Tuesday 31 August 2010

Propping up the finance companies [updated]

A brief potted history; somebody correct me if I have this wrong (a few such corrections now below). I'm mostly going on memory and mine's not the greatest.

During the 2008 New Zealand election campaign, the Australian government moved to provide deposit insurance to the Australian banks. Michael Cullen, then Kiwi Finance Minister, announced that New Zealand would do the same. Nobody bothered getting Treasury and Reserve Bank in for prior consultation, so the whole thing was guaranteed to be a mess - the issue arose because Australia moved and because we were mid-election. Cullen got Key to agree to things in principle, with details to be worked out. The scheme wound up covering a bunch of dodgy finance companies that no sane government deposit insurance scheme ever ought to cover. The initial draft regs were so ridiculous that folks here in the Econ department considered setting up a few finance companies where we'd all invest in each others' companies, have all the companies go broke, then collect from the deposit guarantee scheme. Others had very similar ideas. Drafting regs on the fly during an election campaign is about the worst way of setting policy, but that's what we did. Thanks, Michael Cullen. And thanks John Key for going along with it. RBNZ fixed the stupidest parts of the regulations, but dodgy finance companies got to stay in, paying premiums that were low relative to their risk, with cross-subsidy coming from premiums paid by the banks.

Update: Cullen had had preliminary chats with Treasury prior to Australia's moving, with Treasury's advice provided here. Treasury worried that covering banks and not finance companies could be distortionary, sending money from finance companies to banks. That's not crazy, but it does argue for actuarily fair insurance premiums, as recommended by Treasury at p. 14-15, not the system we wound up with when the final regs were drafted in haste during the election campaign.

Now, what's a finance company, my non-Kiwi readers may ask. So did I. The typical finance company sells term deposits to investors at high interest and lends the money out to such trustworthy folks as 16 year olds with no income and no collateral who want to buy crappy old Japanese cars, put loud exhaust systems on them, and race them around town. When these trustworthy loan recipients pay back their very high interest loans, the finance company pays out its investors at the very high promised interest rates. Now, some of these companies went bankrupt during the financial crisis. And a bunch of people who'd invested their life savings in companies lending money to teenagers with no income for buying depreciating assets began wailing that they never could have imagined that these finance companies paying high interest rates actually might have had risks attached. When folks like me asked why the hell these folks were taking really really risky term deposits at 10 or 12 percent when they could have gotten rock-solid term investments from RaboBank that were paying around 8 percent, nobody could give me an answer beyond "they needed the extra money". Nice. And because it was an election campaign and because nobody during an election campaign wanted to tell a now-bankrupt retiree that his choice to get an extra $40 a month in interest had consequences, these companies got the same deposit guarantees as the banks.

Ok, so that's a finance company. One of the finance companies, South Canterbury Finance, seemed a lot less dodgy than the others. Its founder, Alan Hubbard, lived a frugal life and invested in things like farms instead of in things like cars loans. Except it seems that he was being awfully generous in his administration of things, trying to work more as a one-man regional development agency but doing it with other peoples' money. I'm cool with charity. But the end result of this kind of socially conscious investment is bankruptcy.

The government should have moved to pull finance companies out of the deposit guarantee scheme a year or more ago. The best they could manage was a winding down of the current scheme with a successor scheme to start up a month from now, restricted to companies rated BB and up. Since SCF was covered on the old scheme, the government was stuck: either bail out SCF or let them go into receivership and pay out under the deposit guarantee scheme. The former had lower front loaded costs but potentially high long term costs; the latter gets it all done with. I think I'm glad they chose the latter, if I understand things correctly.

But instead of moving to scale back the guarantees, they're ramping things up. Previously ineligible investors are now covered. Maybe there's some really good reason for this and I've just not been paying enough attention. This ought to be the time to be killing finance company eligibility for government deposit insurance, not expanding it. And I'm not sure why we're conferring rents on folks who were betting last week that the government would provide a bailout:
South Canterbury Finance investors, including all bondholders but not preference shareholders, have been told to spend their cash wisely when they are reimbursed by the government a total of $1.6 billion following the company’s receivership today.

In addition, the government is negotiating a loan of up to $175 million to the receivers for repayment of prior charges over South Canterbury’s assets, including a $100 million facility arranged through investor George Kerr’s Torchlight fund.

The payment under the Crown guarantee appears more favourable to South Canterbury investors than to those in other failed finance companies in recent times.

This is because some depositors and investors in long-dated bonds will now be repaid – having earlier been told not to expect anything.

