An Open Letter to David Shearer and David Parker

Dear David and David,

I have read with interest the policy document you released yesterday: New Zealand Power, Energising New Zealand. I wonder if you could clarify a few points for me.

1. In the document and the associated speeches, you quote the Wolak report's figure of $4.3b of, in your words, "super profits". Have either of your read the report, or any of the trenchant criticisms of that report? (A bit egotistically, I can suggest work that I was involved in, here, here, and here, but there are others.) 
2. You say that "prices are rising faster than in many of our major competitor countries", and show a graph comparing the price trend in a number of countries since 1986. Let's leave aside the question of what is meant by "competitor country". Is it your position that prices were correct in New Zealand in 1986? Elsewhere you say that your new agency, New Zealand Power, will set prices based on operating costs and a fair return on capital. Is it your position that prices were generating a fair return on capital in 1986?
3. You say that the faster rate of price growth in New Zealand "undermines the competitiveness of our economy". But one of your graphs shows that real industrial prices have remained about constant since 1986 and commercial prices have fallen. What exactly do you mean by "competitiveness"? 
4. Your graph shows that the faster increase of prices relative to other countries has been fairly steady since 1986 albeit with an acceleration around 2000. Since your explanation for this price trend is a lack of competition in the market and the use of marginal-cost rather than average-cost pricing, is it your position that these factors have been changing steadily over the past 25 years, accelerating during the period of the last Labour government? Is it possible that the trend might be attributable to steady increases in demand over time and regulatory obstacles to power companies building new capacity? 
5. You say that selling assets will "push up power prices even more as foreign and corporate investors look to maximise profits". Is it your position that the state-owned electricity companies are not currently looking to maximise profit, even though that is their fiduciary duty under the State-Owned Enterprises Act? 
6. You state that the Wolak report found that the four big generators made "super profits of $4.3b at the expense of consumers". You also state that hydro generators earn "super profits" by using free water to generate electricity that is sold at the same price as generators using more expensive methods. Do you think this is what Wolak meant when he calculated the excess profits earned? Have you read the Wolak report? 
7. As I noted earlier, you state that price will be set based on operating costs and a fair return to capital. But the Wolak report assumed that there was excess capacity in New Zealand so that a competitive market would have produced prices based only on operating costs. Are you stating that Wolak's $4.3b figure is overstated? Have you read the Wolak report? 
8.  Drawing on a report you have commissioned from BERL, you state that your policy will create 5,000 jobs and boost the economy by $450 million per annum. In their report, BERL state that they are assuming an economy with deficient demand so that unemployed resources are avaialbe to the industrial and commercial sector with no opportunity cost. In citing that figure as an on-going per annum benefit, are you stating that it is your view that the economy will remain in a state of deficient aggregate demand forever, and that your government would take no other action to increase demand? 
9. And if you have time, could you ask BERL whether it is not an oxymorn to have a computable general equilibrium model, and then state that "the model's calculation of the impacts on the government accounts exclude the direct loss of revenue from lower generator dividends and lower tax receipts from the generator's reduced profits". 
10. By the way, did you know that one of the implicit assumptions Wolak used in his report implied that there was no efficiency loss from the putative overcharging, just a transfer from users to taxpayers? If you accept this report, wouldn't it be easier just to use the tax and benefit system to transfer money back to poorer consumers? Have you read the Wolak report?

Kindest Regards....

You can't kill a bad stat

The New Zealand Drug Foundation should know better. And yet, here we are.

The NZDF put up a Bingo card for those who support tougher regulations around alcohol with the catch-phrases they expect to show up in the debates around the Alcohol Reform Bill. The last page of it has a few problems. Alcohol Reform Bill Bingo  Among the facts, as NZDF sees things:

It's a small number who are ruining it
Since when is 785,000 a small number? That's how many "uninhibited binge drinkers" there are in New Zealand. A further 622,000 people are "constrained binge drinkers". Together that's 1.3 million people, about a third of all drinkers in New Zealand who are not drinking responsibly.

nzdrug.org/smallnumber

Ok. First off, there are 4.4 million people in New Zealand. They're claiming 1.3 million is a third of all drinkers. So they're claiming that we have 3.9 million drinkers in the country. At the 2001 census, there were about 848,000 people aged under 15. So the New Zealand Drug Foundation is claiming that every single person aged over 15, along with 41% of all of those aged 0-14, are drinkers. That seems off.

