Information failures and risky buildings

There's a trade-off when government agencies disclose known risks. Take, for example, AIDS disclosure laws. Some US states require that partners or others likely to be at risk from a patient testing positive for HIV;  others fear that the effect of such disclosure laws is to induce those at risk to avoid being tested. I've certainly not seen any data sufficient for running that cost-benefit analysis,* but it's plausible that either regime could be the correct one.

Wellington Council has a list of buildings sharing the same design flaw as the collapsed CTV building in Christchurch. But they won't tell anybody which buildings are on that list. Is this likely to be efficient? It depends on how Council knows and what they do with the information. If these kinds of flaws get found when Council officers dig back through the old building plans, then there's little risk that disclosure induces building owners to hide flaws. If they're found instead when owners inform Council, then disclosure could induce owners to keep quiet. So, in the former case, disclosure makes sense. In the latter case, it's a trade-off. Whether it makes sense to keep things quiet then depends on the number of owners who would likely be deterred from revealing risks in the disclosure regime and on whether Councils actually do anything to ensure that risky buildings are made safe. If buildings of that sort fall under the usual "you have 30 years to fix it" rule, then it seems unlikely that we're doing much good by keeping things quiet. If they're working towards much quicker repairs of disclosed faults, and if we think that tenants would overreact to the risk disclosure, and if we think that building owners would hide faults in a disclosure regime, then perhaps non-disclosure makes sense.

I'm inclined to agree with NoRightTurn that the case for disclosure seems strong - and especially since the justification seems to be to avoid imposing losses on the owners of risky buildings rather than to avoid that other owners notify Council of building deficiencies. But I'd reverse that call if it turned out that Council were really pushing to get this fixed and if there were substantial risk from unknown building flaws that would fail to be notified under a disclosure regime.

* This state-by-state variation seems eminent fodder for empirical work on the effects of disclosure laws on testing rates. File under "future honours projects" if it's not already been done.

Standards shopping

Small jurisdictions have a hard time covering all the bases. Developing regulations is expensive. If you're determined to have "My Jurisdiction" versions of each and every regulation that could be out there, you're either going to have a ridiculously expensive regulatory regime or you're going to stymie development in niche markets.

Yesterday I pointed to the problems facing Manitoba's Harborside Farms. They want to develop traditional Italian cured meats in small artisanal batches for sale in Manitoba. But they're forbidden from doing it because, unless you can prove your product meets Manitoba regulations, you can't sell it. And it's a sufficiently small market that Manitoba never got around to writing any regulations that would allow them to operate.

Leaving aside for now the very sensible alternative of simply allowing standard consumer protection legislation and liability solve this kind of issue, there's an obvious alternative. Let them produce their product under the Italian regulations, then have Manitoba inspectors verify that they've met the Italian standard.

The problem is very similar to one facing importers of niche-market DVDs in New Zealand. How? You can't sell DVDs here unless you get them rated by the Censor's Office. And they don't rate DVDs for free. If you make a buck a piece on the sale, you'd still need to ship a thousand units in a country of four million people (and change) to cover just the ratings cost.

The solution there is the same as that which should obtain for Harborside. Allow import of films that have been rated by the Australians, or the Canadians, or the Brits, or the Americans, or some other set of trusted countries, and simply require that the ratings sticker note the country which issued the rating.

This kind of solution can be applied across rather a few thin-market small-jurisdiction scenarios. Why does every small area have to reinvent every wheel?

Take it a step further. If Manitobans can import Italian-made products meeting Italian standards, why shouldn't they be able to produce things in Manitoba to Italian specifications, even if a Manitoba regulation does exist? Simply require that the product be labelled as meeting Italy's standards.

Maybe it wouldn't work for everything. A building that meets Canadian building standards instead of New Zealand standards would be better than a New Zealand standard building, unless there's an earthquake. But again, it isn't hard to imagine strange niche construction areas where there might not be domestic specifications, but where the Japanese standards would work a treat.

The fixed costs of developing regulations aren't trivial. Why not allow a bit of forum shopping to spread the burden?

Earthquake-prone buildings

Owners of earthquake-prone buildings now have a bit more time to bring them up to spec. The owners are mad because they say it isn't long enough; people who experienced Christchurch are mad because buildings will still fall on people and kill them in another quake. They could both be right.

It is perfectly plausible that there are buildings that need never be compelled to be brought up to 33% of new building code. Imagine a building in the middle of nowhere, with no nearby pedestrian traffic, and occupied only by those who know about the risk or who are well-advised about it by a sign at the doorway. There is no reason for the government there to get involved, or at least no reason that comes from economics. People can trade off cost and beauty against risk - that's allowed. And so a national rule that forces the owner of such a building to make costly investments to bring it up to code imposes cost in excess of benefit. The owner either will sink money into the building where it isn't warranted, or he will demolish the building that he otherwise would prefer to keep.

On the other hand, imagine a building in downtown Wellington with an unreinforced masonry facade. Everyone in the building knows about the risk and accepts it in exchange for lower rental rates or enhanced amenities on other margins. And that's all fine. But passers-by on the sidewalk and buses driving by on the street have uncompensated risk forced upon them. While the owner will there rightly claim that it does not pass his cost-benefit analysis quickly to bring the building up to 33% of code, he is not accounting for the costs he is imposing, probabilistically, on every passer by. It can easily be the case that, when accounting for the risk of death he is imposing on each person walking past his building, upgrading the building or demolishing it would pass cost-benefit. But he does not care about the costs imposed on others. The new rule is too lax in this case.

What then is an optimal rule? We'd need some way of accounting for the true risk that a building imposes. That risk depends not only on structural features of the building but also on the building's surroundings. And it would be pretty hard for central government to be able to come up with a clean rule. As we saw in Christchurch after the September quake, City Council had a rule in place requiring the closure of footpaths adjacent to risky buildings; Council interpreted the rule in perverse ways. Instead of blocking busy Colombo Street, Council decided that the engineers must have meant that 605-613 Colombo imposed risk instead on tiny alleyway beside the building. And then the building fell on a bus and killed a bunch of people and left Ann Brower to work out the series of spectacular regulatory failures that led to her being the only survivor on that bus.

There's an easier way. Honestly, we do not know when another quake will come or which buildings will collapse. Engineers can put up widely varying assessments of the true structural risk imposed by a building. What do we do when faced with this kind of uncertainty? Impose a liability rule. Instead of giving building owners 15-20 years to get their buildings up to 33% of the new building code, give them five years to get an engineering assessment, to put a safety letter grade prominently at the door, and to get liability insurance. At the end of the five year period, have every building owner liable for damages for every person killed or injured if their building falls down on passers-by. There should not be liability for deaths and injuries incurred by persons inside the building: we can and do voluntarily assume some risks, and we should not prevent people from taking on those kinds of risks. But if your building falls down and squishes a bus, you should be liable for the deaths of each of the people inside of that bus.

