Housekeeping

We're still trialling Disqus here at Offsetting. On current voting, 2 people say "Keep Disqus!", 4 say "Go back to Blogger!", and 8 say "I don't care!". I'm not taking that as resounding support for any option, especially when I compare the number of survey responses with aggregate readership stats.

I'm extending the trial period. Some helpful hints for getting the most out of the commenting system.

• You can choose whether oldest, newest, or "best" comments appear first in the thread. Just go into "Discussion" and move the tick. I think the default is "Best", within which it sorts newest first. If you prefer oldest first, change the default. I can't do this for you. I've had a couple of complaints about new comments showing up at the top; this is something over which you, dear reader, have control. 
• You can up- or down-vote comments by hitting the little arrows; this affects comment ordering for those who sort by "Best". 
• Hitting the "My Disqus" tag tells you if anybody's replied to your prior comments

Minimum pricing

What would the world have to look like for minimum alcohol pricing to be a reasonable policy solution?

Suppose it is the case that harmful heavy drinkers, the sort that impose the greatest harms on others when they consume alcohol, really don't care about the quality of the alcohol they're drinking; they're buying whatever product provides alcohol at the lowest price per standard drink. Suppose further that this cohort's consumption is reasonably responsive to price measures: if you raise the price of the cheapest form of alcohol, you'll do a lot to curb that cohort's consumption while not doing much to reduce the normal consumption of moderate drinkers. Finally, assume that there's little overlap between the kinds of alcohol consumed by harmful drinkers and that consumed by moderate low-income drinkers.

In that kind of a world, minimum pricing on alcohol makes more sense than broader-based alcohol excise tax increases: you can get more reduction in harmful drinking at lower spillover cost to moderate drinkers than by simply increasing excise. A quick Google search suggests lab grade 95% pure ethanol sells for less than $7 per litre if you buy in bulk, or less than $0.10 per standard drink. In this hypothetical world, only harmful drinkers ever go for that product. Typical moderate drinkers instead choose something like, say, Glenmorangie 10 year old single malt. That scotch currently sells for $77 and includes 280 mL of pure alcohol, so just under $14 is excise. With no excise, Glenmorangie would sell for $2.86 per standard drink. If you wanted a $2 minimum price per standard drink, you'd have to charge $1.90 per standard drink to do it via excise to make sure you're charging enough on the lab grade alcohol. But that would load a lot of costs onto the moderate drinkers who then forgo enjoying a harmless bit of scotch before bed.

But are we in that kind of world?

First, in the real world, lower tier product is consumed not just by harmful drinkers looking for the lowest per-unit cost product. A lot of it also is consumed by moderate drinkers of lower income. The more overlap there is between low income harmless drinkers and harmful drinkers in product choice, the less attractive is minimum price in avoiding harming moderate consumers. As David Farrar likes to point out, under Labour's preferred $2 minimum price per standard drink, you could not buy a bottle of wine for less than $16. Most of the wine I purchase runs between $12-$18 per bottle; there are pretty decent wines available in the $8-10 range too, if we watch for specials. If we were in a lower income bracket, we'd be sticking with the $8 bottles. A $2 minimum price would double the cost of our consumption were we sticking with the bottom end of the drinkable price range. And, harmful drinkers also might be choosing the Glenmorangie too.

Second, where both heavy drinkers and moderate drinkers are choosing the same kinds of products, albeit in different quantities, we have to worry a lot about how each kind of consumer responds to changes in prices. The best meta-study on the topic remains Wagenaar, who found that heavy drinkers are roughly 60% as price responsive as moderate drinkers: the price elasticity of demand among heavy drinkers is -0.28 while it's -0.44 for average drinkers. If we doubled the price of lower cost products, which we'd have to do to get to Labour's preferred $2 minimum price per standard drink, moderate drinkers who currently choose that class of product would cut back their consumption by about 44% while heavy drinkers would reduce their consumption by only about 28%. A new paper in Drug and Alcohol Review confirms this kind of finding using data from the Australian National Drug Strategy Household Surveys. From their abstract:

A 1% increase in the price of alcohol was associated with a statistically significant increase of 6.41 days per year on which no alcohol is consumed (P ≤ 0.049), and a statistically significant decrease of 7.30 days on which 1–4 standard drinks are consumed (P ≤ 0.021). There was no statistically significant change for high or moderate-intensity drinking.

