Tuesday 30 November 2010

Bordellos and Baptists

In the Sunday Star Times:
Most of central Auckland's red light venues are clustered around Fort St, a few blocks further downtown, and the Chow brothers' plans to bring organised prostitution into the mainstream entertainment district near the casino had upset some business owners and residents in the area.

However, the Chow brothers' choice of the Palace site to launch their entry into the Auckland market was probably based on a similar strategy they used successfully in Wellington, where they are the leading players in the capital's adult entertainment industry.

They had been quick to realise the business opportunities that became available when prostitution was legalised in 2003, opening Wellington's first legal brothel, Il Bordello, on the city's traditional red-light strip, Vivian St.

Their next venture, the Mermaid strip club and its associated facility, the Splash Club, were more controversial because they were located in the centre of Courtenay Place, the hub of Wellington's mainstream nightlife.

The Chows successfully resisted attempts by the council to curtail those businesses and would have benefited handsomely when planning changes were introduced to prevent similar types of operations opening up in the area.

The plan in Auckland appeared to be along similar lines – get established on a prime spot while planning rules allow it, then rake in the cash once the rules are changed to prevent any competitors setting up nearby.

And the cash-generating potential of the adult entertainment business should not be underestimated. Michael Chow said his Wellington brothels had not been affected by the recession.
I'd noted that most of the scraps now are about zoning. It's damned obvious in hindsight that incumbent brothels will have strong incentive to try to zone out new entrants. Bordellos and Baptists is an obvious extension of Yandle's Bootleggers and Baptists hypothesis: inefficient regulations are most probable where there's someone who'll profit from them and someone who'll provide the moral veneer.

I'd love to know more about the zoning decisions. Did the Chow Brothers just luck into locations that were likely to draw later zoning protection, or did they do anything to help things along?

Monday 29 November 2010


Former National Party Leader Don Brash lists some of the ways National has disappointed us under Key. Among the disappointments are National's failure to split the youth minimum wage from the adult rate.
I worry that, despite knowing that the Labour Government's abolition of the youth minimum wage has very substantially increased youth unemployment - by 12,000 according to Canterbury University economics professor Eric Crampton - we have taken no action (indeed, we voted against Roger Douglas's Bill to reinstate the youth minimum wage), so that thousands and thousands of young people leave school or training and quickly become demoralized, deprived of the opportunity to support themselves, with all the social and personal harm that does.
The full Orewa speech is here.

Brash would have been referencing my post from May on the December 2009 Quarter results. The latest ones have it around 8500; unemployment's turned around a bit.

I'd warn that, besides my being Senior Lecturer rather than Prof (though I'd be happy if Don Brash were to have a quiet word with his former employee, and my current employer, Rod Carr, about this), my numbers here are still back-of-the-envelope. They're backed out from the residuals of a very simple regression plotting the youth unemployment rate as a function of the adult unemployment rate: the residual spiked up abnormally following the abolition of the youth minimum wage.

If it were a murder mystery, the residual plot would be the smoking gun. The youth minimum wage would be standing beside it all shifty-eyed and having had both motive and opportunity. It would be worth a bit more detective work. But no jury in the land would convict that charismatic and popular minimum wage, no matter what the evidence showed; worse, the judge is in cahoots with the Mob.

Update: Liberation analyzes Brash's speech.

Sunday 28 November 2010

Learning the rules

This post is about work. And sex, which are two of the essential areas of life one needs to be able to function in before you can feel like a normal adult. And both sex and work are governed by a set of rules that many people are able to learn just by being in the world.

Asperger Syndrome compromises one’s ability to read nonverbal social cues. A simple example of this deficit is answering the question, “How are you?” It is loaded with so many nonverbal issues that I simply freeze. Even if you tell me, “Just say fine,” sometimes the situation looks special to me, and I can’t figure out why it’s special, so I can’t talk.

So I've spent my life teaching myself the rules for what to do in each social situation. I study people, make notes for myself, and then test the notes to see what other situations my notes apply to. To get a sense of how awkward this looks, here’s a video that is supposed to be a parody of people with Asperger’s interacting with each other. But my family has such a high proportion of people with Asperger’s that this video, honestly, is not far from what our life is like.

In my experience, the places with the most rules are work and sex. So, you can teach yourself the process of becoming better at work by applying the process of learning the rules about dating and sex. And vice versa. I, for example, am great at work rules and terrible at sex rules. So I teach myself using the reverse mechanism.
The rules do make for interesting reading.

HT: @KalimKassam

Citations are counted, not signed

Folks in academia get ranked by citation counts. Some folks get a high citation count for being spectacularly wrong. Everybody wants to show how wrong they are. And so folks in academia welcome critique: "I don't care whether you say I'm full of crap, just get the citation right so it's counted by ISI. Promotions committees count but use absolute values."

Turns out that this can hold in the real economy too, under certain conditions. We'll often rely on reputation to solve problems in one-shot dealings. But if reputation is a high place on the front page of a Google search, it's counted, not signed. And so optimal strategy can be to have spectacularly bad customer service - service so bad that everyone wants to write posts complaining about you and linking to your homepage. It's a heck of a lot easier to draw angry reviews than happy ones. From the New York Times:
Today, when reading the dozens of comments about DecorMyEyes, it is hard to decide which one conveys the most outrage. It is easy, though, to choose the most outrageous. It was written by Mr. Russo/Bolds/Borker himself.

“Hello, My name is Stanley with DecorMyEyes.com,” the post began. “I just wanted to let you guys know that the more replies you people post, the more business and the more hits and sales I get. My goal is NEGATIVE advertisement.”

It’s all part of a sales strategy, he said. Online chatter about DecorMyEyes, even furious online chatter, pushed the site higher in Google search results, which led to greater sales. He closed with a sardonic expression of gratitude: “I never had the amount of traffic I have now since my 1st complaint. I am in heaven.”

That would sound like schoolyard taunting but for this fact: The post is two years old. Between then and now, hundreds of additional tirades have been tacked to Get Satisfaction, ComplaintsBoard.com, ConsumerAffairs.com and sites like them.

Not only has this heap of grievances failed to deter DecorMyEyes, but as Ms. Rodriguez’s all-too-cursory Google search demonstrated, the company can show up in the most coveted place on the Internet’s most powerful site.

Which means the owner of DecorMyEyes might be more than just a combustible bully with a mean streak and a potty mouth. He might also be a pioneer of a new brand of anti-salesmanship — utterly noxious retail — that is facilitated by the quirks and shortcomings of Internet commerce and that tramples long-cherished traditions of customer service, like deference and charm.

Nice? No.


“Very,” says Vitaly Borker, the founder and owner of DecorMyEyes, during the first of several surprisingly unguarded conversations.

“I’ve exploited this opportunity because it works. No matter where they post their negative comments, it helps my return on investment. So I decided, why not use that negativity to my advantage?”
Do read the whole thing - strongest recommendation possible.

Caveat Emptor folks. A high place in a Google search isn't an endorsement.

HT: @heathermg , via @normative

Saturday 27 November 2010

I'll see your utopia and raise you a dystopia

Imperator Fish bashes on the Objectivists. A post at NotPC argued that the Pike River disaster would have been avoided had the mine been open cast rather than shaft; DoC regulations may have prevented the company from using open cast mining.

For folks abroad - New Zealand's South Island continues to be disaster central. Twenty-nine miners died this week in a coal mine explosion on the West Coast. For context, the sinking of the Edmund Fitzgerald killed 29 men thirty-five years ago, in a country ten times the size of New Zealand, and Canadians still sing about it.

I have no clue whether DoC regulations were the binding constraint here - the mine was under some reasonably large mountains. I'd be pretty reluctant to blame the regs absent pretty strong evidence that the mining company had been pushing for open cast. And even then, I'd still be a more than a bit reluctant to pin it on DoC. Suppose it had been a private land owner who only allowed mine access under similar restrictive conditions, and the mine owner agreed. Would we blame the land owner for putting restrictions on use of his land? I'd hope not.

But the bit that bugs me in Imperator's post is here:
Let's also think for a minute abut the logic of the Objectivist arguments. They regard government regulation as evil. So in the Objectivist utopia we would have little or no health and safety legislation. Mines (closed or open) would be deathtraps, because mine companies would have no incentive to run safe operations.
If you want to mock Objectivist utopias for being unrealistic, you oughta do better than posit dystopias as counterargument. In the absence of health and safety legislation, the profit-maximizing firm will provide safety and other amenities up to the point where workers would sooner have more salary than more amenities. - that's rather likely more than zero provision. This is kinda Econ 101.

