Crampton on housing

July 6th, 2016 at 10:00 am by David Farrar

Eric Crampton has a lengthy post at The Spinoff on Auckland housing. He looks at what won’t and will make a difference.

First why there is a problem:

Auckland is adding houses less quickly than it is adding households. But it cannot be as simple as that. Avocado shortages aside, high migration figures haven’t led to shortages of anything else that people buy – and I would not blame migrants for the avocado shortages either. Auckland doesn’t have a barber crisis induced by the tens of thousands more people who need haircuts every month as compared to the same time last year.

Fundamentally, the problem has to be constraints on supply: either the building industry simply cannot keep up, or the council isn’t zoning enough land for either building up or building out.

The constraint, so far, has not been the construction industry. When I was at the University of Canterbury, you couldn’t walk between two buildings during the earthquake rebuild without meeting Irish accents in fluoro vests. Markets can scale up to meet demand if they expect that demand to be sustained. Builders can come in from overseas. Cement plants can be expanded and upgraded. Unexpected housing demand can then cause price blips, but you shouldn’t get the years-long rolling maul we’ve seen in prices.

The series of three reports the Initiative released in 2013, our reports since, and the Productivity Commission’s reports, point pretty strongly to council-level constraints on new building. Pro-density activists made it too hard to expand at the outskirts of town; Not In My Back Yard activists made it too hard to build apartment towers or terraced housing close to downtown. When a city can’t go out or up, prices can only go one way when population increases.

Auckland needs both up and out.

He then looks at the red herrings:

  • 33,000 empty houses at the census – is lower than most centres as a proportion, and consists of houses being sold. renovated or holiday rentals
  • Capital Gains Tax – will cause a one off drop in house prices, but not stop them appreciating again.
  • Migrants – Atlanta has gone from 3 million to 5.7 million people but houses there are only three times median household income- because they build to keep up
  • More state houses – The Government also has to obey the Auckland zoning rules. Unless Parliament legislates over the top of the Auckland Unitary plan, they are also limited to where they can build
  • Land banking – agrees with Phil Twyford the solution to land-banking is eliminating the RUB and allowing development to “leapfrog” over existing land-banks

So what does Crampton suggest:

  • Give Councils incentives to have houses built such as the GST revenue from the construction costs
  • Change zoning to allow housing to build up and out
  • Amend RMA to make it easier to subdivide, easier to change district plans and harder to block new developments

A hipster tax to fund Tieke recovery

April 28th, 2016 at 3:00 pm by David Farrar

Eric Crampton writes:

It is very, very easy to break a beautiful tax system. Here is the recipe for doing it.

Start by finding some product that seems a little frivolous – a bit of a luxury – and preferably one that’s mostly used by people that the typical voter does not really like anyway. Say, for example, the fancy beard oil used by hipsters to maintain their elegant facial appendages.

Then, find some cause that nobody could object to. Something really motherhood and feijoa pie. Tieke recovery. Who doesn’t love the New Zealand saddleback and support its recovery? Nobody.

Add the two together and propose a tax on hipster beard oil to help fund Tieke recovery programmes. Who could object? Hipsters are at best a mild nuisance, and at worst a looming threat to national identity; beard oil seems the height of frivolous consumption; and Tieke are a perennial entry in Bird of the Year competitions.

The bundle is an economic abomination. If Tieke recovery is the best use of the next public dollar, it is best regardless of whether we tax hipsters’ beard oil. And if a tax on hipsters’ beard oil is the most efficient next tax to impose, then the government should tax it regardless of whether the money raised is used to cut other taxes, fund Tieke recovery, or fund something else entirely.

Many countries have a tax system where hundreds or thousands of different products have different tax rates applied to them. I’m glad we don’t in NZ, and hope we don’t change.

My starting point for anyone advocating a new tax, is that they should identify an existing tax to eliminate or reduce so that overall tax levels on families and businesses doesn’t increase.

Sell, don’t allocate water rights

April 11th, 2016 at 4:00 pm by David Farrar

Eric Crampton writes in Stuff:

There has been a lot of outrage that a water bottling plant is being set up in Ashburton. A similar one was built in Hastings last year.

The plants draw water from the aquifer, put it in bottles, and sell it in Asia. Because New Zealand awards consents to draw water but nobody puts a price on water, critics see this as profiteering on an unpriced resource.

At the same time, over a thousand Canterbury dairy farms put water into cows. Dr Daniel Collins estimated that it takes about 250 litres of river and aquifer water, through irrigation, to produce a litre of Canterbury milk. That will not be a net measure, as some of the irrigation does flow back into the aquifer.

But it will take many more litres of water to produce a litre of milk than it takes to produce a litre of bottled water. The milk is collected, the water extracted, and the powder is sold in China.

And so we come to what might be the Canterbury Trabant plant. Does anyone really know whether water from Canterbury’s aquifers is more valuable when put directly into bottles and sold to Asia, or when it routes through a cow along the way?

How low does the price of milk have to be before it would make more sense to leave out the middle-cow?

It is a tough question to answer, and especially where water allocation is set by consent rather than through markets. East Germany allocated iron by something not that different from consents, rationing scarce resources across various industrial uses, and wound up making cars that were worth less than the inputs that went into them.

New Zealand allocates scarce water by consents, and hopefully does a better job of it. Trabants were ghastly; New Zealand milk is delicious.

Crampton correctly identifies that with a limited resource, it is hard to know the best use of water (beyond that needed for home supply) without having some sort of price signal.

Former Canterbury University Senior Lecturer John Raffensperger developed a smart market system letting people with water drawing rights on the Canterbury plains trade those rights.

The system cleverly managed things where drawing a litre of water has different effects on the aquifer depending on where that litre is drawn. It also could make sure that the rivers continued flowing, even in dry years.

What happens when farmers, and water bottlers, and towns and cities, can trade litres of water consent with each other? We can find out where the water really has the most value.

If a dairy farm wants to expand and cannot draw more water for irrigation under its consent, it would have to buy drawing rights from other users.