People respond to prices changes, but changes in average consumption levels are less informative than changes in consumption patterns. The study above finds that, when drinkers cut back on their consumption with price increases, they tend to do it by reducing the number of days in which they have small amounts of alcohol rather than the number of instances of heavier drinking. Wagenaar found that heavy drinkers respond less to price changes on average than do moderate drinkers; if that responsiveness comes from the least harmful parts of heavy drinkers' consumption, then the benefits of price increases in terms of harm forgone are overstated. If the J-curve is right, we're then imposing harms on light drinkers while not doing a whole lot to reduce the harms imposed by heavier drinkers.

If moderate and harmful drinkers consume similar products, albeit in different quantities, and if harmful drinkers are less responsive to price increases than are moderate drinkers, then it's harder to build a case for minimum pricing over excise as mechanism for internalising external harms from consumption; it's an even blunter instrument than is excise.

But, I don't think we can say that minimum pricing just transfers money to the brewers and distillers. Unless there are other bottlenecks in the system, we should expect that competition among producers and retailers would lead to products at the bottom end of the market disappearing unless they can be usefully bundled with things that consumers care more about than marginal increases in drink quality: packaging improvements, promotions, or free complementary goods like t-shirts or shot glasses. There will be deadweight costs where moderate drinkers preferring lower-cost product are forced to purchase products more expensive than they'd prefer, but these are attenuated to the extent that retailers or producers are able to get around the regulations by including, say, lotto tickets with lower quality products. If instead restrictions on liquor permits give some retailers local monopoly powers, minimum pricing will yield rents for those retailers that will be capitalised into the value of the firm. I'd walked through this two years ago.

If we are comfortable in imposing disproportionate consumption harms on moderate drinkers of low income and if harmful drinkers disproportionately consume lower priced product, then a minimum price plus excise can get around one of the stickier problems with excise. A linear excise tax that matches the average external harm from consumption necessarily undercharges harmful drinkers and overcharges moderate drinkers relative to the external harm each imposes: harms from heavy drinking rise nonlinearly in consumption while excise rises only linearly. A minimum price combined with a lower alcohol excise rate lets you impose lower costs on moderate consumers of products of higher inherent cost while still doing something to curb harmful drinkers' consumption; the collateral damage comes from consumption reductions among light to moderate drinkers who prefer cheaper product. I'm not comfortable with the collateral damage, especially in the absence of strong evidence that heavy drinkers disproportionately choose bottom cost-tier products. I'd also expect reasonable substitution into home brewing and home distillation if prices got anywhere near $2/standard drink.

What can we do if minimum price is a poor instrument and excise is blunt? Combine excise with measures directly addressing the harms imposed by harmful drinkers. For example:

• a drunk tank with medical attendants for those drunk and disorderly;
• greater investment in treatment for those whose offending seems related to addiction issues, albeit with the caveat that effects at the margin are likely lower than effects on average among the cohort of those who have thus far been able to access treatment;
• drunkenness isn't a defence to a drink-driving charge; making "while intoxicated" an exacerbating factor in sentencing for other offences might help;
• At least some of the public pressure for increasing the alcohol purchase age comes from that drunk teenagers are annoying. Instead of increasing the alcohol purchase age, implementing a minimum age for being in possession of alcohol without parental permission can do wonders in making drunken teenage parties more discreet. Note too, though, that there is no demonstrable increase in youth alcohol consumption since the alcohol purchase age was reduced to 18.

More on asset sales

I'm quoted in the Press's story on potential asset sales. Spot the minor transcription error from the email I'd sent! First comment to catch it wins the chocolate fish. Two letters are missing... somewhere.

There is a strong case for selling some Christchurch City Council assets, a Canterbury University economist says.

Dr Eric Crampton, a senior lecturer in finance and economics, said that if the council was not prepared to cut its expenditure on large capital projects such as the planned sports stadium and convention centre, it should look at selling assets that were more valuable when owned by the private sector.

''Lyttelton Port and Red Bus very plausibly fall into that kind of category,'' he  said.

''We oughtn't forget that only a few years ago the council thought that a private management company would be best placed to run Lyttelton Port.

''Bus routes in Christchurch are allocated between council-owned Red Bus and other operators, like Leopard, by competitive tender. It's pretty clear that we really need to have the council owning one of the companies.''

For other assets where the council might not want to give up control, like Orion, partial private ownership could help bring in external expertise while bringing in revenue.

''For other assets where efficiency gains from privatisation are limited, there's no strong case to be made between debt and asset sales. Both reduce the city's net asset base and constrain future ability to raise debt in case of seriously damaging future aftershocks,'' Crampton said.

Ultimately, whether the council or the private sector should control an asset depended on which was best placed to operate it.

