Monday 31 December 2012

Best not to leave a live dragon out of your calculations

Frances Woolley wonders whether Smaug's adverse effects on the surrounding region might have been primarily monetary rather than fiscal. Smaug did sit on a rather large pile of gold, taking it out of circulation. And as people can rebuild, perhaps the long-term decline of Dale, Lake Town, and the surrounding region can be modelled as partially being fiscal in origin.

I'm going to disagree rather strongly here.

The primary effect was a strong supply shock - thousands of very skilled Dwarven craftsmen were eaten. Dwarvish replacement rates are very low - they're more fertile than elves, but hardly reach human or hobbit ability to repopulate a land.

Next, the entire region around the Lonely Mountain - Dale and Lake Town - served to service the Dwarvish industry. Dale produced agricultural goods in trade for the Dwarves; Lake Town ferried on Dwarvish goods to the rest of Middle Earth. Absent the Dwarves, there was no reason to rebuild Dale. And LakeTown remained a commercial town linking the Wood Elves and surrounding region with the rest of Middle Earth, but at a necessarily diminished scale.

Further, even one-off events can have long-term adverse consequence. Du Pont and Noy find that the Kobe earthquake permanently reduced that town's per capita GDP.

Finally, Bilbo's warning is important. It is foolhardy to leave a live dragon out of one's reckonings. We cannot model Smaug's attack on the Lonely Mountain as a one-off not-to-be-repeated event. The worst was done in that first attack, destroying the Dwarves and Dale. But Smaug continues to predate the land - none may dare pasture or raise crops near the Mountain for fear of the dragon. That's why it's called "The Desolation Of Smaug" - the area around the mountain where Smaug will see you with sufficiently high probability that it's just not worth heading in there. You can't rebuild Dale while Smaug is there. Imagine considering rebuilding New Orleans after Katrina, if you knew that your rebuilding would likely cause another hurricane every bit as destructive as the last.

For Middle Earth's macroeconomy as a whole, the production once undertaken at the Lonely Mountain would have moved to the Iron Hills and, perhaps, to Moria; I've not read enough of the secondary materials to know if Tolkien ever gave this as a reason for the dwarves there having delved too deeply, but a sharp temporary increase in production for inventory-building followed by steady-state increased production would have been their optimal response to Smaug. It would be too speculative to blame Smaug for the Balrog, but Smaug could perhaps be interpreted as having brought forward the Balrog event.
[Update: The Balrog long preceded Smaug. I was thrown by remembering that Thror's people had there sought refuge after the dragon but forgetting that they were seeking to reclaim it rather than moving to an existing settlement.]
On the monetary side, even though Smaug is sitting on a big pile of treasure, he also destroyed a massive amount of industrial and consumer goods. Had that gold remained in circulation after the large supply shock, too much money would have been chasing too few goods and we could have expected some inflationary consequence. I have no sense of the magnitude of the stock of liquid treasure relative to the flow of goods that otherwise would have been coming from the Lonely Mountain and so I do not know which way the net monetary effect will wind up running. It wouldn't surprise me if it were net deflationary, but it could be less deflationary than Frances is reckoning.

Blogging will continue to be light over this, my summer holiday.

Monday 24 December 2012

Choosing a major

Some assistance for those NCEA graduates considering their majors for their first year at Canterbury for next year:

Alas, I think you have to go to Lincoln if you want to major in Classical Vintning. 

If you're not reading Wondermark, you should be....

Friday 21 December 2012

Crash responsibility, and some back of the envelope reckoning

At the same time that I was trying to get stats on the number of drivers in the .05 to .08 range who had not been involved in accidents, Canterbury's Professor of Finance Glenn Boyle was getting annoyed with the New Zealand Herald's campaigning for a 0.05 limit.

The Herald published an article noting the number of accidents involving drivers just under the legal limit, along with the usual stuff from Alcohol Healthwatch:
Statistics obtained by the Herald on Sunday under the Official Information Act show in the last four years 20 people have been killed in road accidents involving drinking drivers just below the legal limit.
Another 281 people have been seriously injured in crashes where a drink-driver was also tested and found to be just under the limit.
Alcohol Healthwatch director Rebecca Williams said the statistics clearly showed 20 people would still be alive if the Government had responded to calls for a lower alcohol limit.
Glenn was a bit miffed at the Herald's credulity here. First, banning driving above 0.08 hasn't abolished accidents involving drivers who are over the legal limit - we still do arrest lots of people for driving after having had too much to drink. So it's a bit nuts to say that 20 people would be alive if the drink driving limit were at 0.05 over those four years. Some accidents would have happened even if the driver were sober, and some of them would have happened with the driver having continued to drink. It's pretty likely that the number of accidents would be lower, but it's pretty unlikely that each and every one of those accidents would have gone away. Maybe you could make the case for it if there were substantial decreases in driving in the >0.08 range with a drop in the limit to 0.05, but I've not seen evidence on that as yet.

Glenn got in touch with the reporter and noted that I was planning on heading out with the Christchurch police over the weekend; she called and asked me about it. She'd said that she'd call back on Monday to see how things went, so I was a bit surprised to see there'd been a piece on it this past Sunday.

I'll have to clarify a couple of points.

First, I do not doubt that there is increased risk of having an accident if you are between 0.05 and 0.08 relative to a baseline of zero. I would be pretty surprised if drivers in that range were not over-represented among those having accidents. But I do not know by how much they are over-represented. You are also at increased risk of dying in an accident if you are going 100 kph than if you are going 30 kph. But we do not set the speed limit to 30 kph: the reduction in accident risk isn't worth it relative to the delays we impose. So, for example, Forester et al 1984 concluded that the 55 MPH speed limit failed cost-benefit analysis unless we put next to no value on people's time. We also do not drive cars made of nerf to protect pedestrians.

Even if we only considered increased enforcement cost as the only cost, there would still be some cut-point below which the increased risk of accident among those in the .05 to .08 range wasn't worth lowering the legal limit.

If we think that those who choose to drive in the 0.05 to 0.08 range and who do not have accidents wind up having less fun than if they were required to be below 0.05, then that reduction in fun counts for something too - it's reduced consumer surplus. That doesn't mean that it's impossible to have a fun night out while you're the designated stone-sober driver. It just means that these drivers must wind up being worse off as they see it; otherwise, they would already have voluntarily chosen to have had less to drink. That moves the cut-point for increased accident risk upwards in just the same way that increases in the opportunity cost of time increase the optimal highway speed limit.

Unless we know how many drivers who do not cause harm would be inconvenienced by a reduction in the limit to 0.05 from 0.08, we have a hard time assessing the costs of that policy move.

Here's the Herald:
National Addiction Centre director Professor Doug Sellman is convinced there is a link. He said every time someone died in an alcohol-fuelled car crash, it was a chance to point out that former Transport Minister Stephen Joyce was partly responsible.
The Government has refused to move on a lower blood-alcohol limit for drivers until it receives the results of data from the Ministry of Transport and a driver-simulation study from Waikato University.
Sellman said Government "delay tactics" were costing lives. All the information was already available to make a decision, he said. "Joyce didn't act on the international research that was there already. None of the research says we need more research. Only Stephen Joyce believed that."
Sellman said the point of a lower limit was that it would reduce the number of drivers with higher alcohol levels, too.
The Herald on Sunday has been campaigning for a lower breath-alcohol limit, and statistics last weekend showed 20 people had been killed in the past four years in road accidents involving drinking drivers who were just under the current legal limit. But even that wasn't enough to force any response from the Government.
If all that we cared about was knowing that we reduced the risk of car accidents, you could push the button tomorrow for a zero drink-driving limit. You could also push the button for a 30 kph speed limit on the highway and nerf-cars. And you could blame the Transport Minister for every death involving drivers going faster than 30 kph. But reducing accident risk isn't the only thing that matters.

