Tuesday, 22 August 2017

Quality matters: alcohol edition

I've noted John Gibson's work showing that standard demand estimation techniques overestimate the price elasticity of demand for sugary drinks, and consequently overestimate the effects of soda taxes.

Gibson shows that, because most empirical work uses household expenditure on the product category divided by some measure of average price, that work bunches together consumer shifts along both quality and quantity dimensions. If people mostly respond to price hikes by shifting to cheaper brands or cheaper packaging (big bottles versus cans, for example), then the demand estimates will mistake quality shifts for quantity shifts. Gibson uses Vietnamese data where there is both household expenditure data, and actual consumption data, to show the extent of the bias.

Turns out that the effect is pretty pervasive. John presented on some of this at the NZAE meetings; the paper with Bonggeun Kim is now up at RePEc.* They show that the Cox and Wohlgenant method, fairly commonly used, overstates price elasticities by a factor of three. Here's their abstract:
Consumers respond to price rises by reducing quantity consumed, but also by cutting quality. Most demand studies in agricultural economics fail to estimate quality responses to price. Instead, following Cox and Wohlgenant (1986), quality choice is dealt with by adjusting unit values rather than by treating quality as a valid consumer response to model. Studying a two-choice problem in this manner cannot identify either the price elasticity of quantity or the price elasticity of quality, and instead will yield some unidentified hybrid of the quality and quantity responses. We review 150 papers that cite Cox and Wohlgenant (1986) to see how widespread is the neglect of quality responses to price in the literature. Almost 90 percent of studies wrongly mix quality responses to price in with their reported quantity demand elasticities, thus, overstating by how much price rises can be expected to moderate the quantity consumed. Our empirical test, for 32 food and drink groups in Vietnam, shows that the Cox and Wohlgenant method exaggerates quantity responses to price by a factor of three, on average, and hardly differs from what naïve approaches with unit values show. These results cast doubt on three decades of reported price elasticities of quantity demand estimated from household survey data.
They have elasticity estimates on demand for beer. They show that, using the unrestricted method that allows for quality and quantity choices, the price elasticity of quantity demand for beer is close to zero and statistically insignificant, but the price elasticity of quality demand for beer is -0.96 and highly significant.

In other words, basically all of the consumer demand response to changes in beer prices in Vietnam is shifts along a quality axis rather than changing the quantity consumed. That suggests that hiking alcohol excise may do rather less to reduce consumption than you might expect, except among those who are already at the lowest per-unit prices. This cuts in a couple directions. Moderate drinkers show up as more price elastic than heavy drinkers in empirical work: heavy drinkers show up as about 60% as price responsive, going from memory in Wagenaar's survey.

This could be because of measurement error. If more of the heaviest drinkers are also on the lowest price point, then there's less confounding with the quality dimension because they're already at the corner. Moderate drinkers could then appear more responsive because they're cutting back on quality rather than quantity, but consumption drops among moderate drinkers would be less than the demand elasticity estimates suggest. That could mean that the health costs to moderate drinkers of alcohol excise increases are not as large as we might have feared (if moderate drinkers shift to being occasional drinkers, they lose the benefits of being at the bottom of the J-curve), because fewer might be actually shifting. But they would still be losing out on substantial consumer surplus by having to downshift on quality.

This all suggests using consumption survey data rather than price elasticity data for figuring this stuff out - something more feasible in alcohol work because plenty of health surveys will ask people how many drinks they have per week. I'll just have to remember to make sure to look at studies using reported real consumption rather than guessing at it from demand elasticities. Participation elasticities should be fine; consumption elasticities ... be careful where they came from.

I'll copy below extensively from their conclusion:
Consequently, what many studies report as a price elasticity of quantity demand is some unidentified hybrid of the price elasticity of quality and the price elasticity of quantity. About 90% of studies in our review mix quality responses to price in with quantity demand elasticities. This overstates the rate that quantity demand falls as prices rise, and overstates the likely efficacy of fiscal-food policies that tax and subsidize certain foods so as to induce a switch towards healthier diets. Our empirical example from Vietnam shows that standard approaches used with household survey data overstate the magnitude of quantity demand elasticities by a factor of three, on average. This gross exaggeration is irrespective of whether budget share equations use prices or unit values. A similar degree of overstatement by the standard methods is found in the few existing studies that also use the unrestricted method, where households can freely adjust quality in response to price changes (McKelvey 2011, Gibson and Kim 2016 and Andalón and Gibson 2017).

Notably, there are no studies in agricultural economics that use the unrestricted method, and few even cite the intellectual origins, in Deaton (1990). Instead, Cox and Wohlgenant (1986) is cited by agricultural economists to justify how household survey data are used to get elasticities. Our results show that this method is flawed, in the sense that it grossly overstates the response of quantity to price. Indeed, Cox and Wohlgenant elasticities hardly differ from those of the standard unit value method, where budget shares are directly regressed on unit values without any prior regression to get ‘quality-adjusted prices’. The flaws in the Cox and Wohlgenant method are not just an empirical matter – which would leave open the possibility that it might work somewhere else – they are inherent in the way that quality responses to price are treated. Rather than model a two-choice problem with an equation for quantity (or budget share) and one for quality, a dubious identifying assumption that quality is chosen first is made, and it is further assumed that quality effects can be purged by regressing unit values on household attributes. This method also ignores measurement error in unit values and ignores the community-wide response of quality to price.

Relying on Cox and Wohlgenant (1986) also contributes to the ongoing misuse of unit values as a proxy for price. Unit values should always be expected to be a bad price proxy, due to the Alchian-Allen effect; the relative price of quality will vary over time and space due to storage and shipping costs (Gibson and Kim 2015). With relative prices varying, the composition of demand within a survey group will not be constant. Thus, unit values will not refer to the same quality mix over time and space and therefore cannot consistently indicate the group price level. However, if one has local price data, then, conditional on prices, the unit value can be informative about consumer quality choices. Yet the demand put on statistical agencies to provide local price data is diminished by so many studies opting to use unit values to measure price, and some responsibility for this again falls on Cox and Wohlgenant (1986). Looking backwards, 30 years of price elasticities estimated from household survey data are likely to be wrong because they have mixed together quality and quantity responses to price. Going forward, only once databases have both market prices and unit values are we likely to correctly estimate how price changes lead to demand responses on both the quantity and quality margins.
It's a pretty broad critique.

* Note that the pdf download link from RePEc wasn't working for me at time of writing; John kindly emailed me the paper. If you have download problems as well, note in comments and I'll pass it along.

Monday, 21 August 2017

The Outside of the Asylum

The Spinoff's syndication of The Outside of the Asylum started on Saturday, with Joe Bennett's foreword, and the introduction.

A snippet:
On arriving in Christchurch for my job interview with the Economics Department at the University of Canterbury, Associate Professor Jeremy Clark took me for a drive around Port Hills. Driving on roads that would have sent council lawyers in America into apoplexies over the lack of guardrails (and over the sheep occupying the roads), I started to have a feeling that I had stumbled on something substantial.

But I knew it for sure when Jeremy took me to Cave Stream.

In the middle of Arthur’s Pass, a river had carved an underground channel through the limestone. At the head of the trail by the Department of Conservation’s parking lot was a sign.

The sign had instructions that were the opposite of the ones on John Watson’s packet of toothpicks. The instructions were a sign of a sane civilisation, a society I yearned to join.

