Wednesday 31 August 2011

Fat Freedom

Sam Bowman writes:
Politically active groups of doctors are possibly the greatest single threat to personal freedom that there is in the UK today. Their motivation isn't necessarily their wallets, but their egos. Bullies like to use the state to push people around so they feel powerful.
The government (and the electorate, for that matter) forces people to be in the NHS. You have no choice in the matter, and you can’t opt out of it. Jamie Whyte put it well: "first the do-gooders conjure up the external costs by insisting that no one should have to pay for his own medical care, then they tell us that they must interfere with behavior that damages our health because it imposes costs on others." This is perverse and illiberal. The tax would only affect the poor – rich people's spending habits wouldn't be dented. How easy it must be for doctors to pontificate about the need for a fat tax, knowing that such a tax would hardly affect them at all.
This creepy, controlling paternalism has plenty of fans in politics on both sides of the partisan divide. Doctors are the politicians' enablers, lending the weight of their “expertise” to the nanny instinct of the political class in exchange for the feeling of being important. No amount of expertise – medical or otherwise – should give somebody the right to interfere with another adult’s choices. Nor should democracy be used as an excuse to violate the sovereignty of the individual. If fat people are costing the NHS money, that's a mark against having an NHS, not against having fat people.
Here's an upcoming conference to be held at Lincoln University, just down the road from Canterbury.
Public Health Association Conference Information
31 August – 2 September
Lincoln University, Canterbury

Creating our Future – Now
The conference Creating our Future – Now is about looking at what current public health practice is doing successfully to create a healthier future for all New Zealanders – across the socioeconomic spectrum. It will examine what makes environments and communities sustainable and resilient, and what it takes to come back from disaster. It will focus on the health of the country’s smaller ethnic groups, particularly the Asian community which is the country’s fastest-growing, but is often overlooked.

The conference is the biggest event on the 2011 public health calendar and will include papers from people working on issues that are current ‘hot topics’, such as:
  • Income inequality in New Zealand – what it means for the gap in health status between differing groups of New Zealanders.
  • Child home safety – are we tackling a “wicked problem” with tame solutions?
  • Junk food sugars resistant even to regular teeth brushing
  • The unrecognised value of the “Oldie Army” after the Canterbury quakes
  • The harm to male-female relationships contained in beer advertising
  • Casinos offering warm welcome to lonely refugees: the harm gambling does to the Asian community
  • How to reach teenagers about the dangers of tanning: is technology showing the effects of premature ageing the answer?
  • Healthline 10 years on: has it met its goals of saving money and helping those who don’t use primary care services – the elderly, adolescents, Maori, Pasifika and the poor.
  • Growing Up in New Zealand – is intervention at birth “a bit late”?
  • Diversity versus social justice – how inequities are created
  • Climate change and health – what public health practitioners can do to help mitigate the worst effects
  • Recovery from disaster – what can Christchurch learn from international experience?
Go check the conference website for abstracts of some of these papers. I, for one, wasn't aware that male self-identity was largely created by beer commercials. I suppose I ought to watch some rather than flip channels....

The lies we tell

Former Canterbury Professor, David Giles, now at Victoria University in Canada, recently posted on his blog about the pitfalls about teaching something you know to be wrong at a lower level requiring the students to unlearn it at higher levels. He then presented an example from econometrics courses regarding the necessity of the assumption of normally distributed errors for certain results in the standard linear regression model.
Being a microeconomist not an econometrician, this set me to wondering what are the common lies we tell in lower level micro. By this, I don’t mean statements about the world of which someone might contest the empirical validity (e.g. minimum wages cause unemployment), or even the assumptions we make or, more often, are accused of making but never do (e.g. “people are rational”). Instead, I am referring to things that are unambiguously conceptually wrong.

I can think of three common ECON 100 microeconomic lies:
  1. Diminishing marginal utility: We have known since Pareto and Hicks that this concept is meaningless, and neither necessary nor sufficient to show either downward-sloping demand or even diminishing marginal rates of substitution, but it seems to be
  2. Consumer surplus: The answer to no known economic question, this is typically taught at first year not as a useful approximation but the actual value of the difference between the willingness of consumers to pay and the amount they actually had to pay.
  3. Deadweight losses of taxes constructed by comparing total surplus with and without a tax: The deadweight loss triangle corresponds quite nicely to the idea of Pareto inefficiency (at least in contexts where partial equilibrium analysis is reasonable), but the ECON 100 derivation that comes from adding up total consumer plus producer plus government surplus rests on no welfare foundation that I know of. It is not Kaldor-Hicks, since government revenue is considered as a separate entity to the surpluses of individuals.
Any others that anyone can think of? How about the lies we tell in macro?

Note: Please don’t get me wrong; what I am calling lies here are not attempts to pull the wool over students’ eyes or sell a political viewpoint. I don’t think there is ever any justification for diminishing marginal utility, but consumer surplus and deadweight losses are useful concepts to teach that give appropriate conclusions if used in the right contexts. It certainly is better for students to have to unlearn these concepts slightly, than to be hit with duality theory and general equilibrium in their first year.


A petty aggrevation

I'm starting to get why IT folks hate users.

The road by our house is currently being torn up and rebuilt to lay a new sewer line consequent to the earthquake. Half the street is blocked off with heavy equipment and big holes.

At the traffic circle to turn down my road, there's a big "No Right Turn" sign. As you enter the street, navigating between a whole pile of road cones that limit entry, there are three signs. The first says "Local Resident Access Only". The second says "No Through Road". The third says "Road Closed".

After the turn for a small cul-de-sac that runs off of Estuary Road, there's a more formidable set of barricades with the sign, again "No Exit", and a narrow gap through the cones to allow access for residents. At the end of my block, there's a set of barricades preventing through traffic from continuing onto the next part of Estuary Road.

I watched one car do a U-Turn at that final barricade every 5 minutes on Saturday. On Sunday, I watched the Number 5 Bus do a U-Turn there too. It wasn't gracefully executed.

I could buy some small number of folks making U-turns there. If you didn't know whether, say, 197 Estuary was on the North or South side of Beatty St, you could err. But one every five minutes? And a bus?

