The Social Costs of Abstinence

Suppose that the correlation between one's sex life and earnings were actually causal, and worked from sex to income rather than the other way round. What correlation? This one:

Having an active sex life may make you happier, healthier and wealthier.
A new study reveals that people who had sex four or more times a week earned more money than their counterparts who weren't as lucky.
"People need to love and be loved (sexually and non-sexually) by others. In the absence of these elements, many people become susceptible to loneliness, social anxiety, and depression that could affect their working life," study author Nick Drydakis, an economics lecturer at Angila Ruskin University in Cambridge, England, said to CBSNews.com by email.
The discussion paper was published in July by the Institute for the Study of Labor,an economic research institution, in Germany.
Drydakis said he was interested in the topic because of previous studies linking sexual activity with extroversion traits (including being sociable, outgoing and energetic) and good health. In addition, good health has been linked to higher wages. A 2009 Brazilian study also showed a connection between higher wages and a more active sex life.

We can imagine some causal mechanisms that could run from sex to income. Happier people could be more productive at work. Or the cardiovascular benefits could yield better health and then consequently greater productivity. The authors do use a two-stage estimation procedure to try to isolate causality: they try to instrument for sexual activity, so it's at least more plausibly causal than much of what goes on in the public health literature.

If we follow the standard line in public health of assuming correlations are causal and in the "right" direction, and of ascribing as social all things private, we have to then worry about the social costs of abstinence. Those having too little sex earn less and so must be less productive. Those productivity costs reduce output and reduce tax revenue. And if it's working through a health channel, they also impose costs on the public health system.

The policy consequences are left as an exercise for the reader. But note that if you're recommending subsidies, you might need to offset the STD costs on the public health system via complementary regulations around health testing and public disclosure of who has what. This may seem like a violation of privacy, but can we really make rational decisions without perfect information?

[The should-be-obvious caveat: entire post subsumed within a "reductio" tag.]

Adding up the costs

I've wondered what would happen if somebody added up all the various social cost figures, so I'm glad to see Bernard Keane on the case over at Crikey. Here's the grim tally.

By Crikey’s count, various health and social issues are claimed to cost us over $260 billion, in a $1.5 trillion economy. And this is only a selection. A recent Guardian article suggested there was a massive economic cost caused by masculinity – imagine the cost to society of all the problems men cause? Not that women get away scot-free -- being young and female is also a problem as far as the public health lobby goes, given girls just want to have fun.

Still, in a contested policy and funding market place, you have to sell your issue, no matter how objectively important it really is, as effectively as possible.

Note that somebody reckoned the dodgy $15b figure wasn't big enough and so turned it into $36b.

I will quibble with Keane on one point though. He writes:

It’s more difficult if you’re an NGO charged with lobbying for non-economic outcomes, or a public health outfit that wants more money or regulation for a particular problem. You can’t point to lost jobs as a direct consequence of policy. Many health problems, for example, cost governments a lot of money to treat. But that money actuallyemploys people -- doctors and nurses and other health professionals.

That’s where “social costs” come in: the costs borne by everyone else of individual decisions. And, in particular, lost productivity. That’s the new black for, particularly, the health lobby: show that your particular issue causes massive lost productivity that is a substantial cost to the economy. That’s the way to the hearts of hard-nosed decision-makers: show them the economic benefits of dealing with a particular issue.

If you can throw in other social costs, like the cost of the criminal justice system, even better. And with health problens there also the cost of "lost wellbeing", which is measurable but not an economic cost unless it affects productivity or consumption.

The bulk of the costs measured in the cost of alcohol studies fall on the drinker himself; it's only by assuming that drinkers get no enjoyment from consumption that these outfits are able to count private costs as social.

Update: Detmackey, in comments, points to one that we'd all missed. The 'economic impact' of incontinence is apparently $42.9 billion.

Optimal airports

A million dollars a meter to extend Wellington's runway.

The airport announced in May that it would be seeking resource consent to extend the airport by 300m at a cost of $300 million to attract long-haul flights to the Wellington region.

The costs of the runway extension are reasonably well known. But what about the benefits?

All passengers wanting to get to Wellington will enjoy a slight increase in safety. If they value this, they'll be willing to pay more for flights to Wellington. The airport should then be able to extract slightly higher landing fees.

Passengers from overseas wanting to get to Wellington will enjoy a slight decrease in expected travel time as fewer of them will need to connect in Auckland (or Christchurch) to get to Wellington. Again, if they value this, they'll be willing to pay more for flights to Wellington. The airport should then be able to extract higher landing fees from those international flights.

