External refereeing and policy reports

In the academic world, papers submitted to journals go to external referees. The journal editor will usually pick somebody familiar with the general methodology, but will try to avoid picking folks with obvious conflicts with the author. If your paper builds on someone else's work, that person might be asked to referee, but a second referee would also be asked whether the methodology chosen is appropriate to the task at hand. So, if your paper builds on the seminal model by Professor X, referees will also generally include someone other than Professor X who can reasonably comment on the appropriateness of the X model in this context.

"The report was upfront that it was commissioned research, what its aims were, that it was conducted independently, and that it was externally peer reviewed by leading academics in this field."

So, who then were the external referees on the BERL report on the social costs of alcohol use? The acknowledgments thank Professor David Collins and Professor Helen Lapsley for their work as external referees. Who does BERL cite as providing their basic methodological approach? Professor David Collins and Professor Helen Lapsley. Some relevant quotes from the report:

Aside from medical drug use, other drug consumption is routinely presented in the literature as misuse or having harmful impacts only. This tends to reflect the absence of evidence for the non-medical health benefits from the consumption of other drugs (Ridolfo and Stevenson 2001). Collins and Lapsley (2008), for example, has “no problem in using the term ‘abuse’ when referring to the consumption of… illegal drugs”. The authors argue, “in the case of illegal drugs, by definition, society has decided to proscribe their consumption, with the implication that any consumption is abuse.”(p.8)

Any illegal drug use is assumed to be harmful, reflecting the absence of evidence for the non-medical health benefits from the consumption of illegal drugs (Ridolfo and Stevenson 2001). This approach is also consistent with the approach used in recent Australian social cost estimates (Collins and Lapsley 2002, 2008). (p.9)

This study focuses on a broad range of costs covering personal, economic, and wider social impacts. These costs are collectively denoted by the term ‘social costs’ in this report. This focus is consistent with that presented in Collins and Lapsley (2008). Collins and Lapsley gives a “comprehensive economic definition” of harmful drug use costs:

The value of the net resources which in a given year are unavailable to the community for consumption or investment purposes as a result of the effects of past and present drug abuse, plus the intangible costs imposed by this abuse.

Our definition assumes a counterfactual situation in which no harmful drug use has occurred. The range of costs included in this study is detailed in Appendix Table 1. The inclusions and exclusions are compared to the range of costs found in Collins and Lapsley (2008), BERL (2008a) and other drug misuse cost studies. (p.10)

I won't bore you by continuing further. In short, one could reasonably view the BERL report as a NZ application of a methodology applied in Australia by Collins and Lapsley. Not that there's anything necessarily wrong with that, but then claiming that the paper is externally refereed when those referees are Collins and Lapsley...well, that's not external refereeing. Maybe that's standard practice over in the consulting world, but it sure isn't the same thing as academic notions of external refereeing. Over on the academic side, a journal using that kind of refereeing practice would be deemed a mutual admiration society.

Update: None of the Collins and Lapsley papers cited by BERL are themselves published in refereed journals. They're all government reports. As best I can tell from the bibliography. This just keeps getting better, doesn't it.

The Pirate Code

Pete Leeson should be (and probably is) all over this one.

The National Post today reports on some features of the Somali Pirates' code of justice. Stylized facts:

• Hundreds of small pirate cells in communication with each other
• A strict code of conduct across the different cells: no rape, no robbing the hostages, no killing: just peacefully waiting for the ransom
• Adoption of the prior Somali system of clan justice to resolve disputes across cells
• A mobile court based in Bedey where any transgressing pirate can be tried and punished.

From the article:

But while differences remain among various groups, the pirates' first set of rules is precisely aimed at neutralizing rivalries, Mohamed Hidig Dhegey, a pirate from Puntland, explained.

"If any one of us shoots and kills another, he will automatically be executed and his body thrown to the sharks," he said from the town of Garowe.

"If a pirate injures another, he is immediately discharged and the network is instructed to isolate him. If one aims a gun at another, he loses 5% of his share of the ransom," Mr. Dhegey said.

Perhaps the most striking disciplinary feature of Somali "piratehood" is the alleged code of conduct pertaining to the treatment of captured crews.