If we were stuck having to do it from existing data, I'd start here. Keall et al, 2004 provide some pretty decent NZ data.

At Table 5, the report estimates of the death rate per million trips for a few BAC intervals. Among those with no alcohol, the death rate per million trips is 0.2 for both males and females. For those in the .005-.055 range, they found no accidents for women and 0.4 deaths per million trips for men. For the .055 to .105 range, which spans the legal limit of 0.08, the death rate per million trips was 1.4 for women and 1.2 for men. At Table 2, the overall excess death rate per million trips is about 1 - Table 2 controls for time of night.

Now the value of a statistical life for policy purposes in New Zealand is $3.77 million.

The excess death rate per million car trips among those in the 0.055 to .105 range is 1.2 for women and 1 for men. So we'll average that at 1.1 and stick with Table 5 results. Every million car trips taken by drivers in the 0.055 to .105 range costs $4.147 million dollars in expected VSL losses. To the extent that this includes fatalities incurred by the driver, it massively overestimates social cost. But it also doesn't count any of the costs of non-fatal accidents. Because this study only looks at fatal crashes.

So if we only count fatality costs and count all of the fatality costs falling on the driver him or herself, then it would make sense to reduce the drink driving limit from .105 to .055 if drinkers would be no more than $4.15 worse off per trip as consequence. You may see a problem here: the current drink driving limit is 0.08, not 0.105, the risk of accident is strongly increasing in BAC, and this earlier data includes the very high drink driving accident rates among 15-19 year olds, who are now subject to a zero percent limit.

I do not know whether the raw data underlying the study has actual BAC or only the bucketed BAC categories. If the former, getting access to the raw data would let me back out the portion of increased risk in the 0.05 to 0.08 category and restrict things to the over-20 cohort. But it might just be worthwhile to have a look at what MoT is currently collecting, as they're looking also at non-fatal crashes.

So here's a question then. Let's suppose that the costs of non-fatal accidents are on par with the self-imposed fatality costs incurred by drinking drivers so the $4 is ballpark ok (but note the overestimate problems as it includes people in the 0.08 to 0.105 range). Do you expect that most people enjoying a night out would be willing to accept $4 to be subject to a 0.05 rather than a 0.08 limit? Don't tell me "Oh, I would, because I never have that much anyway." This question isn't for you. This question is for those who go out for the night and either worry that they've exceeded 0.05 or know that they're in the 0.05 to 0.08 range. As you walk into the bar someone offers you $4 and says "You can have this $4 if you can guarantee that you'll stay under 0.05 tonight." If most drinkers subject to the risk take the $4, and if the $4 is ballpark correct, then moving to 0.05 makes sense. If you'd have to offer them more than $4, then it's a value-destroying proposition.

Fun fact: you can back out how much net enjoyment people get from their last few drinks - the ones that push them into the 0.05 range - from what they spend on a drink combined with their price responsiveness. When drinks at the bar range from $5 upwards, it's going to be surprising if consumer surplus from last couple of drinks is less than $4 given demand is pretty price-inelastic. In other words, it seems pretty likely that people would turn down the $4 offer. And they'd be even more likely to turn down a lower offer - and I'd be pretty surprised if the non-fatal crash costs were higher than the proportion of fatality costs falling on the drink driver.

Long-term financing

The Christchurch Press tells us that the Canterbury Crusaders have paid half of their last year's profits to the Christchurch Stadium Trust.

It's great to see a sporting franchise willing to help fund its stadium.

The temporary AMI Stadium at Addington cost $30 million.

The Government has proposed building a much larger and more expensive permanent stadium as part of the Christchurch rebuild; nobody quite knows what that will cost. $400 million is the number currently cited. Here's John McCrone:
Time to sober up? With the proposed new convention centre and covered rugby stadium, the mutterings are that Christchurch has got rather carried away with its central-city rebuild plans.
"Why are we talking about a $300 million convention centre and $400m stadium at a time when we're broke? It's a nonsense," remarks one insider with a prominent role in the city's events industry.
"I can understand that we are trying to seize the opportunity of a blank canvas here," he continues, "but we're a very small city, only 350,000 people - in many ways just a large farming village. So with these kinds of facilities, it's hard to see how we can afford them, how they will be viable."
Another informed source - again speaking off the record, as now is not a time to be sticking your head above the parapet, he says - points out that the Government is only just now hiring someone to write the business case for the convention centre, even though it has already begun compiling a shortlist of the developers and contractors to build and run it.
"That tells you nobody's done a proper feasibility study yet," he says. It is all seat-of-the-pants, back-of-an-envelope thinking so far.
Now the Crusaders put $87,147 towards the Christchurch Stadium Trust this year in addition to the amount they paid in rent. I'm not sure what the Crusaders pay in rent or whether the figure is publicly available. But I'm pretty sure that the government fronted all of the capital costs for the temporary stadium and that the Trust is only covering operating expenses. A larger stadium would generate greater ticket revenues but would also have larger operating expenses.

Let's suppose that the Crusaders could earn a million dollars per year in profit that could be used towards a stadium above rental charges that cover operating expenditures but not depreciation. And suppose that they promised to give somebody that million dollars per year for the next 30 years if that somebody would give them cash today for building a stadium - a bond issue. If they marketed the bonds to Crusaders fans and thereby got away with paying only 5%, they'd get a bit over $15 million for the flow of future profits. We could maybe imagine, since we're only playing very rough ballpark figures anyway, that that plus other events at the stadium could hit a $30 million replacement cost target.*

The proposed stadium is on the order of $400,000,000. You're not going to get anywhere near that on a $1,000,000 stream but you could do it on a $26 million stream, if you could get people to accept a 5% interest rate.

But I am encouraged to see the $87,147 contribution. Perhaps we could have a few bake sales to help.

* I'm using this as a ballpark measure of whether the government's investment could be construed as having made sense. If the Crusaders were saving now to replace the $30m stadium in 30-year's time, and if the real costs of construction didn't change over the period, and if the Crusaders could get a 5% real return on investment, then it would take them about 19 years of putting $1 million aside to earn the $30m. It would take over 60 years to get to $400 million.

Thursday 20 December 2012

Finding the denominator

We simply cannot tell whether changing the drink driving limit to 0.05 from 0.08 is a good idea unless we have some idea what proportion of drivers on the road at different times of day are in that range. We can talk a lot about the numerator - how many people involved in accidents have had something to drink. But without the denominator, we cannot make sense of the numerator. 20 accidents could be a huge or a tiny proportion of drivers on the road who have similar blood alcohol readings.

Most likely, drivers in the 0.05 to 0.08 range would be over-represented in the accident stats after correcting for time-of-day and day-of-week effects. But that doesn't tell us whether reducing the drink driving limit would be a good idea. Rather, we have to weigh up the likely reduction in consumption in that range given a change in the law, and the likely consequent reductions in accidents in that range, against forgone consumer surplus among those who would have otherwise been driving in the 0.05-0.08 range without adverse incident. I don't know which way this would turn out, which always makes things more fun.

The New Zealand Police told me that it's impossible to have any automated gathering of that data - their machines are not set up to keep those running tallies. And it didn't look like anybody else was collecting the data. So I tagged along with an alcohol checkstop unit on Saturday night to scope out what would be needed for a survey - how many research assistants would need to tag along to have a decent chance of getting accurate data while still staying out of the way. Over about an hour on Victoria Street, 173 drivers returned no alcohol; 13 were in the 0-250 mcg range (under 0.05); 2 were in the 250-400 range (0.05-0.08); 2 were sent on for evidential readings as they seemed to be above 400 mcg. The officers noted it seemed to be a pretty quiet night - traffic was light and few drivers were in the 250-400 range as compared to other nights. And, surprisingly, one of the officers reported that she was sure that someone else had been collecting data of this sort.