The Ministry of Transport currently sets the Value of a Statistical Life in New Zealand at $3.77 million. That's arguably too low, but it's a great benchmark: arguing about $3.77 million versus the $5 million or so you'd get from a back-of-the-envelope application of revealed-preference measures from the United States to New Zealand, accounting for the income elasticity of safety preferences and differences in income across the two countries is second order. First order is getting a consistent benchmark across different regulatory and liability sectors.

A building owner potentially liable for $3.77 million in damages paid to the estates of those who his building kills will adequately take their interests into account in deciding whether to fix up his building. It would not be that hard to require that building owners carry insurance sufficient for paying such liability claims, or to prove assets sufficient for covering the potential liability. If you've got a building in the middle of nowhere with no passers-by, your insurance premiums will be very small. You then will make the optimal choice and not upgrade your building. If you've got a brick-facade building in downtown Wellington, you'll have to weigh up the costs of insurance against the cost of fixing the place up.

Right now, we are in the worst of all possible worlds. Building owners face neither liability for the risk their buildings impose on those outside their buildings, nor any sufficient regulatory regime to ensure that owners are making appropriate investments in ensuring that their buildings do not impose excessive risk on passers-by. This is why Wellington scares the hell out of me. It's pretty, and I love seeing the old buildings that we no longer have, but they terrify me. I have absolutely no confidence that even really rather dodgy buildings are getting the attention they deserve.

Were the Government to have any interest in implementing a regime such as that described above, I'd recommend one further change. Flip the heritage building regulations around such that heritage boards have zero regulatory power but instead get an annual budget. Owners of risky heritage buildings should be free to demolish them if that's what make sense, given the risk they impose and the cost of upgrading them. Heritage boards' main role should be the payment of annual stipends to owners of heritage buildings for the provision of heritage amenities. Give them a generous budget, funded partially by local Council, partially by central government, and with ample provision for voluntary donation from the public. Let them decide, within that budget, where they can do best by spending money. And then just let go of the rest.

I will absolutely hate saying "I freaking told you so" after Wellington gets a big quake in which unreinforced masonry winds up killing a bunch of people needlessly.

And, in anticipation of the likely critique: yes, I am here absolving building owners from liability for those who chose to be inside their buildings. But current policy absolves them of that liability for those both inside and outside.

Previously:

• In praise of liability
• Worst of both worlds
• VSL and earthquakes
• Heritage preservation

Advertising freedom

Simon Wren-Lewis argues that tobacco plain-packaging mandates may be freedom-enhancing. He writes:

So we have individual freedom, interference, and crucially motivation. Advertising is usually portrayed as just providing information so that consumers can make informed choices. Sometimes it may do that. But advertising is often about suggesting associations, which provide no information at all. It is a mild form of brainwashing. Most of the time it is simply annoying.

For some, the information provided by some advertising might be useful. For most it is not. We can try and avoid advertising if we do not want its ‘information’, by turning the page, recording the programme and fast-forwarding through the adverts, averting our eyes, but this requires effort. Why should I have to make that effort? So for most people most of the time, it is advertising that mildly interferes with our freedom. (If I wanted to be clever, I could say that companies who advertise believe their product makes consumers better off, and therefore it is advertising that is paternalistic. However companies advertise to increase profits, not to increase consumer utility.)

So a government that prevents advertising can be seen as allowing individuals to make their own unencumbered choices. It is giving us a little more freedom and autonomy, rather than limiting it. The argument for advertising has to be that the benefits to the few in getting useful information outweighs the costs to the many in either avoiding it, or getting information they do not want. It is not paternalistic to ban advertising, just as it is not paternalistic to stop people being stalked.

Wren-Lewis is right about a few things, but I do rather disagree with him about the bigger picture here.

First off, we do indeed have plenty of models where advertising plays both informative and persuasive roles. And it is completely sane to model cigarettes as a Lancaterian good with a bundle of characteristics ranging from physical attributes like taste and burn intensity to more nebulous things like image and affiliation.

Brand affiliation for many goods is less about the physical merits of the product than it is about self-identification and self-expression, as Cass Sunstein nicely laid out a few years ago. Policies like plain packaging, that work to destroy the affiliative value of brand choice, could plausibly affect smoking rates. Similarly, a proponent of enhanced fuel-economy could insist that cars getting less than, say, 30 miles per gallon be subject to "plain car" regulations such that they had to be painted in beige, have horns that shouted "I hate the environment and probably am compensating for something" instead of beeping, and have some minimum designated asymmetry - for example, the left headlight would have to be twice the size of the right headlight. People would then be "nudged" into choosing the "right" car. On plain packaging, it's still not clear to me that the policy doesn't just push smokers to discount brands, but I suppose that the Australian data will tell us in a couple of years.

Tobacco branding and packaging is then akin to a Jaguar's sleek lines and beautiful rich colours. If Wren-Lewis wants to say that I'm brainwashed into thinking that an E-series is more beautiful than a Honda Insight, well, I'm not sure how I'd disprove that. I'm not sure he's offering a testable hypothesis there. If we stuck an Insight's body over a Jaguar's frame and engine and proved people liked it less, that's hardly evidence of Jaguar's brainwashing. We're doing more than just affecting irrelevant cosmetic or advertising details: the style is part of the product.

I disagree rather more substantially with the rest of his post. Wren-Lewis asks why the burden should be on him to avoid advertising in magazines by turning the page. The standard answer that any microeconomist would provide him is that the provision of advertising reduces the price of the magazine. Because most consumers prefer buying the bundle of "content plus advertising" at a lower price rather than content-only at a higher price, that's what's provided. At least for most publications. Switching to a "ban the advertising" equilibrium would have Wren-Lewis, and people like him, imposing costs on people like me, who are happier to have advertising and pay the lower price. How do we know which state of the world is better? Aggregate willingness to pay. Profit-seeking publishers weigh up how much they'll irritate Wren-Lewis and lose his custom against drops in profits where people like me are more sensitive to prices than to advertising. That publishers are profit-seeking rather than consumer-surplus-maximizers doesn't really wreck this result.

I'd thought this was pretty standard micro-theory. I don't get why Wren-Lewis gets to decide that the only permissable function of advertising is information-provision. In that world, we would discount to zero the utility that sports-fans get from seeing the affliative persuasive advertising for their preferred team - ads that focus on the team's logo, its chants, and perhaps some unrepresentative action shots.

Further, Wren-Lewis later argues that "the information content of the 'plain packages' [dominated by graphic ugly images] is clearly much greater than packages that were dominated by a logo. So this is one example where the information content of advertising does dominate any reduction in freedom that the advertising entails."

