Afternoon roundup

The closing of a few tabs. 

• Tim Harford's cautionary tale about the Sydney Opera House and how megaprojects bring heartbreak is a must-listen. One bottom line: if you're not real clear at the outset just what problem you're trying to solve, you're going to be causing problems. 
• My weekend column in the Stuff papers compares the current draft Government Policy Statement on Transport to the old 1998 proposed reforms - Better Transport Better Roads. The column also echoes a lot of what turned up in my submission on the draft GPS - which I don't think is yet on our website.
• Central Banking covers The Initiative's proposals around RBNZ: split prudential regulation off into its own separate institution, focus the monetary authority on inflation-alone, and not go ahead with deposit insurance. With comments from former RBNZ Chair Arthur Grimes and Mike Reddell. 
• Labour promises rebates for rooftop solar. Weird thing to promise when there's a lot of grid-scale solar going in without subsidies. The balance between grid-scale and rooftop shouldn't depend on subsidies to the latter. 
• Great piece in Quilette on the 2003 BMJ controversy over passive smoking and mortality. I remember having pointed at this literature when the Helen Clark Labour Government was banning smoking in pubs; I'd figured it should be for the venue owner to decide, especially where the risks from second-hand smoke really seemed nebulous. Not a popular view it turned out. The trendy 'let's get more government grants' people had banked their wins on second-hand smoke and were trying to argue that third-hand smoke (residue on surfaces, basically) was its own new terrible thing that needed a lot of grants. Ah well. 
• Kainga Ora is doing some really neat work in getting construction cost and build times down. The kind of thing that you'd normally expect the private sector to have led ages ago. But when councils allow very little building, who'd have the scale to front that fixed cost in process systems? Nobody would have invented automotive assembly lines if the global market for cars was a thousand a year...

Micromorts

When public stupidity is the constraint, you can either rail against the stupidity, or route around it. And Tim Harford finds a nice hack around public repugnance at putting a value on human life.

Instead of talking about the value of a statistical life, which still puts people off, talk about micromorts: a one-in-a-million chance of dying. If the value of a statistical life is $7 million, a micromort costs about $7. In New Zealand, the Ministry of Transport uses a $4.2 million figure, so a micromort here costs $4.20.

Here's Harford:

Sir David Spiegelhalter, my favourite risk communication expert, reckons that going under general anaesthetic is 10 micromorts. Travelling 28 miles on a motorbike is four micromorts; cycling the same distance is just over one micromort. The National Health Service in the UK uses analysis that prices a microlife at around £1.70; the UK Department for Transport will spend £1.60 to prevent a micromort. In a world where life-and-death trade-offs must be made, and should be faced squarely, this is a less horrible way to think about it all. A human life is a special thing; a microlife, not so much.

As Ronald Howard, the decision analysis expert who invented the micromort, put it back in 1984: “Although this change is cosmetic only, we should remember the size of the cosmetic industry.”

It's also a more accurate way of framing things. Since reasonable VSL measures derive from willingness-to-pay measures for risk reductions around small risks, we're really talking in millimort or micromort space to begin with. The scaling up makes things easier for economists; scaling down makes it instead politically palatable.

Flood risk

Christchurch Council's starting to worry about sea level rises and global warming. As much of the land on the east side of town sank with the earthquake, these risks are a bit bigger than they'd previously been.

There's been a bit of speculation about how this will affect zoning in future, with some recommendations of higher minimum floor heights above sea level. Here's the Tonkin and Taylor report; Cresswell has a skeptical take.

Wouldn't it make more sense simply to have EQC set risk adjusted insurance premiums? Zoning changes mandating higher floor levels only really apply on new builds or, potentially, on substantial-enough building redevelopments. While new buildings will then get the higher floor levels, some older ones will have replacement or refurbishment delayed because the relative cost of a new building's gone up. If EQC set actuarially fair rates for their disaster insurance, the distortion would be gone. We'd also then avoid all of the fights and rent-seeking that will result when Council starts deciding where people will be allowed to build in future due to flood risk, arguments about how seriously we should take the upper-limit projections on sea level changes, and the like. Let the insurers set the premiums, then let individuals sort out whether they like current beachside property. And let EQC's premiums basically reflect the incremental effects of insuring different types of properties on EQC's reinsurance costs. If Swiss Re won't provide reinsurance for my house except at additional charge, I should be paying the costs of that. Where EQC's trying to minimise its reinsurance costs and where the international reinsurance markets are at least somewhat competitive, this knocks the political fights around global warming out of the mix.

Tim Harford comments usefully on distortions caused when government subsidises living on flood plains. EQC premiums are scaled by value at risk, but not by the likelihood of adverse events. The country varies in seismic and flood risk; buildings vary in robustness to those risks. But nobody pays more than $150 per year for their EQC cover. While you might think the distortion can't be that big as EQC only covers the first $100,000 in damage to your house, with insurers charging actuarially fair premiums taking on the bigger part, EQC also covers land remediation.

Conflicts disclosure: Our house in South Brighton, two blocks from the beach, is a couple of meters above road level. The road's a meter or two above sea level. I expect that, as we're at least a meter higher than neighbours down the road, the regulatory changes likely aren't binding on us. But I sure wouldn't be happy about any zoning designations saying that the spit south of Bridge Street needed to go back to bush and sand because of worries about sea level rises a century out.

Wishing for the New Zealand tax code

It's easy to forget just how excellent the NZ tax system is relative to those in other countries. But we are the envy of the world. Two datapoints for this week:

Tim Harford wishes UK VAT reform would move to a system like New Zealand's, where everything attracts GST: we tax food. After listing the absurdities of the UK system, where Jaffa Cakes are tax advantaged over "chocolate digestives" and whether a sausage roll is taxed depends on whether it's been heated. Harford asks what should be done, then answers his own question:

The Mirrlees Review is an attempt to figure out what the UK tax system would look like in an ideal world, and I looked it up. The authors reckon that you could levy a uniform rate of VAT on almost everything, raise benefits, pensions and tax credits, increase the income tax threshold by £1,000, cut the basic rate of tax to 18 per cent and the higher rate to 38.5 per cent, and leave pretty much everyone better off – the government would have more revenue and citizens would be more likely to buy what they really wanted rather than what the tax system nudged them to buy.

Harford wants the VAT to apply to everything, not just to sausage rolls.

Other than the tax-free threshold, that sounds an awful lot like the New Zealand system, where GST applies comprehensively and where, in 2010, the National government reduced tax rates across the board while increasing the GST.

Item the second: Frances Woolley makes the case for taxing food in Canada. The only place where I'd quibble with Frances's analysis is here, and it's only a minor quibble. Frances writes:

When the case for taxing basic groceries is presented in these simple terms, the assumptions underlying the argument become apparent. The equation of choice with happiness rules out any paternalist arguments for exempting basic groceries from taxation. For example, at present soft drinks are subject to sales tax, but milk is not. A tax on milk would be expected to decrease milk consumption and increase soft drink consumption, all else being equal. Those who would argue for taxing basic groceries would respond in one of two ways: first, that we should respect people's choices whatever they are; second, so many of the basic goods exempted from sales tax at present are teeth rotting, IQ-lowering sugary junk anyways that the paternalist argument has little force.

All of this is true. But the current equilibrium also involves a government-enforced dairy cartel that forces up the price of milk relative to soft drinks. Abolish the dairy cartel while imposing GST equally across all food items and the price of milk would drop, not rise. Especially for a GST as low as Canada's, and a dairy cartel as noxious as Canada's.

Again, Frances wishes that Canada had a system that looked a lot more like New Zealand's.

It would be awfully nice if Labour and the Greens here stopped trying to score populist points by hacking on one of the world's best consumption taxes. Labour, in office, recognized the GST's advantages and refrained from wrecking it for a decade. Too much populist nonsense in Opposition might force their hand in a future government.

Do visit the GST tag for Seamus's excellent prior posts.

Minimum wages and living wages

Tim Harford argues that debates over the minimum wage are a sideshow relative to the larger problem: that some workers' output is insufficient to justify a living wage.

But if a young adult cannot produce enough of value to justify being paid a living wage, nothing we do to the minimum wage will help. He, the institutions which trained him and the society in which he lives, have far bigger problems

Harford's certainly right that the longer term solution to low pay is productivity increases; you can't mandate paying people more than their marginal product as firms will simply shift to more capital-intensive processes or to solutions through offshore outsourcing of labour-intensive components.

But not all wages need to be living wages. The 16 year old living at home working part time while going to school doesn't need one; and, his marginal product probably isn't enough to finance a real living. But the kid is learning valuable skills about workplace culture, showing up on time, dealing with customers - things that will help him be more productive in future. Note further that the minimum wage only counts pecuniary benefits; health insurance that comes bundled with many, but not all, US jobs is an increasing proportion of the overall salary package.

At least, as Harford notes, the UK Low Pay Commission, which advises on minimum wages, has let youth minimum wages stay relatively low. Workers aged 21+ are on a minimum wage of £6.08; workers aged 18-20 on £4.98; 16-17 year olds on £3.68; and, there's also an apprentice rate of £2.60.

Here in New Zealand, National's making it a bit to get younger folks onto the lower New Entrants' Wage; otherwise you have to pay the 16 year old, on his first day of work, no less than you'd pay any other minimum wage worker: $13/hour, (US $10.30 or £6.73).* Our youth unemployment rate isn't pretty, at least partially as consequence of the prior Labour government's decision to bring 16 and 17 year olds up to the adult minimum wage.

We can mandate that all wages are living wages, but we can't mandate that all the people who'd like to have work at that pay are able to find jobs.

And I worry Harford packs a bit into "market power" here when explaining Card & Krueger's results on minimum wages and employment in New Jersey:

If employers have market power in the labour market then they might actually offer a lower wage than the balance of competitive supply and demand would produce. Some workers would rather keep looking or sign up for welfare payments, and so employment is lower at this level. Introduce a minimum wage and both wages and employment increase, while profits fall.

Imagine a remote mining town with one big employer who pays the same basic wage to everybody. If you can't pay the new guy more than your existing workers, then you have incentive to abstain from hiring somebody whose output would cover his salary but wouldn't cover the amount you'd have to pay in salary increases to all your other workers. So increases in minimum wages can increase employment and wages in places with monopsonistic employers and low labour market mobility. But in low-skilled retail in suburban New Jersey where there's no way that hiring an additional student to stock shelves at the 7-11 forces you to push up your other workers' wages? Any retailer who's stuck with a labour shortage at current wage rates and the chance to hire an additional worker for a wage less than the worker's marginal product but above prevailing rates has incentive to defect from any cartel of employers. And remember that the theoretical argument works by having people enter the workforce in pursuit of the new higher minimum wage who were outside of the workforce previously; if we start with unemployment - people in the workforce who cannot get jobs at the prevailing wage - the theory can't really apply. I'm not sure that many of our current problems come from too many folks voluntarily sitting outside the labour force because prevailing wages are too low.

* At last report, median hourly earnings were $20.38 (average $24.78). Our minimum wage is 63% of the median wage or 52% of the average; at these levels, we expect reasonable disemployment effects, especially among youths.

Amnio expected value

@TimHarford points to Slate on the risks and benefits of amniocentesis. In short, the standard recommendation is all wrong: it should be more recommended for younger than for older women. Why? Even though risk of genetic defects among older women is higher, the costs of a miscarriage are also higher because it gets harder to have a new pregnancy if the amnio fails.

I'd put together some expected value tables for amnio in case it were needed our last time round. The obstetrician seemed a bit surprised, but it wasn't the first or the last time I'd do something shockingly economistic.

I'm not going to here reproduce the expected value tables lest I attract pitchforks and torches. The Slate article covers most of it and helpfully links to an economics working paper that uses a rather fancier model than I worked up: they use a dynamic model that incorporates the chances of amnio on a replacement pregnancy where I simplified by just assuming an average expected value replacement. It's nice that this working paper's out there though - it'll save others from having to hack out their own simpler versions and might help improve doctors' recommendations.