If the change results in increased passenger arrivals in Wellington, then Wellington may benefit from increased tourist traffic. As always, we would need to be careful in estimating such benefits. First, spending by itself isn't a benefit; increased profits accruing to Wellington businesses are. Measures of "economic impact" that take total expenditures as a benefit are rather misguided. Wellington Council might be justified in putting a bit of money into the airport extension, funded by increased levies on businesses most likely to benefit from increased tourist and conventioneer flows: restaurants near tourist spots, hotels and the like.

There's little case for central government getting involved except where the extension results in a net increase in travel to New Zealand as a whole rather than just travel to Wellington. At least some of the benefit to Wellington will be a cost to Auckland and Christchurch in terms of travelers who would otherwise have enjoyed a layover in one of those cities before continuing on. And so any case for central funding would have to be based on net increases in tourist flows to New Zealand as a whole weighted by the likelihood that those travelers use Wellington as a base for more extensive travel. Central government might watch that any business case for Wellington Council funding not be based on trade diversion from Auckland and Christchurch.

Bottom line: if this were really a good idea, Wellington Airport should be able to fund the bulk of it via a bond issue that would be paid by increased landing fees consequent to the extension. If the main benefit is from increased arrivals from large jets, then set differential landing fees such that those enjoying the benefits are the ones bearing the costs.

Wellington Council could maybe throw in a bit, but should be pretty careful because it's awfully easy for interested parties to put together a business case based on wishful thinking or based on assuming private internalisable benefits are social. Wellington Airport suggests benefits including:

• Reduced travel time and cost for those in Wellington
• Makes travelers willing to bear greater landing fees, so can be fully internalised by the airport.
• Better exposure to international student market
• Possible, and harder for the airport to internalise. Note that much of this would be diversion from other NZ schools rather than a net increase in international student numbers. Wellington might not care about this, but it weakens the case for central government funding. 
• Regional tourism benefits
• Possible, and also harder to internalise. You can imagine mechanisms like local tourism operators paying for inclusion in a brochure handed out to incoming tourists, but that's pretty imperfect. 
• Better international freight options
• Should be fully internalised via landing fees.
• Increased local property values
• Um, no. This is one of the big rules in cost-benefit: you CANNOT count BOTH the increased benefits from an amenity AND the resulting increase in local asset values. That's double-counting.
• Easier for Wellington-based firms to work internationally.
• This would be partially internalised via landing fees paid by those firms, parking fees at the airport, and taxicab slotting fees, but only partially. 
• Reducing fares to Oz by allowing consolidation onto larger planes
• This should be fully internalisable via landing fees.
• Benefits to central NZ from increased tourism
• Again, be careful to assess things based on net likely increases in total tourism. 

It's rather harder for me to see a case for central government assistance, especially where many of the benefits to the Wellington region will be diversion from other parts of the country rather than net increases. Maybe there's a case based on expected national tourism risk from a spectacular Wellington crash, the risk of which could perhaps be lessened by an airport extension - or at least the linked article says so. But were I to be making a list of big lowish (but rising probability) costly risky things that could hit Wellington and for which the government seems inadequately prepared, well...

Comorbidity and costs

Another for the "underlying variables very likely cause both substance abuse AND negative outcomes" file, via +Ole Rogeberg . It appears that novelty-seeking and conduct disorder strongly predict future alcohol, tobacco, and other drug use among youths.

They suggest that early identification of those likely to be at risk and subsequent management of conduct disorders and of novelty-seeking behaviour might reduce the risk of substance abuse.

Behavioral or pharmacological treatment of disruptive disorders in children and adolescents is likely to have lasting effects across multiple disruptive psychopathologies due to the common thread that underlies ADHD, CD [Conduct Disorder], and NS [Novelty Seeking] — the inability to plan out actions, inhibit actions, and consider the implications of actions (impulsivity) (Miller, Stephen, & Tudway, 2004). For instance, preliminary findings from our lab recently determined that higher levels of CD and ADHD symptoms are associated with higher levels of initial sensitivity (e.g., subjective and autonomic experiences, such as reports of pleasure, liking the taste, nausea, heart rate) to alcohol and tobacco during adolescence, which suggests that these individuals may be primed to be more responsive to substances of abuse (Bidwell et al., 2012; Palmer et al., 2012; Wills et al., 1994).

Think back to how social cost studies tend to attribute the costs of substance abuse. They begin by defining as counterfactual the average outcomes for all individuals of similar age and gender; the monetised difference in outcomes between average non-abusers and substance-abusers is taken as social cost.