If those users are happy to give up their drawing rights for the amount offered, then the water is more highly valued when it is run through a cow and turned into milk products. If a water bottling plant that wants to expand is able to pay dairy farmers to hand over some of their drawing rights, then those litres of water are more valuable going straight into the bottle.

Definitely a better idea than the status quo.

Shifting to a trading mechanism would make sure that New Zealand water were put to its best use. That also makes water more valuable – a gain for those with current consents. It also would make it simpler to manage the system in dry years: the government could buy back drawing rights to keep rivers flowing, then sell them back to farmers when rivers run freely. And the farmers who can most easily scale back irrigation in dry years would be the ones to do so.

Public outrage about the bottling plant is really misdirected. What is really outrageous is that New Zealand’s system for allocating water looks so much like East Germany’s system for allocating iron. Let’s hope we have no hidden Trabant plants.

Well argued.

Crampton on UBI

April 4th, 2016 at 11:00 am by David Farrar

Eric Crampton writes:

In principle, a Universal Basic Income, as floated by the NZ Labour Party, sounds great. It’s once you start looking harder at implementation that things quickly become, well, messy, writes Eric Crampton.

If you like a UBI, economist Kevin Milligan tells us you can choose two of the following three options. But only two.

1. A high enough basic income that few people on current benefits are made worse off;

2. A low phase-out rate so that lower income workers do not face sharp penalties for accepting work;

3. A cost that isn’t massively higher than current spending on benefit programmes.

You cannot have more than two of these.

Labour could never do a UBI that doesn’t do 1 and 2 so hence the only sort of UBI Labour could do is one that costs massively more than current welfare spending.

Should organ donors get priority for organs?

September 16th, 2015 at 7:00 am by David Farrar

Eric Crampton writes in the NZ Herald:

Last year, there were 72 kidney transplants from living donors. If fully compensating donors’ lost earnings enabled even only three more people to make that gift, the government would not lose any money from the increased compensation: it would save as much in dialysis costs as it would provide in compensation. Every additional donation enabled after that would save the government over a hundred thousand dollars.

A good policy.

One move that could help encourage donation while costing the government nothing would be the adoption of Israel’s priority system for live organ donors. Why does this matter? If you donate a kidney, there is always a small risk that you could, sometime down the line, regret your decision if your remaining kidney failed.

Those risks are small – the vast majority of living donors surveyed in the international literature are glad that they donated and would recommend it to others. But those lingering worries can make people hesitant to become donors.

Israel helped to solve that problem when its government provided live organ donors a guarantee that, should those donors ever need a transplant, they would not be at the back of a long queue.

Every living kidney donor has already made the queue one place shorter for everyone. Making sure those donors have a decent spot in the queue should they need a transplant encourages donation and helps makes the queue shorter. And it’s fair. The Select Committee should consider taking this extra step.


I agree donors should automatically go to the head of the queue.

Crampton on TPP and drugs

July 30th, 2015 at 3:00 pm by David Farrar

Eric Crampton writes:

I don’t think that the extensions to drug patents hinted at under TPP are for the good. But it isn’t obvious that they aren’t.

Let’s run the story.

Most new drug development happens in the US and EU, with more coming in now from China as well. It is ridiculously expensive to develop new drugs. Some of that is because the FDA makes things harder than they need to be, but a lot of it is real cost. The US has pretty strong drug patent protection to encourage investment in new drug development: nobody will spend hundreds of millions, or more, on drug research that might lead to one or two commercially viable breakthroughs if they can’t reap the rewards on the ones that pan out.

On that story, New Zealand and others have been free-riding pretty hard. Don’t get me wrong – this is great for New Zealand. We get a pile of generics out of India when they come off-patent here and the drug system saves tons of money. But we’re contributing rather less to the general “let’s develop more new drugs” effort. Price controls on pharmaceuticals do discourage new development (and here’s similar EU evidence), and newpharmaceutical innovation saves lives.

You could imagine an international convention, agreed to by everybody, that would reduce global free-riding on research done in the EU and US in order to get more new drugs developed. We in New Zealand would pay more than we’re paying now, but we’d also be paying a fairer share of the development costs of new drugs. Optimal pricing should still involve poorer countries paying less than richer ones, but you’d also have expected things like iPads to sell for less in New Zealand than in the US on the same kind of grounds – so that part might disappoint.

But think about the rhetoric on “doing our part” on global warming, and wonder why the same “doing our part” arguments haven’t been made about pharmaceutical innovation to save lives.

It’s a fair point.

Overall like Eric I don’t want want longer patent terms for drugs, but the cost to NZ may not be hugely significant. We’ll have to wait to see the costings, if or when there is a deal.

I’m still undecided on TPP, and getting nervous about the rhetoric. I’m a huge supporter of freeing up trade, but this is starting to sound like a very modest deal, rather than the gold plated one we were told was the aim of it.

Some of the US demands in the intellectual property chapter would be bad for New Zealand. We have resisted them to date, which is good. But as part of the final stage negotiating we may compromise on the IP chapter in order to make gains elsewhere. Now that may be okay if we get a really really good deal elsewhere, but not if we don’t.

The two key chapters appear to be dairy and IP. So broadly there are four scenarios. They are.

  1. Good dairy access, no compromise on IP chapter – a great outcome – sign it quickly
  2. Poor dairy access, no compromise on IP chapter – a modest outcome – worth signing
  3. Poor dairy access, significant compromises on IP chapter – don’t sign.
  4. Good dairy access, significant compromises on IP chapter – the difficult balancing act

So scenario 1 is what we want. Scenario 3 is what we should refuse to sign up to. Scenario 2 is disappointing but still a gain for NZ so ok.

Scenario 4 is more tricky. The devil will be in the detail. If we really got eventual unrestricted access to the US, Canadian and Japanese markets then we probably have to accept some painful concessions elsewhere. But if the dairy gains are relatively modest, then compromising on the IP chapter may turn the TPP into something I can’t support. Ultimately I’ll reserve judgement until I read the impact analysis, but I’m worried that scenario 1 is looking rather remote.

