Minister makes sense on alcohol minimum pricing

27/04/2014 § 6 Comments

Note: Eric Crampton at Offsettingbehaviour is an expert on the economics of alcohol consumption in New Zealand, and has posted on this. I purposely wrote this post first (because I have looked at modelling of minimum pricing), then checked out his comments. This post is especially long — sorry.

The Ministry of Justice released a report calculating the impacts of a mandated minimum price for alcohol. The reporting (in both the Christchurch Press and the Dominion Post) was that the report said minimum pricing would be good, lots of people were in favour of the policy, and the Minister blocked it anyway.

Minister Collins was absolutely correct to stop the policy, but not for the reason stated. The reporting was that

The ministry recommended that a minimum pricing regime should not be considered for five years. It said this would give time for Government to assess the impact of alcohol reforms which passed in late 2012.

And you think, fair enough, let’s see what happens with existing measures before we go adding new ones.

Back up a moment — who were these ‘people’ who favoured the policy? Well, all the same people who have been trying to reduce alcohol consumption for years. Specifically, SHORE can’t just let people drink in peace. They feature prominently in the article. It turns out that they supplied a lot of the data and analysis for the MoJ report, too.

SHORE got wound up a while back because alcohol has become ‘more affordable’. What does this really mean? It means (a) people have become richer, and (b) they have decided to spend some of their new riches on drink. This is clear evidence that people like alcohol. Given their druthers, they would like more of it rather than less. Alcohol is a ‘normal good’. Affordability is generally a good thing — think housing.

Back to the MoJ report — what did the report say, anyway? I’ll give you the high points.

First, a minimum price produces nearly the same reduction in moderate drinking as harmful drinking. The report acknowledges that harmful drinking is less price sensitive, but says that the fact that harmful drinkers consume cheaper alcohol means that the minimum policy has more bite with harmful drinkers. Figure 27 makes the link, showing that those who drink more frequently are more likely to be buying cheaper alcohol. The link is there but fairly weak. For those who drink daily, 25% are buying alcohol in the cheapest 20% of products (with no link, it would be 20% of them). So, 75% of daily drinkers are buying more expensive products.

My main issue with this is the blatant classism: if you work drunk on Bombay gin martinis or ruin your liver with Dom Perignon, that’s all good. The report wants to sort those icky people drinking Chateau Cardboard and growlers. While trying to target the fraction of the fraction of the population who BOTH buy cheap booze AND drink harmfully (roughly, 25% of 11% (Figure 1), or 3% of consumers), they are penalising people who want a moderate drink on a budget.

My second issue is the elasticities that drive the whole analysis. Just to be clear, there are two main elements to the modelling. The elasticities (how price affects consumption) are one main element. One set of elasticities, from SHORE and AC Nielsen, are in table 7 (p. 24). They are, shall we say, inconsistent with the literature. The report even points this out:

It was decided that the significant reductions in consumption estimated using NZ elasticity estimates are not a realistic representation of what is likely to happen in reality and are contrary to all international evidence of the responsiveness of alcohol consumers to changes in price.

And yet, the analysis still uses these elasticities. The report also uses the Sheffield elasticities, provided in Appendix 3, which have harmful drinkers as more price elastic than moderate drinkers (own price elasticity). So, a key element of the modelling is suspect.

Thirdly, the other main element of the modelling is how drinking links to harm. I spent a little time trying to dig up reliable data, and it isn’t available. The report tells us that it’s a problem:

For all the harm models there is the possibility that the functional form and slope of the relative risk functions are mis-specified (for example, most functions are assumed to be linear). The savings in alcohol-related harm generated are highly sensitive to the form and specification of the relative risk function. (p. 8)

Translation: we don’t really know, and it makes a big difference, but we’re gonna just go with what we’ve assumed.

Finally, the report finds:

A minimum price or excise increase would have some impact on low risk drinkers, but the savings to society significantly outweigh the lost benefits to consumers. (p. 7)

I’m not sure how they’ve made the calculation, but I’ll explain what I’ve seen. Chapter 9 has a big graphic in which the net social effect is the benefits in reduced harm less the ‘Costs of the pricing policy (deadweight loss + lost value of industry assets)’. This figure is after Chapter 8 runs through impacts on consumer surplus, industry revenue and Government revenue. The figures in Chapter 8 are pretty standard, but figure 13, the long-run impact of a price increase, splits the lost consumer surplus into ‘Lost consumer surplus after pricing policy’, which is a deadweight loss triangle, and ‘Transfer of consumer surplus to government or industry’, which is a rectangle showing the rent from the increased price.

