State of play in Australia

I don't follow the papers, I follow the markets. Mostly because I've been having a bit of fun arbitraging price differences across them - no chance of losses across outcomes, expected gain at current prices $250.

At BetFair, things have moved against the Liberals, with prices moving over the day from about a 58% probability to roughly 50/50. But there's substantial sell pressure in Labor's book, with $2706 sitting there ready to short Labor (buy Liberal) at prices from 51.8% to 58.3%. There's only $887 sitting there ready to buy Labor (short Liberal) at prices from 50% down to 39.8%. In both cases, I've combined the books assuming that it's either going to be Labor or Liberal so a short on the one is equivalent to going long on the other.

At iPredict, $106 backs Labor at prices from 38.5% to 50%; $123 sits ready to sell Labor at prices from 50% to 63% (I've pulled my orders in both for these purposes).

The "jaws" at Betfair look set to move downwards a bit for Labor and up for the Coalition. But it's neat how tight things remain, days after the election.

If only I knew how to write scripts to automate trading across platforms whenever prices differed. Of course, if it were easy, no such price differences would exist. Sigh.

Minimum pricing

The New Zealand government is likely to mull over a minimum pricing regime for alcohol.

I hope they get a copy of this one:

The Scottish Government’s plan to control the price of alcohol will barely tackle problem drinking while costing consumers £184million a year, according to a leading consultancy.

The Centre for Economics and Business Research said the introduction of a minimum price of 40p per unit would cause heavy drinkers to cut consumption by less than a pint of beer a week.

The poorest would be hit the hardest, with 10% of the population with the lowest income paying just over 50% more per unit. Moderate drinkers would cut consumption by 4.6% due to their greater sensitivity to price.

The report criticises a Sheffield University study that the government has used to support its legislation.

The CEBR said the Sheffield model failed to take into account “unintended consequences” such as cross-border and internet sales, the impact on jobs, the black market and policing costs, implementation and the reduction in consumer spending on other items.

Senior CEBR economist Benjamin Williamson said: “This report shows that the case for minimum pricing is extremely weak. It would not target problem drinkers and would have a genuine negative economic impact in terms of jobs, trade and costs to the consumer.”

CEBR's reports are here and here. I like this bit:

In effect, minimum pricing legislation forces firms to price as if they were in a cartel.

In addition to promoting cartel style profits, minimum pricing is also likely to lead to a reduction in the number of alcohol producers and brands available to consumers, as such price levels would ‘crowd out’ producers at the lower end of the market.

If minimum pricing was introduced merely as a regulation rather than as a tax, it may actually lead to the more powerful alcohol producers lobbying for increases in the minimum price. There appears to be evidence that this has occurred in Canada where leaked correspondence between the Ontario Finance Minister and the chairman of the Liquor Control Board of Ontario revealed that ‘industry requests’ were made to the government to raise minimum price levels, and that the government supported these requests.

Absent some other market imperfection, these rents ought to be eroded pretty quickly. But more on that later.

HT: Puddlecote.

And more alcohol costs

Australia's all a-buzz with its latest study of the cost of alcohol to society. They get a really big number - even bigger than Collins & Lapsley's prior really big number.

Let's take a look at just one part of that cost figure.

At page 133, they provide some estimates of the economic costs of intangible harms Australians suffer as a result of someone else's drinking. Their survey respondents answer questions that give them a health-related quality of life score. A one-point drop in that score, they say, costs the individual the equivalent of $50,000. Respondents are sorted between those who cannot identify a known drinker who has negatively affected them, those knowing a drinker whose drinking has affected them "a little", and those knowing a drinker whose drinking has affected them "a lot". They take the mean quality of life score for each group, multiply the differences from baseline by $50,000, extrapolate to population averages, and come up with about $6.4 billion in costs.

There are a couple of pretty obvious problems here, if I understand their method correctly. Which I may not, but I'd love to hear if I'm wrong on this count. It really looks like they're just comparing sample means. If so, and if there are any other differences - differences unrelated to alcohol - between folks who have a close relationship with a problem drinker and those who don't, then the mean comparison is hopelessly confounded. There are all kinds of bad social circumstances that are predictors of problem drinking. Those same circumstances would lead to lower quality of life scores regardless of whether there's any drinking. Regression analysis is needed, not comparison of means.

