Thursday, 22 February 2018

Earthquake anniversaries

Seventh anniversary of the Christchurch earthquakes.

GNS figures there's about a 1/120 annual risk of something of similar size hitting Wellington: 0.833%.

Recovery here will be much harder than in Christchurch. There are few local options for firms to relocate to while downtown is torn down and possibly rebuilt. There are few transit routes in and out. The airport could easily be out of service. The Port is only now just talking about getting floating wharf facilities that could be more quickly serviceable after an earthquake. And while there are lots of ways of getting from anywhere in Christchurch to the Hospital, or at least close enough to Hagley Park to be walked over, lots of Wellington suburbs will be cut off from the hospital. Wellington has reticulated gas. The fire service will have a very difficult time accessing some suburbs. The immediate calamity will be worse, and recovery from it will also be harder.

Post-earthquake recovery policy in Christchurch was its own separate disaster. The morass of agencies and regulations contributed to what I've called a confusopoly: nobody knew what they were allowed to do because they needed to get permissions from too many outfits, none of which really knew what they were doing.

In Christchurch, that meant business fled from downtown to the suburbs.

In Wellington, it could easily mean the death of the city.

I'm not speaking hyperbolically here. There is reasonable risk that, after a Mercalli VIII event, Wellington will cease to exist as a city.

Here's the path to failure. It doesn't have to play out this way, and I sure hope it doesn't. But it's more likely than I'd like.

Government replays Christchurch, with a poor governance setup for a recovery agency. Everybody knows Christchurch didn't work well; nobody's prepared for anything else so they go with the current off-the-shelf option, which is a do-over.

Nobody has put sensors into key buildings before the earthquake that would let us know how far beyond design spec key parts of the buildings moved, so engineering assessments will take a long time. Downtown gets cordoned off for months while they figure out which buildings are too risky. The Lambton/Featherston core is under cordon for at least half a year, maybe more than a year, during engineering assessments. Safe buildings cannot be reoccupied because everyone's worried about the other ones that could fall on the safe ones and so it's army barricades again.

Little priority is put on regime certainty: government announces a review of building standards following the earthquake, and no buildings over two stories are allowed pending that review. So even those places that could be safe to build on aren't built on. Essential government functions will have to leave quickly to be able to get on with things, and there won't be enough available safe commercial space here to move people into.

The business core will relocate, possibly to Auckland, possibly elsewhere. The tech core and Weta don't need to be here - they could relocate anywhere. There's a coordination problem in figuring out where the tech sector would go, but a Schelling point might just be to follow wherever Xero goes.

A lot of the core public service will be gone, perhaps with a promise to return when facilities are restored. Civil servants will follow government to wherever it goes.

The University will collapse as students flee even more quickly than they did in Christchurch: recall that the area around the University of Canterbury was relatively undamaged.

After an initial property jump for relatively undamaged homes, there will be a long and terrible decline as people come to realise that the city is finished. Many homeowners will cash-settle rather than repair, and will flee to try to rebuild their lives elsewhere.

And the city will be left with a terrible mess: a rather smaller population of those with the fewest exit options, a big pile of cash-settled unrepaired broken houses, little tax base, and few prospects.

Christchurch makes sense as a city: it's a regional service centre for a broad agricultural periphery with a good university and an important port. If Christchurch didn't exist, you'd have to invent it. So even though government made a complete hash of the downtown recovery, it was going to come back because there was a reason for it to come back.

It's harder to see that for Wellington, even if you can't beat it on a good day.

All of that means that government simply cannot afford to screw up a Wellington post-quake scenario the way it screwed up Christchurch. It may be the difference between the life and death of the city. Restoring regime certainty will be critical.

I hope that the current government puts some priority on it. We're still playing Russian Roulette. The revolver's barrel has 120 chambers, one of them has a bullet in it, and we pull the trigger every year. We have the chance to build a Kevlar helmet to blunt the bullet's effect if we get an unlucky draw. Kevlar ain't perfect, but it helps reduce the risk.

A bit of early planning could be rather helpful. Bryce and I put together a few options for forward planning that would make recovery easier.

If government wishes to return to Wellington, it will have to move incredibly quickly to demolish its own broken buildings and start building new. No multiyear processes for figuring out the optimal design of some new government precinct, just start building. That on its own would do a lot to avoid a death-spiral.

I also expect that we need a liability regime around dangerous buildings impeding downtown access. If the risk imposed by one office tower means that adjacent office towers cannot be occupied, the owners of the adjacent towers should be due compensation from the risky tower. That compensation should fully reflect the costs they face after some minimally-reasonable period after the earthquake. At the margin, this would mean more buildings are demolished rather than held for extensive rehabilitation periods during which they continue to impose risk on neighbours. Getting this regime right would mean a much shorter cordon period. 

As postscript, I worry a lot about uninsurable risk. The odds each year are small, but if it happens, there are losses against which it is currently impossible to insure. Homeowner insurance and income protection insurance don't cut it. There are no Case-Schiller indices that could let you buy options that would act as insurance. There isn't any obvious stock portfolio that would track. 

And there are no retail-level parametric insurance products that take even the simple form "Pays $x if a Mercalli VIII event hits Wellington in 2018; pays $0 otherwise." The fair price of that contract is 0.833% of the contract's price; I'm more than happy to pay a reasonable margin over it to lay off that risk. But contracting costs are too large for anyone to offer this contract to just me, and too few people would be willing to pay say $8300 per year for a contract offering $500,000 in case of earthquake. Not that I've been offered a quote - that's just a doubling of the fair price to reflect a cost of risk transfer. Absent any substantial demonstration of people-other-than-me being interested in buying it, it's worth nobody's time to even offer a quote.

Even Paddy Power declined to quote me a price for a bet on it; bets are the same thing as insurance.

I'm not worried enough to flip to being a renter rather than a home-owner, but I do wish we were closer to Arrow-Debreu worlds. Hopefully, blockchain parametric insurance options will get us there.

Seven years. Read our report. It has nice pictures of my kids in it, playing around the rubble. I'm glad we left Christchurch but wish I could worry less about it here.

Wednesday, 21 February 2018

The Voluntary Future

I'll be speaking today at Optimistic Futures. Ten of us will be giving the 8-minute version of what we each see as an optimistic vision for 2070. I suspect we will have radically different utopias; hopefully they aren't all mutually incompatible.

This is my optimistic vision. It is hardly a prediction of what will happen, but is rather what I'd like to see happen, anchored by the constraint of not being completely implausible.
Good morning. I’m Eric Crampton, Chief Economist with the New Zealand Initiative; I also do a bit of small bit of lecturing here at Vic in Public Economics.

I love today’s project brief. Think of your most optimistic future. Usually economists are asked to make forecasts, and nobody is able to really get those things right. This time, I don’t even have to think about what’s likely, just about what I’d like to be likely. I will constrain my optimism a bit to keep it within the bounds of the potentially plausible.