So I hit their provided link. It's a redirect that goes to an article by Sally Casswell. That article provides results from a survey where they asked a representative sample of people a bunch of questions, including whether they know anybody who they consider to be a heavy drinker. 29% of the sample reported knowing at least one heavy drinker. Now it would be a really really big mistake to extrapolate from the number of heavy drinkers known by people in the sample to a population estimate of the number of heavy drinkers because respondents could easily be referring separately to the same heavy drinker. And, Casswell doesn't do that. In fact, there's absolutely nothing at the link to back up NZDF's claim here. I think this is likely a redirect error: the study backs up the number in the next factoid, where they say "about a third of New Zealanders have at least one heavy drinker in their lives" (note that 29% is almost equidistant from a quarter and a third for rounding purposes. Since a third is 33.333% and a quarter is 25%, a third is just a pinch worse for rounding purposes than a quarter, if you want to be accurate and you like fractions. But you always round up if you want the scarier fraction).

But, because I work in this literature, I know where their number comes from. It's from an old ALAC report, cited here. What counts as an "uninhibited binge drinker"? It's awfully hard to tell from the report. They define it as:

"adults, 18+, who are less concerned with the effects of their drinking and less inhibited than Constrained Binge Drinkers. They drink regularly (often every day) and binge, mainly to unwind, and for the "buzz" and enjoyment."

By my best guess, adults who drink regularly, who sometimes binge, count as "uninhibited" if they don't seem sufficiently contrite about it in the survey questions. At page 25, they say that the main difference between constrained and unconstrained bingers are "demographic and attitudinal characteristics", with the unconstrained exhibiting a more reckless disregard for downside costs of heavy drinking. What counts as binge drinking?

"where an adult reports they have consumed the equivalent of seven (7) or more glasses of alcohol during a single drinking session."

I'll assume that they're there meaning standard drinks. Seven standard drinks, 70 grams of alcohol, is the equivalent of most of a bottle of standard strength wine (a bottle usually has 8-9 standard drinks). A half-litre of Emerson's JP is 3.27 standard drinks. So less than two pints of the JP makes you a binge drinker. Since I have about 0.6-1.3 standard drinks per typical day and perhaps once every month or two have something more like a couple pints of JP (over 3+ hours), and because I really can't see any negative consequences from my drinking pattern, I might count as an uninhibited binge drinker - it depends how often you have to binge to fall into the category. Figure 4 of that report shows that 56% of "uninhibited binge drinkers" had 3 or fewer drinks on their last drinking occasion; 25% of that category consumed 7 or more drinks on their last drinking occasion. So it's not implausible that a lot of people fall into the category. But does the category really tell us a ton about anything useful?

At page 75, the ALAC report compares uninhibited binge drinkers who drink every two to three days and who drank 7+ drinks on the last occasion with those who don't. The heavier drinking members of the uninhibited drinking cohort are more likely to be full time salary or wage earners, have higher income, and are more likely to drink with friends than to drink alone. Are any of those bad things?

But, the worst stat in NZ Drug's "Facts"? This one.