The sign read, essentially, as follows. I wish I had taken a picture of the sign; this is just my paraphrase.
“Welcome to Cave Stream. The cave is dark and cold. We do not provide any lights. The ladder at the end is very slippery. If you enter the cave in winter without proper clothing, you may die of hypothermia. Have fun.”
We had fun.

Confronted with the reality of the world, Douglas Adams’ John Watson did the only sensible thing. He changed his name to Wonko the Sane, built a wall around his beachfront property, decorated the outside of the wall, and put a sign welcoming visitors to his Outside of the Asylum.

Adams’s book was published only in 1984, so for Wonko the Sane escape to New Zealand was not an option. New Zealand was only just coming out of the Asylum. It would soon show its brilliance to the world, but it was still too late to be able to help poor Wonko.

I was far luckier. The University of Canterbury offered me the lectureship, and I moved to New Zealand. The sign at Customs when I arrived might have said, “Welcome to New Zealand.” What it really meant was, “Welcome to the Outside of the Asylum.”

This isn’t an essay on the madness of Canada. Or, not just on the madness of Canada, or America, or even the rest of the world.

It is an essay about the sanity of New Zealand – and the importance of keeping it that way.

A pessimist might say New Zealand is only going mad far less quickly than the rest of the world. But it is still just about the only sane place left.

We don’t know how lucky we are in this country.
Wednesday's instalment will cover the beauty of New Zealand's tax system and GST, and necessary warnings about places that have been daft enough to try doing this kind of thing:
Stay tuned.

Friday, 18 August 2017

More evidence on the J-curve

Another study out on the alcohol-health J-curve. This one uses 13 linked waves of the US National Health Interview Survey series, 1997 to 2009, to look at all-cause mortality, cancer, and cardiovascular disease (CVD) and drinking.*

Lifetime abstainers are taken as baseline, so there is no sick-quitter confound. There could be confounding if those with poor health never begin drinking, but the authors run a sensitivity test excluding those with poor medical histories.

Here's the main table. Model 2 has all the covariates; Model 1 just has demographic covariates.


What do we see here?

Former drinkers have worse characteristics than abstainers - so there's something to the sick-quitter hypothesis. But we already knew that. DiCastelnuovo & Donati showed that the J-curve isn't as deep if you exclude former drinkers.

Light (less than 3 drinks per week) and moderate (3-14 drinks per week for men, 3-7 for women) drinkers, in this study, see a reduction in all-source mortality - their relative risk is just under 0.8 where a lifetime abstainer is 1.0. All-source mortality is the only one we should really care about unless you have particular family histories that you want to factor in. But it is interesting to note that they only find increased cancer risk for heavy drinking - cancer is the one that's had most recent coverage. And note too that they find a stronger J-curve for women than for men - again, the opposite of what you might have concluded from all of the shouting about breast cancer risk.

And here's the more granular J-curve. Again, just what we'd expect.



The Herald covered the study, but neither linked to the study nor contrasted it with prior Herald stories about how a drink will make you get cancer and die.

Time covered it as well (linking to the study), and wrote:
In an accompanying editorial, researchers from the Mediterranean Neurological Institute in Italy wrote that the new findings “supported the conclusion that the J-shaped relationship between alcohol consumption and mortality risk cannot be dismissed, and should guide the formulation of public policies.”

The editorial also addresses the fact that women are sometimes advised to limit alcohol to very low levels because it’s been linked to increased breast cancer risk. While younger adults may not see substantial health benefits from moderate drinking, the editorial argues, “for most older persons, the overall benefit of light drinking, especially the reduced [cardiovascular disease] risk, clearly outweigh possible cancer risk.”
Nigel Latta was giving me heck the other day for defending the J-curve against his preferred anti-alcohol advocate, Jennie Connor. He wondered why the cancer risk isn't listed on the bottle. I'd be pretty happy for it to be - if it followed what the quote above. "For most older persons, the overall benefit of light drinking, especially the reduced cardiovascular disease risk, clearly outweigh possible cancer risk." Like he said, let's see them put that on the bottle. I suspect it would be illegal for them to do so as it's a health claim, but it's nice to think about.


* Note that the National Health Interview Survey is open data. They de-identified it, and anybody in the world can download it just by clicking the link. It is here. You cannot do that for basically any New Zealand health data. The Otago longitudinal survey is closely held by the Otago people. The Ministry of Health's Health Survey has some cross-tabs up, but you can't download the underlying data series. There are Confidentialised Unit Record Files available for the NZ Health Survey, but you have to go through a cumbersome application process to get access - and it would be near impossible for someone not based in New Zealand to get it without having a NZ-based coauthor. I love how American practice is just to de-identify things and put 'em up. I hate how New Zealand's default is "Well, maybe somebody might be able to re-identify, so we won't release anything."

Thursday, 17 August 2017

The Outside of the Asylum

For rather a while, I've argued that New Zealand is Douglas Adams's Outside of the Asylum.

In the Hitchhiker's Guide to the Galaxy, John Watson read the instructions on a packet of toothpicks, decided the world had gone mad, built a wall around his beachfront property, decorated the outside of the wall for the inmates of the asylum, changed his name to Wonko the Sane, and declared his home to be the Outside of the Asylum.

I feel like I'm walking through the door to Watson's property whenever I clear customs to come home to New Zealand. In a world going increasingly mad, New Zealand is, at worst, growing mad more slowly.

I've put together an essay drawing together some of these themes. We'll be releasing it as a fun report for the Initiative at the end of the month. But we're doing things a bit differently with this one. The good people at The Spinoff will be serialising it in five installments - one for each of the books in the inaccurately named Hitchhiker's trilogy.

And, for your listening enjoyment, you'll also be able to catch an audio version of it on Soundcloud, narrated by yours truly.

Watch for the report's first installment at The Spinoff on Saturday. The full report will be released at the end of the serialisation.

I've also set up a separate Twitter feed for this kind of thing.

I rather like the header image I threw together for the Twitter feed.


Apologies for light posting of late. I have a long queue of many things I've wanted to blog about, but a few reports have stood in the way. 

Wednesday, 16 August 2017

Trailblazing to the Outside of the Asylum

Last year's documentary on New Zealand, hosted by Johan Norberg, is now available online. It's a great story, featuring the likes of Roger Beattie. We don't know how lucky we are in New Zealand.



Here's Dan Mitchell on New Zealand, and the documentary.

Full disclosure: the Initiative helped out a bit in putting the documentary makers in touch with some of their interviewees and providing a bit of background detail. I show up briefly towards the end.

As America gets ever-crazier, remember to check back on that list I told you to make back in 2013.
A couple of months ago, when Alex Tabarrok complained of his son's school being turned into a police camp, I noted some of the differences between American schools and the ones here, concluding:
You can choose to live like this too. Sure, New Zealand is getting worse, and it's definitely worse than some parts of the US if marijuana freedom is an important part of your bundle of liberties. But NZ is starting from a much better spot than the US, and it seems to be getting worse slowerthan other places.

Things aren't bad enough to leave yet? Fine. Freedom's a value, but so too are other things like distance from family and wealth differentials and access to Ethiopean restaurants. But write down today some bright-line rules that you think should trigger your future exit; it's easy to acclimatize to gradual changes for the worse.
If you really want to live free, write down your list of things that would actually be sufficient to trigger your emigration, then think about the places you might go that offer the best deal on the bundle of freedoms that matters most to you.

If you're instead happy getting consumption benefits from ranting about the deterioration of freedom in America, or from imagining that you'll be able to change things there, carry on.
Have any of the "Yeah, I'd emigrate if any of these bad things happened" things on your list happened yet?