"Anybody who is caught engaging in robbery on the ship will be punished and banished for weeks. Anyone shooting a hostage will immediately be shot," said Ahmed Ilkacase.

"I was once caught taking a wallet from a hostage. I had to give it back and then 25,000 dollars were removed from my share of the ransom," he said.

Following the release of the French yacht Le Ponant in April 2008, investigators found a copy of a "good conduct guide" on the deck which forbade sexual assault on women hostages.

As Ilkacase found out for himself, pirates breaking internal rules are punished. Conversely, those displaying the most bravery are rewarded with a bigger share of the ransom, called "saami sare" in Somali.

"The first pirate to board a hijacked ship is entitled to a luxurious car, or a house or a wife. He can also decide to take his bonus share in cash," he explained.

This seems a solution to a rather large prisoner's dilemma problem. Any pirate cell can do better in the short term by becoming more violent and by taking more from the victims. But that would draw a much more vigorous response from American and other navies. So they restrain themselves and punish anybody who gets out of line. Honour among thieves and order within anarchy.

This graph has warped my fragile little mind

The graph above is from Bill Watson's excellent roundup of fiscal trends in Canada and the US. For my entire life, Canada's ratio of government spending to GDP has been higher than that in the US. For all those Democrats who threatened to move to Canada during the Bush years, Obama's saving them the trouble: the US is becoming Canada, at least in terms of size of government.

What will happen to those expenditure lines over the next few years? President Obama is pushing for big increases in health care and education and he’s piling on a lot more government debt — which means higher future interest payments—than we are.

It’s not inconceivable that in five years’ time, we’ll be spending less through our public sector than the Americans are through theirs. And if both countries get back to balanced budgets, that means the tax drag will be less here than it is there.

Getting your mind around the possibility that we will be the lower-tax jurisdiction in North America takes some doing, but in fact that was the case during the 1950s, some of the best economic years in our history.

Perhaps the US should just give up and become Canada's 11th province. If Canada would take them.

Update: Veronique de Rugy urges America not to become France in the video below. Salut Vero!

BERL redux

Adrian Slack, principal author of the BERL report of which I've been rather critical, provides a couple of responses over at The Visible Hand.

First in response to “BERL should have made the LC very aware of…”. We didn’t prepare the report for their consumption. As with anything that enters the public domain, it is the consumer’s right to interpret it as they see fit and for them to take responsibility for their reaction to it, not for the author to manage their response to it.

In general, I would agree. But not if the response seems likely to turn into a real world policy implementation unwarranted by the paper. If someone took my paper on political knowledge, one finding of which is that Maori on average and correcting for everything else have less political knowledge than do others, and went on to make a policy argument for restricting Maori from voting, I would be doing a lot of jumping up and down about how that conclusion is not warranted from the evidence presented. Ideas have consequences. If folks want to misinterpret my ideas, that's up to them; if folks want to turn a misinterpretation of my ideas into policies, that's something I'd want to do something about. I'd have thought the same of others.

“Eric Crampton takes to the second point of the report thoroughly” - from a position underpinned by strong rationalist assumptions and a non-verifiable argument (e.g. if someone consumes a good the claim that the private benefits must equate or exceed the costs is not verifiable).

All we really have in economics is revealed preference. Preference is revealed by action. I can't look into people's heads to verify that folks choosing A over B really prefer A over B, all costs included, but neither can Adrian. However strong my rationalist assumptions are in figuring that preferences are revealed by action, it takes stronger ones to assume the reverse. It would be a strange strange world if a preference for Holdens was revealed by buying Fords, or a preference for the Canterbury Crusaders were revealed by wearing a Wellington Hurricanes jersey.

Counting the costs (or benefits) of non-harmful consumption were irrelevant as they do not impose a social cost, and benefits were out of scope. But including either of these components would have no net impact on the estimates for non-harmful use.
Valuing the benefits to harmful users is a complicated area. Consumption decisions by addicted, intoxicated or problematic users are likely to violate some of the rationalist assumptions underpinning conventional consumer choice theory. It is unlikely that many harmful drinkers, for example, rationally decide (or can be modelled as deciding) about their drinking behaviour and career prospects. Labour-leisure choices are typically taught that way at an undergraduate level, and provide useful insights, but the assumptions underpinning these models do not hold universally.