The status quo is fine.
The status quo means 1000 deaths due to alcohol every year. It means 785,000 binge drinkers. It means $72,000,000 in costs for Police, Corrections and health expenditure. It means $4.8 billion in costs to the taxpayer. The status quo means more harm.

nzdrug.org/alcoholreform

I don't know about the 1000 deaths; I hope that it's net of the lives saved by moderate drinking, but I doubt it. The 785,000 binge drinking figure seems a bit off, as noted above. The $72m figure is included in the $4.8 billion figure. And, the $4.8 billion is not a cost to the taxpayer. Again, here's BERL's cost tally:

• $1.52 billion in intangible costs of loss of life (the vast majority of which is reduced life expectancy among very heavy drinkers, with no accounting for increased life expectancy for moderate drinkers);
• $1.48 billion in labour costs of lost productivity (the vast majority of which are the forgone production of the prematurely deceased, and consequently is double-counted with the $1.52 billion above since the Value of a Statistical Life is inclusive of lost production);
• $699 million in "drug production costs", including every cent of excise paid to the government by heavy drinkers;
• $562 million in crime costs, with a ridiculously low threshold for determining what is an "alcohol-caused crime";
• $290 million in health care costs, under the assumption that there are no health benefits from moderate drinking and by zeroing-out the effects of drinking for those disorders where even fairly heavy alcohol consumption reduces the costs of that disorder;
• $200 million in road crash costs, consisting both of those very real costs that drink drivers impose on others and the costs that drink drivers impose on themselves by wrecking their cars;
• $42 million in lost quality of life, again mostly falling on heavy drinkers themselves.

When I'd gone through the figures it looked like maybe $967 million of BERL's $4.8 billion could count as an external cost by more normal method.

It's hard to kill a bad stat. Darned things keep popping up whenever somebody finds them to be convenient. 

Critique and the customer

If the point of an economic consultancy report is to convince serious officials at Treasury, the Reserve Bank, or the relevant Ministries of the economic case for something, and if the consultancy report has serious errors, you can do good by loudly critiquing it if it is wrong. Those who need to know whether the report is right will check the critiques and, if truth-seekers, will update. I understand that some of the serious folks at the Ministry of Health have strongly updated their views as to the appropriateness of Cost of Illness studies around alcohol consequent to critiques, very correctly noting that cost-effectiveness is the better measure.

But if the point of an economic consultancy report is to excite the hooples and to give a sciency justification for whatever some bunch of rent-seekers is trying to push, then critiquing it loudly only serves to provide advertising: this firm will produce the big shonky but sciency-looking number that your industry needs to get public support for whatever you're trying to push.

"Noise made, overtures to outside interests and enlistment of the hooples’ participation is what this situation demands." Al Swearengen, Episode 20, "Childish Things", Deadwood.

If that's what the reports provide, critiques might make things worse by letting the interests know who's best at exciting the hooples.

Want to show that your industry is the key linchpin for the regional economy? Want to show that your party's policy is the one for advancing economic prosperity? Yelling about how a particular consultancy produces numbers that are great for propaganda but bad for policy only serves to fuel demand where the ultimate audience are the hoopleheads.

What else can you say about a consultancy report that includes this in the concluding remarks?

The biggest cost will be loss of face for the “Mainstream Economists” especially the Bank economists, who have continually told us that this is the panacea: There Is No Alternative.  Their experiment will be at an end.

The audience isn't Treasury, the Reserve Bank, the boffins in the Ministry of Finance, academic economists, or anybody serious. It isn't you, Matt, as correct as your critique may be. Neither is it you, Paul: I watched you writing your critique as I went meta.  It's the hooples. And it's the reason that the New Zealand Economic Association really really needs an annual awards ceremony for the worst piece of economic consultancy work produced in the country every year.

So that the hooples can better be advised of the reputation of certain outfits.

Alcohol stats

I wrote this for the op-ed section of Friday's Christchurch Press. I'm currently in Oz where I'll be talking about alcohol policy for the hospitality industry association liquor retailers conference and with a few journalists. So I'm posting this Wednesday and hoping that the piece did come out in Christchurch on Friday. Anyway, enjoy. [Update: here it is!]