Friday, 4 August 2017

There are no answers only tradeoffs

Fundamentally all welfare systems have to answer one basic question: is it better to target a lot of funding to those in most need, or to provide universal benefits at a far lower level of support?

Both options suck, they just suck differently.

Targeting systems are intrusive. They invade privacy. They create distortions in people's choices. But it is the only way of making sure that those in the most need have access to the most resources. If you want to make sure that kids with a single destitute parent receive a lot of support, you have to make sure that the parent is destitute. If there are other sources of financial support for that kid, and you want the next dollar of government money to go to the kid in the worst circumstances, then you need to know whether about it. Otherwise that next dollar goes to the wrong kid.

The system has perverse outcomes. It breaks families apart by financially penalising parents for living together. It encourages lying to the extent that lying is a successful strategy and isn't caught and punished. Where lying is a successful strategy and isn't punished, the targeting system morphs into the universal system, except with everybody lying about their circumstances and substantial financial penalties for truth-telling.

The universal system sucks too. It is impossible to provide every family with the support the government would like to provide to the worst off family: if it gave that much to everybody, the budget would blow out. Here's a quick ball-parking for you. The government takes in about $80 billion a year in revenue. There are about 4.7 million people in New Zealand. Suppose you decided to put every person in NZ on the equivalent of NZ Super, with no monitoring of living arrangements, so $900 per fortnight or $780 per fortnight net of tax for those with no other income. That's $95 billion. The net costs would be less than that because people on higher income would face a higher tax rate on that payment, but come on. There will also be plenty of people with complex needs receiving benefits in excess of NZ Super who would be hurt even by this arrangement.

It is strictly impossible to make a universal payment that is generous enough to help those in the worst circumstances without bankrupting the country. And the second you start layering a targeted welfare scheme on top of a universal scheme, you bring back all of the incentives to lie. Maybe the incentives aren't quite as strong, but they're still there, and there'll still be special pleading for those caught lying that is every bit as compelling as that which we currently hear.

So, which system sucks least? They're both awful. The current system ties a lot of cost around the receipt of benefit, and especially around receipt of more generous levels of benefit. All the monitoring I talked about. And high effective marginal tax rates because of earnings clawbacks. But it is able to deliver focused and targeted assistance to those in most need.

Shifting to a more universal scheme means everybody faces higher effective marginal tax rates, and only partially mitigates the incentives to lie about your circumstances - unless you go to a fully universal system and bankrupt the place (or have the universal payment at a very low level and get turfed from office on the first John Campbell special on kids in households with complex needs seeing a massive cut in benefits).

I prefer the current system, combined with the emphasis under the investment approach in trying to find ways of getting people out of dire circumstances. And that requires actual policing and punishment of those who lie about their circumstances to draw money intended for kids in greater need.

Those defending lying for higher benefits should work out the fiscal implications of moving to the system they implicitly prefer. You can agree with every critique of the current system's perverse incentives and unintended consequences - I do! But you've gotta think through the alternatives, because they just suck differently - and arguably suck more.

Friday, 28 July 2017

Overseas Companies

A little known feature of New Zealand's overseas investment regime: New Zealand companies are covered by it if enough of their shares are bought by foreigners.

Here's Calida Smylie at the National Business Review:
Several major listed companies are counted as overseas persons, even though they have no single dominant overseas owner, including Fletcher Building and Air New Zealand.

Agri-business operations are particularly affected by the OIO’s restrictions on land use by foreign people or companies, because once they reach the 25% threshold they must apply to the OIO when renewing or taking on any new leases or buying land.
Other countries chase foreign investment; New Zealand is so enthusiastic about driving it away that it even counts New Zealand companies that wind up with a broad-enough set of owners. I wonder whether this discourages companies from listing publicly.

Wednesday, 26 July 2017

Don't be a player hater

A column from me in the Local Government Business Forum's newsletter:

Rapper Ice-T isn’t a conventional source of policy advice. But he was right about one big thing: don’t hate the player, hate the game.

Local government too often makes it hard for business to get things done. And as far as much of central government is concerned, local government can barely be trusted to get the mayor’s shoes tied, never mind run anything else.

Relations between central and local government have been strained for a while. Local government often makes decisions that are hardly in the national interest. Auckland’s housing crisis stems from decades of planning and consenting decisions made by local councils that stymied growth. The consequences matter for the whole country, from macroeconomic monetary policy to dismal productivity statistics.

And, from central government’s perspective, local government too often comes cap-in-hand for funding that should be covered by rates.

But look to the incentives facing local councils: the game.

Don’t hate da playa

A council that facilitates growth, runs superb consenting processes, and lays out infrastructure for new development may see little reward for its efforts. Rates from new ratepayers will largely be eaten up by the costs of new infrastructure. And the council budget process makes the remaining contributions of those new ratepayers a bit harder to see: councils decide what to spend, then divvy it up across their ratings base.

Outcomes are then not particularly surprising. If councils bear most of the costs of growth, and central government sees most of the revenue boost when councils facilitate growth, the game will automatically lead to conflict.

But it gets worse. Central government mandates often require local councils to bear costs, without an accompanying revenue stream. This blurs lines of accountability for councils: poorly performing councils can blame central government for its cost impositions – and be at least partially right. And strong performers can be punished when voters see rates increases for which their council really is not to blame. 

You can find the whole thing here (pdf). Note that it was written about a month ago, so doesn't capture the effects of this weekend's announced infrastructure funding changes. I covered similar housing themes on Nights last night with Bryan Crump.

Thursday, 20 July 2017

Get on with it: housing edition

Superu says that land use restrictions contribute to 56% of the cost of a house in Auckland.

They don't provide their background workings, so I can't verify the numbers. But if they're close to right, this is a pretty strong indictment of the last decade of government. National has had almost a decade to fix this mess. Sure, they'll blame their coalition partners for not letting them change the RMA, but they had chances to do it before National lost Northland.

And there are plenty of non-RMA things they could have done too. Councils use the flexibility within the RMA to set restrictive district plans because it's generally in their financial interest to do so. Central government could change that without touching the RMA. Councils hitting their debt limits can't finance the infrastructure needed for long-term growth, even if that infrastructure easily passes normal cost-benefit assessment.

Things this government has failed to do to encourage housing affordability, and it has been almost a decade now:

  • RMA reform;
  • Enabling municipal utility districts to impose special levies in new developments to finance infrastructure: it's how tons of new development in Texas gets financed, and how they maintain housing affordability. You can do it through that kind of MUD structure; you can do it with other structures that finance infrastructure through targeted levies that are kept separate from Council's balance sheets;
  • Punting the GST from new construction back to Councils to help them defray infrastructure costs;
  • Abolish rural-urban boundaries;
  • Tie Council ability to set restrictive urban plans to existing measures of housing affordability. Stuff like "You can set whatever district plans you like, but if the median house price is more than five times the median household income, we will automatically ratchet up the allowed density across the whole city, abolish heritage preservation districts that mostly work as ways for old rich people to keep away the kinds of people they don't like, and abolish urban growth boundaries. Have fun."
Lots of stuff government could have done, and should have done earlier. Lots of stuff government still can do. Get on with it already. 

Wednesday, 19 July 2017

A young adult UBI?

Gareth Morgan's party proposes $3.4b to go to everyone aged 18-23 as $10k after tax transfer – a limited UBI.