But those likely to become heavy substance-abusers would not have had average outcomes had drugs, alcohol, or tobacco never existed.

The relevant counterfactual group are those who were at similar risk of becoming substance abusers and who managed to avoid it. And even that will lead to overestimates because the general-purpose technology that lets those lucky individuals avoid substance temptations would itself drive outcomes.

It's entirely likely that substance abuse aggravates things for those with disruptive psychopathologies and that the costs they impose on others are consequently higher than they would have been. But substance abuse is only responsible for part of that cost - not for the whole she-bang.

It's also worth pointing out that this new study tilts the scales further in favour of Ole Rogeberg in his argument with the Dunedin folks about cohort selection effects. I still wish that Dunedin could be convinced to put up a GSS-style front end for their data so that other researchers could check results while not compromising privacy.

Spreading the burden

The Christchurch Earthquake has the government looking at earthquake standards for older buildings. This could all wind up being rather expensive.

A former adviser to the Reserve Bank and World Bank says the cost of bringing in tougher tests for earthquake-prone buildings would far outweigh the benefits.

Economic consultant Ian Harrison said he had analysed proposals put forward by the Ministry of Business, Innovation and Employment on building standards, and it showed the cost of the tougher regime would be 50 times the benefits.

In Auckland the cost was 1762 times the benefit.

So, how much strengthening is enough?

Let's start with an easy case: your own owned house set back in a yard. If you own the house and live in it, it should be your own business as you're bearing the risk. Maybe we can complicate it where we think that people are bad at thinking about these kinds of risks, but even then it's hard to make a case for doing anything beyond requiring engineering reports on the houses, putting the information on the LIM, and maybe putting a little warning sign at the door for houses found to be particularly risky so that visitors know what they're getting into.

Let's complicate it a bit. You have a two-story brick townhouse built abutting the sidewalk: if the facade comes down, your house will kill people. What standard should there apply? The people inside own the house and have come to their own assessment of the risk, but not so the people on the sidewalk. Or the people in buses traveling down the street beside it. Ideally, we'd want earthquake reinforcement up to the point where the cost of an additional unit of safety provided is equal to the expected cost of the risk imposed: the likelihood of the facade coming down multiplied by the damage done if it does. How can we set a rule that induces the appropriate cost internalisation? Here, I'd expect we do best by relying on insurance: require building owners imposing this kind of risk to carry liability insurance sufficient to pay the current value of a statistical life for each person killed by their building in case of earthquake. In a competitive insurance market, premiums for this policy will reflect the actual value of the risk imposed, and building owners will then have incentive to make improvements that are cost-effective. And given how insurers have behaved since the 2011 earthquakes, we'd likely need some very bright-line rules about which bits of sidewalk count as being which building's problem. We'd possibly also need stock and pillory for insurance officials wanting to spend years arguing the toss about whether a stone from one building is what pushed the victim into another building's zone.

Let's add a further complication: the house is heritage listed and the owners are prohibited from making improvements that would detract from the heritage amenity provided, or at least it's awfully hard. Upgrading these buildings isn't going to be cheap. Heritage amenities are real; there is a real case for local government subsidy of these amenities. But we really need to shift to having that amenity be guaranteed by annual on-budget payments going to those providing the heritage amenity rather than mandates around permissible building modifications.*

What about rental properties? There, I can see a decent case for requiring the engineering reports on suspect properties, along with mandates that a simple version of the report be made available to tenants about the property's real risks. It would certainly be the case that there would be some low-rent buildings that are pretty risky. But it would also be the case that the tenants there preferred living in the riskier building than paying the higher rent for an upgraded building: I'd be rather surprised if upgrading costs imposed on landlords through mandates didn't wind up being passed through as higher rents. It's easy to make the sad-story case of someone 'forced' by poverty to choose a lower quality rental building and how we need to consequently mandate tight standards, but solving that with building regs is just a form of trying to solve an income problem with a price control. If we cared about getting more lower-income rental properties to market, we'd be easing back on the zoning controls that inflate the price of land.

Commercial properties or those visited by the general public are a bit more complicated. The risks of entering any particular building are far from obvious. There are three basic potential approaches. We could mandate adherence to some standard. We could use a liability rule making the building owner liable for deaths caused by his building falling on those inside (requiring insurance sufficient to cover the liability, as suggested above for streetside homes). Or, we could inform those entering the building of the building's risk by way of "Earthquake Grade" signs mimicking the restaurant grades.

But standards are insufficiently sensitive to actual imposed risk.