In my most optimistic future, radical life extension has arrived by 2050. I was born in 1976, so radical life extension’s going to be even more important to me by 2050. Biotech will have developed along with implantable technology so we’ll be having incredibly interesting conversations about what it means to be human. In In the same way that electricity, cars, home appliances, televisions, computers and smartphones went from being luxury toys for the rich to being cheap, reliable tools within the ready reach of the vast majority, so too will biological enhancements. Health will have become cheap – a solved problem.

And Roko’s Basilisk never showed up.

But while all of that is part of my most optimistic future, it’s not what I mostly want to talk about today. I want to talk instead about something I know a little bit more about: how these developments could affect how we change how we solve the generalised problem of living together peaceably – how we govern ourselves.

I’m an optimist about people, and an optimist about technology. But more particularly I’m an optimist about New Zealand.

I moved here fifteen years ago because it seemed to be the best place in the world. By and large, government works well – or at least far less badly than in a lot of other places. In the 1980s and 90s, New Zealand figured out that small countries at the far end of the world that are remote from any of their major markets simply cannot afford the kinds of very silly policies that are common overseas. New Zealand could never afford to throw the kinds of resources at airport security that America turned to in reaction to 9/11, so we didn’t.

New Zealand just doesn’t go for the kinds of knee-jerk policies that larger places are prone to – because we can’t afford them. Kipling said the world would belong to the one who can keep their wits about them when all are losing theirs – that’s us. And it’s us in part because of something Ernest Rutherford pointed out: because we haven’t the money, we’ve had to think.

So where does that take us for 2050? My optimistic vision has three main components. Radical subsidiarity, effective altruism on steroids, and decision markets.

Let’s take a minute with each of these.

Effective altruism is a movement started around a decade ago. It argues that aid should focus on the places where it can do most good. It currently argues that most people are not giving nearly enough to charity, but at least as importantly they’re giving badly: every scarce dollar of aid should go to the place where it can do the absolute most good.

On the path to 2050, we’ll see a shift in government assistance towards greater focus on helping NGOs who can do good work. NGOs will approach the social investment agency with the outcomes they want to improve; SIA will tell them the funding available depending on how much good they do, and big data approaches within government will test outcomes. Good practice will spread.
But government is clunky. It has a hard time shutting down programmes that don’t work, and it’s frustrating to deal with. Bureaucracy always limits the good that civil society can do because of fear of the chance anything bad might happen that might annoy the Minister. The government, and the effective altruism movement, will kickstart the move towards effectiveness evaluation. But civil society will take over from there, interpreting bureaucratic failure as damage and routing around it. As data improves, effectiveness evaluation will become simpler for the voluntary sector as well – government’s advantage in data aggregation will erode more than it already has. The end result: communities able to do more good themselves.

Second, decision markets. Again, current government programmes may kickstart this. Treasury and the Labour government have rightly pointed out that we need a bevy of outcome measures to evaluate how well the country is doing – not just GDP. When we have those measures, we can have forecasts of the measures. When we can have forecasts of the measures, we can have futures markets in the measures. And when we can have futures markets in the measures, we can have combinatorial markets of the effects of policy on the whole set of measures. Instead of having Treasury trying to forecast outcomes across a wide assortment of indicators and too few economists to get the job done, we’ll crowdsource it.

New Zealand was actually making some progress in this area in the late 2000s. We had the world’s best real money prediction market, iPredict. The Vogons in the National Party killed it, but in my optimistic future, the 2018 Labour government took a more flexible approach to the regulations and allowed it to come back. The market quickly starts trading on the environmental, social and economic outcomes Treasury is reporting on, and combinatorial markets let us get a crowdsourced assessment of the effects of policy on different outcomes. We then start having far better information to form the basis for policy – not just the views of the boffins and the Wellington insiders who are good at writing submissions.

Finally, radical subsidiarity. I expect the decision markets would quickly show that we would get better outcomes if communities could make more of their own choices, rather than being led by central government all the time. New Zealand has one of the world’s most centralised governments. In my optimistic future, central government will have shrunk considerably, allowing far more room for decisions to be made at the local level. Communities will be empowered to set the rules that work for them – and as critically, people will be able to easily shift to find the community that works best for them.

That radical subsidiarity also will make it easier for New Zealand to adapt to the tech changes to come. We do have some deeply conservative communities in New Zealand that have barely managed to get their heads around same sex marriage and for whom drug legalisation remains terrifying – transhumanism will be a tough sell. Allowing beachheads for far more liberal approaches – and for experimentation in figuring out what works! – will help build broader acceptance for diverse ways of living and diverse ways of being.

That’s my optimistic future. By 2050, we won’t be arguing about which policies work: we’ll be betting on them and implementing the ones that the crowd’s wisdom has endorsed. We won’t be arguing about how to live; we’ll be moving to the parts of New Zealand that fit our preferred lives and providing the best possible argument for diversity: demonstration. And we will have stopped turning to central government for solutions to everything and will instead look first to ourselves and to our communities, because that’s where the real solutions lie.

And New Zealand will still be the very best place to live, in a much better world.
Thank you. 

Don't blame the bank, blame the Vogons

This kind of headline used to be exclusive to the Inside of the Asylum. But we've imported American Anti Money Laundering rules. And so we get this.

Big kudos to the prior nannying National government. Heckofajob.
You might be 94, but you'll still need an 18+ card: ANZ Bank

He may have fought in World War II, had children and lived in New Zealand since he was 16, but proving his identity is turning out to be tough for an Auckland 94-year-old.

All John Lokes wanted to do was open an account at ANZ Bank after his wife died.

But he doesn't drive or travel overseas, so proving who he was at the bank was tricky.

Loke's daughter Marie Richardson said she took her father into the Henderson branch on Friday and was shocked to discover that neither his expired passport nor his driver's licence, current gold card or credit card was enough to satisfy staff.
...
Marie said after repeatedly reminding bank staff that her father was 94 years old, they agreed to file for an exemption - meaning his request to open an account could be applied for without photo identification.

"They just said, they've got this criteria of what you have to have and they said the auditors are very picky on it ... we had everything we could possibly have. I mean, he can't get a Gold Card in New Zealand without having proved his ID, I wouldn't imagine?

"I was dealing with it, so I got rather stroppy. When they said can you apply for an 18+ card for him, I said, 'you've got to be joking, that is just ridiculous, he's a 94-year-old man applying for an 18+ card?'.

"It is funny but it is silly, too, that you have to go through this performance."