This also represents a significant payday for plucky investors who bought South Canterbury 2012 bonds in the last days of last week at an 80% discount to their value today.

South Canterbury chief executive Sandy Maier said today that the payout under the guarantee scheme would lessen the impact on the South Island economy, where much of the company’s funding base and lending activities were based.

“Very shortly there’s going to be a massive infusion of liquidity in the South Island as all these debenture holders and bond holders get their dough,” Mr Maier told a media conference in Christchurch.

“I hope they do wise things with the money next.”
Hey! That's one way of running quantitative easing! Instead of helicopter money, just give it to the folks who'd bet on the government never ever being willing to let folks eat their own losses.

Bernard Hickey has been covering SCF for ages; TVHE today also is good. AntiDismal called the other day for ending deposit insurance. I'd be reluctant to pull deposit insurance for the banks until after the current financial mess is over with. And even then, I'd worry that the government now has zero credibility in the face of potential bank default and so may be stuck with deposit insurance for the longer term - at least in that case, they collect premiums on the insurance.

If things stay as they are, the message to Kiwi investors is pretty clear. Forget all that "diversify your portfolio" nonsense. Put everything into a government-guaranteed roulette wheel. Heads you get high interest payments; tails the government covers you. Here's the list of companies covered by the deposit guarantee scheme; just be sure that the product you purchase is covered under the extended deposit insurance scheme through the end of 2011 and that the maturity date falls prior to end 2011.

Results I don't fully believe

Here's the latest on the relationship between all-source mortality and alcohol consumption: a U-curve rather than a J. That is to say, heavy drinkers and abstainers have roughly comparable mortality rates, with moderate drinkers doing best. Compared to moderate drinkers, and correcting for a host of confounding variables including whether current abstainers are former drinkers, they find abstainers have a 49% increased mortality risk while heavy drinkers have a 42% increased mortality risk. So it's worse to be an abstainer than a heavy drinker, in their sample.

It's just one study though; I'll stick with the meta-study consensus of a J-curve rather than a U-curve, with a best estimate of about a 16% reduction in all-source mortality with moderate drinking but elevated risk for folks having more than about 4 standard drinks per day. But I'll look forward to estimates from future meta-studies that include this new work.

Will the Ministry of Health ever acknowledge the existence of the J-Curve? Unlikely.

HT: Time, via @mitchellhall

No factual errors?

The New York Times needs some better fact checkers too:
The New Yorker article stirred up the right, too. Some of Mayer’s blogging detractors unwittingly upheld the premise of her article (titled “Covert Operations”) by conceding that they have been Koch grantees. None of them found any factual errors in her 10,000 words. Many of them tried to change the subject to George Soros, the billionaire backer of liberal causes. But Soros is a publicity hound who is transparent about where he shovels his money. And like many liberals — selflessly or foolishly, depending on your point of view — he supports causes that are unrelated to his business interests and that, if anything, raise his taxes.
The New Yorker thought that "Kochtipus" was a term coined in the Obama administration. Here's the New Yorker:
Indeed, the brothers have funded opposition campaigns against so many Obama Administration policies—from health-care reform to the economic-stimulus program—that, in political circles, their ideological network is known as the Kochtopus.
The term was first used in the 1970s.
In the late 1970s, the Koch largess, and the concentrated strategy that was apparently behind its distribution, led to condemnation (mostly from people not getting any of it) of what Sam Konkin dubbed "the Kochtopus" -- a supposedly strangling, controlling monster of multiple limbs.

Brian Doherty, "Radicals for Capitalism", p. 410.
Yup. No factual errors there at all. And this one is dead simple to spot for anybody who knows anything about American libertarianism. The New Yorker's Jane Mayer clearly doesn't.

Monday 30 August 2010

When's an arbitrage not an arbitrage?

I'm beginning to hate Australia.

To recap: I've been playing the price spread between BetFair, iPredict and CentreBet on the Australian election.

If Labor wins, I'll be up $191, with lots of long positions at BetFair and CentreBet, where Labor has been cheap relative to iPredict. If the Coalition wins, I'll be up $280 at iPredict, where the Liberals have been cheap relative to the other two markets. I win in both states of the world.

But the states of the world now don't span the space. The third alternative is no result and a second election. In that case, BetFair unwinds its bets and gives you your money back, iPredict holds positions pending the results of the second election, and CentreBet is still deciding what to do.

If one of the Australian readers would kindly go and box the independents about the ears and make them get on with it already, I'd be much obliged.