At the paper's outset, they explicitly reject mainstream economic analysis's insistence that external costs are the ones that matter:

A small tradition within economics, critical of the cost-of-illness tradition discussed below, has endeavoured to confine the estimated costs to strictly-defined “external costs”, that is, costs imposed on others by the alcohol consumption of the drinker (Heien and Pittman, 1992, Manning, et al., 1989). However, these studies have been quite rigid in excluding costs which they do not regard as true externalities. Thus Heien & Pittman (1992) exclude costs to others in the drinker’s family on the grounds that these “are basically internalized within the family”. They assume there is no external cost on the grounds that a family unit internalizes the alcohol harm that a member in the family causes.
However, this case is only true if the family jointly owns all the resources. [EC: Umm, no.] Each individual in the family is entitled to their own labour and time. When drinker A in the family harms family member B, resulting in a loss of output due to injuries or loss of time spent seeking services, those losses will only be internalized if A and B’s labour and time are jointly owned. In terms of property – be it money or belongings – even if it may be jointly owned no matter who bought it, there are civil and criminal laws that prohibit drinker A damaging it. In this example, if drinker A harms B, that harm is clearly not internalized.

In their rigid approach to what constitutes an “externality”, Heien and Pittman (1992) also exclude injuries to a passenger in a drink driver’s car on the grounds the passenger “has accepted the risk of riding with an abuser”.

Sorry. If you're in the car, you're party to an implicit contract with the driver. It's then internal, not external.

And how joint ownership is required for cost internalization is beyond me. You can do it with Coasean bargaining with complete private individual ownership. You don't need the passengers to be joint owners of the airline for the costs of a screaming baby on the plane to be internalized if the passengers are in a contractual nexus with the airline.

This doesn't bode well for the rest of the paper. But if anybody can provide further insights on whether I'm right that they're just comparing means on intangible costs, as noted at the outset, I'd like to hear it.

The Dean Wormer State

I kinda like Rob Hosking's take on New Zealand's proposed alcohol reforms:

"Drunk, fat and stupid is no way to go through life, son.”

Neither Prime Minister John Key nor Justice Minister Simon Power yesterday used the famous line from the classic film Animal House, uttered by bossy College Dean Wormer to a group of reprobate students.

But it was hanging there over yesterday’s announcements of tougher alcohol laws.

OK, this isn’t Nanny State, but let’s call it the Dean Wormer state.

Perhaps – to be charitable – it is a Dean Wormer in a velvet glove. The principle behind yesterday’s proposals seems to be to use other societal pressures to moderate alcohol usage rather than tougher laws per se.

...

The government of course cried off making alcohol more expensive. There are MPs who want to see higher excise taxes, and also a blanket higher drinking age.

We’re going to hear this group utter the political equivalent of another famous line from Animal House: “this situation absolutely requires a really futile and stupid gesture be done on somebody's part – and we’re just the guys to do it.”

Futile and stupid, because Mr Key is right. Parliament can never legislate for more responsible drinking.

What it can do is encourage New Zealanders to take a bit more responsibility for the drinking that goes on around each of us – at perhaps the price of also encouraging the Dean Wormers among us to emerge.

Crusty old Dean... (shaking fist).

Liberaltarian exit

Brink Lindsay and Will Wilkinson leave Cato.

Writes Weigel:

I asked for comment on this and was told that the institute does not typically comment on personnel matters. But you have to struggle not to see a political context to this. Lindsey and Wilkinson are among the Cato scholars who most often find common cause with liberals. In 2006, after the GOP lost Congress, Lindsey coined the term "Liberaltarians" to suggest that Libertarians and liberals could work together outside of the conservative movement. Shortly after this, he launched a dinner series where liberals and Libertarians met to discuss big ideas. (Disclosure: I attended some of these dinners.) In 2009 and 2010, as the libertarian movement moved back into the right's fold, Lindsey remained iconoclastic—just last month he penned a rare, biting criticism of The Battle, a book by AEI President Arthur Brooks which argues that economic theory is at the center of a new American culture war.

Did any of this play a role in the departure of Lindsey and Wilkinson? I've asked Lindsey and Wilkinson, and Wilkinson has declined to talk about it, which makes perfect sense. But I'm noticing Libertarians on Twitter starting to deride this move and intimate that Cato is enforcing a sort of orthodoxy. (The title of Wilkinson's kiss-off post, "The Liberaltarian Diaspora," certainly hints at something.)

I'm a fan of liberaltarianism, especially in a place like New Zealand where economic liberalism is less strong a predictor of social liberalism than in the States.

Wilkinson now blogs as W.W. over at The Economist.

