What am I missing?

If you think you've got an easy answer to a hard problem, you're likely wrong. So I'm likely wrong here.

The Press reports that the Christchurch Convention Centre was insured for $30m but that like-for-like replacement would cost $60m. Whatever external benefits come from holding conferences in town are mostly internalised by the local hotel and restaurant industry; solutions letting the convention centre build internalize those external benefits helps ensure an efficiently sized convention centre. Here's one way of doing it, conditional on Council wanting a convention centre.

1. Council buys options on a few appropriate sites around town.
2. Council gets in touch with the big hotels to tell them that Council's going to build a much smaller convention centre for $30 million, but that they want to site it so it can be linked by skywalks* to adjacent blocks if the hotels want to be linked to it. If the hospitality industry really wants a bigger convention centre, they can come back with a proposal where the hotels fund an expanded facility. But even with a smaller convention centre, they can still host big conventions by holding plenary sessions in the big convention centre facilities and having breakout sessions in the different connected hotels' conference rooms. 
3. Figure out the set of sites on which you have options that best suits the set of hotel partners. The hotels buy the options off Council for their parts of the build.
4. Exercise the options and get on with it. Make sure there's room on the site to put a few restaurants; put restaurant provision up to competitive bidding so that any rents from conventioneers get capitalized into the purchase price and help fund the place, internalizing the external benefit. 

I expect that I'm missing some fights between Council and the insurers on what "full replacement insurance" really means when building codes change to become more expensive consequent to the insured event happening.

If Council's insurance policy lets them keep the cash rather than forcing them into building a convention centre, that's really not all that bad an option. Are the economics of convention centres that much better than stadiums?

Update: Please note that a decent part of the reasoning here comes from a lunchtime chat with co-blogger Seamus.

* Winnipeg term for covered heated overhead pedestrian corridor. Much of downtown is connected through series of tunnels and skywalks - the Winnipeg Walkway. Most buildings at the University of Manitoba campus, in a different part of town, were connected by their own underground tunnel system. It's lucky that the economics courses were taught in buildings accessible by tunnel; when I lived in a residence hall connected up to the tunnel system, I avoided enrolling in classes that would require going outside. All campuses should have heated tunnel access from the residence halls to the campus bar.

From nudge to shove

David Friedman reminds me about his great post from 2009. I particularly liked his closing paragraph:

An optional charge where the default choice is to pay it is the sort of thing Sunstein and Thaler propose, a nudge in the direction of doing what those responsible believe, possibly correctly, that most of those nudged would want to do if they took the time to think about it. But the people constructing the choice architecture know what result they want to get, they believe they are doing good and so not constrained by what they themselves would consider proper principles of morality and honesty in a commercial context, so it is very easy to make the "wrong" choice more and more difficult and obscure until what is optional in theory becomes mandatory in practice.

Add in ambiguity about what's good enough as opt-out provision and nudge seems likely to drift quickly to shoves.

Cornell's Brian Wansink and David Just worry that the large soda ban won't just be ineffective:

We've dedicated our research careers to helping people eat better, contributing to Smarter School Lunchrooms, 100-calorie packs, and the 2010 Dietary Guidelines. We fear that this ban on large soft drinks will be a huge setback to fighting obesity for two reasons: 1) unless it succeeds, it will poison the water for better solutions, and 2) it won't succeed.

First, consider the McLean Effect. McDonald's launches the visible and controversial low-calorie hamburger. It failed, becoming a byword for restaurants for the next 15 years. No one would dare introduce low-calorie fast-food offerings because "Look what happened to the McLean."

Banning larger sizes is a visible and controversial idea. If it fails, no one will trust that the next big—and perhaps better—idea will work because "Look what happened in New York City." It poisons the water for ideas that may have more potential.

This might be the case in New York, where this ban is looking particularly unpopular. For popular but ineffective bans, I worry we instead make more heavy-handed regulation more likely when the softer touch fails. Adam Ozimeck asks* current paternalists what measures they'd deem too draconian if implemented sometime down the line; if we look at the slippery slope in tobacco regulation, it's the right question to ask. Just don't expect the goalpoasts to stay put.

*  Look for the post "A Challenge for Paternalists", 5 June.

Role reversals: Greens for Austerity

When it comes to funding the Christchurch rebuild, the Greens are our austerity party and I'm looking mildly Keynesian. Strange world.

