Dairy stooges

Back at GMU, Peter Boettke liked to compare tweaks to regulatory regimes to the Three Stooges doing plumbing. Every time Larry turns the monkey wrench to fix one pipe, he's bashing two other pipes that start new leaks. And then it all descends into slapping and nose-pulling as the basement floods.

Today's example: Canada's wonderful dairy supply management system. Some people hate the system for inflating the costs of dairy products for Canadian consumers. But I'm coming to love it for its comedy value. Consider mozzarella cheese.

Fifteen years ago, frozen pizza makers convinced Ottawa to exempt cheese for frozen pizzas from the high tariffs that otherwise protect the supply management system. Restaurants hated the move as frozen pizzas compete with Dominos and the like. This sparked some cheese smuggling. And, according to the Free Press, it also caused this:

A number of restaurant chains recently began circumventing hefty cheese tariffs by importing their mozzarella by way of pizza topping kits.

The Canada Border Services Agency last year designated the boxed cheese-and-pepperoni combinations as a food preparation, rather than simply cheese, meaning they could be imported duty-free.

So we had this big plumbing mess. Fixing one leak causes others.

That sent dairy farmers into panic mode, with the Dairy Farmers of Ontario telling delegates at a regional meeting last fall that the designation was having a "negative impact on domestic mozzarella sales and could have an even greater impact going forward."

The case is currently before the Canadian International Trade Tribunal, and is seen as a serious threat to Canada's farm supply management system.

The CBSA decision allowed importers to bring boxes of the pizza topping, consisting of about 20 per cent pepperoni and 80 per cent cheese, into the country duty-free rather than being hit with the 245.5 per cent tariff that is charged on cheese from outside Canada.

And now the Canadian government has created a new mozzarella milk class so restaurant and frozen pizza makers will be on the same footing. If you like blue cheese on your pizza, you're SOL.

Agriculture Minister Gerry Ritz blames Canadian high prices on economies of scale:

But there will likely always be a price gap between Canadian products and those coming in from bigger markets, particularly the United States, says Agriculture Minister Gerry Ritz.

"At the end of the day I can get a hotel room in the same chain cheaper in the U.S., I can get a steak dinner (for less), it just goes on an on and on," said Ritz.

"It comes down to economies of scale."

Economies of scale matter, but they're hardly a first order explanation for high Canadian dairy prices. New Zealand's supermarket duopoly, despite providing rather high prices for most other things, somehow manages to deliver us a kilo of good cheddar for $9 NZ. Canadians: have a browse down the Countdown (our version of Safeway) aisles. $1 NZD = $0.85 CAD; our 15% GST is included in all listed prices.

But please keep dairy supply management, Canada. Whenever somebody here wants to do something dumb, I love having Canada as "look what happens if you try that" exemplar.

Update: it looks like Canadian prices won't actually drop much.

Who's to blame?

National list M.P. Aaron Gilmore didn't exactly cover himself in glory at Hamner Springs, allegedly calling a waiter a 'dickhead' for refusing to serve him additional wine, saying "Do you know who I am?!",* and reportedly threatening to have the Prime Minister get after the waiter, though Gilmore denies the latter accusation.

The Press on Saturday provided a couple of contrasting explanations. First, Joelle Dally provides a bit of Gilmore's history:

The Press can reveal Gilmore's colourful conduct started long before the Hanmer outburst.

In July 2012 Gilmore ruffled the feathers of Rongotai electorate bosses over his status at a regional party conference.

In 2011, when Gilmore went to speak to University of Canterbury students at a political speed-dating event, a student wrote to The Press about his conduct: "He showed up late, with no apologies to organisers or the candidate he shooed away to speak over. He spoke well past the time limit, and even described himself as ‘the most marginal MP in Parliament' . . . [He] talked over us and got aggressive to the point where I had to ask him if he would mind not yelling at me," she wrote.

Two years ago, the CV posted on Gilmore's Parliament web page was found to have incorrectly accredited him with being a member of Chartered Financial Analyst (CFA) Institute - a membership he had never had - as well as having a high-level finance-sector qualification he did not. He blamed the latter on the Parliamentary Service.

I don't know how much weight to put on any of those. I wasn't at the UC event, and it's always possible that another party's youth activist tried to put the knife in after the event [I have absolutely no clue]. I also don't know who's at fault for the errors on his Vita. The Herald also has tenants claiming Gilmore to be less than the world's greatest landlord.

You could read the list of problems and conclude that Gilmore has some personality problems, or it could be that once a pile-on starts, it becomes self-perpetuating. Imagine that anybody you'd ever annoyed got to contribute to a compilation list for the newspaper; I'm not sure that any of us would come out looking great. I don't know whether it's the former or the latter here, though the Hanmer display was hardly a great showing.

But Doug Sellman knows what's really to blame.