BetFair has a very very thin book on whether there'll be a second election. I need a market in "There'll be a second election and Labor will win". Working out and implementing the right hedge here is going to be tricky.

Sunday 29 August 2010

Tobacco censorship

When the Tobacco Inquisitors at Otago suggested adoption of the WHO's framework for controlling tobacco marketing on the internet, I was a bit curious to see the details. Here they are.
58. In relation to the Internet, for example, there are five principal categories of responsible entity upon which bans or particular obligations should be imposed.
  • Content producers create the content or cause it to be created. These include tobacco companies, advertising agencies and producers of television programmes, films and games that are distributed online. Content producers should be banned from including tobacco advertising, promotion or sponsorship in the content they produce.
  • Content publishers include publishers and entities that select content before it is made available to Internet users (e.g. Internet sites of newspapers or broadcasters). Content publishers should be banned from including tobacco advertising, promotion or sponsorship in the content they make available.
  • Content hosts are entities that control Internet-connected computer servers on which content is stored, including entities that aggregate content produced by others without selecting the content before they make it available to Internet users (such as social networking Internet sites). Content hosts should have an obligation to remove or disable access to tobacco advertising, promotion and sponsorship once they have been made aware of the content. [So Facebook users who smoke are banned from having groups promoting their favorite products]
  • Content navigators are entities, such as Internet search engines, that facilitate the location of content by users of communications services. Content navigators should have an obligation to disable access to tobacco advertising, promotion and sponsorship once they have been made aware of the content. [So Google has to follow rules about what searches are allowed to find, not unlike China's rules.]
  • Access providers are entities that provide end-user access to communications services, such as Internet service providers and mobile telephone companies. Access providers should have an obligation to disable access to tobacco advertising, promotion and sponsorship once they have been made aware of the content. [basically a DNS blacklist as best I'd reckon]
The document goes on to outline sanction regimes, telephone hotlines to call if you see a banned tobacco ad, encouraging civil society monitoring and enforcement....

And folks say Big Tobacco is evil.

Saturday 28 August 2010

For a New Zealand liberal party

...but it's probably too late. Chris Trotter writes:
So, if Act was smart it would announce something as radical and head-messing as an across-the-board decriminalisation of all drugs – backed-up with a comprehensive drug-education programme in schools and generous drug-treatment and rehabilitation schemes for addicts.

And that would only be the beginning.

What would there be to stop Act from going on to announce a campaign to restore all the traditional rights and freedoms of free-born citizens by rolling back all those so-called "reforms" of the legal and penal systems which have empowered the State at the expense of the "sovereign individual"? Or, coming out in support of a woman's right to choose and gay marriage?

Overnight, Act would lose its creepy followers from the Sensible Sentencing Trust and Family First. In their place it would attract a much larger – and younger – slice of the electorate: a slice that is socially-liberal, economically "dry" and temperamentally hostile to the claims of large and authoritarian institutions – especially the State.

The party would still be a bastion of neoliberal thought, but by taking such a radical libertarian stand on issues like drugs, law and order and the power of the State, Act would finally be able to detach the "far-right" label from its back.
I've been arguing the same for a while now. Here's the strategic case for the repositioning. Sir Roger gets it. Here's the analysis showing that they'd at worst not be hurting themselves at the polls.

HT: Bryce Edwards and Gonzo.

Friday 27 August 2010

Hipster Shrugged (updated)

Some of the best, from #HipsterShrugged.

ziege19  I just unlocked the "Helping Is Futile" badge on @foursquare!  #HipsterShruggedabout 4 hours ago via web3 Retweets

ModeledBehavior I invented a motor that ran on nothing but irony. It was kinda cool, I guess #HipsterShruggedabout 1 hour ago via web2 Retweets

petersuderman I used to like the government, but that was before it got big and popular. #HipsterShrugged   12 Retweets

radleybalko I stopped contributing to society way before "going Galt" was cool. #HipsterShrugged about 4 hours ago via webTop Tweet14 Retweets

normative Of course not, who names their kid Dagny? She was "Dolores" until the end of middle school. #HipsterShruggedabout 3 hours ago via TweetDeck1 Retweet

peejaybee Galt's Gulch used to be pretty cool. Now it's like, strollers everywhere. #hipstershruggedabout 3 hours ago via twidroid

jacobgrier Camping out for the new iPhone. Rearden Metal finish, Galt motor. Pretty sweet. #hipstershrugged #stilldropscallsabout 3 hours ago via HootSuite1 Retweet