My read of public finance theory, a read that seems supported on both the left and right of the mainstream economic spectrum, is that you finance things like earthquakes mostly through debt. Even if you're not looking at reasonable threats of recession, you want to do it with debt. If the threat of recession is stronger, debt's even better. As reminder, here's Krugman:

And a natural disaster, like a war, is a temporary event; it should be met largely through higher taxes and lower spending in the future rather than right away, which is another way of saying that it should be paid for in large part by a temporary increase in the deficit.

This isn’t some novel idea, by the way — it’s the standard theory of public finance during war, going all the way back to Ricardo. And the logic of wartime finance applies equally to natural disasters.

The Greens disagree.

The Government has put earthquake recovery costs "on the credit card" rather than implementing a nationwide $1 billion levy, Green Party co-leader Russel Norman says.

In the final act of the party's annual conference at Silverstream, near Wellington, yesterday, Norman focused on the environment and the economy.

Soon after the February 2011 Christchurch earthquake last year, the Greens proposed a quake levy that it calculated at the time would raise $457 million a year, which would be tagged for disaster relief and reconstruction.

Norman said yesterday a levy set at a higher rate than originally proposed would have raised more than twice that – $1b.

That plan would have seen a levy of 1.5 per cent applied to an individual's income between $48,001 and $70,000, 3 per cent on income greater than $70,001, and the corporate tax rate bumped back up to 30 per cent from the 28 per cent it was lowered to this year.

Business would have contributed an additional $340m to the levy under that scenario.

"This is one of the best ways to get in behind Cantabrians at their time of greatest need. An earthquake levy is our way to say, as a nation, that we're all in this together," Norman said.

"National chose to put the earthquake on the credit card and leave the cost for another generation to pay off."

I love future generations as much as the next parent of young kids, but infrastructure around the Christchurch rebuild ought to last until my grandkids are in adulthood. Why would we want to bear all of the burden of it out of current income? As for credit cards, how many of them currently charge a low low 3.3% nominal interest rate for 10-year debt?

Austerity has its place. The structural deficit needs addressing - especially in the medium to longer term where superannuation costs loom large. The Greens propose a few other tax increases to plug the gap but the case for capital gains taxes seems weak; spending cuts seem more effective for achieving longer term fiscal balance.

Paul Walker also has a few reasonable concerns about the Greens ability to pick winners in enviro-industrial policy.

Paternalism - for children, and for the lower orders

Will Wilkinson's excellent post at The Economist highlights the less-than-hidden classist underpinnings of New York's soda ban.

GIGANTIC sugared soft drinks are disgusting. Let's just get that out of the way. Can we also agree that the high-calorie drinks rich people like to consume—red wine, artisanal beer, caramel frappuccinos, mango smoothies with wheatgrass and a protein boost—aren't at all disgusting? At any rate, we yuppie pinot-drinkers know how to look after ourselves. In contrast, the wretched classless hordes, many of them being of dubious heritage, lack the refinement of taste necessary to make autonomy unobjectionable. Those who abuse their liberty, filling the sidewalks of our great cities with repulsive shuffling blimps, can't expect to keep it, can they? 

But should we really be surprised that paternalistic regulation would be so-targeted? When I work backwards from the set of paternalistic regulations to the most plausible underlying motives, I still wind up with the conclusion I'd reached a year ago:

The behaviours of the lower orders disgust me [the regulator]. They give in to base animalistic sensory pleasures. We need to fix them. Tax and regulate them until they stop being noticeably annoying. We'll say it's for their own good, but we'll really stick to the kinds of things that annoy us. So things like making sure everyone in low decile schools takes a course in basic personal finance so they understand how hire-purchase works and avoid making mistakes with loans, we'll not worry about that. But we'll tax fatty foods because obese people are unpleasant to look at and we'll tax the kinds of booze that the lower orders drink because few things are more unpleasant than poor drunk idiots.