An ANZ Bank spokesman said although the bank couldn't comment on specific cases, due to privacy laws, there were customers who did not have the required ID but the ANZ worked them out on a case-by-case basis.
It's easy and obvious to blame the banks when you're stuck in this kind of stupid spot. But the costs to the bank of getting anything wrong in this stuff are not small. Some jackass official could decide that that 94-year-old was really a money laundering risk, and if the bank hadn't been careful enough, well, there'd be trouble. Blame instead should go to the Vogon National Government who passed the AML rules in 2009.

HT: Stephen Franks. Stephen suggests that the prior Labour cabinet may share some blame.

The same Vogon approach to the rules killed iPredict.

We covered the iPredict debacle in our report on regulations and technology. Here's what there happened.
No one suspected that money laundering regulations designed to block big criminal enterprises would kill tiny iPredict.

iPredict was a real-money prediction market owned by Victoria University of Wellington. The market let traders buy and sell contracts that would pay out based on political or economic events. Prices in such markets have provided remarkably efficient predictions of election outcomes. Traders could not deposit more than $10,000 into their accounts, and the total amount of money held in trader accounts in 2015 was about $200,000.

iPredict’s launch in the lead-up to the 2008 election represented the best of New Zealand’s regulatory culture. The Securities Commission took on a facilitator’s role to help iPredict fit the futures exchange into existing regulations. As one insider put it, the commission thought the market was ‘cool’ and wanted to make it work.

iPredict was arguably the world’s leading real-money prediction market of its time.110 The Reserve Bank even cited iPredict’s inflation predictions in its Monetary Policy Statement.111 Political commentators used iPredict’s election contract prices to make their forecasts.112 Meanwhile, anti-gambling pressure groups, and lobbyists for legal gambling operations made for fairly restrictive terms governing the only authorised prediction market in the United States.113

Nonetheless, iPredict was never a financial success. Hopes of running sponsored markets for large corporates forecasting sales, for example, proved overly optimistic. It continued to operate thanks to the generosity of Victoria University and the value of its data to academic research.

But iPredict was hit with two regulatory shocks. The Financial Markets Conduct Act 2013 upended much financial markets regulation, including the provisions under which iPredict operated. While the Financial Markets Authority (FMA), which succeeded the Securities Commission, worked creatively with iPredict to help it fit into the new structure, the legal costs involved were not small. As a securities lawyer who helped iPredict put it, figuring out how to fit iPredict into the Act was almost like taking a securities law exam.114 When regulations designed for big banks hit small players, legal costs can be almost insurmountable.

While iPredict had been successfully working through Act compliance with the FMA, compliance costs involved with anti-money laundering legislation proved overwhelming. Know-your-customer regulations are expensive enough for banks. For iPredict, where hundreds of traders maintained accounts around the $5 mark, and the total amount traded was less than half the value of the average house in Auckland, it was impossible. The arm of the FMA responsible for anti-money laundering compliance seems to have taken a conservative view; the Ministry of Justice then recommended against exempting iPredict. Expecting hundreds of thousands of dollars in ongoing legal costs for a venture that barely otherwise earned its keep, Victoria University closed iPredict.

iPredict’s initial authorisation represented the kind of regulatory nimbleness that would have showcased New Zealand in the digital age. iPredict’s closure demonstrated a rather more hamfisted approach.

Glenn Boyle, professor of finance at the University of Canterbury, helped develop iPredict during his time at Victoria University. On the discussions with the Securities Commission, he says:
I recall the money laundering bogeyman coming up only once, and then only in jest. I don’t remember the exact wording, but it was something along the lines of “you’ll probably get hit with money laundering charges if the Americans invade or we ever elect a communist government.”115
The FMA could and should have recognised that iPredict did not pose any substantial money laundering risk. The market was not sufficiently liquid for anyone to move more than trivial amounts through it. The Ministry of Justice could have recommended an exemption to the anti-money laundering requirements, and reconsidered whether iPredict could operate under exemptions that more closely suited its situation. And all of them should have considered that little iPredict couldn’t likely afford protracted legal negotiations with the government.

Instead, the government loaded a tiny academic enterprise with compliance costs befitting one of the big banks – and broke its back.

110 Disclaimer: One of the authors of this report, Eric Crampton, served as academic advisor to iPredict in the late 2000s.
111 Reserve Bank of New Zealand, “Monetary Policy Statement” (September 2011).
112 See, for example, Niko Kloeten, “iPredict launches new election website,” National Business Review (28 July 2011) and Bryce Edwards, “The infuriating and fantastic Winston Peters,” The New Zealand Herald (11 April 2014).
113 See Iowa Electronic Markets, “About the IEM: Frequently Asked Questions,” Website.
114 Personal interview.
115 Eric Crampton, “Unless the Americans invade or we elect communists,” Offsetting Behaviour Blog (27 November 2015).
Since shifting to Wellington, I don't know how many hand-wringing sessions I've attended where bureaucrats from one Ministry or another agonize over whether New Zealand firms are keeping up with technology, whether firms are innovative enough, why there's a long tail of unproductive firms, and what government might do to induce presumably-complacent NZ firms to push harder.

They never stop to consider whether maybe, just maybe, they could be the problem. Whatever bureaucratic impediments they've put in the way of innovation - those are either invisible to the Vogons or are just fixed facts of the world that cannot be changed.

And yet this remains the place where the Vogons have made the fewest inroads. What hells be all the others.

Tuesday, 20 February 2018

Charter shut-down

Students marched in Auckland against the closure of their schools. 

Partnership schools, New Zealand's take on Charter Schools, started under National - as a concession to the ACT Party. National didn't much support them while in government, but has taken up the cause since Labour's proposed changes to the system.

Roger Partridge, our Chair, was at the rally. I enjoyed his report.
Against this backdrop, it is not obvious why the new education minister is so determined to put an end to New Zealand's charter schools model and, to quote his January cabinet paper, "close these charter schools in their current form".

And to do so without having even visited one of them.

Could the answer lie in misplaced loyalties? Teachers at charter schools are not required to be registered and the schools are bulk funded. These arrangements permit the schools to hire teachers on different contracts to those in regular state schools, to pay teachers more (or less), and to hire specialist teachers from outside the regulated profession.

Each of these freedoms is a threat to the teachers' unions' collective bargaining powers. As a consequence, the teachers' unions have been vocal opponents of the charter schools policy. No one can blame them for that. That is their job.

But our state education system does not exist for the benefit of teachers – or their unions – any more than the legal system exists for the benefit of the Law Society, or the health system for doctors.
Labour has proposed making cartel behaviour criminal. I'm an antitrust skeptic. But if we're going to have antitrust enforcement, under criminal penalty, we should not leave out Ministers and bureaucracies that cartelise industries.