Suppose you, the rapacious Dickensian employer, could put in a safety improvement that will cost $50. You pay each of your 100 workers $10 per year. The workers value the improvement at $1 (per worker). The workers tell you that they'd really like the safety improvement. You tell them that it's expensive and they'd have to take a pay cut: you'll pay them each $9.25 per year if you put in the safety improvement. They say fine. You save $75 in salaries, pay $50 for the improvement. Your profits go up by $25. The workers are happier too - they would have been willing to pay up to $1 each to have the improvement and they've only had to pay $0.75.

Just look around wherever you work and count all the things you're provided as part of your standard employment bundle that aren't mandated by law. Is there artwork anywhere in the building? Is the paint on the walls a pleasing colour? Are the chairs more comfortable than they could be? Is the coffee or tea better than the minimum required? Is the climate control better than the minimum permitted? Is the landscaping pleasant? Employers provide a whole pile of amenities - not because they're required to, but because it's cheaper to provide those amenities than to provide the salary compensation that would be needed in the absence of those amenities.

What's required for this not to hold? It'll break if:
  • Firms aren't profit-maximizing, either because owners like injuring employees or because they're too dumb to recognize a profit opportunity;
  • Firms are bound by other legal constraints. Suppose a worker at the minimum wage would be willing to trade salary for workplace amenities (safety or otherwise). He's barred from making that trade, so the compensation bundle has a suboptimal mix of salary versus amenities.
You could make other arguments about workers being too risk preferring, or having too high a discount rate, or having some other preference that you don't like that leads them to prefer cash relative to safety. In that case, the regs have paternalistic benefits. I'm not much in favour of those arguments, but folks can make them. I have a really really hard time believing that we'd get to zero provision of safety.

Even if you want to posit the worst possible conditions for workers - say a local monopsonistic employer, no union, no exit from the town so you either work in the mine or starve - the employer will still have incentive to provide the most efficient (small) compensation bundle to workers. And if workers put value on safety such that it's cheaper for the employer to provide a bit more safety than to provide a bit of pay, he'll provide safety. Even if workers put zero value on safety, simple concern about mine shut-downs would motivate provision of some safety measures.

Yes, there would probably be less provision of health and safety in the absence of regulations mandating a minimum amount of health and safety. But there wouldn't be zero. I don't know why we need posit dystopias against utopias. Can't we all just have reality-based arguments?

Friday 26 November 2010

You're missing the point, Jim

Writes Jim Anderton in the Herald:
But the most critical factor, crucial to victory, is the National-held "marginal seats", many of which have been traditionally Labour-held seats. Their importance in any election result has been largely ignored. We only need to look to recent state and federal elections in Australia to see how important these seats are in determining the outcome.

Both Julia Gillard and Tony Abbott spent what seemed like a disproportionate amount of their time in marginal seats. They knew only too well how important those seats were.

Marginal seats are often pivotal to election victory and that's where New Zealand's election next year will be won or lost. Currently, the National-led coalition Government of four parties has 16 more seats in Parliament than the Labour-led opposition of three parties. How many more seats does Labour have to win to be in a position to form the next government by having more seats than National?

The answer is only nine seats - if the nine seats are won by Labour off National and Labour wins all its current seats.

In Labour's favour, National has nine "marginal" seats which would be lost to Labour with a swing of less than 3 per cent.

These seats are: New Plymouth, 0.2 per cent swing (with a majority of 105 votes); Waitakere, 1.16 per cent (632 votes); West Coast-Tasman, 1.4 per cent (971 votes); Ohariu-Belmont 1.3 per cent (1006 votes); Otaki, 1.8 per cent (1354 votes); Auckland Central, 2.2 per cent (1497 votes); Hamilton West, 2.5 per cent (1618 votes); Te Tai Tonga , 2.8 per cent (1049 votes) and Maungakiekie, 2.9 per cent (1942 votes).

And then, of course, there is Wigram, an additional seat which I hold but, in my view, Labour will win, now that I am retiring from Parliament.
Of course, under MMP, if Labour picked up nine district seats from National, but the vote share didn't change, Labour would just get nine fewer list seats and National would get nine more list seats. Labour has twenty-two list seats currently. So they'd have to take at least twenty-three of National's district seats to force an overhang - that's the only point at which Labour taking National seats matters in determining the composition of Parliament.

I would have thought that Jim Anderton, who has been a Member of Parliament since the 1980s and who was there when they switched from FPP to MMP in the 1990s, would have known that. But he's apparently among the majority of Kiwis who really don't get how MMP works.

Assurance contracts and dominant assurance contracts

Frances at WCI notes an innovative use of assurance contracts by Public Enemy.
Political rap band Public Enemy is financing their latest album through www.sellaband.com. This is how it works. The band, in this case Public Enemy, announces a fundraising goal - $75,000 to record an album. Fans make on-line donations through sellaband - but if a fan changes his mind, he can switch his funding to another band at any time, up until the point when Public Enemy's fundraising goal is met. Fans can expect some future payback - downloads, a share of any profits, whatever the band promises.

At first glance, Public Enemy's approach doesn't look so different from Radiohead's or Wikipedia's. Yet individuals' incentives to contribute are fundamentally different. Wikipedia is there whether I donate or not, so the best strategy (warm glow of giving aside) is not to donate.

But imagine that 7,499 other people have aready donated $10 to Public Enemy. My $10 donation brings the total up to $75,000, enough to generate a new Public Enemy album. I have no incentive to withdraw my donation, because if I do, the project won't be funded. My donation is a "pivotal contribution."

Indeed, if any one of the 7,499 people pull out, the project won't be funded. Each one of those 7,499 donations are pivotal, so no one has an incentive to pull out.

In the language of game theory, the situation where Public Enemy's album is financed by 7,500 people each donating $10 is Nash equilibrium - each person is making the choice that is best for themselves, taking the behaviour of other people as given.
Public Enemy's fundraising was successful. But there still was a problem in strategy.

If I think that somebody else would be the pivotal contributor were I to hold back, then I've incentive to refrain from donation until the last minute. Frances is definitely right if we consider only the population of folks who have contributed. Given everyone else's contribution, my dominant strategy is to stay in if I'm pivotal. But there's a whole other domain of folks who might contribute but who haven't as yet. Any of them could be the pivotal donor and I could save my money. If too many folks do that, we can get coordination failure where everyone waits to see if their contribution would be truly pivotal, then fails to sign up because the target looks too far from reach.

Public Enemy ran an assurance contract but not a dominant assurance contract. How to make it dominant strategy, or at least much closer to it, to pledge early and stay in? Provide some item of value to the contributor for pledging early. Suppose everyone who pledges some minimal amount to the assurance contract, and doesn't withdraw his pledge before the deadline, gets a token to download one MP3 track available only to pledgers. If the project goes ahead, the song is included as a special bonus track for contributors. The band then takes the place of Tabarrok's assurance entrepreneur: bearing downside risk of paying out to pledged contributors should the project fail to go ahead but earning returns if it succeeds.

All the incentives for pledgers in the model Public Enemy ran - numbered CDs and potentially a share in album revenues - eventuate only if the project is successful. You want an incentive for folks to go in early and to stay in, helping to ensure that the project does finally go ahead. Paying them for doing so is one way of solving the problem. Public Enemy was successful in raising the $75,000 needed to record another album; they lowered their target from the $250,000 that included marketing and other costs. Perhaps dominant assurance contracts could have helped.

Public Enemy is playing Christchurch next year. So is Weird Al. I wonder how many folks will be in the intersection. Conditional on babysitting availability and spousal indulgence....

Thursday 25 November 2010

Free for all?

Michael Morris, representing Canada's Attorney General, warns of a potential "free-for-all" should Ontario strike down the prohibition of prostitution.

Legalization may be associated with a drop in the price of services, but all the way to free? Surely not.

Joking aside, Canada would do well to look at New Zealand's experience. Prostitution was decriminalized in 2003 and operates as any other industry, subject to normal zoning and health and safety requirements. Results? Nothing spectacular. There are complaints about street prostitution in the same places that there have always been complaints about street prostitution - those workers will include some for whom working in a standard business environment with time sheets and shift requirements would prove difficult. Under-aged prostitutes still make the press occasionally, but there seem to be few of them; brothels employing illegal workers face prosecution. But outcomes for most in the industry seem better.