Suppose that smokers do find the packages dominated by big ugly warning pictures are less attractive. Is this evidence of the information content of the packaging having dominated? Hardly. Imagine that Australia had decided to run a different version of plain packaging in Tasmania. There, cigarette packages would have graphic images of slaughtered and injured animals instead of diseased lungs. There is no informational content in such images, but they are disturbing and work to break the affiliative brand utility. Like putting a Jaguar into an Insight's body.

For true paternalists, none of this matters: they know that less smoking is better for you even if you think you like it, so it doesn't matter what the mechanism is so long as it works. For those who at least still nod in the direction of revealed preference and of de gustibus, consider the uglification experiment I propose. Is it really more plausible that Oz's plain packaging regs work (if they do work) through an informational channel, or that they simply destroy part of the product's real value and thereby discourage consumption? And if you want to say that the value provided by beautiful packaging and brand affiliation is not real, think through the consequences of that position more consistently.

HT: Dick Puddlecote

CAFE kills?

American fuel economy standards have a bunch of offsetting effects. If you're going to be in an accident, you're safer in a bigger vehicle, but you're also increasing the risk for everyone else. Tightening the fuel economy regulations then have ambiguous effects: do they save more lives by reducing deaths caused by those in SUVs, or do they kill more people by ensuring that more who are involved in accidents are in smaller vehicles?

Mark Jacobsen runs the numbers.

I estimate the fleet-wide impact of historical CAFE rules to be 149 additional annual fatalities per mile-per-gallon (MPG) increment in stringency. In this case, the shift to smaller vehicles within the car and light truck categories prescribed under CAFE causes deterioration in safety that is only partially offset by reductions in poorly matched accidents. The safety effect translates to a welfare cost of approximately 33 cents per gallon of gasoline saved.⁵ In the context of related environmental externalities, damages of $25 per ton CO₂ amount to 22 cents per gallon of gasoline, and Parry and Small (2005) report costs from local air pollution of about 16 cents per gallon.

So tightening the regs by one mile-per-gallon costs $0.33 in lives lost for every gallon saved while providing $0.38 in reduced pollution for every gallon saved. Pretty close to a wash if we think that the regulations themselves are costly.

He estimates the effects of an alternative policy bringing all vehicles under a single unified standard and reckons that tightened fuel economy standards under that form of regulation come with approximately zero cost in terms of lives lost: drivers of light trucks substitute into safer cars.

Even better could be abolishing CAFE entirely in favour of a petrol tax. CAFE standards only make sense relative to a petrol tax where consumers are particularly myopic and ignore the future petrol costs when buying a thirsty car. They aren't.

Industry welcomes regulation

A first hint that your regulation regime helps create a cartel is a strong endorsement from the regulated industry. It's not always so - sometimes industries welcome things that are less bad than they'd otherwise expected. But still.

Auckland's requiring licences to run suntan beds.

Auckland will be the first city in the country to license sun beds and slap an age restriction on their use.

Auckland Council will require commercial sun-bed businesses to be licensed and comply with a new code of practice including restricting use to those 18 years and over.

The requirements are part of a new Health and Hygiene Bylaw passed by the super-city council's Governing Body today that will replace those of the seven former councils from July 1 next year.

But wait, there's more!

Also caught in tightened health laws will be any businesses that "risk breaking the skin" - such as hair removal, manicure/pedicure and exfoliation.

Licences will be required for commercial services that pierce the skin such as body piercing, tattooing and traditional tattooing.

Traditional and non-commercial ta moko undertaken by artists on, or under the authority of, a marae in the Auckland region would be exempt.

"Licensing gives us a method to monitor areas where we believe there is the highest risk to peoples' health through poor practices, while the code of practice gives the industry a good guideline of what is acceptable," Quax said.

I hope that all of this sticks to very general sanitary code kinds of rules rather than processes that add substantially to small businesses' fixed costs.

These kinds of occupational licensing rules have completely run amok in the US. Let's not import this particular kind of stupidity. We don't really need big barriers to entry for immigrants setting up pedicure shops.

Unintended but predictable

Two years ago, the government proposed banning the import of used cars failing to meet the Japan 05 standard. This effectively banned the import of a large chunk of Japanese cars that, while old, were newer than the New Zealand fleet median age.

I expected that this would wind up encouraging those with older cars to hold onto them for rather longer, as relatively newer substitutes would become more expensive. Whether this wound up increasing or decreasing the average fleet age depended on how many held onto those older cars relative to the number who moved to buying rather more expensive newer cars instead of the 1998-2005 Japanese imports that had been pretty popular; that in turn would depend on the price effects. The regulation looked like it would wind up being pretty binding, at least for the first few years.

The New Zealand Herald now reports:

New Zealand car owners' reluctance to dump their old bangers is contributing to a growing national car fleet and making the roads less safe, the Motor Trade Association says.
...
Association spokesman Ian Stronach said it was the result of the large number of 1995 - 1997 registered used import cars which flooded into the country during the early 2000s. "Most of these cars are still being used and skew the age profile of our car fleet. Today, the average age of New Zealand's car fleet is 13.8 years; that is old by world standards and probably beyond the original design parameters of some models."

The average fleet age in 2010 was 12.88 years. So, since the regulation change, the average fleet age has worsened by a year. It would take more work to show that the change is due to the regulation, but we can say that the change is consistent with my prior "unintended consequences" hypothesis.

Shirking air traffic controllers

It sure sounds like it would improve safety. Everybody knows that being an air traffic controller can be pretty stressful. All those planes up there, have to keep them from bumping into each other. So it just makes sense that you'd want to provide stress leave for those controllers who are obviously suffering, right? What could go wrong?

Doug Allen, currently visiting at Canterbury's Economics department as Erskine Fellow, points me to this classic 1982 piece in the American Economic Review.

The Federal Employees' Compensation Act (FECA), which provides income insurance for government workers injured or disabled on the job, changed in 1974. Employees with at least one dependent would receive 75% of their base salary as tax-free compensation if out on leave. Because air traffic controllers earned a lot, their net take-home pay was higher if they were out on disability. On-the-job stress is pretty hard to disprove.

FECA amendments in 1974 let employees submit evidence from their private clinical psychologists as evidence of disability; prior to that, the government selected the doctor. And, unlike things like "leg cut off" where most doctors would agree, it's harder to verify whether any doctor's diagnosis of stress is all that valid. So Staten and Umbeck predicted that we'd see the most action post-FECA change in claims for non-verifiable things like stress.

They also note that OWCP examiners, who check the veracity of claims, were told to check for specific indicators of on-the-job stress. Deterioration in job performance over time counts. And everybody's monitoring air traffic controller performance all the time, making sure that planes don't get too close together.