The problem arises because it isn’t immediately clear how that rent rectangle is being treated. According to the Chapter 9 definition, it isn’t a social cost, because it isn’t a deadweight loss and therefore isn’t a cost. Now, this is technically true. If the rent can be captured by government or industry, then it is not a loss to society; it is a transfer from consumers (who may then gain by, for example, more government spending).

However, it is still a loss to consumers. They still, as consumers, have to pay more, and are losing that consumer surplus. Therefore, if you want to draw a conclusion like ‘the savings to society significantly outweigh the lost benefits to consumers’, you need to include that transfer in the ‘lost benefits to consumers’. It is not clear that the analysis does this.

So, a summary. This report is suspect. I haven’t read the whole thing and investigated every calculation, but what I’ve seen suggests that all the assumptions are spelled out and all the details are included, so that if you work at it you can begin to understand how parameters and assumptions were transformed into a crusading conclusion that alcohol must cost more! But it should not be the reader’s job to sort through those details. It is incumbent on the Ministry to provide accurate and impartial analysis. I do not believe, in this case, that they have done so.

Sin taxes aren’t mechanical

26/08/2013 § 2 Comments

The title of the post was going to be ‘Beer taxes cause child abuse’, but that over-states the case (and is inflammatory). Instead, let me just refer you to a paper I stumbled across and make a gentler point: taxes don’t mechanically change behaviour. They don’t pull a lever over here and have exactly the effect you think they will over there. Life is messy, people are complicated, and prices are just another variable.

The paper is here (pdf). The authors look at the impact of beer taxes on child abuse. The dependent variable is the probability of severe violence against children, and the main independent variable is the state tax on beer in the United States. Several other variables, including other alcohol policies, were included. The key results are in Table 1.

They find that the tax on beer significantly and sizeably reduces the probability of abuse by women. For men, on the other hand, the parameter is nearly zero  for 1976 data (in the full model) and is positive and large in 1985. That is, higher beer taxes lead to child abuse.

Yes, this is just one paper. Yes, the results are ambiguous when you take into account gender and years and model specification.

But, it serves as a warning. I can take these results and tell a plausible story. Some father just wants to go home and have a few beers and get a nice buzz on. The price has gone up, so he has to ration his beers a bit more. He can’t afford that fourth or fifth or sixth one, the one that gives him the click*. Or, when he does, he doesn’t want that now-expensive buzz ruined by some snotty, whining kid. A few beers at home has turned into worrying about money, and he takes it out on the children.

Sin taxes aren’t mechanical. Raising prices does reduce consumption (of alcohol or cigarettes or fat or sugar or whatever). But what drives the social interest in personal behaviour is the harm caused, not the consumption itself. The link between prices and harm is not as clear-cut, not as mechanical. In fact, as this article suggests, it may sometimes be the opposite of our expectations.

*Cat on a Hot Tin Roof

Brick: It’s like a switch, clickin’ off in my head. Turns the hot light off and the cool one on, and all of a sudden there’s peace.

Imposing preferences, politico-religious edition

11/06/2013 § 3 Comments

I mentioned my Turkish colleague before. Today, he is sputtering about the new law restricting alcohol. Like many, he makes the link between the legal rules around alcohol sale and consumption, and the push for religious restrictions. This new law indicates that Turkey’s government is moving closer to the religious powers, rather than focusing on keeping the government secular.

I can’t vouch for this post on the law change, but I draw your attention to this statement:

Since alcohol abuse is not really an issue in Turkey (a government study found that 83 percent of adults never even touch a drink and only one percent have a drink every day), at its heart the new alcohol law is a political move.

That ‘government study’ link takes you to a news article with this information:

You may think Turkey has a serious alcohol problem, but according to the Turkish Statistical Institute’s Household Budget Surveys, only around 6 percent of Turkish households consume alcohol. These results are consistent with the Institute’s 2011 Family Structure Survey, which found that 83 percent of Turkish adults never use alcohol. Most of the rest are casual drinkers; less than 1 percent said they drank every day.

I haven’t gone looking for the household surveys, on the assumption that it’ll be too hard to find the right statistic, so I’m accepting this as true (or at least true-ish): alcohol consumption isn’t particularly high in Turkey. As a result, the social costs of alcohol — health, employment, and criminal externalities — wouldn’t be particularly high. And so, we in the West can look at this law change and recognise that it is motivated by religious preferences.