Don't blame Aaron Gilmore, blame the alcohol. Brainwashing alcohol displays in supermarkets made him (allegedly) surreptitiously record phone conversations with his tenants and mess up his vita, among other things. And trying to fit in with his mates is what had them dobbing him in to the press and apologising to waiters for him. 

I suspect that Big Alcohol is also behind the Novopay debacle, if you just squint your eyes enough.

* Whenever I hear of some minor celeb pulling the "Do you know who I am" trick, I can't help but imagine the dancing man from the Black Lodge in Twin Peaks, "Fire, Walk with me". He reveals his identity thus:

"Do you know who I am? I am The Arm, and I sound like this ... [Indian war whoop]".

The Arm was the one part of Bob that wasn't evil, so he cut it off; it then manifested as the dancing Man From Another Place. The dancing man wasn't evil, just a bit silly and sad. Like the people who shout "Do you know who I am?"

Boffin fun

Suppose you're the boffin in the Minister of Culture's office who's handed the letter from some European heavy metal website asking about how heavy metal is supported in your country.* You could send back a boring form letter saying nothing. Or you could include this in your reply:

There is no official government support for young people to learn instruments for use in metal music. The government does fund an initiative called Sistema Aotearoa, which enables primary-aged children from disadvantaged communities to learn classical music under the instruction of the Auckland Philharmonia Orchestra. It is not inconceivable that these young players may one day end up accompanying power metal groups such as Nightwish as part of a full orchestra, or providing ominous strings and horns on a black metal record by the likes of Cradle of Filth or Dimmu Borgir".

A chocolate fish for the person in the office of NZ Minister of Arts, Culture and Heritage, Chris Finlayson, who cited Dimmu Borgir and Nightwish.

HT: Kiwiblog, who got it from DimPost

* That seemed to be the gist of the request, but the site didn't include the original request letter, so it's hard to tell just what was asked.

Can I chip in?

City Councils face a few problems in assessing effective demand for Council services. Sure, lots of people will say how much they want that various amenities be provided, but everyone has incentive to overstate their true preferences. And while we have complicated Lindahl pricing mechanisms that might work in theory, I've never heard of their actually being used.

And so I was really pleased to have Citizen Investor pointed out to me.

As I drove down Brougham Street last night, I wished for an Android App where I could, at every stupid traffic snarl caused by the absence of a right-turn light and a consequently overflowing turn lane, contribute to a Kickstarter campaign where I could chip in to help fund the provision of right-turn lights.* Citizen Investor takes those projects that lag behind in the Council's approved-but-not-yet-funded queue, and lets contributors bump them up the queue. Neighbor.ly works similarly.

If Christchurch Council would let me chip in, here are the things for which I'd be willing to stump up some cash in addition to what I'm already paying in rates:

• Turn lights at Clyde & Creyke
• Turn lights on Blenheim
• Turn lights on Brougham south of downtown
• Probably a half dozen other turn lights
• Rebuilding the kid's play structure in the South New Brighton Park

Wouldn't it be great if there were an App that used GPS data to let you know about Kickstarter campaigns for proposed civic projects in the locale? Take the kids to a park that's a bit tired; the phone prompts you that somebody's proposed a nice new set of facilities; you pledge $20. Enough people do it and more cool stuff gets built. Have all the potential GapFiller projects in there too. Please make it so.

* When Council invested in traffic lights, the road rules said that the person turning across traffic had right of way against the person turning with traffic. So, in American terms, the guy turning left across traffic has the right of way over you if you're going the opposite direction and turning right. That means that the turning lanes for the difficult turns have a chance to clear without a turning light. It also meant a few accidents with confusion about the give way rule. We changed the give-way rule but didn't put in the now-required turning lights to let people make the difficult across-traffic turn.

Measuring the influence of golf caddies

Over at the Dismal Science, a correspondent, Ross, commented on my post about the wage contracts for golf caddies, syndicated from here on Offsetting.

Ross suggests a neat natural experiment that could potentially identify an exogenous effect of caddy on a golfer's performance. The imposed exogeneity comes from the fact that for years all players in the Masters were required to use an Augusta National Club caddy, whereas in the other three major tournaments, golfers could use their own caddy. So one way of looking at the effect of caddying is to see how much predictive power player rankings at the other tournaments have for performance at the Matser's relative to how much predictive power they have for each other. If there had been no change of rule, such an exercise might be suggestive but hardly conclusive, as  there might be something about the Master's that encourages a different kind of player. (My little bit of golf knowledge suggests that this might not be a huge deal--the major tournament that is the most different from the other three is the British Open.) 