So what happens? After the rule change, a bunch of air traffic controllers figure out that they can earn more by demonstrating on-the-job stress, choose times of the day when it's safest to breach minimum separation between aircraft so there aren't actual collisions, and encourage planes to get just close enough to each other to trigger their near mid-air collision sensors. Controllers with more experience have much stronger incentive to do it, as the compensation is based on the employee's salary, and there's a reasonably steep salary progression. Before the law change, inexperienced staff and those with more than 10 years' service (actual burnout) reported the most 'system errors' (violation of separation rules). After the law change, those with 5-10 years' service started experiencing the most system errors.

They conclude:

The steady increase in controller compensation awards and retirements during the 1970's has been cited recently as evidence of stress in the occupation. However, it seems clear that this is in large part a product of making compensation and retirement less costly to obtain. Concern has also been expressed over the relation between job pressures placed on controllers and aviation safety. If one is willing to take reported System Errors as a measure of workforce efficiency, it is clear that measured efficiency deteriorated following the FECA amendments, but not because of traffic increases or equipment failures. We have argued that in attempting to formalize the criteria for adjudicating controller psychological claims, OWCP created an incentive for controllers to demonstrate deteriorating performance. 

We have attempted in this paper to constrain theory of shirking behavior to generate refutable propositions. The methods described in the paper can be employed in the investigation of any type of contract. However, the nature of the FECA provisions and the air traffic control profession provided the elements essential for demonstrating the effectiveness of this approach. That we chose air traffic controllers in particular is, of course, no reflection on the integrity of the profession. The maximization postulate upon which micro theory relies leaves no profession exempt from marginal responses to gains from shirking. We offer this study as a demonstration that economics as a behavioral science can provide useful insights into behavioral patterns likely to result from incentives to shirk.

In later work, they show that air traffic controllers became a lot more likely to do this kind of thing after finding a doctor who's willing to certify stuff as being stress-related.

Regulations should always pay some heed to that people respond to incentives.

That supply not enter the market

In response to a few attacks on taxi owners, New Zealand three years ago started requiring that all cabs have cameras and be on 24-hour monitored dispatch.

I expected that this was a move towards cartelization that would have bad effects on consumers. I'd written:

The real cost of the soon-to-be-mandatory taxicab cameras won't be the 30-odd cents it adds to the cost of the typical cab ride. Rather, it's the loss of surplus that will come when the World Cup hits in 2011 and jitney cabs will fail to come into the market because of the increased fixed cost of shifting your private car into taxi service. Right now, best I'm aware, so long as you have a driver's license that permits it, nothing much stops you from slapping a sign onto your car saying "Cab" and charging to run folks around town. We'd expect that to happen during odd spikes in demand.

I figured that this would have most effect around the time of the Rugby World Cup, or other big events that would otherwise bring jitneys into the market. Looks like it's been worse than I expected.

The Herald reprints a piece from The Star:

A lack of taxis in some parts of Christchurch is causing major problems for evening revellers trying to get home safely.

The drop off in taxi numbers is leaving agitated people outside pubs, leading to fights and tempting people to drive home after drinking.

Some taxi drivers are refusing to go to the eastern suburbs because of concern about damaging their vehicles on quake-damaged roads, which is compounding the problem.

New Brighton's Pierside Cafe owner Tony Brooks said since the earthquakes they could not get taxis to take their patrons home.

Security staff, bar managers and DJs were driving patrons home.

"This has been an issue from the moment the earthquake hit - this is not just a little problem, this is a big problem," he said.

"We had Midge Marsden here on Saturday and it was an amazing gig - but it was all soured at the end of the night by the lack of taxis," he said.

Mr Brooks said he had been pre-booking taxis for when the bar closed at 1am but they never turned up.

People were driving home drunk as a result.

Taxi companies say tougher regulations and costly maintenance on vehicles because of damaged roads meant six operators had stopped since the earthquakes.

Blue Star Taxi's general manager Bob Wilkinson said: "Part of the issue is the way the bar scene has split, now the hotspots are in Riccarton, Lincoln Rd and Merivale and The Palms and it is pretty hard to cover all of those areas instead of just the central city before the earthquakes.

"Six taxi companies folded because new regulations mean they had to have 24-7 rosters, cameras in cars, a phone room and this added to the cost of running them."

First Direct's owner Pam Jackman said: "Our drivers don't want to go out to Brighton because of the roads." Ms Jackman said their taxi could do between 1000 and 3000 kilometres a week.

Ferrymead's Speight's Ale House restaurant manager Joseph Poulter said the most frustrating thing was waiting for the taxi companies to answer the phone on a Friday and Saturday.

"We just give up and try another number," he said.

Mr Wilkinson said there were only three major taxi companies left in Christchurch which were covering a city once serviced by more than nine.

You'd normally expect that shortages like this would bring new supply into the market: people who'd charge a fair bit to run cabs from the Brighton bars late in the evening. Pull the kid seats out of the back of the van, slap a sign on the side, and offer fixed-price fares to different parts of town. But not if you also have to run under dispatch and cover the costs of a camera setup.

I wonder whether private-hire vehicles are still exempt from the regulations.

Liquor traps

Gordon Tullock warned us that once substantial rents accrue to some regulatory provision, it gets hard to change the regulation even if it is spectacularly inefficient. He illustrated the case with New York's taxicab medallion system: the restriction on the supply of cabs doesn't help the drivers but instead drives up the price of the asset in fixed supply, the medallion itself. Abolishing the medallions would bring prices down for dispersed consumers but would impose substantial capital losses on the medallion-holders.

There is a way out of transitional gains traps: tax the winners to pay off the losers. But it's awfully hard to implement. Opaque transfers are opaque for a reason: voters do not understand them and regularly oppose things that would make them better off. Tullock's biggest lesson then is that we should never ever get into transitional gains traps in the first place as they are just so very hard to escape.

Today's edition: liquor permits. Cities like restricting the number of liquor outlets, reckoning that they can thereby reduce the number of problems caused by drunks. If the restriction is binding, then the licence to sell alcohol becomes an asset for the owner. If the restriction is really binding, it can be a really valuable asset. Witness Flemington, New Jersey [ht @MarketUrbanism]:

Local officials who want a more lively town center and a development team seeking to restore a landmark hotel were hoping to put a new watering hole on Main Street. Then they ran smack into New Jersey's strict, Prohibition-era alcohol laws, which restrict the number of liquor licenses per town. Flemington had just three—two belonging to establishments in strip malls and one for a Veterans of Foreign Wars hall.