And liability rules would prove really rather expensive for any building that often hosts a large number of people - it's very easy to imagine that many people would voluntarily, and in full knowledge of the risk, choose to enter a building that would have been demolished as too expensive to insure under a liability rule. We only want a liability rule where we think that people are incapable of making rational risk assessments when in possession of full information about the risks, or where it's exceedingly expensive to provide that information. But they should beat nation-wide regulation where different parts of the country have different actual earthquake risk.

Finally, I'd expect that locals would quickly figure out how much weight to put on Red/Yellow/Green-light earthquake risk signs. When I was up at a conference in Wellington last year, the building had a big "Earthquake risk" sticker on it. Had I known at the outset that the Law & Economics Association was choosing to host his event in such a place, I'd have declined to attend - I am rather disinclined to walk into any brick unreinforced building in Wellington barring very large side-payment. Online maps of earthquake building risks would quickly sort things out.

There's a good case for having liability rules or standards for buildings that the public is forced to attend by the state: courtrooms, prisons, public licensing offices and the like. We can't use a revealed preference argument around risk acceptance for those venues. But for other buildings where entry is voluntary, what's wrong with mandating signs advising the public that "Engineering assessment suggests this building has (very low, below average, average, above average, seriously high risk) of falling down in case of earthquake. Entry is at own risk."

I'd expect that optimal policy would mandate liability insurance for risks imposed on passers-by, regulation for buildings whose collapse would block essential traffic routes (or, equivalently, liability equal to the full actual cost imposed in such case, with insurance premia then doing the work), and warning signs for entry into buildings.

It would make me awfully sad if Oamaru's historic district had to be torn down to meet earthquake regs where Oamaru's actual risk perhaps isn't all that high. Competitive insurance quotes could sort that out more effectively than can nationwide regulation.

* And if you've not been following the utter madness in Christchurch, read this and weep. Because their destroyed house was in a heritage zone, all the heritage from which is now flattened and gone, this couple is banned from putting up the house they want on their property [article, editorial]. The planners won't revisit the heritage zone regs until 2014-2015. As for the dictatorship downtown...

The costs of everything... a continuing series.

The real cost of fiscal externalities running through the health system isn't the transfer from relatively healthy taxpayers to those choosing unhealthy lifestyles (and the otherwise sick), it's the cost we bear when we put too much priority on reducing that total health bill relative to other goals.

Recall that a fiscal externality is an effect I have on you by virtue of the tax system. If my behaviours affect my health, and even if I would have made exactly the same choices if I bore all of the costs of my own healthcare, I nevertheless impose a cost on you through the tax system. But as just about every choice you make has some effect on your health, the scope for individual autonomy is awfully limited in a world where we tried setting policy to minimise those behaviour-related costs. @LibertarianView provides a short list of things you might be doing that cost the UK's NHS money.

I fielded an email from the producer over at Freakonomics Radio who wondered if I knew of any studies of the aggregate cost of sex; Stephen Dubner had a pretty tongue-in-cheek proposal around it a while back. I didn't know of any. I hope that nobody took Dubner's proposal too seriously as I'm rather sure he didn't. But I suppose a study tallying the costs of sex, under an assumption that there'd be no loss of consumer surplus were it abolished, could be just the thing to make the whole "Costs of X" industry finally die of shame.

Insulation

I didn't know that the government commissioned work on the effectiveness of its Clean Heat programme which provided subsidised insulation. Arthur Grimes reports in the latest MOTU update that they matched treatment homes with a set of comparable control homes and ran difference-in-difference estimation on the effects. He writes:

The energy study showed that insulation treatment caused a statistically significant, but small (0.7%-1.0%) fall in metered energy consumption. The small drop in energy use is consistent with an economic model in which energy efficiencies were obtained from the insulation so that the effective price of heating fell, in turn resulting in increased consumption of heat (i.e. a warmer house). Greatest energy savings were experienced in cool areas. Measured energy use was shown to increase slightly with the installation of clean heat installation (no data were available on nonmetered energy use).

So free insulation will not help reduce energy demand: people respond to the reduced cost of heating by consuming more of it. This is worth knowing as some parties think that improved insulation is a substitute for greater generation capacity.

Health outcomes improved consequent to better heating. The MOTU reports found a 3.9:1 benefit-to-cost ratio, but that 71% of total benefits were from reduced mortality. As a public health intervention to reduce mortality, this could be fine. But it is hard to make a market failure case for the subsidy scheme.