I subsequently heard back from the right person at the Ministry of Transport that they have run a short survey assessing the proportion of drivers on the road in the various BAC ranges, or at least tallying the numbers registering 0, 0-250, and 250-400. And, even better, they've promised me the raw data mid-January. It's limited in that they were only looking at Friday and Saturday nights, but so long as I can sort out the proportion of accidents that happen at the same times, I can deal with it.

I'm very glad I'm not going to have to re-create the wheel on this one. The data collection looked like it wasn't going to be the easiest thing, and I was starting to have nightmares about just what the University administration paperwork was going to be needed to get permission to send RAs out with the Police, even were I to have found external funding.

Many thanks to the Officers who let me tag along for the night, the Canterbury Road Policing Manager, and Mike McCosker for getting me in touch with the right people to get things going. I think it's going to be pretty useful knowing how this data gets generated when I go to play with it in the early new year.

Wednesday 19 December 2012

Regardless of whether it's true, it's still a great story

I knew that New Zealand is a bit of a freedom-loving outlier in allowing home alcohol distillation. But I didn't know how that came to pass. I can't vouch for the story below, but it rings true. Hat tip to @LyndonHood. I've tidied some of the formatting and fixed copious typos; check the original if you want it without that.
How did it become legal in NZ ? Ray and Des explain ...
Tom : The story of how distilling became legal in New Zealand is rather interesting. It all dates back to the last Labour Government in the mid 80's when they decided in their wisdom that Government Departments would be sold off to private enterprise, turned into State owned enterprises (companies) or in the case of Departments like Customs which couldn't really do either, be run like businesses and make a profit where ever possible.
During the redrafting of our liquor laws 1989/90 the Customs Department put it to the Government that if they were supposed to be business like why did they have to check on all licensed stills in the Country where they only collected revenue from the ones that made alcohol. The solution to the problem? Make the ownership of a still no longer illegal which they did by simply removing that section from the act.
Very shortly after this became the case two bright sparks by the name of Peter Wheeler and Malcolm Wheeler (yes the same ones that wrote the book and own Spirits Unlimited) decided that if the ownership of a still was no longer illegal then they would start selling them to the general public. This created a beautiful Catch-22 for Customs, under the Customs Act if you distilled alcohol you had to have a licence and pay excise tax, but the thought of policing home stills for small amounts of alcohol filled them with horror so they made an internal policy that although there was nothing to stop them licencing home stills that they wouldn't do it.
This left them in another no win situation, the maximum fine under the act was $500 and confiscation of the offending alcohol, the cost of a prosecution several thousand dollars so they didn't deem that to be an efficient use of their money either so they largely turned a blind eye to it all. After many submissions to Government (myself included) when the liquor laws where changed again in October 1996 sanity prevailed and the customs act was changed and the word spirits added into the part about brewing beer, wine or the growing of tobacco for your own use was free of excise tax. This is a pretty unique set of circumstances which are unlikely to be replicated overseas I would have thought although I believe that there is a lot of pressure for Australia to follow and we are watching with great interest to see if it happens.

Des : The situation to some extent got too big for the government to control and as the product being produced could not be faulted on health grounds (yes it was tested by "the powers that be") there was really no other choice but to legalise it. In about September 1995 it was estimated that there were close to 2000 stills, capable of producing alcohol, being used as 'ornaments' in the Auckland city alone. A number of us interested parties made submissions to our local members of parliament and the governing bodies in support of the law change.
There have really been no problems and so long as it stays that way other governments may eventually see the light. However it must be remembered that alcohol production is a good, easy, and inexpensive source of tax revenue to any government. For this reason I urge all NZers to 'play the game' and abide by the rules. We have something unique to be cherished.
I really don't know whether this is anywhere near accurate. But it's not far from the story at the Spirits Unlimited website, where they sell stills, supplies, flavourings, and home tobacco growing kits - $18.75 gets you the supplies for growing 100 tobacco plants; the curing kit is another $18.45. They also note which products are too large for shipping overseas.

I don't grow my own tomatoes or distill my own spirits, preferring to trust to the division of labour and specialisation. But I like that I could.

I wonder whether anybody's measuring the elasticity of still sales and distillation supplies with respect to the alcohol excise tax.

Rugby Boosterism

Breathtaking. The Ministry of Business, Innovation & Employment produced a report, "The Stadium of Four Million", on the 2011 Rugby World Cup.

The first sections of the report are pretty unabashed boosterism, lauding the successes of the event. It's a bit surprising that they talk about the benefits of enhanced stadium infrastructure in Dunedin with nary a mention of, well, this:
The stadium was pushed as a multi-purpose venue. An appendix to the "CST Feasibility Masterplan Report" of 2007 said it was important it was "perceived at a community level to be multi-purpose and cater for more than rugby". Since it opened last August, only two major non-rugby events have been held: a gig by Elton John, and the 150th birthday celebrations for Otago Daily Times publishers Allied Press. Neither paid a stadium hire fee. In June 2008, two major concert promoters had told the D-Scene newspaper what should have been self-evident: Dunedin was too small, remote and student-oriented to provide the sales base to attract big-name acts. In February this year, council-owned stadium management company Dunedin Venues Management Limited's (DVML) chief executive David Davies said concert bookings for the stadium would be "thin" in 2012. "What's thinner than one?" asks Garbutt. Cull says the council has to leverage the advantage of having a roof, guaranteeing events won't be rained off. Farry, who wanted to run the stadium for its first two years, is disappointed the council hasn't attracted more concerts.
The council envisaged DVML would return a substantial annual dividend to help defray loan repayments. Incredibly, DVML were told to borrow money, if they had to, to ensure a return. "There is no way a company could be milked like this without blowing apart at the seams," says University of Otago academic Rob Hamlin. DVML duly baulked, the board was sacked and replaced by new directors, Denham Shale and Bill Baylis, both former South Canterbury Finance board members. "A 100 per cent commonality of board membership with a company described as the biggest corporate fraud ever in this country takes real genius," laughs Hamlin. DVML predicts a $2.4m loss this year, saying it cannot cover the cost of debt-servicing on the stadium loans, and Davies cried at a press conference to announce his resignation. Cull says it was "completely unrealistic" to expect the stadium to service its own debt (it was originally predicted to make an annual profit of around $100,000); instead he's instigated a review to find the best operating model and how it can run at the lowest possible cost. Farry, meanwhile, reckons the trust would have run the stadium at a modest surplus. Pro-stadium councillor Syd Brown also says the stadium can be profitable: "It will work, it is an asset."
Hamlin argues it may never be viable: if it cost $200m in loans, that means raising $500,000 a week to cover the interest. "Every person from the child born yesterday to the octogenarian blowing bubbles down the old folks' home would have to go to that stadium once a week, without fail," he says. Garbutt believes it would be most sensible to mothball the stadium.
Some benefit. This matters more because the report does not provide any kind of Cost-Benefit Analysis. Rather, it's all economic impact and effects on GDP. They assume that all of the stadium upgrades happened because of the RWC (not that implausible); increased construction expenditure in the CGE model will turn into larger GDP. Except Dunedin could yet go bankrupt over it.

Roger Procter, MED Chief Economist, notes at pages 94-95 of the report some of the report's rather strong limitations. He writes that while CGE modelling can be an important input to a cost-benefit assessment, we still need that cost-benefit assessment to assess any net economic benefit. And as best I can tell, there's no cost-benefit analysis in this report. Maybe it'll be in a subsequent report.

Further, a lot of the benefits tallied depend on the counterfactual that's used. At page 15, they talk about overseas visitor spending being 16.2% higher in September and December 2011 compared with September and December 2010, and retail trade being up 5.7% over the same interval. But the world economy strengthened considerably from 2009 to 2010 and continued strengthening through 2011. The CGE modelling should account for that, but they are taking the increase in visitor numbers as an input. And the graph presented at p. 43 makes it look as though they're estimating excess visitor numbers in 2011 based only on actual numbers from 2010: the "But for the RWC" 2011 figures coincide with realised 2010 visitors for the period of the RWC. If we would have expected numbers to have gone up with continued American and Australian economic recovery, then this may overestimate the RWC's effect. And, again, the estimated RWC-visitor-bump is an input into the CGE model.

