Duty Free

Otago's Richard Edwards wants to close the "loophole" allowing duty-free import of tobacco and costing the country millions in lost excise revenue. Let's look at this from first principles.

First, recall that excise is imposed not for the purpose of revenue generation, but rather (ideally) as a quasi-Pigovean charge to internalise external costs of consumption, noting however that current tobacco excise is roughly three times any cost smokers impose on the government through the public health system. "Lost revenue" matters a lot less than whether we've messed up relative prices.

Visitors to New Zealand bringing tobacco or alcohol products with them for their own consumption while here should not be subject to excise taxation on those imports where excise is intended to defray the costs to the public health system involved with the consumption of those products. Tourists will go home and eventually potentially impose costs on their own public health systems for tobacco consumed while here, but are not likely to impose costs in New Zealand. Alcohol could potentially lead to the imposition of social cost if someone flies here, gets drunk, and does silly things. We then need a balancing between the expected social cost per unit import and the cost of collecting duties and tariffs at point of import. Excise on spirits is $50 per litre of pure alcohol; the duty-free concession is three bottles of spirits that would likely contain about 1.35 litres of pure alcohol, or $67.50 in tariff. A very small portion of that would represent potential expected costs that could be imposed on the New Zealand government through the consumption of the imported product by foreign tourists. But note too that we make many other concessions to foreign visitors because the cost of charging them would be a hassle. Tourists are given free coverage for minimal accident treatment by ACC without paying premiums despite that a small ACC levy imposed at the border would be pretty straightforward. Any of these measures that slow down processing at the border and annoy tourists risk imposing cost rather in excess of the potential benefit.

Returning residents are a bit different. Whether a Kiwi consumes alcohol or tobacco brought with them from abroad or bought at the local shoppes, the external costs are the same. A duty free limit then should be set simply in recognition of that it can be more expensive to collect taxes at the border from returning residents than to run those taxes within the country. There are perfectly legitimate, non tax avoidance reasons for bringing in product from abroad. When I go home to Canada, I like to bring back ice wine that's otherwise here hard to get. Smokers may wish to find products that are different from those commonly available here. We also have a personal goods concession allowing the import of goods valued up to $700. This gives us a bit of a benchmark on Customs' expected hassle-cost of collecting taxes at the border. If it isn't worth hassling an incoming returning resident for $100 in GST because of collection costs, it would be surprising if it were worth hassling an incoming returning resident for $67 in excise. Presumably the import allowances are set with a recognition of that returning residents will often have a combination of personal goods, tobacco and alcohol. The threshold for imposing hassles at the border is then pretty high, because hassle costs at the border are pretty high.

Where Edwards has a reasonable point is that as excise increases, the duty-free allowance should presumably change. The higher is excise, the lower should be the duty-free allowance because it will be easier to hit the break-even point where excise matches the transaction cost of collecting it. I've not seen the time path on the personal concession for tobacco product. If it isn't lower now than it was a decade ago, there could be grounds for checking whether it should go down a bit. But were the personal limit to be lowered substantially, we'd need a separate and higher limit for incoming tourists. And that too imposes hassle costs.

Finally, it isn't hard to imagine second-best arguments where, if consumption among higher income cohorts is less likely to impose substantial external harm - they tend to have private health insurance, for starters - then duty-free imports for jet-setters is one way of having excise rates that scale appropriately.

In other news, the NBR reports that changes are afoot for low-value GST exemptions on imports. I really hope that whatever regime they come up with recognizes the potentially large fixed cost imposed on any import when you make online shoppers go through an extra hassle step to collect the goods they're buying. It would be very very easy for regulations here to turn into protectionism for local inefficient retailers.

Housing crises and public choice

The worst is yet to come for Christchurch housing. As the rebuild picks up, we're going to have to house thousands* more construction workers, families in temporary housing while their houses are being repaired or replaced, and somehow find room for incoming students as fear-of-Christchurch eases.

Lois Cairns writes in the Press:

The Christchurch City Council and the Canterbury Earthquake Recovery Authority (Cera) have pledged to work together to tackle the city's housing problems.

Both organisations are promising more action to address the shortfall of housing in the city amid growing concerns the housing pinch, which has already pushed rents and house prices sky-high, will worsen between now and 2017.

"I would like to think this is a new start . . . that we can work together. There is so much at stake," council housing committee chairman Cr Glenn Livingstone said yesterday.

His comments came during a workshop on housing organised by the council and attended by representatives of Cera and the Ministry of Business, Innovation and Employment (MBIE).

