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.