conor64  People vilify Dagny Taggart, but I wish more corporate execs always traveled by rail #HipsterShruggedabout 3 hours ago via TweetDeck4 Retweets

willwilkinson  So you're playing the Mouch fundraiser? Cool, cool.#HipsterShruggedabout 4 hours ago via web

evanbanks Taggert Transcontinental was so much better back when it was called Taggert Local and sold fixies. #hipstershruggedabout 4 hours ago via web

willwilkinson  PHU was my safety school. #HipsterShruggedabout 4 hours ago via web 2 Retweets

normative Actually, Francisco's got this trust fund, but he doesn't like to talk about it . #HipsterShruggedabout 4 hours ago via TweetDeck

willwilkinson Yeah, Francisco's super-rich, but he's totally cool politically. #HipsterShruggedabout 4 hours ago via web 2 Retweets

normative Yeah, Ragnar was in Sigur Ros for a while, but he bailed when the label got so hardass about piracy. #HipsterShruggedabout 4 hours ago via TweetDeck 3 Retweets

willwilkinson  20th Century Motor Company used to make a sweet hybrid. #HipsterShruggedabout 4 hours ago via web

grandmofhelsing  Galt's Speech really isn't as good as his earlier work. #hipstershrugged about 4 hours ago via web 7 Retweets

laughinghyena13 That hamburger sandwich is fine, but I've had much better at a diner in Wyoming #hipstershruggedabout 4 hours ago via twidroid from San Francisco, CA  1 Retweet

normative  No, it's *Rearden* Metal. I mean, it looks just like 80s metal, but it's ironic  #HipsterShruggedabout 4 hours ago via TweetDeck

normative   I swear by my life and my love of it, if I have to hear "Oxford Comma" one more f*ing time... #HipsterShruggedabout 4 hours ago via TweetDeck

SandyS1  They released my concerto on CD, so I went on strike because it's got more integrity on the 180-gram vinyl pressing.#HipsterShruggedabout 4 hours ago via Tweetie for Mac

jacobgrier  I have John Galt's entire speech... on vinyl #hipstershrugged about 4 hours ago via HootSuite 5 Retweets

grandmofhelsing Richard Halley is the best musician ever because he only performs to select audience at new club, Galt's Gulch. #HipsterShruggedabout 4 hours ago via web

ziege19  I refuse to accept as guilt the fact of my own face on the T-shirt I am wearing.  #HipsterShruggedabout 4 hours ago via web

normative  Who is John Galt? Oh, you probably haven't heard of him, he's really obscure.  #HipsterShruggedabout 5 hours ago via TweetDeck

Yeah, appropriating these folks tweets makes me a looter. Meh. #HipsterShrugged

Update: Julian Sanchez, who started all this, has posted his favorites, here.

Minimum alcohol pricing and economic rents

I'd noted yesterday that it's likely that the rents from minimum pricing get eroded unless there's some other imperfection in the system. Let's walk through it now.

If you want to work out who profits by minimum pricing, you have to figure out whether there's an asset in fixed supply in the system. Suppose we had a completely free market in alcohol in all respects but one: a minimum retail price of $1 per standard drink. And suppose further that the cost to the consumer for low end product, absent the rule, could be as low as $0.50.

In that world, do the alcohol producers get to pocket $0.50 per standard drink? Unlikely. They're still having to compete with each other for customers. Now, if there are some who actually prefer bad alcohol at high prices to good alcohol at high prices, like the perverts I see around here who will take instant coffee over espresso when both are free, then there could be some rents to producers. But even in that case they'd be competing on other margins as well: product packaging or other ancillary bundled goods, for example. Didn't one of the "ready to drink" brands have a promotion a while back putting $20 notes into random cases of product? Is it possible to ban every potential tweak on that model?

Do the shoppes get to pocket $0.50 per standard drink? No. They're not going to be buying much product at $0.50 per standard drink that they'd then get to on-sell at $1 per standard drink because they're competing with other shoppes. That competition means that product actually worth $1 per standard drink will wind up retailing at about $1 per standard drink, and the low quality product will be driven from the market. In the alternative case of the folks with perverse preferences preferring the cheaper products, the stores will compete for those folks' custom through more advertising, better facilities, lower margin on complementary goods and so on. And if they don't, some other shoppe that does will enter the market and do well.