Imagine two possible policies. Policy A gives cash to households and lets them choose whether to insulate their house with it; they're also given a pamphlet listing all of the benefits of insulation including increased life expectancy. Maybe it also has a nice narrative about how nice it is being in a warm house. There are lots of suggestions about how the money should be used for insulation, but it leaves the choice up to the household. Policy B gives a voucher for home insulation that can only be used for home insulation. If in the Policy A world households choose things other than insulation, can we really say that the the insulation subsidy programme passes cost-benefit analysis relative to the "give money to poorer households" programme? I don't think so.

Sure sure, there are other benefits where you could make a case: reduced hospitalisation and the like. But if 71% of the benefits were reduced mortality (ie reduced losses in VSL), then the benefit to cost ratio without the VSL gains drops to 1.131:1. And if people would demonstrate that they value other things by more than the VSL gains, it's hard for me to see the case for Policy B over Policy A.

Note: I've read only Grimes's summary and not the underlying work.

Kill all the kittens

Gareth Morgan wants to eradicate cats from New Zealand. His campaign website does a good job in describing the various evils cats perpetrate upon our ridiculously pacifistic native wildlife. But it's missing the first thing I'd have expected in a policy campaign coming from an economist: a cost-benefit analysis.

First, how much consumer surplus is generated by cats? It has to be pretty big. The New Zealand Companion Animal Council claims* that the 48% of NZ households owning at least one cat spend on average $838 per year on their cats. 1.419 million cats at $466 per cat is about $660 million spent on caring for cats. I don't know what the price elasticity of demand for cat ownership is, but aggregate surplus seems awfully likely to be big.

Second, how elastic are wildlife numbers to cats' presence? Cats kill a lot of things; they're awfully murderous. But if they weren't there, would native wildlife rebound, or would the population of other predators expand with the reduction in competition?

Finally, how much value do we really place on native wildlife? Sure, we get some existence value from the birds and lizards that cats eat, and it's nice seeing them and hearing them. But is it enough to trump the consumer surplus that people get from cat ownership? I don't know and neither does Gareth. But I'm not the one wanting to kill all the kittens.** Shouldn't we have to run a cost-benefit analysis before considering kitty genocide?

Gareth does recommend a few potentially useful things, like belling cats. I doubt that the cats who do the most damage would be the ones that are belled, but the proposal at least doesn't seem likely to do much harm. Another option: make your next cat a Persian. Our last one was so ridiculously over-bred*** that she could barely eat kibble, much less do any harm to, well, anything other than furniture, carpets, clothing, and my dignity.



* I have no clue how reliable their survey is.

** Ok, he isn't really saying we should kill them all, just that we should phase them out over time. But, still, I'm pretty sure that every time you drink a Coke, Gareth Morgan kills a kitten.

*** We got her from the Cat Protection League's cattery. Long story there. After we moved to New Zealand, Susan insisted we get a cat. I asked that it please please please not be another long-haired one. She sent me to the bank machine to get cash to pay the Cattery after we'd been looking at a nice short-haired one. When I got back, she'd signed all the paperwork for a defective Persian with a substantial underbite. The cat was lost eight years later consequent to the earthquakes.

Tax maximisation, smoking, and the Stalin Gap

If my lifestyle and leisure choices lead me to remit less to the government in taxes than I would have under alternative scenarios, have I imposed an externality on the State?

James Meanwell asks:

Eric, care to weigh in on a debate I'm having about this elsewhere? Specifically, does loss of tax revenue as a result of lower productivity (e.g. due to smoking, eating too much) count as an externality? I've argued that the government would have to be spending efficiently, which is unlikely, for the loss of revenue to count as an externality and so it probably doesn't (count). Not sure if that's right, but the notion (i.e. loss-of-revenue-due-to-lower-productivity-as-externality) seems odd to me.

I started replying to his comment, but reckoned it deserved its own post.

Let's start with the big picture and work down to details.

Consider two people, alike in relevant ways at age 10 and equal in earnings potential, but with different utility functions. So they make different choices.

Mr. A decides that the rat race isn't for him and decides instead to take a part-time job at 20 hours per week instead of 40. Were he to have worked a full time job, his earnings would have doubled and, because of progressive taxation, his tax payments would have more than doubled. But he's not on welfare; he just can transform relatively little income into a fair bit of happiness because he really likes leisure.

Mr. B does not enjoy sitting idle; he consumes his leisure by smoking while working a full-time job. Associated health issues reduce his productivity and, as consequence, he earns a quarter less than he otherwise would; his tax payments are then perhaps a third lower than they otherwise could have been. Other sources have a lower wage penalty for smoking; we'll stick with a big one for present purposes.