It would be mildly fun to have one person sit at the traffic circle and count the proportion of people approaching the circle with GPS devices on the dashboard and compare it with the proportion of folks making U-turns with GPS. Rather a few folks making U-turns seem to have them, but I don't know the relevant base rate.

Tuesday 30 August 2011

Blaming the Press

Jay Rosen very nicely lays out the problem. Journalism has shifted entirely from discussion of the relative merits of policies and their likely effects to the horse-race. All attention goes to how policies might play with the electorate. He blames the "cult of savviness": readers are invited to be insiders, along with the journalists, in trying to guess political party strategies and tactics, and whether those will be effective.

I'm with Rosen on the problem. But his while his solution may be elegant for those who wish to eschew the horse-race and focus on the issues, those folks already can get the analysis they want. There are, believe it or not, more serious news outlets that do provide analysis of the issues. And blogs help too, if you know what to look for. Where do I go if I want reasonable analysis of NZ policy issues? I'd start with the National Business Review. The Christchurch Press's Mainlander section on Saturdays is surprisingly meaty. And, just ignore the ones that go for sensationalism.

The real problem is that relative demand for thick policy analysis is much much smaller than for the horse-race. If politics is mostly about group-affiliation and status-seeking, people will care more about whether their team is likely to do well than about the effects of policy. And there's really not much that can be done about that. It's like complaining that Firefly gets cancelled after a season while we're into I have no clue which season of Big Brother. There are places folks who want decent TV can go - HBO for starters. The rest is pablum. Complaining that most TV producers make pablum while ignoring that most viewers really really like pablum kinda misses the point. The bigger problem is that while I can exempt myself from trash TV by just changing channel, I can't exempt myself from trash policy.

Further fine-grained results

Rob Salmond asks some decent questions in comments. I'm going to partially answer them with another set of regressions.

Here, I'm taking the unemployment rate as the dependent variable. In the first column, I run a specification on 15 year olds by themselves: the group one year too young to be hit by the minimum wage change. In the second, I pool 16 and 17 year olds: the group experiencing the change. In the third, I pool 18 and 19 year olds: the group who had been subject to adult rates well prior to June '08. Standard deviations in parentheses under coefficients.

16 & 17
18 & 19
Adult unemp rate
Post June 2008 indicator
Adult unemp rate * indicator

In all the stuff I've been doing, I've not been using interaction terms and indicator variables for the regime change; we only have a dozen quarters of data since the change.  That's why I prefer conditioning the model on the pre-June 2008 data, running projected unemployment rates going forwards, and just using an eyeball on the difference. But, here are the results instead using an indicator and an interaction term.

If we combine the level and interaction effects to get a net effect at a 5% adult unemployment rate, we get an unemployment rate among 15 year olds 19.7 points higher, 11.53 points higher for 16 & 17 year olds, and 4.5 points higher for 18 & 19 year olds.

Another way of running things: take the unemployment rate among 16 & 17 year olds as predicted by the unemployment rate among 18 & 19 year olds. In that case, when we have a 21% unemployment rate among 18 & 19 year olds, the combination of shift and interaction variables in that specification give us an excess unemployment rate among 16 & 17 year olds of 10.4 percentage points.

Rob asked about goodness of fit measures across the cohorts. I can't easily get that from Stata for OLS with Newey-West standard errors, so the above just has OLS. If we run the above regressions with Newey-West errors, results for 18 & 19 year olds become significant; the coefficients just are much smaller in absolute magnitude than for the younger cohort. But there's no particular action in R-squared above other than that we don't explain as much of the variance in outcomes for 15 year olds. Neither is there any particular action in the R-squared measures if this morning's regressions were run in OLS instead.

But let's go back to my preferred way of running things and just condition the model on quarterly data from 1986 to 2008 and use the established relationship between adult and youth unemployment rates to forecast what those would have looked like from June 2008 onwards had that prior relationship held up, recalling that the period from 1986 to 2008 included periods with adult unemployment rates substantially in excess of anything we have experienced in the current recession.

Unemployment, 16 & 17 year olds

Unemployment, 18 & 19 year olds

Big jump in unemployment rates for 16 & 17 year olds relative to their prior trend given adult unemployment rates; much smaller jump for 18 & 19 year olds. Note further that some unemployment among 18 year olds will be carry-over from having been unemployed when 17.

Rob also asks to what extent I can exclude the global recession. Prior recessions had far higher adult unemployment rates AND lower youth unemployment rates than the current recession. Any effect of the recession ought to be picked up in the effects of adult unemployment rates: recall that we're projecting youth unemployment rates from adult rates. If something in the current recession just has hit youths harder than adults relative to how things have operated in prior recessions, that could be driving things. But it would have to have hit 16 & 17 year olds particularly hard relative to 18 & 19 year olds, and it would have had to have been timed to match the change in the youth minimum wage.

The younger cohort drives it [updated]

Stats NZ has very helpfully provided some disaggregated HLFS data with results for 15, 16, 17, 18 and 19 year olds separated out. StatsNZ rocks. And so I re-ran things splitting the 15-17 cohort, who experienced a rule change in 2008, from the 18-19 cohort, who've been subject to the adult minimum wage for much longer.

The graph below plots the residuals from the very simple regression I've been running that predicts youth unemployment as a function of adult unemployment.

So, what do we see here? The blue line traces how youth unemployment outcomes for the 15-19 age group as a whole differ from predictions based on a model estimated on the period prior to the change in the youth minimum wage. The red vertical line marks the period break.  The green line tracks residuals for the 18-19 cohort; the red line for those aged 15-17.

As expected, there's a much bigger spike for the younger cohort who became subject to the new rules than for the older cohort who had previously been at the adult minimum wage. Outcomes for 18 and 19 year olds are worse as well, which I'd attribute to this cohort not having experienced this kind of labour market since they became subject to the adult minimum wage and to more eighteen year olds coming into age eighteen unemployed rather than in employment (note that the red line jumps higher and, importantly, earlier than the green line).

And, we can run a few other fun regressions.