So in the world where there's only minimum price regulation and the market is otherwise competitive, I have a hard time seeing big rents to anybody. Costs get bid up instead. But we're not in that world in one critical way that's set to become more important: restrictions on who can sell alcohol. All signs point to a bunch of local retailers being expropriated by the state without compensation as licences fail to be renewed. That makes the surviving retailers local monopolists with some pricing power. The producers again don't get the rents - they're competing with each other for space in the shoppes. But the remaining licence holders can earn rents, presuming that the drop-off in demand is more than offset by the revenue increase - likely, as the price elasticity of demand is -0.42 or so. That will bid up the value of those shoppes that get to keep their licences, presuming that the license transfers with the sale of the shoppe. Basically, an oligopoly model with competitive fringe will apply: the supermarket duopoly (Liquorland owned by Foodstuffs, if you recall) constrained by fringe internet and remaining small shoppes for wine and beer; the big liquor outlets constrained by fringe remaining small shoppes and internet for liquor. Small liquor shoppes keeping their licences will be taking some local monopoly locational rents limited by their customers' access to transportation or the internet.

A couple of predictions then:
  • It isn't going to be the big guys who lose their licences. Foodstuffs and Progressive are well organized and I'm sure have lobbyists. The little immigrant-owned liquor shoppes in South Auckland - they're set for the chop. And there might be some weirdo hits to the big guys in small towns that have had dry-county leanings for some time.
  • The value of the licences increases, so minimum price regulation pushes up the price of shares in Foodstuffs and Progressive as they own a lot of licences.

I've not adjusted my portfolio (University Superfund plus iPredict) as result of these predictions, so don't take them as stock advice.

YouTube tobacco

RSW37 points to TV3 News coverage where Otago's George Thompson, moaning about that there are videos of smoking on YouTube, seems to lament that we haven't China's ability to control the web.
The internet is just so much harder than other media. It's a real wild west. There's no rules and there's no real control, except in places like China.
And he seriously says this like it's a bad thing. Hit the link above for the video; I can't see any way of embedding it.

The TV3 story has Philip Morris saying the company has asked YouTube to take down videos with their branding; presumably this is due to healthist pressure rather than copyright issues, though you can never be sure. YouTube is a pretty nice archive of the history of advertising. Hopefully that doesn't get wrecked.

First they erase the cigar from Churchill's mouth, then they take the Winstons* away from the Flintstones?

*Yes, I know that's RJ Reynolds, not Philip Morris. But it's too good an old ad to pass up.

Thursday 26 August 2010

The afternoon's weeping

Item the first: the Tobacco Inquisition at the University of Otago's Wellington School of Medicine now want to censor the internet to get rid of YouTube videos friendly to tobacco companies.
Lead researcher Lucy Elkin said that while tobacco companies denied advertising on the internet, the significant brand presence on YouTube was consistent with indirect marketing activity by tobacco companies or their proxies.

"The internet is ideal for tobacco marketing, being largely unregulated and viewed by millions of people world-wide every day," she said.

The study also found that while YouTube provides for the removal of material it defines as offensive, it does not currently consider pro-tobacco content as grounds for removal of specific video clips.

However, public and health organisations could request that YouTube removes pro-tobacco videos containing material considered offensive under present rules, Elkin said.

Governments could also implement the WHO's Framework Convention on Tobacco Control requirements on controlling tobacco marketing on the internet.

But Thomson said in New Zealand, the government had shown it was not willing to put the legal resources to deal with examples of indirect tobacco marketing.
I need to start smoking cigars again.

Go to YouTube. Put "Smoking" into the search bar. You get:
  1. Smoking lettuce
  2. quit smoking
  3. a 1951 Goofy No Smoking cartoon
  4. a Sonic the Hedgehog no-smoking video
  5. Short video of smoking celebrities
  6. Smoking tire (cars)
  7. A Star Wars anti-smoking PSA
  8. Another anti-smoking video
  9. ...
It goes on and on, probably 10:1 anti versus pro smoking. Clearly YouTube is a propagandist for Big Tobacco and is in desperate need of censorship.

Who is funding Otago to do this stuff? Ah. The Health Research Council of New Zealand. Nice. I'll have to remember to try paying somebody cash under the table to take back the part I paid for that study.

Item the second: a Belgian paying about $NZ 110/month for the third fastest broadband package, capped at a maximum of 30 MBps, downloaded 2.6 TB of data over a month and his ISP is cool with that. I'm paying $110 NZ per month for broadband plus phone for their fastest package, currently delivering 7 MBps to the exchange but less than 2MBps for overseas connections, that caps out at 20 GB/month of traffic. Nothing to be done about it, and no particular policy moves can fix it. It's a small remote market problem. But I still weep.

