I guess I'll need a bridging loan [updated]

I'm a bit lost for words about EQC's latest rule change.

The Earthquake Commission charges a levy on all home insurance policies in New Zealand and covers the first hundred thousand dollars in damage to properties in the event of an earthquake, landslip, or other such event. There were warnings ahead of the Christchurch earthquakes that EQC was not charging enough to cover its potential liabilities and that it certainly was not well placed to manage any kind of major event; nobody paid much attention.

So anybody with home insurance in Christchurch has to deal with EQC. There's no obvious way of contracting around EQC to have a private insurer take on the things EQC normally covers. Where damage to a house is less than EQC's capped limit, you have a choice. Either you can project manage the rebuild yourself and submit the bills to EQC for payment, subsequent to their approval of a plan of works and costing, or you can have Fletcher's serve as project manager; Fletcher's is the default. While you can ask that Fletcher's use your preferred contractor in your repairs, some contractors now refuse to deal with Fletcher's. Where you let Fletcher's choose the contractors, there seems to be pretty high variance in outcomes.

We own an old weatherboard house with lots of character features; we wanted a contractor that specialises in that kind of home. We have full replacement insurance coverage. When our preferred contractor told us that he would not take on any more Fletchers-managed projects, we decided to go for an opt-out and let that contractor handle project management.

Now, EQC has changed the rules. Instead of our submitting the plan of works and proposed costings to EQC, followed by having the contractors bill EQC for the approved work directly, EQC has decided that opt-out owners have to pay their contractors directly then submit the bills to EQC for reimbursement.

EQC has a very bad history for paying on time. And if they decide, unilaterally and arbitrarily, to change the rules again mid-process, the homeowner is then stuck with costs.

We're now likely to need a bridging loan from our bank so we can handle our repair costs. And we'll have to hope EQC doesn't shaft us. But EQC is likely to shaft us.

At least we're likely to be able to get that kind of a loan. Or I expect we'll be able to; I'll have to talk with the bank.

This system stinks.

Update: Somebody called "EQC" in the comments at the Press site writes:

EQC has a number of changes to the Opting Out process with the aim of streamlining the process for customers and making it easier for them to take control of their own repairs, if they choose to do so. The flipside of EQC’s more hands-off role in these repairs is that we need to be clear about the customer’s responsibilities once they take on the role of project manager. To reflect this, EQC has produced some new customer information which including misleading wording relating to “reimbursement”. The revised wording places an emphasis on customers having the responsibility to manage invoices and EQC payments to ensure their contractor is paid on time. This is a standard part of the project management role, and it’s important customers know what is involved before taking the step to opt out of the Canterbury Home Repair Programme. As project manager, a customer running their own repairs takes on the risk that if invoices are incomplete, late arriving with EQC, or if some other complication arises, they may be required to pay a contractor upfront and be reimbursed. EQC pays on the 20th of the month following recpeit of invoice. As for Steve Brooks' comments that people not opting out will add years to the repair timeframe, the Canterbury Home Repair Programme has so far completed 18,000 full scope repairs - cusomters project managing their own repairs have completed a few hundred. But then Mr Brooks makes money when he persuades people to opt out, so he would say that.

I can't find anything on the EQC site discussing any of this.

Odoriferous statements

Prime Minister John Key said he didn't think minimum pricing would do much to curb heavy harmful drinking. Jennie Connor is quoted in a press release excoriating Key:

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".

"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". [emphasis added]

When I saw the release [HT: ed.co.nz], something seemed awfully odd about the bolded quote. What's the reference category, fruit juice? What's meant by "relative to other drinks"? So I dug around a bit for the work she's citing.

Connor is almost certainly referring to this Canadian study, which does argue in favour of minimum pricing. But compare their numbers with the bolded quote above.