Crampton on copyright

July 22nd, 2015 at 9:00 am by David Farrar

Eric Crampton writes:

Australia National University’s Dr George Barker suggested this week that New Zealand could do well by strengthening its copyright legislation. He warned against the fair dealing exceptions that have crept into the law and asked, “Why not have copyright law like property law – i.e. it lasts forever?” 

That is a good question.

Eric is being generous. I think it is a stupid question. But it allows a good answer from Eric:

Five years ago, Larrikin Music, who bought the rights to an old Australian folk song, sued Men At Work for including an 11-note flute sequence from it in their 80s-hit, “Down Under”. Where Men At Work had intended homage in its celebration of all things Australian, Larrikin, and the law, saw copyright infringement. 

But does that really go far enough? If an 11-note sequence counts as infringement, how much do modern artists owe Pachelbel’s descendants? The four-chord sequence making up the core of his Canon in D has been repeated in dozens, if not hundreds, of subsequent songs. Should evidence produced by Australia’s Axis of Awesome be used in copyright lawsuits by anyone who can document that, ten generations back, Johann Pachelbel was a great-great- grandfather? It seems absurd.

Even from the perspective of a profit-seeking artist, copyright is a double-edged sword. Stronger copyright both increases the rewards from having produced a piece of work and increases the cost of creating new works. Artistic works feed off each other. New works build on older traditions, reinterpreting old folk tales and old folk tunes for new generations. The Brothers Grimm collected and published older folk tales like Cinderella and Sleeping Beauty in the 1800s. In the 1900s, Walt Disney brought those stories to life in a new form. In the 2000s, well, it is hard for new innovation to occur because copyright law, at least in the United States, has frozen the usage of most important works produced since 1923. 

Why should copyright be limited? Because current creators draw on a global commons in their artistic creations. And future generations of artists deserve a commons too.

A good answer indeed.

I think copyright should apply for the life of the creator plus 20 years. That gives an incentive to innovate, but provides a commons for our future.

Academics claim NZ will in future be better off with no dairy industry!!

April 30th, 2015 at 2:00 pm by David Farrar

The Herald reports:

A peer-reviewed study authored by Massey University scientists has claimed that worst-case scenario costs to society from environmental harm caused by farming could equal the economic benefits of the dairy industry, creating a “zero-sum” situation for the country.

However, the paper, titled NZ Dairy Farming — Milking Our Environment for All Its Worth, has come under heavy criticism by economics academics approached by the New Zealand Herald today.

I’m somewhat surprised it got through peer review, after reading the critiques. Some extracts:

“The report does a good job in identifying some of the environmental harms from dairying, but, at least on a first reading, does not provide a reliable estimate of the value of those harms,” said Dr Eric Crampton, head of research at the New Zealand Institute.

He believed some of the tallied costs used in the calculations — such as harm a farmer might do to his or her own pasture through soil compaction where stocking rates were too high — should have never been considered “external” costs, while other costs appeared “over-estimated”.

This is the same fatal flaw that the BERL alcohol study had also – treating private costs as public costs. That is not a minor issue.

“The high-end estimates of the costs of nitrogen leaching, estimated at over $10 billion, seem to assume we would need to remediate all water in New Zealand to a drinking water standard — however, very few sites currently exceed nitrogen standards for drinking water.”

So it is based on the most far fetched scenario possible.

Dr Crampton also took issue with the upper-bound cost of the second largest cost component factored into the report, national dairy greenhouse gas emissions, which was put at over $3 billion.

“But that figure cannot be relevant for policy without considering relative greenhouse-gas intensity of dairy production in different countries and without considering the alternative uses to which dairy land would be put if it were not in dairying — and especially where the paper notes that dairy makes up half of New Zealand’s agricultural emissions,” he said.

“If every dairy cow in New Zealand disappeared, we would see more cows elsewhere and more beef and sheep production here. The net effect on greenhouse gas emissions is not particularly clear.

Exactly. It might indeed increase greenhouse gas emissions globally.

Professor Frank Scrimgeour, director of the Institute for Business Research at Waikato University, slammed the research as “sloppy” and argued its bold claims could not be substantiated.

“The authors do not do any original data collection, estimation or modelling,” he said.

“They synthesised existing data without ensuring that measurements are consistent through space or time.

And also:

University of Waikato professor of agribusiness Jacqueline Rowarth said it was “naive” to expect water quality in waterways could be restored to drinking water standards, and she noted people reading the study needed “to consider alternatives and relativities”.

“This sort of research doesn’t actually get us anywhere, and that’s disappointing.”

Federated Farmers point out:

“To give you an idea, the report used the 1980’s figure suggesting Taranaki had 40% of its sites exceeding the Drinking Water Standard.  If the authors had bothered to talk to the Taranaki Regional Council they would have found the more pleasing result of just 4% (cite pg. 17 of the 2014 Taranaki State of the Environment Report) of sites in Taranaki exceeding the Drinking Water Standard.”

So they were using 1980s data instead of 2014 data. Again how did this get through peer review?

But no doubt we will see this study promoted by the Greens as justifying their policy to get rid of as many cows as possibly.

Crampton on child poverty

October 3rd, 2014 at 11:00 am by David Farrar

Eric Crampton writes at Interest:

Prime Minister John Key signalled last week that child poverty is to be one of his priorities for the coming term. Too many children in New Zealand grow up in families with very little disposable income. Poverty has traditionally been an issue captured by the political left, with demands for more redistribution to solve the problem. Inequality too has captured a fair bit of attention, despite strong evidence that income inequality has not really changed much since a rise in the late 1980s and early 1990s: the trend has been flat for two decades.

Even more surprisingly, data from the Ministry of Social Development shows that real household income growth in the lowest deciles has been very strong, both from 1994 to 2013, and from 2004 to 2013. The poorest decile in 2013 has real household income 40% higher than the poorest decile in 1994. And from 2004 through 2013, real household income growth was strongest for the lowest four deciles than for the richest six deciles.