Concluded the Prostitution Law Review Committee in 2008:
The PRA has been in force for five years. During that time, the sex industry has not increased in size, and many of the social evils predicted by some who opposed the decriminalisation of the sex industry have not been experienced. On the whole, the PRA has been effective in achieving its purpose, and the Committee is confident that the vast majority of people involved in the sex industry are better off under the PRA than they were previously.
Most fights now are over zoning; there's some risk that brothels will effectively be recriminalized in some towns through restrictive zoning laws.

Here are the Occupational Health and Safety Guidelines for workers in the sex industry. Decriminalization is hardly a free-for-all.

Update: Note that some of the NZ effects may be due to Police having been fairly light on prostitution enforcement ex ante - brothels were tolerated if they were discreet. If brothels had been subject to greater restriction prior to decriminalization, then a greater fraction of sex workers would have been street workers prior to the law change and would have moved to brothel work after the law change.

Tuesday 23 November 2010

Second-hand smoke

While some worry about third-hand smoke, we can't even be sure that second hand smoke has detrimental effects. From BMC Cancer (DOI):
ETS exposure was not found to significantly increase risk among never smokers in this study, however, several potential explanations are possible. ETS exposure either as a child or an adult in the home or the workplace has been evaluated in numerous studies [53]. The results, however, have been inconsistent as to the significance and magnitude of the effects among never smokers. When estimates were pooled in a meta-analysis of 34 case-control studies of non-smokers, a pooled relative risk of 1.2 (95% CI 1.1-1.4) was observed, although only seven out of 34 studies reporting significantly elevated risk [6]. It was suggested that the inconsistency in the significance of findings across studies could be due to issues of sample size, measurement error, recall bias and confounding [54]. Despite our efforts to minimize misclassification bias by collecting data on involuntary tobacco smoke exposure data for home, work and other exposure locations during both childhood and adulthood, the possibility of these issues cannot be excluded.
They do find exposure to welding equipment, solvents & paints, and soot/woodsmoke are associated with increased risk of lung cancer. But not environmental tobacco smoke. There doesn't seem to be nearly as much handwringing about any of the other findings as there is about the failure to find an effect of ETS.

To the extent that we really really care about the harms to which workers expose themselves in the workplace, we should have moved to ban workplace exposure to welding equipment and paints before banning smoking in bars and restaurants. Or require that welding shops and panelbeaters have air ventilation systems more powerful than those that were required in restaurants back when they were allowed to have non-smoking sections.

Surprisingly, playing in the shop with the welder when I was a kid has increased my chances of lung cancer by more than did my parents' smoking. Not that I regret having played with the welder. Few things are more worthwhile for a boy than messing about with welders....

Update: Do read Church of Rationality on this one - very nice analysis.

Monday 22 November 2010

Pride and Prejudice and Zombies [updated]

Assorted thoughts on Pride and Prejudice and Zombies.
  • I cannot imagine reading the book without zombies. It's obvious from the beginning that Elizabeth will marry Darcy. The rest of the story is the dancing around social conventions of the early 1800s that delay the inevitable. Tedious, at least for me. Maybe it's only that way because so many plots since then have followed the drill set down here and contemporaneous readers found it surprising that she wound up with Darcy. But that's not good enough reason to read it today, without zombies.
  • The revised edition tails off in the latter third, with insufficient zombie-related events. Instead of a zombie attack every other chapter, we can go fifty pages without Elizabeth doing away with a ghastly unmentionable. The occasional reference to zombies just reminds you how much they're missed. They come back a bit at the very end, but it's a long wait.
  • There really ought to be an adjustable Kindle version of the book where you can dial up or down the number of zombie incidents. Turned down to zero, the book will reduce to the Jane Austen original. Turned up to ZOMBIE MAX PLUS MORE ZOMBIES TO THE POWER OF ZOMBIE TIMES INFINITY, there'd be zombie attacks on every page and reference to zombies in every paragraph. The neutral setting would be the author's default - the book as currently published. I'd stick with the neutral setting for the first half of the book, then start dialing things up. Why can't a book of this sort have a continuously variable number of zombies? We've already achieved variable cowbells for MP3. This would be the killer app for e-readers, or at least the one that would prompt me to buy a reader.
  • The Bollywood dance numbers saved Bride and Prejudice from Austin tedium. But imagine how much better Bride and Prejudice and Zombies could be! Thriller-style dance numbers, modified to Bollywood. And if the movie were released in format allowing for continuously variable zombies for the home audience....

Update: Other potential "& Zombies":
  • Atlas Shrugged, letting Hordes of Ravenous Undead Eat the Looters and Parasites. Premise: Hank Rearden's metal is used in zombie-killing devices; Francisco D'Anconia's mine is instead a "Zombie Free Paradise" that, when nationalized by the looters, turns out to be full of extra ravenous zombies (which they find when the first bus-load of new looter residents is brought there); Dagny Taggert is the world's greatest zombie-killer, until John Galt convinces her to stop trying to protect folks who've given the zombies their sanction. Galt invents a machine that uses static electricity to kill zombies, but won't turn it on until Americans turn out their zombie-influenced politicians and zombie-sympathetic ethics. The book's a thousand pages long and could reasonably by condensed by at least a third, leaving room for lots of zombie exploits.
  • The Big Short (and Zombies). The financial crisis was actually due to zombies.
  • An Inconvenient Truth: The Planetary Emergency of Global Warming and Zombies. A warmer climate facilitates the spread of the zombie infection; there's a conspiracy of Big Oil, the Trilateral Commission, the Rand Corporation, the Reverse Vampyres and the Zombies to ensure that we don't get a carbon tax. Some musing about whether a rapid increase in zombie infections could reduce aggregate carbon emission.

Sunday 21 November 2010

Technology first

Get the technology sorted first.
The iron law tells us that the basic math of global emissions will only become more unforgiving. As countries like China and India develop, they will demand ever-greater supplies of cheap energy. Global energy use will likely double or triple over the next 50 years, even if we use energy much more efficiently. If developing countries can't get energy from cheap low-carbon sources, they will get it from fossil fuels.

While the iron law of climate may seem obvious, many on the left continue to reject it, insisting that turning up the volume with dire warnings of climate apocalypse and civil-rights-style protests can overcome the basic technological and economic obstacles to action. These efforts have only resulted in the intensification of the climate wars and increased the polarization of the issue.

Coming to terms with these realities will require answering a raft of questions. If campaigns based on the dangers of global warming don't work, how can we build a different kind of political consensus for action? Given our increasingly polarized political culture, where are the opportunities for bipartisanship? How do we reduce carbon emissions in the absence of high carbon prices and what strategies can accommodate developing countries' overriding need for inexpensive energy?

In the end, all questions—whether political or economic—return to questions of technology. What will it take to develop energy technologies that are clean, cheap, and abundant? If private firms are unlikely to make sustained investments in the development of those technologies, what role should the public sector play in undertaking those activities? How do we ensure that such efforts will improve the cost and performance of energy technologies, rather than simply subsidizing the production of more of the same?

At the Breakthrough Institute, we've long championed energy innovation and technology investment as the central strategies to address climate change. This approach is consistent with America's historically bipartisan commitment to economic prosperity and geopolitical security and our long tradition of investing in new technologies that have remade American life for the better.

A technology-first policy is not the same as a technology-only one. Better and cheaper energy technologies are a precondition for successful caps or carbon taxes, not a substitute. This is, in fact, how the United States tackled past pollution challenges like acid rain and ozone depletion: First we created low-cost alternatives, and then we implemented regulations to require their widespread adoption. (emphasis added)
Again, New Zealand should be finding a niche in methane-mitigation agricultural research for free distribution to the world rather than beating itself up with an ETS (prior posts here and here).

Saturday 20 November 2010

Grey market beer

I'd not heard of this one before. @yeastieboys points to controversy over the status of grey market beers: beers imported into a country market without the brewer's explicit authorization. If I were to buy a few cases of some interesting beer from the UK or US, shipping it via surface mail, it probably wouldn't taste the best on arrival if I didn't take precautions to ensure that it were refrigerated and handled properly. An authorized importer will presumably follow whatever guidelines are set out by the brewer; a grey market distributor will take care that varies with the expected effects on his reputation.

Foreign brewers worry that they'll bear the reputational cost if a grey market importer fails to take due care and beer arrives in subpar condition: customers will reckon the brand isn't very good rather than blame the distributor.

I've a few of worries about this line of argument.