Here, I take as dependent variable the number of employed persons in the age category (thousands) as a function of the population in that age category, the adult unemployment rate, an indicator variable equal to one for periods subsequent to the minimum wage change, and an interaction term between the adult unemployment rate and the indicator variable. For the 18 and 19 year olds, the indicator variable is insignificant and the interaction term is only barely significant at the 10% level. But the interaction term is significant at the 1% level for every age cohort from 15-17.

Each specification uses OLS with Newey-West standard errors for autocorrelation. (Newey in Stata, two quarter lag).

Recall that adult unemployment in the current quarter is 5%. So the interaction term (and the insignificant shift variable) for 17 year olds says that, after June '08, a 5% adult unemployment rate correlates with 11,100 fewer 17 year olds in employment than would have been the case prior to June '08 (17,500 fewer in employment from the interaction term, 6,400 more from the shift variable).

Employment is substantially lower for younger age cohorts - and the difference is statistically significant. For 19 year olds, there is no statistically significant difference in the post 2008 era. Eighteen year olds have a drop in employment, but the effect is smaller than for 15-17 year olds. And this is all about what we'd expect with a policy change affecting 15-17 year olds. In the prior period, some 17 year olds would carry through employment to age 18 and so fewer 18 year olds would be out on the market for the first time; employment among 18 year olds in the current era is then lower as well despite their not being directly subject to the change in policy.

There's more work yet to do. With the disaggregated data, there's now enough to make it worth writing up properly.

While we're talking youth unemployment, I'm going to be charitable and interpret John Key's assertion that, in the absence of minimum wages, youth pay rates would drop to a couple of dollars an hour as his just opening up room on the right for ACT. Employers do have to compete with each other for employees.

Update: 15 year olds are not subject to minimum wage legislation. Specifications looking at the unemployment rate for 15 year olds as a function of the adult unemployment rate find that the adult unemployment rate has no predictive power for the 15 year old unemployment rate except when we're looking at the period post the change. If the adult unemployment rate affects the number of 15 year olds in employment (second set of regressions) but not the unemployment rate for 15 year olds, it's doing it then through labour force participation rates: when there are no jobs going, the 15 year olds don't enter the labour market. And, as we'd expect that employers would worry about a massive wage hike when the 15 year old turns 16, that also directly depressed employment of 15 year olds subsequent to the change even if the change doesn't nominally affect 15 year olds.

Monday 29 August 2011

Stealth Taxes

Frances Woolley argues the case for hidden taxes:
Visible taxes can lead to bad policy choices when a tax's visible incidence is different from its actual incidence. The average tax payer will vote for a tax/benefit scheme that appears to be in his or her interests - for example, increased health care spending financed by increased corporate income taxes - not realizing that the burden of the corporate income taxes might be shifted forward onto customers or backwards onto employees - in other words, right back onto the average tax payer.
It's a nice second-best argument. And, consistent with one of my favourite papers in experimental economics (previously discussed here): Sausgruber and Tyran's finding that buyers in a double-auction will happily vote for inefficient redistribution programmes framed as a tax on sellers but will oppose it when framed as a tax on buyers, despite equivalent incidence.

I'm not sure that a tax's invisibility necessarily protects against stupidity. New Zealand's clean GST is built into consumer prices; there's still not unreasonable pressure to wreck it by exempting food. But, that Labour's only advocated the wrecking ball when safely away from the Treasury benches suggests something.

Frances continues:
A final argument for stealth taxation is that it facilitates budget balance.  People want good things from their governments, like health care and old age pensions. But they don't want to pay taxes. So the temptation is to vote for spending initiatives and vote against any tax increases. When taxes become more visible, people become more aware of the taxes that they are paying, and lobby harder for tax cuts. The result: future generations are burdened with debt and taxes.
Now the argument could be made that in fact invisible taxes contribute to government debt - if the average voter realized how little he benefited from the Bush (Bush-Obama?) tax cuts, how much those tax cuts benefitted the richest Americans, and just how mind-bogglingly rich the richest Americans are, perhaps he would have voted against them. I don't know of any decisive evidence on this point, so if you disagree, feel free to say so in the comments.
Some degree of visibility in taxation is desirable - without information how the tax system works, and who bears the burden of taxation, it is difficult to make good policy decisions.
This is a fun one to think through. Specify that voters are largely ignorant but will vote against anybody they think is to blame for bad outcomes. And, specify a Westminsterian system so they know who's to blame for bad outcomes. In that world, I'm not sure whether it matters a lot whether the taxes are hidden or visible. If taxes with too high of deadweight losses are used to fund services of too little value, incumbents get turfed. Maybe it takes slightly longer if policy has lagged effects. Retrospective economic voting then saves things. If there's no opacity, the ruling party has to balance losses from bad effects of policy against loss in popularity from running "works, but unpopular" policy. At least there's weight on the effects of policy despite voters not knowing a damned thing except what they see out the window.

In a political system where responsibility attribution is more difficult - either Parliamentary with PR and powerful committees or a Presidential system with strong division of power and a federalist structure - things are harder to work out and could then persist longer. Then there's rather less incentive to weigh the effects of policy; rather, you blame the President if you're Congress, blame the other party in Congress if you're the President, blame the State if you're local government. Blame gets spread and incentives for good policy are flattened.

I'm also not sure that complete opacity is as good an idea in a Brennan-Buchanan Leviathan taxation world than in a Musgrove benevolent despot one.

Thinking like economists and thoughts about economists

Chris Auld finds that people without a high school education are most likely to think that economists are know-nothings. The proportion of GSS respondents having such views is mostly declining in education. From Auld:

This is consistent with what I'd found on correlates of economic thinking in New Zealand - the more educated are more likely to agree with what I'd taken as consensus economist views. And, with what Bryan found in the States. But I don't recall seeing anything like that uptick among grad school folks, though I'd have to double check. The questions I'd used as indicating economic thinking all touched on microeconomic rather than macro issues: whether wage and price controls are a good idea; whether high income taxes make people less willing to work hard; whether we should have import controls.

Perhaps folks who've gone to grad school encounter too many folks who've done too much macro?

Saturday 27 August 2011

Light-rail disease

Christchurch isn't the only victim...

