Extending Wellington Airport

May 24th, 2013 at 11:00 am by David Farrar

The Dom Post reports:

Wellington City Council is stumping up $1 million of ratepayer’s money to help Wellington Airport make it through the resource consent phase for its proposed runway extension.

The airport is considering a 300-metre extension north into Evans Bay at a projected cost of $300 million – or $1m a metre.

The extension would allow long-haul flights to and from Asia, and connections to Europe, with new-generation aircraft such as the Boeing 787 Dreamliner and the Airbus A350.

Mayor Celia Wade-Brown said the resource consent process was expected to cost $2 million and the council would vote later this month to contribute up to $1 million as a project ”kick start”.

I’m all for extending the airport, but not sure why the Council should subsidise a resource consent for it.

If Wellington Airport thinks they can make enough money from extra flights and user charges, then they should start the process.

The short and long-term benefits to Wellington of a runway extension were significant, she said.

BERL has calculated the immediate direct economic benefit to the region at more than $43 million a year with more than 300 post-construction jobs created.

Hopefully that report is more robust than the one they did on the costs of alcohol which was beyond redemption as it included costs only, and neglected to include benefits in their calculations.

Hopefully also more robust than their one claiming nationalising the power industry would create 5,000 jobs.

As I said, I think a runway extension is a good idea, and would love to be able to fly overseas (except Australia) without going through Auckland.  But the Airport is a commercial entity. It should only fund an extension if it believes it can generate enough revenues to pay for it.

The cost of alcohol

August 26th, 2012 at 11:12 am by David Farrar

Eric Crampton inserts some facts in a Press op-ed:

I do not particularly care what the jury decides on who is or is not a wowser. But I work with and care about the numbers around alcohol policy. And the impression most readers would get from the latest reporting in The Press is a bit at odds with, well, reality.

Let us begin perhaps with Jennie Connor’s citing of “a Canadian study” on the effects of minimum pricing. Can a 10 per cent increase in the minimum price of alcohol really reduce total alcohol consumption by 16 per cent? No. …

Across-the-board increases in the minimum price of alcohol have far smaller effects: a 10 per cent price increase reduces aggregate consumption by only about 3.4 per cent, as is made reasonably clear in Auld’s paper.

But the bigger mis-use of numbers follows:

I was a bit more surprised to read of the new commissioned BERL report on the health costs of alcohol in Canterbury. …

BERL here replicated work done in Australia by Collins and Lapsley (2008). But where Collins and Lapsley added up all the costs imposed by those disorders where alcohol makes things worse and subtracted from that total all the cost savings from those disorders where alcohol reduces costs, BERL simply erased any beneficial effects of alcohol for disorders including ischaemic heart disease, cholelithiasis, heart failure, stroke and hypertension. …

I received the paper Wednesday courtesy of the CDHB. And BERL, at footnote 14, reports they’ve done the same thing again: “The Collins and Lapsley fractions indicate some alcohol use may be beneficial for some conditions. We concentrate on harmful drug use, and assume zero fractions for such conditions.”

So their measure of the costs of alcohol to the Canterbury health system relies on an assumption that there can be no health benefits from alcohol – an assumption that runs contrary to the weight of international evidence. Assuming one’s conclusions is hardly proper method.

To put it more bluntly the BERL paper is useless as a public policy tool.  Measuring harm without measuring benefits is something zealots do, but we expect better in scientific papers.

Crampton concludes:

How often do you read that problem drinking among 15-24 year olds was no different in 2006/2007 than in 1996/1997 before the change in the alcohol purchase age?

Or that per capita alcohol consumption is down substantially since 1991? Othat light drinkers have about a 14%reduction in their chance of dying from any cause than people who never drink, correcting for the host of other health-related behaviours that are usually given as reasons for ignoring the health benefits of moderate drinking?

Be skeptical of the moral crisis around alcohol.

Amazing to see the comments at The Press attacking Eric personally or attacking things he never said. Very few able to engage on the actual issue.

More on BERL

July 14th, 2009 at 12:51 pm by David Farrar

BERL have done a fuller response to the criticism of their study. An extract:

BERL freely accept comment and debate on our publicly released reports. The project brief for this study was focussed on providing detailed information on the costs of alcohol and other drug abuse to New Zealand society. Measurement of benefits was clearly outside the scope of the project. We cannot accept criticism for not covering issues that were outside the project’s terms of reference.