MBIE senior analyst Dan Martin told councillors the loss of about 12,200 homes in the quakes had dramatically changed both the rental and home ownership market in the city.

It was estimated 7 per cent of the housing stock had been lost.

Shelley Robinson reports in the Herald:

The housing situation in Christchurch is now the worst it has ever been, forcing some families to squat in empty red zone houses.

People being forced out of rental accommodation because of earthquake repairs can now not afford alternative accommodation, welfare agencies say.

Said Christchurch City Missioner Michael Gorman: "I've never ever known it (housing situation) to be like this. It is the worst it has ever been. Usually there is always hope but now it feels as if there is no hope left out there.''

Mr Gorman said squatting in red-zoned houses was not unusual for the homeless - but he was now aware of families who were moving into abandoned houses.

Mr Gorman said a mother with two teenagers was squatting in a Bexley red-zoned house because they could not afford to rent a home.

They been previously been in a rented property but had to leave that for earthquake repairs and couldn't find anywhere else affordable.

Absolutely none of this is surprising. Many people have been very loudly suggesting that Council needed to open things up so that new housing could quickly come on-stream. Very simple fixes, like allowing people to put in a secondary flat inside their houses, could have been achieved at a penstroke a thousand days ago. And yet Council did nothing. Instead, we've had years of arguing about zoning and plans and building codes and stadiums and light rail.

I understand the standard public choice arguments around NIMBY regulations and housing. Long story short, homeowners like higher prices and hate having lower income neighbours and so push for regulations that keep minimum lot sizes large, prevent densification, and restrict development out to the suburbs. Similarly, property-owning developers want strong restrictions on the ability to develop - the regulations then enforce something of a cartel among those developers who can work the system. Sure, it's all couched in a nice veneer, but those are the basic incentives.

Some of the basic literature:

• Groves and Helland show that zoning is mostly a distributive enterprise: a way of allocating rents. 
• Clingermayer similarly provides evidence of zoning's being used both as a way of reducing externalities and as a way of distributing rents. 
• Evans despairs that urban planning takes pretty much no account of standard cost-benefit analysis and instead operates under a public choice model which, while helpful in understanding why things are as they are, does little to help us understand how to fix things. "Thus the economist who chooses his profession in the hope of advancing human welfare, and then chooses to study the economics of town planning, is likely to find his or her professional career frustrating, since their advice will be either ignored or unpopular."
• Webster summarises the basic approaches: Pigovean, Coasean, and Public Choice. 
• Pennington's book looks especially helpful; I need to order a copy. His paper here highlights planning failures and the cycle in which policy failures beget further failures. 

What I don't understand is why the basic economic theory of deregulation didn't kick in. Peltzman taught us that when the costs of regulation change, the equilibrium changes. All of the minor niggling regulations that propped up housing prices and increased building costs in Christchurch before the earthquakes became incredibly binding and restrictive and costly after the earthquakes.

Why didn't Council get out of the way?

I can understand worries about the long term and what the city should look like fifty years out. But very simple things that would have had little to no effect on long term character and that could have quickly brought at least some more supply onto the market immediately after the quake were also blocked.

Why did it take more than a thousand days to get to the point where Council starts taking seriously that we might just need to let people build more houses more easily? Why did it take the threat of central government imposing a plan?

Understanding why Christchurch screwed up so very badly might help in fixing Wellington's regulatory structures before their earthquakes come.

Potential explanations:

• Rent-seeking and political capture by homeowners, each of whom likes the idea of housing affordability in general, but particularly likes their own asset value increasing and dislikes their neighbour's attempt at subdividing.
• Legal risk to Councils where any easing up on building codes could expose them to "leaky-home" style liability. And while this can explain stuff around construction methods and dithering interminably over setting the building codes post-quake, it does nothing to explain council reticence to open up more land or to allow increased densification.
• RMA litigation risk: failing to allow increased density or to permit more development on the fringes causes homelessness; fixing the regulations might lead to somebody suing them for not having gotten all the processes right or not having consulted sufficiently or for failing to have properly considered amenity affects.
• Council fears of taking on infrastructure costs. However, MUDs do solve that problem rather nicely. 
• More psychological explanations: a disfunctional council (elected and/or bureaucrats) post quake just wants to hunker down and do exactly the same thing it's always done in exactly the same way it's always done it. Allow people to put flats into their houses? Bah, we've never allowed that. You just want to turn the area around the University into something like Dunedin, don't you? Well, we won't have that, not in our city. You say we're expecting another fifteen thousand construction workers? Well, [sticks fingers in ears, shouts la-la-la-la-la I can't hear you].