State of play in Australia

I don't follow the papers, I follow the markets. Mostly because I've been having a bit of fun arbitraging price differences across them - no chance of losses across outcomes, expected gain at current prices $250.

At BetFair, things have moved against the Liberals, with prices moving over the day from about a 58% probability to roughly 50/50. But there's substantial sell pressure in Labor's book, with $2706 sitting there ready to short Labor (buy Liberal) at prices from 51.8% to 58.3%. There's only $887 sitting there ready to buy Labor (short Liberal) at prices from 50% down to 39.8%. In both cases, I've combined the books assuming that it's either going to be Labor or Liberal so a short on the one is equivalent to going long on the other.

At iPredict, $106 backs Labor at prices from 38.5% to 50%; $123 sits ready to sell Labor at prices from 50% to 63% (I've pulled my orders in both for these purposes).

The "jaws" at Betfair look set to move downwards a bit for Labor and up for the Coalition. But it's neat how tight things remain, days after the election.

If only I knew how to write scripts to automate trading across platforms whenever prices differed. Of course, if it were easy, no such price differences would exist. Sigh.

Minimum pricing

The New Zealand government is likely to mull over a minimum pricing regime for alcohol.

I hope they get a copy of this one:
The Scottish Government’s plan to control the price of alcohol will barely tackle problem drinking while costing consumers £184million a year, according to a leading consultancy.

The Centre for Economics and Business Research said the introduction of a minimum price of 40p per unit would cause heavy drinkers to cut consumption by less than a pint of beer a week.

The poorest would be hit the hardest, with 10% of the population with the lowest income paying just over 50% more per unit. Moderate drinkers would cut consumption by 4.6% due to their greater sensitivity to price.

The report criticises a Sheffield University study that the government has used to support its legislation.

The CEBR said the Sheffield model failed to take into account “unintended consequences” such as cross-border and internet sales, the impact on jobs, the black market and policing costs, implementation and the reduction in consumer spending on other items.

Senior CEBR economist Benjamin Williamson said: “This report shows that the case for minimum pricing is extremely weak. It would not target problem drinkers and would have a genuine negative economic impact in terms of jobs, trade and costs to the consumer.”
CEBR's reports are here and here. I like this bit:
In effect, minimum pricing legislation forces firms to price as if they were in a cartel.

In addition to promoting cartel style profits, minimum pricing is also likely to lead to a reduction in the number of alcohol producers and brands available to consumers, as such price levels would ‘crowd out’ producers at the lower end of the market.

If minimum pricing was introduced merely as a regulation rather than as a tax, it may actually lead to the more powerful alcohol producers lobbying for increases in the minimum price. There appears to be evidence that this has occurred in Canada where leaked correspondence between the Ontario Finance Minister and the chairman of the Liquor Control Board of Ontario revealed that ‘industry requests’ were made to the government to raise minimum price levels, and that the government supported these requests.
Absent some other market imperfection, these rents ought to be eroded pretty quickly. But more on that later.

HT: Puddlecote.

Wednesday 25 August 2010

And more alcohol costs

Australia's all a-buzz with its latest study of the cost of alcohol to society. They get a really big number - even bigger than Collins & Lapsley's prior really big number.

Let's take a look at just one part of that cost figure.

At page 133, they provide some estimates of the economic costs of intangible harms Australians suffer as a result of someone else's drinking. Their survey respondents answer questions that give them a health-related quality of life score. A one-point drop in that score, they say, costs the individual the equivalent of $50,000. Respondents are sorted between those who cannot identify a known drinker who has negatively affected them, those knowing a drinker whose drinking has affected them "a little", and those knowing a drinker whose drinking has affected them "a lot". They take the mean quality of life score for each group, multiply the differences from baseline by $50,000, extrapolate to population averages, and come up with about $6.4 billion in costs.

There are a couple of pretty obvious problems here, if I understand their method correctly. Which I may not, but I'd love to hear if I'm wrong on this count. It really looks like they're just comparing sample means. If so, and if there are any other differences - differences unrelated to alcohol - between folks who have a close relationship with a problem drinker and those who don't, then the mean comparison is hopelessly confounded. There are all kinds of bad social circumstances that are predictors of problem drinking. Those same circumstances would lead to lower quality of life scores regardless of whether there's any drinking. Regression analysis is needed, not comparison of means.