  • Whoever decided that pharmacies should only be owned by pharmacists has helped to cartelise that industry. Any Ministry and Minister continuing that regime should face criminal charges.
  • Building materials supply regulations that make it difficult to import perfectly adequate materials from places like Tokyo, Seattle or Vancouver are a form of cartel restriction. The Ministries and Councils that encourage those rules should face criminal charges if they do not change the rules to allow greater competition.
  • Occupational licensing restrictions, while not nearly as bad as in the US, foster cartels. More charges, likely against MBIE. 
  • And if the Minister, the Ministry of Education, and the unions change the rules to block competition from charters, I'm sure there are a few spare sets of handcuffs lying around. 
  • The Productivity Commission concluded that government regulations around the tertiary sector have cartelised higher education. Unless they fix the system, we could imagine cartel charges against the Minister for Tertiary Education, CUAP, TEC, and the Vice-Chancellors.
  • How many regulatory regimes provide a simple vehicle for objecting to competitors' rights to do business? How many of them could be deemed to facilitate anticompetitive behaviour? 
  • If the government brings in a GST-at-the-border regime that is more costly to enforce than the GST revenue it brings in, and that deters imports because of the hassle involved for consumers, the most plausible explanation is cartelisation behaviour. The Retailers Association and the Booksellers Association, together with the Minister implementing it, should face antitrust investigation under threat of criminal penalty should it happen. 
Efficiencies can be a defense in corporate antitrust cases - if a merger or anticompetitive-looking regime actually benefits consumers, then it's fine. But the firms involved have to show it. 

And so if any of those regulatory regimes actually pass cost-benefit assessment and benefit consumers on net, that's a perfectly valid defense. But the Ministries, for once, would have to put up a rigorous cost-benefit assessment of their regimes. Is there any chance at all that any cost-benefit assessment could find that it makes sense to ban people from using drywall that's perfectly good enough for use in Vancouver homes? That there's any defensible reason for only allowing pharmacists to own pharmacies? 

It sounds like satire because we all know full well that the State will never prosecute itself for its own cartel behaviour. But are there really that many cartel arrangements that can stand up without government support? 

Monday, 19 February 2018

Small effects

A report by the New Zealand Institute of Economic Research (NZIER) concluded that a sugary drinks tax by itself would not significantly reduce obesity. This has fuelled the merchants of doubt who are opposed to including it in a multi-strategy approach to reduce our appallingly high rates of childhood obesity and dental caries.

The report drew the wrong conclusions because it dismissed the estimated changes of body weight as trivial when in fact, applied across the whole population, they are substantial. For example, an 800g reduction in weight from a 20 per cent tax would have an impact equivalent to halting the rise in population weight gain for three years.
I suppose that's the conclusion you get if you think the world's a Manichean struggle of heroic public health people against some evil conspiracy.

Let's leave the battles of good and evil and go back to the study. The NZIER report surveys a pretty wide literature.

The specific one that Swinburn is here citing in from John Gibson at Waikato. The Gibson study takes a prior simulation model of Grogger's and corrects an overestimate of the demand elasticity. Grogger doesn't really look at obesity though. Grogger rather estimates the effect on obesity of a reduction in soda consumption using models of energy intake and expenditure.

Gibson shows that Grogger massively overestimated the effect of tax on consumption, and so Grogger's modeled effects on obesity were too large. The steady state weight change should have been about 0.4kg, not Grogger's 2-4 pounds. The Mexican tax has been characterised as a 10% tax (close, but it's really a peso-per-litre excise), so I guess doubling that gets you the 800 grams.

Gibson corrects the demand elasticity part, but doesn't look at the soda-to-obesity part. He just says that if Grogger's model of the consumption-obesity relationship is right, then the effect of tax on obesity is much smaller than Grogger estimated.

NZIER cites a pile of studies that do try to get more direct links from consumption to obesity outcomes.

NZIER cites Maniadakis et al, 2013, a metastudy of 55 studies on sugar taxes. NZIER summarises:
The relationship between prices and taxes on food and beverage items and health outcome measures was found to be very weak. Results suggested that a 10 percent increase in prices (including by imposition of a tax) would be expected to reduce energy intake by a maximum of 50 calories per day, resulting in a weight loss of up to 0.3 kilograms per year, which was deemed to be insignificant.
But it would be a misreading to say they deemed it insignificant because 300 grams per year is small. They deemed it insignificant because it was the largest effect found in the eleven studies in that category, with other ones finding smaller effects or zero effect. Here's Maniadakis et al:
Moreover, six studies ,, and five studies  examined the association between beverage/food prices and taxes and energy and weight outcomes, respectively. These studies indicated that there is a very small impact of prices and taxes on energy intake and weight outcomes. These studies indicated that the caloric effect of a 10% increase in prices or a corresponding imposition of a tax reduces energy intake by a maximum of 50 calories per day, 450 per month, and up to 0.3 kilograms or 1.5 pounds per year, which cannot be considered significant. The specific studies also indicated the regressive nature of taxes and that their use is promoted mostly in order to generate revenue for the public purse.
NZIER also cites Backholer et al, another metastudy suggesting insignificant effects. Here's NZIER:
Backholer et al. (2016) reviewed studies estimating the effects of an increase in the price (or a tax) of sugar-sweetened beverages on purchases or consumption and weight outcomes regressivity, within high-income countries. Price elasticity estimates varied considerably across studies as did resulting consumption changes and weight changes. The review found that few studies statistically tested differences in outcomes between socio-economic groups. Seven studies reported on changes in weight outcomes for the total population following an increase in SSB prices. Studies either found no association between a tax on sugar-sweetened beverages and BMI or a very small association, with insignificant weight loss implications of up to less than 2kg over ten years. Some found similar reductions in weight for all socio-economic groups while others found greater reductions for lower income groups compared to higher income groups. A tax on sugar-sweetened beverages was associated with a wide range of estimated impacts on the population obesity rate: from a less than 0.1 percentage point decrease in obesity prevalence to a more than 10 percent (3 percentage point based on a 30 percent obesity rate) prevalence reduction. All studies that examined the average household tax burden reported that tax on sugar-sweetened beverages would be regressive, but with small differences between higher and lower income households (0.10-1.0% and 0.03%-0.60% of annual household income paid in tax by low- and high-income households, respectively). 
The problem isn't that 2kg over ten years is deemed small, it's that it's the largest effect in a field of either smaller effects or no effects.

Swinburn then goes on a bit of a rant about the inapplicability of rationality models, but I don't see the relevance - or at least I don't see that it goes the way Swinburn wants it to go. Whether people are wholly rational, or completely barking mad, the studies aren't showing any particular effect of sugar taxes on sugar consumption - at least in the ranges that have been tried so far.

But it's worse than that. The rationality assumptions are what make sugar taxes a plausible intervention in the first place. If people are completely irrational, there's no necessary relationship between demand and prices except through an income effect. And in that world, why would we even be thinking about sugar taxes?

Sugar redux

Responses to NZIER's literature review on sugar taxes have been fun.

