I concur

After noting that Turkey's alcohol restrictions around bar and off-licence closing hours are pretty obviously religiously motivated, Bill Kaye-Blake makes a few observations about alcohol and policy:

Once you start working through the various economic analyses and the associated social and medical literature, a few things become clear:

• people drink booze because they like to, or because it makes things less bad. Either way, it makes them happier than the baseline
• alcohol is a ‘problem’ for a minority of people and/or on occasion. A few people are dipsos; the average adult occasionally gets blotto. Making the problem out to be more than that is disingenuous
• price is a stupid way to deal with the externalities. First, by definition addicts are insensitive to price. Secondly, the behavioural response of binge drinkers to increased prices is to cut out the moderate drinking sessions, not the harmful ones
• the research that shows otherwise is flawed. Crampton’s done the heavy lifting, so go see his work, but I’ll back him up. Poor assumptions, begging the questions, faulty parameters — embarrassing, really.

Just because the alcohol activists in New Zealand aren’t banner-waving members of the CWTU doesn’t make their desire to impose their preferences on the rest of the population any better. We can see it clearly on the other side of the world. Let’s be clear about it at home, too.

I'll only dissent only very slightly by way of clarification. Addicts are only relatively insensitive to price. They still respond to price, just less so than moderate drinkers. And so price-based policies have greater marginal effect on moderate drinkers than on heavy drinkers.

Meanwhile, and as expected, New Zealand's anti-alcohol brigade is using the very large weapon given them in the alcohol reform legislation to push for local teetotalitarianism.

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. 

Tax all the things

New Zealand has one of the world's cleanest tax codes. It typically aims to avoid distortionary effects and to avoid collecting tax where the collection costs outweigh the taxes that would be collected. So we have GST on imported goods, but only where the total value of the import is high enough to make it worth IRD's time. And, we have a Fringe Benefits Tax to avoid giving employers undue incentive to provide in-kind benefits.

The FBT does result in some silliness where the administrative hassles imposed on firms for FBT blocks some value-enhancing deals between employer and employee, but the thing seems right in principle.

NZIER has criticised IRD's latest proposed extension of the FBT to employer-provided parking. The extension, as I read it, seems consistent with IRD's general philosophy: don't bother collecting a tax where the value at stake is small; apply FBT where a valuable consideration is provided to the employee in lieu of salary. So they will charge FBT on employer-provided parking downtown, where parking is expensive, but not out in the burbs, where it's cheap. The value of employer-provided parking has risen along with downtown land prices. But administrative costs here are going to be pretty high, and the new system will likely wind up distorting location choices near the tax/no-tax FBT parking zone boundaries. Whether the distortions caused by the tax will wind up being bigger than the distortions caused by failing to implement it isn't clear to me.

But I do like Bill Kaye-Blake's demand that IRD be consistent and tax all the things. Some employees might negotiate a parking spot instead of a raise, but what about a bigger office? Nicer coffee? A bigger desk? Plusher carpets? More attractive assistants?

The Government can’t stop there, either. From my office, I can see any number of buildings with stunning views of the Wellington harbour. The sun sparkling on the early-morning ripples, the picturesque hills — those views aren’t available to everyone. Some workers are clearly receiving much more of these benefits from their offices than others. It’s about time the Treasury sorted out some non-market valuation studies of the amenity value of offices and made sure that those perks are properly taxed.

In fact, it isn’t just the views and the sunshine. Some workers get more floor space, larger desks, nicer office coffee. What we really need is a ‘defined office package excess’ (DOPE) tax. The Government can set minimum standards for office workers, and any provision of amenities in excess of that minimum gets taxed. Once the process is in place for the Auckland and Wellington CBDs, it can be rolled out to other localities and other types of workplaces.

The most egregious evasion of taxes on benefits, though, is going to require collaborative intervention by economists and psychologists to tax properly. It is my understanding that some workers are receiving an additional benefit beyond their wages and salaries, cellphones, nice office surroundings, and the like. A tax system can be properly calibrated only if it contains a PFT — a Personal Fulfilment Tax.

I like where Bill's going with this, but he clearly hasn't gone far enough. What happens if, after you've negotiated your job and salary, the employer chisels on the non-pecuniary side by sticking you in an open plan shed for a few years before moving you into a much-smaller-than-expected office in another building? Or if the work conditions deteriorate substantially? Shouldn't the employer get a FBT credit for those kinds of things that they might then provide compensation to the employees and prevent their departure?