At the paper's outset, they explicitly reject mainstream economic analysis's insistence that external costs are the ones that matter:
A small tradition within economics, critical of the cost-of-illness tradition discussed below, has endeavoured to confine the estimated costs to strictly-defined “external costs”, that is, costs imposed on others by the alcohol consumption of the drinker (Heien and Pittman, 1992, Manning, et al., 1989). However, these studies have been quite rigid in excluding costs which they do not regard as true externalities. Thus Heien & Pittman (1992) exclude costs to others in the drinker’s family on the grounds that these “are basically internalized within the family”. They assume there is no external cost on the grounds that a family unit internalizes the alcohol harm that a member in the family causes.
However, this case is only true if the family jointly owns all the resources. [EC: Umm, no.] Each individual in the family is entitled to their own labour and time. When drinker A in the family harms family member B, resulting in a loss of output due to injuries or loss of time spent seeking services, those losses will only be internalized if A and B’s labour and time are jointly owned. In terms of property – be it money or belongings – even if it may be jointly owned no matter who bought it, there are civil and criminal laws that prohibit drinker A damaging it. In this example, if drinker A harms B, that harm is clearly not internalized.

In their rigid approach to what constitutes an “externality”, Heien and Pittman (1992) also exclude injuries to a passenger in a drink driver’s car on the grounds the passenger “has accepted the risk of riding with an abuser”.
Sorry. If you're in the car, you're party to an implicit contract with the driver. It's then internal, not external.

And how joint ownership is required for cost internalization is beyond me. You can do it with Coasean bargaining with complete private individual ownership. You don't need the passengers to be joint owners of the airline for the costs of a screaming baby on the plane to be internalized if the passengers are in a contractual nexus with the airline.

This doesn't bode well for the rest of the paper. But if anybody can provide further insights on whether I'm right that they're just comparing means on intangible costs, as noted at the outset, I'd like to hear it.

The Dean Wormer State

I kinda like Rob Hosking's take on New Zealand's proposed alcohol reforms:
"Drunk, fat and stupid is no way to go through life, son.”

Neither Prime Minister John Key nor Justice Minister Simon Power yesterday used the famous line from the classic film Animal House, uttered by bossy College Dean Wormer to a group of reprobate students.

But it was hanging there over yesterday’s announcements of tougher alcohol laws.

OK, this isn’t Nanny State, but let’s call it the Dean Wormer state.

Perhaps – to be charitable – it is a Dean Wormer in a velvet glove. The principle behind yesterday’s proposals seems to be to use other societal pressures to moderate alcohol usage rather than tougher laws per se.


The government of course cried off making alcohol more expensive. There are MPs who want to see higher excise taxes, and also a blanket higher drinking age.

We’re going to hear this group utter the political equivalent of another famous line from Animal House: “this situation absolutely requires a really futile and stupid gesture be done on somebody's part – and we’re just the guys to do it.”

Futile and stupid, because Mr Key is right. Parliament can never legislate for more responsible drinking.

What it can do is encourage New Zealanders to take a bit more responsibility for the drinking that goes on around each of us – at perhaps the price of also encouraging the Dean Wormers among us to emerge.
Crusty old Dean... (shaking fist).

Liberaltarian exit

Brink Lindsay and Will Wilkinson leave Cato.

Writes Weigel:
I asked for comment on this and was told that the institute does not typically comment on personnel matters. But you have to struggle not to see a political context to this. Lindsey and Wilkinson are among the Cato scholars who most often find common cause with liberals. In 2006, after the GOP lost Congress, Lindsey coined the term "Liberaltarians" to suggest that Libertarians and liberals could work together outside of the conservative movement. Shortly after this, he launched a dinner series where liberals and Libertarians met to discuss big ideas. (Disclosure: I attended some of these dinners.) In 2009 and 2010, as the libertarian movement moved back into the right's fold, Lindsey remained iconoclastic—just last month he penned a rare, biting criticism of The Battle, a book by AEI President Arthur Brooks which argues that economic theory is at the center of a new American culture war.

Did any of this play a role in the departure of Lindsey and Wilkinson? I've asked Lindsey and Wilkinson, and Wilkinson has declined to talk about it, which makes perfect sense. But I'm noticing Libertarians on Twitter starting to deride this move and intimate that Cato is enforcing a sort of orthodoxy. (The title of Wilkinson's kiss-off post, "The Liberaltarian Diaspora," certainly hints at something.)
I'm a fan of liberaltarianism, especially in a place like New Zealand where economic liberalism is less strong a predictor of social liberalism than in the States.

Wilkinson now blogs as W.W. over at The Economist.