It's not implausible that poorer cohorts are more in need of paternalistic regulation than higher income cohorts, if only because of differences in intelligence across cohorts. Do flip back to the linked post and consider the stylized facts there presented:

• The kinds of alcohol that poor people like get taxed far more heavily relative to overall price than do the kinds of alcohol that rich people like. That isn't unreasonable where the external costs of alcohol use are proportionate to the pure alcohol consumed, but when we start going for minimum price regulation and specific taxes on RTDs, it looks an awful lot more targeted.
• Official government agencies ignore the evidence on the J-curve and instead promote an abstinence only line. The only sense I can make of this is the noble lie: dumb people who'd otherwise be tempted to drink too much if they drink at all shouldn't drink; smart people can see through the official line.
• The war on drugs is more heavily enforced against poor people than against rich people.
• "Fat taxes" would disproportionately hit the poor. The tax will be a greater portion of the purchase price of hamburger meat compared to scotch fillet, even if the fat proportions are identical. And, the higher the proportion of ingredient cost in total price (as opposed to say the input of a high quality chef), the greater will be the the proportionate burden of an ingredient tax. Any bets on whether the price of a McDonald's burger goes up by more, percentage-wise, than a Ruth's Chris steak if we put in a fat tax?
• If the point of an "internality" tax like a fat tax is to force the individual to weigh the health costs to himself when purchasing, we'd need to scale those taxes by income if we think that rich people respond less to a small per unit increase in food prices than do poor people but suffer from similar behavioural anomalies; if we think that smart rich people are already weighing up those costs and compensating with increased exercise, then it doesn't matter that the per unit charge has less effect on the that group.
• There's all kinds of talk of mandating that fast food restaurants prominently display nutritional information and calorie counts. But folks tend to overestimate calorie counts at fast food places and underestimate them at the fancier restaurants where rich people eat. Because everybody expects fast food to have lots of calories.
• Finally, high IQ folks may be better able to route around whatever regulations are put in place.

It still looks to me as though paternalistic regulation is generally targeted at annoying behaviours exhibited by poor people, with sufficient route-arounds to keep the regulations from being too annoying for higher income cohorts. Bloomberg's soda restrictions were just a bit more blatant than most. Again, pulling from last year's post:

One of the better critiques of policy prescriptions based on behavioural economics is that it requires the modeller to step out of the system and to assume that he and the regulator who implements his policies are less subject to the problems ascribed to the regulation's subjects. Public choice folks worry that the paternalistic regulators suffer from the same behavioural foibles as everyone else but have worse incentives than do individuals who have to suffer the consequences of their own decisions. But if the implicit model is that all of this behavioural stuff really only applies to those people over there - poor dumb people, then there's good reason to keep the modeller out of the system.

Recall that Berggren found very few articles in behavioural economics advancing policy prescriptions consider the possibility that regulators might also be subject to behavioural anomalies; I think it's because of a general assumption that they do in fact sit above those they're regulating.

Sporting Costs

This weekend's addition to the social cost of sport in New Zealand:

Motocross riders pushed themselves "to the max" at the annual Michael Godfrey Memorial Motocross this weekend, with nine riders having to be flown to Christchurch Hospital with injuries.

The 29th Michael Godfrey memorial event was held on Saturday and yesterday at Omihi, attracting 300 riders from around the country.

Nine riders had to be taken to Christchurch Hospital by the Westpac rescue helicopter.

All were treated for moderate injuries, ranging from concussion to limb fractures.

Race director Graeme Allan said it was ''an amazing weekend''.

''We had an incredibly strong depth of talent there. It's just the strongest team we've ever had.''

He said the number of injuries was not surprising given it was a ''national-calibre event''. [emphasis added]

The Accident Compensation Commission charges levies on employers that are adjusted by the employer's industry and history of workplace accidents [the Employer's Account], a 1.7% levy on all earnings* [the Earner's Account], levies on car registration,** and a separate levy on petrol. Finally, the government kicks in a bit for those not in employment. It looks like normal sporting injuries are covered out of the earners' or non-earners' accounts, depending on the employment status of the injured person; injuries to professional athletes as part of their job would come from the Employer's Account.***

What does this all add up to?

Figures released under the Official Information Act show that ACC paid out $56 million for rugby-related claims in the past financial year, making it the costliest sport for injuries.

The Wellington region generated $5m worth of rugby injuries.

The total cost to ACC for sport-related claims in the 2010-11 financial year was $333,995,252, of which $29,356,295 was paid out for injuries in Wellington.