Inconvenient data!

So why has poverty, and especially child poverty, seemed so much more pressing?

The Ministry of Social Development data, cited above, measures real household incomes before housing costs. And housing costs have been rising. MSD reports that 23% of children aged 0-17 live in the poorest quintile of households (the bottom 20%): they’re slightly over-represented, when disposable household income is counted before housing costs. But when we take incomes after housing costs, 27% of children live in the poorest quintile: high housing costs disproportionately affect poorer children. Forty-two percent of households in the poorest quintile spend more than 30% of their income on housing; only 9% of the richest quintile do.

While child poverty is lower than it was in the early 1990s (even after housing costs) and child poverty rates are now back to levels comparable to those prior to the Great Financial Crisis, they remain substantially higher than they were in the 1980s. Housing costs substantially affect disposable incomes at the bottom of the distribution.

Housing unaffordability is consequently a substantial part of New Zealand’s child poverty problem. When poor households have to spend 30%, 40%, or even 50% of their incomes on housing, there simply is not much left to pay for anything else. And so spots of bad luck, like a car breakdown or an unexpected expense, can quickly become major issues.
So the biggest victims of the artificial restrictions Councils have placed on land use, are the poor. Allowing Auckland to build both upwards and outwards would be a great step in reducing child poverty.

Crampton and Nolan on Greens spending claims

August 25th, 2014 at 10:00 am by David Farrar

Matt Nolan at TVHE blogs:

This one is genuinely disappointing as it seems to be an almost explicit misinterpretation of Budget forecast figures.

The numbers for claiming falling real expenditure come straight from the Treasury forecasts here, but are then deflated.  This sounds good on the face of it, and people do this all the time.  However, it ignores that there is both unallocated spending, and allowances for additional spending in future Budgets – both which largely get allocated to Health and Education on the day.

It is an “open” secret that the Health and Education numbers work this way – as both Labour and National want to announce increases in spending on these items on the day. [Note: It is just like “tax cuts to get rid of fiscal drag” – political marketing all the parties do].

In that context, saying that the real value of spending is going to fall on these items is empty rhetoric.

It is almost a lie.

Eric Crampton also explains:

So what do we have here? For each line, we have the expenditures by spending area. For example, health rises from $12,368m in 2009(actual) to $15,274 in the 2018 forecast. BERL then goes and deflates that by expected inflation; the Greens then claim that there’s a real cut in spending.

Now take a look at the line reading “Forecast for future new spending”. That’s the line where Treasury makes its best wink-wink-nudge-nudge guess as to future operating spending announcements, some of which it’s possibly already had to cost for future government policy announcements, and some of which will be based on expectations of future inflation adjustments.

When BERL runs its inflation adjusted accounting on Core Crown Expenditures, it finds a 9.9% nominal and 2.8% real spending increase over the next three years. That total Core Crown Expenditures categoryincludes the future spending increases. Those future spending increases have not been allocated across spending categories. If it were allocated proportionately across all categories, the weighted average of the different categories’ increases would wind up being 2.8% real. But BERL doesn’t assume that. It just takes each line from the BEFU and inflation adjusts it while ignoring the forecast future new spending.

This sort of manipulation does not help the credibility of BERL or the Greens. They knew they were being misleading.

The slippery slope is real

July 11th, 2014 at 1:00 pm by David Farrar

Eric Crampton blogs:

So, the playbook over the last 30-40 years or so: set minor policy changes every few years that work incrementally to de-normalise smoking and tobacco. Restrict use in some public places that seem like protection of non-smokers at first, then extend it outwards not to protect non-smokers, but to stigmatise smokers. Eventually smokers are so marginalised that a full ban becomes politically palatable. First you de-normalise, then further regulate, then ban. And, at every step, deny that the next step’s already planned. Until it’s too late to matter.

Now, if you follow alcohol policy, how often have you heard this one: “Alcohol is no ordinary commodity”? Or, that advertising, availability at some event, shops with visible signage, or brand sponsorship normalise alcohol consumption and so should be restricted or banned? There’s a lot of focus on making normal alcohol consumption not seem normal. There might be a reason for that.

A lot of these policy documents will draw the parallel to tobacco before claiming that, unlike in the case of tobacco, they’re just trying to hit heavy or harmful consumption and so full-on tobacco-style restrictions aren’t needed. But every year, we move further through the list of tobacco controls that the anti-alcohol folks want applied to alcohol too.

Richard Edwards’s post helps show that we’re not building strawmen when we warn about slippery slopes. There’s a direct mechanism in which each regulation makes the marginal political cost of the next one a bit smaller, helping to facilitate it. And there’s pretty clearly a planned effort to push through the incremental steps on the way to the end goals: each makes the next seem less radical. Slippery slopes are only logical fallacies if there aren’t these kinds of mechanisms. 

They want to ban smoking, ban sugar and inevitably ban alcohol. It is a slippery slope, and we ignore it at our peril.

Crampton on alcohol prices

April 30th, 2014 at 12:00 pm by David Farrar

Eric Crampton blogs:

Imagine that hazardous drinkers really really cared about the price of alcohol. If you increased the price of alcohol just a little bit, they’d stop drinking harmfully. Imagine further that moderate drinkers didn’t respond very much to prices: what does it matter to the rich Chardonnay-sipping set if a bottle is $8 or $40? If that were the true state of the world, we would have a very simple solution to alcohol problems: hike excise taxes. Harmful drinkers would stop drinking and would stop doing alcohol-related harmful things; moderate drinkers would pay more but that would just be tax revenue for the government. Since they wouldn’t change their consumption by very much, deadweight costs would be pretty small relative to the harms avoided. Yay taxes!

But is the assumption that heavy drinkers are more price response true?

Unfortunately, the world don’t quite look like that. Our best evidence on it remains Wagenaar’s metastudyshowing that heavy drinkers respond to a 10% price hike by reducing consumption by 2.8%; average consumption drops by 4.4% with the same price increase. Moderate drinkers respond more to price increases than do heavy drinkers.

