The wage premium paid to lesbian workers is a bit of a mystery. Sure, lesbian women are better-educated on average, are more likely to be white, live predominantly in cities, have fewer children, and are significantly more likely to be a professional. But even when you control for these differences, the wage premium is still on the order of 6%. …

Eric offers some theories on why this might be:

First, and most importantly, maternity risk. If an employer expects a lesbian employee to be less likely to take maternity leave, and if maternity leave imposes costs on an employer, then the employer will be more likely to hire and to promote the lesbian over the straight woman. What evidence do we have? Petit’s field experimentshowing that maternity risk is responsible for a fair bit of women’s lower average salaries.

How could this be tested in the data presumably available in the original study? Test whether the wage gap between lesbian and straight women is larger for younger women than for post-menopausal women. That will confound with age cohort effects, but there may be a way around it: use state insurance mandates on assisted reproduction, or state policies with respect to same-sex adoption. If some states require that insurers cover fertility treatments as part of an employer’s insurance package and others don’t, or if some states make it easier for lesbians to adopt kids, then we’d expect the wage gap between lesbians and straights to be smallest in those states that make it easiest for lesbians to have kids.

Second, testosterone and negotiation strategies. Women, on average, are less aggressive in wage negotiations. If testosterone correlates with aggressiveness in salary negotiations, and some evidence suggests higher than average testosterone levels among lesbians as compared to heterosexual women (though that evidence iscontested), then we’ve another candidate explanation.

I’d put money on the maternity risk variable. I’d only put money on the negotiations one at decent odds.

I go the other way to Eric. I think the theory of more assertiveness in salary negotiations is most likely to explain the gap.

IF THE Government said that the minimum price for a new car were $50, nobody would expect it to affect sales. Neither would an increase to $65. But it would certainly start mattering if the Government applied a minimum price of $5000 to all cars, new and used.

Exactly. Only the stupidest person could argue that a mimimum price would not affect sales at certain levels. Hence the focus should be about at what level it starts to matter.

The latest youth unemployment figures are very bad. The unemployment rate for kids aged 15 to 19 is 27.5 per cent …

This isn’t just the recession. Unemployment rates for adults are higher than they were in the boom of the mid 2000s, but the recent downturn has not hit adult workers the same way that it’s hit the kids. The current adult unemployment rate of 6.6 per cent is only three points higher than its low mark in the mid 2000s. Meanwhile, youth unemployment rates are a staggering 15 points higher.

So what changed?

Both rates usually track each other, reflecting the overall strength of the labour market. Changes in the adult unemployment rate explain a high proportion of changes in the youth rate.

But in late 2008, this relationship began to break down. Compared with a previous trend, the current youth unemployment rate is eight points higher than we could have expected given the adult unemployment rate. That’s about 12,000 kids who, given the current adult unemployment rate, we would have expected to have jobs. …

Neither can they simply be due to the current downturn: when adult unemployment hit 10.2 per cent in 1992, the youth unemployment rate was 23.4 per cent – three points lower than today – and youth labour force participation rates were higher. Bear in mind that adult unemployment today is nowhere near 10.2 per cent.

The answer seems obvious. While done with good intentions, the abolition of a lower minimim wage rate for teenagers has priced them out of the labour market.

No, the sharp increase in youth unemployment from late 2008 appears to have been caused by the abolition of the youth minimum wage in early 2008. Such a result isn’t surprising. Economist Stephen Gordon summarised Pierre Fortin’s work on this effect in relation to minimum wages: when minimum wages are below about 45 per cent of the average wage, they have little effect on employment; above that, they present a danger to employment.

By contrast, New Zealand’s minimum wage of $13 an hour is about 50 per cent of the average hourly wage – well into the range in which we expect negative employment effects, particularly for young workers.

And if the minimum wage increased to $15/hr, it would impact youth even harder.

Reinstating a youth minimum wage well below the adult rate wouldn’t eliminate youth unemployment. But it would let employers start creating new jobs that young workers could productively fill while gaining experience. It’s time to stop pricing young workers out of the labour force.

I agree. What the Government should do is freeze the youth minimum wage at $13/hr and keep it there until it has hit the floor of 80% of the adult minimum wage (which happens when it hits $16.25), and then have it remain at 80%.

Says BoingBoing:

“Lesbians make more money than straight women (And nobody really knows why)”Really? Nobody? I can think of a couple of explanations, pretty easily testable.

And Eric’s theories:

First, and most importantly, maternity risk. If an employer expects a lesbian employee to be less likely to take maternity leave, and if maternity leave imposes costs on an employer, then the employer will be more likely to hire and to promote the lesbian over the straight woman. What evidence do we have? Petit’s field experiment showing that maternity risk is responsible for a fair bit of women’s lower average salaries.

Certainly possible.

Second, testosterone and negotiation strategies. Women, on average, are less aggressive in wage negotiations. If testosterone correlates with aggressiveness in salary negotiations, and some evidence suggests higher than average testosterone levels among lesbians as compared to heterosexual women (though that evidence is contested), then we’ve another candidate explanation.

I’d put money on the maternity risk variable. I’d only put money on the negotiations one at decent odds.