Forget AIDS or SARS, there’s a new billion-dollar contagion popping up across the country. Symptoms include visions of grandeur, severe loss of reality and a propensity to enact massive tax hikes. It’s called LRTS: Light-rail transit syndrome.
And while the surest cure for this new ailment is a large application of public input and a quick dose of common sense, the antidote appears in extreme short supply.
Patient zero in the current Canadian outbreak of LRTS is southwestern Ontario’s Region of Waterloo, a high-tech hub as home to BlackBerry-maker Research In Motion and the University of Waterloo. The diagnosis was confirmed this June when the region, population 500,000, approved an $818-million light rail transit project.
Light rail transit is beloved by bureaucrats and planners for its sleek and modern look that provides the aura of a big-city amenity. Those susceptible to LRTS claim it can transform modest cities into booming metropolises by instantly boosting transit usage, curbing congestion, spurring rapid downtown development and attracting young mobile workers of the Richard Florida ilk.
But like any fixed-track mass-transit system, light rail is best suited to moving high volumes of commuters to and from dense downtown employment cores, as is the case in Calgary. It requires specific densities and geographies to work effectively and even large cities such as Baltimore and Buffalo have struggled with light rail. And it’s expensive.
For anyone wondering about palliative care for terminal cases of LRTS, consider an earlier outbreak on the other side of the Atlantic:
Edinburgh, Scotland, population 490,000 was infected by LRTS a few years before Waterloo Region. Its $870-million light-rail transit project was also presented to local taxpayers as the means by which their city would boldly march into the future. And it would be free — paid for by higher levels of government.
Today three-quarters of the budget has been spent but less than a third of the infrastructure is in place. With cost overruns entirely the responsibility of local taxpayers, this summer Edinburgh city council (after rejecting calls for a referendum) debated tearing up the whole thing and forgetting it ever happened. In the end they decided to shorten the route substantially. And they still need to come up with $438 million.
Don’t let Light Rail Transit Syndrome happen to you.
Christchurch light rail fans may wish to read the whole thing.....

The same disclaimer applies to this post as applied to my prior post on light rail.

Friday 26 August 2011

Lessons from Childrens' literature

We've been listening to an audiobook of Alice in Wonderland (among other things) on our daily commute. Dodgson's portrayal of jurors is a little less than complimentary.
The twelve jurors were all writing very busily on slates. ‘What are they doing?’ Alice whispered to the Gryphon. ‘They can’t have anything to put down yet, before the trial’s begun.’

‘They’re putting down their names,’ the Gryphon whispered in reply, ‘for fear they should forget them before the end of the trial.’

‘Stupid things!’ Alice began in a loud, indignant voice, but she stopped hastily, for the White Rabbit cried out, ‘Silence in the court!’ and the King put on his spectacles and looked anxiously round, to make out who was talking.

Alice could see, as well as if she were looking over their shoulders, that all the jurors were writing down ‘stupid things!’ on their slates, and she could even make out that one of them didn’t know how to spell ‘stupid,’ and that he had to ask his neighbour to tell him. ‘A nice muddle their slates’ll be in before the trial’s over!’ thought Alice.
The judge doesn't fare much better. Re-read Alice Chapter 11 if it's been too long.

Our bedtime reading lately has included The Wizard of Oz, which has this wonderful bit on the demand for humbug. After the Wizard patiently explains that he has no magical powers and no ability to grant courage, hearts or brains, they're nevertheless demanded from him. So he supplies placebos which greatly satisfy.
Oz, left to himself, smiled to think of his success in giving the Scarecrow and the Tin Woodman and the Lion exactly what they thought they wanted. "How can I help being a humbug," he said, "when all these people make me do things that everybody knows can't be done? It was easy to make the Scarecrow and the Lion and the Woodman happy, because they imagined I could do anything.
And so too went his rule of the City of Oz, where all needed to wear green-tinted spectacles nominally to protect them from the sparkling emerald radiance but really to make an otherwise normal city appear green.

There are some great lessons to be had in the classics. I wonder how much of it the three year old will pick up.

Preventing arbitrage

Pharmaceuticals are cheaper in Canada than in the States. Even in the absence of Medicare this would likely be the case; income-based price discrimination would have cheaper prices in Canada for goods characterized by very very high fixed costs and trivial marginal cost (adjusting for that the price of everything is higher in Canada). But price discrimination can only be maintained if you make it hard to arbitrage. Car trips to Canada are relatively pricey, but internet sales aren't.

How to prevent re-import this way? Beat the crap out of Google:

Department of Justice
Office of Public Affairs
Wednesday, August 24, 2011
Google Forfeits $500 Million Generated by Online Ads & Prescription Drug Sales by Canadian Online Pharmacies
Internet Search Engine Accepted Advertisements from Online Canadian Pharmacies that Targeted U.S. Consumers and Illegally Imported Controlled and Non-Controlled Prescription Drugs into the United States

Ouch. The DoJ's argument is disingenuous though:
“The Department of Justice will continue to hold accountable companies who in their bid for profits violate federal law and put at risk the health and safety of American consumers,” said Deputy Attorney General Cole.  “This settlement ensures that Google will reform its improper advertising practices with regard to these pharmacies while paying one of the largest financial forfeiture penalties in history.” 
I call BS. Prosecution protects a price discrimination scheme and consequently works to keep drugs cheaper for Canadians; in the absence of restrictions on arbitrage, drug companies would have to charge Canadians US prices and would forgo profits in doing so.

If Google is to be policeman for international price discrimination regimes, I wonder what Google's policing costs are.....

Thursday 25 August 2011

Trusting used car dealers

A loyal anonymous reader, likely employed at the Ministry of Transport, seems aggrieved by my prior post. Here's his comment, and my attempt at an answer. I'll let y'all do the grading of the question and the answer.
Ok, I think we can accept that the government decision is beat you over the head with a stick stupid and that all bloggers are mensa graduates with perfect information so answer me the following please:
1) If MOT data shows no correlation between the volume of used vehicles being imported and the volume of vehicles being scrapped why does this change on 1 January? 
2) If stats NZ CPI reports that the average used car price shows no correlation with used vehicle import volumes why does this relationship change on 1 January?
3)If Mr Vinsen has said that imports will halve and prices double virtually every year since 2005, and they have not, why is he right this time? 
4)If the new rule only requires imports of newer vehicles, how much more expensive does that make the vehicles already in the fleet?
5)If the average age of the fleet is 13 years, how much younger does it get from importing yet more 12 year old vehicles? 
6)When did you start trusting used car sales men for advice on anything?
You have three hours.
I lost the first 90 minutes of the challenge as my computer doesn't boot up before 9 am. But here goes anyway. In reverse order.