As reminder on the background: the Ministry of Health commissioned the New Zealand Institute for Economic Research to do the work. NZIER's report is dated August 2017. The Ministry did not release the report. I heard it existed and put in an OIA request 30 October. The Ministry delayed the release until late January.

I don't know why the Ministry didn't just put the report up on its own website when it was received. Maybe they wanted to brief any incoming Minister on it first, and there was an election that got in the way. But it still took a long time and the Ombudsman's chasing them up. Bureaucratic cock-up is always a plausible explanation, but for a report that was just sitting on their desk, for months, and that took no redacting or anything other than a signoff... I suppose there are advanced degrees in bureaucratic foul-up.

Anyway, we received the report and put out a press release on it; would be a shame for good work to go unnoticed. Best I'm aware, it's not available anywhere on the MoH website, just on NZIER's website.

I wonder if the outfits that liked to paint opposition to sugar taxes as being exclusively ideologically driven or driven by nefarious interests will ever provide some apologies. The Public Health Brigade (NZ edition) likes to sue for defamation whenever their motives are impugned, but they're awful quick to assume that any opposition to their Good Works can only have evil motive. 

Sunday, 18 February 2018

Pharmacy smokes

Pharmacies in New Zealand aren't the most competitive. We have a bizarre rule requiring that majority ownership of any pharmacy must be held by a pharmacist. It's just dumb. We don't require that restaurants be owned by trained chefs; we don't require that bookstores be owned by licensed authors; we don't require that vegetable shops be owned by registered farmers with a Bachelors in Agricultural Sciences. 

But only a pharmacist can own a pharmacy because somehow training as a chemist is exactly what you need to be able to run a retail operation.

All that's to say that there can be rents available in pharmacy because of stupid entry restrictions.

So Otago went and surveyed 30 Wellington pharmacies asking them if they'd like a monopoly on cigarette sales. Otago University wants to ban cigarettes everywhere, and the path to doing that can involve making it a hassle to get cigarettes. So making them available only in pharmacies can be part of that.

Pharmacies have some local monopoly power given the entry barriers caused by the ownership restrictions. Their markups on cigarettes could consequently be a fair bit higher than that seen at the local dairy.

And despite that, pharmacist support for selling smokes wasn't all that high.
Pharmacies may consider selling tobacco to help achieve New Zealand's "bold measures" of being smokefree by 2025, a research survey finds.

The small-scale University of Otago survey asked 30 Wellington pharmacies in 2015 if they would consider filling the void of tobacco sales if they were phased out in supermarkets, convenience stores, petrol stations and tobacconists.

It was a very likely option for 20 per cent of participants, but the majority of pharmacists said they were somewhat likely (43 per cent) to sell tobacco if the strategy was proven to be effective elsewhere.

However, pharmacists were concerned the sales could decrease safety through tobacco-related crimes like robberies and staff abuse, increase foot-traffic and work-load, and potentially damage the "health professionals" image of New Zealand pharmacies.
I don't get how a survey of 30 pharmacies asking them whether they'd like to be the sole suppliers of cigarettes gets to be a peer-reviewed journal article.

But it is kinda interesting that places that hold all kinds of high-demand products - all the prescription narcotics - and already have security measures in place for those restricted drugs, are scared to stock tobacco because it would make them a target for robberies.

Saturday, 17 February 2018

Cannabis cross-price elasticities

It's been a bit of an open question whether legalised marijuana would lead to more or less alcohol use.  If the two goods are complements, say if people liked drinking while consuming cannabis, then any increase in cannabis use could yield greater alcohol use. If they were substitutes and people smoked instead of drinking, alcohol use could drop.

RAND surveys some of the more recent evidence. 
Different studies also examine different time periods, and the laws have been changing over time. Early state laws (such as the medical cannabis legislation California passed in 1996) tend to allow broader qualifying patient conditions, legal home cultivation and less oversight of dispensaries. Differences in policies may lead to different effects on cannabis use, and possibly alcohol use. And the laws' impact may evolve over time as the market expands or as federal enforcement shifts.

A recent working paper out of the University of Connecticut and Georgia State University has received a fair bit of attention as the latest in this series of attempts to shed light on the issue of whether alcohol and cannabis are substitutes or complements based on evidence from medical cannabis laws. The authors examined changes in alcohol sales at grocery and convenience stores and other outlets. They found that cannabis and alcohol are strong substitutes, with medical cannabis implementation being associated with a 15 percent reduction in monthly alcohol sales.

That is a surprisingly large effect, equivalent to what we would predict if the price of alcohol increased on the order of 30 percent. The effect seems especially large considering that during the study period of 2006 to 2015, the newer state medical cannabis programs that drive the main result were more restrictive and had low participation rates, typically involving less than 1 percent of the population (PDF). Of course, these medical laws could have effects that reach beyond the registered patient population if they made it easier and cheaper for non-patients to access cannabis, or if the laws caused the public to change its attitudes about cannabis and alcohol use more broadly. Much more needs to be learned about what's driving the results in this working paper.
They warn that these results on medical marijuana might not apply to recreational cannabis laws, as alcohol tax revenues in Colorado and Washington have remained fairly stable since marijuana shops there opened.

Friday, 16 February 2018

Housing stocktake

I'm both late and early to this particular party.

Phil Twyford this week announced the results of his commissioned stocktake on the housing crisis. The housing shortage is real and the consequences are substantial. Infrastructure funding constraints block housing supply increases. Given the shortage of housing, the accommodation supplement is likely to be soaked up mostly in higher rents.*

I did like Henry Cooke's noting of something missing
He insisted in the morning the effort was not political and to a certain extent, Twyford would have wanted some solid figures on this made public. But this was unabashedly political.

The report's authors - all well-respected professionals - clearly come at the issue from the left. People who agree that there is a housing crisis but focus on issues of planning rather than rental regulation like Eric Crampton were absent.
I would fill in a couple of missing blanks, though I really like the report overall. I'm late to the party as the report was out earlier this week, but I'm also early since I've been watching this file for a while.

Tenants' Rights

If housing supply remains completely messed up, then there can be a case for strengthening tenants' rights. Just as with the accommodation supplement, the inelastic side of the market bears the burden. Regulating better quality for tenants will mostly be an imposition on landlords, rather than tenants, in an inelastic market - though there can always be undesirable side effects.

But if housing supply is fixed, then the incidence shifts. You then can easily wind up in spots where people would have been happier paying lower rent for a less well maintained property, or having fewer flatmates in a less well maintained property, but aren't able to. If supply is working properly and is relatively elastic, more of the cost is passed through to tenants by exactly the same logic that has landlords currently reaping the benefits of the accommodation supplement.

There's also a fun intersection with the government's proposed change to the bright-line rules on investment properties. Background: New Zealand doesn't have a capital gains tax, but if your income comes from putting time and effort into shuffling capital around, you're going to be taxed on that gain as income. And that's not nuts. National had used a two-year bright-line rule which said that if you flipped investment properties purchased less than two years ago, you were probably buying and selling properties as income so the gain was taxable. Labour's extending that to five years.