First, even in home markets, a brewer's product isn't always sold through authorized outlets with guaranteed fridge temperatures. A bar can buy a keg of any kind of beer, fail to clean its lines, and provide a poor experience to the customer. The beer vendor (barring those that own the taps) can't guarantee that the bar does a proper job in cleaning its lines just like it can't guarantee that a shipper will take due care. Why is the latter that much worse?

Second, importers will still face reasonably strong incentive to handle product with care. Even if the customers can't tell what's a brewing fault and what's due to rough treatment, the beer buyer for a serious outlet ought to be able to. And it's that buyer who chooses whether again to deal with the importer. A retailer who consistently sells quality interesting products will have an easier time in getting customers to try new things than one that sells products that have gone off.

Finally, the reputational damage is likely to be fairly constrained. Beers will only arrive in a country via the grey market if the brewer hasn't reckoned the country worth the effort, if the brewer tries to engage in international price discrimination, or if retailers are insensitive to product quality and prefer product that's been poorly handled but sells at a discount. But retailers also earn reputation. Let's assume for the moment that the grey market supply always provides poor product experience. If a US microbrew figures that the New Zealand market isn't worth exploiting due to the fixed costs and it's subsequently served by a poor grey market, what are the losses to the brand?
  • Its reputation within the country is somewhat eroded, making it more expensive for the brewer to open an official channel - they'd have to work to rebuild reputation. But how likely is it that they ever would have sold product here anyway?
  • If Kiwis post bad reviews of the beer on the various online beer forums, surely folks would start picking up a fixed effect: glowing reviews from domestic reviewers followed by scathing reviews from folks thousands of kilometers away ought to look to most folks like shipping problems. It's hard to see this as having big reputational costs for the brewer.
The bottom line for beer lovers ought to be that they shouldn't hesitate to buy grey-market beers, but that they should:
  • Check the expiry date on product
  • Only buy from retailers who care about quality product. If a retailer's chiseling on buying cut-rate imports that arrive in damaged condition, how do we know he's not chiseling on other margins that affect product quality? But if the retailer cares about quality, he's probably making sure to stock from distributors who also care about quality: grey market or not.
  • Have a chat with the retailer if they get a bottle that seems off. A good retailer will take it seriously and check other bottles from the same shipment for faults; one that doesn't may not be worth repeat custom.

Friday 19 November 2010

GST regressive?

New Zealand's high school kids are completing their national exams currently - the NCEA.  @actoncampus points to one of the questions from a prior year exam now used for practice:.
Two policies the government could use to help low-income households are:
  • reduce regressive taxes (eg remove GST from basic necessities such as food and medical services)
  • increase transfer payments to low-income households (eg increase the unemployment benefit)
  1. Explain why GST (Goods and Services Tax) is a regressive tax.
Here's my draft model answer.
This is a trick question. The GST is not actually a regressive tax, or at least is not one in absolute terms. While it is true that, at any point in time, a poor person is spending more of his income on consumption than is a rich person, all earned income eventually is spent; when the earned income is spent, it is taxed. On a life-cycle understanding, consumption taxes are not regressive.

A progressive tax system is one in which the rich pay a greater fraction of collected taxes than their share of national income; a regressive one is one in which the rich pay a smaller fraction of collected taxes than their share of national income. A flat consumption tax, like the GST, is more regressive than the income tax because the income tax is relatively progressive. If it's the case that rich people spend more while abroad (exempt from GST), then GST becomes slightly regressive. However, GST applies to purchases of newly constructed goods and not to used goods (houses, cars and such); if the tax is not completely passed through to purchasers on the eventual second hand market, and if richer people are more likely to buy new goods rather than used ones, GST becomes slightly progressive.

Bottom line: the GST is only regressive relative to the progressive income tax system. Moving to greater reliance on GST relative to income taxes can be regressive if the income tax reductions are not designed to maintain the ex ante level of progressivity. Further, those moves benefit debtors relative to savers: those with higher levels of savings at the point of the switch in regime are taxed twice while debtors bought goods at low tax rates and get to pay back the debt with income that draws less tax. Since rich people tend to have greater savings than poor people, the move advantages poor people.
I wonder how the NCEA graders would have handled that....

Continuing to love Christchurch

Before the quake, it was the random appearance of art events.

Now, it's the creative use of new vacant lots where the old brick buildings used to be. Opening next week.
Gap Filler aims to temporarily activate vacant sites within the central city with creative projects, to make for a more interesting, dynamic and vibrant central city.

Gap Filler will see vacant sites - awaiting redevelopment as a result of the September 4 earthquake or otherwise - utilised for temporary, creative, people-centred purposes. Examples include: garden caf├ęs, outdoor cinema, live music, dance on a temporary dance floor and other creative responses to sites by local artists.

Gap Filler is temporary in nature, seeking to activate gap sites for around two weeks at a time, to demonstrate that the city can grow in important ways without large capital expenditure or major construction. Gap Filler projects can move from site to site as spaces become available around the city. All projects will be able to occupy or vacate a site within a day.

The central city needs our help! It was struggling prior to the earthquake and it is struggling even more now as a result of damage to, and loss of, many of our buildings and businesses.

This initiative is temporary and creative. With empty blocks of land suddenly activated, those that live and work in the city will experience their city in a different way. Others who don't typically spend much time in the city may also be lured in to experience these projects and sites.

A small group of enthusiastic, young creative professionals have come together to respond in a creative way to the shock and impact of the recent earthquakes on the central city. Included in the group are: a public art project manager, film society president and university lecturer, an architect, a graphic designer, a construction project manager and an installation artist. We will work with local artists and creative people to create more excitement for Christchurch residents this summer.
Downtown needs something like this. Folks with two year olds who love seeing construction equipment spend a lot of time downtown; Ira loves the huge digger sitting atop the pile of rubble in the middle of still-closed Manchester Street where it tears down the old Manchester Courts building.

But it's otherwise pretty depressing. I regularly go to an old-timey barber shop on Manchester Street. The other buildings in his block are condemned, the sidewalk's closed, there's no parking; I'm not sure how much longer he'll be able to stay open. We'll see if he's still there next week when I'm due. The commute to work down Ferry Road through Woolston is still a broken smile of missing and damaged buildings. Parts of town seem normal, then there's a vacant lot or what will be a vacant lot when the demolition crews get around to it. Not remembering what used to be in a vacant lot is somehow more depressing than remembering what was there and missing it.

GapFiller seems likely to bring small delights. Thanks guys! You rock.

Thursday 18 November 2010

Dutton at Ted

Denis Dutton's excellent talk at TED, accompanied by the best animation routine I've seen for such things. Beauty isn't just subjective: it's an evolved instinct.


Testing whether we are liked

I've noted before that, for our wedding back in 2002, Susan and I decided against sending out A and B list wedding invitations. Standard drill in the US, for my NZ readers, is to have a biggish wedding. First you send invitations to the A list, see how many reply, then see how much space you have to send invitations to folks on the B list. We didn't want to do that. Instead, we assigned probabilities to each invited guest's attendance and sent out invitations such that the expected number of attendees matched the capacity of the venue. Risky play? Sure. So long as we weren't biased in our guess, we'd be fine on average. But this was a one-shot event and we had no clue about the variance of our estimates. But it all worked out. 225 invites turned into 125 positive replies. We had capacity for 125. All was good.

But we were briefly terrified. The 75% probability folks turned into acceptances a lot faster than the lower probability folks turned into rejections. Excel recalculated the expected number of guests as we updated our estimates with outcomes. I think it touched 170 briefly. And then came the late declines, and all worked perfectly.

Jeff Ely says that this is because people like us (or, more likely, like Susan).
An invitation is an option that can be exercised at any time before the date of the party. The people who did not respond immediately are waiting to decide whether to exercise the option. If she’s a true friend then this is because she has a potential conflict that would prevent her attending. She is waiting and hoping to avoid that conflict. When she is sure there is no conflict she will say yes.

The other people are hoping for an excuse not to come. Once they get a better offer, manage to schedule a conflicting business trip, or otherwise commit themselves, they will send their regrets.

In both cases, when the party is imminent, the option value of waiting is gone. Those who want to come but haven’t gotten out of their conflict give up and send their regrets. Those who hoped to get out of it but failed to come up with a believable excuse give up and accept.

So, a simple measure of how much your friends like you is the proportion of acceptances that arrive in the final days. Lots of acceptances means you better set aside a few extra drinks for yourself.
Our acceptances came early; the rejections, worryingly late. And so Ely's test suggests that folks liked us. Excellent.