Some of that will be injuries to professional athletes and would consequently come out of their paid levy on earnings. A professional rugby player's employer pays pays a 6.46% ACC levy on payroll, but with discounts of up to 58.7% if the employer agrees to self-fund some workplace accident costs. " For comparison purposes, central bankers pay 0.09% and universities pay 0.14%, both with similar access to the discount plan above-linked.

I'd be curious how the total above spilt between professional and amateur athletes; while the article gives the top-costing broad sporting categories, it didn't split those by whether they came out of employers' or earners' levies. Few of this weekend's motorcyclists would have been riding as part of their jobs, so they'd likely have had rides in the Westpac chopper paid by ACC out of the Earner's or Non-Earner's accounts.

A few points:

• While underpricing of sporting risk will yield some distortions in risk-taking in sport and in choice of sport, ACC here mostly funds a transfer from those who don't participate in sport to those who do.
• It doesn't seem like it would be ridiculously hard to knock out a sizeable portion of those transfers by having sporting clubs and major sporting events like the motocross race treated as quasi-employers for ACC purposes, assessing a fixed per-club levy with experience-rated premiums that varied with the type of sport.  
• But, there are many other sports for which it would be almost impossible to charge (bouldering, rock climbing, swimming, skateboarding...). Assessing levies on easy-to-levy sports and not on others might induce minor distortions in choice of sport.
• There are some sporting events that would likely die under actuarially fair pricing. It would be efficient that they cease, but the political costs could be high. The Motocross rally's spokesman indicated that the incurred injuries were on par with those he expected. An actuarially fair premium then would have been somewhere around the cost of the incurred expenses. If flying nine injured motorcyclists from Omihi to Christchurch on the emergency chopper and treating all of their injuries came in at less than $45k, I'd be reasonably impressed; $45k in insurance cost would be $150 per rider for the event. Some amateur rugby clubs that would probably also shut down under fair insurance pricing. 
• It's not easy to tell outside of a market system what risks would explicitly be priced within a market system. Socialising risks means a lot of private behaviours get seen as imposing social costs. Whether a risk gets priced seems more to do with popularity and acceptability than underlying characteristics.

* Maximum individual levy $1934 - no ACC levy is charged on earnings over $113,768. 

** About $200 per vehicle, but not adjusted by driver accident history or correlates of vehicle riskiness other than broad classes like "petrol vehicle" and "motorcycle over 600cc". John Small pointed to some problems in risk pricing across ACC vehicle classes a couple of years ago.

*** Injuries to Motocross drivers *might* come out of the Motor Vehicle Levy, if the dirtbikes are registered and if ACC deemed that to be road accident rather than sporting event. In that case, it's largely a transfer from road motorcyclists to dirt bike enthusiasts.

VSL and earthquakes [updated]

Bill Kaye-Blake starts running the cold calculus on the weight we ought put on earthquake safety.

That is, given the known risks of earthquake, we should be willing over the next 50 years to invest over $5 billion $26om on earthquake safety in order to save the lives of people in Wellington. If we think that saving all those lives is impossible (which it likely is), then we can scale the total back. For 1,000 lives saved, the amount is $3.5 billion  $175m. This calculation doesn’t say anything about the 13,000 injured however. They need to be added in, too.

This is an example of an explicit cost-benefit analysis of the trade-offs we might be willing to make. We can spend some money to make buildings safer and save lives, or we can spend it on other things that also have value (health, education, and margaritas).

Dear reader, before you accuse me of being a heartless economist, let me point out that decision-makers are already making this trade-off.

The faster we move towards a liability regime, the better. Announce that, as of a five years from now, building owners will need to carry liability insurance for potential fatalities caused by their buildings. Insurers will set premiums to reflect building-specific risk. Owners then weigh the ongoing insurance cost against the cost of repairs and rebuilds. At the same time, switch from regulatory heritage preservation to local councils' paying annual subsidies for provision of heritage amenities.

Give it a few years so that we don't run into construction capacity constraints with the Christchurch rebuild, or import a pile of European and American unemployed builders on two-year work visas.

* Update: Bill corrected an error in his original figures - the relatively low risk of earthquakes makes the efficient level of expenditure lower. That also makes the actuarialy fair insurance levies lower.