But think on the timing. Suppose you bought a house three years ago and rented it out. New rental standards will force you to take on more debt than you're comfortable with, or are able to take on. So you decide to sell your investment property because of the change in investment conditions, not because you're trying to bank capital gains or because you were trying to profit by flipping properties as income. Under the new bright-line rule, more of those sellers will be caught for tax on any increase in their property's value. I wonder how many of the more highly geared ones will find this difficult.

Accommodation supplements and state housing

The report also recommends increasing the state housing stock, noting sharp increases in the waiting list. But this too should be seen in the context of the current crisis. When Council won't let people build, you'll automatically get more applications for state housing because of overcrowding and high rents in private markets.

National recognised that it made little sense for government to own housing stock when the needs of the people it is trying to help change a lot over time. If locational preferences change, it's hard to move state houses. If family configurations change, you can't easily shift around how many bedrooms are available in a state house. And if you sell a state house on a large lot in a desirable location, you can unlock funds that would let you help far more than the one family being helped by the state house.

And so National was trying to shift away from state housing, much of which was due for renewal anyway, and towards more flexible arrangements paying people cash and letting them use the accommodation supplement to get the kind of housing they needed where they needed it. You know how Trump is looking to screw up SNAP in the US by giving people a box of basic food items rather than the current cash transfer that lets them buy the food that makes sense for them? Giving people an accommodation supplement lets them find the accommodation that's right for them instead of a box of house that might not.

But that policy is not nearly as effective as it could be, and is far more expensive than it should be, when Councils don't let people build. The costs of housing assistance, as the report notes, were $1.977 billion in 2017. Recall that core government spending in New Zealand in the last fiscal year was about $80 billion. So 2.5% of core spending went towards accommodation supplements, with much of the benefit enjoyed by landlords rather than tenants in an inelastic market. And nobody in National could or would displace Nick Smith from the housing portfolio.

That failure hardly makes a case for a renewed state housing push though. Rather, it makes the case for immediate liberalisation of zoning rules in Auckland eliminating most of the viewshafts and allowing far more density in the places people want to live. You'll get affordable housing if you let people build the mid-tier density that's missing in Auckland: a lot more terraced housing in the inner suburbs. More people on less land per person through taller dwellings, fewer parking spaces, and smaller yards combine for more affordable rentals. Allowing expansion at the city's fringes prevents the price of inner-city land from being unduly bid up.

The report isn't really about policy - it's about the symptoms of the current mess. But the prescription for those symptoms has to depend on whether the underlying cause of the disease is going to get treated. And I have every expectation that Twyford is serious about getting at the underlying constraints on supply. Let's take a somewhat crass analogy. Suppose a person with cancer has two options: palliative care with a lot of opiates and a low life expectancy, or aggressive chemo that has been shown to be very effective for this type of cancer. If you're going to go with the chemo and fix the underlying problem, you're not going to need the palliative care.

Fixing the underlying supply issues and infrastructure financing would do a lot to fix the symptoms the report identifies. I worry that, if those aren't fixed, neither the private sector nor Kiwibuild can really get going (and if they are fixed, Kiwibuild is hardly needed). And we'll still be hitting capacity constraints in the construction sector.

I wish government could focus on just getting the underlying regulatory and funding issues sorted out rather than trying to be a huge property developer at the same time.


* Fun to see that Labour's report is making this correct point. The relatively inelastic side of the market bears the cost of a tax or enjoys the benefit of a subsidy. And so econometric results from 2005's housing market are of little use in determining the incidence of the accommodation supplement in 2017, like I'd noted last year.

Four day weeks?

The Dom Post asked me for comment last week on Perpetual Guardian's trial of four-day work weeks. They wanted to know whether I were pro or con. I couldn't really do that: how am I or anyone else outside of the company to know what works best for them? I'm totally 'pro' their being able to try this out, but how could anybody be for or against it as a general policy?

So I gave them this instead, celebrating that companies and workers still have the freedom to come to whatever arrangements work best. For some it could be four day weeks, but it would hardly work for all. 
New Zealand's relatively flexible labour markets allow this kind of innovation, but we should not take them for granted.

Australia's Awards system, for example, is far more prescriptive about the pay and conditions that must be in place in every workplace.

The rules might make sense if one size really did fit all firms in any given industry, but the market is more complicated than that.

If Perpetual Guardian's experiment works for them, firms facing similar circumstances will have to take notice. If it fails, they can revert to the more standard five-day week.

The costs or benefits either way fall with them, so they have every reason to have thought hard about this.

But when regulation sets the conditions across a whole industry, experimentation like Perpetual's becomes much too hard.

And if MBIE gets things wrong, firms and workers bear the costs.

Let's celebrate Kiwis' ability to innovate, while we still have it.

Risk premiums and the gender wage gap

A few days ago, this study of gender pay differences for Uber drivers came out. The key finding, that women earned 7% less than men, was stunning because Uber uses a gender-blind algorithm. The figure below was the most interesting one from the study as it summarized the differences in pay quite well.
The Uber study found a wage gap determined by men being more likely to drive quickly, to take jobs at riskier times, and to take jobs to riskier places. But without the kind of microdata that Uber has, and if you didn't know that fares and pay were set by a gender-blind algorithm, you might have been quick to conclude it was just discrimination.
However, there are hard to properly measure in order to assess the share of the wage gap truly explained by discrimination. Here with the case of Uber, we can get an idea of the amplitude of the differences. Male Uber drivers prefer riskier hours (more risks of having an inebriated and potentially aggressive client), riskier places (high traffic with more risks of accidents) and riskier behavior (driving faster to get more clients per hour).  The return to taking these risks is greater earnings. According to the study, 20% of the gap stems from this series of choices or roughly 1.4 percentage points.

I think that this is significantly large to warrant further consideration in the future in the debate. More often than not, the emphasis is on education, experience, marital status, and industry codes (NAICS code) to explain wage differences. The use of industry codes has never convinced me. There is wide variance within industries regarding work accidents and diseases. The NAICS codes industries by wide sectors and then by sub-sectors of activities (see for example the six-digits codes to agriculture, forestry, fishing and hunting here). This does not allow to take account of the risks associated with a job. There are a few study that try to account for this problem, but there are … well … few in numbers. And rarely are they considered in public discussions.

Here, the Uber case shows the necessity to bring back this subtopic in order to properly explain the wage gap.
It'll be interesting to watch where the current NZ government takes pay equity legislation.