6) I never said that I trusted his numbers, just the sign of the number. I said I was agnostic about magnitude; it's not something I've looked into. From the initial post:
I have no sense of whether Vinsen's estimate of the price effects are correct. He is undoubtedly correct about the direction of the change. I'm agnostic about magnitude.
5) That'll depend on how much more expensive relatively newer vehicles get. If a bunch of folks with 18 year old cars become less likely to switch up to 15 year old cars because the folks with 15 year old cars aren't trading up to 12 year old cars, the mean gets pushed back, right? If the price rise for 12 year old vehicles is big enough, then the fleet can age substantially. If the price rise is small, so too will be the effect on fleet age.

4) It can have big effects at the margin, but will depend on relative elasticity of supply and demand. It's easy for the effects to work their way all the way down the line though, right? If the cohort who'd usually purchase 10 year old Japanese imports and sell off their 15 year old Japanese imports hold off trading in for a few years because the price of newly imported used vehicles has gone up, then the supply of domestic older used cars goes up, etc. As for magnitude, that's something I could set up as an honours project for a student but not something I'm going to try doing now. Especially not under a time constraint.

3) Again, I'm agnostic on magnitude. But not on sign. See above.

2) My first cut answer would be that the supply curve is near-horizontal over the relevant range. NZ demand is a small part of the overall market. As soon as there's any price pressure here, increased imports keep things in line. We'd then see no correlation between domestic price and used vehicle import volumes.

1) I'm having a hard time reckoning how there's no relationship between imports and scraps prior to 1 January; I'd have to understand that prior to working through the comparative statics. Surely every car that is imported eventually is scrapped - we don't export our low value castoffs to anybody else given shipping costs. Or at least I'd be really surprised if we did. The only way there's no correlation then between imports and scrap is if we're still in disequilibrium - that there are lots of individuals who want to have a second car where the price is low enough but haven't yet acquired that second car. In equilibrium, the guy importing the 10 year old Honda sells his 15 year old Honda to a guy who sells his 20 year old Honda to a guy who sells his 25 year old Honda to a guy who scraps his 30 year old Honda. In disequilibrium, there's a market for those 25 year old Hondas as second cars that are rarely driven. If that's the world, and the price of the 10 year old Hondas rises, a lot of those 25 year old Hondas remain the daily drivers for poorer folks rather than turning into the second car for slightly less poor people. Mileage adjusted fleet age rises.

I haven't access to the MoT data cited. But if the commenter does, and is interested in providing some of it for an honours project two years from now (roughly long enough for effects to start working their way though), I'd be more than happy to supervise an Honours project using that data to examine the effects of the regulatory change. As mentioned, I'm agnostic on magnitudes. But I'd love to find out!

The case against a dirty GST: Illusory benefits of exclusions.

John Pagani, in the blog post that motivated my post on the GST yesterday, suggests four reasons for supporting the exculsion of fresh fruit and vegetables. In short, these are that it would mitigate the regressive nature of the GST, that it would promote better nutritional outcomes, that we already exclude a number of products from the GST so it is already dirty, and that the best thing about the policy is that everyone gets the same break. Let’s take each of these in turn.

1. Excluding fruit and veg is a way of making the tax less regressive.

Actually, John didn’t exactly make this claim, but it is implicit in his analysis, and it is a common mis-concpetion. First, please shout if from the rooftops: The GST is not a regressive tax. Steve Landsburg had a good post last year , which I won’t duplicate here, explaining how a flat-rate labour income tax with no tax on capital income (which is equivalent to a clean GST) implies a flat rate of tax. Adding in taxation of capital income results in double taxation. You can argue that a clean GST is undesirable because it doesn’t have the double taxation of capital income (compounded by inflation), and such double taxation is a good thing given that the rich earn a greater fraction of their income from interest and other capital income than the poor, but don’t say that a clean GST is regressive. Furthermore, if you want to argue that a clean GST is bad because it doesn’t imply double taxation of capital income, please don’t also advocate Kiwisaver or other tax incentives to encourage retirement saving. You can’t have it both ways.

More important, when one considers the overall tax system rather than just the GST in isolation, it becomes clear that excluding a class of goods from the GST is a lousy way to achieve income redistribution. To illustrate, consider an economy with a broad-based GST, but one that includes an exemption for a particular class of goods done for equity reasons rather than to encourage consumption of those goods. Now consider an alternative system in which the exemption is removed, and the extra revenue earned is returned as a negative poll tax to every adult in the country. Such a redistribution would be easy to implement. It simply means bringing the implementation of the benefits (dole, superannuation, DPB, etc.) into the same system as income tax, and then either increasing benefits or reducing the tax liability by a fixed amount. This policy will eliminate the distortions implied by having differing rates of tax, and would eliminate the compliance and enforcement costs that come from having different tax rates across different goods. And the impact on equity? As long as the rich spend a greater absolute amount on the good that had been zero rated than the poor, even if the good is a necessity that takes up a smaller fraction of their income, this policy will see the tax bill of the rich being raised by a greater amount than the poor while all receive the same rebate back. That is, removing a GST zero-rating would be a distortion-free way of taking from the rich to give to the poor! Only if the good in question were one where poor people spent a greater absolute amount than the rich would removing the zero-rating not be equity enhancing. Are there such goods? I haven’t seen data on this, but at a guess the only candidate goods would be fast food and cigarettes.

2. Exempting healthy foods is desirable/necessary to achieve good nutritional outcomes.

There are two issues here: The first is whether one wants to use Pigouvian taxes and subsidies to bring about behavioural changes in the nation’s eating habits; the second is whether GST exemptions would be the best way to do so. Let’s assume that we do want to use tax interventions. In this case, the optimal policy would be excise taxes on unhealthy foods and excise subsidies on healthy food. The nutritional value of food doesn’t change just because it is used as an intermediate good; apple slices don’t cease to be healthy just because they are served at McDonalds as an alternative to fires in a happy meal. (Note to American readers: the apple slices in New Zealand happy meals are not peeled nor served with caramel dipping sauce!)