Wednesday 17 November 2010

2011 predictions

iPredict's vote share markets ought to be scaring National.

There are eight potential states of the world, sorted by whether ACT, New Zealand First, and United Future make it back into Parliament. iPredict has contracts on each, assuming that the very most likely route into Parliament for them is winning a seat - no chance any crosses the 5% threshold. Here's some first cut analysis, based on the highly dubious assumption of independence across contracts that lets me ignore covariance, and based on simple rounding rather than using the quota system for list allocation.

The most likely state of the world, 26.7% by current prices, sees ACT returned but neither United Future nor New Zealand First. In that state of the world, National and ACT together see 60 seats, based on current prices. But the Maori Party gets 5 seats (overhang of one - expected outcome given prices on contracts in the Maori Seat markets). So even in that favourable state of the world for National, the Maori Party could give the government to a Labour/Green alliance (56 seats plus 5).

Next most likely has none of the minor parties return: 21.2% In this case, National at 58 seats ties Green + Labour; again, Maori makes the government.

There's a 12.4% chance that ACT and UF make it in but not NZ First. National's coalition, assuming UF stays with National, makes 60 seats to Labour/Green's 55. Maori could induce a tie, but that seems pretty unlikely. This is the best state of the world for National.

Next, an 11.4% chance of ACT and NZ First without UF. National plus ACT total 58; Labour plus Green 54, NZ First gets 4 and Maori 5. I'd guess National most likely to form government here as the alternative would require NZ First and Maori to side with Labour/Green.

Next most likely: a 9.8% chance that only UF makes it in. National and UF get 59 seats; Labour/Green 58. Maori Party chooses the government.

Next: a 9% chance that only NZ First makes it in - worst state of the world for National, who get 56 seats to the Labour/Green 55. NZ First could ensure a National government with 5 seats, but I'd expect them to be more likely to go with Labour; they couldn't push Labour over the line on their own. So Maori chooses the government.

Then, a 5% chance that all the minor parties survive. National's coalition gets 58 to 54 for Labour/Green. Either Maori or NZ First could make a National government, but it would take both together to make a Labour government.

Finally, a 4.2% chance that UF and NZ First survive while ACT doesn't. National and UF get 57 seats; Labour/Green 55. Maori or NZ First could give the government to National; both would be needed to make a Labour government.

The market says there's a 78% chance of a National Prime Minister following the next election; this requires that Maori stay onside with National if the vote share markets are to be trusted. I'm always a bit nervous about relying on results from the vote share markets - they have very flat payoff curves and don't pay out for about a year.

But the bottom line seems to be that the Maori Party will likely choose the next government; consequently, whichever party forms government, the Coastal Coalition folks will be upset.

Tuesday 16 November 2010

Poverty in poverty measures

Should we measure absolute or relative poverty in developed countries? The former captures real poverty but misses relative deprivation; the latter lead to absurdities as the measures would prefer equal but poor societies to unequal but rich ones.

Kristian Niemietz in The Journal of Public Policy notes a further problem with relative poverty measures: what's the relevant comparison group? If relative poverty draws on the notion that folks feel disempowered relative to a comparison group, we kinda need to know against whom folks compare themselves. And relative measures anchor things to the median.
The concept of relative poverty suggests that in case of doubt, the poor would be better off foregoing a rise in living standards, as long as the median income households forego an even bigger rise. Since this is a very stark assumption, we should expect the evidence supporting it to be especially strong. If it is not, there would be a strong case for finding a poverty measure which avoids this.
Niemietz proposes a mixed absolute and relative standard for determining poverty: construction of minimally acceptable bundles of goods to define the poverty line, as measured by actual spending by low income groups. This ties relative measures to spending by other relatively poor people rather than to the median.
The poverty line would be equal to the cost of all items on a list of essential goods and services. The items would be obtained through a large-scale survey (the CMS-element) similar to the Poverty and Social Exclusion survey, to ensure a degree of social relevance. The survey would yield a number of broad product categories. In identifying specific products for each product category, the list would then be streamlined (the BSA-element). In this way, the inability to purchase a particular item could be separated from unwillingness to do so, and structural changes in the relevant product markets could be incorporated.
And so we'd solve the problem of benchmarking things to the median.

I'm probably missing something here, but doesn't the method then require an ex ante decision about what income level constitutes poverty? If you're going to take the common items in bundle of goods purchased by poor people as constituting the minimal bundle, then that bundle will be bigger if it's bought by folks making $15,000 and less than it will be if restricted to those making $8,000 and less. So what then makes for the appropriate reference group?

Sorting out poverty measures is an important problem; Niemietz does a great job of outlining the absurdities of existing approaches. I'm not sure that it doesn't still beg the question. But I've probably not read closely enough.

Monday 15 November 2010

A Mencken hypothesis

Hypothesis: every new bit of information you learn about H.L. Mencken leads to upward revision of his awesomeness.

I'd not heard of the bathtub hoax.  I'll copy the most fun bits below from his 1926 piece repudiating his 1917 bathtub story.
On Dec. 28, 1917, I printed in the New York Evening Mail, a paper now extinct, an article purporting to give the history of the bathtub. This article, I may say at once, was a tissue of absurdities, all of them deliberte and most of them obvious…
This article, as I say, was planned as a piece of spoofing to relieve the strain of war days, and I confess that I regarded it, when it came out, with considerable satisfaction. It was reprinted by various great organs of the enlightenment, and after a while the usual letters began to reach me from readers. Then, suddenly, my satisfaction turned to consternation. For these readers, it appeared, all took my idle jocosities with complete seriousness. Some of them, of antiquarian tastes, asked for further light on this or that phase of the subject. Others actually offered me corroboration!
But the worst was to come. Pretty soon I began to encounter my preposterous “facts” in the writings of other men. They began to be used by chiropractors and other such quacks as evidence of the stupidity of medical men. They began to be cited by medical men as proof of the progress of public hygiene. They got into learned journals. They were alluded to on the floor of congress. They crossed the ocean, and were discussed solemnly in England and on the continent. Finally, I began to find them in standard works of reference. Today, I believe, they are accepted as gospel everywhere on earth. To question them becomes as hazardous as to question the Norman invasion.
The story lived on for decades and even now continues to make the occasional appearance as purported fact.

Not much has changed.  The internet makes it a lot easier to check if a story is a hoax, but it also makes it a lot easier for the credulous to forward around emails that are no more accurate than Mencken's bathtub story - no, [name redacted], Kevin Rudd didn't give a speech demanding immigrants assimilate (and neither did Sir Wilfred Laurier), margarine isn't close enough in chemical composition to plastic to be counted as plastic, and margarine wasn't invented as cheap turkey feed that wound up killing the turkeys.  But at least these things tend not to make it into the papers.

Social cost figures, by contrast.....

Sunday 14 November 2010

Twitter transitivity and identity

I tweet via @EricCrampton.

The new Twitter interface gives a list of folks similar to me. Or, at least it lists four different ones each time I refresh.

The first one that came up is @Offsetting. That's good. That's the account I use for tweeting posts from the blog. So it should be similar to me - it is me. I am similar to me. Twitter has proven identity. Good start.

Transitivity gets harder though.

I am similar to @wtdickens. Maybe a bit - he's a hell of a lot smarter than I am. I'm his Grandstudent via Bryan Caplan.

But @wtdickens is similar to @SFFedReserve, @stlouisfed, and @clevelandFed. Bill's a serious macro guy, so I can see how he'd be similar to a Fed. But I'm certainly not similar to a Fed. Transitivity fails.

I'm also similar to @jodiecongirl, who is similar to @Nudgeblog. Again, transitivity fails.

I wonder if there's any back end list of all the folks on your "similar to" list and their propensity scores (or whatever they're using for a matching algorithm).

Saturday 13 November 2010

Sadly satire

Reverse the signs of the effects, and it's what passes for research. But when public health guys are quoted in favour of alcohol, you have to know it's satire.
A new study by a Christchurch research unit has proven conclusively that the rising number of liquor outlets is having a beneficial effect on neighbourhoods and communities, and have more cost benefits for the taxpayer.

The three-year, latitudinal study by the Canterbury Health Research Institute of Science and Technology found while the rising number of cheap liquor outlets lead to more drinking in the home, their proliferation also reduced road accidents and was more cost-effective to the taxpayer than having people driving while over the limit.