As Friedman taught us, "as-if" is all we need. Predictions from the Becker-Murphy model of addiction tend to bear out in the real world (long-term price elasticity of demand greater than short-run elasticity, for example) regardless of underpinning assumptions about rationality. The upshot of the Becker-Murphy model is that we cannot simply point to the existence of addiction and conclude irrationality: their model generates addictive behaviour within a purely rational, full information environment where folks choose between an addictive good and a composite commodity that includes everything else in the world. Why move to assuming irrationality when outcomes are consistent with a pure rationality model?

And even if you want to bring in some bad decision-making, why assume that the benefits are zero? That's torturing the method far too much. Drive consumer surplus down to epsilon if you want, but saying that the benefits to the drinker are less than the cost of the alcohol consumed really looks to be nothing more than a way to inflate costs. If you define benefits as zero, you get to count all of the resources that go into producing the good as costs; if benefits are at least as much as what folks pay for the product, then you don't. There is no basis for assuming benefits to be equal to zero. What basis do I have for saying the benefits are at least as much as folks pay for product? Evidence that they do in fact pay for product!

Low risk drinkers, for example, are affected at work on average one day in four years. This is more likely to reflect a poor, impulsive (and time inconsistent) decision than a calculated choice. Moderate drinkers are affected only about a day per year, but it is unlikely that an employer will employee for having a hangover the day after the end of year party. Employers do not willingly contract in to this kind of behaviour, but bear the costs.
For high risk drinkers, employers have difficultly identifying, let alone punishing, such behaviour. In practice, there is a myriad of reasons that the costs of such behaviour represent externalities rather than internally and rationally borne costs. These might include the relatively low importance of reputation (and therefore reputation risk) in industries that harmful alcohol users are employed in or the difficulty for employers in identifying and documenting alcohol-related problems.

All we need is that the probability of retention or promotion is an increasing function of job performance. If excessive alcohol consumption negatively affects job performance, it reduces the probability of good retention or promotion outcomes.

To paraphrase Dr Cullen, it takes a peculiarly warped sense of values to equate the output lost due to premature mortality with rational consumption choices. Equivalently, people whose drinking makes them unemployable (resulting indirectly in output losses) are more likely to be trapped by addiction than making a rational career choice. The professional who might be modelled using the equivalent variation argument who tosses up between preparing for work the next day or having another beer is unlikely to fall into this category.

Then call me warped. I consciously and deliberately choose a diet that includes richly-marbled steaks, even though such choices may well take a year off my life. Does that make me irrational? I'm maximizing the product of years of life by the quality of each year rather than just years of life. Who's to tell me that my utility function is wrong?

Moreover, if the underlying model is that folks are helplessly trapped by addiction and are completely unable to make choices, I completely fail to understand how a tax increase on alcohol is supposed to help them. If the argument is that there's a vertical demand curve, a price increase doesn't affect Q. We do have decent evidence that consumption responds to prices, but that gives lie to the argument that folks can't make choices.

You can argue your case for the assumptions and perspective you would use, and the emphasis that you would put on Homo Economicus. The research sought to answer a set of questions, with no restrictions from the client on the method beyond it being internationally recognised and no conclusion in mind. The report was upfront that it was commissioned research, what its aims were, that it was conducted independently, and that it was externally peer reviewed by leading academics in this field.

The conclusion was driven entirely by the choice to weigh the benefits of alcohol consumption as being zero for the five hundred thousand (Table 4.1) consumers reckoned to be consuming half of the alcohol drunk in New Zealand. I'm pretty sure that I'm interpreting the report correctly here. Table 4.1 lists 513,000 harmful drinkers in 2005/2006. Half a million in a country of about 4,000,000 - one in eight - is defined as getting zero benefits from the alcohol they consume. Is this plausible?