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It would be pretty easy for diligent Christchurch Press readers to conclude that alcohol is the worst scourge of humanity. Doug Sellman featured several times over the last fortnight warning us all of alcohol’s dangers; health reporter Georgina Stylianou wrote two articles on a new estimate of alcohol’s cost to the Canterbury health budget. And the University of Otago’s Professor Jennie Connor told us that minimum prices are remarkably effective in reducing alcohol consumption, pointing to a Canadian study “that showed a 10 per cent increase in the minimum price of alcohol reduced consumption by 16 per cent relative to other drinks.” Connor was quoted in a Mainlander feature on Doug Sellman explaining how Professor Sellman is not in fact a wowser; presumably it’s only free-spirited libertines who write op-eds in the New Zealand Herald worrying about how Woodstock commercials encourage boys “to have sex with their best mates’ mothers” and that advertisements “encouraging middle-aged women to get their teenage clothes back on and flirt with their son’s best mates” do not contribute to a healthy society.  (30 October 2009)

I do not particularly care what the jury decides on who is or is not a wowser. But I work with and care about the numbers around alcohol policy. And the impression most readers would get from the latest reporting in the Press is a bit at odds with, well, reality.

Let us begin perhaps with Jennie Connor’s citing of “a Canadian study” on the effects of minimum pricing. Can a ten percent increase in the minimum price of alcohol really reduce total alcohol consumption by sixteen percent? No. The number is so far out of line with the vast consensusof the literature that I got in touch with Chris Auld, one of the authors of what had to have been the study Connor had read, a piece in the May 2012 issue of Addiction. And my read of his study was right. If you increase the price of beer by ten percent, you could get a reduction in beer consumption of sixteen percent, but that’s because beer drinkers move over to other alcoholic drinks. Across-the-board increases in the minimum price of alcohol have far smaller effects: a ten percent price increase reduces aggregate consumption by only about 3.4 percent, as is made reasonably clear in Auld’s paper.

That the sixteen percent figure is screamingly wrong should have been obvious to anybody who is familiar with the literature. The largest estimate of the responsiveness of alcohol consumption to price measures in Wagenaar’s 2009 survey of 112 different studies suggested that a 10% price hike reduced consumption by 8.4%; Wagenaar concluded that 4.4% is the best consensus estimate. And for heavy drinkers, it was 2.8%. Auld’s 3.4% is then right where a reasonable person would have expected an estimate on the effects of minimum prices might fall. Sixteen percent – that’s right out.

The Auld study does come out in favour of minimum prices, but in conjunction with a decrease in alcohol excise taxes: it’s then a way of increasing the cost facing heavier drinkers while doing less harm to moderate drinkers if heavier drinkers drink cheaper alcohol. I worry more that the policy does disproportionate harm to moderate-drinking poorer people.

I was a bit more surprised to read of the new commissioned BERL report on the health costs of alcohol in Canterbury. Their prior work in the field, a 2009 study that included a measure of costs to the health system among other costs of alcohol, seemed to put a pretty heavy thumb on the scales in estimating the costs borne by the health system. My article in today’s issue of the New Zealand Medical Journal lists a few of those problems [note: link may only be active after lunchtime Friday, sorry]. While alcohol greatly increases the burden of disorders like liver cirrhosis, it also reduces the costs of cardiovascular disease. BERL here replicated work done in Australia by Collins and Lapsley (2008). But where Collins and Lapsley added up all the costs imposed by those disorders where alcohol makes things worse and subtracted from that total all the cost savings from those disorders where alcohol reduces costs, BERL simply erased any beneficial effects of alcohol for disorders including ischaemic heart disease, cholelithiasis, heart failure, stroke and hypertension.

As I had warned BERL against this kind of method when I served as discussant on their paper at the 2009 New Zealand Economic Association Meetings, I was curious whether they’d revised things. But, the new BERL paper wasn’t available. Two separate stories in the Christchurch Press, with lots of reaction quotes from doctors, were based on a paper that the reporter did not have and was not yet available for public critique. I received the paper Wednesday courtesy of the CDHB. And BERL, at footnote 14, reports they’ve done the same thing again: “The Collins and Lapsley fractions indicate some alcohol use may be beneficial for some conditions. We concentrate on harmful drug use, and assume zero fractions for such conditions.” So their measure of the costs of alcohol to the Canterbury health system relies on an assumption that there can be no health benefits from alcohol – an assumption that runs contrary to the weight of international evidence. Assuming one’s conclusions is hardly proper method.

