Taxing people into better lives

30/10/2013 § 9 Comments

I’m struggling with sugar and fat taxes. The hope is that we can encourage people to improve their diets by changing relative food prices. We know that in theory we can, and that in practice there seems to be some effect.

But does it make those people better off?

This is purely an economics exercise, not a medical/public health one. So, all the usual assumptions and disclaimers apply.

Assume that someone drinks a lot of soda (technically, sugar-sweetened beverages — SSBs). The consumption contributes to their obesity and puts them at greater risk for diabetes. Let’s just focus on the diabetes angle. What this means is:

soda now > diabetes later.

That is, they prefer having soda now, and are less concerned about diabetes later. Or, rearranged:

soda now – diabetes later > 0.

This presentation emphasises that the pleasure from soda now, even once the diabetes later is taken into account, is net positive.

Now, let’s say that we tax soda so this person stops drinking it:

soda now + tax < diabetes now.

We haven’t made them ‘better off’. We have taken away their pleasure and substituted something less valuable.

There are essentially three ways that this might be an improvement:

  • information problem — they didn’t know how bad diabetes would be when they drank the soda, so the tax keeps them from the negative experience
  • time-inconsistent preferences — the future self would have wanted the past self to abstain
  • externalities — diabetes imposes costs on everyone else, so the person isn’t facing the true costs.

This third option is interesting. Let’s say I am poor. My consumption is generally constrained by my budget. The one area where this isn’t true is public goods — botanical gardens, beaches, education and healthcare. If I contract diabetes, I expand my use of healthcare beyond my own budget constraint. By drinking soda now and contracting diabetes, I am actually consuming outside my budget constraint. On the other hand, stopping people from drinking soda and thereby stopping them from contracting diabetes is pushing them back inside (or closer to) their budget constraint. Therefore, the policy makes them poorer.

Yes, I understand that it makes them healthier. I’m just not sure that it makes them ‘better off’.

NZ is not the US (again)

24/10/2013 § 2 Comments

NZIER (my employer) has released a report today: Fighting fit? Assessing New Zealand’s fiscal sustainability. From the media release:

NZIER recommends that tough decisions around taxes and government spending need to be taken now, and stuck to, in order to avoid a US-like situation in the future when the economic and political costs of correcting debt levels become dangerously high. A bipartisan agreement on funding superannuation costs would be a good starting point….

“Without significant changes, government debt will be almost twice New Zealand’s GDP by 2060, compared to 26.3% of GDP now. That is simply not affordable” said Dr Lees.

I had no hand in the research, and I haven’t reviewed the figures, so I can only take Dr. Lees’s word on those. Two points to make, however.

First, the 26.3% of GDP figure — which looks big, yes — needs some context. The first bit of context is that lots and lots of developed countries are in debt and doing just fine. So, debt in itself isn’t the problem. It’s why we are in debt. That leads to the second bit of context. Here is a graph of NZ government debt, sourced from the hive mind (
The present situation looks anomalous against the previous 20 years, so it probably isn’t a great benchmark.
The second bit of context is that the New Zealand system of government is not like the United States’ (here’s a longer explanation). One is parliamentary, the other is presidential (with a bicameral legislature). The reason that 46 Representatives (of 435) and 6 Senators (of 100) were able to shut down the government is because of the way the different parts of the US government are organised. In New Zealand, the Prime Minister has a ruling coalition. In the US, the President can face a hostile Congress with real power.
Furthermore, the shutdown had nothing to do government spending. If these US politicians were interested in reducing government spending, they would be overjoyed with Obama, who ‘has actually been tighter with a buck than any United States president since Dwight D. Eisenhower’. But the history of actual government deficits/surpluses has little to do with the mythology.

By all means, let’s make sure that New Zealand is fiscally sound for generations to come. But let’s not pretend we’re the US. That bit of rhetoric doesn’t help us understand our own situation.

Be professional

22/10/2013 § Leave a comment

Yes, yes, I know. I have been absent. Mea culpa, truly. I am trying, as a friend of mine used to say, to fit 10 pounds of ‘stuff’ into a 5-pound bag. Feel free to convert to metric.

Anyone out there need a job?

I interrupt this unscheduled silence to point to Slate article by Laura Helmuth via Scott Lemieux at Lawyers, Guns & Money (an eclectic blog and excellent Zevon song). The title of the article — words to live by, actually — is ‘Don’t Be A Creep’.

The point, as Lemieux summarises, is that professional people should be professional. Helmuth:

If you are established in your career and in a position to help others, congratulations. Be as generous as you can be, and while you’re at it, remember to thank the people who helped you. But recognize that you have a tremendous responsibility to take your mentees seriously. It’s easy to forget how insecure and uninformed someone can be starting out, and it’s hard to remember that you have a lot of power in comparison, even if you have just a few years more experience or feel like a cog yourself. Be respectful, be appropriate, be professional. Above all else, do not be a creep.