Turning to the appendix, we find that folks in the "hazardous" and "high risk" groups count as getting zero benefits from their drinking. You're in the hazardous group if you consume 40 grams of alcohol per day. That's opaque. There's a reason that's opaque. Let's pull back the sheet. 40 grams of alcohol. One ounce of draught beer by volume weighs one ounce. A pint is 16 ounces then, either by weight or by volume. A beer that's 5% alcohol by volume is 4% by weight. 40 grams is 1.41 ounces. So hazardous drinking is 1.41 ounces of alcohol per day, which is about 35 ounces of normal beer. So two pints of regular beer, 32 ounces, puts you just below the limit for "hazardous drinking". A beer with lunch and a wine with dinner: BERL says you get benefits from alcohol. Add in one evening drink, and you get zero benefit. Not just zero net benefit: zero gross benefit. You'd have done better by putting your money through a shredder. According to BERL. Without that assumption, about three quarters of the listed costs melt away.

That's what really bugs me about this report. As David Friedman pointed out a long time back, you really oughtn't have your thumb on the scales when weighing up costs and benefits. Adrian's saying that they had no remit to consider benefits, but that's obfuscation. They defined benefits as being zero for 12.5% of New Zealanders who they say consume half of the produced product, so they're taking a position on the benefits while pretending not to. I hate it when paternalism is disguised as being economic analysis.

Rauparaha over at TVHE seems to be feeling a little bit conciliatory. I'm not.

The Case for Doing Nothing

Greg Mankiw points me to Jeff Miron's excellent talk on the financial crisis. He eloquently makes the case for doing nothing. As Bryan Caplan would say, "Doing something hasn't worked. Isn't it time to give nothing a chance?" I know not how to embed the video here; follow the link above instead.

I haven't done a roundup of NZ policy in a while. That's mostly because nothing much has been happening as we wait for the budget to come out. It looks like some promised tax cuts will be put on hold, but it also looks like there's some chance that the worst part of former Finance Minister Michael Cullen's scuttling of the government's books might be cut: the Working for Families package. Stay tuned.

Incentives matter: Canterbury edition

Some members of the Department of Economics met with the University's Director of Green to be educated in newthink and the new way of rubbish collection on campus. While campus janitorial services will continue picking up litter from hallways and from the sidewalks below our windows, they will no longer empty our office rubbish bins. Instead, we're expected to carry individual used tissues and banana peels from our offices to a central garbage area elsewhere in the Department where we get to puzzle out into which of several rubbish bins individual bits of rubbish ought be placed. The Director of Green argues that carrying bits of rubbish from our offices to the central bins is of zero cost for academic staff. Perhaps next we'll be asked to vacuum the carpets as we walk to and from our offices. I think they're wrong about the costliness of hauling used tissues down the hallway and are underestimating the attractiveness of the aforementioned cheaper alternatives. This won't end well for anybody.


My line managers should note that I am only here pointing out the obvious incentive effects; any increase in rubbish found in the hallways or outside my window post the change has absolutely nothing to do with me.

Dilbert comic is the 25 September 2008 edition.

Triple bottom line doesn't help the real bottom line

I've been skeptical about corporate social responsibility. Proponents argue that firms implementing triple bottom line accounting will reap all kinds of reputational benefits. A piece of research that runs counter to these arguments and instead confirms my priors comes from Reitenga, Linthicum and Sanchez, 2009, "Social Responsibility and Corporate Reputation: The Case of the Arthur Andersen Enron Audit Failure"

We examine the influence of social responsibility ratings on market returns to Arthur Andersen (AA) clients following the Enron audit failure. Chaney and Philipich (2002) found that AA's loss of reputation resulted in negative market returns to AA clients following the Enron audit failure. Proponents of social responsibility argue that social responsibility can improve the reputation of the firm, while detractors argue that social responsibility expenditures are a poor use of shareholder money. If social responsibility sends a signal to investors regarding the reputation/ethics of management, social responsibility could mitigate the negative returns to AA clients following the Enron audit failure. Using a matched sample of AA and non-AA firms, we do not find evidence that social responsibility mitigated the negative returns to AA clients following the Enron audit failure. Our results are inconsistent with claims that social responsibility can burnish a firm's reputation in a time of crisis and with prior research indicating a positive relationship between social responsibility and market value.

If the CSR folks were right, Arthur Anderson clients with strong CSR policies would not have taken as big a hit as their less responsible compatriots. Turns out not to have been the case. I suspect that proponents of CSR, at least in our Accounting department, would argue that this is evidence of the failure of markets to recognize the importance of CSR rather than of the failure of CSR and will promote triple bottom line accounting ever the more vehemently.