I had a short chat with The Project about it yesterday; the logistics didn't work out for a longer chat as I was out to Christchurch to help launch an excellent new book on smart water markets - more on that another time. I'd put together a few notes in case I was to have had a longer chat; I'll share those here.

The bulk of Morgan's proposal would be funded by cancelling National's tax package, with minor bits coming from forecast future surpluses ($400m), canning student allowances and student loan living costs for folks in that age cohort (maybe $267m they think), and job-seeker support for those in that age cohort.

I don't know how this interacts with WFF and consequent fiscal effect. Some of the benefit could be clawed back - with potentially lower fiscal cost.

The bulk of the cost comes from cancelling National’s tax package. That package pushed out the income tax thresholds for the two lower tax boundaries. So providing funds to those 18-23 is at the expense of reduced taxes for every other cohort.

National’s tax package bumped up the accommodation benefit for students and hiked the accommodation supplement. In current rental markets, that programme would mostly subsidise landlords rather than help tenants; just giving that money as cash transfer to 18-23 year olds may not be all that bad.

More generally, there are two basic ways of trying to provide income support. Targeted programmes, like those that the government currently runs, and like those it will be further developing as part of the investment approach, seek to direct funds to particular sorts of need. They get messy and complicated very quickly as necessary part of targeting, and the rules can often feel perverse. If you want to make sure that kids in households with the least support get the most help, you need checks around what kinds of support are available in the household – and that’s where all of the monitoring stuff around live-in partners and the like comes in.

These programmes are able to deliver targeted benefits at tolerable cost, focused most closely on areas of greatest identified need. And the Investment Approach will ramp all of that up to direct funds to programmes that do the most good in improving lives, as measured by reduced reliance on benefits. Note that the object there isn’t the reduced reliance on benefits but that it’s a signal of other things having gone wrong.

A UBI is at the opposite end of the scale. It provides blanket payments to everybody regardless of need. The UBI forgoes targeting in favour of simplicity, but at the expense of high cost. So while a UBI would reduce the high EMTRs facing a lot of people on multiple benefits who are working 20-30 hours per week, where combined clawback rates can mean that workers only keep 10 cents or less from each dollar earned (in some cases), it is at the expense of higher EMTRs for all other earners. And then the net effect depends on whether you do more good by reducing large perverse incentives for a small group of people, or by avoiding (relatively) smaller perverse incentives for a much larger group of people.

TOP is right to point to the unfairness of some of the support provided to students that is not provided to others starting out in the workforce. They propose taking away some of the extra support provided to tertiary students (though fall short of re-introducing interest on student loans, which they should have), but apply the savings to a blanket payment to everyone aged 18-23 regardless of need.

And where they've maintained benefit payments above $10k for those currently in receipt of benefit packages over $10k, they've also maintained some of the costly hoop-jumping (and high EMTRs) that are part of the costs of the current system.

As for incentive effects and work, here's a recent evaluation of what happened in Manitoba's Mincome experiment.
Thus, Figure 5 graphs overall trajectories in order to get a general picture of subgroup trends. Subgroups are displayed as baseline and study period averages for ease of presentation, and treatment effects are shown in parentheses in Figure 5. Among the most consequential, Mincome’s average treatment effect (the difference between changes in Dauphin and changes in the Manitoba control) for singles is a 16.2 percentage point fall in household participation in the labor market. Among young people there is a similarly large treatment effect, at 18.6 percentage points. Dual-headed households appear less sensitive to Mincome. For this group, the equivalent treatment effect is 7.4 percentage points. Thus, the overall experimental effect on labor market participation is disproportionately driven by changes in young and single-headed households.
So the biggest drop in labour market participation was among youths. 

Dauphin's guaranteed family income started at $19,500: about half of annual household income at the time. Morgan's proposed $10,000 is much lower than that relative to median household income in New Zealand, so corresponding effects on labour market participation would be expected to be lower than those found in Manitoba.

While the authors note that drops in participation would not be large enough to cause problems in overall scheme financing, note that Mincome wasn't self-financing. Lots of people in Dauphin weren't in the experiment, and the money for the experiment came from overall government revenues. 

That makes it harder to tell what the real effect on participation would be. On the one hand, you might expect people who wanted to be able to drop out of the labour force would be disproportionately willing to participate in the experiment, which would mean the found effect is larger than you might expect for the population overall. On the other hand, you might expect that if everyone faced the kinds of tax rates necessary to fund a UBI scheme, dropping out of work for current workers would look more attractive. In that case, you'd expect real-world effects to be larger than those found in Mincome for payments comparable to those used in Mincome. 

Tuesday, 18 July 2017

Water Markets - back to the Staff Club

I'll be back in Christchurch late this afternoon to help launch an excellent book by John Raffensperger and Mark Milne on smart markets for water. I'm a big fan of their work, and the book is excellent. It even has a foreword by one of the godfathers of smart market design, Vernon Smith.

Here's the invitation blurb; please do RSVP if you'll be attending so they don't wind up over capacity. I think they had room for about 8 more as of yesterday.
Increasing pressure on water resources means that society needs to be smarter.  New technologies can combine with market approaches to get more value from water while better protecting the environment.  Join the Waterways Centre for Freshwater Management in the release of a book on one new technology, Smart Markets for Water Resources: A Manual for Implementation. The book is co-authored by John Raffensperger (now at Rand Corp.) and Waterways member Mark Milke.

The event provides an opportunity to look forward to better incorporating new technologies and market approaches in water resource management. Dr Eric Crampton, Chief Economist at the New Zealand Initiative, will open with a short presentation regarding the role of markets in freshwater management.

Tuesday, July 18, 20175:30 – 7:00 pm
Upstairs, Ilam Homestead
University of Canterbury
Nibbles provided and drinks are available at the Staff Club Bar downstairs.

About Dr Eric Crampton: Dr Eric Crampton is the Chief Economist at The New Zealand Initiative. He served as Lecturer and Senior Lecturer in Economics at the Department of Economics & Finance at the University of Canterbury from November 2003 until July 2014. He is also the creator and author of the well-known blog "Offsetting Behaviour". He has written on water pricing in popular media outlets including the National Business Review and the Christchurch Press.

About Smart Markets for Water Resources: Water markets have not realised their potential because of high transaction costs and the problem of the interaction of users’ environmental effects. The book examines an elegant solution -- the smart market. It covers the prerequisites that must be in place before the market can begin. It describes how the market would be structured and how it would operate, for different types of hydrology. It discusses matters ranging from common objections to water markets to the layout of the market operator's databases.  More than an academic analysis, the book is manual to be used as a starting point for implementation.

All are welcome – please email suellen.knopick@canterbury.ac.nz to RSVP.

Hope to see a few old Staff Club friends there. It's the place the kids have missed most since moving to Wellington.

Monday, 17 July 2017

Green investment

I'm having a hard time seeing the point of the Greens' proposed new government-backed green-tech investment fund.

Here's their description:
In our first term of Government, the Green Party will:
  • Establish a government-owned, independent, for profit Green Infrastructure Fund with a social and environmental purpose, to act as a magnet attracting private finance to transformational low carbon, climate resilient projects.
  • The Fund will kick-start new clean infrastructure projects like solar and wind power installations, energy efficient buildings, biofuels, and other clean technologies.
  • The Fund will have a minimum target rate of return of 7 percent, an annual emissions reduction goal of one million tonnes of CO2, and generate thousands of new jobs.
  • It will cost $110 million over three years to be initially paid for by raising oil royalty rates from 46 percent to the international average rate of 70 percent.
Their full policy document points to what they see as the problem:
Without the right policy, price signals, and supportive partner institutions in place, private capital has continued to fund carbon and resource intense investments, while starving the emerging cleantech sector of the capital it needs to thrive.
I can understand there being a lack of investment in some tech, and overinvestment in others, if the price on carbon isn't right. But if that's the problem, and if the Greens are proposing the right price for carbon, then the fund isn't really needed: investors would shift over as the price signal changes. If the projects can earn a 7% return and aren't more risky than other comparable investments, I don't know why government kick-starts are needed.