The estimates indicate that a 10% increase in the minimum price of a given type of [alcoholic] beverage reduced consumption of that type by about 16.1% relative to all other  [alcoholic] 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). The first estimate may overestimate minimum price effects because it incorporates compensatory increases in consumption of all other beverages. The estimate of the effect of across-the-board changes in minimum prices on total consumption will be biased to the extent that the extra structure we imposed on the model is unrealistic.

Connor is citing the results from the own-price study as being the estimate of the effect of the across the board increase.

Doug Sellman, in the same press release, says

"The PM's statements reek of alcohol industry influence."

As for the bouquet emanating from the Connor/Sellman press release...

Price elasticity of alcohol demand [Updated]

Otago's Jennie Connor cites some numbers on the elasticity of alcohol demand with respect to price that just seem off [HT: ed.co.nz].

But Professor of Preventive and Social Medicine at Otago University, Jennie Connor, says price does influence alcohol consumption.
She says studies show a 10 percent increase in the minimum price of alcohol reduces consumption 16 percent.
Professor Connor says it's a very efficient and effective way of reducing problems from alcohol, because it targets heavy drinkers the most.

I've been citing the Wagenaar meta-study results showing an aggregate alcohol demand elasticity of -0.44; she's saying it's -1.16 -1.6. There's a bit of a gap there.

When I look at Table 1 of Wagenaar's metastudy of 112 different studies of the price elasticity of demand, I can't find a single one that has an aggregate elasticity lower than -0.92 at the lower end of the confidence interval; the lowest point estimate is -0.84. Recall that you need to hit -1 to have a product that's price elastic. But those are aggregate estimates; maybe there's just something different about elasticity at the bottom end of the price distribution.

So let's have a look at a very recent Australian issues paper examining the case for minimum pricing. This one comes from the Australian National Preventative Health Agency. What do they say about demand elasticity at that end of the distribution?

First, we have to be awfully careful in distinguishing between own-price and aggregate category effects. If you look at the effects of a price increase in one category of product, you'll likely overestimate aggregate price responsiveness because price-sensitive shoppers will flip to another alcohol product category if one category's prices change.

Who does the Australian National Preventative Health Agency cite? Wagenaar, like I do: Wagenaar reports aggregate elasticity across all alcohol categories. They cite two other meta-studies, one of which, Gallet, also reports an aggregate category elasticity that's pretty much identical to Wagenaar's. Where Wagenaar gets -0.51, Gallet gets -0.52.* The last one only reports elasticity by category, which is next to useless for reckoning changes in response to minimum prices or cross-category excise increases, but within-category findings are about the same as Wagenaar and Gallet were getting in those kinds of estimates - more elastic than aggregate elasticity, but still nowhere near -1. Wagenaar gets -0.8 for spirits; people shift from spirits to other products more quickly when the price of spirits jumps.

Next, ANPHA cites some Sheffield figures on aggregate price elasticities for overall alcohol consumption: -0.47 for moderate drinkers and -0.21 for hazardous and harmful drinkers. They note too that, when we look at own-price elasticity within product categories, hazardous and harmful drinkers are more price elastic than moderate drinkers: they're more likely to shift product categories. But that tells us zilch about what harmful drinkers do in response to a price increase for the entire product category; it would be misleading to use this kind of data to claim that harmful drinkers are the most price responsive. They're most price responsive when their preferred brand or product changes in price but they're also least responsive to aggregate changes in alcohol prices.

Finally, ANPHA look at some evidence from Canadian experiments with social reference pricing. At page 16, they cite evidence from British Columbia where a 10% increase in alcohol's minimum price resulted in 3.4% reduction in aggregate consumption: again, a finding consistent with the numbers I'm citing, and not consistent with Connor's.

ANPHA cite a bunch of other Sheffield simulation results showing relative price inelasticity but greater simulated total consumption changes among harmful drinkers than among moderate drinkers. Simulation results here are going to be pretty sensitive to parameter estimates, but it's also the case that a smaller percentage consumption reduction among heavy drinkers than among moderate drinkers can easily generate larger total consumption decreases among heavy drinkers.