“Certainly the research shows that moderate drinkers will become binge drinkers over time because of the ease of access to alcohol,” says research leader Dr Adrian Bateman, “but it also shows that people are doing it in their own home which therefore reduces the cost of policing, traffic problems and anti-social behaviour in public.

“In fact there is a good case to me made for having more, not fewer liquor outlets, as people will walk to bottle stores rather than drive home drunk from the pub.”

A cost analysis showed that during the three-year study which involved 500 households in each of the main centres (but not Hamilton) the cost saving in terms of policing and drink-drive prosecutions was estimated at $550 million.

Adult members and teenagers in the chosen households were all given a pedometer, maps of their local district indicating liquor outlets, and when a new bottle store or pub opened they were introduced to its location by text message and Twitter.

In the period under study the number of liquor stores in each area more than tripled and in some areas of Auckland a new liquor shop was opening every week during the last year of the study.
“And the result has been that people might be getting tanked up,” says Dr Bateman, “ but they weren't hooning it up on the streets or taking the car for a spin and fleeing from police roadblocks. That has got to be good news for everyone.

“I think if there is anything we can take from this it is that at the moment we are only hearing one side of the story from the anti-booze lobby and local communities. We need to do more research.

“But right now I think it would be fair to say CHRIST says 'Yes' to binge drinking and more booze outlets.”
I'm not sure that their $550 million figure is any less credible than any other number that shows up in this literature.

I also like that the study is latitudinal.

Friday 12 November 2010

Folk activism

Patri writes, if not eloquently, then at least graphically about the perils of folk activism:
She’s complaining about a policy that does exactly what we expect democratic policies to do, and advocating for a different policy that would be against the goals of special interests (“Want to get corporate money out of politics?”) and better for society as a whole. As I said in a Students For Liberty talk this past weekend, for all the good this approach does, McArdle might as well have called a press conference and farted into the microphone.
My metaphor is deliberately provocative because I find this pattern so appalling, and it seems absurd that economists so often ignore these basic results in their own field. It moves me to shout: We do not live in a world that mainly suffers bad policies due to lack of ideas about better ones, or lack of elegant explanations supporting good policies, but one that suffers bad policies due to system and meta-system level incentives. In the real world, if you want to have any chance at any effect on changing bad policies, you must take this into account, frustrating and difficult though it is. Vaguely assuming that the problem is not enough eloquent blog posts or op eds is like finance professors actively investing in individual stocks (ignoring both efficient markets & diversification), or nutrition experts living on Twinkies – experts behaving directly contrary to the most basic results in their own fields.

Here's my best counterargument to Patri, coloured by that I spend a reasonable amount of time arguing about stupid policy and dishonest statistics.

First, policy outcomes, on the whole, reflect voter preferences. All the special interest stuff matters, but in the details of policy rather than in its broad sweep. Why do we have lots of transfers to the middle class? Because the median voter likes that. Why do we get crazy ag support programs (at least in the US, EU, Canada... everywhere but NZ)? Because the median voter has vague fears about losing control of "our food" and has some idea of the programmes' supporting bucolic countrysides. How much goes to dairy and how much goes to peanuts? That's special interest lobbying.

Why are we getting all this nanny state nonsense? I'd argue it's because voters are reckoning that costs of others' behaviour are now being borne by them, via public health systems. And they've overestimated those costs due to biased cost studies. And so I reckon it worthwhile to spend time punching holes in dishonest cost studies. It might not move the median voter a lot, but we're all part of the equilibrium.

Second, we'd also want to worry about excessive optimism about the prospects for institutional change. If public choice says we need to change the incentives to change political outcomes, why would we expect those who profit by current arrangements not to fight against such changes? Is it more futile to argue against policy X or against the institution that generates policy X?

Big picture, Patri's right: the only way to get transformative change is by increasing competition in government. Seasteading. But isn't a division of labour optimal? If Patri's work pans out, the whole world gets a lot better in the long run. The rest of us help make the current world a little less sucky by making it incrementally harder to pass bad legislation.

Again, we're all part of the equilibrium. Efficient markets hold because some finance profs (and others) do go in and correct prices when their research identifies a firm the valuation of which is out of whack.  Voter opinion gets further out of step with reality when public choice folks withdraw from policy debate.

And sometimes the nutrition experts do eat Twinkies.

Thursday 11 November 2010

Commuting markets

Marginal Revolution pointed to this piece arguing for a different form of congestion pricing: pay for priority at lights.

The only way I can imagine this being implementable would be having bidders submit their intended destination on leaving the house, or having a standing route-bid, with a schedule of offers for different total commute times. The traffic management system would have to reoptimize the sequence of lights in real time to take account of incoming bids and traffic volumes. Most decent grid systems already have some kind of optimization algorithm working somewhere in the background, ensuring that folks on a one-way set of streets meet a string of green lights - so streets get greens, then avenues, then streets. The system would then spit back to the GPS the commuter's optimized route. The optimization problem doesn't sound trivial. I'd expect some kind of loss function minimizing a weighted sum of divergence from its default light sequence (which presumably minimized total waiting time) and divergence from maximal fee collection. Running it just on willingness to pay would probably get the mayor booted out of office - too many folks would be too annoyed at rich folk motorcades going by.

I'm not sure whether I like the idea. It would implement a form of congestion charging, and I favour congestion charging. I'd worry a bit about folks trying to free ride on the typical commuting routes of richer folks. In Christchurch, aggregate willingness to pay of Sumner folks to get to downtown/home in rush hour would be high, so I'd take a slight divergence from my regular route to free-ride on their priority lights. That would mess things up a bit. Perhaps the system could avoid that by randomizing routes: Monday's paid route from the rich suburb to downtown would be different from Tuesday's. And then there'd be a counter-industry of folks who'd tweet updates of the daily priority route.

I'd also worry about the incentives facing the city in setting the algorithm. We know that red light cameras, ostensibly meant for safety, resulted in shorter yellow lights so that cities could collect more fines (while increasing the risk of accidents). I'm now imagining sitting at a red light, middle of the night, with nobody else around in either direction, while the system waits to see if I'll input a bid. Minor downgrades of the baseline algorithm to make the paid experience more valuable would not be surprising.

Wednesday 10 November 2010

I think I bunged Joe Bennett's knee

Today's Press
And it was then that I came across an article that I've been waiting to read for years. It was about smoking.

It announced in clear and ringing tones that the smoker is an economic benefactor to the nation, a selfless contributor to the public good. I've been saying so myself for years to no effect because people see it as an attempt to justify my foul and murderous habit.

Well this piece [EC: I assume this one] was written by a non-smoker. Yes, he said, the diseases that smokers die of cost money to treat. But the diseases everyone dies of cost money to treat. Almost all of us are going to cost the health service a bundle in the end. But smokers are considerate enough to die a bit earlier, thereby saving the country a massive amount in pensions.

Moreover, smokers pay vast sums in taxes on their cigarettes that more than pay for any medical treatment they receive. In other words, if I stopped smoking you'd have to pay more tax. And the people who bang on about the evils of smoking haven't a leg to stand on. They just enjoy the sensation of thwarting someone else for their own good while feeling morally superior.

And I was so delighted to read this piece that I leapt from the armchair to fetch a celebratory cigarette, tripped on a footstool and bunged my knee.

And is there a moral in that? Non.
The moral is that the Ministry of Health gets to count Joe Bennett's knee as a cost of smoking. It'll be in their revised estimates.

I'd loved Bennett's prior column on the Christchurch local body elections.

There are always confounds

Via Barking up the Wrong Tree we find that some of the reported negative effects of alcohol and tobacco on student academic performance may be due instead to caffeine.
Using academic achievement as the key outcome variable, 7377 Icelandic adolescents were surveyed for cigarette smoking, alcohol use, daytime sleepiness, caffeine use, and potential confounders. Structural equation modeling (SEM) was used to examine direct and indirect effects of measured and latent variables in two models: the first with caffeine excluded and the second with caffeine included. A substantial proportion of variance in academic achievement, which might otherwise have been attributed to the harmful effects of cigarette smoking and alcohol use, was found to be attributable to caffeine. Evidence was obtained that daytime sleepiness, which was found to be independently associated with usage of licit substances (nicotine and alcohol) and caffeine, may be an important mediator of the negative impact of those substances on academic achievement. Findings suggest the importance of including measurements of caffeine consumption in future studies of adolescent substance use.
The article is available via PubMed for folks with ScienceDirect subscriptions.