Radio New Zealand called me for comment on the thing on Saturday; here's what I sent through. I recorded an interview on those themes; not sure if it aired as I was out with the kids Sunday.

  1. If there are green-tech investments out there able to earn a minimum 5% rate of return, or a targeted 7-8% rate of return, what barriers exist that currently block that investment in New Zealand? We keep being told that the world is awash in capital, with loads of savings looking for relatively safe homes with reasonable returns. What problem is the fund then trying to solve?
  2. If the barrier to green-tech investment is that returns are too low because the right price signals are not in place, it's still not clear what problem the fund solves. If the price signals aren't there, then the government's $100m won't find projects yielding returns and private capital won't join it; if the Greens put in place higher carbon charges that would make some green-tech investment feasible in New Zealand, again the fund wouldn't be needed as there would be private capital already ready to make the investment. The document says that clean tech's benefits aren't always captured by investors so government is needed - if that's right, isn't it more appropriate for government to be taxing pollution and then letting investors work out for themselves what works best to solve things?
  3. It is odd for an investment fund to have a job-creation goal in addition to rate of return on investment. That wind turbines employ a lot of wind turbine technicians isn't a good reason to invest in them. If they happen to employ a lot of technicians while still producing electricity cheaply, that's something different. I hope the bullet point on job creation is an ancillary by-product of the investment rather than the point of it. Note too though that if those skilled technicians are necessary for the projects to go forward, and if New Zealand doesn't have them already (or enough of them), well, we're already at very very high employment rates - would we be then importing workers to do it, or would this be a longer-term thing where they'd plan on putting in new training programmes for very specialised jobs? If it's the latter, that's risky too: the price of solar (I think!) is dropping faster than the price of wind power; what happens if the government encourages a pile of kids to train up to be wind technicians and the next year, everybody's installing Tesla solar roofs, the price of power drops, and wind farms are no longer viable?
  4. The proposal suggests funding projects like house retrofits, or innovative diversions from landfill. None of those make sense as investment projects. Homeowners can already borrow at the mortgage rate to fund house insulation projects, or lighting retrofits, or whatever. If that lending were less risky than the mortgage rate, banks would be competing already to provide funding for those projects at the lower interest rate. So what would this fund then do: provide loans to homeowners to put in insulation and the like, and charge a lower interest rate than the banks? Why would private investors stump money for that when they could buy shares in banks instead? Similarly, landfill remains remarkably cost-effective.
  5. The way solar prices are dropping, I'd put reasonable odds on NZ hitting a 100% renewable electricity target (or darned close to it - maybe one other plant sticking around for emergency peaking demand) by 2030 even without a drop of government money going in. Have you seen the new Tesla roofs? They're already advertising as cost-competitive with traditional roofing materials; they'll be available from next year. Give it a decade and all the new roofs going in, and roof replacements, will be solar plants - unless the price of electricity drops faster than the price of these distributed generation panels. I also wonder a bit about the point of biofuels once we're at that point (although there's really cool stuff on the horizon from algae).
  6. Kick-starting the fund by hiking oil royalty rates may be risky. I haven't had time to check into it, and won't have time to, but surely folks who have sunk capital into building offshore wells would have signed contracts specifying the royalty rates, right? It would be pretty surprising if anybody were willing to put in tens of millions in investment if they thought the government could wipe out the returns by hiking the royalty rates quickly. And if it had to raise the funds by hiking royalty rates on new drilling, well, there hasn't been all that much interest in drilling even at current royalty rates. 

Tuesday, 11 July 2017

Coalitions

Peter Ellis's NZ election simulations show a 58% chance that any coalition would require New Zealand First in it. 


So 58% chance that Winston is in either coalition, and an additional 6% chance that Winston makes the tie that puts a Winston-Labour coalition neck-and-neck with National's coalition.

So there looks to be zero chance of Labour's being able to put together a coalition that does not involve New Zealand First. But there's reasonable chance that National could.

There are some New Zealand First policies I like. I think the version they've been pitching for shunting some GST revenues back to Councils is completely unworkable, but there are workable ways of achieving that objective - and finding better ways of funding Councils and improving their incentives is rather important. NZ First is more sympathetic than most parties to devolution as well.

But if New Zealand First's strong anti-immigration position is your biggest concern, I think that has to argue for a strategic vote for one of National's current coalition partners that has been pro-immigration: ACT, United Future, or potentially The Maori Party with Carrie Stoddart-Smith now there as candidate.

Voters of the left who are pro-immigration will have a difficult time this go-round.

Monday, 10 July 2017

Counting calories

Alcoholic beverages in New Zealand don't require nutritional labeling. It's an anomaly relative to other food and drink, but does it make sense to add labeling requirements to alcohol just to have consistency across products?

I'd missed NZIER's assessment when it came out but had it pointed to me last week.

NZIER carefully goes through the complicated chains necessary for labeling to have an effect, and why the likelihood of any effect at all is very small, and how the international studies struggle to find any effect. Because they look not to have been able to see any way of finding an effect, they instead asked a different question: How big would the reduction in obesity have to be for compulsory labeling to pass cost-benefit?

After answering that question, they warn that their numbers are likely to be lower bound figures: more people would likely need to shift weight as consequence of the rule than they're expecting. Why? Because the obesity cost estimates are an average over the category, and those at the thinner end of the category (and less expensive end) might be the ones more likely to shift. I'd also want to check whether the obesity cost figure is incremental to any overweight cost figure, or is the total cost of being in the category relative to someone of normal BMI - because otherwise benefits may again be overstated.

They benchmark cost-effectiveness not against any cost-benefit analysis, but against existing programmes. Health Star was justified on similar basis, they report, and it was estimated to be cost-effective if obesity and overweight dropped by 0.04%, or 1513 people per year. Even that isn't a clean comparison though because the Health Star figure looked at changes in obesity and overweight, not just obesity; this study just looks at obesity.

And their winding up is pretty clear on the caveats. They give zero assessment of whether the policy would be cost effective, just the number of people, as a minimum, who would have to stop being obese as consequence of the policy for the policy to be effective. They provide no indication of whether that number could be expected to be reached, and specifically note that they cannot estimate it because there is no basis on which they could do so. And while they include some high-benefit cases based on purported welfare effects of obesity rather than just fiscal cost, they also have a whole appendix section on why they think those costs are overestimated.

One caveat they didn't put up: you can get perverse effects if you mandate putting up calorie counts while banning advertising of health benefits of moderate consumption. Other foods that have positive health consequences for moderate consumption at least can let people know about it.

Consider the kind of person who has zero clue that alcohol contains calories. If we have low information consumers, why would we expect them to be poorly informed only on the calories margin? Suppose that person also does not know that moderate drinking reduces all-source mortality risk by 16% or thereabouts, but has heard the repeated warnings about heavy drinking. Our consumer, let's say, is consuming 3 standard drinks per week and, after hearing about the calories, drops to 2. Knowing about the health benefits of moderate drinking but not the calorie count might have had the person shift from 3 to 4; knowing about health benefits and calories might have had the person stand pat at 3.

