Cartels protect producers, not consumers

Mark Schatzker explains how Canada's agricultural cartels help keep quality produce from Canadian foodies (HT: @acoyne):

But here’s what hasn’t been said about supply management: It is the enemy of deliciousness.

If you have ever wondered why you can buy heritage chickens such as the famed poulet de Bresse in France but not in Canada, or pastured butter the colour of an autumn sunset in Ireland but not in Canada, or why it’s so hard to find pastured eggs here, the reason is supply management.

Great ingredients, as any good cook will tell you, come from small producers who lovingly tend their flocks and the land that sustains them. These artisan producers – the very people attempting to make food local and sustainable – are stifled under supply management because it requires the one thing these starry-eyed pastoralists almost always don’t have: money. A single cow’s worth of dairy quota, for example, costs about $27,000 (up to $40,000 in B.C.). Quota for one egg-laying hen can cost upward of $200.

Now do the math. A tiny egg farm of 500 hens (a typical Canadian farm has 20,0000 or more) can cost more than $100,000. (Exact prices and rules vary across provinces.) Ontario’s minimum allotment of chicken quota – 14,000 units (or about 90,000 birds a year) costs $1.5-million. And a tiny herd of 10 dairy cows costs more than $250,000. How many small farmers have that kind of scratch?

The resulting lack of agricultural diversity is a story told on store shelves across Canada. At my local butcher shop, the choice of chicken is limited to standard factory birds and “natural” factory birds. South of the border, by comparison, delectable breeds such as Plymouth Barred Rocks, New Hampshires and Jersey Giants can be found at farmers’ markets, butcher shops and on the Internet.

And yet the Canadian ag cartels have been able to paint themselves as the stalwart defenders of Canadian product against American imports, which all right-thinking Canadians know have to be less pure and clean than Canadian product.

Meanwhile, the Ottawa Citizen's Kate Heartfield rightly invokes Olson's Logic of Collective Action in explaining the mess:

In fact, the only thing the parties can find to argue about in this complex and vexing area of public policy is which party supports supply-managed farmers most.

The political barriers to reform are built into the system. Almost half the dairy quota goes to Quebec, an electoral battleground. There are only 12,965 dairy farms in this country — plus fewer than 5,000 in all the other supply-managed sectors combined — and every Canadian is a food consumer. But the costs to the consumer are invisible and difficult to quantify, and the complex system that imposes those costs is not widely understood. Dairy, egg and poultry farmers, though, know all about it and they’re heavily invested in the issue — literally, since the value of the quota they hold depends on what happens to prices in the future.

“If a government takes them on, they’re in for a big fight,” says John Manley, former Liberal cabinet minister, now the president and CEO of the Canadian Council of Chief Executives. “Look at what’s happening with the wheat board. It would be 10 times more vicious.”

The whole piece is excellent; it rightly points to New Zealand as example of a thriving free-market agricultural sector.

But Canada's problem is worse than Olson, though; it's Tullock. Even the winners aren't made better off by the system as all the rents are capitalised into the price of quota. But I still think there's a potential solution in buying them out.

Pipeweed

A nation of hobbits likes its pipeweed. Radio NZ and The Press report on a survey published in The Lancet showing marijuana use in Oceania (Australia and New Zealand) is well above international norms. Here's the relevant table from Lancet:

Clicking the image should provide the requisite embiggening. They figure 9.3% to 14.8% of folks in Australia and NZ have used marijuana in the last year while 2% to 2.8% have used amphetamines. The lower bound estimate on both for Australia/NZ is above the upper bound estimate for most other areas. This despite Australia and New Zealand both being islands in the middle of nowhere in the midst of a big useless anti-meth push that has had no effect on meth use but that keeps me from getting decent cold medicine when needed.

Keep digging up, guys. You're doing a heckuva job.

Or legalise marijuana and put it under the same regulatory apparatus as alcohol; make the whole deal politically palatable by taxing it sufficiently to keep retail prices close to where they are now. Turn the deadweight costs of prohibition into tax revenue.

Accidentally creating big numbers

Remember Radio NZ's reporting that smokers each cost "the economy" $139k annually? The Quit Group helpfully tells me by email that the figure, derived from Des O'Dea's prior report with some help from BERL, was actually the present discounted value of the stream of costs associated with a smoker.

An annual cost of about $11,350 gets you a PDV of $139k at an 8% discount rate. So messing up the difference between the PDV and an annual cost gets you an order of magnitude error.

And recall too that the O'Dea report included a rather extensive list of costs more properly viewed as costs to the smoker than as costs to "the economy". As O'Dea concluded about the costs smokers impose on "the economy":

Leaving aside these difficulties, it is certainly reasonable to assume that most of the additional health-care costs caused by smoking are borne by non-smokers through additional taxes (smokers do pay some share of these taxes). Also it is reasonable to assume that most of the 'lost  production' costs of premature mortality and increased morbidity are borne by smokers and their households (though there is some loss of profits also, and of tax revenue to government). A considerable amount of work would, however, be needed to get precision on these matters.