I haven't any great answers here but it's something worth thinking more about. 

* One estimate that was floating around was 15,000 additional workers in the next year.

23 and Me skepticism

I agree entirely with Alex Tabarrok's post on the ridiculousness of the FDA's shutting-down 23 and Me.

Further, I would love to subscribe to a service like 23 And Me. But I haven't yet.

Let me reframe things just a bit.

We've recently found out that the NSA has basically been able to see everything that Google sees. And Google knows just about everything about me. I have zero worries about Google knowing everything about me - they just use it to better target ads, and I see that as a plus rather than a minus. They might turn ads from a nuisance to offers to sell me things I'd actually value at more than their selling price? Oh Nos! But having that big database of everything just sitting there is way too tempting for government. What they can't subpoena from it, they'll hack their way into and steal. Things that seemed kinda crazy conspiracy theory territory just a couple years ago... well, priors get updated.

23 and Me, run by Anne Wojcicki, Sergei Brin's partner, is putting together a great big database of everybody's DNA. Sure, for now, they've not run the full analysis along all base-pairs, just key markers. But we'll get there as costs drop. Eventually they'll have a great big searchable database of millions of people's DNA. And it will be great, just like Google is great. We'll find out all kinds of associations between genotype and phenotype we'd never otherwise have known about. Rare diseases will get spotted early, lives will be saved. Maybe we'll even get some kind of merger with Google profiles to make it even more accurate. And the ads I get will be even better (again, I see as a plus).

But a database like that is awfully tempting, isn't it? The first temptation will be searches for matches against samples from crime scenes. Even identifying the close kin of criminals can help pin them down. And it will be popular. Because finding and stopping criminals is popular. So warrants asking 23 and Me if they have any matches for particular samples will go down a treat.

Then we'll start seeing 23 and Me elevated risk profiles for criminal activity. Parents will want to know if their kids are at higher risk for antisociality in their teenaged years, so we'll see these start showing up in their profiles.

And my won't those profiles be tempting. And we know that Google's been way less vigilant against designing things to harden against government attacks. Where that's normally irrelevant, it's pretty hard to believe that we'd have that different a culture in a company run by Brin's wife.

The odds of all this turning into pre-crime identification are pretty low. Maybe 5%.* But downside costs seem high.

If a service like 23 and Me started up in China, I'd likely sign up. I cannot imagine the Chinese government giving two whits about the genetic profile of individuals in New Zealand, or their being at all likely to respond positively to subpoenas from America or elsewhere asking to trawl through their databases. And they at least try to keep the NSA out of their stuff.

Transactions costs to New Zealand kept us from signing up to 23 and Me a few years ago. For once, I'm kinda glad about those kinds of costs.

* I suggested a bet with Bryan Caplan on this stuff on Twitter. He reckoned 1% chance; I'd thrown up a 10% ballpark. We've settled on 5%, but need to flesh out the details. I'd expect something like "If, by 2025, mainstream media reports that government agencies are using DNA database profiling to find groups more likely to commit crimes, and uses the information to target social assistance or criminal justice agencies for crime prevention, Bryan owes Eric $20. Otherwise, Eric owes Bryan $1. If the FDA mess effectively closes down 23 and Me (substantial drops in subscriber base), bet's off: it's a conditional bet."

I'd be happy to go to one chance in four that 23 and Me is served a warrant asking them to match crime scene samples against their database by 2025 as well.

Driving while....

The New Zealand Herald asked me for comment on a new study showing that driving while hung over is a bit riskier than driving while at the .05 level. I told them:

“It isn’t particularly surprising that driving while hung over increases accident risk. I would expect that driving while suffering from a very bad cold and headache, or driving with the flu, or being pretty tired, would have similar effect. In all of these we have to remember that increases in relative risk can be much larger than the actual risk imposed: if I’m thousands of times more likely to be killed by an asteroid when standing outside than while hiding in a bomb shelter, I’m still not very likely to be killed by an asteroid.”

“The reported risk increase here is more substantial than driving at .05. Drivers in the .05 to .08 range are about five times more likely to have an accident than someone who is sober, which is just a bit riskier than driving while having a conversation on a hands-free cellphone. I expect all of these are slightly less risky than driving with my five and three year olds in the back seat when they have conflicting views about what should be on the radio.”