Monday, 12 February 2018

Environmental economics

In the current edition of the NBR ($), I remind people that standard mainstream economics textbooks have plenty of ways of dealing with environmental effects. We hardly need to shift to some sustainability-based alternative.
Auckland has congested roads not because of any need to replace mainstream economics with a sustainability-based alternative. Auckland’s congestion problems have rather less to do with failings of economic theory and rather more to do with central government’s refusal to allow Auckland to use mainstream solutions.

The case for better water management also seems clear. When the US had problems with acid rain from excess sulphur dioxide emissions, it implemented a cap-and-trade regime to reduce emissions to sustainable levels. Inefficient plants shut down, others cleaned up and acid rain ended.
I conclude:
Shifting from standard economic models to sustainability-based alternatives risks losing the scale provided by mainstream methods for weighing alternatives, making it too easy to adopt policies that cost the country far more than the value provided.

The political right has framed sound policy addressing externalities as being too costly for economic growth. In doing so, it made it too easy to cast economic growth as the enemy of sustainability.

We need to re-emphasise the parts of the mainstream economic textbooks that are hardly new but are true.
There's too much of the David Suzuki critique flying around.

Thursday, 8 February 2018

Informative advertising

New Zealand's in a fun legal limbo right now on e-cigarettes. Everybody knows that the Ministry of Health is soon to be liberalising, so the de jure restrictions that prevent selling of nicotine-containing e-liquids aren't being enforced. It's pretty easy to get vaping liquid.

In some ways, whatever regulatory regime comes out of this will be more restrictive than the current de facto status quo.

But if legalisation makes it easier for providers to advertise, that could be for the good.

Dhaval Dave and coauthors find that FDA restrictions on e-cigarette advertising in the United States prevented people from quitting smoking. From their abstract:
Only recently introduced into the U.S. market, e-cigarettes have been aggressively promoted, and use is increasing rapidly among both adults and youths. At the heart of the regulatory debate are fundamental questions regarding whether e-cigarettes will draw cigarette smokers away from a dangerous habit or lure new initiates into tobacco use. We provide some of the first causal evidence on whether e-cigarette advertising on television and in magazines (which comprise about 90% of total media spending on e-cigarettes) encourage adult smokers to quit. We find that the answer to this question is a tentative yes for TV advertising but no for magazine advertising. Our results indicate that a policy to ban TV advertising of e-cigarettes would have reduced the number of smokers who quit in the recent past by approximately 3%, resulting in roughly 105,000 fewer quitters in that period. On the other hand, if the FDA were not considering regulations and mandates that would likely eliminate many e-cigarette producers during our sample period, e-cigarette ads might have reached the number of nicotine replacement therapy TV ads during that period. That would have increased the number of smokers who quit by around 10%, resulting in an additional 350,000 quitters.
To paraphrase Dr Strangelove, building a much less harmful alternative to combustible cigarettes doesn't do you nearly as much good if you can't tell anybody about its existence.

Monday, 5 February 2018

Bad beer takes

The Atlantic's Derek Thompson likes craft beer. But his take on its rise in the US doesn't make a lot of sense. And I'm surprised that Noah Smith didn't catch the errors

Thompson argues that the complicated morass of American state-level regulations around brewing and beer distribution meant that the big brewers couldn't take the whole field.
At the end of Prohibition, lawmakers felt that smashing these vertical monopolies was critical to promoting safe drinking. After the passage of the 21st Amendment, citizens in all states voted to abolish tied houses by separating the producers, like brewers, from the retailers, like bars. This led to a “three-tier system” in which producers (tier one) sold to independent middlemen that were wholesalers or distributors (tier two), who then sold to retailers (tier three).

By dividing the liquor business into three distinct groups, these state-by-state rules made the alcohol industry deliberately inefficient and hard to monopolize. “The great effervescence in America’s beer industry is largely the product of a market structure designed to ensure moral balances, one that relies on independent middlemen to limit the reach and power of the giants,” wrote Barry Lynn, the executive director at the Open Markets Institute, a nonprofit that researches antitrust issues.

The modern alcohol sector is specially designed to promote variety, in other ways. So-called “thing of value” laws make it illegal for beer producers to offer gifts to retailers in an attempt to purchase favorable shelf space. Other rules make it illegal for producers to buy shelf space, which saves room for smaller brewers to thrive at supermarkets and liquor stores. Altogether, these rules are designed to check the political and economic power of the largest alcohol companies while creating ample space for upstarts.

If the U.S. had long ago allowed a couple of corporations to take over both the distribution and retailing of wine before the Napa Valley renaissance, Lynn told The Atlantic in an interview, Americans would be exclusively sipping three varieties of Gallo table wine. “The reason that didn't happen 50 years ago is because you had this system that was designed to promote deconcentration, to incentivize [retailers] to go out and find the new, the different, the alternatives,” he said. “It was effective in achieving that aim.”
Let's now imagine a country that didn't have these kinds of rules. Where brewers could choose whichever distributor they liked, or sell direct to the public, or sell direct to supermarkets and other retailers, or run it as a brewpub - whatever they wanted. A country where it was easy for supermarkets to get bulk deals with preferred brewers so they faced wholesale prices much lower than some of their retail competitors. And where nothing particularly blocked larger brewers from buying up smaller ones - or from putting in the taps for new bars in exchange for whatever tap access rules they and the bar can agree on.

If you think that gives you an oligopolistic or duopolistic market, think again. New Zealand has none of those dumb rules and has a craft beer scene that rivals the best American states. It's easy for new craft brewers to set up - and I can no longer keep track of all of them. We have concentrated retail markets for supermarkets; one of the chains leaves all of the beer stocking decisions to their local franchise and some of those have superb selection. Craft beer's widely available in pubs, and Lion's purchase of a few craft brewers has made craft even more accessible.

Bottom line: you don't need stupid inefficient rules in order to get good beer. You just need to make sure you don't set rules that make it too hard for new brewers to set up and compete. New Zealand has that, and the beer's great here. 

Friday, 2 February 2018

Sugar taxes - NZIER's advice

Sugar taxes just are not effective in improving health outcomes. When we surveyed the evidence for our report, The Health of the State, we found no compelling reason to think the things would work.

NZIER's report for the Ministry of Health reaches the same conclusion.

First, some backstory and grousing about document release under OIA. 

Back in October, I requested that the Ministry of Health provide me a copy of the report it had commissioned reviewing the effects of sugar taxes.

The Ministry of Health delayed my request under section 9(2)(f)(iv) “to maintain the constitutional conventions for the time being which protect the confidentiality of advice tendered by Ministers of the Crown and officials”, and under 18(d) as the report would soon be publicly available. But they never said how long 'soon' was.

I interpreted that combination as meaning they needed time to brief the Minister. I advised the Ministry that as I expected that it would take a fortnight to brief the Minister on the report, I'd be following up with the Ombudsman at that point.

The Ombudsman's Office provided a helpful hurry-along, reminding MoH of its preference that 'soon' have a definite date around it.