If health-conscious but poorly informed people who read labels are the ones most likely to change behaviour, they're less likely to be heavy drinkers to start with (because they're health conscious). If that's the case, then labeling could have the perverse effect of most substantially reducing consumption among the cohort receiving net health benefits from consumption, and that effect would need to be weighed in (and is here ignored).

It would be mildly fun to do the same extreme bounds style analysis to show how many thin moderate drinkers would need to shift to abstinence for every obese person who became not-obese for the policy to wind up doing harm.

I also wonder about trade effects if imported products would be subject to compulsory labeling but are not currently labeled. We could then be back in the annoying case where importers have to stick stupid labels on everything, like they do for standard drink counts. I don't know whether places from which we currently import have labeling requirements that would conform to what NZ/AUS would be thinking about, or whether this would be additional. NZIER notes no trade hassles if the thing's non-discriminatory, but you could get effects on competition and reduced access to imported products, which would have harms for consumers.

In any case, it's tough to see any strong case for mandatory labeling in that report.

Saturday, 8 July 2017

Weka woo

Excellent feature on Roger Beattie over at Stuff. Looks like DoC's investigating him for his excellent Weka Woo hats (buy them here!)
Beattie has been described as an eco-anarchist with a knack for turning obscure ideas into successful businesses.

He farms giant kelp, sells paua pearls and breeds lines of obscure sheep, including one he helped invent.

He is a staunch libertarian. His conservation ideals stem from his belief in the power of commerce to solve problems.

"Passion lasts for a certain period of time, but commerce has stamina," he said.

"The thing about bureaucracies is they would rather not make a decision that's positive and run the risk of it turning sour when it's much easier for them to say no.

"I'm the complete opposite. I'm a serial entrepreneur – I understand risk, I can manage it."

Earlier this year one of the Port Hills fires started across the road from his farm. He joined firefighters and his neighbours in putting out the fires, which razed the hills opposite, now a patchwork of green and rusted grass as it regenerates.

When the area was evacuated, Beattie refused to leave. If they forcibly removed him he would have sneaked back in.

The same principle of civic disobedience applied to his conservation beliefs.

"We have the world's worst statistics for birds becoming extinct, becoming endangered," he said. "If we don't do something about it it's going to keep getting worse.

"Bureaucracies are totally risk averse, and no one is panicking. The public get it very, very quickly. We need to have a series of circuit breakers. There needs to be a tipping point, and I think we're on the tipping point."
Beattie also featured in NZ Farmers Weekly in June:

Friday, 7 July 2017

From free range kids to rocket launches

In 1999, at 18, Beck did something most people would consider very stupid. After checking out books from the library to learn how to make his own fuel, he set up a laboratory in a backyard shed and set to work on a rocket engine. Lacking a hazmat suit, he wrapped himself in plastic bags and put on a welding helmet as he distilled peroxide and other chemicals.

After successfully testing one of his engine designs, he decided it was time for a proper adventure. He strapped the engine to the back of a custom-built bicycle, dressed himself in a red jumpsuit and white helmet, and fired up a trial run in a local parking lot. Leaning forward in a near-prone position, he managed to reach about 90 miles an hour. To slow himself down, he first sat upright, allowing wind resistance to do some of the work lest the brake pads or wheels melt. “Only a few people on the planet have put their legs inside a rocket,” Beck says. “It’s a very good feeling.”
New Zealand used to be the kind of place where this could happen, and it built the kind of people who could build rocket launch facilities in Mahia. The health and safety brigade are slowly killing the environment that lets this kind of thing happen.

Low low prices

TV prices are so low that StatsNZ has to rebase the CPI. They normalise things in the base year to have an index figure of 1000. So the price of TVs and of cell phones in 2006 was 1000. Cell phones have dropped to 66; TVs have dropped to 60. Why? Quality adjustment.

The TV that cost thousands in the 2000s now costs maybe a couple hundred. Sure, you can still spend $5000 on a TV. But the TV you'd have spent $3000 on in 2006 is a hundred-dollar model now.
The CPI rebase
This section explains the reasons for the upcoming rebase of the CPI and FPI indexes and when it will be applied. For those of you interested in quality adjustment, or who use the index numbers in your models – read on.

We have been reviewing and reweighting the CPI basket of goods and services over the last six months. Part of the review also involves determining whether there is a need to rebase the indexes. Low inflation has led to relatively  small differences from the expression base of 1000 in the past decade, so we have kept the 2006 base period. However, due to increasing quality in some areas, we have been reporting falling prices in these areas of the index and some are now approaching zero. To adjust for this, we need to reset all of the CPI indexes back to 1000.

Technological advancements affect CPI index numbers
An important part of the CPI review is to ensure we account for improvements in technology. As it improves things get better, faster, flashier, and cheaper. The prices of mobile phones, cameras, and videos, for example, have fallen steadily over the past decade. The average price of a flat panel TV in 2006 was a staggering $3,382. If that same TV was still available today it would likely cost around $200. Similarly, a digital camera bought in 2006 would have cost about $500, now you don’t even have to buy one, they’re built in to your mobile phone and they have better specs. In the day of the ‘brick’, circa 1983, the luxury of being able to call someone while out and about would have cost roughly US$3,995 (see 40 years of the mobile phone: Top 20 facts). By 2006 the average price of a mobile phone was $249; this phone in today’s market would slip into our pocket for a mere $16.33.

When consumers get a better quality product or one with more features for the same price, this counts as a price drop in the CPI. We fix the quality of these types of items in the CPI so that we can price the same item through time.

Figure 1 shows the indexes for TVs and mobile phones for 2006–17.Figure 2 shows the indexes for the recreation and culture subgroup for the period 2006–17.Keep your eyes peeled for the updated CPI basket in January We update the CPI basket every three years, with additions and removals reflecting changes to consumer spending patterns. For example, DVD players were state of the art at the turn of the century and were added to the basket in 2002, but have been replaced by computers in the ‘cloud’ and were removed from the basket in 2008. Video-cassette recorders nearly held on that long and were only removed in 2006, signalling the end of an era of heading to the video shop on a Friday night. Mobile phones were added to the basket in 2002 and because they are still popular, will likely be there for a long time.

New CPI base period Due to all these technological advances, some of our indexes are now almost zero. From 2006, price falls recorded in the CPI for cellphones and accessories have moved the index for this item from 1000 to 66. The index for TVs is now at 60. Because these indexes are so close to zero we are losing accuracy in the CPI.

To adjust for these large differences, we will rebase the CPI by resetting all the indexes to a base period of June 2017 = 1000.
HT:  Newsroom Pro's 8 things at 8am

Wednesday, 5 July 2017

Evidence based party?

Gareth Morgan's TOP party wants to hike the alcohol purchase age to 20.
The purchasing age was lowered to 18 from 20 in 1999.

"It was lowered in 1999 to appease the alcohol lobby, and we were promised at the time that if evidence showed harm went up after the change they would reverse it," Morgan said.

"All of the evidence, all of the reports, have pointed unambiguously to harm going up."
All of the evidence, all of the reports.

Here's the best report on the subject:
Note too that the Boes & Stillman results cast severe doubt on prior work using RDD designs to extrapolate harms from the discontinuity at the purchase age. And their 2013 paper shows no particular effect on other harms.

Meanwhile, their overall policy cites the BERL report on the social costs of alcohol. Egads.