Without trying to calculate a precise estimate of 'external costs' it does seem reasonably apparent that the tax contribution of approximately $1 billion annually by smokers exceeds substantially the external costs of smoking which fall on non-smokers. If savings on pension costs from premature mortality of smokers were added as well the net fiscal contribution of smokers, to the fiscal gain of non-smokers, would be further increased. [emphasis added]

Here's my prior critique of the O'Dea report (and more detail, with summary of cost components, here). Here's a prior summary post on the health costs of tobacco in New Zealand.

I trust The Quit Group will pass along a correction to Radio NZ. Annual costs aren't quite the same thing as the present discounted value of a stream of annual costs.

Alco-pops and minimum pricing

The production technology for "alco-pops" isn't that complicated. Buy a 2L bottle of Coke, dump some out, pour in a bottle of cheap whisky. Share and enjoy. So when the Australians decided to impose disproportionately high taxes on mixed drinks, it would have been surprising if the kids targeted didn't revert to the methods used by their elders in the days before ready-mixed alcoholic canned drinks. The latest: the tax had no effect on binge drinking [HT: @TheIPA].

YOUNG binge drinkers have simply switched to cheaper booze to beat the Federal Government's controversial "alcopop" tax.

New research shows 15 to 29-year-olds have dodged the 70 per cent tax on popular pre-mixed drinks by changing their drink of choice.

The University of Queensland study found no significant reduction in binge drinking-related hospital admissions since the tax was introduced in 2008.

I can't believe anybody actually could have thought this would work.

Federal taxes on pre-mixed alcoholic drinks were increased in 2008 by the Rudd government to tackle binge-drinking among teens, particularly girls, and to fund a new preventative health program.

Maybe you could build a model in which credit constraints on teens are binding, their ability to pool funds across a group of friends is limited, and they have no capacity for saving up to buy a larger bottle of alcohol. And nobody sells the small "airplane bottles" of alcohol. In that world, high taxes on ready-mixed unit-sized drinks could reduce aggregate consumption.

In the real world, or at least the one I remember of a couple decades ago, folks either took turns buying a bottle or chipped in together.

The article says health groups now are lobbying for either volumetric taxation on alcohol or minimum pricing. It would be a fun intermediate micro exam question to have students compare the welfare implications of the two systems. Here are the crib notes for minimum pricing:

• Minimum pricing in Australia
• CEBR on minimum pricing in Scotland
• Minimum pricing and economic rents

I'd love to see work on whether there's substitution into more toxic intoxicants with substantive price hikes. I would be surprised if a substantial increase in the price of the cheapest available alcohol did not induce substitution into solvents or worse among some of the folks the health groups might be trying to help. Then, even if we count at zero the consumption losses incurred by moderate drinkers with a price hike, it's still ambiguous whether health effects in the target group are positive or negative.

Economics of the Rugby World Cup

There was a good article in today’s Press by Jenny Keown on the economics of the 2011 Rugby World Cup. It is a pretty good summary of how forecasts of spending were lower than expected or offset by compensating reductions.

Keown interviewed me for the article, and I pointed her in the direction of the blog posts by Eric, Paul at Anti-Dismal, and Sam Richardson, although, of these, she only cites Sam. I am also quoted at the end:

"It's a failing of my profession that hucksters give any answer [before the event] they are paid to give. The economics of sporting events don't exist. If you want to spend money on an event, whether it be the Olympics or the Rugby World Cup, it comes down to the feel-good factor."

That is a slight misquote. Of course the economics of sporting events exists. What doesn’t exist are benefits of sporting events from increased economic activity as opposed to the benefits from consumption of the events themselves. The “feel-good factor” is simply the benefits that accrue to people like me who didn’t spend a cent on tickets, Sky TV (at the margin), or World Cup merchandise, but still received some utility from the event's being staged in New Zealand.

My only quibble with the article is that a reader might get the impression from the take-down on how forecasts of spending turned out to be too optimistic (delightfully referred to by NZIER’s Shamubeel Eaqub as “hopium”), that there would have been tangible economic spillover benefits from the Cup had spending patterns turned out as forecast.

$139,000?

Ah, the lazy summer season, when lobby groups can sneak pretty much any kind of rubbish into Radio New Zealand's Inbox and have it be treated as news. Here's the latest:

Cigarettes rose in price on 1 January, for the third time in 21 months.

The price of a packet of 20 cigarettes is now about $14 and a pouch of loose tobacco is about $31.

The Quit Group estimates each smoker costs the economy $139,000 per year in health and other costs.

Chief executive Paula Snowden says the group returns $38 to the economy for every $1 it is funded, but has had no increase since 2007.