A final bit of fun. The boosterish early part of the report talks about the potential gains from increased international business contacts as foreigners travel to New Zealand to see rugby. And that is indeed a plausible but hard-to-quantify benefit. But the notes for the CGE modelling say that much domestic NZ RWC attendance was not displacement from other domestic tourism activities but rather displacement from international travel. That lets that domesticly diverted attendance count as a gain in the CGE modelling. But it also attenuates the benefits of "international connectedness". That bit doesn't get noted in the early boosterism.

For a future honours project, it would be rather fun to have a student check whether countries represented in the RWC, as compared to comparable matched non-RWC countries, had enhanced longer term tourist flows. The report makes a lot of surveys of visitors happily reporting that they'd recommend New Zealand to friends. If that's true and substantial, it should show up in aggregate tourist flows by country sometime over the next few years. It would also be neat to compare these effects with per capita LOTR and Hobbit box office revenues by country.

I chatted with Radio New Zealand's Eric Frykberg about some of these issues late this morning.

Paying for roads

National has announced that petrol excise will increase for the coming three years. Some of my Twitter stream has been suggesting they're doing this to patch up the budget rather than to cover roading expenses. Can't it do both?

The most recent year-end financial statements, those for the year to June 2012, had the government receiving:
  • Road user charges of $1,045 million
  • Petrol fuels excise of $1,478 million ($847 million on domestic production; $631 million on excise-equivalent duties on imports)
  • Motor vehicle fees of $175 million.
So about $2.7 billion in revenues for roads.

Vote.Transport in Budget 2012 had just under $3.4 billion for the National Land Transport Programme, of which a substantial portion was a loan from the Crown for cashflow management. A quick adding-up of the real expenditures on road related stuff looks like $2.6 billion in road spending - about what they collected in revenue. I expect that the loan that's on the books is for expenditures perhaps having been front-loaded during the year with excise dribbling in throughout the year, but perhaps somebody with more familiarity with the Crown Accounts can correct me if I have that one wrong. 

Simple cost inflation would require that petrol excise and road user charges increase if next year's roading expenditures are the same in real terms as they were this year. If the government has any plans on spending more on roads next year than it did this year, then excise has to go up by more than that. I note also that Note e of the Financial Statements, page 129, includes the following:
"Other earthquake costs do not include costs associated with the future repair of local roadways. This exclusion reflects that the first call for funding these future expenses will be from dedicated ring-fenced revenue in the form of road user charges, fuel excise duties, and registration fees paid to the New Zealand Land Transport Fund. Should the Government's share of the costs associated with the future repair of local roadways exceed the amount available from that ring-fenced revenue, the Government has a number of options to allocate future to this expense. The Crown's share of the costs for local roadways remains uncertain, as is the range of funding options available to the Government."
If the Crown's share of roading rebuild costs has increased, then petrol excise rising to cover it isn't crazy either.

A reasonable argument against the excise increases would be an alternative of issuing roading bonds to be paid off over a longer period of excise revenues, so the burden of current road construction is spread across future road users. And that would be reasonable for one-off shocks like the Christchurch earthquakes. But if every year we have to spend some amount to maintain the stock of existing roads, and some amount to build new roads to match population growth, and if the annual increases in the roading stock are roughly the same from year to year, then the annual burden should work out to being roughly the same under either regime.

I don't think there's sufficient evidence to conclude that National's ramping up petrol taxes as a deficit-fighting measure, except inasmuch as it allows the government to continue building roads without drawing on revenues coming from outside the National Land Transport Fund. But I suppose that next year's budget will reveal whether that's right. It would be rather disappointing if the government were using petrol charges to raise funds for other purposes, but I expect that will not turn out to be the case.

As for whether the Government will produce a surplus ... iPredict says there's a 15% chance for 2014/15.

Update: Liberty Scott posts something useful in the comments; I'm hoisting it up here. If the new roading expenditures are a one-off rather than part of an ongoing set of construction projects, then it really makes far more sense to use debt to finance them.  Here's Liberty Scott:
The fundamental problem is that the current capital expenditure on major roads is a one-off, as it really is a bunch of projects that have at best marginal economic benefit. There wont be equivalent major projects ever built again, so there is a major problem with the PAYGO funding system paying for capital the year it is built, even though that capital has a depreciated life (particularly if you consider earthworks and tunnels which largely never deteriorate) of 90 years +.
What should have been done is that the state should have borrowed for those projects and paid for them over many years, but MoT has been almost wilfully blind to this issue. What ought to happen in future is that there should be less long term spending on roads, because the network will largely be built out by the time all of the RoNS are finished.

Tuesday 18 December 2012

Insurance follies

A few Christchurch stories that ought be read together.

Item the first: Insurance companies seem to be deliberately dragging their feet so that policy holders will give up and take indemnity payments.

We were insured with AMI. Its Christchurch Earthquake claims are now being handled by government-owned Southern Response, carved out of AMI before the rest of the business was sold to IAG. They have told us that out-of-scope claims like ours - the parts of the claim that are solely covered by private insurance and have nothing to do with the government's Earthquake Commission coverage - will be assessed "within 3 to 5 years". They haven't answered emails about the out-of-scope claims where the damage is getting worse because it's not been repaired. I think that they hope that I'll give up and fix everything myself out of pocket so they can then refuse to pay for the repairs. The "insurance is a scam" feeling gets stronger.

Item the second: If you want to have the terms of your insurance contract enforced, you need to sue them.

Item the third: The government has made it a bit hard to route around its preferred project managers, Fletchers. We have opted out because we wanted to specify our own builder, and we hope that will turn out well. Going with Fletchers seems a lotto ticket with a lot of downside variance. Read the comments section for different homeowners' experiences. The best advice I've there seen: videotape your whole house before the builders start and video it again afterwards.

Item the fourth:
An insurance advocacy service for quake-hit Cantabrians will be smaller than originally planned, Earthquake Recovery Minister Gerry Brownlee says.

In July the Christchurch City Council voted unanimously to ask the minister to establish an insurance tribunal and advocacy service in the city.

The service was being managed by the Canterbury Earthquake Recovery Authority and would help residents battling for information about when, or if, their homes would be repaired.

A spokesman for Brownlee said the need for such a service was "no longer as great".

"The need is lesser than it was and the [service Cera is] designing will reflect that."
I'm sure that this is because Brownlee figures everything's going well so the programme isn't needed rather than because successful advocacy would increase the government's liabilities via Southern Response. I'm rather glad that the University of Canterbury's Law School is here helping out.

Solving for equilibria

The Greens think that poor people can't solve for the equilibrium. Voluntary labeling of healthy foods has been proposed, with one option being "traffic light labeling". Here's Mojo Mathers:
If you are a food manufacturer of a particular product and look at the criteria and find out that your product will get a zero for health (the lowest score possible proposed in the report), would you still say “yes! Sign me up, that will help sales”?

No, you wouldn’t.

So a voluntary scheme will just end up on the healthy foods, and consumers who don’t currently read the back of labels will still not know which foods they should think twice about before purchasing."
This part of the reasoning is exactly right. Under a voluntary disclosure regime, the best label first. The first runner-up labels second to avoid being pooled with the second and third categories. In the end, everyone labels except those who would receive the worst ranking.

But we tend to expect that everyone can solve this kind of model: that the absence of a "yellow light" or "green light" label conveys as much information as the presence of a "red light" label. I suppose it's an empirical question. I prefer voluntary regimes where organic, GMO-free, dolphin-safe, or other standards-meeting manufacturers can label their products as such and customers can infer what they like from the absence of a label - and especially where some mandatory labels can wind up doing harm.

