought it was doing good in adding food miles; they'd missed that our pastoral systems have lower overall greenhouse gas emissions. 

In very important ways, the problem facing somebody wanting to intervene in particular individual markets to try and fix the problems caused by not having a good ETS are similar to the problems facing somebody trying to run the old Soviet economy. I'm not trying to make a dumb ideological point about Greenies here: rather, it's about information and its dissemination through a system. The Soviet planners had to figure out how rationally to allocate scarce investment resources in a world where they couldn't really tell how much consumers valued anything; that's a hard-to-impossible problem to solve. An environmental planner working in a world without either a comprehensive carbon tax or an equivalent ETS has a parallel problem in trying to figure out all of the environmental upstream and downstream costs of any product, its substitutes and its complements, and of all the processes used to produce it and its substitutes and its complements. Art Carden explains it in more depth. Product-by-product intervention is awfully likely to produce environmental absurdities. You don't have to be a climate change denier to oppose piecemeal interventions of this sort.

The Dismal Science: Stadiums edition

The rather strong consensus of the academic literature shows that government subsidies to sports stadiums fail to deliver promised economic benefits. 

Massey's Sam Richardson, and co-blogger at The Dismal Science, has done the academic heavy lifting in New Zealand; most of the other bloggers syndicated at The Dismal Science have chimed in from time to time with our takes on things.

Close-Up highlighted some of Sam's work on stadiums; I popped up a bit but the serious work on this issue is Sam's. When Mark Sainsbury asked what Earthquake Recovery Minister Gerry Brownlee thought about the economic case for stadium subsidies, Gerry replied: 

"They say that economics is the Dismal Science. And you've found some really good exponents of that."

Indeed, Gerry. Indeed. 

I will be hitting some of the highlights of our collective prior efforts on stadium subsidies at The Dismal Science feed at SciBlogs. Enjoy the mini symposium!