But the rule did change in 1982, after which golfers could use their own caddy at the Master's. So here is my suggested test. Take the 5 years prior to the rule change and the 5 years after. For each major tournament in those 5 years, find the subset of players who played in that tournament and each of the previous three (i.e. all 4 majors over a 12-month period), and note the ranking out of that subset of players in each tournament. Then for every pair of players the player with the highest average ranking in the three previous tournaments also had a higher ranking in the 4th. If caddying is important, we would expect to see that the fraction of pairs where the pairwise ranking stayed the same was lower for the pre-1982 Master's than for the other three tournaments (due to the effect of randomly  assigned caddies), but that that difference disappeared after 1982. 

I don't have time to do this, so I put it out there if someone wants to jump in as a co-author and do the legwork. My guess is that golf is such a high-variance game that there simply won't be enough data to tease out any statistically significant result, but it might be interesting. Or maybe it could be an Honours project. 

STEM shortages

The American econo-blogosphere has been wondering whether there really is any shortage of workers in Science, Technology, Engineering and Maths. Dan Kuehn and coauthors at the Economic Policy Institute suggest that the absence of particular wage inflation for graduates in STEM disciplines means there are no particular shortages of STEM workers relative to other workers; Tyler Cowen notes that this may be evidence of a shortage of complementary inputs for those workers. Kuehn agrees, but notes that policy then should be targeting those complementary inputs rather than boosting STEM numbers.

The American policy debate differs from the Kiwi one. There, they're talking about increased immigration for STEM workers via H1-B visas; EPI doesn't think they're needed. Here, we're wondering how much emphasis the tertiary education system should put on STEM disciplines relative to the others.

I've done a bit of digging around in NZ Stat; unfortunately, the publicly available data doesn't seem sufficiently disaggregated to say much about relative shortages. Median weekly income for all occupations went up by 6.7% from 2009 to 2012. Professionals' incomes increased by 9.4%; technicians and trade workers' income went up 4.9%; community and personal service workers' median weekly income went up 12.7%; managers' median weekly income went up 14.4%. By broad category, there doesn't seem to be much evidence of the kinds of salary ramp-ups that would be consistent with strong shortages in STEM disciplines. If anything, skilled managers seem to be in shorter relative supply. It could be that the technicians category is too broad and is missing out on very large increases in science technician salaries; maybe the 'scientist' category is a high-wage-growth lump within the broader professional category. The ANZSIC classifications are sufficiently finely grained, but I'd have to make the data request.

But suppose that we found STEM shortages here evidenced by large salary discrepancies. While salary ramp-ups can be evidence that we need to make it easier to import skilled workers, they're not really sufficient basis for increased government spending on STEM training. We'd rather expect that higher salaries would draw capable students into STEM subjects and away from disciplines with worse employment prospects. If there were binding constraints built into the funding system, like caps on the maximum number of students who could be funded to pursue those disciplines, then those caps could be revisited. But instead it seems the government wants to pour more money per student into STEM training. Where the gains from STEM training are internalised in higher wages, I'm not sure that's such a great play.

The best case for encouraging STEM workers over others is if those disciplines generate greater social benefits relative to the worker's wages;* maybe you could make some productivity spillover case for it. But even in that case, we ought to be intervening where the intervention can have best effect. If tech workers require a lot of complementary inputs and are mobile, does it make more sense to highly subsidise STEM disciplines in our universities and hope that the New Zealand labour market finds use for them, or to subsidise the wages of qualified STEM workers, or to subsidise the outputs that the government thinks actually generate whatever positive externalities they think come from technological innovation? If our workers are mobile and if there are agglomeration effects in play, then other countries will always be able to outbid us for STEM workers graduating here; I'm less than convinced that large funding boosts for STEM disciplines are the best way of achieving whatever the government's trying to achieve. If it wants more scientific research, funding lab outputs directly or establishing prizes for great new innovations bids up the wages of STEM workers most likely to produce those innovations and also brings in the complementary investments.

If the story is asymmetric information about job prospects and salaries post-University leading to inefficient student choices among disciplines, that seems already adequately addressed by government initiatives to highlight employment prospects for various degrees.

* The alternative case would work as follows. Government wants to maximise its total net tax take. If it thinks that young peoples' time preferences are too high relative to the government's time preferences, or even just if it discounts non-wage elements in students' utility functions, it might want to push people onto lower-welfare-but-higher-lifetime-earnings paths. That's more an Olson despot, NZ Inc. model. If government were maximising a broader social welfare function, it would put more weight on the externality case and look for areas where social benefits are high, wages are low, out-migration is unlikely, and where increased provision can be more efficiently ensured with training rather than wage/output subsidies. Another alternative case: it's a second-best solution when they're constrained to provide student loans at zero percent no matter what discipline the student chooses while repayments are keyed to income.