Equilibrium solution the second: the inefficient dining decision. Matt Nolan finds himself at a family dinner where, nobody wanting to be the only one to order a large dessert and nobody consequently being first-mover, everyone winds up in a sad coordination failure. Knowing the risks of such sad equilibria, and knowing that others usually feel the weight of social convention and social pressure more keenly than I do, I try to take on these first-mover costs myself by ordering the dessert and the drink. It's efficient that I do so, and I get to feel good that I relieve others of the burden of feeling bad about being the first one to order. I love the happy confluence of my interest and the social good in these kinds of cases.

Previously: Efficiency over Etiquette

Monday 17 December 2012

Pluralism and health

I've critiqued the public health crowd for being too willing to set health as the only value, or at least one that is accorded the presumptive right to trump any other element of someone else's more pluralistic vision of the good.

Australia recently implemented tobacco plain packaging legislation. The new packages are not particularly pleasant, with pretty prominent pictures of diseased lungs and the like. Box Wrap offers a sleeve that wraps around the uglified tobacco packs with more pleasant images. In short, it's a sticker. It's a sticker that happens to be the right size to wrap around a cigarette carton. And so:
The Australian Medical Association has urged the federal government to ban stickers being sold to wrap around cigarette packets to sidestep tobacco plain packaging laws.
A Department of Health and Ageing spokeswoman said they would be "immediately investigating this product to evaluate its status" but refused to speculate on what actions could be taken.
The AMA wants the government to ban a sticker. DoHA wants to see whether they're able to ban a sticker.

Any bets on whether they'd be trying to ban it if the exact same product were sold without the anti-nanny-state rhetoric? I mean, look at all of the similar products that exist and have not yet roused DoHA and AMA ire. Here's an Australian Ebay list of cigarette cases. Here's another set. And some more. Does the AMA and DoHA hate the sticker because it's perhaps an easier way to route around their packaging law than buying a cigarette case? Or because it's bundled with a freedom of choice message and a deliberate thumb-in-the-eye to the anti-tobacco movement?

The Australian Medical Association wants to ban a sticker. What a world.

Update: Chris Snowdon caught this one before I had. He also points to other Australian wackiness. The Director of the Centre for Research & Action in Public Health at the University of Canberra, Rachel Davey, lauds Britain's wartime and post-war food rationing as an example for reducing obesity.
Wartime food shortages and government directives forced people to adopt different eating patterns. They ate considerably less meat, eggs, and sugar than they do today.

Rationing was enforced in Britain for 14 years, and continued after the war had ended. Meat was finally derationed in June 1954. Petrol was also rationed, so people stopped buying and using cars, and public transport was limited. There was no “obesity epidemic” as food supply and travel was limited, meaning people ate less and did more physical exercise (walking).

Interestingly, during the years when rationing was enforced, the prevalence of obesity was negligible in the United Kingdom. And waste was minimised as both individuals and government agencies were busy finding new ways of reducing the waste of food resources to a minimum (sustainable consumption).

Is it conceivable that some form of food rationing and portion control may help address the dramatic rise in obesity and the sustainability of our foods supply? If we continue to over-consume foods in unsustainable ways for both our health and our planet, we may be left with no other choice.

Director's Law: New Zealand edition

Matt Nolan brings Director's Law to the Timaru Herald:
So with a recession, spiralling inner-city house prices and a rising cost of living, is the Kiwi middle-class also feeling the squeeze? You might think so, but some economists reckon the numbers tell us we've never had it so good.
"They don't know how lucky they are," declares analyst Matthew Nolan of Wellington's Infometrics.
Jean-Pierre Du Raad, chief executive of the New Zealand Institute of Economic Research, agrees. The middle-class squeeze is "a bit of an urban myth", he says.
Since 2001, our middle-class median income has risen by 21 per cent. Yes, the recession has hit, but it's arguable the middle class has suffered less than the poor and the rich. In part, that's because of Director's Law.
Named after the late American economist Aaron Director, it suggests the middle class will always have undue political influence because of its size and aggregate wealth.
"The middle class has political power, so the things they are concerned about are acted on," says Nolan.
"They are always trying to transfer things to themselves. They are not being selfish as individuals... we all want our lives to get better, it's just human nature."
So in New Zealand, that means political decisions that benefit the middle more than anyone else: The expansion of Working for Families tax breaks, the removal of means-tested superannuation, subsidised healthcare and interest-free student loans.
Du Raad says 40 per cent of the extra $1.5 billion invested into Working for Families went to middle-class families (a two-parent family with two children earning less than a combined $126,300 will receive Working for Families assistance) and says the 2010 tax switch, where GST rose and income tax went down, benefited the middle class by $10 to $25 a week.
Nolan also notes that a proportion of people around the 60th percentile (that's richer than 59 per cent of people, poorer than 39 per cent), who aren't paying net tax, they get more from the Government than they give - almost certainly due to Working for Families.
So where did the myth of the middle-class squeeze come from? Well, says Nolan, the middle class knows how to make a noise, everyone's feeling the recession, and many have paid attention to the noises coming from America.
He concludes:
"It seems strange," concludes Nolan, "to demand transfers [of wealth] to the middle-class at the same time we're demonising those unemployed during a recession and making it harder for them to get benefits."
I'm not sure there's been that much demonisation of the unemployed here; welfare reform has been more targeted at longer term beneficiaries with a goal of getting those on the domestic purposes benefit back into work. There may have been tightening up of regs around the unemployment benefit (Matt will know more about this than I do), but I've not seen much excoriating the currently unemployed.

Friday 14 December 2012

More fat taxes, and a minor correction

I chatted with Radio New Zealand about fat taxes on Wednesday. I talked about the problems of defining healthy and unhealthy foods, and the lobbying waste that can result around boundary cases if we go the route of taxing specific foods rather than content. And I noted that Denmark dropped its fat tax because of the administrative cost it placed on Danish firms, as well as the cross-border shopping it induced. So the summary here isn't quite accurate. I wouldn't have said that it was abandoned because of the difficulty of defining healthy and unhealthy foods; I gave that as a reason against implementing one here, but that wasn't quite what happened in Denmark.

For more on Denmark's abandoning of fat taxes, see:
The Times story notes that it's harder to introduce comprehensive taxes like Denmark's than to simply tax soda. It doesn't note that if you only tax soda, people flip to other sugary products. If you're going to do it at all, you probably have to do it comprehensively: excise on sugar or fat following a regime similar to that for alcohol in that it's levied on producers at the point of manufacture. 

A few minor problems that would need to be sorted out:
  • Small producers will have problems in paying the tax up front while waiting for payment of product. Not sure there's much that can be done about it other than giving a bit of time to make payment. I know that some of the smaller alcohol producers worry about this when looking at cash-flow.
  • Some food products are both input and output - you can either buy sugar or fats as a consumer product, or you can buy them as an input for making other stuff. If any sugar bought as an input turns 100% into something present in the consumer product, then this doesn't matter. You tax it at point of production and the effect flows through the system. But what of food production where the sugar or fat itself disappears but is a necessary intermediate good? If you fry with butter, only some of that butter makes it into the food (compared to, say, just eating a stick of butter). If you turn sugar into alcohol, the sugar's then gone. Any sugar or fat that cooks off or is turned into other things as part of the food production process means that you're going to have to have a tax rebate system for people using sugar or fat as an input.
    • You might think this is easily solved by taxing only those who sell directly for final use. But you still need a way of registering and tracking those who buy products for intermediate good use from the same outlets that sell to final consumers. And you'd still have the problem of assessing things properly for home-based production. If we tax based on the average amount consumed, people who eat sticks of butter are relatively under-taxed while those who use it for greasing cast-iron pans are over-taxed. The same problem holds for cooking with alcohol, and is recognized with tax-free salted cooking wines and sherries. Maybe it is a less important problem in cooking - I do not know enough about food chemistry to know. But I do know that some home brewers and distillers use sugar; maybe taxing them on sugar they don't eat is a second best workaround for there being no tax on small-scale home distillation. 
  • If you tax sucrose, people will switch to fructose and glucose. You've gotta tax all the sugars to avoid any inefficient switching, but if there's reason to expect that any of the sugars are less bad than the others, you could levy different taxes.
  • You'd need to set up a regime for assessing tax on imported food products, with the importer then being liable for any fat/sugar tax. So long as imported products have all the nutritional labelling that would allow accurate and timely excise assessment, great. Delays at the border kinda suck though, especially for fresh fruit that should be subject to any sugar tax. I suppose that we could deem different categories of fruit to contain some average sugar content and tax them appropriately. [I still don't get why folks who want fat and sugar taxes want to subsidise sugar-laden fruits. Fructose doesn't get any less fructosy for being embodied in a strawberry]. 
  • There are substitutes for fat that are worse than fat. I expect a reasonable amount of awfulness consequent to any large tax on butter, lard, or other common fats.
More fundamentally, I just do not believe that there is a plausible market failure based case for fat and sugar taxes. 