Recall that failing to tax fringe benefits induces inefficiency by encouraging employers to provide compensation in non-cash benefits rather than cash at the margin. Suppose that the employer could provide some benefit the employee values at $1.00 at a cost of $1.10. An employer should prefer providing cash. But, because of income tax, it otherwise costs the employer $1.33 $1.50 to provide $1.00 to the employee (more if you count GST), so the employer chooses the inefficient non-pecuniary benefit.*,**

Now, think about disamenities. Suppose there's some disamenity that would cost the employer $1.20 to avoid (say, installing a better air conditioning system) but that the bearing the disamenity only costs the employee $0.95: he would prefer the bundle of the disamenity and a $1 cash transfer. The best solution has no abatement and a higher salary. But, it costs the employer $1.33 $1.50 to provide the $1 cash transfer and so the employer inefficiently abates the disamenity because of the lack of FBT tax credits.

Some might think it perverse that an employer be awarded a tax credit for providing disamenities. But efficiency may well require it. If, that is, the administrative overhead isn't itself more distortionary.

* In the presence of FBT where there are hassle-costs imposed on the employer, we can get underprovision of some otherwise efficiently-provided amenities: the employer may fail to provide an amenity valued at $1 and costing the employer $0.90 if the additional FBT hassle costs total more than $0.10.

** $1.50 - 0.33*$1.50 = $1 ==> I made stupid math fails when the actual numbers don't really matter in a constructed example.

Inflation expectations

Bill Kaye-Blake notes the macroeconomic consequences of the delayed Christchurch rebuild, and wonders whether we consequently should have more stimulatory monetary policy:

First, I could see the logic in the plan. Austerity for reasons of national economic policy — reducing the debt, placating overseas money markets — while getting some Keynesian intervention through Christchurch. Secondly, it didn’t work. It became clear in 2011 that it wasn’t working. Nevertheless, the Government stuck with the plan longer than I think they should have, and longer than the state of the economy warranted.

He puts up graphs showing RBNZ estimates have been optimistic relative to experienced reality for the last several quarters, that core CPI has been low, and that unemployment remains high.

I'm happy to agree with Bill that the stalled rebuild had macro consequences, as well as the general awfulness for folks stuck in very poor housing. But let's have a look at some inflation expectations.

I'm here drawing from iPredict's quarterly markets on inflation rates. The table below has the risk of inflation outcomes above 3% and below 1%, based on the price of shares in the relevant markets.

Quarter	Probability inflation less than 1%	Median expected rate	Probability inflation greater than 3%
March 2013	84%	Less than 1%	1%
June 2013	23%	Between 1% and 2%	5%
September 2013	34%	Between 1% and 2%	10%
December 2013	15%	Between 1% and 2%	15%
March 2014	18%	Between 1% and 2%	19%

Inflation risks look pretty balanced over the medium term.

The markets are also expecting no change in the OCR in any quarter through the end of the forecasting horizon. The greatest likelihood of any change is a 21% chance of an 25bp increase in December 2013, though the markets also are pegging pretty stagnant GDP growth rates and an unemployment rate unlikely to drop below 6% before September quarter 2013.

You could maybe justify a small cut to the OCR on that risks currently should be weighted towards breaching the top rather than the bottom of the bound, and on that the median expected rate converges to a shade below 2% rather than a shade above it. But it's hard to see much case for that RBNZ has been grievously tight when they're targeting a medium term.

Consumer and voter identity

Bill at Groping Towards Bethlehem talks about identity as a form of commitment. The person who thinks it unethical to eat meat might waver in any particular instance because no particular meal would ever be the one that resulted in an animal having been killed; being vegetarian brings commitment. He's here treading some of the ground previously covered by Cass Sunstein in Solidarity in Consumption.

I note some of these issues in my Public Choice classes when we cover expressive voting. When we're making decisions as shoppers, our consumption decisions are often bundled with all kinds of expressive considerations and identity issues. But there's no reason to expect these to be at all suboptimal in any overall sense. We weigh up the expressive benefits from certain consumption choices and weigh them against the opportunity costs - the extra amount of real resources we have to forego in making that choice. We can have problems, surely, where because we've bundled some aspects of consumption into our identities we might take too long to switch from a suboptimal path after a relative price change, but because we're individually bearing those costs, the losses can't be spectacularly large. Otherwise we'd switch.