Safety preferences

Economists know a few things. Among the things I think we know:

• People generally require compensation to take on a known risk of death or injury: safety is a good for most people;
• As people get richer, they require more compensation to take on a risk of given size: safety is a superior good;
• Risk-tolerance is heterogeneous across individuals, and not simply because of differences in income: some people are better able to manage risks or incur fewer psychic costs in thinking about downside costs of risk.
• Observations that some individuals engage in a risky activity for little compensation could be evidence that they are poorly informed, or it could be evidence that they have a high tolerance for risk.

Matt Yglesias argues that we should avoid policy overreactions to the recent and tragic factory collapse in Bangladesh. We expect more on-the-job deaths in poorer countries even in cases where there is perfect knowledge among workers about risks; poorer workers prefer total compensation bundles with higher monetary income and fewer on-the-job amenities like safety.

Bill Kaye-Blake takes issue with Yglesias's analysis. He writes:

It may look on the surface like Yglesias is being all ‘realist’ and ‘sensible’, but in fact he gets the economics wrong. He forgets three things:

• preferences are only half the story. The other half is the choice space in which preference can be expressed. It is the combination of preferences and available options that lead to the choices made. Ascribing the choices to preferences alone gets the theory wrong; one can just as legitimately point to the limited options

While that's true, surely the options available are endogenous to local effective preferences. If effective demand among local workers were for a total compensation bundle that included more safety and lower wages, and if it were no more expensive for the firm to provide that kind of bundle than to provide the less-safety-higher-wages bundle, they'd wind up providing it. It could take a while - if safety is largely contingent on prior fixed plant investments and if plants have a relatively long life, it would be hard for workers to change things at existing factories. But it would also be hard for anybody else to effect that change.

• the market theory that Yglesias uses to underpin his ideas — that there are market transactions deciding the prices of garments and safety — assumes freely available and perfect information. A large economic literature then explores the impact of relaxing that assumption. But that’s the post-grad course, and Yglesias is stuck in 101. Here’s the thing: we could make it perfectly obvious to Western consumers how their garments were made, what the working conditions were. Then we could talk about a market solution. Let me put it another way: is Burger King going to launch a horse-burger because people were buying them before they found out what was in them?

Let's take the case of imperfect information among workers first as I think it's the more serious one. Suppose that workers trust in that the existing government regulations around safety form a binding floor on the level of safety that a firm can provide, but that the owners chisel by bribing officials in ways not noticed by workers. Then, the workers are effectively accepting a lower total compensation bundle than they thought that they were being provided. Bill links to plenty of evidence that the factory owners in this case were up to all kinds of shenanigans.

What do we expect might work in this state of the world?

• Asking Bangladesh to increase its building standards is unlikely to have much effect where the quality of governance is too poor to enforce the current standards; asking Bangladesh to improve its generalised quality of governance may not be far from asking for unicorns. Improved governance would be great, but we have no good general handle on how to achieve that.
• Local workers will discount existing building codes and government regulations and perhaps demand more direct and credible signs that the expected level of safety is being provided. I'm not here suggesting that a local worker can go up to the company owner and demand things; rather, a factory opening up next door showing with credible evidence of stronger standards will hire away workers where workers have effective demand for safety. 
• This could yield a market in external certification, but it could be tough to establish. You need somebody that the workers trust to provide the certification, who is competent to do it, and whose officials are less corruptible than state workers. It's far from impossible, but I'm not sure it's easy.
• If local certification options don't pan out, this is actually a spot where Western retailers could help out. Western retailers can enforce standards among manufacturers through spot-checks and the like, and they're credible. But what should they enforce?
• If you think that the main problem is that owners lie to workers about existing safety standards but that workers are otherwise competent to choose safety-salary bundles, you want the retailers not to be enforcing minimum safety floors but rather to be providing accurate information to workers about real safety risks and about safety conditions in other potential places of employment. Putting in minimum safety standards risks worsening the lot of workers who legitimately would choose less safety and higher salaries.
• If you think that the main problem is that poor foreign workers cannot adequately judge safety risks, you want the retailers to put in a minimum safety standard using their best estimate of what well-informed poor workers would choose. I worry that these kinds of standards wind up instead embedding a lot of Western wishful thinking; I also worry that rich country lobbyists have strong incentive to push for standards that work to raise their rivals' costs rather than to improve the lot of workers. 

I'm not sure that there's any particular net market failure caused by imperfect information among Western consumers. My basic model has two offsetting effects: consumers don't really know what goes into the sausage, but they're also prone to believe that banning sweatshops leads to kids in schools rather than kids in malaria-ridden fields or in garbage dumps. It is way way easier to get Western consumers outraged about working conditions in third world countries than it is to get them to think hard about policies that might do more good than harm. And first-world manufacturers and unions are quick to jump in with entrepreneurial policy proposals that look nice while raising rivals' costs.

And so I worry about the risk of making workers in third world factories worse off as they see things. I'm sure Bill worries about that too; we may just be disagreeing on how far above the ideal floor any minimum-standards campaign would wind up pushing things.