The best case you can make for it is the fiscal externality where people eat less healthy things and the cost is borne by the public health system, but I don't find it all that compelling an argument. Recall that we impose Pigovean taxes not because we want to punish bad people but rather to get rid of the deadweight cost of some underlying inefficiency. If fat and sugar consumption are not all that elastic, then the bulk of the effect of the public health system is pecuniary rather than technological. That is, if in a world where people paid 100% of their own health care costs, they wouldn't consume that much less sugar, then the public health system does not much screw up our choices over fat and sugar consumption. And the point of a Pigovean tax is to induce people to make the choice that they would have made in a full-cost world.

Still too opaque? Here's an analogy. Suppose that you (and a lot of people like you) love Marmite and Chex. You have to eat them together - whenever you buy Marmite, you have to eat it on a Chex biscuit. And you eat 3 of those cracker-Marmite combos per day, no matter what. Each of them costs $1, with half the cost being Marmite and half the cost being the Chex. But your demand curve is perfectly inelastic: if the cost were $10, you'd still be eating three per day. Now the government comes in and says that, from now on, Marmite is free. You go to the government dispensary every day and get three servings of Marmite to put on your Chex. Then somebody comes out and puts out a "Social Costs of Chex" study that counts as cost to the country everything that the government spends on Marmite because of people who mix Marmite and Chex. You can make a fairness argument for a Chex tax to compensate the government for its Marmite expenditures - in which case you wonder why they made it free in the first place. But you can't make an economic efficiency argument for it - it's just a transfer. And what about all the people who eat their Chex without Marmite and whose consumption of Chex may be more sensitive to price?

More realistically, there's a mix of technological and pecuniary effects. Because people aren't annually confronted with an insurance bill itemising their failures and the things they could do to lower their costs for the subsequent years, people very likely make some different choices around nutrition, exercise and risk than they otherwise would. But how much of the total cost of their health care would have obtained anyway, and how much is due to the distortion in behaviour caused by the existence of the public health system? Suppose that some of our Chex-eaters, above, shift to eating 4 Chex per day instead of 3 after the free-Marmite policy. That last Chex-and-Marmite bit of wonderfulness is inefficiently consumed and could be subject to Pigovean taxation, but everybody seems to think we need to be charging enough to cover all the free-government-Marmite costs of Chex eaters. 

Further, I've yet to see any full life-cycle costing on obesity. You can get big numbers if you add up the costs of obesity-related disorders, but what about savings to the pension system where the obese die early? And what about the costs that the obese would have imposed on the health system in old age were they instead thin people? I suspect that the sign of the effect is still negative, but I'm not massively confident about it. And I doubt that many of those proposing fat and sugar taxes care about the true direction of the sign on the pecuniary effect. I still worry that, someday, we'll figure out that it's the healthy people who live to 100 who wind up costing the government the most money. And then...

The other argument you can make for fat and sugar taxes is based around behavioural economics and internalities. The case there is that while some true version of ourselves would like to constrain our existing selves against eating tasty things that may have long run costs, that true version of ourselves is every day thwarted by the me-of-the-moment who insists on eating too much Marmite-and-Chex.* But that requires, pretty critically, that those individuals, if given the choice, would prefer to be bound against consuming the less healthy products. And even if we can show that for some individuals, that hardly gives us reason to impose population-wide measures that hit those who really prefer to be unbound - you would have to prove that the internality-based gains to those with self-control problems outweigh the losses in surplus imposed on the rest of us. And, you'd have to show that fat and soda taxes are the most efficient means to that end in a world that has Stickk.

Previously on-topic at Offsetting:

* I can't stop thinking about Marmite and Chex now. I hate you Kiwis for getting me hooked on the stuff just before the earthquake shut down the Marmite factory.  

Thursday 13 December 2012

Jim Henson meets Ayn Rand [Important update]

Jim Henson argued with Ayn Rand in an ARPANET discussion forum in 1976. Along with Yoko Ono. I had no clue that this existed. Massive thanks to Luis for the pointer.

*** Update, erratum, and apology. Twitter commenters said fake; I searched around. And I found this on the ARPANET Discussion Forum webpage. There is no link to this page within the main site, but it comes up on Google. Here it is:
The parties responsible for presenting the textual information on this website, and in other formats that appear as part of this project, disclose that their intention is to create the thoughts and emotions of the various characters presented through The Arpanet Dialogues in an effort to stimulate debate about the current state of world affairs from the perspective of hindsight.
I apologise for not having searched this out more thoroughly earlier.

Update 2: Here's a discussion of the project. Clever. But it would have been nice if they'd have linked to the disclaimer from the front page.
And here's io9 on it, via Russel Brown.

In hindsight, Ronald Reagan's voice sounded the most out of synch with the Reagan that plays in my head - a bit more cardboard than I'd expected. But the fake Rand sadly didn't seem that far out. For other fake Rands, do read Mozart Was A Red, by Murray Rothbard.

Original post follows below.
Artist Sidney Nolan, also in the discussion, asked Henson which was his favourite puppet.
Each character is special for me they represent different aspects of myself. Kermit the frog is perhaps closest to me. An altar ego of sorts.

What does that say about you.

Big laughs. He is exceptional.

I dont know. I don’t think too much about it.

My favourite is Big Bird. He is so tall and gentle.

To be honest I find it to be senseless entertainment. I prefer the celebration of men and what they can achieve.

Do you have children Ms Rand.

What do children have to do with what I prefer.
Ms. Ono you are too idealistic I think.

I agree.

I think Ms. Rand is even more idealistic at heart.

And sad.
And Ayn later misses the point:
I think Ms. Rand and my character Oscar the Grouch would have a lot to talk about actually. I am laughing out loud at this idea.

Why would I want to talk to him. What has he achieved or trying to achieve.

He has achieved what I think is the ultimate goal of your way of thinking.
Isolation. Contempt for others. A hard heart. Yet even he can muster a bit of empathy every now and then.
I am not isolated. I have no contempt for others. Millions of people read my books and find my thoughts inspirational. I hardly spend my time on the sidelines in a trash can grumping.

Not yet anyway.
Read through the whole transcript and tell me it wouldn't be hard to programme a bot whose output would be indistinguishable from Rand's for 80% of her contributions. I've a soft spot for Rand. And I disagree  with Henson about the "ultimate goal" of Rand's project. But Henson takes this one.

Other ARPANET Dialogues:
  • Marcel Broodthalers, Jane Fonda, Ronald Reagan, Edward Said, 1975. Lots of fun "What's this whole chat thing for" discussion at the start between Reagan, Said and Broodthalers. A sample:
    What are the implications [of online chats]. This will revolutionize they way people do business. Culture perhaps. Someone from Japan can have a conversation with someone from California. What about China.