A few "driving while" risks:

• Driving while using a cell phone, whether hands-free or not, is about four times riskier than baseline.
• Driving while using a cell phone, in simulator, is about as risky as driving while at .08, whether hands-free or not.
• But note that a really rather nice regression discontinuity design shows no real effect, and a potential upper-bound risk estimate around 3 times baseline. Ungated discussion here.
• If you're getting six hours of sleep per night, you're driving at the equivalent of .05. If you've been awake for 24 hours, you're comparable to someone at .10.
• Should we ban new parents from driving on basis of likely sleep deprivation?
• Older adults with cataracts (but still allowed to drive) were 2.5 times as likely to have had a history of at-fault crashes than those without cataracts. 
• Old people and young people are risky. Compared to 30-59 year olds (baseline), those over 70 have twice the risk of fatal accident involvement, as do 19 year olds. A 16 year old with passengers is 4.72 times as risky as a 30-59 year old with passengers; a 20-24 year old with passengers is 2.54 times as risky.
• Drivers over the age of 85 had 10.62 times the baseline risk of multiple-vehicle accidents at intersections and 3.74 times baseline risk elsewhere. 
• Drivers in the .05-.079 range are 5.5 times baseline risk; those above .08 are much riskier (15.5 times baseline). Same study has no increased risk for cannabis, but combinations of alcohol and other drugs were very risky.
• People who are left-handed have 2.35 times baseline accident risk.
• Not including any alcohol-related accidents, time of day matters a lot. Driving at 4 in the morning is 5.7 times as risky for accidents as driving at 10-11 am; they chalk it up to sleepiness. Maybe we should just have curfews.

A few others I've not seen studies about, but surely matter:

• Children in the back seats, by age and number
• Finding a screamed-for child's toy on the floor of the back seat while driving
• Stopping child from kicking the back of the seat
• Resolving disputes about whether it's her turn for music or his turn for audiobooks
• Enforcing bargains made in the back seat by the children with respect to turns
• Driving after child in toilet training in back seat announces "I need to make a pee"
• Note that post-quake Christchurch, with portaloos everywhere, was rather good on this front.
• Indulging a five-year old's preference to dungeon master me through a scenario he's inventing on the go and trying to keep track of the rule changes he keeps making.
• Checking the speedometer every 30 seconds on windy and hilly roads to make sure that you haven't varied by more than 4kph from the speed limit.
• And, finally, Sue Ellen Mishke

Update: Otago's Nick Wilson commented on the same study for the Fairfax papers. He graciously pointed me to the following additions:

• People with latent toxiplasmosis (from cats) have 2.65 times the baseline risk of car accident. That's the average. For those with high levels of toxiplasmosis antibodies, the risk is 16 times higher. People with high levels of toxiplasmosis are worse than people driving above .08. See also here.
• Some of the evidence on risks associated with having a cold, though I haven't the time today to calculate odds ratios from their presented data. See also here.

Damn it feels good to be Professa

I love this Inside Higher Ed piece:

A blog post last week offered an unexpected idea: New Ph.D.s are behaving like those who seek to join drug gangs.

"If you take into account the risk of being shot by rival gangs, ending up in jail or being beaten up by your own hierarchy, you might wonder why anybody would work for such a low wage and at such dreadful working conditions instead of seeking employment at McDonald's. Yet, gangs have no real difficulty in recruiting new members. The reason for this is that the prospect of future wealth, rather than current income and working conditions, is the main driver for people to stay in the business: low-level drug sellers forgo current income for (uncertain) future wealth. Rank-and-file members are ready to face this risk to try to make it to the top, where life is good and money is flowing," wrote Alexandre Afonso, a lecturer in political economy at King's College London.

He cites the work of the economist Steven Levitt and the sociologist Sudhir Venkatesh in understanding drug gangs. "With a constant supply of new low-level drug sellers entering the market and ready to be exploited, drug lords can become increasingly rich without needing to distribute their wealth towards the bottom," he writes. "You have an expanding mass of rank-and-file 'outsiders' ready to forgo income for future wealth, and a small core of 'insiders' securing incomes largely at the expense of the mass. We can call it a winner-take-all market.

Then he turns to academe and finds very similar conditions. "The academic job market is structured in many respects like a drug gang, with an expanding mass of outsiders and a shrinking core of insiders. Even if the probability that you might get shot in academia is relatively small (unless you mark student papers very harshly), one can observe similar dynamics," he writes. "Academia is only a somewhat extreme example of this trend, but it affects labor markets virtually everywhere....  Academic systems more or less everywhere rely at least to some extent on the existence of a supply of 'outsiders' ready to forgo wages and employment security in exchange for the prospect of uncertain security, prestige, freedom and reasonably high salaries that tenured positions entail."

Academia's a tournament game.