Finding the two missing letters above is left as an exercise for the reader. [Update: Philip catches it. I'd said "unclear" rather than "clear" in the sentence: "It's pretty [un]clear that we really need to have the council owning one of the companies."] I'd also sent this paragraph, which didn't make the cut:

“It’s a bit of a shame that so much of the discourse around asset sales has focused on differences between dividend rates and the interest rate on Council borrowing. First, it’s harder to put a fair value on assets held by government because they’re not traded on the open market; the recent rather large reduction in the book value of KiwiRail points to some of these difficulties. Where we are less certain of the asset’s value, we have less confidence around the actual dividend rates. Further, where reported dividend payments include a lot of booked capital gain rather than actual cash payments, it’s not entirely a fair comparison with bond payments. But more fundamentally, ownership of assets comes both with risk and with ongoing maintenance liabilities; gaps between dividends paid by Council enterprises and interest on Council debt is largely explained by that the former is riskier.”

There is little point in keeping the "family silver" as a hedge against bad times if you're not willing to sell it when bad times hit. Still, cutting back on planned expenditures on a new stadium in excess of the insurance payout makes an awful lot more sense than either debt or asset sales.

Increasing the burden

This is why we can't have nice things.

Imagine that there's something you like. You have the power of government at your disposal to help you get more of the nice thing you like. Should you:

1. Pay people a subsidy for providing the nice thing;
2. Make it more expensive for people to own the nice thing.

When it comes to heritage buildings, which are very nice things indeed, we're increasingly doing the second. The National Business Review reports that the Heritage New Zealand Pouhere Taonga Bill will make it more difficult for owners of pre-1900 buildings to make any kind of alteration. In addition to requiring a building consent and, for buildings listed in district plans, a resource consent, you'll now also need an archaeological permit. 

NBR points to the Law Society's submission on the bill. They write:

The practical implications of this definitional change, however, are wide-ranging for New Zealand’s older settlements.  In some of these (for example, Nelson and Dunedin) there is still a substantial housing and commercial building stock comprising pre-1900 structures. A literal application of the definition of “archaeological site”, together with its companion definition of “harm”, means that there will be many thousands of private dwellings around New Zealand that will require an archaeological authority to be obtained for the most minor maintenance work, such as the replacement of spouting or the hanging of new wallpaper.  It is not clear whether this level of intervention with private ownership rights is intended by the Bill.  If that is not intended, then revisiting the definition of “harm” or “archaeological site” is warranted.  The Law Society does not believe that this difficulty can be addressed by Heritage New Zealand simply applying the legislation in a pragmatic way, since the failure to obtain an archaeological authority is a criminal offence of strict liability.

Who would want to own a heritage home if they had to seek archaeological approval if they wanted to change the wallpaper? If the value of heritage buildings is bid down because of the regulatory encumbrances, investments in maintenance and strengthening are attenuated too.

Previously:

• Heritage Preservation
• Liability and building risk
• See also ISCR, pages 14-15 at the linked PDF.

Disqus: discuss

I switched to Disqus about a week ago. Should I keep it?

Pro:

• I've now added a few words for comment content filtering. I hate to delete comments for language. But I really don't want this blog ever to hit content-filtering flags in high schools or elsewhere. It's easier for you to use euphemisms or @#%! than it is for me to delete things where the rest of the comment, as poetic as it might be, doesn't outweigh the cost of potentially being flagged as not safe in filtered environments.
• You, as commenter, will easily be able to go back over time and see every comment you've added. The imported comments don't do a great job with this, but it'll work with new comments as they're added.
• I can easily go back to check other comments you've made on my site - Seamus and I both like being able to easily find helpful contributions from our commenters. Without Disqus, we have to remember the post on which the comment was made. With Disqus, we should be able to scroll back through a commenter's contributions to find it.
• I had had people complain of problems in getting comments up under Blogger. I've not heard that kind of complaint yet about Disqus.
• Any commenter can quickly see if somebody else has replied to one of his comments by hitting "My Disqus". 

Con:

• It's buggier than Blogger; I sometimes have to hit refresh to get the comments. 
• It takes more bandwidth, so viewing from mobile is slightly more expensive.
• It isn't as pretty as Blogger's native interface, especially on mobile.
• The imported back archive of comments isn't nearly as pretty as it should be; everybody gets the same null avatar, me included. 

It wouldn't be hard for me to flip it back; I have things set so that Disqus comments are synched with Blogger, so almost all of the comments would still be there if I drop Disqus.