The ANPHA issues paper doesn't make policy recommendations; it just looks at issues around minimum pricing. But they do include in their appendix a paragraph noting their prior recommendation: that alcohol move to a tiered volumetric tax that looks an awful lot like New Zealand's current system where spirits are more heavily taxed per unit alcohol than beer and wine, which are more heavily taxed per unit alcohol than low-alcohol products. I'm not endorsing the ANPHA paper or its recommendations,** but its survey around the price elasticity of demand is pretty much what I've been finding in my own searches through the literature. And I can't find anything in it that would support suggestions that alcohol consumption is relatively price elastic to regulated minimum prices.

I'd love to know where Connor's getting her elasticity estimates. They are completely outside of any plausible range. Again there is not a single paper among the 112 papers cited by Wagenaar that comes within cooie of the numbers she's suggesting would here apply; not a single one finds that aggregate alcohol demand is relatively elastic. O'Connor's suggesting an absolute price elasticity of demand of 1.16 1.6. Zero of the 112 cited by Wagenaar finds an absolute elasticity greater than 1. ANPHA does not cite a single finding suggesting an absolute elasticity greater than 1. Maybe there's a study out there somewhere that supports it, but I'd be awfully uncomfortable being cited in the press using number that are that far out of whack from the rest of the literature.

Finally, Connor says that minimum pricing targets heavy drinkers the most. It's true that they'll take the biggest dollar hit from an increase in minimum prices. But they are still less responsive relative to their consumption than are moderate drinkers. Imagine, for instance, claiming that rich fat people are most affected by a 100% tax on food because they wind up having the biggest increase in what they spend on food. Yeah, it's true. But the smaller absolute reduction in the quantity consumed by poor thin people matters too, especially if they cut their consumption by a much larger proportion than do the rich folks.

UPDATE: I've found the study Connor is citing, or at least I think I have. And, I think it's the same one that ANPHA is citing. Remember how I noted at the start that you have to be careful to look at aggregate changes rather than just own-price? Well, ANPHA was careful about that. Connor is citing the figure from the same study that looks only at what happens to, say, beer consumption if you hike the price of beer while leaving the price of wine constant. Suppose Honda increased the price of its cars 10% and we saw a 16% drop in Honda sales as consumers shifted to Toyotas; it would be a bit nuts to sell that as saying that a 10% tax on all cars would reduce aggregate car purchases by 16%. Here's the original paper:

The estimates indicate that a 10% increase in the minimum price of a given type of beverage [EC: eg, spirits, beer, wine] 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). The first estimate may overestimate minimum price effects because  it incorporates compensatory increases in consumption of all other beverages. The estimate of the effect of across-the-board changes in minimum prices on total consumption will be biased to the extent that the extra structure we imposed on the model is unrealistic. 

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.

Previously:

• Minimum Pricing
• Correlation, causation and alcohol
• Drinkers' utility
• Alco-pops and minimum pricing
• The whole darned alcohol tag
• Moderate drinking and health

*Note that I've been citing -0.44: mean elasticity across all the estimates is -0.51, but Wagenaar gives -0.44 for total alcohol after adjustment for study characteristics.

** In particular, arguments around increasing the price of the lowest-cost products in Australia, where the WET means that cask wine can be very cheap, just don't translate to the New Zealand environment where we already have a tiered volumetric excise regime. I also am far more sceptical of results coming from Sheffield's simulation work than they seem to be.

Housekeeping

We're still trialling Disqus here at Offsetting. On current voting, 2 people say "Keep Disqus!", 4 say "Go back to Blogger!", and 8 say "I don't care!". I'm not taking that as resounding support for any option, especially when I compare the number of survey responses with aggregate readership stats.

I'm extending the trial period. Some helpful hints for getting the most out of the commenting system.