If Mr. B's lower tax payments because of his choice to smoke are of policy consequence, then so too are Mr. A's lower tax payments because of his choices. Indeed, we could say that Mr. A is far worse than Mr. B: while Mr. B pays, in New Zealand, about three times as much in tobacco excise as he'll cost the public health system and is so kind as to die before costing the superannuation system very much, Mr A pays zero tax on his leisure and will earn two-thirds of the national average wage in his retirement despite having contributed relatively little to the superannuation system.

If we need to use policy to nudge Mr. B into smoking less, because of reduced tax earnings, then we also need to nudge Mr. A into working harder. And when nudges don't work in tobacco and start becoming shoves, we need to start shoving Mr. A as well.

Mancur Olson argued that Stalinist Russia had the world's most effective extractive tax regime. Workers were effectively compelled to work by near complete inframarginal taxation combined with very low taxation at the margin. If Stalin had had the ability to solve the Socialist Calculation Problem, he could have done slightly better, leaving each worker with an individualised menu of two choices: starvation, or a personalised bundle of very hard work and some goods leaving the worker epsilon better off than under starvation. I suppose that we could consider any deviation from that level of work as a harm imposed on the state. But it's only Stalin who'd really want to push there.

The Okun Gap is the difference between potential and realised GDP due to excess unemployment. I'll call the Stalin Gap the difference between an individual's potential maximal tax payments and his actual tax payments based on his choice to consume leisure over labour - partially because he would choose some leisure even in the absence of taxes, partially because too high of income tax rates yields substitution to leisure.

Most of us could earn more, and consequently submit higher tax payments, by choosing more labour and less leisure. But we'd be less happy.

So that's the big picture: the world in which the smoker's lower income tax payments (ignoring his much much higher excise tax payments) are sufficient basis for taking away his leisure is one where we want to penalize people for taking holidays or failing to work as many hours as they otherwise could: closing the Stalin Gap. Unless we say that leisure via time off relaxing is, by assumption, good, while leisure via smoking is bad - but that remains question-begging.

Smaller picture: is this even an externality?


Short answer: likely, but likely very small, and that small portion mostly because of how the tax system treats poor people.

All right. An individual chooses between smoking, leisure and labour. In a world with private health care and no taxation, the individual optimally balances health harms from smoking against enjoyment of smoking - he earns less because he smokes, but that's just part of the full cost of tobacco that he enters into his optimisation. All you behavioural guys who want to complain about whether he can be rational or informed on this can shut up for the moment - we're trying to figure out whether he's imposing an externality on the government once we move to a tax regime, so the behavioural stuff is entirely beside the point.

Some optimal level of smoking will be found above. What happens when we add taxation and government? The smoker will bear fewer of the wage costs of smoking because the government takes a portion of his earnings and so he should optimally smoke more. But again, the same is true of the individual's choice to consume other forms of leisure in the presence of income taxation. Recall that in economics, we don't care about externalities because of pecuniary effects like "the government gets less in tax". We care about them rather because they distort choices: people move from taxed labour to untaxed leisure in the presence of income taxation. The incremental increase in smoking when the returns to labour drop under a taxation regime can be viewed as a distortion. But, again, think of anything that helps increase the marginal utility of leisure. In a world with taxes and government, people choose more days off playing cheap but excellent video games relative to the zero-tax world. What then is the productivity cost of video games? Or of any other kind of leisure? It's hard for me to see any productivity externality of smoking that is different in kind from any other labour-leisure distortion generated by taxation. And it would take some number crunching to show that the technological portion of any effect* here isn't already over-internalised by current levels of tobacco excise.

Gordon Tullock reminded us in 1998 that government produces externalities as well as solving some externality problems. The vast bulk of reduced income taxation accruing to government due to smoking could only be remedied by imposing harms on smokers that are larger than the potential gains to government. Now, if you want to assume that smokers are irrational and hurting themselves by their choice to smoke, you can do that, but you don't really need the effects on income taxation to make the case.

Recall that smoking is concentrated among poorer cohorts and that marginal tax rates, though not average tax rates, are very high for the poor. If the deadweight costs of high marginal tax rates are making poor people smoke more than they otherwise would because the personal income losses are low, they're probably also screwing up a whole lot of other choices that are of greater consequence as well. If you're going to worry about it, start by trying to fix the tax schedule and abatement rates for the various income-contingent benefits so that the effective marginal tax rates facing poor families are not insanely high.

The Ministry for Social Development noted that 35% of beneficiaries (people receiving benefits other than just Working for Families, NZ's EITC) in paid work in 2008 enjoyed effective marginal tax rates higher than 75%, with some non-beneficiary low income families enduring abatement of the minimum family tax credit facing EMTRs over 100%. MSD concluded dryly, "Work incentives are very low for such families".