This piece is a good reminder of something important. I am filing it under ‘7 skills of consulting’, because it ties in with the whole idea of those posts. My recipe for being a consultant includes cultivating a sense of restraint, sobriety, balance — professionalism. It’s also a good way to treat other people. Just because you’re Mayor of Auckland Commodore in the Navy principal investigator on a few projects doesn’t make you irresistible, regardless of what Kissinger said.

Even a little power comes with responsibility.

Food prices and public health

09/10/2013 § 8 Comments

The University of Otago announced the results of some research in which I’ve been involved.  The relevant blog post is here. What I really like about the post is the moderate tone:

In the first paper from the SPEND Project, we found that across 20-odd food groups, low-income people and Māori tended to change their consumption of foods more in response to price changes, using New Zealand data.  This is entirely consistent with economic theory – and data about price impacts for other consumer goods such as tobacco.

This suggests – but does not prove for reasons we outline below – that taxes on ‘unhealthy’ foods like those high in saturated fat, salt, and sugar; and subsidies on ‘good’ foods like fruit and vegetables should not only improve diets across the board, but more so among socially disadvantaged groups with worse diets and health to start with.

But the proof is in the pudding, which in this case is the health and economic modelling to see what effect taxes and subsidies will actually have on disease rates.  And due to data limitations our modelling is still only half-baked, no matter which research group’s findings you look at.

The post goes on from there and explains more about the different bits of research.

Of course, there are all the problems with implementing such tax/subsidy programmes, and the philosophical issues with ‘nudges’ and individual welfare. But importantly, we now have better estimates of prices elasticities in order to make better calculations about gains and losses.

Again with Inequality

07/10/2013 § Leave a comment

I have already written about Inequality: A New Zealand Crisis, here on the introductory section and here in relation to evidence-based policies. Today, I’ll finish with it.

I still don’t buy the idea that inequality is bad for everyone (p. 13):

in less equal societies nearly everybody, not just the poor, is adversely affected.

The book cites The Spirit Level in support of these claims, but I’ve already addressed the weaknesses of that book. But then, the authors of Inequality don’t really believe this idea, either. Max Rashbrooke reviews the data on income equality and the divergence since the 1980s, and shows clearly how the top income decile has done well. Robert Wade explains how the divergence has been worst for the bottom 40%, best for the top 10%, and relatively neutral for the other 50% in the middle. Even amongst Maori, some have done better than others through the claims settlement process, according to Evan Te Ahu Poata-Smith.

They agree that some people do just fine out of inequality, thank you very much.

The book is good at making the case that inequality is more important than poverty. It runs through some of the standard arguments — that lack of options or access is necessarily comparative, that people need a minimum to participate fully in their society, that recognition of fundamental human rights requires greater equality. What convinced me more was that ‘poverty’ is othering, whereas ‘inequality’ recognises that we are all bound up in the process.

Several chapters are by economists: Robert Wade, Ganesh Nana, Paul Dalziel and Nigel Haworth. Wade does a good job of explaining the international context for New Zealand inequality and the zeitgeist that lies behind it. Nana wanders away from economics, which reduces the impact of his chapter. He calculates that the unemployed cost the country $27 billion in lost production. But his assumption relies on the idea that the unemployed would be averagely productive, even as the other chapters tell us about poor education and training. He forgets that better training would cost money, too. Dalziel (a former colleague of mine) focuses on what he knows well — education-employment linkages for school leavers — and provides some realistic ways to improve the situation.

Haworth has an interesting chapter. The central idea is one of path-dependence: New Zealand has become locked into a low-wage economy. Businesses are organised around low-skill, low-wage work, so workers don’t train or work more efficiently, and the process reinforces itself. Changing the situation requires pushing the whole country in a new direction, a la Singapore or Finland. Now, I’m not interested in living in either of those countries, but the idea of path-dependence is interesting.

The book could be better organised. For example, Dalziel provides a good framing statement but it is buried on pp. 187-188:

Inequality is entrenched in all five pillars of New Zealand’s welfare state — employment, income, housing, health and education.

Also, Jonathan Boston’s chapter is very good for setting up the whole notion of inequality — well, equality — but it’s several chapters in.

Another issue is focus. The book clearly starts with an intended focus on income inequality. Rashbrooke explains that income inequality is a key issue — income allows people to participate fully in society, and it is a clear outcome measure. Some chapters — like one on prisons and crimes — stray a bit too far from the central premise.

The book also doesn’t get its story straight. Gareth Morgan and Susan Guthrie tell us that

New Zealand superannuation delivers recipients a level of well-being that is exceptionally high by international standards.

But this statement comes soon after Mike O’Brien says:

This is not to argue that payments for superannuitants are too high: the evidence suggests that those living only on New Zealand superannuation (with no other income) are close to or below the poverty line.

So, the book is uneven. It covers the right material for people who are already concerned about inequality in New Zealand. I’m afraid, though, it isn’t well constructed enough to prod more people to do anything. It also doesn’t provide many recommendations, so it’s not clear what they should do and why.

Notes for foreigners on US shutdown

04/10/2013 § 3 Comments

Most site hits here are not from the US. As an ex-pat, I feel a duty to explain the current ‘shutdown’ of the US government to my guests.