When we flip over to the political realm, identity and expressiveness choices are individually costless. Now that isn't always true - some folks get so wrapped up in it that it surely imposes real costs on themselves and others. But on the whole, you don't really need to weigh up the real external costs imposed by your expressive and identity choices in policy. If it makes you happy to believe that you're a good person who's affiliated with good people and voting for the kinds of things that good people vote for, then it really doesn't matter much if those policies actually do harm in the real world. There's no feedback loop from individual choice to individual consequence at the ballot box. And so we get the political world we live in.

I say politics is the mindkiller. Andrew Coyne puts it a bit more bluntly:

In short, partisans are morons: mindless, mouthbreathing automatons.
— Andrew Coyne (@acoyne) December 4, 2012

Enjoy your identity and affiliations when shopping. But, if you can (and only metaphorically), grab an icepick, jam it up into the part of your brain that connects identity and affiliation to politics, and stir it around a bit.

Green growth

There's a new 'Green Growth' report out. The Science Media Centre asked me for comment; here's what I gave them, along with a few additional comments below.

“There’s much to like in the [Green growth] report. It rightly recommends that New Zealand move toward more efficient pricing and trading of water resources. Similarly, they recognize the opportunity for New Zealand to make a global difference by directing research and development resources towards lower-emission pastoral systems – so much the more so if New Zealand were to release the developed technologies under Creative Commons license as our contribution towards reducing global warming. Streamlining regulations to let entrepreneurs take advantage of New Zealand’s natural potential comparative advantages in aquaculture also is well worthwhile.

“I worry that some of the identified opportunities may impose cost well in excess of potential benefit.

“While more energy-efficient buildings would be very nice to have, regulatory mandates in the area often have perverse effects. For example, mandates that homes undergoing renovations also be brought up to higher energy efficiency standards can encourage people to avoid renovating their homes. Financing programmes assisting those already undertaking renovations for earthquake-strengthening to improve energy efficiency at the same time would be more effective; by contrast, EQC in Canterbury has been barring homeowners from undertaking any energy-efficiency improvements while repairing earthquake damage.

“Imposing carbon dioxide emission standards on New Zealand vehicles, when we do not make vehicles, mostly shifts to other countries those used cars we would have bought. We already have seen evidence of reduced used car availability and higher prices consequent to the government’s recent regulatory measures that effectively barred Japanese imports produced prior to 2005. Further, shifting towards greater use of electric cars because of New Zealand’s low electricity emissions-intensity would only work if we were able substantially to expand our base of hydroelectric or geothermal generation.

“I was somewhat surprised to see no recommendations around allowing well-regulated hydraulic fracturing technology for natural gas extraction. Wave and tidal power are worth investigating, but remain rather too uncertain to bank on. Greater use of natural gas powered thermal electricity generation is likely New Zealand’s best bet for lower emissions intensity power generation in the absence of substantial breakthroughs in other energy sources.”

I'll add a bit here.

As best I understand things, coal is now part of our baseload generation capacity. Huntly runs all the time, their gas turbines are easier to fire up and scale down for peaking than are their coal units, and our hydroelectric stations are obviously better as peaking units. Adding electric cars adds to baseload demand, so we need more baseload capacity. That's ideally hydro, which is banned by the environmentalists / water spirits people. Wind can be part of our baseload because it can be partnered with hydro: when the wind blows, we can dial back the hydro plants and save the water there for times when the wind is calmer. But, that means they need to service the same demand points as our hydroelectric stations. And hydroelectric plus lots of wind means the Canterbury High Country. And the environmentalists / scenery people have banned our putting wind power there too because it would make a tiny percentage of that scenery look different. So that's out too.

Fracking can be done safely - from my read of the literature, whatever problems there have been in some cases with water contamination can be avoided by techniques that only slightly increase the cost of extraction. Getting more access to cheap natural gas in New Zealand can displace what coalfire generation we are running and gives us room to expand generation capacity at lowest environmental cost given the existing political constraints. But the Greens have pushed to ban that too, and have succeeded in getting a pile of Councils to ban it within their catchments.

What's left? Maybe more geothermal.  Tidal remains a bit of a pipe dream - I hope we can get there someday, but I'd sure want it on-stream and running before pushing everybody into electric cars. Solar faces some of the same constraints as wind - it's a great complement to hydroelectric and lets us store electricity in the form of lakes-not-yet-run-through-turbines when the sun shines. And maybe it'll be low enough cost sometime soon that we'll be able to use it. And I wonder whether the same "Oh but I hate everything that changes anything" people will work to ban solar plants near our hydroelectric stations in the same way that they're putting wind into the "too hard" basket.