She expects the price increase to save the economy up to $73 million.

Let's start with what's right about the piece. I have no reason to believe that they've lied about the price of a packet of cigarettes. The rest isn't so good.

Recall that GDP per capita in New Zealand is somewhere around $45,000*. So Snowden is claiming that a smoker costs "the economy" three times per capita GDP. And recall that median income is less than per capita GDP, which also includes payments to capital. Snowden's number is three times that. It's utterly implausible.

Next, she expects the price increase to save the economy up to $73 million. If flipping a smoker from smoking to non-smoking saves those costs, then she's expecting about 525 people to quit. If only a fifth of costs are avoidable and the rest are sunk, the price increase results in around 2600 people quitting smoking. But the last survey numbers I'd seen have about 22% of the population aged 16-65 smoking. Again, see asterisk below, but there are about 4.5 million people in the country. Let's be conservative and say 300,000 smokers; 2,600 quit. This is all ballpark, but it suggests maybe one percent of smokers are expected to quit with the price hike. And, that's with me granting the $73 million. I'd really need to see the workings to figure out what they're doing here.

Finally, let's aggregate up for a final plausibility check. Say there are 300,000 smokers in the country. If they each cost $139k, that's about $41 billion that Paula Snowden claims smokers are costing the country. And even the ridiculously high Collins & Lapsley numbers have smoking costing all of Australia only $32 billion. And there are just a few more people in Australia than in New Zealand.

Every decent journalist should have a few of these numbers just rattling around in the back of his head to give numbers like Snowden's a rough plausibility check. It's not plausible that a smoker costs the country three times per capita GDP. That's the first bit of stink. If the implied participation elasticities are as suggested by a quick ballparking, then we'd wonder about the costs imposed on poor people who continue to smoke even if everything else is right. That's the second bit of stink that should have been queried.

But the biggest howler is that Snowden claims a 38:1 benefit to cost ratio for her organization's work.

When did they stop teaching scepticism in journalism school? Radio NZ, you've been pwned by The Quit Group. You can do better.

*Please note that I'm working off memory for a lot of these figures. No Internet at the guest house in Nelson where we've been avoiding earthquakes for the last week, so I'm burning through Vodafone Pay-As-You-Go data. Back in quakeland tomorrow.

Previously: Bogus MoH figures on smoking costs.

Update: Sarah Woods of The Quit Group advises that the $139,000 figure is the present discounted value of costs, with the estimate based on Des O'Dea's prior figure (which included a raft of costs borne by smokers that don't really count as costs to "the economy") and with ROI calculations undertaken by BERL. I'll have a look through their report. But Radio NZ has inflated The Quit Group's figure by an order of magnitude by transforming a present discounted value figure into an annual cost figure. At an 8% discount rate, the PDV of $139k is about $1.7 million. And let's remember exactly what the O'Dea report concluded about the costs smokers impose on "the economy":

Leaving aside these difficulties, it is certainly reasonable to assume that most of the additional health-care costs caused by smoking are borne by non-smokers through additional taxes (smokers do pay some share of these taxes). Also it is reasonable to assume that most of the 'lost  production' costs of premature mortality and increased morbidity are borne by smokers and their households (though there is some loss of profits also, and of tax revenue to government). A considerable amount of work would, however, be needed to get precision on these matters.

Without trying to calculate a precise estimate of 'external costs' it does seem reasonably apparent that the tax contribution of approximately $1 billion annually by smokers exceeds substantially the external costs of smoking which fall on non-smokers. If savings on pension costs from premature mortality of smokers were added as well the net fiscal contribution of smokers, to the fiscal gain of non-smokers, would be further increased. [emphasis added]

E-cigarettes

Murray Laugsen writes in The Listener about measures that could help folks quit smoking. The government claims to want to eradicate smoking by 2025. What helps folks quit? Giving them substitutes that are less harmful. A smoker has a better chance of quitting if he complements quitting either with smoking low-nicotine cigarettes or with e-cigarette inhalers which deliver nicotine but without the other substances that form the bulk of smoking's health risks.

So policy should then encourage e-cigarettes and, perhaps, place less tax on low-nicotine cigarettes to encourage their use as part of quitting.

But MedSafe last year banned the sale of the nicotine cartridges; those wishing to use them to quit have to import them for personal use. Pharmacies had made claims about the cartridges' effectiveness as a cessation aid; that made them a medical device.

And less risky alternatives, like Swedish "snus", described by the Royal College of Physicians as the least risky tobacco product, are also here banned. 

My best working model of the current situation: anti-tobacco zealots get to the top of the Ministry of Health and hate tobacco and nicotine more than they care about harm reduction. And folks selling cigarettes don't like substitutes. Then it's just Bootleggers and Baptists. But if anybody has a better model, I'd love to hear it. The problem for my model is that even SFC seems to have come around on e-cigarettes, if not on snus. Inertia?