I received a copy of the report on Wednesday by courier, 50 working days after the initial request for a report that was just sitting on the desk at MoH. It's also now up on NZIER's website, which is fortunate as the only digital copy MoH was willing to provide would have been unusable: image files in a PDF rather than searchable text.

But enough complaining about the OIA.

It looks like NZIER found the same thing that we did. They reviewed forty-seven peer-reviewed studies and working papers published over the last five years.
In our review of the literature, we find that:
  • Taxes do generally appear to be passed through to prices and some reduced demand is likely

  • Estimates of reduced intake are often overstated due to methodological flaws and incomplete measurement

  • Price elasticities from early studies with fundamental methodological flaws have later been used in a number of other studies to assess the impact of sugar taxes, resulting in significantly overestimated reductions in demand

  • There is insufficient evidence to judge whether consumers are substituting other sources of sugar or calories in the face of taxes on sugar in drinks 

  • Studies using sound methods report reductions in intake that are likely too small to generate health benefits and could easily be cancelled out by substitution of other sources of sugar or calories

  • No study based on actual experience with sugar taxes has identified an impact on health outcomes

  • Studies that report health improvements are modelling studies that have assumed a meaningful change in sugar intake with no compensatory substitution, rather than being based on observations of real behaviour.
The evidence that sugar taxes improve health is weak.
The NZIER report notes that the Ministry was particularly interested in the evidence around taxes on sugar-sweetened beverages.

The report emphasises that sugar taxes only improve health outcomes through a chain that must hold at every link. Imposing the tax must increase prices; increasing prices must reduce consumption; reducing consumption must reduce energy intake; reduced energy intake must reduce physiological risk factors.

When NZIER evaluated the literature, they found substantial reason to worry about the chain that leads from taxes to potential health benefits. They find causality hard to determine; problems in estimates of consumption elasticities; difficulty in finding links between taxes and health outcomes; and little work on optimal tax design.

They conclude:
As we noted in the section on frameworks, there are multiple steps in the chain of intervention logic from the well-established principle that an increase in the price of a good leads to a reduction in consumption of that good and, all else equal, to an improvement in health outcomes.

There have been several recent examples of governments imposing taxes on sugar with the intention of improving health outcomes and, thus an extensive literature examining the effects of those taxes.

Our conclusion is that the evidence base gets weaker further along the chain of intervention logic.

If taxes did not have economic costs, through deadweight losses and implementation costs, then even a slight causal link between a tax and an improvement in health outcomes might be justified. That, however, is not the case.

We have yet to see any clear evidence that imposing a sugar tax would meet a comprehensive cost-benefit
Anti-sugar campaigners have framed opposition to sugar taxes as reflecting the pecuniary interests or ideology of those opposing those taxes. The evidence instead suggests that those taxes would have little discernible effect on health outcomes and would be unlikely to pass any cost-benefit assessment.

Thursday, 1 February 2018

Critical studies and neoliberalism

I love this essay from Joseph Heath, who was stuck reviewing a dozen 'critical studies' books as part of the jury for a book prize.
The most striking thing about the books is that, out of 16 books I received, only four were straightforward instances of what would traditionally be thought of as “social science,” according to the positivist conception. In other words, only four of them had as their primary objective the desire to establish and present to the reader facts about the world. The others, by contrast, had as their primary objective the desire to advance a normative agenda – typically, to combat some form of oppression. That is to say, they were driven by the “emancipatory” interest of human reason.

Most of these could broadly be classified as one or another form of “critical” studies. (In academia, the term “critical” is often introduced into the description of a field, in order to flag this orientation toward normative questions, particularly those involving one or another forms of oppression. Thus we have “critical” legal studies, “critical” race studies, “critical” aboriginal studies, and so on.) Most of these books were also profoundly cringe-inducing. They were, to put it mildly, bad. Forced to read a dozen of them, however, I began to notice certain patterns in the badness.

Earlier on, I said that the ambition for “critical social science” was to have, not just social science guided by normative commitments, but for those normative commitments to be made explicit. The biggest problem with the books I read is that they almost invariably failed on the second half of this. It was obvious that the authors – with the exception of a few law professors – had no idea at all how to make a normative argument. Indeed, they seem incredibly averse even to stating clearly what sort of normative standards they were employing. The result was entire books aimed at bolstering resistance to things like “neoliberalism,” none of which ever stated explicitly what “neoliberalism” is, much less what is wrong with it.
I suppose those books' authors could have consulted Oliver Hartwich's history of the term.

Back to Heath:
A long time ago, Habermas wrote a critical essay on Foucault, in which he accused him of “cryptonormativism.” The accusation was that, although Foucault’s work was clearly animated by a set of moral concerns, he refused to state clearly what his moral commitments were, and instead just used normatively loaded vocabulary, like “power,” or “regime,” as rhetorical devices, to induce the reader to share his normative assessments, while officially denying that he was doing any such thing. The problem, in other words, is that Foucault was smuggling in his values, while pretending he didn’t have any. A genuinely critical theory, Habermas argued, has no need for this subterfuge, it should introduce its normative principles explicitly, and provide a rational defence of them.

As I was reading through the stack, I couldn’t help but notice that the most reliable indicator that a book is going to be a complete mess, from a normative perspective, is that it contains either discussion or extensive citation of Foucault (and/or Bourdieu). From the perspective of someone in philosophy, where this stuff is dead as disco, it’s amazing to see academics still taking it seriously. In any case, the major thing that they seem to be attracted to, in this ’80s French theory, is the cryptonormativism.

For instance, I had noticed a long time ago that the term “neoliberal” functions as the most important piece of cryptonormative vocabulary in critical studies. For those who don’t know, here’s the basic problem with “neoliberalism.” It’s a made-up thing. It’s just a word that Foucault popularized, to talk about economic ideas that he didn’t really understand. There is no group of people out there who actually describe themselves as a neoliberals. Because of this, there are no constraints on what it can refer to, and there is no one to answer any of the criticisms that are made of it. Compare that to terms like “conservative” or “libertarian.” Because there are real people who call themselves “libertarian,” if you write something that criticizes libertarianism, an actual libertarian might write back and contest what you say. With “neoliberalism,” on the other hand, you can say whatever you want, without any fear that a real-life neoliberal will write back and contest your claims – because there are none. As a result, people who use this term in their writing are basically announcing, up front, that their intended audience is the left-wing academic echo chamber. After all, if they wanted to engage with people outside that chamber, they would have to address one or more of the ideologies that are actually, and self-consciously, held by people outside that chamber. (In this respect, people who criticize neoliberalism are the cowardly lions of academia. If you think you’ve got what it takes, why not go out and find an actual right-winger to argue with?)
That has changed a bit recently, with Sam Bowman at the Adam Smith Institute appropriating the term for his set of beliefs.

Do read Heath's whole essay though. It's excellent.