Tuesday 24 August 2010

Objections to philanthropy

Isn't it terrible that not all billionaire philanthropists hate themselves for their wealth and wish to atone for the evils of money-making by giving money to pro-government causes or, at worst, medical research?  Just terrible.  Horribly terrible.  Just read the latest New Yorker:
The Kochs are longtime libertarians who believe in drastically lower personal and corporate taxes, minimal social services for the needy, and much less oversight of industry—especially environmental regulation. These views dovetail with the brothers’ corporate interests. In a study released this spring, the University of Massachusetts at Amherst’s Political Economy Research Institute named Koch Industries one of the top ten air polluters in the United States. And Greenpeace issued a report identifying the company as a “kingpin of climate science denial.” The report showed that, from 2005 to 2008, the Kochs vastly outdid ExxonMobil in giving money to organizations fighting legislation related to climate change, underwriting a huge network of foundations, think tanks, and political front groups. Indeed, the brothers have funded opposition campaigns against so many Obama Administration policies—from health-care reform to the economic-stimulus program—that, in political circles, their ideological network is known as the Kochtopus.

In a statement, Koch Industries said that the Greenpeace report “distorts the environmental record of our companies.” And David Koch, in a recent, admiring article about him in New York, protested that the “radical press” had turned his family into “whipping boys,” and had exaggerated its influence on American politics. But Charles Lewis, the founder of the Center for Public Integrity, a nonpartisan watchdog group, said, “The Kochs are on a whole different level. There’s no one else who has spent this much money. The sheer dimension of it is what sets them apart. They have a pattern of lawbreaking, political manipulation, and obfuscation. I’ve been in Washington since Watergate, and I’ve never seen anything like it. They are the Standard Oil of our times.”
Full disclosure: there's a high chance that at least some of my grad student funding came via Koch. Students on stipend could never quite tell where the money came from. But I was at George Mason.

I do have to wonder about the New Yorker's fact checking. It was called the Kochtipus well before Obama. I'd heard of it even back in 1999. It got the name not because it was some big shadowy anti-Obama network of front groups but rather because of the effect that a billionaire couldn't avoid having on a bunch of small and very poorly funded libertarian groups. Go read Brian Doherty's Radicals for Capitalism for context. Doherty attributes "Kochtopus" to Sam Konkin in the 1970s.

I expect much better of the New Yorker. This is a smeary hit piece.

Peak helium?

At the ACT regional conference a while back David Round argued that we need to be seriously preparing for peak-everything, with the prices of oil and other commodities set to go through the roof and disastrous consequences sure to follow. As I was the speaker immediately after him, I opened by offering him there a bet:
Wager 1: If the price of a bundle of 20 commodities, chosen by David Round, grows in value by more than the S&P 500 over the next 20 years, Eric owes David $500. If not, David owes Eric $500. We will take the value of the bundle and of the S&P averaged over the five-year periods 2006-2010 and 2026-2030.

Wager 2: If world per capita GDP increases by less than 15% in real terms over the next twenty years, Eric owes David $500; otherwise, David owes Eric $500.
David is still choosing his bundle of commodities; I'll look forward to blogging the full details when things are settled.

But he might worry about adding helium to his portfolio. BK Drinkwater explains nicely:

And this brings me to the first in an occasional series: BK's Investment Tips.

Today's tip is: Helium! It's a lock!

An impending shortage means prices will go up. So stock up now while the Federal Helium Reserve keeps selling the stuff to you at Before Peak Helium rates. Those suckers are so stupid, they don't even realize that it's vital for the world's governments to stock up on non-renewable resources so as to ensure they never get used. All you have to do to profit: buy helium today at today's rates, and hold onto it until Peak Helium, when prices will skyrocket and you'll be richer than Rockefeller.

Of course, there are a few practical difficulties.

If you believe in Peak Helium, you should probably invest now, before everyone else catches on and drives the price up. Since everyone else should be doing the same, we should have seen some movement in the market already. We haven't. That kinda suggests you're out on your own.

There's no clearing house that covers helium futures, so you're going to have to go over the counter with Uncle Sam. I'm guessing that if you believe in Peak Helium, you're also convinced that the United States is a substantial default risk.

And since we're talking forwards now rather than futures, it might be a good idea to give some thought to where you might stick all that helium when it's delivered. If you can't think of anything, I have suggestions.

My point? Don't talk to me about Peak Helium, or Peak Metal, or Peak Oil, or Peak Anything Else until you've put your money where your mouth is. More gently, and paraphrasing a billboard on my street: there's probably no Peak [Insert Commodity Here], so stop worrying and enjoy your life.
The lock was a particularly nice touch.