The answer is no.

Enter the NZ Government report on excise and minimum pricing. Fortunately, the Minister has more sense than her Ministry and hasn’t gone ahead with minimum pricing; hopefully, she’s not looking at excise. What’s the problem with the report? They started by assuming that heavy drinkers are more responsive to prices than are moderate drinkers.

So why would you assume something that is not backed by the evidence?

And they know it’s wrong. Here, at Table 5, they show the general consensus of the international literature: heavy drinkers don’t respond to prices nearly as strongly as do moderate drinkers. …

Bottom line: heavy drinkers are roughly half as responsive to prices as are moderate drinkers. That’s page 20. And they cite Byrnes accurately at page 21.

So they know their assumptions are wrong, yet they still used them?

But then what do they go and do? They started by trying to get SHORE to estimate NZ elasticities, but something went wrong there: the elasticities were completely out of whack with reality. Reading between the lines at page 25, it looks like SHORE was using the increase in purchases of products on special at supermarkets as part of its price elasticity estimation, and that just ain’t right. If you switch brands because something’s on special and buy more of it than you otherwise would have, that isn’t the same effect as you’d expect for across-the-board price changes you get with excise or minimum pricing.

Way different things. I might buy more Coke rather than Pepsi when Coke is on sale. But that doesn’t mean if the price of both Coke and Pepsi increases that I’ll buy less overall.

The report agrees the NZ figures are wrong:

“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.”

Yet …

Rather than discard the completely nuts NZ numbers, they let those figures stand and added alternative numbers as robustness checks. Those big headline estimates you’ve been seeing in the papers about just how awesome excise is? They’re based on the numbers that, according to the report, “are not a realistic representation in reality and are contrary to all international evidence of the responsiveness of alcohol consumers to changes in price.

Example? A 133% excise hike means about a 40% increase in the cost of low-priced beer, a 44% increase in the cost of low-priced wine, a 45% increase in the cost of low-priced RTDs, and a 103% increase in the price of low-cost spirits. The heavy drinkers SHORE estimated a 61% reduction in harmful consumers’ consumption with that tax hike. So they’re saying that harmful consumers are more than unit elastic. That’s just not right.

I’m glad we have someone who can analyse these reports, and point out the errors in them. we run the risk of flawed decisions being made on the basis of flawed analysis.

Competition helps all

January 10th, 2014 at 4:00 pm by David Farrar

Eric Crampton writes:

A few years ago, Jerry Hausman showed that Wal-Mart does a lot to benefit even consumers who don’t shop there. When a Wal-Mart opens, competitor local supermarkets cut their prices to keep customers. And poor customers reap most of the benefits

Figlio and Hart, in the latest AEJ: Applied Economics, show a similar effect with school vouchersAn ungated version is here.

Suppose your worry about school vouchers is that low social capital parents’ stick with a local underperforming school while kids whose parents have better social capital all flee with their vouchers to the better private schools. And suppose further that you care way more about the potential losses to the former than about the gains for the latter. You might then oppose voucher systems.

Figlio and Hart show that public schools facing competitive pressure from private schools under a new voucher system provided stronger student score improvements. All that concern about kids left behind as the private schools cream off the best voucher kids? Not much of an issue if the public schools facing the competitive pressures perform better as consequence. They find the biggest positive effects in public schools facing strong financial incentives to retain low-income students.

There has also been studies showing that charter schools not only improve the performance of students at those schools, but neighbouring public schools improve their performance also.

For some strange reason, this is seen as a bad thing because it clashes with an ideology that competition is bad.

A way to reduce housing costs

October 24th, 2013 at 7:00 am by David Farrar

The Government is keen to reduce housing costs. Eric Crampton has a way they can do this:

Donal Curtin pointed to some less-than-helpful government action that helps increase construction costs. New Zealand initiated anti-dumping action against Chinese wire nails, Malaysian galvanised wire, and Thai plasterboard, among other things. And so we have a specific tariff helping to keep prices up for plasterboard. While we’re trying to rebuild after an earthquake.

So one part of central government is all mad about excessive construction costs. Another part of central government penalises foreigners for selling us construction materials cheaply.

It’s a fair point. If foreigners want to dump cheap materials on us, let’s take advantage of it!

Sky and copyright and Netflix

October 3rd, 2013 at 10:00 am by David Farrar

Eric Crampton blogs:

It seems that the lawyers at Sky didn’t like my post on Netflix. They’ve not been in touch with me about it, nor did they get in touch with the folks at SciBlogs about it when I syndicated it there.

But late last week, the National Business Review asked if they could run it as part of their Weekend Edition. I agreed, as I always do. Shortly after it went up at NBR, I received an email from NBR’s Head of Digital saying that they’d had to pull the piece after a legal threat from Sky TV. Sky’s lawyer wanted excised from the article the instructions on how to access Netflix from New Zealand. In my piece, I linked to an Australian website providing instructions on how to access Netflix. I also included a postscript noting that Hola seemed to work very well.

So it is there anything wrong with telling people how to get around geoblocking?

First, note that New Zealand generally allows “parallel importation”. The New Zealand Government, in general, does not think that it is its job to enforce whatever exclusive dealing arrangements that some overseas manufacturer wants to enter into with a domestic distributor. There is a minor exemption on DVDs and films where you cannot import films for commercial distribution for a period of five months from the date that the film is first made available to the public. This lets the theatres get a run where international windowing delays release here relative to the US. However, the ban specifically allows import of legitimate copies for personal non-commercial use. It would be reasonable to read accessing Netflix for personal use as falling into this category, though note that I am not a lawyer. I discussed the temporary ban here. …

But, by my read of 226b, the variety of mechanisms described at this Australian site simply work to circumvent a system controlling geographic market segmentation by preventing playback in New Zealand of a non-infringing copy of a work. Netflix’s catalogue of films and TV shows in the US is non-infringing in exactly the same way that a DVD on sale in the US is non-infringing. And buying a DVD there, bringing it here, and watching it on a region-free DVD player should be as protected as subscribing to Netflix via something like Hola or Unblock-us. Maybe it violates the Netflix terms of service in the US, and Netflix could be justified in cancelling somebody’s account if they deemed such use to be in violation of their Terms of Service. I expect that bringing a Region 1 DVD here and watching it on a region-free player might violate the DVD’s Terms of Service as well. But a take-down notice based simply on the use of the word Hola or a simple description stating that installing Hola was really easy? Again, I’m not a lawyer; hopefully I won’t have to consult one. I’ll rattle a tip-jar if I do and if it winds up being at all pricey.