Tuesday, 4 July 2017

Cannabis revenue

NZIER's done some nice work estimating the tax revenues that could accrue through marijuana legalisation. They base things on a 25% excise rate plus GST and come up with figure around $70 million.

They contrast it with Treasury's earlier estimate of around $150 million in revenue, but any number you come up with in this space depends on what you think the government's trying to achieve with excise. If you think they want to continue to deter consumption by maintaining retail prices to consumers around where they are now, then you need to ballpark how much production costs would drop in a legal environment and set excise plus GST to fill that gap. If you think government would aim to internalise external costs, the excise rate would be close to zero.

I'd estimated a range from maybe $75m to $200m conditional on government wanting to keep retail prices about where they are now. If the government wants to do something else with excise, you'd get a different number.

Catherine Harris reports on that earlier figure here today as well:
Eric Crampton, chief economist for think tank The New Zealand Initiative, has also tried to estimate the excise tax take on cannabis, coming up with a range of $75m to $200m in 2013.

The big uncertainty was the production costs, because as an illegal drug "nobody really knows," Crampton said.

But he agreed the price would almost certainly come down as the premium attached to the risk of producing an illegal commodity was removed.

Production would become more efficient, "because people are able to produce to scale without being worried about being raided."

"It seems like a natural market for New Zealand. We do seem to be missing a trick in that, if Northland is as good as they say it is."
And just a super kudos to Ross Bell and his team at the Drug Foundation. He's been doing just so much to advance the debate here.

Inequality concern?

The comms framing on the latest Roy Morgan survey puzzles me.

The survey asked New Zealanders what their greatest concern was going into the election.

They reported, in order:
  • Poverty and the gap between rich and poor (14% listing this as single biggest problem);
  • House prices and housing affordability (13.7%)
  • Housing shortages and homelessness (9.6%)
  • Government/Politicians/Political unrest (6.2%)
  • Immigration/Refugees (5.5%)
The middle two items are both about housing. 23.3% listed housing as their greatest concern. 

But here's how Roy Morgan framed it. 
New Zealanders’ concerns highlighted in run to election: Poverty and the gap between rich and poor is the single biggest issue facing New Zealand and the World according to New Zealanders
It seems odd to bundle poverty and inequality into one big thing when they're really conceptually separate things, while splitting house prices apart from housing shortages, when those are really the same thing.

I talked with Radio Live this afternoon about it, along with co-panelist Max Rashbrooke.

I argued that the inequality concern reported in the poll is likely driven by the massive concern about housing seen in the poll. The inequality stats over the past two decades have been flat, and poverty trends reverse direction depending on whether you consider things before or after housing costs.

Rashbrooke argues that inequality concern is instead driven by people slowly realising the consequences of changes that happened 30 years ago in the income distribution. It's a pretty tough proposition to test, but I'd have thought that John Creedy's work showing a decline in household consumption inequality since just before the reforms (a rise, then a fall, winding up a tiny bit below the start of the series) would suggest that isn't what's going on.

As for the stuff I'd there cited:
Previously:

Friday, 30 June 2017

Chainsaws and aeroplanes

I'm glad that the lumberjack tried this one here instead of in the States:
It seems a no-brainer that chainsaws wouldn't be an acceptable item to take as luggage on a plane, but a man in New Plymouth gave it a go anyway.

After getting upset when he was told he couldn't take the chainsaw on the plane, the man missed the 4.40pm Jetstar flight to Auckland which left and arrived on time.

He then boarded a 7.15pm flight which was delayed by 67 minutes after the plane's captain kicked him off for behaving badly.
...

New Plymouth police senior sergeant Bruce Irvine said it appeared the man had tried to take the chainsaw onto a Jetstar plane and became upset when flight staff stopped him.

The police were called about 5.20pm on Monday as a precaution in case the situation got out of hand, Irvine said, but the situation was sorted out before they arrived.

"They resolved the argument over the chainsaw and he accepted that he couldn't take it on the plane," he said.

"No one got arrested," Irvine said. "It sounds like a storm in a tea-cup."
Petrol fumes in a chainsaw's tank can be highly explosive and are not recommended either in checked luggage or as carry-on.

In other parts of the world, trying to bring a chainsaw into an airport and then behaving badly, with the police being called in, might yield rather worse outcomes. Nobody was beaten, shot, or even arrested. Instead, they just resolved the argument over the chainsaw. And this is as it should be, here in the Outside of the Asylum.

Thursday, 29 June 2017

Alcohol access and harms

A large sample study of American enlisted soldiers, who turned 21 while enlisted, found large increases in alcohol consumption at the birthday but no increase in harms consequent to that consumption: no meaningful effect on suicidal tendencies, depression, tobacco use, physical fitness, psychological health, deployability, smoking, or job-related infractions. 

Recall too that, following Boes & Stillman, the RDD estimates around the time of the birthday would be larger than the longer term effects one might extrapolate from the RDD (the paper rightly restricts things to the neighbourhood of the birthday and doesn't extrapolate).

From their conclusion
Using data on all soldiers between 2009 and 2015, we observe a large and significant increase in drinking after the 21st birthday overall, and the increases are largest amongst those who were depressed, had a family history of mental health problems, had better coping ability, and had higher cognitive ability. Despite the large increase in consumption, we do not find any meaningful impacts of legal access to alcohol - overall or in any sub-group - on any of the short-term outcomes we observe, including suicidal tendencies, depression, tobacco use, physical fitness, psychological health, deployability, smoking, and job-related infractions.

How do our results add to the current knowledge of drinking behaviors in the military? Drinking and use of tobacco products have long been part of the military culture (Oster et al., 2012). Alcohol is even used by unit leaders as a way to build unit cohesion and reward the completion of difficult tasks. As one USMC sergeant recounted in a New York Times Op-Ed of his experience, beer consumption and underage drinking are common within the barracks even though alcohol is prohibited inside the military compound (Brennan, 2012). Soldiers do know they will get punished if they get caught drinking underage or drinking hard alcohol within the barracks. Thus, it makes sense that using data from the military workplace, we find increases in alcohol have no meaningful impact on soldiers’ physical and mental health and adverse behaviors, even as attaining legal access increased their consumption.
They caution against extrapolating to civilian populations: the environment for soldiers is a bit more controlled, and soldiers might reasonably expect to be caught and punished for poor behaviour consequent to drinking. I'd expect you could extrapolate to say that the expectation of being caught and punished for poor behavior - individual responsibility if you will - is an important part of mitigating social costs.

Wednesday, 28 June 2017

Afternoon roundup

The notables from the lunchtime closing of the browser tabs:

Monday, 26 June 2017

Inside the asylum: food safety edition

Versions of cost-benefit that tally up all of the savings to a public health system from banning people doing things they like, and ignore the costs incurred by people banned from doing things they like, lead to this:
We reveal today that new Ministry of Primary Industry guidelines for food outlets require your hamburger to be cooked to fried or grilled to 70C internal temperature. As any home cook can tell you (or indeed, anyone with a copy of the Edmonds Cookbook sitting handy) 70C is, to all intents and purposes, nuking it to high heaven. What is left is a hunk of dried out, grey tyre rubber.

...Chefs around the country have no doubt been stewing at the new "guidelines", but it was executive chef Dan Fraser at the historic Duke of Marlborough Hotel in Russell who put a match to the flambé.