Having a decent bar, it turns out, is helpful to reviving small downtowns, development experts say. So, in February, the developers came up with a novel but expensive solution, buying the Italian restaurant that owned a license and eventually transferring it to the downtown hotel. The price: about $1 million for the permit alone.
...
The Union Hotel owners' arduous journey to opening a bar is emblematic of a conundrum facing small downtowns across New Jersey. In a state making efforts to reverse decades of sprawling suburban development, a shortage of liquor licenses has emerged as a hurdle to rejuvenating Main Streets, according to development consultants and planning groups.
...
The ramifications have been felt across the state. Local officials in Glassboro, N.J., a South Jersey borough of about 18,000 people, said their $300 million public-private downtown development plan has been set back because it only has seven liquor licenses, with one changing hands recently for $700,000, said Joe Brigandi, the borough administrator. It has made it difficult to attract a new downtown restaurant, he said.

Meanwhile, Manitoba's emergence from the liquor dark ages is hindered by the existing rent-holders. The Winnipeg Free Press's Bartley Kives* documents the insanity of the prior liquor regulations, with 12 different highly prescribed liquor licences that often require venues provide services of negative value to their customers. Live music requirements ban the use of DJs for some licencees, for example.  But Kives also sees the transitional gains trap:

And more politically, the province isn't prepared to undermine entrepreneurs who've invested heavily in restaurant-lounge concepts such as Earls, Moxies and the Keg, which have proven extremely successful in recent years.

"We're not going to step all over people who've invested in infrastructure," said Chomiak, referring to independently owned restaurants as well as the chains.

In Manitoba, Earls-style venues have stolen the club-going clientele away from hotel beverage rooms, suggested Jim Baker, president and CEO of the Manitoba Hotel Association.

Decades ago, hoteliers opposed liquor-regulation reform in fear of losing market share to stand-alone venues. Today, hoteliers are more concerned about the prospect of legalizing alcohol-delivery services -- which would harm beer vendors -- than they are with the idea of more small clubs serving alcohol in downtown Winnipeg.

Baker said he would also like to see the province ease up on regulations governing minors in beverage rooms, especially in rural areas where banquets and fundraisers would present a business opportunity if people under 18 were allowed on-site.

"There's a need to see how these people can use the larger rooms for other purposes," said Baker, who cautiously supports the idea of regulatory reform. "We want to be part of this discussion."

Hotel, restaurant and club owners are also united in their desire to see liquor inspectors ease up on the enforcement of minor infractions such as improper paperwork. That sort of cultural change is coming as part of the creation of a new regulatory agency, Chomiak said.

There's a great Masters thesis to be written applying the Peltzman model of regulation and deregulation to liquor law in Manitoba.

New Zealand has been a minor oasis of sanity relative to these kinds of cases. Australia, as I understand things, has sufficiently restrictive liquor permitting laws in some parts of the country that people buy hotels just to be able to run the permitted liquor outlet attached to the hotel. I worry that NZ's move to greater local control of licensing options will wind up letting local activists restrict the supply of new licences, to the hoozahs of existing permittees, and move us into the trap. Read New Jersey and Manitoba as cautionary tales.


* When I was in Manitoba, I remember Kives having had the entertainment beat (though I could have that wrong; it was a long time ago). Now, every time there's a great piece in the Winnipeg Free Press, it's from Kives (and here and here). I wonder how long it'll be 'till he's scooped up by one of the national papers.

Open Banking Resolution and Deposit Insurance

New Zealand's Open Banking Resolution system in case of bank failure makes bank failure less likely, and so makes depositor bailouts less likely, but doesn't eliminate the risk that the government might bail out depositors.

Matt Nolan has made this point more than a few times and has urged that we reinstate deposit insurance and require banks to pay for this implicit insurance; I hope instead that the RBNZ and government will find ways of making more credible that the depositors may be burned. If depositors bear risk, then they have to pay a bit more attention to where they put their money and, in doing so, encourage the banks to be more sensible. Further, the simple existence of OBR with a set sequence in case of failure should reduce the panic that pressures governments into bailouts. But if we can't make it credible, then Nolan may be right. 

Toby Fiennes, RBNZ Head of Prudential Supervision, laid it out in a speech yesterday. 

So OBR is about keeping a bank open and providing the government with real alternatives to liquidation or full taxpayer bailout – both of which may be totally unpalatable. It facilitates a rapid and orderly resolution of a bank failure. It does so without changing our basic legal framework around ranking of creditors in a wind-up or insolvency. In particular:

– It does not change the fact that depositors’ and other creditors’ funds are at risk. It is a well-established legal principle that people stand to lose money if a business that owes them money cannot meet all its obligations. Banks are the same as any other business in this regard.

– It does not change the ranking of creditors. Shareholders will be the first to lose their investment. Once shareholder funds are exhausted, subordinated creditors bear losses, followed by all other unsecured creditors on a pari passu basis, meaning that those with an equal legal claim get equal treatment. This is the same as in a liquidation.

Two features of OBR make it particularly well-suited to the principles for crisis resolution I outlined earlier. They are:

– Its flexibility. OBR deals with the immediate crisis, including payments and liquidity issues around failing banks, without closing off long-term solutions.

– It reduces moral hazard. Bank shareholders, management and investors know that in the case of bank failure the authorities have a viable option that would put their stakes at risk. The mere presence of OBR in the toolkit will impact expectations of government support.

Fiennes continues:

It is important to emphasise that OBR and deposit insurance are not in any way alternatives. OBR is also applicable in a world where we have deposit insurance as in one where we don't. Deposit insurance usually involves the establishment of an insurance fund, to which banks contribute. There are many different variations on, and within, that basic framework, but OBR can cope with all of them. For example, if there’s an insurance fund, the fund itself could stand as a creditor in the OBR. This is how the FDIC (the US deposit insurer) is treated in failed US banks.

New Zealand does not currently have any form of deposit insurance or deposit guarantee. This position was confirmed by the Minister of Finance in 2011 (http://www.beehive.govt.nz/release/maintaining-confidence-financial-system). There are three reasons for this position:

– Deposit insurance is not always effective in preventing bank runs by retail depositors. UK-based Northern Rock suffered a classic retail run in 2007, despite a deposit insurance scheme being in place.

– Deposit insurance is hard to price accurately and fairly; and brings with it difficult boundary issues. Should it be just for banks – as is currently the case for OBR – or should it also include finance companies, building societies and credit unions? How would we ensure that the least risky banks do not end up subsidising the more risky?

– Deposit insurance will increase moral hazard, making the banks more susceptible to failure, which brings with it the need for more, costly regulation.He also notes that a large bank's failure could easily overwhelm a deposit insurance scheme and that the costs of deposit insurance in encouraging bad bank behaviour outweigh the benefits of avoiding depositor losses. So even in Nolan's world where the government cannot credibly commit not to bailout, the inefficiency caused by the certainty of a bailout (rather than the weighted expectation of one) can be large enough to make the scheme undesirable, even if the government does wind up bailing out the banks.