3. But we already exempt goods such as existing houses and financial services.

This betrays a misunderstanding of the difference between exemption and zero-rating. Financial services are exempt, not zero rated. This is done to avoid definitional problems, and doesn’t cause the increase in compliance costs that zero rating does.

For second-hand goods, recall the principle that a GST is designed to look like an income tax without the double taxation of those who delay their consumption. Consider a world with a 50% income tax and no taxation of capital income, and then replace it with a 100% GST on newly produced goods and services but not on second-hand goods. It is a trivial exercise in general-equilibrium theory to show that these two worlds are identical. (Exercise for any undergraduate economics students reading this—show that the after-tax prices of both newly produced and second-hand goods will double in this example, even though second-hand good trades are not subject to the GST.) John’s statement that “a new house costs 15 per cent more than the identical house across the road that’s a year old” is simply wrong.

The bottom line is that none of these examples of goods being exempt in any way implies that we have already stepped on to the slippery slope of a dirty GST. Zero-rating fresh fruit and veg would be such a step.

4. “The best thing about the policy is that everyone gets the same break”.

You have to be kidding me. People like me who spend a lot on fresh fruit and vegetables would get a big break; those who meet their nutritional needs from canned and frozen fruit and veg would not. If you want to advocate for a tax break for the middle class at the expense of the poor and the rich, there are more honest ways of doing so than supporting exclusions from the GST that would cater to the consumption patterns of the middle class.

Wednesday 24 August 2011

The case against a dirty GST: Some GST basics

This blog post by John Pagani about removing the GST from fresh fruit and vegetables has raised an interesting issue about value-added taxes like the GST and how well understood they are. Pagani comments; “I doubt there is anyone who would support a GST of 20 per cent with no exceptions; that would be inhumane”. Well, I don’t think of myself as inhumane, but if we had a 20% GST I would still be in favour of it applying as broadly as it does now. In fact, I would make the opposite claim to John: No-one, no matter what their political perspective, their desire for income redistribution, their concern about unhealthy eating, their belief in the efficacy of price signals as a way of changing eating habits, or even their basic level of humanity should every be in favour of muddying the GST by removing it from particular categories of goods. The key word in this sentence is “should”. I am convinced that the reason there are differences in opinion on this issue is misunderstanding about the GST.

In this post, I want to point out some aspects of a GST that are not as well understood as they should be, and in a subsequent post I will explain why commonly stated justifications for giving special treatment to some goods just don’t hold water.

The first thing to note is that a clean GST is equivalent to a labour income tax at a flat rate with no tax on capital income. By example, imagine an economy with a 20% flat-rate income tax on labour income and no tax on capital income. Now replace it with a 25% clean GST. This implies that 20% of the cost a product is the GST, hence the equivalence to a 20% income tax. In the income tax system, consumers who save have 20% of their income taken off at the point they earn it, and their savings then grow at the market rate of interest. With the GST, nothing is taken off at the start, the full value of their income grows at the market rate of interest, but then 20% of the total value is paid as GST when the income is finally consumed. Either way, consumption is reduced by 20% by tax. In short, the two systems are identical in the impact on consumer’s consumption possibilities and in government revenue.

Second, it is a basic mistake in tax policy to examine the efficiency and equity aspects of a single tax in isolation, rather than considering the effect of the overall tax system. For instance, the distortionary effects of a tax on a particular class of goods depends on whether there is also a tax placed on the goods that people might substitute too. Similarly, the equity implications of a GST depend on the income tax system that exists at the same time. Consider the tax system we had for most of the period of the 1999-2008 Labour government: a 12.5% GST, and income tax rates of 19.5%, 33%, and 39%. Now consider a change to a 20% GST. To maintain the same level of progressivity (and humanity) in the overall system, all that is needed is to increase benefits by 6.6%, and reduce the respective income tax rates to 14%, 28.5%, and 35%.

Finally, it is important to distinguish in a value-added tax like the GST between exemption and zero rating. The idea of a value-added tax is to tax final consumption but not the use intermediate goods. (If all sales were taxed, we would create a tax incentive for massive vertical integration, probably at a cost of bureaucratic inefficiencies.)

One can try to tax final consumption by guessing which purchases reflect final consumption (such as a retail sales tax), but this will not catch all final expenditure and will catch some intermediate-good purchases. A value-added tax works by having all sellers add the tax to the price of their goods but having them subtract off the tax already paid on intermediate goods. In this way, it is only the seller’s value-added that is taxed at each point in the production chain, but consumers will face the full value of the tax wherever they purchase.

Let’s work with a simple example with a 10% GST. A miller produces $10 bags of flour, to which it adds $1 GST, giving a cost of $11 to bakers and final consumers. A baker combines that $10 of flour with $10 of labour to produce $20 of bread, to which it adds $2 of GST. The baker, however, only pays $1 to Inland Revenue as it subtracts off the $1 already included in the price of the flour and paid by the miller. Finally, a café combines the $20 of bread with another $10 of labour to produce $30 of sandwiches to which $3 is added. The café subtracts off the $2 tax already paid by the miller and baker, and sends the final $1 to the government. The price to consumers of any of these three goods ($11,$22, or $33) includes a full 10% of tax.

Zero rating is typically applied to a category of good rather than to a category of seller. Using the same example, let’s imagine that bread is zero-rated, but flour is not, and nor are café sandwiches. The miller seller sells flour to the baker for $10 + $1 GST. The baker combines the flour with $10 of labour to produce bread worth $20. It places no GST on this, and sells it for $20 but claims the $1 paid by the miller back for a tax bill of -$1. The café still adds $3 to the price of sandwiches, but as the bread had no tax applies, it can deduct tax already paid and so remits the full $3 to the government. Consumers therefore pay the full 10% tax if they buy sandwiches or flour, but not if they buy bread.

Exemption works differently, and in New Zealand it is typically applied to the seller rather than the good. Exemption means that you don’t have to add GST to the price, but you also can’t claim back the GST already paid. Exemption is done to reduce compliance or implementation costs rather than to materially affect the price of a particular good. For instance, small businesses with turnover of less than $100,000 can choose to be GST exempt, although for some there is an advantage to registering for GST anyway. In our example, if bread were exempt, but not flour or sandwiches, the miller would charge $1 for the flour. The baker who added $10 of labour would then have to sell the bread for $21, so that bread-buying consumers would still be paying an effective 5% tax. And the café adding $10 of labour to $21 bread to create sandwiches would have to charge 33.10 for the sandwich, being unable to claim back the implicit $1 of tax paid by the miller, so that the implicit tax rate on sandwiches would be 10.33%.

This difference between zero-rating of goods and exemption of sellers, is the key to understanding why New Zealand’s clean GST has far lower compliance costs than the typical value-added tax. When completing one’s GST return on-line, one can simply enter two numbers: Total sales to domestic buyers, and total purchases from GST registered sellers. Because there is a single rate of GST, that is sufficient to calculate the GST component of your sales and the GST already paid on purchases. When some goods are zero rated, the fraction of the price paid on goods that is GST will depend on the proportion of each purchase that was for a GST-rated good. Filling out returns then means adding up the GST component of every single purchase separately. It is true as Pagani says that “the purity of a flat rate is good, but it’s not the whole enchilada.” Maybe this increase in compliance costs would be tolerable if abandoning purity brought other benefits. But the putative benefits of exclusions are illusory, based on mis-understanding the above points.

More on that tomorrow.

Incentives Matter: Conference edition

New Zealand academics are fast approaching the PBRF deadline for quality-assured research outputs to be counted and, perhaps, weighed. Since counting is easier than weighing, and since "quality-assured" doesn't have to be that hard, there's a demand for conferences. Especially ones with published conference proceedings.

And so this turned up in my inbox. Academics get lots of invitations to conferences. This one, I expected to be for a conference held in India or Malaysia. But it's being held in Auckland. It certainly looks high quality. Check it out.

I won't copy most of the conference details, but the key bit for Kiwi academics needing published QA conference proceedings before end-December is that the refereed conference proceedings will be published before the mid-December conference date. I also love how all of the accepted papers will subsequently be published in one of a set of refereed journals within six months of the conference "subject to compliance to the review report, editorial comments and journal's guidelines." Multiple best paper awards will also be presented. And committees that do better at weighing than counting will take note.

Incentives matter. Academics who insist otherwise when it comes to policy sure seem to respond to them when it comes to PBRF.

Here's my absolute favourite bit from the call for papers:

E.  Venue, Conference Lunch And Dinner  Our conference venue is at Rendezvous Hotel in Auckland, New Zealand. You will have several feedings such as arrival, morning and after-noon break-foods , buffet lunch and conference dinner . We  welcome you to this international gatherings of  academics and researchers from many countries of the world. 
The attendees will enjoy several feedings in addition to getting a QA publication in conference proceedings.

Has academia in New Zealand really come to this?

Tuesday 23 August 2011

French folk songs

Post earthquake budgets at Canterbury remind me of some of the tunes I learned in music class.

You see, I went to a French-immersion elementary school in Manitoba.

We sang from a book called "Les 100 plus belles chansons". Almost invariably, the lyrics were of murder and death and cannibalism, usually to pleasant and upbeat tunes. Or at least those were the ones Mlle. Parent chose for us to sing to her in chorus. If there were non-cannibal non-death songs in there, I don't know about them.

I'm particularly remembering the one where a sailing crew had to draw straws to see who would be eaten when the food ran out: Il était un petit navire

Another greatest hit: The lament sung by a mother bird whose babies flew from the nest too early, fell, and were eaten by a fox: A la volette.

Good times....

Rot at the centre of New Zealand economic commentary

Matt Nolan over at TVHE takes issue with Gareth Morgan's latest NZ Herald column.

Matt hits some of the problems in that piece. But he's probably pulling his punches out of professional courtesy. As I'm in the academic world instead of the consultancy world, mostly, I don't have to. And so I'm going to smack Morgan around a bit on his history of economic thought.

In particular, Morgan name-drops J.S. Mill in favour of redistributive spending. Morgan writes:
It was during the industrial revolution that grotesque disparities in wealth and intensified impoverishment of the workhouse poor led the economist philosophers of the "enlightenment period" to conclude the purpose of taxation was, as John Stuart Mill put it, to "favour the diffusion rather than the concentration of wealth".
Ok, let's go back and have a look at what Mill advocated then. Mill definitely supported redistribution for the alleviation of absolute poverty and starvation. But he also worried that if the provision of relief made relief more attractive than work, "the system strikes at the root of all individual industry and self-government." Let's go back to source:
In so far as the subject admits of any general doctrine or maxim, it would appear to be this—that if assistance is given in such a manner that the condition of the person helped is as desirable as that of the person who succeeds in doing the same thing without help, the assistance, if capable of being previously calculated on, is mischievous: but if, while available to everybody, it leaves to every one a strong motive to do without it if he can, it is then for the most part beneficial. This principle, applied to a system of public charity, is that of the Poor Law of 1834. If the condition of a person receiving relief is made as eligible as that of the labourer who supports himself by his own exertions, the system strikes at the root of all individual industry and self-government; and, if fully acted up to, would require as its supplement an organized system of compulsion, for governing and setting to work like cattle, those who had been removed from the influence of the motives that act on human beings. But if, consistently with guaranteeing all persons against absolute want, the condition of those who are supported by legal charity can be kept considerably less desirable than the condition of those who find support for themselves, none but beneficial consequences can arise from a law which renders it impossible for any person, except by his own choice, to die from insufficiency of food.
What did Mill favour? Indoor relief in workhouses that was always less desirable than working for wages but preferable to starvation. So far from favouring heavily redistributive income taxation to alleviate the problems of the workhouse poor, Mill favoured the workhouse.

So it isn't just the modern amoral mathematization of economics that leads to opposition to Morgan's preferred policies.