Unfortunately, alcohol policy is one of those areas where a lot of people’s convictions about the right answer put a pretty strong lens on how they assess the literature. How often do you read that problem drinking among 15-24 year olds was no different in 2006/2007 than in 1996/1997 before the change in the alcohol purchase age? Or that per capita alcohol consumption is down substantially since 1991? Or that light drinkers have about a 14% reduction in their chance of dying from any cause than people who never drink,correcting for the host of other health-related behaviours that are usually given as reasons for ignoring the health benefits of moderate drinking?

Be skeptical of the moral crisis around alcohol.

Unquestionable costs

Back in 2009, BERL told us that harmful alcohol use cost New Zealand's health system $286 million dollars for the 2005/06 year. There were a few problems with their method. It's worth revisiting these now that a new BERL number on alcohol health costs is out. I'd critique their current numbers except, well, I'll come back to that one.

The BERL report was modelled on an Australian study by Collins and Lapsley. Collins and Lapsley used a table of alcohol aetiological fractions to assign health costs. So if alcohol is responsible for 100% of alcoholic liver cirrhosis, 100% of the costs of alcoholic liver cirrhosis are attributed to alcohol. For some disorders, alcohol consumption reduces costs to the health system. In particular, cardiovascular disease is reduced by alcohol consumption. So while someone consuming 8 standard drinks per day is likely to blow his liver out (and impose costs on the "treating bad livers" part of the health system), he'll likely have pretty clean arteries (and reduce costs on the "fixing plugged arteries" part of the health system). To get a measure of net costs you take all the fractions, some positive and some negative, and multiply by the costs of each to the health system. This will remain an imperfect measure of aggregate health costs: if moderate drinkers live longer, they'll impose greater total costs on the health system by living longer than teetotalers; if heavy drinkers die early, they'll cost the health system money early on but save the system money in the longer term. But the method gives you a first cut.

So, what did BERL do? They took Collins and Lapsley's table and surgically removed any disorders for which alcohol provided protective effects. Why? Footnote 15:

A related, but separate, issue is that of the beneficial consequences of drug consumption.  This report concentrates specifically on the social costs of harmful use.  It does not analyse the impacts from non-harmful use, such as any protective health effects of alcohol consumption.  That is, beneficial impacts of alcohol use are not included as cost offsets.

They do a bunch of handwaving about how health benefits are contentious. But their source document, Collins and Lapsley, included those benefits. And it's not a great out to say that there are no medical benefits once you get past 4 standard drinks per day. Sure, that's about where aggregate mortality risk goes past the baseline for teetotallers. But that curve is drawn for net effects: assuming away the benefits side puts a pretty big thumb on the scale in measuring total costs to the health system, especially when metastudies like Corrao's find strong cardioprotective effects well into the range where total mortality effects are pretty negative.

So after assuming away any possible health benefits from alcohol use, BERL found that alcohol imposed a large burden on the New Zealand health system. We didn't have the resources to reverse-engineer their pretty shonky zeroing-out of potential health benefits when we critiqued their study but simply noted it as something that made their figures rather higher than they should have been.

Anyway, BERL has a new figure out on costs of alcohol to Canterbury's health system. Or so reports the Christchurch Press. Their reporter, Georgina Stylianou, seems to be running off the press release here. She interviews a bunch of the usual suspects about just how awful alcohol is. Any fact checking on the figure? No. Why? The paper isn't yet released.

The report will be released in full this week and will show the range of conditions in which alcohol is a contributing factor.

Since I can't critique their new figures, I'll remind folks about what was wrong with their figures last go-round. I wonder if they've fixed anything.

It's not encouraging that the Christchurch Press seems to be playing into the media strategy that BERL and CDHB here are running: get a story on the press release, maybe another one when the report is made available; get the figures into public debate but don't let anybody have a chance at critiquing them. I'd hoped for better.