    Wouldnt you rather pick up the phone and call.

    All this damned typing.
    Said has the best imagination and foresight about what ARPANET could lead to. The novelty of corresponding by instantaneous text with people you've never met before, whose voices you don't know and whose faces you can't place - it's commonplace for us, but not so much 40 years ago.

What if?

A couple of weeks ago, I gave a talk as part of the University's "What If" lecture series, asking "What if alcohol were not as socially costly as everyone says?" It's now up on the University's site and is embedded below.

There is one question at the end that I handled poorly. An attendee wondered whether the change in the reported binge drinking rates could be due to definitional changes. Because the numbers I was using were using the older and consistent standard, I said that wasn't it. But the reported increases were coming from some more recent reports. And I just don't know whether they were using a consistent standard for binge drinking.

Wednesday 12 December 2012

Obesity costs

Another day, another cost study. This time we're told that obesity costs New Zealand between $722,000,000 and $849,000,000.

Here's a thought experiment. Imagine that we wave a costless magic wand and every obese person suddenly has a BMI right in the middle of the healthy range. Would long term health costs increase or decrease? Well, we know that we'd save a bunch of current costs of treating diabetes. But everyone dies of something, eventually. And many of those somethings affect the Ministry of Health's budget. If the diseases from which the obese would otherwise die are less expensive than the diseases that do affect the obese, then obesity has net cost on the health system: the cost difference and time discounting. But we really should net out the costs that the obese would have imposed had they not imposed obesity-related costs.

Total health care costs were estimated at $623.9 million. The additional costs were costs of productivity losses associated with obesity: premature mortality and excess sick leave. Here's the two approaches they used.

The "Human Capital Approach" takes the present discounted value of all future earnings up to the age of retirement for those who died prematurely due to obesity. The "Frictional Cost Approach" takes three months' base salary assuming average salaries and workforce participation rates, then adding an additional training and recruitment cost of 97% of the FCA premature death cost. They added to both of these costs of short term absenteeism: the overweight and obese take an extra 0.4 days' sick leave on average in Australia; this was multiplied by obesity prevalence rates and average population daily wage rates. Depending on whether the FCA or HCA method were used, that gives us the additional $98-225 million.

But there are a few problems here too. Obesity is pretty concentrated in lower income strata. Some of this will be obesity issues resulting in lower salaries, but it seems awfully likely that the kinds of things that lead to obesity are also the kinds of things that lead to lower income. Using average wage rates and average workforce participation rates then is a pretty poor proxy for wage rates among those whose obesity issues were so severe that they died early as consequence. You could make a case for it where obesity caused the lower wages; when it's more a consequence of other factors that drive income, as well as having its own negative effect on income, not so much.

The study's authors note this:
With regards to the estimates of the lost productivity costs, it could be argued that obesity and overweight is more prevalent among low SES groups and therefore using an average wage to calculate the productivity cost estimates is not a true reflection of the costs. Our analysis was based on the availability of average wage and participation rates data in NZ.
But there's an awful lot of data out there that would let you scale wage rates among the obese. For example, the 2008/2009 NZ Adult Nutrition Survey. They sort people by NZ Deprivation Index 2006 quintiles, where 1 is least deprived and 5 is most deprived. 41% of Decile 5 females class as obese, with only 26.8% normal; 48.5% of Decile 1 females class as normal and 16.5% as obese. The male profile is flatter in income. Here's the table.

All you'd need to do is weight wages by relative quintile populations and quintile wage rates. You could at least get an average fractional multiplier to apply to the average age-wage-gender profile.

I wonder how many multiples of the total annual health care budget you'd get if you added up all the different "Costs to the health system" figures.

In related news, the Science Media Centre asked me for comment on a new metastudy on the effects of fat taxes. Here's what I provided; bits of this may be showing up in a few places.
"Taxes and subsidies to encourage healthy eating are notoriously difficult to administer in the real world. They're the kind of thing that sounds simple, but wind up being a bit of a compliance nightmare. Why subsidise fresh vegetables while ignoring frozen or canned vegetables, which are just as nutritious and favoured by poorer cohorts? Where then do we draw the line between a frozen unprocessed product and one that's too processed to count any longer? If minted peas count, where do we draw the line between a frozen vegetable and a processed food product? I'm reminded of a recent Australian case where a judge had to decide whether a mini-ciabatta counted as bread (GST-exempt) or as a cracker (subject to GST). The food importer flew in a bread expert from Italy as a witness in the case. These kinds of systems lead companies to find strong tax advantage in having their products being declared compliant. The accountants, lawyers and bread-deciders can do well out of it, but that's not necessarily to the national advantage. Denmark recently abandoned its one-year-old fat tax because of the administrative burden it placed on Danish firms."
"The paper finds a ten percent increase in the price of soft drinks via a soda tax would reduce soda consumption by 9.3 percent but would only reduce overall energy consumption by 0.2%. People who want to consume sweet things shift away from taxed sweet things to less-taxed sweet things."
"The paper focuses on the effects of tax and subsidies intended to affect consumer behaviour. Another way of tackling the problem is to look at how consumer behaviour changes with other changes in the relative prices of healthy and less healthy foods. Jonah Gelbach, Jon Klick and Tom Stratmann used American data from 1982 to 1996 to see whether changes in the relative prices of healthy and unhealthy foods over time across U.S. regions affected obesity rates. Because overall food prices vary by a lot more than any real world fat tax, their study gives us a way of examining what can happen with very large price increases. They found that the relative price of healthy food really does little to determine overall obesity rates. While we should not expect large health benefits from fat or sugar taxes, the administrative costs are real and substantial."
See also this Mercatus primer.

Saturday 8 December 2012

In Praise of Iconoclasm

The BBC, the Catholic Church, the Boy Scouts of America, the Penn State Football Club. Heck maybe Sesame Street.

Pedophiles like institutions that are too-sacred-to-critique.* Whenever we set up institutions for veneration such that the optimal within-institution response is to cover up rather than to punish in response to individual failings, we're going to have problems. Sesame Street has been great on this front; the others, really not so much.

And so iconoclasts do us a service in making sure that nothing is sacred.

Today's edition: the British Royals. I'm a fan of the Queen. But I was still pretty disappointed to see half of Twitter piling onto the couple of radio hosts whose prank call to Kate Middleton's hospital led to the suicide of the switchboard operator who connected the call. Surely there have been hundreds of thousands of prank calls in the last few decades. There's one radio station in every major city that does this kind of thing at least weekly; start adding it up. How many prank calls did the Jerky Boys run? The accident rate seems awfully low, all things considered. If you're going to pile onto these particular radio hosts, what about all of the other ones who took risks no smaller than these guys did and whose calls led only to a bit of fun?

One response in particular disappointed me though - that this prank call was different because it involved the Royal family. I'm not embedding because of coarse language. But no institution is too sacred to prank. Radio hosts prank calling venerable institutions helps to keep those institutions from being too sacred for other forms of critique. Lew, on Twitter, replied with some topics he thought too shocking and offensive for comedy; Gilbert Gottfried's performance at the Friar's Club Roast for Hugh Hefner post 9/11 is the appropriate reply.

And for the Twitteratti baying for blood - what will you do if one of the family of one of the radio hosts commits suicide over your bullying? And when the rest of Twitter decides just which tweet was most to blame and piles onto that Twit, prompting another suicide, and another round of blame, rinse and repeat. I know it's all fun to feel morally righteous by demanding punishment, but who among us has never laughed at at least one prank call on the radio at some point in our lives? You know it's listener demand that drives what's played on the radio, right? 

* If you don't believe me on the quasi-sacred status of Penn State, you've not been to Pennsylvania.

Sovereign Debt

John Cochrane's 2012 Condliffe Memorial Lecture at Canterbury.