Further, as West points out, Mill opposed progressive taxation. Here's West:

The fact moreover that Mill made it quite clear to the Select Committee on income Tax that he was not in favor of a progressive income tax, separates him from most modern advocates of a negative income tax plan. Mill's objection to the progressive income tax was based partly on his demand for "social justice," and partly upon his concern for incentive effects, not at the lower end of the income scale but, again, at the upper. He objected that "to tax the larger incomes at a higher percentage than the smaller is to lay a tax on industry and economy; to impose a penalty on people for having worked harder than their neighbours."
And what do we find when we go back to source? The line immediately prior to the one West quotes reads:
Both in England and on the Continent a graduated property tax (l'impôt progressif) has been advocated, on the avowed ground that the state should use the instrument of taxation as a means of mitigating the inequalities of wealth. I am as desirous as any one that means should be taken to diminish those inequalities, but not so as to relieve the prodigal at the expense of the prudent.

So Mill favoured using taxes to mitigate inequality but not if it punished the prudent in favour of the prodigal. So all of this hints that maybe, just maybe, Morgan does violence to the Mill quote he initially presented. Let's check. Here's the source, in a fuller context. The initial italicized portion forms the question posed Mill in his testimony before Parliament:
I quite understand the force of your argument as between one portion of the upper classes, and the other portion, that is to say, the distinction that you have so clearly and admirably stated between the owners of permanent and terminable incomes, and the owners of precarious and certain incomes; but then I wish to draw your attention to quite another division, the next division of society, not according to the source of income, nor according to the tenure of income, but according to the quantity of income relatively to the wants of human nature for subsistence and for comfort, and to ask whether it did not appear, that upon the whole, the adoption of this principle, that savings are not to be taxed (setting aside the degree in which you may be able to give it a precise application), and the attempt to frame a law upon that principle, would not be a change in our law favourable to the condition of the poorer classes of society as compared with the wealthier? 
I think it would be favourable to the saving classes, whether poor or rich, compared with the spending classes; and that consideration I think is even paramount to the other. If the rich are to be subject to a greater proportionate amount of taxation than the poor, I think it ought to be done in some other way. A succession duty is the most unobjectionable mode of doing it, because in that way it is confined to hereditary wealth. I think you must allow people to retain the full advantage for their lives of what they have acquired; but the State may deal with it on the occasion of succession. I certainly do think it fair and reasonable that the general policy of the State should favour the diffusion rather than the concentration of wealth, but not, I think, by taxing people twice on the same portion of their income, or by taxing people for the fact of their saving. Taxing people on what they save, and not taxing them on what they spend, or taxing people on a larger proportion of their income, because they are better off, does not hold the balance fairly between saving and spending; it is contrary to the canon of equity, and contrary to it in the worst way, because it makes that mode of employing income which it is public policy to encourage, a subject of discouragement. [emphasis added]
So the line after the one Morgan cites specifically cuts against capital gains taxes and progressive income taxes in favour of progressive estate taxes. In other work, Mill argues in favour of a proportional tax on expenditure above a minimal threshold. Sure, this generates average progressivity, but it's hardly a progressive marginal tax schedule. Morgan can go read Kurer in HOPE.

I'm not a history of thought scholar. But I took enough history of thought in grad school to know that Mill favoured indoor relief. In other words, he worried like hell about "welfare bludging". The debates we're having today over welfare aren't all that different from the ones had a century and a half ago over the British Poor Laws. We can read arguments today about whether women have an incentive to have kids out of wedlock so as to get on the DBP. A hundred and fifty years ago, Mill advocated that the poor in workhouses observe strict separation of the sexes to avoid the Malthusian problem. There is nothing new in current welfare debates. And yet Morgan calls today's debates about incentives facing the poor in the face of relief "dumbed-down".

Like Matt, I'm really frustrated by the article. I'm really sympathetic towards arguments for a guaranteed minimum income in place of the current welfare system. But I sure would know better than to cite Mill as support.

Sports and science journalism

Thomas Lumley's fed up with lazy reporting in the sciences:
if a press release or a wire service story told you that the Wallabies had a new training regimen that would improve their game without making them fitter, faster, tougher in the scrum, more accurate with kicking, or better at putting in the elbow, you’d ask questions. We’d like to see science journalism eventually get up to the standard of sports journalism.
He points the finger at journos who gulped down the claim that an hour of TV watching costs 22 minutes of life expectancy [which I'd critiqued here]. And, because his stats-fu is better than mine (and probably because he read the studies a bit more closely than I did), he notes:
The journal, in its blog, says that the real story was about sedentary lifestyles vs exercise.  They are shocked — shocked — to find that there might be sensational news coverage of the article. However, they do note:“The blast of news coverage also suggests that creative research angles on behavioral health impacts are useful in grabbing the public imagination.” Indeed.
The really strange thing about the paper, though, is the 22 minutes of life lost per hour of TV.  Looking at the confidence intervals shows that there is huge uncertainty (the range is from 20 seconds to 45 minutes), but it still doesn’t really make sense.  Some of this is just correlation vs causation — in reality, not everyone who spends the evening in front of the TV would spend the time jogging, or even playing golf, if their Sky subscription were cut off.   The other component is the model used for years-of-life lost.  The researchers didn’t actually do anything with individual participant data from the AusDiab study. They took the results of a previous analysis (which didn’t get nearly as much coverage) and added in the assumption that the effect of TV weakened with age.  Under that assumption, the effect must be a lot larger for younger people than it appears, and since younger people have more minutes of life to lose, that increases the average cost of TV.  The assumption was described  by the authors as if it was a universal fact, and it’s true that several important risk factors follow this pattern — one reason is that there are more things to die of at older ages, which applies here, but another is that, eg, low blood pressure in older people happens for bad reasons as well as good, and that doesn’t apply here.  In any case the attenuation assumption is doing a lot of the work, and it is only weakly connected to any actual data.
I'm very pleased that there's somebody else out there who cares about this stuff. It's really a bit pointless though. Papers exist to sell eyeballs to advertisers. Most of those eyeballs are in front of squishy grey stuff that doesn't care a whole lot about scientific accuracy but rather about group affiliation and sensationalism. The real problem is on the demand side. We get the journalism we deserve. Just like we get the politics we deserve.