Objections to philanthropy

Isn't it terrible that not all billionaire philanthropists hate themselves for their wealth and wish to atone for the evils of money-making by giving money to pro-government causes or, at worst, medical research?  Just terrible.  Horribly terrible.  Just read the latest New Yorker:

The Kochs are longtime libertarians who believe in drastically lower personal and corporate taxes, minimal social services for the needy, and much less oversight of industry—especially environmental regulation. These views dovetail with the brothers’ corporate interests. In a study released this spring, the University of Massachusetts at Amherst’s Political Economy Research Institute named Koch Industries one of the top ten air polluters in the United States. And Greenpeace issued a report identifying the company as a “kingpin of climate science denial.” The report showed that, from 2005 to 2008, the Kochs vastly outdid ExxonMobil in giving money to organizations fighting legislation related to climate change, underwriting a huge network of foundations, think tanks, and political front groups. Indeed, the brothers have funded opposition campaigns against so many Obama Administration policies—from health-care reform to the economic-stimulus program—that, in political circles, their ideological network is known as the Kochtopus.

In a statement, Koch Industries said that the Greenpeace report “distorts the environmental record of our companies.” And David Koch, in a recent, admiring article about him in New York, protested that the “radical press” had turned his family into “whipping boys,” and had exaggerated its influence on American politics. But Charles Lewis, the founder of the Center for Public Integrity, a nonpartisan watchdog group, said, “The Kochs are on a whole different level. There’s no one else who has spent this much money. The sheer dimension of it is what sets them apart. They have a pattern of lawbreaking, political manipulation, and obfuscation. I’ve been in Washington since Watergate, and I’ve never seen anything like it. They are the Standard Oil of our times.”

Full disclosure: there's a high chance that at least some of my grad student funding came via Koch. Students on stipend could never quite tell where the money came from. But I was at George Mason.

I do have to wonder about the New Yorker's fact checking. It was called the Kochtipus well before Obama. I'd heard of it even back in 1999. It got the name not because it was some big shadowy anti-Obama network of front groups but rather because of the effect that a billionaire couldn't avoid having on a bunch of small and very poorly funded libertarian groups. Go read Brian Doherty's Radicals for Capitalism for context. Doherty attributes "Kochtopus" to Sam Konkin in the 1970s.

I expect much better of the New Yorker. This is a smeary hit piece.

Peak helium?

At the ACT regional conference a while back David Round argued that we need to be seriously preparing for peak-everything, with the prices of oil and other commodities set to go through the roof and disastrous consequences sure to follow. As I was the speaker immediately after him, I opened by offering him there a bet:

Wager 1: If the price of a bundle of 20 commodities, chosen by David Round, grows in value by more than the S&P 500 over the next 20 years, Eric owes David $500. If not, David owes Eric $500. We will take the value of the bundle and of the S&P averaged over the five-year periods 2006-2010 and 2026-2030.

Wager 2: If world per capita GDP increases by less than 15% in real terms over the next twenty years, Eric owes David $500; otherwise, David owes Eric $500.

David is still choosing his bundle of commodities; I'll look forward to blogging the full details when things are settled.

But he might worry about adding helium to his portfolio. BK Drinkwater explains nicely:

And this brings me to the first in an occasional series: BK's Investment Tips.

Today's tip is: Helium! It's a lock!

An impending shortage means prices will go up. So stock up now while the Federal Helium Reserve keeps selling the stuff to you at Before Peak Helium rates. Those suckers are so stupid, they don't even realize that it's vital for the world's governments to stock up on non-renewable resources so as to ensure they never get used. All you have to do to profit: buy helium today at today's rates, and hold onto it until Peak Helium, when prices will skyrocket and you'll be richer than Rockefeller.

Of course, there are a few practical difficulties.

If you believe in Peak Helium, you should probably invest now, before everyone else catches on and drives the price up. Since everyone else should be doing the same, we should have seen some movement in the market already. We haven't. That kinda suggests you're out on your own.

There's no clearing house that covers helium futures, so you're going to have to go over the counter with Uncle Sam. I'm guessing that if you believe in Peak Helium, you're also convinced that the United States is a substantial default risk.

And since we're talking forwards now rather than futures, it might be a good idea to give some thought to where you might stick all that helium when it's delivered. If you can't think of anything, I have suggestions.

My point? Don't talk to me about Peak Helium, or Peak Metal, or Peak Oil, or Peak Anything Else until you've put your money where your mouth is. More gently, and paraphrasing a billboard on my street: there's probably no Peak [Insert Commodity Here], so stop worrying and enjoy your life.

The lock was a particularly nice touch.