"Sovereign Debt -" the 2012 John Condliffe Lecture from John Fountain on Vimeo.

I wasn't able to attend as I was home sick most of this week. So I'm grateful that John Fountain put this together. John Cochrane has been an excellent visitor at the Department; his seminar on Friday was superb. I knew a lot about finance that just wasn't so, or was so 15 years ago and ain't any longer. I thank John for fixing that.

Friday 7 December 2012

Not an equilibrium

So taxi cab tips are up consequent to a new credit card swipe system that encourages large tips. Cheap Talk and Marginal Revolution have both noticed.

Here's Alex Tabarrok:
Joshua Gross estimates, that this simple nudge has increased the income of taxi drivers by $144 milion per year. Had the drivers demanded this increase via an increase in rates it probably never would have happened.
But does this make the drivers better off? Not unless they own the taxi medallion!

Joshua notes that the new charging system started in 2007.

Recall that New York City taxicabs are heavily regulated: the right to run a cab has to be purchased. The medallion giving you the right to run a cab is expensive. The 2004 annual report of the Taxicab and Limousine Commission gives the price history from 1947 to 2004.
They stopped publishing that graph in subsequent years' annual reports, but they do report average sale prices:
  • 2005: $350,000 individual, $391,000 corporate
  • 2006: $411,000 individual, $525,000 corporate
  • 2007: $420,964 individual, $573,489 corporate
  • 2008: $550,000 individual, $747,000 corporate
  • 2009: $584,000 individual, $775,000 corporate
  • 2010: $624,000 individual, $850,000 corporate
  • 2011: $699,000 individual, $1,000,000 corporate
  • 2012: Average annual prices are not yet available. 
Every year when I teach my public choice class, I look up the taxi medallion price when I lecture on transitional gains traps. And I've been a bit puzzled about why the prices seemed to skyrocket during the 2008 recession and onwards; the top line of the graph above, $350,000, seems pretty low compared to where things are now.

I added red bars at the bottom of the chart above for NBER recessions, although the really poor resolution on the original PDF makes identifying years a bit tough. Note also that the first few years aren't to the same scale as the rest: 1947, 1950, 1952, 1959, 1960, 1962, 1963, then annual ticks thereafter. You can really see the dip from the 1991 and 2001 recessions, though the latter recession's dip started prior to the recession. But the 2007-2009 downturn was surely larger than the prior recessions, and was accompanied by a strong increase in medallion sale prices. This puzzled me until now. The present value of the potential rents increased with the new fare system, so medallion prices went up.

This surely then was accompanied by an erosion in non-tip payments to drivers since the market for driving cabs is competitive, even if the right to run a cab isn't. This is my prediction; I haven't been to New York in a while. Maybe somebody who knows can tell me whether I'm on the right track. 

Consumer and voter identity

Bill at Groping Towards Bethlehem talks about identity as a form of commitment. The person who thinks it unethical to eat meat might waver in any particular instance because no particular meal would ever be the one that resulted in an animal having been killed; being vegetarian brings commitment. He's here treading some of the ground previously covered by Cass Sunstein in Solidarity in Consumption.

I note some of these issues in my Public Choice classes when we cover expressive voting. When we're making decisions as shoppers, our consumption decisions are often bundled with all kinds of expressive considerations and identity issues. But there's no reason to expect these to be at all suboptimal in any overall sense. We weigh up the expressive benefits from certain consumption choices and weigh them against the opportunity costs - the extra amount of real resources we have to forego in making that choice. We can have problems, surely, where because we've bundled some aspects of consumption into our identities we might take too long to switch from a suboptimal path after a relative price change, but because we're individually bearing those costs, the losses can't be spectacularly large. Otherwise we'd switch.

When we flip over to the political realm, identity and expressiveness choices are individually costless. Now that isn't always true - some folks get so wrapped up in it that it surely imposes real costs on themselves and others. But on the whole, you don't really need to weigh up the real external costs imposed by your expressive and identity choices in policy. If it makes you happy to believe that you're a good person who's affiliated with good people and voting for the kinds of things that good people vote for, then it really doesn't matter much if those policies actually do harm in the real world. There's no feedback loop from individual choice to individual consequence at the ballot box. And so we get the political world we live in.

I say politics is the mindkiller. Andrew Coyne puts it a bit more bluntly:
Enjoy your identity and affiliations when shopping. But, if you can (and only metaphorically), grab an icepick, jam it up into the part of your brain that connects identity and affiliation to politics, and stir it around a bit.

Wednesday 5 December 2012

Externalising the Internality

In my standard classroom account, a smelly person on the bus next to you isn't imposing an externality, or at least not one that can be relevant for policy. You're both in a contract with the bus company through purchase of the ticket. If the bus company reckoned it would earn more money by restricting bus access to those suitably groomed, they could do so. That they don't means that the losses from doing so exceed the gains - the costs in hassles for the bus drivers and increased time at the stop exceed the costs of lost custom among those who don't like that particular negative lottery ticket. The bus company has an encompassing interest in getting that decision right; they're residual claimant on the surplus.*

But that account is wrong when the bus company can be sued for discrimination. The law can externalise internalities by mucking about with exclusion rights.

L.A. Weekly tells the story of a homeless man who sued MTA for violating his civil rights; they wouldn't let him on the bus because of his appearance. And, from the context of the rest of the story, likely because of his odour. MTA settled for $200,000 in January 2011. In a Coasean world, the bus company could just start paying him not to take the bus. But free entry into the "being unpleasant and not taking the bus" industry would probably make that rather cost-prohibitive.

The rest of the story is well worth reading. Nowell, the man excluded from the bus, used a good chunk of his settlement to take a one-year lease in an apartment building. But because his neighbours were pretty insistent that he take a bath, he consequently refused to take one. So after several months of legal fights, he was evicted. Nobody comes out of the story smelling minty fresh.  The story concludes:
"When I moved in, they made such a huge issue right from the start," he [Nowell] says.
If he cleaned up, they would think he did it because of them.
"It might be a childish way to react, but it also has to do with self-respect. Call it pride, or whatever you want. If they'd just left me alone, let me catch my breath. By them making an issue out of it, none of it happened. Everything went wrong."
Nowell admits there are patterns he's become locked into. "Enough people tell you you're a certain way, a bum, you think, 'I must be that.'  When you're at the bottom of the barrel, everyone feels like they have the right to tell you what to do, where to do it and when. It becomes a reflex action to dig your feet in and say no," he says. 
SB Properties kept his six months' prepaid rent plus double deposit. Now it is going after him for attorney's fees. Nowell estimates he paid his attorney $30,000. He isn't sure. He hasn't been counting the money too closely, except to note that he has less than a quarter of the original settlement left. He is spending much of the rest to appeal the jury verdict.
"Why did they allow me to sign the lease and immediately turn around and spend the next eight months trying to remove me?" he asks, unable to move on.
By the time SB got him out, it was August. The irony — and in this case there are many — is that his lease had only four months left.
Asked if he believes Nowell would have cleaned up on his own, had he just been left alone, SB Properties general manager Yaniv Abiner pauses for a long time, then finally says, "What do you think?"
Nowell, meanwhile, is on the hunt for a new place to live, noting wryly, "A roommate situation isn't going to work for me."
Yesterday, he explains over the phone, he went to see a unit in a downtown artists loft building, hoping that artists would be more understanding. The woman who owned it was waiting out front. She said no the minute she laid eyes on him, adding that he ought to try a halfway house for people on welfare. "I'm not the stereotype you think I am," he admonished her.
He did not wear the new pants. "I'm looking at them right now, in fact," he says.
It has been some time since he last took a bath.
Fixing homelessness seems a bit harder than giving somebody enough money for rent.

* Similarly, Christchurch's Red Bus must reckon that the costs of letting professionals onto the bus with a takeaway cup of coffee exceed the cost of lost custom among my cohort.