Why can’t we do the same for New Zealand?

I’ve generally stayed away from the alcohol debate on this blog, because it crosses over into my paid work a bit too much. Not that I have to say much — Eric Crampton has done a bang-up job of dealing with the issues in a theoretically consistent way. Once you start working through the various economic analyses and the associated social and medical literature, a few things become clear:

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

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

One-sided science reporting

03/12/2012 § 3 Comments

The Dominion Post over the weekend had a set of articles — above the fold, lots of column-inches, full-colour photos — focusing on scientists. That, in itself, is great. The problem is that these scientists were stepping far outside their expertise and the journalists did nothing to rein them in, or at least present an alternative view.

I have previously discussed these problems, but going back over the posts I think I might have been too nuanced. Let me be plain:

  • New Zealand has a better environment than most tourists’ home countries. That’s why they want to come here. Are we 100% Pure? Of course not. Does it matter? Yes, no, maybe. Should we get our knickers in a twist that we haven’t lived up to the hype? Of course not — don’t be daft.
  • All the talk of creating an innovation ecosystem and fostering a high-tech economy is a patter. A patter is what the con man does to keep you distracted from his hand reaching into your pocket. One article (‘Smart means looking beyond clean green’, which I can’t find on the DP site) pointed to the Kapiti Coast and its efforts to get high-tech manufacturing going. Hey, I’ve looked at it. The KC is tiny — there are single university campuses and factories overseas with more people. There is no way to get the scale, scope, agglomeration, etc. necessary for a leading-edge sector. The New Zealand science system does really well: it publishes a lot, it has plenty of researchers, there are some areas in which we are the world’s best. But let’s not kid ourselves. Oh, and just in case you don’t believe me, check out the Growth and Innovation Framework (pdf) from 2002, which was going to solve all these problems by 2011.
  • People live here, and therefore work here, because of the quality of life. I was talking last week with a guy my age who is doing really well in the scientific world in Europe. His work and commute mean that he is away from home 14 hours a day. This is pretty standard in most big cities, where all that great innovation takes place. I’m not interested, and neither are most of the people here. If we wanted that life, we would be living it — elsewhere.
  • Don’t bring up alcohol research to prove how scientific you are, unless you are really willing to engage with it. I’ve just played around the edges and I can see how complicated it is. Yeah, okay, jacking up prices and clamping down on access will reduce harmful drinking amongst adolescents. But, at what cost? That is always the question — at what cost? If you don’t ask and answer that question, you are spouting propaganda.
  • Spare me the martyr talk. I’ve been hassled over my research, too. Heck, some of it is so controversial I can’t get it properly funded. It doesn’t make you more right.

The core problem is uncritical science reporting. These scientists have to deal with robust debate at work. More of that in the newspapers wouldn’t go amiss.

How price-based policies work

06/09/2012 § 4 Comments

Price-based policies are all the rage. A core idea is that we need to get prices ‘right’, and then market forces and consumer rationality will get us to maximum satisfaction. But, as Eric Crampton likes to remind us, slopes are often slippery.

Rather than worry about the coefficient of friction, however, I want to lay out how price-based policies actually work and what that means for policy and welfare.

First, we start with how consumers respond to prices. The technical term for this is ‘elasticity’, but let’s just go with the simpler ‘response’. There are three responses when the price of some item goes up:

  • the item itself — when the price goes up, we usually buy less
  • income response — because spending on the item itself has changed, the money we can spend on everything else also changes
  • other items — we will buy more of some things and less of other things.

One of the key things to understand is whether total spending on the item itself goes up or down. Take petrol, for example. When petrol prices go up, we buy less (in litres)  but not a lot less. As a result, spending on petrol goes up. On the other hand, when prices for some things go up (cherries, mangoes, merino-possum jerseys,…) our total spending on them goes down.

That leads to the income response. This is somewhat simplified, but basically we can have more or less money to spend on other things. We change how much we spend on everything else — heating, healthcare, holidays, etc.

Finally, we also need to take into account how the item itself fits into our total consumption. Take petrol again. When petrol goes up, cars and holidays become more expensive, so we buy less of them. Phone calls and internet connections can substitute for driving somewhere, so we buy more of them.

Now, let’s think about a tax on something like alcohol, ignoring for a moment where the tax revenues go. The tax makes the alcohol more expensive. That pushes up total spending on alcohol. We then have less money to spend on everything else, good and bad. Finally, our spending on everything else shifts around, depending on whether those things go with alcohol or substitute for it.