• You can choose whether oldest, newest, or "best" comments appear first in the thread. Just go into "Discussion" and move the tick. I think the default is "Best", within which it sorts newest first. If you prefer oldest first, change the default. I can't do this for you. I've had a couple of complaints about new comments showing up at the top; this is something over which you, dear reader, have control. 
• You can up- or down-vote comments by hitting the little arrows; this affects comment ordering for those who sort by "Best". 
• Hitting the "My Disqus" tag tells you if anybody's replied to your prior comments

Minimum pricing

What would the world have to look like for minimum alcohol pricing to be a reasonable policy solution?

Suppose it is the case that harmful heavy drinkers, the sort that impose the greatest harms on others when they consume alcohol, really don't care about the quality of the alcohol they're drinking; they're buying whatever product provides alcohol at the lowest price per standard drink. Suppose further that this cohort's consumption is reasonably responsive to price measures: if you raise the price of the cheapest form of alcohol, you'll do a lot to curb that cohort's consumption while not doing much to reduce the normal consumption of moderate drinkers. Finally, assume that there's little overlap between the kinds of alcohol consumed by harmful drinkers and that consumed by moderate low-income drinkers.

In that kind of a world, minimum pricing on alcohol makes more sense than broader-based alcohol excise tax increases: you can get more reduction in harmful drinking at lower spillover cost to moderate drinkers than by simply increasing excise. A quick Google search suggests lab grade 95% pure ethanol sells for less than $7 per litre if you buy in bulk, or less than $0.10 per standard drink. In this hypothetical world, only harmful drinkers ever go for that product. Typical moderate drinkers instead choose something like, say, Glenmorangie 10 year old single malt. That scotch currently sells for $77 and includes 280 mL of pure alcohol, so just under $14 is excise. With no excise, Glenmorangie would sell for $2.86 per standard drink. If you wanted a $2 minimum price per standard drink, you'd have to charge $1.90 per standard drink to do it via excise to make sure you're charging enough on the lab grade alcohol. But that would load a lot of costs onto the moderate drinkers who then forgo enjoying a harmless bit of scotch before bed.

But are we in that kind of world?

First, in the real world, lower tier product is consumed not just by harmful drinkers looking for the lowest per-unit cost product. A lot of it also is consumed by moderate drinkers of lower income. The more overlap there is between low income harmless drinkers and harmful drinkers in product choice, the less attractive is minimum price in avoiding harming moderate consumers. As David Farrar likes to point out, under Labour's preferred $2 minimum price per standard drink, you could not buy a bottle of wine for less than $16. Most of the wine I purchase runs between $12-$18 per bottle; there are pretty decent wines available in the $8-10 range too, if we watch for specials. If we were in a lower income bracket, we'd be sticking with the $8 bottles. A $2 minimum price would double the cost of our consumption were we sticking with the bottom end of the drinkable price range. And, harmful drinkers also might be choosing the Glenmorangie too.

Second, where both heavy drinkers and moderate drinkers are choosing the same kinds of products, albeit in different quantities, we have to worry a lot about how each kind of consumer responds to changes in prices. The best meta-study on the topic remains Wagenaar, who found that heavy drinkers are roughly 60% as price responsive as moderate drinkers: the price elasticity of demand among heavy drinkers is -0.28 while it's -0.44 for average drinkers. If we doubled the price of lower cost products, which we'd have to do to get to Labour's preferred $2 minimum price per standard drink, moderate drinkers who currently choose that class of product would cut back their consumption by about 44% while heavy drinkers would reduce their consumption by only about 28%. A new paper in Drug and Alcohol Review confirms this kind of finding using data from the Australian National Drug Strategy Household Surveys. From their abstract:

A 1% increase in the price of alcohol was associated with a statistically significant increase of 6.41 days per year on which no alcohol is consumed (P ≤ 0.049), and a statistically significant decrease of 7.30 days on which 1–4 standard drinks are consumed (P ≤ 0.021). There was no statistically significant change for high or moderate-intensity drinking.