As I'm not a banking guy, here are a few things I particularly do not know much about and would materially affect the ability of OBR to reduce bailout risk:

• The proportion of secured versus unsecured bank liabilities. If there isn't much that can be burned through before hitting depositor assets, then the haircut landing on depositors would be greater and so too would be the political pressure for a bailout. 
• How easy it would be for banks to shift away from unsecured liabilities, knowing that risks put on depositors make bailouts more likely.
• Bank ownership structures. The NZ banks are owned by big Oz banks that have an implicit Oz government guarantee that's actually worked into their Fitch credit ratings (as best I understand things). Suppose something bad happens and one of the Oz banks and its NZ subsidiary both are going down. Do we know what assets are really with the NZ subsidiary and which are with the Oz parent? Will there be incentive to restructure the equity profile depending on which side of the ditch is looking stronger? Can they tunnel equity back to the Oz parent in the NZ subsidiary is looking dodgy and so leave less to burn through in OBR? RBNZ runs some strong prudential regulation; I'm sure they're on top of this stuff. I just don't know anything about it.

The greater the proportion of the burden borne by bank shareholders and unsecured creditors other than depositors, the lower I'd expect to be the pressure for bailouts. If deposit holders are to take a ten percent haircut if bad things happen, I doubt that they could muster nearly as much bailout sympathy as depositors facing a fifty percent haircut. 

Fiennes concludes:

But there’s always the remote possibility that a bank does get into trouble, at some point. If that happens there are no simple solutions. It will be messy, people will lose money and how it is dealt with will depend on circumstances at the time.

OBR is a tool that gives government an additional option to taxpayer bailout or liquidation. It is not the only option that will be available on the day. Its mere existence provides important incentives for bank shareholders and management to minimise the risk of failure.

New Zealand does not currently have deposit insurance, for reasons that are more to do with moral hazard and the sheer difficulties of defining boundaries and pricing than consumer protection. We believe it is better to keep the risk of failure very low, including through a strong regulatory framework, than to build structures that can distort incentives and behaviour.

If, however, deposit insurance were to be introduced, it could easily be accommodated within our toolkit of OBR and other crisis measures. It is not a case of choosing between one or the other – they have different objectives and can work alongside one another if need be.

We have to distinguish between best-case deposit insurance and achievable deposit insurance. How well you think the government can price the bank's underlying riskiness and how well the political system can ensure fair actuarial rates rather than implicit subsidisation of riskier banks will matter in your evaluation of deposit insurance's desirability. But note too that the world in which the government is really good at assessing bank's risks is also the world in which prudential regulation likely works well. I lean towards staying out of deposit insurance, but I'm not hugely confident in my point estimate here - as I noted earlier, I'm not a banking guy and really don't have enough information to be very confident.

Update: I failed in copying the second bit of Fiennes's speech the first go-round. My computer was trying very hard to crash while I was posting.

Unintended consequences?

Richard Thaler points to a lovely piece of university regulation. We cannot afford such a regulation at the post-earthquake University of Canterbury, but it is beautiful.

Don't get Euro rule that bonus<salary. Won't it just raise salaries? Once worked at U that had rule alcohol<food at dinners-> more desserts!
— Richard H Thaler (@R_Thaler) March 6, 2013

Lots of universities get tetchy about alcohol being on dinner bills where staff are taking distinguished guests and speakers to dinner after an event. Some of it is puritanism, some of it is worries about how it looks, and some of it is pure misanthropy from university regulatory czars.

This rule consequently is a beautiful thing. It has all the appearance of working to constrain alcohol spending. But it encourages a move to a far better equilibrium: dinner with dessert and with wine, while still prohibiting really outrageous wine expenditures. If this were an intended consequence with a deliberately opaque regulation, would that academia had more administrators of this sort.

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...

Don't start by assuming stupidity

Suppose that you want to reduce petrol usage because of global warming.

If you begin from an assumption of consumer rationality, you'll prefer a carbon tax or some form of emission trading. Announce today a schedule of Pigovean carbon taxes and how they will affect petrol prices as they ramp up over time. Then let customers decide how to re-optimise when buying cars. We'd expect an increase in demand for cars with better fuel economy. Cars with worse fuel economy will start having to sell at a discount. Manufacturers adjust their product mix to account for changing demand and aggregate fleet composition changes over the longer term.

If you start from an assumption of consumer stupidity, you'll prefer regulations targeting car manufacturers mandating fuel economy standards. If car buyers are myopic and stupid, they'll fail to account for the higher lifetime cost of a car with worse fuel economy. Because customers are stupid in this way, manufacturers will not adjust their product mix to shift towards cars with better fuel economy - there's no change in demand for more efficient cars even with a well-publicised schedule of future tax increases. And so direct regulation has to be used. There are problems with this and lots of them - all the gaming of US CAFE standards and redefinitions of what constitutes a truck as most obvious example. But it could be a second best if car buyers are really stupid. Or, if they're just really really short-sighted. We'll also have to assume that car buyers do not change their behaviour by a lot when the price of driving a kilometer goes down by a lot.

What happens if we look to the data? Busse et al in the latest American Economic Review find pretty good evidence that car buyers' demand for fuel economy is sensitive to petrol prices. They conclude (ungated versions):

We estimated that a $1 increase in the price of gasoline increases the market share of cars in the highest fuel economy quartile by 21.1 percent and decreases the market share of cars in the lowest fuel economy quartile by 27.1 percent. We also estimated the effect of a $1 increase in gasoline prices on unit sales of new cars and found that sales in the highest fuel economy quartile increased by 10–12 percent, while sales in the lowest fuel economy quartile fell by 27–28 percent. We estimated the effect of gasoline prices on the equilibrium prices of new cars and found that a $1 increase in the price of gasoline is associated with an increase of $354 in the average price of the highest fuel economy quartile of cars relative to that of the lowest fuel economy quartile. For used cars, the estimated relative price difference is $1,945.

We used these estimates to investigate whether the changes in equilibrium prices for new and used cars associated with changes in gasoline prices show evidence that consumers undervalue future gasoline costs of cars with different fuel economies relative to the prices of those cars. This could be thought of as a necessary condition for effective policy: the more car buyers discount future fuel costs, the less effective a gasoline tax or carbon tax will be in influencing vehicle choice. Using several different assumptions about vehicle miles traveled, a range of assumptions about the elasticity of demand, and comparing the relative price differences between different quartiles, we find little evidence of consumer myopia. Many of our implicit discount rates are near zero; most are less than 20 percent.

So the "people aren't stupid and weigh costs over time in a sensible fashion" model seems the better baseline approach.