And while it would be fun to see a 'Damn it feels good to be Professa' version of the Geto Boys...


... reality is a bit more Weird Al.

Builder Baker

I'm not quite sure what to make of this election billboard in Christchurch East.

Candidates in the Christchurch East by-election:

• Baker, Leighton. Conservatives. A builder.
• Doocey, Matthew. National. Healthcare manager at the CDHB. His website notes a BSc (Hons), MA, and an MSc. It also says he's studying towards a doctorate in health by distance at Bath University in the UK. 
• Gaskin, Ian. Independent. Who knows. But he wants to go into coalition with Key.
• Holland, Adam. Independent. Who knows. I don't think he's an academic.
• Lambert, Paula. Aotearoa Legalise Cannabis Party. Described as "Christchurch East mother Paula Lambert", no occupational or education details listed. Nice policy statement - maybe she has an academic background, but it's hard to say. 
• Lichtwark, Jenner. Democrats for Social Credit. Mystery fiction writer. 
• Moorhouse, David. Greens. Canterbury BCom in Accounting, works in IT. 
• Park, Sam. Independent. Who knows. I don't think he's an academic. 
• Veale, Gareth. ACT. Earthquake claims specialist, recent graduate in Politics at Canterbury. 
• Williams, Poto. Labour. Notes she attended Auckland Girls' Grammar, but no mention of tertiary. LinkedIn has her living in Auckland working as General Manager at SJOG Waipuna and lists Southern Cross University. [Update: James Dann suggests Poto might be working towards a doctorate part time.] [Update 2: Rupert points to confirmation.]

Matthew Doocey comes closest to being an academic as he's working towards getting a doctorate while working as a CDHB manager. But it would be a pretty big stretch to call him an academic. [Update: same holds for Poto, see above.] Unless anybody with book learning (as opposed to Book learning) counts. iPredict says National has a 24% chance of winning the by-election; Williams has a 76% chance. 

None of the minor party candidates, according to the betting markets, have any chance of taking the seats. We then should read most of their positioning as building the party vote for the next general election. The Conservatives are placing themselves as the party for those who disdain academics. There's probably a reasonable market there. But boy would it be sad if we ever traded a party on the right that grounded itself in Hayek and Friedman for one that seems more likely to send the academics out to join the shearing gangs.

Update: James Dann comments here, noting other billboards contrasting, effectively, trades versus suits. That's at least a totally fair comparison for Christchurch East. And pro-trades would, and should, resonate really well in Christchurch. "Just let the tradesmen start building and get the darned suits out of the way" - not nuts at all. Their identity politics play isn't a bad one. But the anti-academic flavour puts me off.

Update2: Alternative reading: this is all just part of the trades/suits framing, with anybody who doesn't work with his or her hands being counted as an academic. Not quite the standard definition, but not an unpopular one.

Fertile employment

One potential explanation for lower female wages: employers fear that female employees will take maternity leave and condition wage and employment offers on that risk. I'm not saying it's a good thing. It's almost certainly illegal. But it's potentially a thing employers do. My Masters student Hayden Skilling is currently investigating whether this can explain any substantial part of the unexplained gender wage gap; I'll report on results later this year.

In the meantime, here's an interesting bit of evidence. Spending a lot of time in casual employment rather than full-time employment increases the risk that a woman is childless by age 35. 

MAIN RESULTS AND THE ROLE OF CHANCE The likelihood of childbirth by around age 35 was reduced for every year spent in casual employment, irrespective of socioeconomic status, partner's education and parents' birthplace. The likelihood was reduced by 8, 23 and 35% for 1, 3 and 5 years spent in casual employment, respectively.

Now run the thing in reverse and assume rational expectations. You're an employer. Two equally capable potential employees are up for a job. One comes with a non-trivial risk of taking maternity leave. The other is male. In case of maternity leave, you need to sort out cover and you can't guarantee that the employee returns. So you're taking on risk and you need to be compensated for taking on that risk.

There exists no real way for young women credibly to signal that they have no plans on having children, or that they promise to work for n years prior to any childbearing. It's generally illegal for the employer to ask, and both the candidate and the employer knows that any promise made is unenforceable - in fact, the employer would likely get in trouble for trying to enforce it.

Again, I'm not saying any of the resulting equilibrium is in any way good or desirable. If you wish to promote gender equity, though, you have to set incentives such that good results obtain. Maternity leave mandates that are costly to employers will likely result in fewer women being given positions that draw maternity coverage. Employment subsidies proportionate to the cost of the risk imposed might socialise the costs more efficiently.

Previously: Parental Leave and Benefits.