People respond to prices changes, but changes in average consumption levels are less informative than changes in consumption patterns. The study above finds that, when drinkers cut back on their consumption with price increases, they tend to do it by reducing the number of days in which they have small amounts of alcohol rather than the number of instances of heavier drinking. Wagenaar found that heavy drinkers respond less to price changes on average than do moderate drinkers; if that responsiveness comes from the least harmful parts of heavy drinkers' consumption, then the benefits of price increases in terms of harm forgone are overstated. If the J-curve is right, we're then imposing harms on light drinkers while not doing a whole lot to reduce the harms imposed by heavier drinkers.

If moderate and harmful drinkers consume similar products, albeit in different quantities, and if harmful drinkers are less responsive to price increases than are moderate drinkers, then it's harder to build a case for minimum pricing over excise as mechanism for internalising external harms from consumption; it's an even blunter instrument than is excise.

But, I don't think we can say that minimum pricing just transfers money to the brewers and distillers. Unless there are other bottlenecks in the system, we should expect that competition among producers and retailers would lead to products at the bottom end of the market disappearing unless they can be usefully bundled with things that consumers care more about than marginal increases in drink quality: packaging improvements, promotions, or free complementary goods like t-shirts or shot glasses. There will be deadweight costs where moderate drinkers preferring lower-cost product are forced to purchase products more expensive than they'd prefer, but these are attenuated to the extent that retailers or producers are able to get around the regulations by including, say, lotto tickets with lower quality products. If instead restrictions on liquor permits give some retailers local monopoly powers, minimum pricing will yield rents for those retailers that will be capitalised into the value of the firm. I'd walked through this two years ago.

If we are comfortable in imposing disproportionate consumption harms on moderate drinkers of low income and if harmful drinkers disproportionately consume lower priced product, then a minimum price plus excise can get around one of the stickier problems with excise. A linear excise tax that matches the average external harm from consumption necessarily undercharges harmful drinkers and overcharges moderate drinkers relative to the external harm each imposes: harms from heavy drinking rise nonlinearly in consumption while excise rises only linearly. A minimum price combined with a lower alcohol excise rate lets you impose lower costs on moderate consumers of products of higher inherent cost while still doing something to curb harmful drinkers' consumption; the collateral damage comes from consumption reductions among light to moderate drinkers who prefer cheaper product. I'm not comfortable with the collateral damage, especially in the absence of strong evidence that heavy drinkers disproportionately choose bottom cost-tier products. I'd also expect reasonable substitution into home brewing and home distillation if prices got anywhere near $2/standard drink.

What can we do if minimum price is a poor instrument and excise is blunt? Combine excise with measures directly addressing the harms imposed by harmful drinkers. For example:

• a drunk tank with medical attendants for those drunk and disorderly;
• greater investment in treatment for those whose offending seems related to addiction issues, albeit with the caveat that effects at the margin are likely lower than effects on average among the cohort of those who have thus far been able to access treatment;
• drunkenness isn't a defence to a drink-driving charge; making "while intoxicated" an exacerbating factor in sentencing for other offences might help;
• At least some of the public pressure for increasing the alcohol purchase age comes from that drunk teenagers are annoying. Instead of increasing the alcohol purchase age, implementing a minimum age for being in possession of alcohol without parental permission can do wonders in making drunken teenage parties more discreet. Note too, though, that there is no demonstrable increase in youth alcohol consumption since the alcohol purchase age was reduced to 18.

More on asset sales

I'm quoted in the Press's story on potential asset sales. Spot the minor transcription error from the email I'd sent! First comment to catch it wins the chocolate fish. Two letters are missing... somewhere.

There is a strong case for selling some Christchurch City Council assets, a Canterbury University economist says.