Pushing more demand onto the grid, without getting more capacity on the grid, is a bit scary. I like the stuff in the report about getting more active demand management systems. That will help smooth out some of our peaking issues. But we need more baseload if we want electric cars sometime down the track. It's not obvious how we get there from here.

Bill Kaye-Blake also provides useful comment:

Bottom line: the report seems to be a re-tread of well-known issues with a recommendation to spend more public money to help private businesses. When it comes to really difficult issues — what trade-offs are we willing to make? how do consumers symbolise environmental values through economic transactions? — it seem to fall silent. Maybe somewhere in those 300 pages they grapple with the hard stuff. If so, Pure Advantage will have gotten its money’s worth.

Economic Dilettantism

Bill Kaye-Blake takes a Rothbardian turn!*

Rothbard wrote:

“It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.” 

Bill takes on the disappointing proclivity of New Zealand's bench scientists to opine on economics.

In the June issue of AgScience, Prof Shaun Hendy has an article entitled, ‘New Zealand’s voyage of economic self-discovery’. He also has a post with the same title over a Sciblogs. Before I get too wound up, I should give Prof Hendy his dues. He does do fieldwork amongst economists in their native habitat. But in the end, it is dilettantism.

The article sounds impressive — we have a new approach! we have pretty pictures! Nokia! But really, what he is able to tell us is:

• New Zealand is small and distant
• its economy is based on what has worked in the past
• scale is important
• we should be more productive.

He isn’t telling us anything new. No, really, there is nothing new there. And what is there is either useless or confused.

Bill goes on, citing underpants-gnome theories. He concludes:

But then I’m just an economist. Maybe Prof Hendy would like to hear my thoughts on the Higgs boson. After all, I’ve been watching The Big Bang Theory.

While I agree with Bill, I'm somewhat less annoyed by the Hendy piece's content than he is; the bits from the article that aren't new aren't useless either. It's worth emphasizing that a fair bit of New Zealand's lagging performance comes from being small and distant rather from particular policy failures. We can always do better, but there aren't a whole ton of low-hanging policy fruit around waiting to be picked. Land use policy, the RMA, and immigration would be the first places I'd look for gains. But it would be pretty optimistic to expect large or quick improvements from any of them.

* The position is hardly unique to Rothbard; he just said it well. But I do think it's fun to paint Bill as agreeing with Rothbard.

War of ages

So it's all about the intergenerational conflict and how the old are sucking the life out of the young, and how the young might cut the oldies off. Nolan makes some threats. Bill shows that the oldies will never have the numbers to outvote the young folks so they'd better behave themselves. Nick Gillespie figures the same thing's set to happen in the States.

But there's a problem. Young people generally support giving money to old people. Or at least every bit of US evidence I'd previously seen suggested that young people would rather have the state take care of their aging parents and inlaws. support transfers to the elderly.

What does the New Zealand data say? This is just a 5 minute cross-tab. But the 2008 New Zealand Election Survey has an age variable, and it has a question: "Should the government be responsible for the old?".

If you run a straight correlation between the age variable, zage, and the "should the government support old people" variable (zgovold), where higher numbers mean "shouldn't", I get a -0.0462. So older people are slightly less likely to support giving lots of money to old people.

Let's break things up. Split the age cohort variable into the under 40s, the 40-64 year olds, and the 65+ folks. Not correcting for anything else. What do I get?

47% of the young think the government "Definitely should" be responsible for the old.
52% of the middle aged also say "Definitely should". Their parents are in that cohort, if alive.
49% of the oldies say "Definitely should".

What happens when we just move down to "Should" instead of "Definitely should"?

46% of the young, 43% of the middle aged, and 48% of the old say the government "Should" be responsible for the old.

If we add up the "Should" and "Definitely should", we get just about everybody regardless of age wanting the state to take care of old people.

If we add up the "Shouldn't" and "Definitely shouldn't"? 5% of the young, 4% of the middle aged, and 3% of the old fall into that category.

Among the cohort of respondents aged 18-39, 37 of 712 people giving a response said either "Shouldn't" or "Definitely shouldn't".

If there's some incipient revolution against the elderly, I'm not seeing it in the data. But maybe things have changed since 2008.

Every young person who's below the median income will prefer that the state pay for their parents by taking money away from richer people. And a lot of folks would prefer that the government pays for a nursing home (or give the money that can be used to rent a small flat, or help support a reverse mortgage) than that they wind up hosting their parents or inlaws in their own home.

Things will get worse as the effects of the massive burden of transfers to the elderly becomes more apparent. And there's a fantastic case for raising the retirement age. But intergenerational warfare is far from the radar.

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.