Effective marginal tax rates in excess of 75% are very likely to induce all sorts of very real distortions in behaviour; I expect the decision to smoke incrementally more because of reduced returns to wages is pretty trivial in this mess.



* Again, we don't care about externalities that are pecuniary. Imagine that the smoker smokes exactly as much under a tax regime as under a no-tax regime. The government earns less than it would were the smoker a non-smoker, but this is purely pecuniary: the gain to the government by forcing him to quit would be overmatched by the losses experienced by the smoker. The only portion that can matter for welfare is the excess smoking induced by the lower return to labour under the tax regime. And that's unlikely to be large relative to the amount of smoking that's invariant to income tax rates.

Social Costs of Healthy

Chris Auld was prescient. If we require corrective policy to internalise pecuniary costs running through the public health system, then we have to do it across the board. And what if it turns out that healthy people wind up costing more because they have a longer retirement in which they consume lots of subsidized health services? He wrote:

If healthy behaviors wind up increasing lifecycle health care costs, we should either subsidize less than we otherwise would, or perhaps even tax, healthy behaviors. Healthy behaviors in this scenario benefit the person exhibiting the behavior but impose costs on everyone else, and this logic demands that we discourage healthy behavior relative to whatever policies we would otherwise have enacted.

This argument does not sit well with me.

A new article in PLOS Medicine finds that the lifetime health costs of the healthy are indeed highest:Non-smokers of moderate BMI imposed the highest lifetime costs. [HT: @Dick_Puddlecote, who points to the Telegraph's report on the study.] Update: I'd missed the date on the PLOS online study; it's from a few years ago. So Auld's prescience may have been overstated. Thanks to Chris Snowdon for the correction.

From the article's conclusion:

In this study we have shown that, although obese people induce high medical costs during their lives, their lifetime health-care costs are lower than those of healthy-living people but higher than those of smokers. Obesity increases the risk of diseases such as diabetes and coronary heart disease, thereby increasing health-care utilization but decreasing life expectancy. Successful prevention of obesity, in turn, increases life expectancy. Unfortunately, these life-years gained are not lived in full health and come at a price: people suffer from other diseases, which increases health-care costs. Obesity prevention, just like smoking prevention, will not stem the tide of increasing health-care expenditures. The underlying mechanism is that there is a substitution of inexpensive, lethal diseases toward less lethal, and therefore more costly, diseases [9]. As smoking is in particular related to lethal (and relatively inexpensive) diseases, the ratio of cost savings from a reduced incidence of risk factor–related diseases to the medical costs in life-years gained is more favorable for obesity prevention than for smoking prevention.

Here's the graph of the expected costs and benefits of smoking and obesity prevention, imagining a costless intervention that would switch the obese or smokers into normal-weight non-smokers. For the first few decades after the assumed-costless intervention, all's great. And then...

If it were free to turn smokers into non-smokers, and if we ignore tobacco excise revenues entirely, they say the costless intervention only passes a fiscal cost-benefit analysis for discount rates higher than 5.7%. If we remember that tobacco excise revenues are heavily front-loaded, being paid often decades before the health costs obtain, then you're not going to find a discount rate where the costless intervention saves the government money.

They warn that they've only focused on health care costs and have left aside productivity costs. But the bulk of productivity costs are borne by the drinker, smoker, or eater himself: they're reflected in lower wages.

Smokers remain the benefactors of the rest of us - voluntarily paying ridiculous levels of tax and then dying before taking much out of the superannuation system.

It's a mistake to model governments as unitary agents. The zealot parts of government want to ban tobacco; the sane parts worry about revenue consequences. I wonder, as does Lionel Shriver, whether worries about lost excise motivate government antipathy towards electronic cigarettes. The zealot side of government doesn't like them because they let smokers keep having fun without moral consequence; the fiscal side doesn't like the lost revenue: bootleggers and baptists in different government departments.

Meanwhile, the British Labour Party contemplates bans on sugary breakfast cereals. I agree entirely with Alex Masse's piece at the Spectator. Alex writes:

Yet one of the features of our society is the steady accumulation of influence – and increasingly of power too – of what might be termed the Government-Health-Security Complex*.

Sometimes slippery slopes really do exist. Some folk warned that the public health industry – that is, the Government-Health-Security Complex – would never be satisfied with its battles against tobacco and alcohol and that it would, in time, launch fresh offensives against fast food, soft drinks, and all things salty an sweet.Don’t be silly, we were told. That’s different. Well, who looks stupid now?