Your preferences enter positively into the social decision function; please state them below. If there are implementation issues where I've likely messed up a setting in Disqus that you'd like fixed, I'm happy to take advice on that one too.

Accommodation incidence

Poor people in New Zealand are eligible for a subsidy towards accommodation expenses: the Accommodation Supplement.

The Greens' Metiria Turei calls the supplement a "landlord subsidy" and points to it as part of the general problem of housing affordability: it pushes up the price of housing.

In the current state of the world, she's mostly right. Given a near-vertical supply curve for housing, because land use policy in New Zealand is a complete mess, anything that subsidizes demand mostly gets capitalized into land prices. So it is a subsidy to landlords, mostly via capital gains. 

If developers were allowed to build new housing in response to demand, either by increasing density or by building out, the incidence of the subsidy would be entirely different. 

In the graphs above, we map out supply and demand for rental accommodation among low-income cohorts. 

D represents their demand curve. It slopes down for the usual reasons: when housing is expensive, people demand less of it. Think less of the grosser forms of substitution, like homelessness, but rather of the intensity of rental use: families doubling up in accommodation units and many kids sharing bedrooms. When housing is expensive, people double up; when it's cheap, we have more space per renter. D+A gives demand when low-income renters have access to the accommodation supplement: the vertical distance between D and D+A is the level of the subsidy.

S is the supply curve: the price at which developers bring new low-income units onto the market. It slopes up as well. But, the slope differs between the graph at left and the one at right. On the left, supply is relatively inelastic. And that's the current state of the world in New Zealand. It is illegal to provide low income housing, or any kind of housing, cheaply. Councils restrict the supply of land such that its price is bid up. And, they make it illegal to put self-contained flats into existing homes: one of the quickest and least expensive ways of expanding the supply of more affordable units. And in that state of the world, the accommodation supplement does little to expand access to accommodation; rather, it mostly confers rents upon existing landlords. The quantity of housing shifts outwards from Q to Q', but most of the supplement is taken by landlords. It's then capitalised into land prices, helping to further push up the price of land that's made scarce by regulation.

In the happier state of the world, that pictured in the graph on the right, developers are able to bring new supply onto the market when demand for it exceeds the cost of providing it. The regulatory barriers are eased and the supply curve is consequently more elastic. In that state of the world, the accommodation supplement results in a greater supply of housing for lower-income tenants, with less of it turned into a transfer to landlords. The government is spending more in total on the accommodation supplement, but is also getting a lot more housing for its spending; it could achieve better accommodation outcomes under this regime even with moderate reductions in the supplement paid. That's because the spending mostly turns into new housing instead of into transfers to rentiers.

To keep the graphs simpler, I only rotated the supply curve. More realistically, the supply curve would have been pushed out, resulting in lower ex ante prices and higher ex ante quantities; there's less need for an accommodation supplement where regulatory inflation of land costs effectively bans developers from building low cost housing.

Stephen Franks illustrates the current political equilibrium:

For most of New Zealand's wonderful years of egalitarianism you could buy land for your house for around one year's average earnings, and build your house for about two and a half year's earnings. After taxes and living expenses you could expect to get rid of most of your mortgage over the next 10 to 15 years.

Then the baby boomers inherited political power. Already set for housing they don't need to be grateful to developers. They can despise subdividers. They'll rally to block densification, and 'sprawl' and highrises and infill units and anything that might offend their 1970s aesthetic sensitivities or glorious views. They feel the virtue in sending others to commute in trains from apartments on 'hubs' irrespective of the surveys that show fewer than 5% want to live like that.

The more scarce is housing the better off the boomers are. If you are already on the property escalator of course you will demand 'protection' of 'heritage' building and suburbs. It guarantees your overinvestment in housing. Artificial scarcity will not be exposed for the selfishness it is. Bankers of course agree. Otherwise they might find they've lent more than houses are worth, as they have in the rest of the world.

Zone more land to allow higher density use, allow more subdivision on the edges of town, and implement congestion charging so negative sprawl externalities are handled adequately. Current sets of land use restrictions build massive fragility into our systems so that private owners simply cannot respond to sudden changes in housing supply.

Organ incentives

Were I a Facebook person, I'd be hitting the "Organ donor" button, now apparently active in New Zealand.

Last week New Zealand became the latest to approve a Facebook initiative that allows people to state that they want to be organ donors.

The global scheme works to promote organ donation, by allowing people to create a "life event" on their timeline saying they wish to become a donor.

Family members are still requested to give permission when the time comes, but the Facebook initiative is helpful in promoting discussion of the issue, Facebook's Australia and New Zealand communications and policy manager Mia Garlick said.