Now imagine that you set a fuel economy standard instead of a carbon/petrol tax in a world where customers are forward-looking and not idiots. Well, once they've bought the more efficient car, the value they derive from burning another litre of petrol increases substantially: they can drive farther, and they're not charged any more for that litre of petrol. And so a lot of the reductions in carbon emission you might have expected get whittled away by that people drive more. If you'd done it instead with a petrol tax, the marginal cost of another litre of petrol is higher. People still flip to the more efficient vehicle, but petrol usage doesn't rebound as much as consequence because the marginal cost of a litre is higher.

Afternoon roundup

Today's afternoon news roundup.

Item the first: NZ's organ donor rate remains low; the kidney waiting list in particular remains long. Andy Tookey again suggests compensating cadaveric organ donors with subsidised funerals to encourage donation. I agree.

Item the second: if you're a small country, and the US ignores a WTO ruling in your favour, your options are pretty limited. Antigua gets points for creativity. HT: Susan.

Item the third: the National Business Review reprinted a couple of my posts this past weekend; here's cost-benefit analysis and banning cats. Their comment pool is a bit different from the one we have here. I'll be talking with Jim Mora and Radio New Zealand's The Panel on the topic around 4:15 this afternoon. [Update:  embedded below]


Item the fourth: American crime rates seem more sensitive to number of police on the streets rather than number of people in jail; the policy recommendation is to spend less on imprisoning people and spend more instead on community policing. A small portion of this effect is may be due to that crimes committed by police may be less likely to show up in the crime rates. The Bridgeport, Ct. police officers filmed stomping on the head of an immobilized and tazered individual are on desk duty rather than under arrest, at least so far. At least the guy who filmed them is unlikely to be arrested; had it happened in another state results could have been different. But I do agree with the overall policy recommendation - so much the more so if it could be done by diverting police resources away from victimless crimes.

Item the fifth: SciBlogs is running a survey on scientific literacy. I got a perfect score on it, but only because I lied a little bit about one of my answers. One question asks what makes a scientific result most credible: peer review, reputation of the research team, or a couple of other options. I knew the right answer was peer review. But I often put a lot more weight on researcher reputation. Things are so infrequently replicated, and results so often fragile when replicated, that I far more typically weigh a bundle of researcher reputation, publication, and topic. A new working paper from somebody who's credible is just worth more to me than a published piece from somebody who has a bit of a reputation for results that are fragile to specification search.

Item the sixth: +Jeet Sheth rightly wonders whether this is inconsistent with our usual assumptions around transitional gains traps. I'd think of it more in terms of a Peltzman regulatory model. In New Zealand, older used cars must undergo a basic safety inspection every six months while newer ones only need it every year - the Warrant of Fitness. They don't seem to be a profit centre for most garages except inasmuch as they give garages the opportunity to sell other (hopefully needed) services to those getting inspected; some garages specialise in only doing WoF checks on a quick while-you-wait basis. The national government proposed moving to annual inspections for vehicles first registered in 2000 or later. Recall that in the Peltzman model, regulation always balances the public interest with that of the regulated party; that balance changes as technology changes. The mechanics' trade association lobbied against the change, painting it as a road safety issue; the Automobile Association lobbied in favour of it despite also providing WoF checks. While dedicated WoF stations could have been earning some rents from the regulations, free entry into providing WoFs would have meant those rents would not have been huge. It's better viewed in a Peltzman model where deregulation (or a loosening of regulations) can emerge when a technological shock makes the regulation less beneficial to the regulated and to customers. Here, mechanics who weren't WoF specialists would have been seeing less benefit from the regulation as car manufacturing standards improved over time (and so potential gains from on-selling other services were smaller); the regulation's incidence was also pretty obvious to car owners.

Item the seventh: having this particular lotto number selection strategy isn't clever, it's just a way of increasing your winnings if your main numbers happen to come up. It's a bit nuts to purport that any number selection strategy is more clever than any other. It's a random draw guys. Random.

Item the eighth: Andrea Marchesetti points to a nice little story perhaps illustrating Caplan's rational irrationality model. Recall that in Caplan's model, when beliefs are of low cost, you'd indulge your bliss belief; when beliefs contrary to truth become expensive, you scale back demand for them. The Wall Street Journal reports that "haunted" homes in Hong Kong no longer trade at much of a discount; the property boom has pushed prices up. Entrepreneur Ng Goon Lau buys up at discount houses where an unnatural death has occurred, rents them out to expats who don't believe in ghosts, then later sells them - presumably with reports from the renters showing there to be no ghosts. It's unclear from the story whether the Hong Kong boom has brought in sufficient expats that haunted houses were bid up to standard prices without locals changing their beliefs, or whether the absolute increase in housing costs induced locals to put up with spooky ghost problems.

So concludeth the closing of the browser tabs.

Type I and Type II Errors

An efficient pharmaceutical regulation system will balance the costs of mistakenly releasing bad drugs onto the market against the costs of taking too long to release good drugs. It's easy to point ex post to bad drugs that were released in error, but changing the system to be more rigorous will very likely also delay the release of good drugs.

Unfortunately, stories like this one have a much easier time finding people who've died due to bad drugs than finding those who have been saved because a good drug was approved more quickly in Canada than in the US.

Maybe there are system-wide improvements that can move Canada onto a more efficient frontier. But if you're on the frontier, you're always trading off the costs of killing people with bad drugs against the costs of killing people by delaying their access to drugs. The Macleans piece seems horrified that many serious drug dangers are found after a drug has come to market:

Meanwhile, the problem continues to grow. The need for change is reflected in a Canadian study that reveals that serious drug dangers are frequently identified after they come to market. Almost one-fifth (19.8 per cent) of 434 new active substances approved by Health Canada between 1995 and 2010 were later given serious safety warnings—some only months after approval—Joel Lexchin, a physician and professor in the school of health policy and management at Toronto’s York University, found. The study, published last month in the Archives of Internal Medicine, shows risks are higher for drugs fast-tracked in 180-day “priority reviews” (versus the 300-day norm): 34.2 per cent had serious warnings.

Sure. But we have to weigh things. If a third of fast-tracked drugs had serious warnings after they came to market, then two-thirds didn't. We have to weigh any costs experienced by folks getting the bad third against the benefits of quicker access to better drugs for the people getting the good two-thirds. How many people would Canada kill through delay if they decided to make the procedures so strict that every single possible danger was identified before drugs were released?

I don't know whether Canada's at the right point on the frontier, or even if it's on the frontier. But America sure isn't at the right point on the frontier. And that the Macleans piece doesn't even consider the tradeoff means it really isn't helping to find the right answer.

Labelling and non-tariff barriers

David Farrar asks why we shouldn't mandate nutritional labelling on alcoholic beverages. People may well forget that alcohol has caloric content; providing information has value.