Odds that this kind of work leads to calls for regulation of energy drinks rather than easing back on regulation of alcohol and tobacco?

Tuesday 9 November 2010

UK Nudges

I've been pretty critical of Sunstein and Thaler's "Nudge" programme of libertarian paternalism. The emphasis seems to be pretty heavily on the latter. In theory, we could imagine replacing a lot of existing paternalistic regulations with nudge-style interventions that would reduce the total amount of coercion; however, it's seemed rather more likely that nudges would be added on to the existing set of regulations to increase the scope of paternalism rather than to make existing paternalism less onerous. Richard Thaler's objected that this isn't the point of libertarian paternalism:
The point of libertarian paternalism is precisely to devise policies that help but don’t intrude. I don’t like most pure paternalism either. But I really feel that the best way to fend off pure paternalism is by utilizing nudges instead of shoves, and by insisting that we keep the nudges as gentle as possible. Can any true libertarian really disagree?
But let's see how the UK Cabinet Office's Nudge Unit is implementing Thaler's advice.
The application of behavioural economics does not imply a paradigm shift in policy-making. It certainly does not mean giving up on conventional policy tools such as regulation, price signals and better information. Sophisticated behavioural programmes to reduce smoking or excess drinking don‟t imply giving up on taxes on cigarettes and alcohol. Similarly, programmes to persuade us to eat five portions of fruits or vegetables a day mean still have to address practical barriers such as how the lack of supply of fresh food in poorer neighbourhoods.
Nudges are complements to standard paternalistic regulation, not substitutes for it. The total amount of paternalism increases.

The document above-linked makes few policy recommendations other than that nudge approaches be considered as part of the policymaker's toolkit. But here are some of their general suggestions.
  • Use social norms to convey examples of desired behaviours: "Most people do X" as information campaigns
  • If taxes aren't normally incorporated into the sticker price on the shelf, start adding them into the sticker price of bad things so they'll appear to be pricier (alcohol).
  • Affect matters, so aim for emotional responses to interventions.
  • People desire positive self-image; link negative self-image to targeted behaviours (smoking causes impotence, etc)
  • Because some may not approve of government pushing folks towards desired behaviours, use public campaigns with messengers "that are not seen as agents of the state": peer to peer programmes, non-government organizations
  • Encourage "opt out" contributions as part of prices to help fund public projects. Examples given are Washington State's default $5 addition to drivers' licence fees for state parks. "This has implications for policy-makers either concerned with raising revenues in a non-compulsory manner, or with more nuanced ways of regulating and adjusting for market failures."
  • Priming folks with songs with "pro-social" lyrics increases altruistic behaviour, but "more research evidence is needed before such interventions could be recommended". I'd hate to guess where they'd wind up going with this. Reduced spectrum licence fees for radio stations playing a quota of pro-social music?
  • Social marketing drawing on affect to encourage blood donation and community volunteering
  • Bottle deposit schemes use loss aversion to encourage recycling; make them mandatory.
  • Train kids in schools to provide health information to parents and grandparents.
  • Evidence that interventions affecting individual behaviour, like workplace smoking bans, may indirectly affect their peer group's behaviour and consequently "may increase the legitimacy of policies that are used to target other unhealthy behaviours."
  • "Where confusion exists in pricing structures, it may be necessary to require companies to present their prices in structured formats that allow consumers to make the choice that is best for them."
  • They note, without recommendation, that among the factors that prime folks for excessive drinking are container size. Presumably this would lead to measures making the half-pint the standard default unit rather than the pint.
  • Mood can affect choices; decisions made in "hot" states may be regretted, so "it may be useful to have a formal 'cooling off' period that allows us to come back and reconsider our decision at a later date"; insurance and personal loans are given as example.
  • Mechanisms requiring casinos, including those online operating out of the UK, to exclude problem gamblers who've signed onto self-exclusion agreements. (recall that Julia Gillard has done this one worse in Australia)
  • Default opt-out private pension contributions.
They note that getting public approval for some of their proposals might be difficult; they recommend deliberative forums where citizen juries get to hear evidence and discuss issues, with results of those forums helping to build legitimacy for proposed policies. I wonder whether they've here hoping to exploit Cass Sunstein's work finding a strong severity shift in jury deliberations.
If the event has such legitimacy, then it could be seen that some personal responsibility has been preserved because people have been able to make a considered and informed decision to allow government to change their behaviour.
Nice. Libertarian paternalism has shifted from opt-out to "if we have a forum, it's ok".

As example of judging whether an intervention might be controversial, they suggest a potential policy of "acceptable eating contracts", where the obese would sign contracts mandating certain eating behaviours; they suggest this would be less controversial than policies using priming to achieve similar ends. The Acceptable Behaviour Contracts with which they're compared are given as alternative to prosecution for low-level offending; I'm not sure whether Acceptable Eating Contracts would be entirely voluntary or "nudge" voluntary, where the NHS doctor says you'll be sent to fat camp in the alternative (but it's still your choice).

I wonder how long it'll be until the Ludovico Technique is recommended as Nudge-based policy as alternative to worse things for folks whose preferences don't conform to those of the nudgers.

HT: John Humphries and Joseph Clark.

Monday 8 November 2010

Front page news in Christchurch

Today's Christchurch Press. Read and weep. Both of these were on the front page of today's paper.

First: playing Mozart in City Mall downtown (an open air spot, not a shopping mall) reduces antisocial incidents and petty crime there. Evidence? The year on year falls to October 2010. Except, there was a big earthquake back in September, right? And lots of cops hanging out everywhere since then waiting for Gerry Brownlee's go-ahead to shoot looters or anybody who looks suspicious? So what we'd need then is August to August comparisons or, better, comparisons with parts of town that didn't start getting the Mozart treatment. Year on year declines looking only at the single spot are so completely confounded with earthquake effects as to be useless.

Second: A paranormal investigator says there's been a big increase in paranormal events since the earthquake. I can see this running on a "news of the weird" page, but front page? Did the paranormal investigators send out a press release? This is on the front page of our local paper.
Most cases related to strange noises, although one man said he had been attacked by a ghost.

Heyrick said the "sheer strength and power" of the earthquake may have been responsible for the increase in paranormal activity.

The number of old buildings damaged in the earthquake may also have been a factor, he said.

It was well known among investigators that when renovations on old buildings took place, "it tends to wake up dormant spirits, and activity tends to come out of nowhere", he said.

"With the earthquake, it literally smashed walls apart, and knocked down floors and ceilings, so you can imagine the effect that would have had."

The team, which did not charge for its services, had conducted two full investigations, and was planning to do several more.
At least the comments section on the online piece is good fun. I especially like the worries about attacks by ghost sharks....

Oils spills versus fishing

Surprisingly, the Gulf of Mexico oil spill may have been the best thing for lots of fishes. Why? Because it shut down the fishery.
Valentine’s research, which consists of trawl surveys in Mobile Bay, Mississippi Sound and around the barrier islands shows a roughly threefold increase in what the nets captured after the spill compared to before, in terms of both the weight of the catch and the number of animals caught. Valentine said it was possible seasonal factors played a role in the changes in the data, though he believed the lack of fishing was the key.


“The problem with the fishing closure, that impact is so large it is probably going to swamp any impact of the oil spill,” Powers said. “We’re not saying we didn’t lose any fish to the spill or the contaminants. We’re saying it is going to be harder to detect any smaller changes due to oil spill contamination. We’ll have to look carefully.”
Read that again. The Gulf of Mexico, plus oil spill minus fishing, has three times as much fish as it had with no oil spill but with fishing.

The American part of the Gulf is under a quota management system; I don't know how the rest of the Gulf is managed.

Lessons, if these results hold up:
  • The Gulf fishery is rather resilient.
  • BP ought to shell out for lost earnings during the fishing ban, but it doesn't look like there will be any long term negative effect on fish stocks.
  • In a rational world, fishermen would do better to highlight the economic costs to them of the oil spill than the environmental costs to the Gulf if commercial fishing reduces fish stocks by an awful lot more than oil spills.
  • Evidence of stock tripling is not evidence that ex ante quotas were too high, but will be interesting data to feed into models of optimal catch rates. If anything, it's probably evidence that the ex ante quota was pretty sustainable. The fisheries economists will be drooling over this: they've now an experiment showing the effects on fish stocks of a total fish ban, with a bit of oil and dispersant contamination. This ought give them a better handle on actual resource replacement rates.
The punchline of all this should be that global commons problems in fisheries are very likely worse than the effects of any other kind of pollution on global fish stocks.