This raises to me the question of why the hell did the Government spend $135,000 on a report that won’t be of great use for decision makers, as it deliberately ignores benefits. I’m not angry at BERL – I’m angry at the Ministry of Health and ACC for wasting our money.

Crampton and Burgess have done a detailed ten page response to BERL’s response. First they note:

Prior to corrections, we had found net external costs of $146.3 million. Our adjustments produce a net positive figure for alcohol consumption: net external annual benefits totalling $37.8 million, an overall adjustment of $4,832 million from BERL’s original estimate. However, given the margin of error in work of this sort, we would regard both our initial figure and our corrected figure as suggesting external costs roughly equal to collected tax revenues.

It is worth noting that our adjustments were made without access to BERL’s calculations, our request for access declined by BERL on 15 May on grounds of protecting intellectual property. We provided BERL with an early draft of our paper seeking comment in case we had erred in our reverse-engineering of their figures; now, nearly a month later, they have raised objections leading to an adjustment totalling only $36 million. We not aware of any substantive errors that remain in our critique; we welcome additional feedback.

They also look at the issue of benefits being excluded:

Regardless of the terms of reference, BERL’s treatment of benefits in their report is integral to their headline costs calculation. As BERL correctly points out at page 173 of their report, private costs can only be counted as social costs if there are no offsetting private benefits:

BERL’s treatment of private benefits adds $2.2 billion of private costs to their headline costs for alcohol. Plainly, and regardless of the scope of the RFT, BERL’s treatment of benefits is material to their method, directly affecting their measurement of the costs of diverted resources, and more subtly affecting all of their other cost measures.

It does sound like BERL is trying to have it both ways. Crampton/Burgess compare drinking to skiing:

Consider, by analogy, skiing: a risky, but enjoyable activity.
If we wished to count the “social costs” of skiing and wanted to include all of the costs borne by those skiers who broke their legs while skiing, we would need to weigh those costs against the benefits enjoyed by all of the skiers who made it down the slope without accident. Alternatively, we could consider only the external costs of skiing. Counting all of the private costs as social costs by virtue of an unsupported assumption that gross benefits are zero does not provide a useful cost figure.

And this is the crux. If you ignore benefits, you can find any activity has horrible costs. If you ignore benefits, it would be logical to conclude that skiing should be restricted or banned.

And their conclusion:

BERL has chosen not to defend its economic cost report on grounds of economics. Instead, BERL’s main strategy has been to attack the personal values and world view of its critics. BERL’s use of analogies suggesting our personal acceptance of murder and drink driving are in the nature of personal smears. BERL disingenuously continues to allege that our results hinge on perfect rationality and perfect information, in spite of our repeated rebuttals of that point. Their complaint that benefits are out of scope and beyond criticism is obviously incorrect: their treatment of benefits is the basis on which private costs are included alongside external costs. BERL’s treatment of benefits defines the methodology.

And finally:

Most seriously, BERL has not explained what policy makers can do with a cost report that by BERL’s admission has no policy relevance absent benefits. Without this explanation, we are left to observe that the methodology used by BERL produced very large headline cost figures, their report repeatedly mischaracterised those costs as welfare measures, that these costs were misinterpreted by at least one group of policy makers and BERL did not to our knowledge make any attempt to correct this misinterpretation until after our critique of their work was released and picked up by the mainstream media. It is this non-response by BERL that motivated our review.

Identifying a use for BERL’s report on the important issue of alcohol misuse is a matter that remains unexplained

Hopefully the next time the Ministry of Health and/or ACC has to front up to a select committee, an MP or two can ask them that exact question. And ask for our $135,000 of taxes back.

BERL responds

July 7th, 2009 at 12:19 pm by David Farrar

I’m pleased to see that BERL have responded to some of the criticism of their report concluding the cost of alcohol abuse in NZ was close to $5 billion a year.

Treasury have apologised to BERL for some of their comments, on the basis that BERL were not asked to do a full cost/benefit study. In that regards, it is fair enough that BERL not be criticised for working to their brief.

However as someone interested in public policy, there are real questions abotu why Government agencies both commissioned something that was not a full cost benefit study and further why it was promoted by such.  The research was being treated as gospel, and we now know it was research only looking at costs without benefits.

BERL have said Crampton and Burgess made some mistakes in their analysis, and Crampton has blogged that yes there were two mistakes. However they only add $36 million onto the costs. And as it happens they had also missed out the portion of excise tax collected by Customs which increases external benefits by $197 million. This means that their original figure of a net cost of $146 million is now a net benefit of 38 million. That is close enough to zero – in other words the current excise taxes cover the external costs of alcohol, and there is no case for increasing them.

I hope suitable scrutiny will be directed towards other research reports which do not look at both benefits and costs, and get used by lobby groups and government agencies incorrectly.

Roger Kerr makes some good points in a recent column:

Liquor is in many ways not special. Hundreds of products – matches, detergents, electricity, pharmaceuticals, motor vehicles and firearms, for example – cause problems if misused.

Nevertheless, there are external social costs, such as drink driving, which give rise to legitimate concerns.

The challenge for policy is to target these problems with effective interventions (and enforcement of existing laws), not to penalise with regulations or taxes the vast majority of responsible drinkers.

As one commentator has noted, “Raising taxes on alcohol to prevent problem drinking is akin to raising the price of gasoline to prevent people from speeding.”

Absolutely. Too often the Government goes for the easy approach which pubishes everyone equally, rather than target those causing the problem.

The Law Commission needs to engage with this analysis and follow the Generic Tax Policy Process for any recommendations on tax.

Similarly, it should follow the required Regulatory Impact Statement process for any recommendations on regulations in its forthcoming discussion paper.

That process requires a demonstration that the benefits of any recommendations or regulations exceed the costs. Competent analysis requires benefits and costs to be quantified, not just asserted, otherwise serious public policy errors could be made.

It is highly unlikely that proposals to restrict liquor outlets, for example, would meet a cost-benefit test.

I agree. They won’t stop problem drinkers getting alcohol but will make it harder for most people to buy alcohol conveniently.

Instead, the Law Commission should focus on ways of internalising the external costs of alcohol abuse.

For example, why should those who injure themselves in an alcohol-fuelled assaults or burglaries enjoy generous ACC benefits? Many foreigners would regard such treatment as ludicrous. Will Sir Geoffrey Palmer, one of the ‘fathers’ of ACC, be open-minded enough to look at such an obvious remedy?

Similarly, if we are willing to confiscate the vehicles of boy racers, why should we not confiscate the vehicles of serial drink drivers?

Target the offenders, don’t try and social engineer the entire population.

Eric the murdering economist

July 7th, 2009 at 1:04 am by David Farrar

I have previously covered the damning critique done my Eric Cramption and Matt Burgess of the BERL study which found the cost of alcohol consumption was around $5 billion a year. Crampton and Burgess cited multiple errors in the BERL study (including no counting of benefits) and concluded it was actualyl less than 5% of that.

NBR reported last week a response (finally) from BERL:

Adrian Slack says Berl was only commissioned by the Ministry of Health and ACC to look at the social costs and not the benefits of alcohol, and would have needed an additional $135,000 were it to extend its remit to examining the benefits and policy implications. …

A pity that it was not made clear at the time it was costs only. I wonder why the Government would see value in commissioning a paper that looks at costs without benefits. Anyway onto the next comment my Mr Slack:

He accused Dr Crampton & Mr Burgess’s critique as being based on strong assumptions about perfect markets, perfect information, and individual rationality.

“So for example someone who murders someone, from the individual’s point of view, Eric would be, I presume, quite comfortable with that. The person who decides to murder someone else makes an evaluation of what are the benefits and costs to me of this action? Society says ‘well some people do murder other people’, but society says ‘that’s not good.’”

Now that was not a type. He just said that Eric Crampton would be comfortable with someone murdering someone (from an economic perspective). This is BERL’s response instead of a detailed point by point response to the 30 to 40 errors cited in the report?

Paul Walker responds with disbelief – not just from the sillyness of the analogy, but the repeating of economic mistakes:

If the only costs of murder were the internal cost to the murderer then we may not be too concerned with murder. BUT, there are some obvious, to most people if not Adrian Slack, external costs to murder, that is, the loss of life of the victim. The victim is the victim because they have not willingly agreed to be murdered, that is what makes murder, … well … murder.

I have no doubt that both Eric and Matt are opposed to murder, and for the very good reason that it violates the victim’s property right in themselves. Murder is not a market transaction in the sense that it is not a voluntarily agreed to trade resulting in both parties being made better-off.

One of the major points that Matt and Eric made about the BERL report is that BERL didn’t seem to know the difference between internal and external costs. The Slack quote above only reinforces that point.

Indeed an own goal. Eric Crampton also responds:

Economists tend to think that murder is a bad thing. Why? Well, despite the murderer presumably enjoying the act, his gain comes at a cost that he doesn’t personally bear: the death of his victim. That’s the kind of cost that economists tend to call an externality. And so economists tend to support laws against murder. We similarly tend to support laws against theft: while the thief tends to think taking other folks’ stuff is a good idea, the thief’s victims tend to be hurt by it and the thief won’t weigh those folks’ losses against his gains. In these kinds of cases, individuals’ rational calculation of their own costs and benefits lead to socially bad outcomes because of the substantial external costs.

Eric goes on to say that having BERL paint him as pro-murder (economically) is gettign close to a version of Godwin’s Law where you should concede defeat if that is the best you can do.

Blaise Drinkwater also comments on the costs vs benefits issue:

But just because I buy that the BERL report is a costs curvey only, I’m not obligated to buy the report, which bungled the costs badly. Remember, the BERL report said that alcohol costs New Zealand’s society the equivalent of $4,794m, using an “international framework” that seems to have as its main justification the academic equivalent of a circle-jerk. Burgess and Crampton, employing more mundane economics, came up with a figure of $662m. BERL is yet to explain satisfactorily why their headline figure seems to out by a factor of seven.

That is what I am most interested in. I do hope BERL does a more robust and detailed response than they have to date, so people can then judge with confidence which figure is most useful.

Treasury on BERL report

June 29th, 2009 at 4:13 pm by David Farrar

I covered a while back the evisceration of a BERL report into the social costs of alcohol. This report inflated the cost by around 3000% (or $4.6b), and was being cited by the Law Commission as rationale for all sorts of law changes.

NBR reported at the end of last week that Treasury has now expressed concern about thre reliance being placed on reports such as this (which costs the taxpayer $135,000). NBR quotes Treasury Deputy Secretary Peter Bushnell:

The Berl report into the social costs of alcohol being used by the Law Commission is work that doesn’t look like it meets the “normal standards you would expect”, according to Deputy Secretary of the Treasury Dr Peter Bushnell.

There were numerous problems cited in the report by its academic reviewers, including:

“I think the points they’re making are sound about adding the costs of production into the cost of it, and not counting any benefits. In a market if you’re selling something that people are prepared to pay for, then they’ve at least got that much benefit, otherwise they wouldn’t have bought the stuff. So if you exclude the benefits then you’re clearly only looking at one side of the story.”

And as I have said previously,far too many Government reports look at costs only, and not benefits.

However, the mere fact Law Commission president Sir Geoffrey Palmer is seeking out economic advice is positive, “because in the past lawyers often assumed that economics had nothing to do with it.”

That said, the onus should be on the Law Commission to be rigorous Dr Bushnell said.

“Sir Geoffrey’s reputation is reduced [if] he’s putting weight on something that actually doesn’t stack up. So the Law Commission ought to … build in processes that give adequate QA and so on.

“What we’re saying is it’s your reputation that’s at risk here. It doesn’t reflect well on the Law Commission if it … backs [work], that doesn’t have a sound basis.”

That is a pretty undiplomatic serve. Basically saying if you use shoddy reports you’ll get a shoddy reputation.

I’m actually a fan of much of the work the Law Commission does (I like the fact they are pro-active not just reactive) but Ministers will not be as inclined to listen to them if they don’t make sure any reports they use as justification hold up to scrutiny.

Alcohol costs grossly exaggerated

June 17th, 2009 at 3:32 pm by David Farrar

Two economists – Eric Crampton and Matt Burgess, has scrutinised a report by BERL, which cost the Government $135,000. The BERL report concluded the annual social costs of alcohol was $4.79 billion (and has been quoted as a reason to tax alcohol more etc), while Crampton and Burges says BERL have exaggerated costs by 30 fold. Crampton blogs:

“What we found shocked us. BERL exaggerated costs by 30 times using a bizarre methodology that you won’t find in any economics textbook,” Dr Crampton said.

“BERL has virtually assumed its answer. The majority of the reported social costs rest on two very strange assumptions which BERL has asserted without any reason or evidence,” said Dr Crampton said.

“The report assumes that one in six New Zealand adults drinks because they are irrational; that is, they are incapable of deciding what is good for themselves. BERL further assumes that these individuals receive absolutely no enjoyment, social or economic benefit from any of their drinking,” Dr Crampton said.

“These assumptions allowed BERL to count as a cost to society everything from the cost of alcohol production to the effect of alcohol on unpaid housework. That’s bad economics.”

Among other serious flaws, Dr Crampton said the report’s external peer review was done by the authors of the report’s own methodology, important findings in academic literature that alcohol had health and economic benefits were ignored, BERL did not properly warn readers about the limitations of its methodology, and used language in the report that was frequently misleading.

And that is just from the press release. The actual report is as savage as I have seen in critiquing an economic work:

This paper reviews BERL’s report, finding it contains serious deficiencies. For reasons of time, we focus exclusively on BERL’s tabulation of the costs of alcohol. Methodological errors account for approximately forty percent of BERL’s listed costs: double-counting of the costs of insurance and the costs of insured losses; counting as costs all of the alcohol consumed by harmful drinkers rather than just the portion harmfully consumed by those drinkers; incorrect use of multipliers; not accounting for cohort differences between serious alcoholics and the rest of the population in labour force characteristics; and, assuming an implausibly large reduction in crime in the absence of alcohol.

And further:

First, for alcohol consumers BERL uses an epidemiological basis to define the threshold for economic harm. This definition is crossed after 1.8 pints of beer and is low enough to catch one New Zealand adult in six. …

Second, BERL assumes all harmful alcohol and drug consumption is irrational. Irrational consumers are incapable of detecting private costs in excess of private benefits. To the extent those private costs exceed benefits, they are counted as social costs. Third, BERL assumes irrational consumers enjoy zero gross (not net) benefits, meaning all private costs are counted as social costs. The second and third assumptions are not justified – they are simply asserted by BERL. The effect of these assumptions on BERL’s cost estimate is profound. An analysis that would otherwise be confined to externalities is instead inflated by private costs.

And even more:

The credibility and independence of BERL’s work is also questionable, further limiting its usefulness. The analysis ignores most of the large body of peer-reviewed economic literature in favour of a few (mostly commissioned) reports by a very small subset of health economists whose reports have been subject in that literature to many of the same criticisms leveled here. BERL’s report can be reasonably characterized as a New Zealand implementation of a methodology developed by Professors Collins and Lapsley, cited over 100 times in the BERL report. These same authors provided the external peer review of the report.

And finally the summary:

It is customary in reviews like this to offer at least some praise, but BERL’s report has few redeeming features. Beneath its professional veneer, BERL’s report fails in multiple dimensions. Its conclusion is assumed. Its core assumptions defy both reason and the body of peer-reviewed literature. Its headline figures are overstated by an order of magnitude. The methodology is without foundation in the economics discipline, and the report has been peer-reviewed by the authors of its flawed methodology. Its literature review is highly selective. The report contains elementary errors and misunderstandings of economics, and policymakers are likely to be misled by the report’s loose terminology and spurious comparisons1
2. The BERL Study . In sum, these flaws render the report of negligible use for subsequent policy-making.

Now that is brutal. And the Government paid $135,000 for this report and the Law Commission has been citing it as a rationale for its advocacy.

I suspect the BERL report is just one of money where only costs are looked at, benefits ignored, and costs inflated to the maximum.

Economist disagree – shock horror

March 19th, 2008 at 10:33 am by David Farrar

BERL have come out and said they disagree with the BNZ about NZ going into recession.

It reminds me of the three economists having an archery contest. The first one has an arrow hit a meter to the left of the bullseye, the second one then goes and hits a meter to the right of the bullseye and the third one yells out “Bullseye” 🙂

Less common is the different stances of the PM and Finance Minister.  Helen was all “the economy is strong, no problems” while Cullen admitted NZ may have a small recession.