Are we happier? No, we are not, by assumption. The economic model assumes that we spend our money on the things that provide the most satisfaction. Otherwise, we could change our spending patterns and be happier. When prices go up (without compensating somehow), we are poorer and less able to get satisfaction.

Are we healthier? Well, that’s complicated. Let’s assume that our alcohol consumption (or sugar or fat consumption) is in the ‘harmful’ range. Assume, further, that by consuming less of it (although spending more on it) we are doing ourselves less harm. We have to set against that the income response and the spending on other items. We are poorer, so we buy less healthcare and less home heating. Our spending patterns shift, so we might buy less tobacco (if we smoke when we drink) but we also might buy less tomato juice, celery, and horseradish (because we like Bloody Marys). We may end up healthier, but we may not.

Are we ‘better off’ — has our welfare increased? In one sense, no, it hasn’t, by assumption (see, ‘happier’, above). If, however, we assume that people lack information or we assume that they are too myopic (that is, they know what’s good for themselves but don’t place enough weight on the future), then such policies might increase experienced welfare even as they decrease happiness in the present.

Note, however, the chains of ifs and buts, the assumptions on assumptions. If the lack of information or myopia is sufficient, and if the buying patterns shift towards ‘good’ products on balance, and if the net health impacts are positive, then price-based policies can make us better off.

I’ve left out a lot, a discussion of what happens with the tax revenue being the obvious gap. Even in the simplified example, though, the complexity is obvious. To quote the Dread Pirate Roberts, ‘Anyone who says otherwise is selling something.’

This stuff matters

22/08/2012 § 11 Comments

I’ve been turning over in my head a recent comment from James Zuccollo about the discussion on this blog, TVHE, and Offsetting. Regarding the tone some of us economists have taken with physical scientists, he asked, does this have to be a gladiatorial encounter?

My answer is, this stuff matters.

First, this stuff matters in a narrow sense. We have competitive funding for research in New Zealand. Economists try to get funding — oh, let’s own this, I try to get funding — and we find ourselves having to explain economics to engineers, psychologists, sociologists, geographers, etc. And time and again, economics research isn’t quite important enough to be funded. Since it is a zero-sum game — if you get funded then I don’t — it is a fight.

Secondly, this stuff matters in a much broader sense. An important reason for doing economics is to understand how to maximise welfare. We can argue about efficiency versus equity, individualism versus collectivism, narrow versus broad definitions of welfare, the role of externalities, and the impact of cognitive heuristics and biases. But still, we are trying to make the world a better place.

The role of applied microeconomics — my little corner of the world — is even more focused on this goal than other areas, such as econometrics or theoretical economics. We are looking at how people and businesses are directly and indirectly affected by policies and decisions. One of the things I keep finding is how little we really know. We keep making policies and decisions and hope they are the right ones, but we don’t really know.

Let’s take a clear example, one of Eric Crampton’s bugbears: alcohol policy. The Government is discussing instituting a minimum price regime in order to curb harm from drinking. Importantly, a minimum price will make it more expensive for anyone who wants to buy cheaper alcohol. Why might people want cheap alcohol? Well, maybe they drink a lot of it, ‘too much’ by some standard. Maybe they have decided that a little ethanol is nice, but don’t want to spend too much on it. But maybe, just maybe, they are poor. They like a drink or two at the end of the day, just like richer people. Wine at $15 a bottle doesn’t fit the budget, but chateau cardboard tastes just fine and does the trick.

What we know from economic theory is that putting up the price of cask wine has both a price and an income effect. The price effect means that people buy less of it. The income effect means that they buy less of everything else, including heating, medicine, fruit, and all those things that are considered ‘healthy’.

To continue in catechism form:

Q: How much less healthy stuff do people buy?
A: We don’t know.

Q: What’s the net impact on health?
A: We don’t know.

Q: Why don’t we know?
A: The research hasn’t been done.

Q: Why hasn’t the research been done?
A: Because no one has funded it.

Q: Why hasn’t anyone funded it?
A: Because it lost the competition for scarce research funding.

So, to recap: real people are going to have their health and wellbeing directly affected by policy, but we don’t know how much and haven’t bothered to find out. We will possibly make the world worse, all because the social science research — the economic research — hasn’t been funded.

So yeah, it is a fight. Because this stuff really does matter.

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