I wonder whether future Seasteads will be able to claim 300 mile limits and implement innovative property rights mechanisms in fisheries. How many Seasteads would we need to replace a global commons problem with a global PD game?

HT: Scott Beaulier's shared items

Saturday 6 November 2010

Hot Professors and Gresham's Law

Frances Woolley over at Worthwhile Canadian Initiative finds that an economics professor's hotness, as measured by students on ratemyprof.com, increases male professor salaries but has no effect on womens' salaries.
A key source of variation in academic salaries is the ability to obtain an outside offer. Hiring a senior academic, however, is a bit like buying a used car - one that is on the market is much more likely to be a lemon. Someone who is charismatic, likeable and well-organized - the traits that our hot professors seem to possess - may be more likely to convince a hiring committee that he's not a lemon. An outside offers story would be an alternative explanation of why we do not see a hotness premium for women - women are more likely to be in situations where they are unable to move because of family or other commitments.

When we estimated the returns to hotness, we controlled for research productivity - number of publications, citations, and holding a Social Sciences and Humanities Council research grant. Yet there might be further indirect effects of hotness if, for example, people who are fit and healthy are more likely to be hot and also are more productive researchers. We explored this possibility, but didn't find much - the relationships between hotness and research productivity were generally positive, but almost always statistically insignificant.

Where there is a stong relationship is (not surprisingly) between students' evaluations of a professor's hotness and their evaluations of his or her teaching. Hot male professors received significantly higher scores for clarity (0.76 on a 1 to 5 scale) and helpfulness (0.68 on a 1 to 5 scale) than their not-hot counterparts. There was very little difference, however, between the hot and the not in terms of students' ratings of the professor's 'easiness'.

But the pattern for women was quite different. Hot female professors had somewhat higher clarity scores, but the difference wasn't statistically significant. Where hot female professors received significantly higher evaluations was in terms of helpfulness (1.0 higher on a 1 to 5 scale) and "easiness" (0.43 on the same 1 to 5 scale - how I have struggled and failed to avoid the inevitable innuendos).

As a feminist, I find the results in one sense profoundly depressing. Men can have it all - be attractive and also well-paid. Women have a choice - you can go for it, be tough, negotiate a high salary, have high expectations of your students. But don't expect to see a chili pepper beside your name any time soon.
If the study had shown that female salaries were increasing in hotness, I'd expect complaints about how econ departments, typically heavily male, pay extra for eye candy.

Now let's suppose, for sake of argument, that there's no correlation in New Zealand: salaries are invariant to hotness.

As an exercise for the reader, work out the equilibrium where labour is mobile.

Friday 5 November 2010

Health costs of tobacco

My critique of the Ministry of Health's tobacco cost figure is in today's Christchurch Press. For readers coming in from the Press, here's some of the supporting argument:
  • Kip Viscusi's work showing that smokers save the government money
  • Des O'Dea and George Thomson's report on the costs of smoking - the source of the $350 million figure. Their headline figure is much larger as it includes a lot of costs that smokers impose upon themselves, like their spending on tobacco products. That's not a cost to the health system, the taxpayer, or anyone other than the smoker. My critique of their report, in the New Zealand Medical Journal, is here.
  • I'd first noted the $1.9 billion tobacco cost figure here, then figured out its source, started worrying about the method given the RIS on the tobacco excise tax increase, got the workings by OIA, then first critiqued the workings here.
  • Hon. Tariana Turia's letter, cited in the Press piece, is reproduced here.

The piece from today's Press copied below. I suspect it puts me off MoH's Christmas Card list. I'm more of a Festivus guy anyway.

Politically convenient numbers

You could be forgiven for thinking that the health system could save $1.9 billion dollars if tobacco had never existed. That’s what the Ministry of Health says smoking costs the public health system. But, you’d be wrong. The Ministry’s latest estimate of the cost of smoking has nothing to do with the costs that smokers impose on taxpayers or the costs that could be avoided if smoking were to disappear. Rather, it’s a politically convenient number whose promotion has much to do with gaining voter support for anti-tobacco initiatives and nothing to do with real economic costs.

I was pretty surprised when this figure started being cited earlier this year. It was much higher than the previous estimate of $350 million dollars – a figure produced not by the Big Tobacco lobby but rather by Des O’Dea in a report commissioned by anti-tobacco crusaders Action on Smoking and Health. And so I was also pretty surprised that nobody seemed at all skeptical of the new figure. Here’s how they derived it, courtesy of an Official Information Act request and extensive correspondence with the Ministry. After sorting the population by age, gender, income, ethnicity and smoking status, they then compared the costs of providing health services to smokers as compared to non-smokers for each group. The excess costs of the smoking group were tallied up to produce the $1.9 billion figure. But there are two very big problems with this way of estimating costs.

It’s easiest to think of smoking as bringing forward a whole lot of end of life costs. Smokers die earlier than non-smokers. We know that. And the costs to the health budget of somebody who is dying are rather higher than the costs of somebody who is healthy. But everybody dies sometime and most of us will incur end of life costs that will be paid for by the public health system. Suppose that a smoker will die at age 65 and a non-smoker will die at 75. Comparing 65 year old smokers to 65 year old non-smokers and calling the difference the cost of smoking then rather biases upwards the measured costs of smoking; we ought to be comparing the health costs of a smoker dying at age 65 with the health costs of a non-smoker dying at age 75. And, perversely, the deadlier cigarettes are, the greater will be this bias. The younger smokers are when they die of smoking-related illnesses, the greater will be the measured cost difference between smokers and non-smokers because a smaller proportion of comparable non-smokers would be incurring end of life costs. The figures assume that in the absence of smoking, smokers would never have imposed end of life costs on the health system. But for their smoking, all smokers would have died of a sudden, and cheap, heart attack and would only have had average health costs up to that point. That’s clearly nonsense, but the $1.9 billion figure only makes sense if it’s true.

Further, we might well expect that there are differences between smokers and non-smokers beyond those accounted for by income, gender, ethnicity and age. Imagine a 45 year old white female of average income who happens also to be an active jogger, moderate drinker and health food enthusiast. Is she more or less likely to be a smoker than a 45 year old white female of average income who happens also to avoid the gym, drink too much and never touch a vegetable? On average, we’d expect that folks who are more health conscious on other margins are also less likely to smoke. But the Ministry’s method, which doesn’t correct for those other health related behaviours, necessarily lumps all of the differences between smokers and non-smokers into the cost of smoking rather than into the cost of having a generally unhealthy lifestyle that includes smoking. It’s only if smokers and non-smokers are otherwise identical, on average, in their health-related behaviors – after correcting for income, gender and ethnicity – that the Ministry’s figure holds up. But that’s also pretty clearly nonsense.

Worse, the Ministry of Health seems to know that the figure is nonsense. Writes Hon. Tariana Turia in correspondence, “[w]hile giving a good indication of what the current costs are of treating the health damage caused by smoking, this figure [$1.9 billion] has never been portrayed as a measure of what might be saved if compared to a world where smoking had been eradicated.” But that’s the only way of making sense of the number’s use in comparison to the aggregate tobacco excise tax take of roughly a billion dollars. Why would we even start comparing the costs of smoking as represented by the $1.9 billion figure with the excise tax take if we didn’t think that the figure represented some measure of the costs to the public purse that could be avoided in the absence of smoking? It’s troubling that the Ministry continues to promote the figure when it bears no relation to the costs that could be avoided in the absence of smoking.

There seems to be a hard core of staffers at the Ministry of Health who view the ends as justifying the means in the war against the sins of the flesh. Not content with haranguing smokers about their habit, they want to rally non-smokers against smokers by arguing that smokers cost non-smokers money through the tax system. I might be happy to live and let live (or otherwise) if a smoker does it in his own house and well away from me but less so if I think that every puff he takes costs me. Thankfully, every other estimate I’ve seen has smokers paying well in excess of what they cost the system. Concluded Des O’Dea in the report cited above, “[i]t appears certain that smokers contribute considerably more in taxes than the net ‘economic costs’ to the rest of the community caused by their smoking.” If smoking disappeared tomorrow, your taxes would have to go up to make up the difference. Thank the next smoker you meet for helping to keep your taxes down. And be as skeptical of numbers coming from the Ministry of Health as you would be of numbers produced by the tobacco industry. Neither is a disinterested party.