Getting around geoblocking actually allows you to pay for a copyrighted work. I think we should resist all geoblocking. If you want less piracy, then allow us to buy the content we want.

Any lawyers have a view on whether Eric’s original blog post does fall foul of the Copyright Act?

Russel Norman thinks tax is not a burden!

September 19th, 2013 at 11:00 am by David Farrar

This is incredible and should ring warning bells about the attitude of a Government with the Greens in it to taxation.


Its horrific that Dr Norman thinks tax is not a burden, and even worse calling it so is right wing.

When the state takes a large proportion of your income, of course it is a fucking burden.  If they didn’t do it, you’d have less more money.

If tax wasn’t a burden, then hundreds of thousands of people would pay extra tax voluntarily. Does Dr Norman wake up every morning and send a donation in to the IRD?

Plus the stupidity of Norman’s comments are highlighted by the fact that he got owned on Twitter by Gareth Richards who pointed out that Dr Norman himself had in the past used the term himself. So in fact Dr Norman was just attacking poor civil servants for using the same term as he had used. He should apologise to the Treasury officials he maligned.

Norman tried to defend his new found view that tax is not a burden on the basis the Government spends tax revenues on some good things. Eric Crampton points out:

Taxes are a bad, public services are a good. Saying the first doesn’t mean denying the second.

Again I’m horrified that we may have a senior economic minister in a future government who does not think taxation is a burden on hard working New Zealanders who fund the tax system. It reflects a neo-marxist view I guess that all income is really the property of the state’s, and we should be grateful they allow us to keep some of it.

Also Eric schools Dr Norman on some basic economics:

More importantly, economists use the word ‘burden’ in a particular way. A few useful notes about Principles-level (maybe intermediate) economics for someone who thinks himself qualified to be finance minister:

‘Burden’ measures the total cost of a tax. The ‘excess burden’ is the amount by which the cost of a tax exceeds the amount collected. Treasury tends to reckon that excess burden is around 20%: it costs us about $1.20 to raise $1.00 in tax. The $1.00 raised is a transfer from the public to the government; the $0.20 is pure loss due to distortions in economic activity consequent to increases in our current mix of taxes.


Russel Norman suggests only “right wing” economists talk about tax burden. Here is a JSTOR search on “tax burden”. There are 61 pages of search results with 100 results per page. Item number 177 on a date-sorted list is famous Right Wing Economist John Maynard Keynes discussing the Colwyn Report on Natinoal Debt and Taxation. Item 398 is rabid right-winger Nicholas Kaldor’s call for wage subsidies to reduce unemployment (1936).

Burden is just the term used by economists to describe the cost of the tax and to help sort out the difference between statutory and economic incidence. Like “While X writes the cheque to IRD, the burden of the tax falls on Y and Z.” That’s it. It’s the standard term used in the main texts to describe this thing. Richard Musgrave (centre, maybe centre-left) uses it. James Buchanan (right) uses it. Pick a random public finance text, you’ll find “tax burden” or “excess burden” somewhere in it.

Then on Twitter Dr Norman goes further rejecting both the labels burden and distortionary for taxes!

My challenge to all those who agree with Dr Norman that tax is not a burden, to write out larges voluntary cheques today to the IRD. That means it is no extra burden on you, and reduces the burden on the rest of us.

UPDATE: Russel has actually referred to the tax burden in Parliament, as has Metiria Turei. This reinforces that Dr Norman should apologise to the Treasury officials for his attack on them for using the exact same language both Green co-leaders have used in the past.

Testable hypotheses

June 7th, 2013 at 11:00 am by David Farrar

Eric Crampton blogs:

In the futile hope that maybe, just maybe, folks’ views about welfare policy might just stand to be informed by data, here are a few testable hypotheses I’ve seen floating around. They posit things that are knowable, and I’m sure data exists to resolve things. Let’s walk through a few of them.

First, how do poor people use money? I tend to say we ought to just give money to poor people if we want to make poor people better off. Other folks think that they’ll just waste it on booze and cigarettes rather than helping their kids. I don’t discount that that’s also possible; it’s an empirical question.

Now why does this matter? If you think that parents will waste money given them, you might prefer in-kind benefits provided directly to the children of poor parents rather than cash transfers. School breakfast programmes can fall into that category, despite that they’re rather ineffective and largely go towards feeding kids who would have been fed anyway. I think that some of the support for wrecking the GST by exempting merit goods also comes from this kind of view, though I think this rather misguided: vouchers for merit goods could be a rather less ruinous way of achieving the desired end.

So, the test. Get household consumption survey data, look for some shock to benefit payments, and check the effects on different consumption categories. If extra money going to poor households disproportionately increases consumption of lotto tickets and booze, then the paternalists who want to make sure that money given to the poor is used for particular things are right in wishing for more in-kind benefits; if not, then the paternalists should back down on such assertions.

I can’t imagine that this empirical test has not been done by somebody somewhere; I just don’t know the results.

It would be interesting data. I don’t know if there would be data for NZ. There hasn’t been any real change to benefit levels since 1991, and I suspect that changes to benefit levels often occur at the same time as other changes – so overall consumption data may have multiple factors changing it.

But the next one may be testable.