‘What in the world is going on?!’ I hear you cry. ‘We thought only Italy did this sort of thing.’

Sadly, no.

There are two explanations you need. The first is procedural, the second is political.

The procedural explanation is actually straightforward. The whole thing is legal, in keeping with the Constitution. The US is not a parliamentary system, so the President can be from a different party than the one that controls the Congress. In addition, the Congress is bicameral (two ‘rooms’ or houses: ‘bi-‘ + ‘camera’). The House of Representatives is larger and has two-year terms. It is considered the most responsive to popular sentiment — lots of members (smaller constituencies) and shorter terms. The Senate is smaller, and Senators have six-year terms. It is thought to be more august and deliberative (paralleling the UK House of Lords). Different parties can control the two houses. Currently, the Republicans control the House and the Democrats control the Senate (and have the Presidency).

Under the Constitution, spending bills must start in the House. The idea is that, since it is the people’s money, the people’s representatives should have first say. After that (very long story short), bills have to be approved by the Senate and the President. They will have their own ideas about what the spending bill should say. The Senate can work in committee with the House to create a compromise version. The President essentially can only vote up or down on whatever bill he receives.

The current shutdown, procedurally, is simply that the Republican House is proposing a spending bill that neither the Democratic Senate nor Democratic President will approve. Because they cannot agree, no funding has been approved for this fiscal year (starting 1 October). No money, no government.

That explanation, though, is entirely unsatisfactory, because it doesn’t have the frisson of politics. That’s where the action is. It helps to understand a few things:

  • Both parties are fractured. Both parties have different groups representing different interests, often at odds with each other.
  • Both parties primarily represent business interests. They represent different business groups, who have different agendas. Because only the two main parties have any real power, all the other interests are somehow incorporated into them: labour, Green, libertarian, etc.
  • Democrats tend more toward labour and environmental interests. Under the New Democrats (Clinton(s) and Obama), these interests must be placated enough to keep them from getting in the way of business. For examples, see Obama’s throwing of Elizabeth Warren under a bus, and the Clinton/Obama healthcare reforms that maintain industry structure and profit while still leaving millions uninsured.
  • Republicans tend more toward laissez-faire economics and social conservatism. Since Reagan, the strategy has been to fire up a base of social conservatives (the Christian right), then do as little as possible to keep them placated while advancing an agenda of big business power. This strategy has involved ‘wedge’ issues (that is, being divisive), including God, gays, guns and abortion. Republicans also controlled the last redrawing of Congressional districts, and they resorted to the time-honored tradition of gerrymandering. Although they are the minority party, they have leveraged their smaller vote count into a powerful position.

The current stalemate is the result of two forces. First, the Democrats have moved more and more towards supporting business interests. Obama represents the policies of Republicans of 20 years ago. The Affordable Care Act (‘Obamacare’) is basically the same as a proposal by the conservative Heritage Foundation and the Massachusetts plan instituted by Romney before he was the Republican candidate for President. The more the Democrats move in that direction (‘triangulate’ in Clinton terms), the more Republicans need to move even further in conservative and/or libertarian directions. The political centre moves with them.

The second, related force is the split in the Republican party. It used to be that the Christian conservatives and small-government advocates were ‘useful idiots’. They helped get Republicans elected but didn’t drive policy. Reagan and Bush I raised taxes. Reagan, Bush I and Bush II all presided over expansions of government power and spending. They didn’t adhere to the principles they espoused.

But they have been doing this schtick for over 30 years. A whole generation of voters has been raised on the rhetoric and didn’t know it was a con. Add to them the social conservatives who want to keep privilege for themselves (‘Segregation forever!’). Then add in a few more low-information types (‘Keep government out of Medicare!’). In the last couple of elections, these voters have been successful at sending just enough contrarians and culture warriors to the House to create a voting block big enough to say ‘No!’ That is splitting the Republicans between the True Believers and those in the business of business, and the TBs currently have the upper hand.

The rhetoric also contributes to a view amongst some of these voters that the current government is illegitimate: it doesn’t represent the ‘real’ America and must be opposed.

Keep in mind, though, that even the TBs in the House don’t believe what they say they believe. This is obvious as the shutdown takes effect. For example, these same people who won’t fund the government went down to the WWII memorial in a public park to make a PR stunt of helping a group of veterans get in. They are also more than happy to have the Capitol police on duty — unpaid! — today. They have kept on the flight controllers and the border guards. They don’t want a government shutdown. They just want to dictate which parts of government operate and which ones don’t.

This point circles back to the trouble with Democrats. They keep letting Republicans off the hook for their rhetoric and never call them to account. The Democrats do this because fundamentally they want something similar: smaller government via smaller social programmes.

And that’s really why we have the shutdown. The Democrats want something and can’t quite admit it, and the Republicans don’t really want what they say they want. So they’ve bumbled into a barfight, circling each other in displays of aggression and keeping the rest of us from just enjoying a night at the pub.

Where Am I?

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