Libertarian paternalism is an oxymoron

Remember those Sci-Fi movies from the '50s where the mad scientist, who only had the good of the world at heart and proceeded with his experiments despite much warning, winds up on his knees crying out to the sky "It wasn't supposed to be like this! This isn't what I wanted!"

Here's Richard Thaler on Mayor Bloomberg's ban on soda:

To state the obvious: a BAN is not a NUDGE.The opposite in fact. So don't blame Bloomberg's ban on large soda cups on us.
— Richard H Thaler (@R_Thaler) May 31, 2012

To which Justin Wolfers replied:

.@R_Thaler Disagree. Bloomberg's not banning Soda. Indeed, the big cup still exists--it's two little ones. So this IS really a nudge.
— Justin Wolfers (@justinwolfers) May 31, 2012

There isn't much distance from nudge to shove, especially when preference heterogeneity keeps nudgers from recognizing when they're shoving. Justin doesn't see it as too costly, likely because he isn't a soda-fan either. So how could it be costly? A religious nudger could similarly see it as pretty costless to encourage at-home parenting by banning having a nanny employed more than 3 days a week; a parent could always opt-out by hiring a second nanny.

Should we blame Thaler? Here's what he had to say two years ago when pressed on whether his libertarian paternalism wouldn't lead to bans and harder paternalism:

In short, the risk of the slippery slope appears to be a figment of Professor Whitman’s imagination, and clear evidence of his bathmophobia. To be fair to him, this phobia is hardly unique to him and Professor Rizzo. Slope-mongering is a well-worn political tool used by all sides in the political debate to debunk any idea they oppose.
...
Instead of slope-mongering we should evaluate proposals on their merits. (We devote a chapter of Nudge to an evaluation of the choice architecture used in Sweden’s social security experience.) Helping people make better choices, as judged by themselves, is really not a controversial goal, is it?

For all the protests that "nudge" was supposed to have strong opt-out provisions, it was awfully predictable that it wouldn't turn out that way in practice. I don't know how much time Thaler spent  working to ensure choice was preserved in his proposed choice-preserving architecture, but he did spend a bit of time telling libertarians that this sort of thing couldn't happen.

I still like my old review of Nudge, in which I proposed some nudges at the ballot-box:

While Sunstein worries about our decisions over investment plans or our weakness of will at the buffet table, I worry about our decisions at the voting booth. We vote infrequently, there’s no feedback from our personal voting decision to any policy outcome (unless you happen to hit Lotto by breaking a tie), the voting decision is complex and we may have little grasp of the issues at stake let alone our own positions on those issues. In my own research, I’ve found that only about half of voters in 2005 could place National, United Future, and Labour correctly on a left-right spectrum, for example, and that individuals’ political knowledge independently affects their policy and party preferences even after controlling for income, education, race, employment, gender, and other demographic characteristics. And so I think we (by which I mean you) need a nudge. Under my libertarian paternalistic voting system, your electoral enrolment would be linked to your census details. You’d then answer a brief questionnaire when entering a computerized voting booth, and I’d tell you, through the computer’s algorithms, for whom you should vote. Trust me: I’d be choosing the option that really would be best for you, if you only understood all of the policies supported by each of the parties and had a PhD economist’s understanding of the likely effects of these policies. You’d still be free to pick some other candidate or party, but you’d have to first reject the default choice I’d pick for you. The remaining options would then be presented in an order designed to maximize the chances of your choosing the next best option.

I trust that you find this kind of scheme repugnant. I’d find it great, so long as I got to be the choice architect. But opinions surely would vary, and I’d surely oppose the scheme if anyone other than me got to be the architect. The problem is that most of the arguments against my scheme cut similarly against Sunstein’s. More worrying, Sunstein seems pretty happy to blur the line between nudges and shoves: increasing cigarette taxes to discourage smoking is surely paternalistic, but is a bit stronger than a nudge. And, honestly, even the choice preserving nudges, like cars that nag you about the petrol you could save by easing up on the pedal, sound thoroughly unpleasant: I’d be nudged into learning enough automotive electronics to cut the right wires.

Update: It's occurred to me that I can't assume that everybody in the world has read the brilliant piece that started all this: Sunstein and Thaler's "Libertarian Paternalism Is Not An Oxymoron". Restricting it to choice of defaults, it's pretty tough to fault their argument. Except it never gets restricted to choice of defaults, now, does it?