Here's the case against them.

First, it is fairly easy for large producers of homogeneous products to add nutritional labels to their products. The one-off testing and label re-jigging is a fixed cost that is spread across a very large number of units. But, suppose you're a craft brewer and you get a notion to make a seasonal autumnal ale with pumpkin in it. It'll taste good and sell well as a small batch. But after you make a batch, you're going to have to send a bottle to the lab for testing, wait for the results, and attach the appropriate nutritional label to your new brew. This will add maybe a fortnight or more to your brewing cycle on the first batch of the product and cost you a bit in testing. You can't spread those costs over many units because you're not making many units. And heaven help you if you decide you should double the pumpkin in the next batch.

Second, it's a non-tariff barrier against imported products made in countries that do not have labelling requirements. When New Zealand implemented labelling requirements for standard drinks a few years ago, the shop where I bought my oddball foreign grey market craft beers had to print off little labels for each bottle of the one-offs that they sold, converting the percent alcohol content into a number of standard drinks. This added to the cost of foreign craft beer relative to domestic or mass market product.

You will rightly note that this is also an argument against mandatory nutritional labelling requirements on any small volume products.

If there's any steam behind nutritional labelling requirements, there are things we can do to make it less awful.

The easiest labelling requirement would only require that producers give a general range of calories contained per serving of the product based on the alcohol content alone. A gram of alcohol has seven calories, so a standard drink contains 70 calories. Most products could then simply say something like:

"One serving of this product provides 50-100 calories through its alcohol content."

If you really want to know the protein, carbohydrate, sugar and salt content for the drinks, carve out an exemption for small-batch products and for imported products. 

I really love the oddball small-batch beers that turn up in New Zealand, whether made domestically or imported. Anything that adds fixed costs helps to kill that product range. New Zealand has enough problems with fixed costs without inventing more of them.

Ban the bottle

I'm a fan of Charles Tibout's arguments about local government competition: lots of small local governments competing with each other for residents and cooperating with each other for provision of services that are more efficiently provided on a wider scale.

I was surprised when Rodney Hide led the charge for Auckland's amalgamation. The best case I could make for amalgamation would be that the small scale of local government means it has a very hard time attracting talented people to make reasonable decisions; Council policies can be stuck on the stupid setting for rather a while. A merged Auckland encompassing a million or so people ought to be big enough to attract more talented bureaucrats able to make more sensible decisions.

Neil Miller points to one less-than-sensible decision coming out of amalgamated Auckland Council [HT: Nolan @ TVHE]. They're pushing bottle shops to ban single-bottle sales. Neil writes:

Craft beer plays little or no part in the problems around heavy drinking, particularly among younger people.  The streets on a Saturday morning are not awash with bottles of Emerson’s Pilsner ($6.10) nor the car park studded with empty magnums of Liberty C!tra IIPA ($22.10).  The Council has simply made a series of assumptions and come up with a one-size-fits-all “solution” so it can say it is “doing something.”  I doubt any thought was given to the sales of craft beer or the people who want to purchase them responsibly in central Auckland. 

"Something must be done" is a rather persistent problem. And, with a merged Council, craft-beer lovers will have a harder time driving to an outlet that can help them out. I hope that the bottle shops are able to get around it by requiring that people buy at least two bottles and sticking a rubber band around them to make a package when the customer comes to the till.* At least there are mail order options.

Neil again:

However, at this stage the Government is looking to avoid the single container issue saying people with problems should contact the Council as it is their policy.  It seems yet another drift net policy with unintended consequences, something we will probably see a lot more of as Parliament considers the key provisions of the new Alcohol Reform legislation. 

This kind of local nonsense is one of my bigger worries in the proposed Alcohol Reform Bill, which will provide a fair bit more scope to local Councils for alcohol regulation. Compliance costs are higher when retailers face a patchwork of regulations across the country; I would expect local activists with time on their hands have more influence over policy at the local level. I consequently expect the equilibrium to turn rather more meddlesome in most places.

* My local dairy, for a while, sold cans of Coke labelled "Not for individual resale." Above the cans he had a small sign saying "Buy two!". I liked that.

Meanwhile, in the asylum

I like to think of New Zealand as being the Outside of the Asylum.

Outside of the Asylum, farmers are free to sell their produce.

Today's news from inside the asylum: hosting a 10 year old's birthday party and selling a bit of farm produce at the event hosted on your farm gets you thousands of dollars in fines.



We don't know how lucky we are....

Intended and unintended consequences

Adam at Modeled Behavior points to a potential unintended consequence of Bloomberg's soda ban:

Seth Goldman, the founder of Honest Tea, has a great op-ed in the WSJ today describing how the regulation, which bans drinks over 25 calories per 8 ounce serving from being served in containers larger than 16 ounces, would be costly and damaging to his business:

We initially went with 16.9 oz. (which is 500 milliliters) because it is a standard size that our bottle supplier had in stock at the time. We subsequently invested several hundred thousand dollars for 16.9 oz. bottle molds. Is 16.9 ounces the perfect size? Who knows? As a beverage marketer, we willingly submit to the unforgiving judgment of the market. What we did not anticipate was an arbitrary decision to constrain consumer choice.

One response we considered was putting 0.9 ounce less liquid in our bottles, but that would create a separate set of complications. We fill our bottles to the brim—not just because we like to deliver an “Honest” value, but also to ensure quality since we do not use preservatives. Then there is the costly prospect of having to change all of our UPC codes (those complicated black bars found on every product on a grocery shelf) because we would be offering a different liquid volume—all for 0.9 ounces!

In addition to losing the several hundred thousand dollars in machinery they invested, they won’t switch to 16 ounces because, as Seth puts it “what if next year, Cambridge, Mass., comes up with a ban on 15.5-ounce containers?”.

I wonder whether it's necessarily unintended.

At least since Peltzman/Stigler, we've come to see regulation as a balancing of the interests of the regulated and the public. The former here we can proxy as the big soda makers.

It might not be crazy to view a ban that just catches anybody using an international standard size, 500mL, as something that imposes disproportionate costs on small producers. Big guys can spread fixed costs of this sort over lots of units, and are probably already using US standard sizes. Anybody who's gotten a good deal on a few containers of international standard metric-sized bottles winds up stuffed. At the margin, Bloomberg (or, more likely, his staffer) might have thought of this as a way of making the big guys a bit less angry about the regulation.

I'd not run the metric conversion in my head when the policy first came out; my in-the-head heuristic is 8 oz = 250mL - both are about a cup. But that was wrong: Google tells me 8 oz is 237 mL. Maybe Richard Thaler needs to nudge me into using better metric conversion heuristics.

Apologies for the brief posting hiatus; semester constraints have begun to bind.