Dr Eric Crampton, a senior lecturer in finance and economics, said that if the council was not prepared to cut its expenditure on large capital projects such as the planned sports stadium and convention centre, it should look at selling assets that were more valuable when owned by the private sector.

''Lyttelton Port and Red Bus very plausibly fall into that kind of category,'' he  said.

''We oughtn't forget that only a few years ago the council thought that a private management company would be best placed to run Lyttelton Port.

''Bus routes in Christchurch are allocated between council-owned Red Bus and other operators, like Leopard, by competitive tender. It's pretty clear that we really need to have the council owning one of the companies.''

For other assets where the council might not want to give up control, like Orion, partial private ownership could help bring in external expertise while bringing in revenue.

''For other assets where efficiency gains from privatisation are limited, there's no strong case to be made between debt and asset sales. Both reduce the city's net asset base and constrain future ability to raise debt in case of seriously damaging future aftershocks,'' Crampton said.

Ultimately, whether the council or the private sector should control an asset depended on which was best placed to operate it.

Finding the two missing letters above is left as an exercise for the reader. [Update: Philip catches it. I'd said "unclear" rather than "clear" in the sentence: "It's pretty [un]clear that we really need to have the council owning one of the companies."] I'd also sent this paragraph, which didn't make the cut:

“It’s a bit of a shame that so much of the discourse around asset sales has focused on differences between dividend rates and the interest rate on Council borrowing. First, it’s harder to put a fair value on assets held by government because they’re not traded on the open market; the recent rather large reduction in the book value of KiwiRail points to some of these difficulties. Where we are less certain of the asset’s value, we have less confidence around the actual dividend rates. Further, where reported dividend payments include a lot of booked capital gain rather than actual cash payments, it’s not entirely a fair comparison with bond payments. But more fundamentally, ownership of assets comes both with risk and with ongoing maintenance liabilities; gaps between dividends paid by Council enterprises and interest on Council debt is largely explained by that the former is riskier.”

There is little point in keeping the "family silver" as a hedge against bad times if you're not willing to sell it when bad times hit. Still, cutting back on planned expenditures on a new stadium in excess of the insurance payout makes an awful lot more sense than either debt or asset sales.

Increasing the burden

This is why we can't have nice things.

Imagine that there's something you like. You have the power of government at your disposal to help you get more of the nice thing you like. Should you:

1. Pay people a subsidy for providing the nice thing;
2. Make it more expensive for people to own the nice thing.

When it comes to heritage buildings, which are very nice things indeed, we're increasingly doing the second. The National Business Review reports that the Heritage New Zealand Pouhere Taonga Bill will make it more difficult for owners of pre-1900 buildings to make any kind of alteration. In addition to requiring a building consent and, for buildings listed in district plans, a resource consent, you'll now also need an archaeological permit. 

NBR points to the Law Society's submission on the bill. They write:

The practical implications of this definitional change, however, are wide-ranging for New Zealand’s older settlements.  In some of these (for example, Nelson and Dunedin) there is still a substantial housing and commercial building stock comprising pre-1900 structures. A literal application of the definition of “archaeological site”, together with its companion definition of “harm”, means that there will be many thousands of private dwellings around New Zealand that will require an archaeological authority to be obtained for the most minor maintenance work, such as the replacement of spouting or the hanging of new wallpaper.  It is not clear whether this level of intervention with private ownership rights is intended by the Bill.  If that is not intended, then revisiting the definition of “harm” or “archaeological site” is warranted.  The Law Society does not believe that this difficulty can be addressed by Heritage New Zealand simply applying the legislation in a pragmatic way, since the failure to obtain an archaeological authority is a criminal offence of strict liability.

Who would want to own a heritage home if they had to seek archaeological approval if they wanted to change the wallpaper? If the value of heritage buildings is bid down because of the regulatory encumbrances, investments in maintenance and strengthening are attenuated too.

Previously:

• Heritage Preservation
• Liability and building risk
• See also ISCR, pages 14-15 at the linked PDF.