Like so much else this is also, in the end, a question of power and class. The NHS – treated as some kind of secular religion – is to be used as a means of shaming the population (especially the bestial lower orders) into behaving in a more comely, acceptable fashion. The class prejudice inherent in all this is rarely far from the surface. The common people are revolting. Their pleasures must be taxed or, wherever possible, suppressed entirely (see extending the ban on smoking in working-class clubs for example).

And, always, the message is simple: the people – poor, lardy, wheezing, sods – are too stupid to make their own choices and it is government’s role to save them from themselves.

Next step then is plain packaging for breakfast cereals....

Matters of Substance

I provided a short review of the literature around alcohol's J-curve for the New Zealand Drug Foundation's "Matters of Substance". I've previously been critical of the Drug Foundation's take on the J-Curve; it's been great that they've noted the evidence from this side.* There are some other great pieces in this month's issue. Their Mythbusters column checks whether drinking really can help us to forget. And they also look at the ongoing costs of New Zealand's war on marijuana.

Australasian Science Magazine asked me to contribute a short piece for their Conscience column; it was in the November issue. With their permission, I've embedded a scanned version below.The ethics of modelling costsEnjoy!

* For more extensive takes on moderate drinking and health:

• Moderate Drinking and Health
• The J-Curve
• The J-Curve: Science versus Politics
• Saying it again, louder
• Results I don't fully believe
• How do I love the Ministry of Health?
• And MoH responds
• More on moderate drinking and health

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.

I hate economic impact numbers

What the heck is "economic impact" even supposed to mean? Seamus keeps wondering if it wouldn't be fun to set an honours project asking "To what relevant economic question is "economic impact" a useful answer, if any?"

My main reason for hating them is that they're so awfully abused by the press. It's hardly the press's fault though - if we as a profession keep producing these figures without adequately explaining (or understanding, in some cases) what they are, they'll keep abusing them.

Today's example, highlighted by Matt at TVHE: a $200m estimated "economic impact" of health disparities between Maori and Pakeha New Zealanders gets turned by the journalist into a cost to taxpayers.

The University press release:

Avoidable deaths of Māori children in New Zealand are costing the country at least 67 lives and around $200 million per year in economic impact, but greater Government spending on primary care and other key interventions could help to resolve the problem, health researchers say.

The journalist version:

The public health physician said 67 Maori children died avoidable deaths every year, costing taxpayers $200 million annually.

Ummm, no. Unfortunately, the Auckland University press release is about as unhelpful as possible in letting any journalist sort this out. Why? Not only do they fail to link the article, they also fail to name the journal: the study was "published in an international public health journal".

If you search through PubMed on the two authors' last names, you can find the article. It's here. But little chance a journalist will have time to do that.

What do you get if you read the article? Here's the results brief at the start:

Preliminary estimates suggest child health inequities between Māori and non-Māori in New Zealand are cost-saving to the health sector. However the societal costs are significant. A conservative “base case” scenario estimate is over $NZ62 million per year, while alternative costing methods yield larger costs of nearly $NZ200 million per annum. The total cost estimate is highly sensitive to the costing method used and Value of Statistical Life applied, as the cost of potentially avoidable deaths of Māori children is the major contributor to this estimate.

So both the press release and the journalist's piece ignore that Vaithianathan and Reid produced a range of estimates with a $200m upper bound rather than a point estimate around $200m. And, the larger number relies on VSL measures. What's a VSL measure? The intangible costs of a premature death. That's only a cost to the taxpayer in the rather indirect sense that the people who are sad when someone dies prematurely may also be taxpayers, and that some of the VSL measure could be viewed (given how NZ's VSL measure is constructed) as partially being due to that premature deaths are tragic for the family. And, worse, the University press release cites the deaths as though they were something not included in the $200m.

There's other weird stuff in there. There's a measure of time out of work for grieving parents that's based around the median wage rate, but if the whole darned story is about the costs of poverty among Maori in terms of premature mortality, it's just a bit odd to use the median wage rate. But I'd hardly expect a journalist to pick that up.

Why oh why can't university press offices pumping published work done at their schools link to the darned paper and write things that won't be misinterpreted by journalists? Are they trying to confuse people? I could understand it if the article were behind a ton of subscription gates, but this one's free access.

Can we just ban economic impact studies? It's almost inevitable that the things get misinterpreted like this. And they then do far more to confuse than to illuminate.

Costs to the taxpayer of $200 million.... How long 'till somebody cites this in Parliament as a cost to the tax system? Any bets?