Second, “can’t feed ’em, don’t breed ’em”. Twitter and the NZ blogs have a bunch of folks yelling at each other about whether the main problem in child poverty stems from poor people’s unwillingness to engage the prudential constraint or whether it’s bad luck. Those on the right note that if poor people stopped having kids they couldn’t afford, then child poverty would be less of an issue. People on the left instead remind those on the right that birth control can fail and that people in good financial circumstances can fall on hard times for reasons outside of their control and after they’ve set their family size.

So, a test. Start with DPB numbers. What is the current fertility rate of women receiving the Domestic Purposes Benefit, and how does it compare to the fertility rate of women of similar age and marital status who are not receiving government support for the raising of children? If the fertility rate among women on the Domestic Purposes Benefit is roughly what we would expect given known rates of contraception failure, then score a point for the left. If women on government support are instead choosing to have more children while in poverty, then score a point for the right. I would bet that the data shows rather more childbearing than would be expected from contraception failure alone, but less than the fertility rates among similar-aged women not on the DPB, but I’ve not seen the data.

This data should exist, and be testable. Anyone know if it has been tested anywhere? What is the fertility rate of women on the DPB and women not on the DPB?

Food in schools

May 17th, 2013 at 10:00 am by David Farrar

Eric Crampton blogs:

A few months ago, Social Service Providers Aotearoa asked me to review the literature on school breakfast programmes and provide an assessment of whether public funding of school breakfast programmes offered value for money. I spoke on the issue in Wellington and in Christchurch in February. As the government seems to be looking at the Mana Party’s proposals around food in schools, it seems worth posting things here as summary.

I was only looking at school breakfast programmes, and so I can’t here comment on school lunch programmes. I’m not sure why we’d expect results to vary greatly, but it’s worth having the caveat.

Anyway, on my best read of the literature, it’s hard to make a case for that we’d get any great benefit from the programmes. Rather, we often find that they don’t even increase the odds that kids eat breakfast at all. Many shift breakfast from at-home to at-school, but among those who hadn’t bothered with breakfast before the programme, not many wind up starting when schools provide it. You can then get kids reporting that they’re less hungry as consequence of the programmes, but it’s awfully hard to reject that the main thing going on is that kids are eating at 9 at school instead of at 7 at home and are consequently less hungry when asked at 11.

This is what tends to happen with any programme or subsidy that is not targeted.

If you (for example) make medical insurance tax deductible, it doesn’t tend to increase the number of people with medical insusrance. It just allows fairly well off people to pay less tax.

Very few kids don’t have breakfast because their parents can’t afford one. They cost very very little if done at home. By comparison, they cost a lot if done centrally.

A legislated requirement for the Government to provide breakfasts for all school children is a bad way to try and solve the problem of kinds turning up at school unfed.

The alcohol crisis

February 26th, 2013 at 7:07 am by David Farrar

Eric Crampton blogs on the alcohol crisis:

The volume of alcoholic beverage available for consumption in New Zealand fell 3.3 percent in 2012, Statistics New Zealand said today. The decrease was due to a fall in the volume of beer, down 20 million litres. This fall was partly offset by a 4.3 million litre rise in the volume of wine.
“Although the volume of alcoholic beverages available was down more than 3.0 percent, the amount of pure alcohol fell only 0.6 percent,” industry and labour statistics manager Louise Holmes-Oliver said. “This was due to change in the types of beverages available.”
An increase in the volume of higher-alcohol beverages such as wine, spirits, and spirit-based drinks accounts for the smaller fall in pure alcohol available. The volume of high-alcohol beer (over 5.0 percent) also increased. In contrast, all other beer categories available for consumption have decreased.
The volume of pure alcohol available for consumption per person aged 15 years and over fell 1.7 percent, to 9.3 litres in 2012.
But all the public health lobbyists and the Opposition have been claiming we have an alcohol crisis in New Zealand, and the price of alcohol must go up to stop ever-increasing consumption levels.
Since the alcohol laws were liberalised in 1989, the average amount of alcohol available for consumption has dropped by around a litre per capita.
I note the headline in the Dom Post is:
RTD alcohol availability on the rise
This is instead of a headline about alcohol availability drops.
Although the volume of alcohol available for consumption fell 3.3 per cent last year, ready-to-drink (RTD) spirit-based drinks are still on the rise.
By how much?
Latest Statistics New Zealand figures show pre-mixed RTDs were up 78,000 litres, rising 0.1 per cent to 62 million litres.
By 0.1%!! Shock, horror. As the population grew by more than 0.1% it is in fact a per capita decrease.
The overall downturn in alcohol available for consumption was due to a fall in the volume of beer, which dropped 20 million litres, a decline partly offset by a 4.3 million litre rise in the volume of wine.
Yet no headlines about wine consumption. The media often have double standards. Wine consumption is seen as good, RTD consumption as bad. Gambling on Lotto is good and celebrated and gambling on pokies is evil and destructive.

Coroner recommendations

February 18th, 2013 at 3:00 pm by David Farrar

Eric Crampton blogs a list of recent Coronial recommendations, including:

The problem we have is Coroners only look at how to reduce deaths. They seem to often miss any requirement for balance such as whether their recommendations are practical or affordable – or if they may have undesirable consequences.

Lucy at Cycling Auckland takes issue with the last recommendation:

The Coroner made two recommendations, both of which I feel quite strongly would not help to improve cycling safety. Irritatingly, neither of them seem very relevant to the actual accident he investigated.

First, as mentioned in the media, he recommended that the wearing of hi viz should be made mandatory for all cyclists because he saw it as a “no-brainer.” He doesn’t present any evidence to support this view.

This recommendation seems oddly unrelated to the case, given that the crash happened at 5.20 pm when it was just getting dark and Stephen Fitzgerald was wearing both reflective hi viz stripes and functioning lights.

So it is not even relevant to this case – but the Coroner just thought it was a good idea. It isn’t.

The problem with both of these recommendations, in my opinion, is that while they would probably make individual cyclists safer if they followed them (although it’s arguable in the case of hi viz, because there is some evidence that drivers give cyclists more space when they look less experienced) overall they make cycling less attractive.