I'd want a slightly stronger button indicating LifeSharers membership.

Michelle Robinson's article makes the case for compensating live donors, drawing on a few bits from me. She uses some of the best quotes I'd sent; the full text I'd provided is below.

"There are a few reasons for New Zealand's relatively low organ donation rate. To start with, we don't have great awareness campaigns around organ donation. So when people renew their driver's licence, they've not really put much thought into the donation decision, and nothing around the driver's licence scheme really helps to encourage an informed decision. Next, to be eligible to be an organ donor, you have to be in an ICU bed when you die; doctors here seem reluctant to assign a terminal patient to a scarce ICU bed in hopes that the patient's family will consent to donation. Finally, because the driver's licence scheme does not constitute informed consent, doctors feel the need to seek explicit family permission for organ donation at what is the worst possible time for families to be making that kind of decision. So it's no surprise that half of families asked decline that the deceased's organs be made available for transplant." 

"Other countries have tried a variety of approaches to increase both live and cadaveric donation rates. Even if everyone signed their organ donor card, we just couldn't meet demand for kidneys; live organ transplants help to fill that gap. Israel has had great recent success with a combination of two policies. First, they have increased compensation for live organ donors. Donating a kidney or a liver lobe is pretty safe - fishermen have a higher on the job fatality rate than do live donors of liver lobes. But, the donation means time away from work both before the transplant and in post-operative care. Israel compensates donors with up to 40 days' lost wages and expenses. Given the costs of dialysis for public health systems, this kind of compensation isn't nearly as expensive as you might think. M.P. Michael Woodhouse has a Private Member's Bill in the New Zealand Parliamentary ballot that would enhance compensation to live donors here. Second, Israel introduced the "Priority System". If you agree that your organs should be available for others if you die, you're given priority should you ever need an organ donation. While medical ethicists worry that it might not be fair that people who are unwilling to share with others might have a lower position in the queue, we have to remember that measures like this don't just change peoples' positions on the list, they also increase the number of organs available for transplant. Israel saw a sixteen percent increase in the number of registered donors with the Priority Law; we have to weigh any of these fairness worries against that these policies save more lives." 

"There are other measures New Zealand could reasonably consider. One policy that should neither be terribly controversial nor terribly expensive would be payment towards the funeral costs of organ donors. This simple policy could help push the organ donation decision from being an afterthought at the drivers' licence office to being something that families talk about together when planning their estates. That takes the emotional heat out of the decision and helps a grieving family to know and respect their loved one's wishes when a nurse or doctor asks about organ donation. And, as the University of Otago Medical School is already covering cremation costs for those donating their bodies for medical research, a subsidy worth about $1500, extending partial payment of funeral costs to organ donors would only really be an extension of something that's currently allowed. WINZ helps defray funeral costs for the poor; why can't we also defray the funeral costs of those helping to save others' lives and reducing the burden on the public health system through their donation decision?" 

"One option I particularly like is LifeSharers. LifeSharers is a club that's free to join. All you have to do is agree to be an organ donor - there are no fees and nobody is excluded, even if medical problems mean your organs might never be used. Being willing to share is all that's required. If you're a LifeSharers member, you agree not only to be an organ donor, but also that first call on your organs should go to a LifeSharers member on the organ waiting list who is a suitable tissue match. If nobody on the LifeSharers list is a good match, your organs go into the general pool. The beautiful thing about LifeSharers is that every person who joins it increases the benefits to anybody else considering signing up as an organ donor with LifeSharers; it's the private equivalent of Israel's Priority Law. If I sign only my driver's licence, I don't do much to encourage anybody else to be an organ donor. But if I join LifeSharers, I help to make it be in your interest to become a donor member. The transplant ethicists here in New Zealand don't particularly like it because they worry that somebody who refuses to share, for whatever reason, might be disadvantaged; I worry more about all the people who are disadvantaged when too few people sign up as organ donors." 

"It's also good that New Zealand is starting to explore running something like America's Kidney Exchange system; National's proposed changes include a feasibility study. Suppose that I wished to donate a kidney to my wife, but I'm not a good tissue match for her, and you're a poor tissue match for your partner, but I'm a match for your partner while you're a match for mine. The Kidney Exchange looks for situations like this and builds chains of living donors. This February, The Kidney Exchange built a chain of thirty kidney transplants involving sixty people. With a smaller population, New Zealand wouldn't be as likely to build these long chains of living donors, but it would still be a great way of helping to increase live donation rates. I hope we move quickly to implementation."