First he received an email from an MPI official. "You need to make some changes," he was told – the same stern message they were sending other restaurants and caterers around New Zealand.
And it isn't just hamburger:
Fraser said the rules will also cause issues for serving steak tartare, beef carpaccio, pate or chicken livers.
This is what you get when the government bears downside costs through the public health system and Vogons run things. If the justification is that people might underestimate risks of undercooked hamburger, then maybe you could make a case for putting warnings on menus about risks of undercooked hamburger. Maybe something like "Well done burgers are safest, but less tasty. We serve ours medium. Consider our non-burger options if that's what you prefer!" At least that version of things has some respect for individual preferences.

I'd written on this back in 2012. Minister Wilkinson was citing $162 million in costs of food-borne illness. A chunk of that was enforcement costs that, if anything, would have to rise with her new regime. As for the rest? Count the costs of illness, ignore the benefits of tastier food. Standard drill when you want a high social cost figure to justify compulsion. My post of 2012:
The bulk of the remaining tabulated costs are individuals' intangible willingness to pay to avoid a foodborne illness - about $100 million in residual private costs as estimated from NZ value of statistical life estimates. We can leave aside for now problems in that we don't have good prevalence data on non-reportable illnesses like norovirus that manifests as mild gastroenteritis; Applied Economics is very up front about the limits of inadequate data here. But by far the biggest part of the cost estimates comes out of willingness to pay measures.* That's important. Why? Because people are choosing, all the time, which dining establishments to frequent.

Suppose that there's a roadside falafel place with food I adore but that comes with completely known 1% risk that I'll get mild food poisoning. I eat there a hundred times, I get food poisoning once. But I keep going back because of the taste. If new food safety regulations mean the place shuts down, Wilkinson's measure says I'm better off because I'm saved those willingness-to-pay derived figures on the costs of mild food poisoning. But I've already specified that I knew about the risk and judged it worthwhile; I'm then necessarily worse off if I can't get a falafel. You can't easily use a willingness-to-pay measure to overturn a consumer's decision when consumer decisions underlie willingness-to-pay measures. You can perhaps make an asymmetric information argument; that tends to argue for random inspections and public posting of findings on facility cleanliness rather than for big compliance regimes.

So is the new regime worth the cost? That depends on the compliance costs that will be faced by small and mid-sized traders. Wilkinson assures us that small traders won't face onerous burdens, but I'd really prefer seeing proper analysis of the Bill from someone like Otago's Andrew Geddis. And we have to keep in mind that a substantial proportion of the costs Wilkinson cites might actually be voluntary choices consumers are making that, on lucky draws, yield tasty goodness any diminution of which consequent to regulation ought be counted against the Bill's possible health benefits. Banning me and others like me from having my hamburgers medium-rare might save the health system a bit, but it'll certainly cost me some utils. Equally bad is what a big fixed-cost regime would do to food startups. I really hope that the legislation isn't as costly on those two fronts as some folks fear; I'd love to see independent legal analysis.
Emphasis added.

Remember when National campaigned against the nanny state? I know it was a long time ago. I think they've forgotten too.

Monday, 19 June 2017

Higher education, big big numbers

I don't think we can blame the consultants for this one.

Normally, big big numbers in economic impact reports are a black mark on the consultancy producing them. They don't come with enough health warnings, and the misleading big big figures draw headlines too easily.

Dave Guerin's Ed Insider newsletter (essential reading for anybody following tertiary ed in New Zealand) covers the Universities NZ report, produced by NZIER. He writes:
Universities NZ released Regional activity of universities (30 pages) on 27 Apr 2017 (UNZ media release).
  • The report had straightforward analysis of the direct university spending and employment in their region, and the contribution to regional GDP.
  • NZIER also estimated the indirect and induced expenditure due to universities, but placed major caveats on those figures, stating that UNZ had specifically asked for them. They noted that the government did not see such numbers as a credible argument for increased government expenditure on universities. NZIER repeated their 2-paragraph warning 9 times in the report, and added an appendix with more detail on the issue.
  • Universities NZ cited the largest number possible ($19.95b) in their media release.
For an example of a nice health warning, here's a bit from NZIER's Exec Summary:
Estimating the size of these indirect and induced effects in a way that is economically meaningful is problematic. They can be estimated using multipliers that try to reflect the ripple effects of university expenditure on the economy, but this approach makes so many assumptions that the estimates should be seen as indicative only. The multiplier analysis approach (used in the mid-2000s but now discredited) massively overstates the indirect and induced economic activity attributable to any industry because it fails to consider alternative uses for the resources employed by the industry. At best, multiplier based estimates of indirect and induced effects are a measure of the current footprint of the university in the city/region. They cannot be added to calculate a national total across cities/regions and they are not accepted by central government as a credible argument for increased expenditure on university education or R&D.

Though indirect and induced effects are estimated in this report they should be seen as indicative only. See Appendix A for further caveats and comments on indirect and induced effects.
Pretty blunt. When clients use the big big numbers, even when the reports have health warnings as blunt as these are... yikes.

Sunday, 18 June 2017

Farewell Molly Malone

Courtney Place pub Molly Malone's was damaged in last year's earthquake. The building is old, but not heritage-listed. So it fortunately can be demolished, as the owners wish.

"In this case, the building has been identified by the council as earthquake prone … [and] the applicant contends that the building 'is a clear and present danger to the public'."

In addition, the owners planned to fill the space in the interim, and eventually rebuild, meaning any effects on the streetscape would be temporary, Hayes said.

However, the council's senior heritage advisor Vanessa Tanner opposed the demolition.

She said that while the build was not heritage listed, it had significance in terms of the build and social context.

Heritage New Zealand also weighed in, saying the loss of the Molly Malones building was regrettable due to both the heritage qualities of the building and its place in more recent social history.

[Council Senior consents planner Lisa] Hayes said there were no rules preventing its demolition as it was not a heritage building.

"While I acknowledged the advice of Ms Tanner that there will be an adverse heritage effect associated with this loss, this will be a public effect and needs to be balanced with the risk to public safety if the unsafe building is to be retained," Hayes said.

Saturday, 17 June 2017

Diversity in the metastudy

Wharton's Katherine Klein has a nice literature review up on the effects of corporate boardroom gender diversity.

The bottom line seems to be no effect.

Klein usefully contrasts consultancy reports on the topic with the findings of the academic literature:
Do companies with women on the board perform better than companies whose boards are all-male? Many popular press articles and fund managers make this claim, citing studies by consulting firms, information providers and financial institutions, such as McKinsey, Thomson Reuters and Credit Suisse.

Writing recently on Huffington Post, for example, one consultant observed the following:
“Companies with gender-diverse management teams have been proven to consistently perform better and be more profitable than those without them. There is overwhelming evidence to support the value of having more women in senior leadership positions. A growing body of research –including studies by McKinsey & Company — has proven that companies with more women in senior executive and board roles have advantages over those that don’t.”
But research conducted by consulting firms and financial institutions is not as rigorous as peer-reviewed academic research. Here, I dig into the findings of rigorous, peer-reviewed studies of the relationship between board gender diversity and company performance.

Spoiler alert: Rigorous, peer-reviewed studies suggest that companies do not perform better when they have women on the board. Nor do they perform worse. Depending on which meta-analysis you read, board gender diversity either has a very weak relationship with board performance or no relationship at all.
That's consistent with my read of things as well. But be careful here too: there being no relationship doesn't mean that quotas or mandates would be costless. You'd need to specifically sort through the studies that looked at effects of quotas, because changes in board composition that are board initiated might differ from ones that are compulsory.

Previously: Wishful Treasury Thinking

Friday, 16 June 2017

Afternoon roundup

Some highlights from the closing of the browser tabs: