Surveying heavy drinkers

The latest NZMJ has a couple of pieces on alcohol minimum pricing.

The editorial from BC's Tim Stockwell lauds minimum pricing's successes in BC, though I think he there overstates the case - especially where some of his own work in British Columbia makes a hash of things by using regional CPI within B.C. to get differences in the real value of the province-wide minimum alcohol price. I'm pretty sure that you can't induce panel variation in your main regressor of interest by just dividing that constant by the varying regional CPI. That's probably one of those things that ,robust won't fix.

The new New Zealand evidence comes from a survey of just over a hundred heavy drinkers. The Science Media Centre asked me for comment on that part; my comments are copied below.

“Minimum alcohol pricing has the potential to mitigate harms from heavy drinking at lower cost than across-the-board excise increases. However, we need to be cautious about the potential effects.

“The Falkner et al study surveys heavy drinkers to ask them what they might do were they faced with higher alcohol prices. Thirty percent of those drinkers who have previously faced situations in which they could not afford alcohol reported having turned to illicit or prescription drugs when they could not afford alcohol; the authors note this may be an underestimate since their survey excluded drinkers who had reported co-morbid drug use. Pricing heavy alcohol users out of alcohol, for some users, will result in shifting to other substances. Net effects on harms are then less clear.

“Byrnes et al (2013), in Australian data, reported that heavy drinkers did respond to price hikes by curbing consumption, but that they did so by cutting back consumption on their lower drinking days. Heavy drinking was not affected. This will have health benefits, but smaller benefits than you might expect if you had expected that drinking on heavy drinking days would be as strongly affected. In this case, the health benefits of minimum alcohol prices may be overestimated if heavy drinkers respond to price increases by saving up to maintain binge days.

“Minimum alcohol pricing at $1 per unit would require that, for example, no standard bottle of wine be priced at less than $8 to $9 dollars. While this would affect heavier drinkers who may otherwise downshift in quality in response to excise changes, it would also affect lower income moderate drinkers. Benefits in reducing harmful drinking among harmful drinkers need be weighed against the costs imposed on moderate lower income drinkers – and especially where moderate drinkers are far more responsive to price hikes than are heavier drinkers (Wagenaar et al, 2009). We also need to note that while the survey asked heavy drinkers, who were predominantly lower income, how much they paid on average per standard drink, the survey did not ask moderate or light drinkers of lower income what they pay for their preferred product.

“While survey respondents indicated that they had not turned to informal alcohol supply, or home brewing, in response to previous instances of not being able to afford alcohol, sustained alcohol unaffordability might induce different behavioural responses. For example, one person setting up a distillation unit could easily informally supply neighbours at far less cost than either minimum prices or current alcohol cost. When alcohol prices are high enough, the investment in distillation kit, or even simpler fermentation, can become worthwhile. Were minimum pricing implemented, the government might wish to undertake better tracking of informal alcohol supply.”

“Policy in this area needs to weigh carefully the potential benefits of some drinking reduction among heavy drinkers against the harms imposed on poorer lighter drinkers.”

Declared conflicts of interest: The Initiative is a member-funded think tank. Its members include many of New Zealand’s leading corporations, including one in the alcohol industry and a retail grocery chain. While in the Department of Economics and Finance at the University of Canterbury, Dr Crampton's work was partially funded by the Brewers Association of Australia and New Zealand. He maintains his academic independence. He also is a moderate consumer of alcohol.

I might also note that if there's a case for minimum alcohol pricing, it's also a case for reducing the existing excise levy.

Previously:

• Minimum pricing
• Minimum alcohol pricing and economic rents
• Markets hate profits: minimum pricing edition
• Petrol tax:speeding :: alcohol tax:binge drinking
• Increasing excise is great, if you assume the right things
• The Omniscience Constraint
• Public health and the regulatory state
• Minimum pricing
• Minimum prices and mortality risk
• Evidence and minimum pricing
• About that Canadian study...
• Alcohol minimum pricing
• A hopefully concluding note on the price elasticity of alcohol
• Seeing what you want to see - minimum pricing edition

Tax incidence isn't a subsidy

Suppose alcohol excise doubled. As you walked down the supermarket aisle, you saw that excise tax pass-through rates varied from product to product: low-cost product prices didn't go up quite as much as you'd expected they would.

Does this mean that supermarkets are subsidising lower-priced products? The University of Sheffield / East Anglia alcohol folks think it does.

The findings, published today in the journal Addiction, showed that supermarkets responded to tax increases by subsidising prices of cheaper products. Price rises for cheaper products were up to 15 per cent below the level expected if the tax increase had been passed on fully. 

Although under-shifting affected around one in six of all product lines, these drinks account for a large proportion of total sales: approximately 68 per cent of beer, 38 per cent spirits and 31 per cent of cider sales. 

There is a likely implication on health with previous research showing the heaviest 5 per cent of drinkers in the UK population, classified as higher-risk drinkers according to NHS guidelines, buy 33 per cent of all shop-bought alcohol and favour cheaper supermarket products. Subsidising cheaper alcohol when taxes are increased is likely to lead to smaller reductions in excessive alcohol consumption, and consequently smaller reductions in the harms caused by excessive alcohol than if tax rises were passed on in full.

Paul Dobson, professor of Business Strategy and Public Policy at UEA, said: “Subsidising cheap alcohol might be attractive to supermarkets in their efforts to increase the number and frequency of store visits that shoppers make, but it is socially irresponsible when it encourages excessive consumption. 

Ok, let's go back to the basics on tax incidence again.

First, we rarely expect perfect price pass-through. The burden of any tax increase will be shared between buyers and sellers depending on the relative price elasticity of the two groups. We get perfect pass through where demand is perfectly inelastic (consumption doesn't vary at all with price), or where supply is perfectly elastic. Otherwise, they share the burden. So undershifting just tells us that we don't have perfectly inelastic demand or perfectly elastic supply. If demand is perfectly inelastic, then prices are a dumb policy for trying to curb consumption in the first place. Supply's likely to be pretty elastic, but perfectly?

Now let's make things a bit more complicated.

Suppose that we have two alcoholic product categories in perfectly separated markets. In both cases, supply is pretty elastic. In the first market, customers are moderately price sensitive on the whole, but don't put a lot of effort into price comparison shopping. In the second market, customers are much less price sensitive when it comes to total consumption, but are incredibly price sensitive when it comes to product or outlet selection. So in market A, customers don't flip brands or stores much when prices go up, but they will scale back total purchases. In market B, customers will flip brands or stores immediately for a penny's price difference while not changing their total consumption very much.

We typically say in tax incidence theory that the relatively inelastic side of the market bears the greater part of the tax burden. If customers would flip to other brands or other retailers really quickly in market B, we'd expect that the retailers and producers would bear a greater part of the burden in market B than in market A. It's going to be a bit complicated by that I'd expect total demand at the bottom to be more price inelastic than in the middle ranges, but the main action here should be in sensitivity across brands and retailers if there are some rents going to producers through imperfect competition.

Again, we get differential responsiveness to the excise change without any "subsidy" to lower-cost products.

The most puzzling thing the paper finds is supranormal pass-through on the higher cost products. I expect this is what draws the "subsidy" explanation. For me, it instead upweights something I've heard a lot from smaller brewers but hadn't expected would have huge absolute effects. They've argued that, because excise gets paid at the brewery/distillery at point of production, and because everybody along the way then takes margin on the total price on the product coming out of the plant, you should expect more-than-proportional pass-through. I've not worried about it a lot, because the excise component of an $8 half-litre bottle of something by Three Boys, Yeastie Boys, Emersons, Panhead or otherwise really isn't that huge, so the absolute effects there wouldn't be huge either. But it would show up in these kinds of measures of retail-end pass-through rates.

Seeing what you want to see: Minimum pricing edition

Before we start working through Otago's latest missive on minimum alcohol pricing, let's re-state a few baseline facts.

• Heavy drinkers are less price responsive than are moderate drinkers. This is well established in Wagenaar's metastudy, and is recognized (but then later ignored) in the Ministry of Justice's report on alcohol minimum pricing. Here's a table from that MoJ report. Heavy drinkers are somewhere around half as responsive to price increases as are moderate drinkers. 
  


• Heavy alcohol use substantially increases your risk of some disorders: these disorders have positive aetiological fractions in normal tables looking at alcohol's burden on the health system. But alcohol use also reduces the incidence of other disorders: these then typically get negative aetiological fractions. The 2008 Collins & Lapsley report in Australia included both the positive and negative health effects. When you add up all of the positive and negative effects, you get reduced all-source mortality risk, as compared to non-drinkers, up through consumption of about four standard drinks per day, with risk minimised at a bit under a standard drink per day. I summarised the evidence on the alcohol J-curve here and here, and contrasted it with the New Zealand Ministry of Health's view here. Prior concerns about mixing former drinkers with never drinkers were worth worrying about, but have long since been answered.
  
  Here are the key graphs from DiCastelnuovo and Donati:
  
  
  
  You can also check effects on morbidity in the Nurses's Cohort Study, which showed that alcohol consumption in middle age predicts better outcomes in old age.


• Drinkers get consumption benefits from drinking. You don't have to assume perfect rationality to recognise that alcohol consumption is pleasurable for many many people. You can build stories around how imperfect information or bounded rationality could yield too much consumption for an individual relative to how that individual would judge things in a perfect world, but that just says that there is some net excess costs from the last units of consumption, not that all the prior units were worthless. The Ministry of Justice report handled this well by counting consumption reduction under minimum pricing or increased excise as a harm imposed on those consumers that could be offset by some health or other benefits. 

Ok. With that in mind, let's turn to the University of Otago Public Health Blog* on minimum pricing. A few folks have pointed me at this one; it's taken me a while to get around to blogging on it as I spent an extended weekend shifting house for earthquake repairs.**

Blakely, Connor and Wilson start by citing a recent Lancet paper by Holmes et al [sorry, that's a ScienceDirect subscription link] in support of alcohol minimum pricing that found the largest effects on lower-income harmful drinkers. And, sure enough, the Lancet paper does claim that minimum pricing's largest effects would be on harmful drinkers. But how do they get there? For that, we need turn to the supplementary tables.*** And things there just seem a bit odd. Let's go through it. 

First, their estimates of health effects are based on aetiological tables (See Tables A3 and A4, and adjusted tables A14-A17) that assume positive aetiological fractions on heart failure, cholelithiasis, ischaemic heart disease, and hypertensive diseases. Here's Collins and Lapsley, 2008, on those disorders:

Collins & Lapsley note that you can get no negative aetiological fractions if you follow English et al, 1995, in looking at the increment of drinking above the safe level of drinking; this would be appropriate for interventions that have no effect on light and moderate drinkers and only affect heavy drinkers. That won't be the case for pricing measures. So the Lancet's health effects have a heavy thumb on the scale: they assume no health costs to moderate and light drinkers when their consumption drops with minimum pricing.

Perhaps this doesn't matter as much in the Holmes et al paper if we buy their second big assumption: that the price elasticity of alcohol demand is very different from our best consensus estimates.**** They argue that alcohol consumption is pretty elastic while using estimates that have heavy drinkers just as price responsive as moderate drinkers. As a robustness check, they test the case where heavy drinkers are much more responsive to prices than are light drinkers - the opposite of the evidence I've cited above. A proper robustness check would be based on Wagenaar or Gallet's estimates. 

Holmes et al's Table 1 (main paper) provides the elasticity estimates they get from the UK Living Costs and Food Survey (LCF). I've copied that below:

The diagonal has the own-price elasticities for each beverage category; the off-diagonals have the cross-price elasticity. The column shows the effect on a particular beverage's consumption of a one percent increase in the price of the beverage listed in the row. So, if we were to increase the price of each beverage category by 1%, we could sum up the effects down each column to get the total effect on each beverage. 

When you do that, you find that a 1% across-the-board price increase yields: 

• a 0.94% (1.12%) reduction in off-trade (on-trade) beer purchases, 
• a 1.14% (0.07%) reduction in off-trade (on-trade) cider purchases, 
• a 0.12% reduction (0.76% increase) in off-trade (on-trade) wine purchases, 
• a 0.5% reduction (0.07% increase) in off-trade (on-trade) spirits purchases, and 
• a 0.62% reduction (1.13% increase) off-trade (on-trade) RTD purchases.

None of that seems particularly plausible. Elastic cross-price elasticities can be plausible where consumers shift to other products. But if you were to put a 10% ad valorem tariff on all products containing alcohol on top of existing prices, I sure wouldn't expect about a 10% reduction in beer purchases. I'd expect about a 4% reduction. And while I can imagine that minimum prices could yield a shift from off-licence to on-licence consumption, the table isn't giving the effects of a minimum price, it's giving the effect of a one-percent increase in each category's price. 

When SHORE provided the Ministry of Justice with elasticity estimates that were more than unit elastic, the MoJ report noted (p. 25):

Another significant concern is that the size of the elasticity estimates generated by AC Nielsen and the SHORE and Whariki Research Centre are very large compared to international estimates, and result in significant changes in consumption when the various pricing options are analysed. The large off-licence elasticities may be driven by the fact that both regular prices and promotional prices are included in the elasticities. The large on-licence elasticities are likely to be a consequence of a reasonably small sample size and cross-sectional data.

It looks like the LCF suffers from the same problem that the NZ MoJ noted: they're deriving elasticities from consumer reports of weekly purchases and weekly prices paid where there's pretty substantial chance that consumers buy a lot when goods are on special to stock up for weeks in which goods are not on special. Elasticity estimates out of this kind of approach would be useful for a brewer deciding whether to put some stock on special, but perhaps less useful in figuring out the effects of blanket price increases that persist. 

If you tracked my purchasing behaviour, you'd say I'm really very price sensitive. When somebody had the 2008 Penfolds Bin 28 on special a few years ago, I bought several bottles. When it's north of $30 a bottle, I don't touch it. I've only just opened that case. Consumption smooths over time; purchases are lumpy. I'll do the same thing with beer: when a great beer is on special, I buy a lot of it; when it's not, I might buy only a bottle. My day-to-day consumption doesn't vary, but my inventory changes. I do this because I'm cheap, I have a low(ish) discount rate, and I like keeping a reasonable stock of alcohol in case of emergency. If heavy drinkers pay more attention to what's on special than I do, then we might expect that their elasticity estimates are particularly unsound.

So, the study assumes that heavy drinkers are just as responsive to prices as are moderate drinkers, and that both are reasonably price-elastic. Because heavy drinkers spend a lot more of their money on alcohol, and because they're purchasing more of the lower-cost products, minimum prices have a larger effect on them. And, because they've assumed that moderate drinking has no health benefits, there's no offsetting health losses for those moderate drinkers that do reduce their consumption. If instead heavy drinkers are more likely to be watching for what's on special and are otherwise less price responsive than are moderate drinkers then we might worry about some of the conclusions in this study.

Anyway, Connor et al over at the Public Health Blog take all the figures pretty uncritically. They then note the study's consistency with Tim Stockwell's work in B.C., Canada. Loyal readers will recall that the Stockwell paper there assessed the effects of changes in province-wide minimum prices in a within-province panel in which there was no panel variation and in which the main source of time-series variation was CPI changes; I also didn't get why they were using lagged prices to predict current acute injury rather than lagged consumption. I further note that Stockwell's prior work with Chris Auld showed that consumers were, on the whole, pretty unresponsive to minimum price changes [PubMed]: the price elasticity of demand with respect to changes in the minimum price was about -0.34.

Matt Nolan over at TVHE already hit on one of the broader conceptual problems in the Connor et al post: they are utterly dismissive of harms imposed on moderate drinkers by measures that restrain moderate drinkers' consumption. Connor et al write:

The discussion about whether minimum unit pricing is likely to be effective policy for New Zealand depends on the outcomes that are considered. The government’s analysis is focused only on whether the policy will deliver reductions in alcohol consumption by the heaviest drinkers, without increasing the cost of the cheapest alcohol to those who don’t drink so much. This is to misunderstand the range of benefits that can be attained by reducing alcohol consumption in all drinkers, and to undervalue the reduction in adverse effects of other people’s heavy drinking.

Nolan wrote:

The gains come from putting a minimum price of alcohol that prices the poor out from consumption. Consumption that has a benefit – something that is ignored constantly.

Talk about evidence all you want (a lot hopefully – as evidence is central, and I respect the PHB for bringing empirical research up so constantly), but if your ethical framework places zero benefit on consumption choices of the poor your policy conclusion will be restricting the choice of those in poverty – always.

Nolan's right about the main problem here. But the empirical case they're making isn't nearly as sound as they're letting on. Heavy drinkers are far less price responsive than are moderate drinkers, as noted above and in the MoJ study. Binge drinkers also aren't all that price-responsive. 

Connor et al write:

Concern over the effects of policy on drinkers other than those with the most harmful patterns is only warranted if reduction in consumption in these groups and the consequent health benefits are considered a poor outcome. Many harmful effects of alcohol have no threshold. For example, the leading cause of alcohol-related death in NZ women is breast cancer, and a woman who drinks two small glasses of wine a day has a 10% higher risk of breast cancer than a woman who has one. There are also substantial secondary benefits from reduction in other people’s drinking in the community – all for the price of giving up very cheap alcohol. These benefits include reduction in the risk that you or someone close to you will be injured by a drinker, the reduction in vandalism, disorder and intimidation in neighbourhoods and urban centres, and the large economic benefits to the country through reduction in healthcare costs and responses to crime.

The MoJ report at least started with the right framework: we should treat it as a cost to drinkers that they be curtailed from drinking, and we should treat it as a benefit to others if drunks then do them less harm. Because their elasticity estimates were out of whack, they overestimated the benefits that could be obtained per unit pain imposed on moderate drinkers. But the framework made sense. Connor et al above say we shouldn't even be thinking about the effects of policies on consumption enjoyment among moderate drinkers. And even if we were restricting things to health benefits, it's odd to restrict our consideration to those health effects that are negative. It's total mortality and morbidity that should matter for population health. And we might also worry that the evidence on light drinking and cancer may be confounded by consumption under-reporting. Here's Klatsky et al:

Abstract

PURPOSE:

There is compelling evidence that heavy alcohol drinking is related to increased risk of several cancer types, but the relationship of light-moderate drinking is less clear. We explored the role of inferred underreporting among light-moderate drinkers on the association between alcoholintake and cancer risk.

METHODS:

In a cohort of 127,176 persons, we studied risk of any cancer, a composite of five alcohol-associated cancer types, and female breast cancer. Alcohol intake was reported at baseline health examinations, and 14,880 persons were subsequently diagnosed with cancer. Cox proportional hazard models were controlled for seven covariates. Based on other computer-stored information about alcohol habits, we stratified subjects into 18.4 % (23,363) suspected of underreporting, 46.5 % (59,173) not suspected of underreporting, and 35.1 % (44,640) of unsure underreporting status.

RESULTS:

Persons reporting light-moderate drinking had increased cancer risk in this cohort. For example, the hazard ratios (95 % confidence intervals) for risk of any cancer were 1.10 (1.04-1.17) at <1 drink per day and 1.15 (1.08-1.23) at 1-2 drinks per day. Increased risk of cancer was concentrated in the stratum suspected of underreporting. For example, among persons reporting 1-2 drinks per day risk of any cancer was 1.33 (1.21-1.45) among those suspected of underreporting, 0.98 (0.87-1.09) among those not suspected, and 1.20 (1.10-1.31) among those of unsure status. These disparities were similar for the alcohol-related composite and for breast cancer.

CONCLUSIONS:

We conclude that the apparent increased risk of cancer among light-moderate drinkers may be substantially due to underreporting of intake.

Connor et al, as usual, insinuate that moneyed interests prevented their preferred lovely policy's adoption.

It is difficult to understand the government’s decision when the Ministry of Justice report appears to appreciate the evidence-base for minimum unit pricing. Also the evidence from Sheffield and British Columbia have been available for some time. When the British government reneged on its commitment to introduce this policy in July last year, Prof Sir Ian Gilmore, chairman of the Alcohol Health Alliance UK, said the government had “caved in to lobbying from big business and reneged on its commitment to tackle alcohol sold at pocket-money prices“.

There's a better and simpler explanation: the evidence base in the MoJ report was weak given their elasticity estimates, and the government wasn't keen on running a nanny-state initiative in an election year unless the evidence were stronger.

So, some bottom lines:

• The elasticities reported in the Lancet study are out of line with what we'd typically expect;
• The health benefits reported in the Lancet study are very likely widely overestimated due to overestimation of heavy drinkers' price responsiveness and due to the Lancet paper's ignoring of the health benefits of moderate consumption (and the forgoing of same when price hikes induce moderate drinkers to cut back);
• The NZ Ministry of Justice report itself noted substantial problems in their elasticity estimates; the Minister was consequently entirely right to shelve plans for substantial price hikes or minimum pricing;
  • See also Bill Kaye-Blake on this one. He commented: 

    The report appears to be a masterwork of consulting. It freely acknowledges that parameters are wrong and then uses them anyway. I’ve never had the guts to do that.

There is a reasonable case for minimum alcohol pricing when combined with lower overall excise: if there's reasonable evidence that lower-priced products are disproportionately consumed by harmful consumers and that we consequently do more to abate harms in that cohort than we do to impose harms on poorer moderate consumers, then minimum pricing lets you increase prices at the bottom end without doing as much harm to moderate consumption among middle-income consumers. But it has to be an empirical case based on reasonable elasticity estimates and weighing appropriately both harm reduction and consumption losses. The MoJ report failed on the elasticity estimates but at least got the framework right; the Connor et al post didn't seem to think the consumption losses mattered.

Previously:

• Minimum pricing
• Minimum alcohol pricing and economic rents
• Markets hate profits: minimum pricing edition
• Petrol tax:speeding :: alcohol tax:binge drinking
• Increasing excise is great, if you assume the right things
• The Omniscience Constraint
• Public health and the regulatory state
• Minimum pricing
• Minimum prices and mortality risk
• Evidence and minimum pricing
• About that Canadian study...
• Alcohol minimum pricing
• A hopefully concluding note on the price elasticity of alcohol

Disclosures: as I will be ceasing employment with the University of Canterbury effective 14 July, the Brewers' Association of Australia and New Zealand has ended its contract with the University; my prior disclosures statement no longer applies. I am doing a bit of expert witness work on local alcohol policies that has nothing to do with minimum pricing.

* I totally don't understand why the University of Otago lets them put its logo on their blog. I'd never put the Canterbury one on mine because I'd never want it to be seen as being some official view of the Department or University, and I expect that Canterbury's branding poo-bahs would have disallowed it if I'd have asked. This is one of the happy instances where the University likely would have barred me from something that I really never wanted to do anyway.

** Lame excuses are lame. But it did suck away more time than expected. 

*** I could only get the link to the supplemental materials to show up when I opened it in IE rather than Chrome. Good luck.

**** But, at 1.1.3 in the appendix, they say that they're evaluating mortality relative to a "everybody stops drinking" scenario. In that case, the J-curve is going to matter a lot.

Increasing alcohol excise is great, if you assume the right things

Imagine that hazardous drinkers really really cared about the price of alcohol. If you increased the price of alcohol just a little bit, they'd stop drinking harmfully. Imagine further that moderate drinkers didn't respond very much to prices: what does it matter to the rich Chardonnay-sipping set if a bottle is $8 or $40? If that were the true state of the world, we would have a very simple solution to alcohol problems: hike excise taxes. Harmful drinkers would stop drinking and would stop doing alcohol-related harmful things; moderate drinkers would pay more but that would just be tax revenue for the government. Since they wouldn't change their consumption by very much, deadweight costs would be pretty small relative to the harms avoided. Yay taxes!

Unfortunately, the world don't quite look like that. Our best evidence on it remains Wagenaar's metastudy showing that heavy drinkers respond to a 10% price hike by reducing consumption by 2.8%; average consumption drops by 4.4% with the same price increase. Moderate drinkers respond more to price increases than do heavy drinkers.

Even worse, Byrnes et al show that heavy drinkers' price responsiveness mostly comes from their reductions in drinking on low-drinking days: they basically save up to be able to continue binging on the weekend. So their reduction in consumption is in the part of their consumption that does the least harm. Boo taxes!

Enter the NZ Government report on excise and minimum pricing. Fortunately, the Minister has more sense than her Ministry and hasn't gone ahead with minimum pricing; hopefully, she's not looking at excise. What's the problem with the report? They started by assuming that heavy drinkers are more responsive to prices than are moderate drinkers.

And they know it's wrong. Here, at Table 5, they show the general consensus of the international literature: heavy drinkers don't respond to prices nearly as strongly as do moderate drinkers.

The Wagenaar numbers vary a bit from the -0.44 that I tend to cite as average; I usually go for the weighted measure. Bottom line: heavy drinkers are roughly half as responsive to prices as are moderate drinkers. That's page 20. And they cite Byrnes accurately at page 21.

But then what do they go and do? They started by trying to get SHORE to estimate NZ elasticities, but something went wrong there: the elasticities were completely out of whack with reality. Reading between the lines at page 25, it looks like SHORE was using the increase in purchases of products on special at supermarkets as part of its price elasticity estimation, and that just ain't right. If you switch brands because something's on special and buy more of it than you otherwise would have, that isn't the same effect as you'd expect for across-the-board price changes you get with excise or minimum pricing.

As the report rather bluntly puts it:

"It was decided that the significant reductions in consumption estimated using NZ elasticity estimates are not a realistic representation of what is likely to happen in reality and are contrary to all international evidence of the responsiveness of alcohol consumers to changes in price."

Rather than discard the completely nuts NZ numbers, they let those figures stand and added alternative numbers as robustness checks. Those big headline estimates you've been seeing in the papers about just how awesome excise is? They're based on the numbers that, according to the report, "are not a realistic representation in reality and are contrary to all international evidence of the responsiveness of alcohol consumers to changes in price."

Example? A 133% excise hike means about a 40% increase in the cost of low-priced beer, a 44% increase in the cost of low-priced wine, a 45% increase in the cost of low-priced RTDs, and a 103% increase in the price of low-cost spirits. The heavy drinkers SHORE estimated a 61% reduction in harmful consumers' consumption with that tax hike. So they're saying that harmful consumers are more than unit elastic. That's just not right.

The other problem with the SHORE numbers is that they couldn't distinguish between heavy and moderate drinkers. Everybody's elasticity was equally overestimated.

Because those numbers were so out of whack, they also ported in some Sheffield elasticity estimates from the UK. Problem with those estimates is that, while they're about right on average, they've messed up the relative elasticities: they have harmful drinkers being more price responsive than moderate drinkers. I'm not sure why they didn't pull in the 2008 Sheffield estimates noted at Table 5. At Table 25 they say, using Sheffield, that a 133% excise increase would reduce low risk consumption by 18.6% while reducing harmful consumption by 21%. If that 133% excise increase corresponds to about a 45% price increase, then Wagenaar's estimates would say we'd get only a 12.6% decrease in heavy consumption and a 28% decrease in moderate drinkers' consumption (using the figures from Table 5). Heavy drinkers' real-world price responsiveness is 60% of that advertised, while moderate drinkers' responsiveness is 150% of their figures.

Now, why does this matter? The more responsive are moderate drinkers to price measures as compared to heavy drinkers, the more expensive is any bit of harm reduction in terms of harms imposed on moderate drinkers. And the folks who wrote the report know this matters too! Here's what they wrote at page 85:

Overall it appears that excise increases have a greater impact on harmful drinkers than low risk drinkers, based on University of Sheffield elasticity estimates. This is driven by the greater own-price elasticities, particularly for spirits. However, this result is inconsistent with findings in studies such as Wagenaar et al (2009), which found that heavy drinkers are much less responsive to price changes (with an elasticity of -0.28 compared to -0.62 for all drinkers). The University of Sheffield also found that harmful drinkers are much more price inelastic compared to low risk drinkers when total alcohol consumption was considered, rather than consumption by beverage type.

We also do not have separate elasticities for per occasion drinking, and recent evidence indicates that people are much less price responsive during drinking occasions (Byrnes et al, 2012). Therefore there is a risk that the effects on purchases could have been over-estimated for per occasion purchases. 

Therefore we cannot conclude with confidence that excise increases will have a greater impact on harmful drinkers. More research is needed to confirm this, which could be done once revised University of Sheffield elasticity estimates are available.

Here are but a few of the the ways this will affect their analysis:

• Crime reduction benefits are overestimated both because heavy drinkers are modelled as being far more price responsive than they really are and because crime seems more responsive to binge drinking than to longer term heavy drinking, and it's the latter that seems more affected than the former among heavy drinkers. 
• The health effects will be overestimated where harmful drinkers are modelled as sharply curtailing consumption and where we underestimate by how much moderate drinkers shift into non-drinking and miss out on the health benefits of moderate drinking.
• The deadweight costs facing moderate consumers are underestimated in the Sheffield figures that understate moderate drinkers' consumption elasticity.
• All the other benefits that require consumption reductions among heavy drinkers will also be overstated.

Tables 40 and 41 have a whole whack of sensitivity checks. What if population growth is lower or higher? What if we use a higher or lower discount rate? Nowhere in the 21 sensitivity analyses is the one that really matters: "What if we use a sane, international-consensus measure of relative price elasticities?"

Whether this is enough to overturn their net benefits finding - I can't tell without a pretty extensive bit of work. Just linear extrapolations from the changes in harmful and moderate consumption won't do it: deadweight costs will increase extraproportionately, and harms are likely exponential in heavy consumption.* But I'm pretty sure that Collins was dead right in not relying on this stuff to justify imposing minimum pricing: the case hasn't been made. 

A few other potential problems on a cursory reading:

• They estimate the productivity costs of those showing up to work with hangovers under the assumption that those prone to showing up to work with hangovers have average productivity characteristics but for their propensity to show up for work with hangovers. I rather suspect that less conscientious workers are more prone to showing up unfit for duty, and that this affects more than just hangovers.
• They estimate the productivity costs of taking a day off for a hangover under the assumption that the kinds of people who take a sickie for a hangover wouldn't have used up that free sick day for some other recreational purpose later in the year. This also seems implausible. 
• Their analysis of alcohol-related unemployment is bereft of consideration of comorbidity between alcoholism and depression and the independent effect of underlying characteristics on employment.
• Frictional costs to employers of replacing fired or deceased workers seem predicated on an assumption that the employer would never otherwise have to have replaced that worker.
• Their crime estimates count as an alcohol-caused crime any crime committed by someone arrested within 12 hours of offending and presenting as at least moderately intoxicated. While this may underestimate things by excluding those who aren't caught until much later, it also says that every one of those moderately intoxicated arrestees would never have committed the offence but for the alcohol. Not sure which way things will cut on that one, but I'm awfully sure that they'd do better by just porting in some decent estimates of the elasticity of crime with respect to alcohol out of something like Carpenter. 

I'll be interested to see what they come up with when they have a second go at this, with some sane elasticity figures. 

On the plus side, Footnote 31 points to my blog post on likely effects of minimum prices on producers. I'd have recommended this one instead.

* At Table 37, they give a $268,185,000 cost of a 133% excise hike. If moderate consumers are 150% as responsive as they're reckoning, then a linearisation would put that cost up to $402 million. At Table 30, they give a value of harm reduction in Year 1 of $740,344,000. If heavy consumers are only 60% as price responsive as they're reckoning and if harms were linear, that knocks the benefits down to $444m. So we're down to a net benefit of about $40 million, without considering that deadweight costs will be higher than implied by linearisation, and without considering the other problems noted above. Whether the linearisation on harms here overstates or understates things gets complicated: for any individual drinker, harms are strongly non-linear, so if we had a pile of really really heavy drinkers estimated to become moderate drinkers, but instead only become heavy drinkers, then my linearisation overestimates how much the report overstates harm reduction: the reduction in harm in moving from really really heavy drinking to heavy drinking is bigger than the reduction in harm from moving from heavy to moderate drinking. But if instead we get the harm reduction from greater proportions of heavy drinkers shifting into moderate drinkers than really would, then the linearisation would be about right. And if prices are really bad at hitting acute drinking that contributes most greatly to harms, then even my linearisation understates the extent to which the report overstates harm reduction. It's complicated, and I haven't access to the guts of this machine. 

Minimum prices and mortality risk

The latest Stockwell piece on alcohol minimum pricing and alcohol-related fatalities seemed a bit fishy.

I was mostly worried about how they ran a panel study that had zero cross-sectional variation in their main regressor of interest and where the main source of time series variation was CPI adjustments to measured prices, but it looked like there were plenty of other holes for truck-driving expeditions.

George Mason statistician Rebecca Goldin goes for a scenic tour, noting another rather serious problem. Standard t-statistics don't really do the job if you're pouring over multiple lags to look for effects. She writes [ht Forbes]:

What’s troubling here is that they break the data down into many quarters and categories, run multiple statistical tests, but don’t adjust for multiple testing. This results in a table spotted with statistically significant results even as basic statistics tells us this method will produce spurious results.

A close look at the table is suggestive that spurious results are indeed at hand. This table looks at 16 quarters following a minimal price increase, and whether there is a correlated increase or decrease in deaths among acute, chronic or wholly attributable alcohol deaths. The authors point to a statistically significant decrease in wholly attributable deaths in the quarter that a price increase was implemented, as well as in the second and third subsequent quarters. (but not in the first quarter, nor the 4th-15th quarters).

But it also shows a significant increase in acute deaths in the third and fifth quarters after a price increase, and then a statistically significant decrease in acute deaths in the 8th quarter after the price increase. Chronic deaths saw statistically significant decreases in the 8th, 9th and 13th quarter after a price increase, but not in the other 13 quarters. This all suggests that the results could be, at least in part, the result of simply running a lot of tests on a lot of data – and without adjusting for multiple tests, randomness can creep in. Though the results do lean toward decreased death, picking out the most extreme of the results (as the media and the authors of this study did) may be misleading. In fact, if the 1,388 wholly alcohol attributable deaths occurred evenly over the quarters, these numbers refer to trends in about 87 deaths each quarter – trends that would be highly sensitive to a small number of deaths.

So while there seems to be an overall trend of decreased death with increased prices, the failure to account for multiple testing means there could be true correlation or there could be just a statistical fluke.

Eventually, somebody's going to take a proper shotgun to the stuff Stockwell's been up to. When Chris Auld was doing their econometrics, I didn't worry about their empirical results. Things seem to have gone a bit adrift since then.

Cheap plonk

It's not crazy to argue for the combination of a lower alcohol excise tax and a minimum per-unit price for alcohol if harm-causing drinkers disproportionately choose the cheapest plonk while moderate drinkers choose more expensive drinks. The anti-alcohol lobby likes to point out that moderate drinkers on average choose more expensive beverages, but this really doesn't tell us anything without a correction for income - if heavy drinkers disproportionately come from poorer cohorts, and if poorer people of all drinking intensities choose cheaper products, then income cohort effects confound things.

Consider though the Lindauer Rose, a bubbly that often retails around the $9 mark. It's 12% alcohol, so it's around 7 standard drinks. Labour's preferred $1.50 or $2 per standard drink minimum price would bind on the Lindauer Rose. Cheap plonk consumed by harmful drinkers? Or an Air New Zealand Wine Awards Gold Medal winner?

If the cheaper alcohol categories include nicer drops very plausibly chosen by moderate drinkers on a budget (or even ones at which I'd turn up my nose, so long as preference heterogeneity is allowed), we really really need to worry about harms imposed on moderate drinkers when weighing the effects of minimum pricing on harmful drinking.

More letters....

This time to the DomPost consequent to Olivia Wannan's article on alcohol minimum prices. Olivia's piece is one of the better summaries I've seen out there. But I did want to make a couple of points. Here they are.

Thank you for Olivia Wannan's reasonably balanced piece on alcohol policy.
 I would make one note of correction. In 2009, Matt Burgess and I released a report critical of BERL's $4.8 billion estimate of the social cost of alcohol in New Zealand. That report was entirely uncommissioned; we simply did not like that what we viewed as a bad statistic was influencing policy. We concluded there that social costs were instead on the order of $760 million. Late in 2010, Matt and I were commissioned by an Australian alcohol consortium, NABIC, to produce a similar report examining the Australian study that formed the basis for BERL's report. In doing so, we discovered a substantial error in our prior work on BERL: one not noted by BERL in its response to our critique, by Brian Easton in his paid report for the New Zealand Law Commission evaluating our work, or by Australian consultants Marsden Jacob and Associates, who were paid $60,000 by the New Zealand Law Commission for their report critiquing our unfunded paper. We consequently updated our estimate of the social costs for New Zealand to roughly $967 million. NABIC did not request this addition to the paper we produced, but we did not want the error in our prior work to stand once we discovered it. The net effect of our doing funded work on alcohol was to increase our estimate of the social costs of alcohol in New Zealand.
 Aggregate social costs are a poor basis for policy. We can easily imagine worlds in which alcohol's harms are tiny, but where particular measures could reduce those harms without offsetting costs to others; we can similarly imagine worlds in which alcohol's harms are enormous but where no measure could reduce harms without doing even more harm to moderate consumers' enjoyment of alcoholic products. A more relevant assessment would consider the benefits of any particular policy along with the harms imposed on moderate drinkers and others by the policy and simply recommend those policies doing more good than harm. 

Check your sources

Doug Sellman in the opinion section of today's Christchurch Press claims to have had his numbers right [not yet online]. Let's check the history here.

Here's Sellman and Connor's original press release:

Who is advising the Prime Minister on alcohol reform?

Mr Key announced today that he doesn’t believe that minimum pricing for alcohol will change the amount people drink.

“This is contrary to the scientific evidence base about alcohol pricing in general and minimum pricing in particular” said Prof Jennie Connor, medical spokeperson for Alcohol Action NZ.

“Mr Key states that what typically happens is people move down ‘the quality curve’ and still get access to alcohol. Where does this information come from? On the contrary, minimum pricing specifically targets the very cheapest alcohol options and is predicted to reduce average consumption by removing high-alcohol low-cost products from the market.”

“A recent Canadian study has shown that a 10% increase in the minimum price of alcohol reduces its consumption by 16% relative to other drinks”. [emphasis added]

“And these latest data are consistent with the scientific literature which indicates that increasing the price of alcohol has a positive impact on reducing heavy drinking”.

This is very clearly saying that there are very large price effects of increasing the cost of the lowest-priced alcohol. I had initially found the Newstalk ZB report and wondered whether she'd been misquoted, before finding the press release.

I wrote:

Connor has to have been misquoted here or the journalists left out a couple of subsequent clarifying sentences. The error is in the press release. Oh dear.

The link there is now deprecated, but the Scoop link still works.

In today's press, Sellman says that they had it right all along:

On July 3, 2012 we issued a press release recommending the government enacts a minimum price per standard drink of alcohol – to eliminate ultra-cheap drinks favoured by binge drinkers, young drinkers and heavy drinkers – and pointed to a Canadian study that showed ‘‘a 10 per cent increase in the minimum price of alcohol reduces its consumption by 16 per cent relative to other drinks’’. Our wording was based closely on the paper’s wording: “Longitudinal estimates suggest that a 10 per cent increase in the minimum price of an alcoholic beverage reduced its consumption relative to other beverages by 16.1 per cent (p0.001).”

Two days later Crampton wrote a damning critique of the press release on his personal blog, using the same arguments he later used in this Press article. However, it appears Crampton based his critique on a short Newstalk ZB news report of the press release, which quoted Jennie Connor saying, ‘‘studies show a 10 per cent increase in the minimum price of alcohol reduces consumption 16 per cent’’. Note: the reporter had cut off the words ‘‘relative to other drinks’’, which would indeed be wrong if she had said it.

Crampton’s blog piece, and his later Perspectives article, ridiculed the presumed mistake: ‘‘Can a 10 per cent increase in the minimum price of alcohol really reduce total alcohol consumption by 16 per cent?’’ he wrote. ‘‘No’’. But if he had taken the basic precaution of checking the primary source, our press release, he would have seen the words ‘‘relative to other drinks’’ and realised that we had not misquoted the Canadian study at all.

Thus Crampton’s main argument in the Press article was based on his own simple and avoidable mistake, which seems careless for a senior lecturer.

The problem isn't that the Newstalk piece left off the words "relative to other drinks" but that Sellman and Connor used that estimate as though it were relevant to average consumption and where "other drinks" would be interpreted as something other than other categories of alcoholic beverages.

Further, they might have noted that my post of 10 July quoted the press release accurately; my post of 5 July had cited the NewsTalk reporting.

If we look a bit further down the Auld paper, we see pretty clearly what Sellman and Connor had missed:

"The estimates indicate that a 10% increase in the minimum price of a given type of beverage reduced consumption of that type by about 16.1% relative to all other beverages, and a simultaneous 10% increase in the minimum prices of all types reduced total consumption by 3.4% (p<0.01 in both cases)."

Sellman and Connor were building a case in their press release that the Prime Minister was way off base in claiming that raising the minimum price would not have large effects on drinking. Whether "relative to other drinks" is included or not is irrelevant where the context suggests that "other drinks" means drinks other than alcohol.

And so I sent the letter below to the Press this morning:

Doug Sellman in Monday's Press claims to have had his numbers right all along. In his press release of 3 July, he and Jennie Connor wrote:

“Mr Key states that what typically happens is people move down ‘the quality curve’ and still get access to alcohol. Where does this information come from? On the contrary, minimum pricing specifically targets the very cheapest alcohol options and is predicted to reduce average consumption by removing high-alcohol low-cost products from the market.”

“A recent Canadian study has shown that a 10% increase in the minimum price of alcohol reduces its consumption by 16% relative to other drinks”.

The rather obvious interpretation of their release, which was highly critical of the Prime Minister's claim that minimum prices would not greatly affect consumption, was that we should expect a sixteen percent reduction in consumption of alcohol relative to other drinks were the minimum price of alcohol to rise by ten percent.

The paper on which their analysis was based does indeed have a quote that reads a lot like Sellman and Connor's. But, it refers to the effects you get if the price of one category of alcohol - like beer, wine, or spirits - rises relative to other categories of alcoholic drinks. It isn't talking about the consumption of alcohol as compared to fruit juice. This is obvious if we read the second clause of the sentence, where Auld and his coauthors write:

"The estimates indicate that a 10% increase in the minimum price of a given type of beverage reduced consumption of that type by about 16.1% relative to all other beverages, and a simultaneous 10% increase in the minimum prices of all types reduced total consumption by 3.4% (p<0.01 in both cases)."

In Monday's Press, Sellman claims not to have misquoted the Canadian study and that they had, all along, meant "relative to other drinks" to refer to other categories of alcohol. If so, it seems odd to have chosen that figure as being relevant to the argument they were building. It could be relevant if we were estimating the likely reduction in consumption of premixed "alco-pops" relative to other alcoholic beverages, but surely the total amount of alcohol consumed matters more than whether it is consumed in one type of alcoholic beverage rather than another. And, for total consumption, the 3.4% figure is the rather more relevant one.

I strongly encourage readers to read the paper on which Sellman's claims are based and to judge for themselves, rather than trusting either of us. An ungated version of it is available here: http://www.vsnews.fr/etudes/Does-Minimum-Pricing-Reduce-Alcohol-Consumption.pdf . Or, go to scholar.google.com and type "Does minimum pricing reduce alcohol consumption?" You will find that the authors there, like Sellman, favour minimum prices. I worry more about harms imposed on lower income moderate consumers of lower cost alcohol. How we weigh the tradeoff between reducing harms from heavy drinkers and reducing consumption benefits from poorer moderate drinkers is a fairly important discussion. But the case for a minimum price for alcohol ought not be based on an estimate of its effects that is roughly five times larger than that which can be supported by the evidence.

Evidence and minimum alcohol pricing

Otago's Jennie Connor and Alcohol Action NZ's Doug Sellman are angry again. This time, because Justice Minister Judith Collins cited some Masters' research done at Massey AUT showing that students surveyed said they'd not change their binge drinking habits if prices increased; they instead want the government to rely on international peer-reviewed evidence based on actual consumption patterns rather than on surveys.

And fair enough.

Fortunately, we have some evidence ready at hand. Byrnes et al, 2012, Drug and Alcohol Review. They use Australian household surveys from 2001, 2004 and 2007 to see how changes in alcohol prices affect the number of reported days of no, low, moderate, and high alcohol consumption; they find that while price increases do reduce consumption, they tend to reduce the number of days of low consumption while not changing the number of days of moderate and high alcohol consumption. This would be consistent with binge drinkers dropping the occasional beer or wine with dinner to save up for the big nights out. If policy is more worried about binge drinking than about light drinking, this might matter.

It's also mildly amusing that an Otago healthists complains about policy being based on surveys. I wonder what Connor would make of her Otago colleagues' call for banning smoking outside of bars on the basis of a survey of thirteen youths recruited in part via Facebook; the youths reported in focus groups that they'd be less likely to smoke if they couldn't smoke outside of bars. Maybe that one's ok because it's published in a journal rather than being a Masters Thesis.

Connor also notes that heavy drinkers tend to purchase cheaper alcohol relative to moderate drinkers.

“It has been established that hazardous drinkers spend less per unit of alcohol than others, and drinkers compensate for price increases by shifting to cheaper drinks. In the United States, the heaviest 10% of drinkers spend approximately $0.78 per drink compared with $4.75 per drink for the lightest 50% of drinkers.”

This only is a relevant comparison if the heaviest drinkers and lightest drinkers are drawn from the same parts of the income distribution. Suppose for sake of argument that heavier drinkers are more likely to be drawn from poorer parts of the income distribution and lighter drinkers from higher income parts of the distribution. If that's the case, we would want to compare the price paid by heavy and light drinkers correcting for any differences in income. If people with demographic characteristics similar to the heaviest 10% of drinkers but who are light drinkers spend $1 per drink (just a guess here), then minimum prices pushing above that hit both heavy drinkers and light drinkers of modest income. I know that consumption benefits from alcohol count for zero in the healthist world, but they ought to matter for policy.

At least they're not today claiming that a 10% increase in minimum prices reduce consumption by 16%...

About that Canadian study...

Last week, anti-alcohol advocacy group Alcohol Action NZ put out a press release where the University of Otago's Jennie Connor was quoted:

"A recent Canadian study has shown that a 10% increase in the minimum price of alcohol reduces its consumption by 16% relative to other drinks".

I got in touch with one of the authors of what has to be the study to which she's referring.

Chris Auld reported that the -1.6 price elasticity figure indeed only refers to a measure of own-price elasticity. Except it isn't quite own-price elasticity. Because the estimation technique doesn't correct for substitution effects, it combines the own-price elasticity with cross-price elasticity from other products. Quoting from Chris, with his permission:

Suppose we have two types, 1 and 2. Demand for type 1 is x_1( m_1, m_2 ), presumably decreasing in own min price m_1 and increasing in the min price, m_2, of the other type. The panel models recover d(x1 - x2)/d(m_1), so they are not estimates of own-demand slopes. For example, we might estimate -1.6 if the own-elasticity is -0.9 and the cross-elasticity is +0.7. Since we are not controlling for the cross-price, nothing can be said from these models about the effect of increasing both minimum prices---it could be that total consumption is almost invariant to min prices, but we could still generate big estimates from these models if various types of alcohol are strong substitutes. Test statistics against the null that the total effect is zero are still valid, but it's easy to misinterpret what the estimates mean

Chris also confirms that the -0.34 estimate is the one that best reflects the expected effects of an across-the-board price increase like minimum pricing, but notes that the standard kinds of time series problems makes that estimate rather less robust than he'd like.

I think it's [the estimate] probably too high, although it may be in the ballpark - a variety of evidence does suggest that min price changes are quite effective in targetting heavy drinkers.

Wagneaar found -0.28 among heavy drinkers, so I'm less worried about potential lack of robustness around Chris's estimate; if every estimate of this sort has similar robustness issues, then we might worry about systematic overestimation of demand elasticity with publication bias.

Heavy drinkers who consume cheap alcohol will be targeted with minimum prices, but so too will moderate poor drinkers who choose cheap alcohol.

Chris says he's doing some theory work showing that:

the central planner would always like to impose minimum pricing but reduce conventional taxes when confronted by consumers who are heterogeneous in an underlying demand parameter and when externalities are nonlinear in consumption---because there is an externality on the quantity but quality choice, the planner would like people to drink less alcohol, but drink higher quality alcohol.

I agree with Chris on this one - I'd posted a pretty similar point last week. The New Zealand Drug Foundation should perhaps pay attention to this one: having a minimum price should be coupled with excise reductions, not increases; NZDF has been pushing for both a minimum price and an increase in excise. If the ex ante excise were seriously below the optimum, then I'd expect a model like the one Chris is likely working up to say instead that minimum pricing lets us increase excise less than we otherwise would. But aggregate excise here isn't far out from actual external harms from alcohol. And I still worry about effects on moderate drinkers of lower income. The policy seems likely to be severely regressive.

Jennie Connor really should retract her press release or issue a correction. It leads people to believe that a minimum price will have far more effect on harmful drinkers' consumption than can be supported by the evidence. Otherwise, how much weight should anybody place on any "fact" claimed by Jennie Connor in her press releases?

In other scorekeeping, Ross Bell is right and John Key is wrong: a minimum price will increase the average quality of drink consumed, not reduce it. Here's Key:

"Instead of buying a $10 bottle of wine that might go to $15, they'll buy a $5 bottle of wine that'll cost $10. Their outlay is the same, the quality of what they're buying is worse," John Key said.

Competition among retailers, distributors, and producers ensures that drinkers get at least the minimum price's worth of value for the drink they're consuming except where there are other restrictions in the system that allows agents to accumulate rents.


But in that same article, Bell underestimates the number of standard drinks in a bottle of wine; this has the effect of reducing the perceived effect of a minimum price. Bell writes:

If the Government were to set the minimum price for alcohol at $1.50 - a reasonable and workable price - it would mean a seven-standard-drink bottle of wine could not be sold for less than $10.50.

Most bottles of wine are closer to 8 standard drinks than to 7. I had a quick flip through our wine rack. A Pegasus Bay riesling came in at 6.6 standard drinks. Nothing else in the rack rounded to 7 - everything else rounded to 8, except a few Aussie reds that rounded to 9. 8 standard drinks at a $1.50 minimum price is $12, not $10.50. And, though I'm a moderate high-income drinker, I do often buy bottles of wine in the $10-$12 range. The Montana Classics range on special for $9 is typically great value; I never feel bad about using third of a bottle in cooking at the price, and a glass while cooking is generally decent too.

Bell cites a Scottish government study suggesting that moderate drinkers won't reduce their consumption by much in absolute terms while heavy drinkers will have massive reductions in absolute consumption. If that one's based on Sheffield, and if Sheffield there is assuming constant elasticity across moderate and heavy drinkers, I wouldn't put much weight on it. Sometimes Sheffield estimates differential elasticities, sometimes they just assume constant elasticities. I'm not sure what they're doing in this particular one. And I also worry too about differential patterns in how people reduce their consumption. The Australian study I'd cited last week showed that most of the action in price increases is in reducing the number of days of light drinking rather than reducing the amount of heavy drinking, though there are other studies suggesting reasonable price elasticity of binge drinking. 

Finally, Bell cites BERL's (adjusted) figure on alcohol-related harm: $4.4 billion. That's disappointing. Ross, please remember that that study is just terrible. Again,

• They count the VSL from lives lost while simultaneously counting the total value of forgone production from premature mortality. The Ministry of Transport, who puts out the VSL measure, never does this when they tabulate the social costs of car crashes. They count the value of lives lost in accidents, the cost of injuries, and the value of production forgone due to injuries, but they don't count forgone production from those who die. The measure of the value of a statistical life is inclusive of the measure of forgone production. BERL says that VSL costs are $1.52 billion and that labour costs, mostly from deaths, is $1.48 billion. 


• Where their model study, Collins and Lapsley, counted both the health benefits and the health costs of drinking and took a net measure of costs to the health care system, BERL took a one-line assumption that harmful drinking can never have any health benefits as justifying a move zeroing out any of the aetiological fractions where alcohol reduced costs. This was absurd and points strongly to that they just wanted to give the Ministry of Health the very very large number that the Ministry of Health wanted. Even drinking that is on net harmful can have a mix of underlying positives and negatives. 


• They everywhere conflate private and social costs. Ross, you probably want to include all the costs that drinkers impose on themselves. And that's fair enough where you accurately characterise those total costs as mostly consisting of costs drinkers impose on themselves. But neither of the points above have anything to do with that. It's just poor method designed to inflate reported costs. And repeating the "costs New Zealand" line without the qualification makes people think that you're referring to a cost to the taxpayer through the health system rather than a cost drinkers impose on themselves - it's misleading; I hope not purposefully so.

Peter Dunne seems pretty sensible on this one, even if I do curse his name each and every time I want to get cold medicine that works.

"To say that we'll have a minimum price of $12 for a bottle of wine because people who can't afford to pay $12 shouldn't pay a lesser price, but Chardonnay socialists who can pay $25, $30 for a bottle of wine will still be able to get their wine. I think that's a really elitist and ridiculous argument."

The policy would reduce some harmful consumption, but it would also reduce some reasonable consumption from lower income drinkers - and from a few higher income cheapskates like me. We either need more serious work showing that the harms prevented outweighs the harm imposed by the policy, or at least coupling the policy with transfers to those negatively affected.

Markets hate profits

Unless there's some barrier in the system preventing it, no firm can sit on excess profits forever. Competition erodes away the excess profit until everybody's again earning a normal rate of return. Today's case in point: alcohol minimum pricing. I've made the point before, but it's worth walking through again as the logic isn't immediately obvious to non-economists.

Neil Miller argues:

Because most craft beers are currently priced over the $2 a drink threshold, it could be argued that they will become closer in price to mainstream beers which might encourage drinkers to “trade up”.  However, the costs to the big breweries will not have increased and they will basically be making more money for the same beers.  This means they will be able to increase marketing and distribution efforts.  Mr Albertson’s point about minimum pricing putting pressure all the way up the chain is critical.  

He's right that the big brewers will have more money for marketing and distribution. But they're pretty unlikely to be making more money for the same beers. Let's walk through the logic.

Suppose I'm one of the big brewers and Labour takes power. Lianne Dalziel announces a $2 per standard drink minimum price. Doug Sellman shouts about how it should be $10. My product previously retailed at $1 and cost me $0.25 to produce. I got $0.05 in profit and the rest was distribution / retailing costs. Can I suddenly start pocketing $1.05 in profits for that drink?

Minimum pricing hasn't made my competitors go away. I expect that they'll be trying to increase market share. What should I do? The first thing I'd try is a new promotion: Every 4th case (24 pack) of beer has $20 inside. My production cost goes up by a bit over $0.20 per bottle, so I'm only pocketing $0.85 in profit per bottle. But if my market share goes up by enough, it's totally worth it.

My competitors try it too. They promise $20 in every 3rd case. Then somebody in Parliament figures out that the real cost of alcohol to consumers is nowhere near $2 per standard drink as we're effectively rebating a big pile of the minimum price to consumers as a cash lottery. So that gets banned.

What next? Free t-shirt! Free shot glasses! Free beer mugs (collect all 8!). Then Parliament bans bundling any kind of good with the beer.

What next? It depends a lot on how different cohorts of drinkers respond to increased product quality versus increased related amenities. Maybe I can turn my bottles into something that's beautiful, with a stopper cap on a wire that makes it useful for re-use as a water bottle. Maybe I can make my labelling nicer. Maybe I can open up my own bottle shops where I sell only my own product but there's just an awesome environment for my customers: free massage from a Tui Girl with every purchase.

Think I'm kidding? Look at what happened in the US when airline prices were regulated. The airlines were banned from competing on prices. So what did they compete on instead? Better meals, better drinks, and more attractive stewardesses.

Unless there's some barrier to competition somewhere in the system, nobody gets to sit on free profits. These kinds of rents get eroded pretty quickly. Customers either wind up buying alcohol that actually costs $2 per standard drink (less normal profit) to produce, or that's bundled with amenities they find more valuable than improvements in the quality of the drink but that still cost $2 per standard drink (less normal profit) to provide.

Who might get to enjoy excess profits - rents - out of minimum pricing? My first pick are those who have bottle shop licences in poor neighbourhoods. They'll have local monopoly rents, especially when their customers have a harder time going across town for bargains. That will be capitalised into the price of the firm, and the next guy who buys the bottle shop will only then be earning normal profits, but there's likely a windfall gain to some small bottle shops.

Markets hate free profits: somebody's always rushing in to try to grab them. That competitive process runs until everybody's just earning a normal rate of return. I'd expect that the only conditions under which the big breweries get to keep selling current product at a $2 per standard drink minimum profit and just bank the profits are the conditions under which they could do it without a minimum price. Basically they need a strong cartel that prevents entry. Fortunately, we're nowhere near that kind of a world, at least in New Zealand.