This is particularly true of the hi viz recommendation. Even riders such as myself, who have very little interest in fashion, would probably be put off by a permanent requirement to wear hi viz.

Because I don’t particularly want to walk around the supermarket or go to work in hi viz, such a law would require me to permanently wear a hi viz vest over my normal clothes. This would not only be hot in summer but also would be annoying to carry around when I reached my destination.

Obviously, of course, riders who actually care about how they look while riding – such as teenage girls or the Frocks on Bikes types – would quite likely choose not to ride at all if hi viz was mandatory.

I’ve yet to see a single person support the Coroner’s recommendation.

Value for Money: School Breakfast Programmes and Other Early Childhood Interventions

February 4th, 2013 at 7:00 am by David Farrar

The Social Service Providers Association are holding a couple of seminars on the topic “Value for Money: School Breakfast Programmes and Other Early Childhood Interventions”.

The guest speaker is Eric Crampton, who I am sure will be both rigorous and interesting.The details are:

Monday 11th February, 1 – 3pm
St Albans Community Centre
1047 Colombo St, St Albans

Thursday 14th February, 3 – 5pm
Mezzanine meeting room, First floor of the City Library
65 Victoria St, Wellington Central

Just a gold coin donation to attend and you can register at SSPA.

Benefits of alcohol

November 29th, 2012 at 2:00 pm by David Farrar

Charley Mann at The Press reports:

Those who enjoy a glass or two should ignore the ”badly overstated” warnings about alcohol over the festive season, a University of Canterbury academic says.

The flurry of alcohol warnings ahead of Christmas were overstated and incorrect, said economics lecturer Dr Eric Crampton. ”Nobody warns us about the warnings.”

“And there’s danger in that … since some of the warnings are either false or badly overstated.”


Crampton said health warnings on alcohol focused ”exclusively” on curbing the harm experienced by heavy drinkers but ignored the enjoyment for moderate drinkers. This risked doing more harm than good, Crampton said.

”It is hard to open the paper without finding dire warnings about alcohol’s costs to the country. But how often do we hear that drinkers earn more than non-drinkers?

“Or that light drinkers have lower mortality risk than non-drinkers? Or that light-to-moderate drinking predicts better ageing outcomes?

Fundamentally alcohol is very different to tobacco. Tobacco kills you, even in moderation. Almost everyone who smokes wants to give up smoking. Very few moderate or light drinkers want to give up alcohol.

Hence the focus should be on heavy or binge drinking, not on demonising alcohol overall.

More good analysis

September 29th, 2012 at 8:27 am by David Farrar

Eric Crampton has also been analysing the national standards data. he finds:

Decile matters greatly. All else equal, a school one decile higher has about a four percentage point increase in pass rates. But, decile matters at a decreasing rate: moving from Decile 2 to Decile 3 correlates with a 3.3 percentage point increase in maths pass rates while moving from Decile 8 to Decile 9 only improves pass rates by one percentage point.

Class size matters: schools with more students per teacher have higher pass rates. I suspect reverse causation here: for a fixed budget, those schools that are able to run larger classes are likely those that have fewer discipline problems and so are able to put those resources to other uses.

Ethnicity matters. A standard deviation increase in the proportion of Maori students reduces aggregate pass rates by 1.3 percentage points in reading and 2.2 percentage points in math. Similar trends exist for Pacific Island student ratios. I’d be pretty cautious in interpreting this one: if you run things decile-by-decile, the effects mostly disappear. The biggest negative effect seems to hold in high decile schools, but by the time you get to Decile 10 schools, the median school has only 5.9% Maori students. Results then may be a bit sensitive to a few outliers on the right hand side. Like Luis, I’ll refrain from doing much more until the official results come out.

Single sex schools seem to do well; boarding schools seem to do poorly.

All interesting data.

There are decile 1 schools providing pass rates twenty percentage points or more above what we’d expect, given their characteristics (that’s the 0.2 number on the y-axis); there is one decile ten school providing pass rates more than twenty percentage points below what we would expect given its characteristics. Differences in school performance simply do not come down only to decile. Decile’s the most important thing. But differences in performance among schools of the same decile by definition have to be about something other than decile. I can’t tell from this data whether it’s differences in stat-juking, differences in unobserved characteristics of entering students, differences in school pedagogy, or something else. But there’s something here that bears explaining. 

And this is the potential value. Identify the schools doing best and worst, and try to emulate them and help them respectively.

Somehow the left think this is a bad thing!

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.

Crampton on minimum prices

July 11th, 2012 at 7:57 am by David Farrar

Eric Crampton blogs:

Last week, anti-alcohol advocacy group Alcohol Action NZ put out a press release where the University of Otago’s Jennie Connor was quoted:

“A recent Canadian study has shown that a 10% increase in the minimum price of alcohol reduces its consumption by 16% relative to other drinks”.

Eric did something very unusual then.

I got in touch with one of the authors of what has to be the study to which she’s referring

Chris Auld reported that the -1.6 price elasticity figure indeed only refers to a measure of own-price elasticity. Except it isn’t quite own-price elasticity. Because the estimation technique doesn’t correct for substitution effects, it combines the own-price elasticity with cross-price elasticity from other products. 

Eric then starts quoting formulas which will turn off neurones in most people, but they are there if you want to read them.

Chris also confirms that the -0.34 estimate is the one that best reflects the expected effects of an across-the-board price increase like minimum pricing

That means a 10% increase in prices would reduce consumption by 3.4%. Eric concludes:

Jennie Connor really should retract her press release or issue a correction. It leads people to believe that a minimum price will have far more effect on harmful drinkers’ consumption than can be supported by the evidence. Otherwise, how much weight should anybody place on any “fact” claimed by Jennie Connor in her press releases?

But to show he is balanced (and Eric is one of those guys who is all about the facts), he sides with Ross Bell of the Drug Foundation over John Key re the impact of minimum pricing on the quality of drink. But he also corrects Ross on a couple of things also. A post well worth reading.