Funnily enough, my gut instinct is that a more aggressive negiotating stance would be the bigger contributor to the gap.

But really, if correcting for the observables reduces the wage gap between lesbians and heterosexual women from around 40% [the paper cites average hourly wages of $18.70 for lesbians and $13.34 for cohabiting non-lesbian females] to around 5%, odds are pretty high that there are a bunch of unobservables also correlated with job performance that aren’t captured in the wage regression.

That’s a pretty large pay gap.

You could be forgiven for thinking that the health system could save $1.9 billion if tobacco had never existed. That’s what the Ministry of Health says smoking costs the public health system.

But, you’d be wrong.

The ministry’s latest estimate of the cost of smoking has nothing to do with the costs that smokers impose on taxpayers or the costs that could be avoided if smoking were to disappear.

Rather, it’s a politically convenient number whose promotion has much to do with gaining voter support for anti-tobacco initiatives and nothing to do with real economic costs.

I was pretty surprised when this figure started being cited earlier this year. It was much higher than the previous estimate of $350 million dollars – a figure produced not by the Big Tobacco lobby but rather by Des O’Dea in a report commissioned by anti-tobacco crusaders Action on Smoking and Health.

So the costs have gone from $350, to $1.9b – how did they achieve this?

After sorting the population by age, gender, income, ethnicity and smoking status, they then compared the costs of providing health services to smokers as compared to nonsmokers for each group.

The excess costs of the smoking group were tallied up to produce the $1.9b figure.

So what’s the problem?

It’s easiest to think of smoking as bringing forward a whole lot of end-of-life costs.

Smokers die earlier than nonsmokers.

We know that.

And the costs to the health budget of somebody who is dying are rather higher than the costs of somebody who is healthy.

But everybody dies sometime and most of us will incur end-of-life costs that will be paid for by the public health system.

Suppose that a smoker will die at age 65 and a nonsmoker will die at 75. Comparing 65-year-old smokers to 65-year-old nonsmokers and calling the difference the cost of smoking then rather biases upwards the measured costs of smoking.

We ought to be comparing the health costs of a smoker dying at age 65 with the health costs of a nonsmoker dying at age 75.

Yes. This is what I assumed was done. But obviously it did not produce a big enough figure.

The figures assume that in the absence of smoking, smokers would never have imposed end-of-life costs on the health system. But for their smoking, all smokers in this scenario would have died of a sudden, and cheap, heart attack and would only have had average health costs up to that point. That’s clearly nonsense, but the $1.9b figure only makes sense if it’s true.

So the $1.9b is a useless figure. Sadly I doubt it will stop people citing it.

If smoking disappeared tomorrow, your taxes would have to go up to make up the difference. Thank the next smoker you meet for helping to keep your taxes down.

And be as sceptical of numbers coming from the Ministry of Health as you would be of numbers produced by the tobacco industry. Neither is a disinterested party.

Indeed.

New Zealand is blessed with one of the cleanest value added taxes in the world, our GST. Every new good is taxed at 12.5% (likely to rise to 15%); the tax provides about a fifth of national tax revenue. …

A fun Australian case, via the Centre for Independent Studies daily email update, ideas@TheCentre:You wouldn’t usually expect to find baking recipes in court judgments, but Justice Sundberg of the Federal Court in Melbourne made an exception recently. In doing so, he demonstrated how overly complex Australia’s tax rules are.

Take 67.5% wheat flour, 20% water, 8% olive oil, 2% sea salt, 1.5% yeast, and 1% malt extract. Follow the instructions in Lansell House Pty Ltd v Commissioner of Taxation [2010] FCA 329, and what you get is either bread or a cracker.

At least that was the question Justice Sundberg had to answer. A small food importer from Melbourne had been importing Perfetto Mini Ciabatte, an oven-baked Italian flat bread that only culinary philistines – or the Australian Taxation Office – could mistake for an ordinary cracker.

Australian tax law has kept lawyers and bureaucrats busy for a long time over this mini ciabatta. Basic food stuffs are exempt from GST, but other foods are not. Thus, bread does not attract GST but crackers do.

The food importer thought he had a clear case when he claimed tax-free status for his mini ciabatta. He had even flown in Italy’s leading bread expert Giampiero Muntoni to testify in court. Signor Muntoni holds an EU certificate that entitles him to certify whether a product is a bread or a non-bread item for value added tax purposes in Italy. To this infallible bread pope it was clear that if the ingredients are that of bread, if it looks like bread, and if the Italian tax authorities classify it as bread, it must be, well, bread.

This was not good enough to convince an Australian court, though. Justice Sundberg noted that mini ciabatta cracks like a cracker; it’s sold next to crackers in Australian supermarkets; and a chemical analysis revealed similar gluten and protein content as that of crackers. In conclusion, he upheld that GST had to be paid on it.

It would be easy to find this issue ridiculous, but actually it is symptom of what is wrong with our tax law. It is incomprehensible that there should be different taxes for, arguably, very similar products.

Tax lawyers would do very well if we start introducing exemptions.

Make no mis­take, copy­ing with­out the per­mis­sion of the owner is theft–-no mat­ter how many sappy sugar-coated dit­ties you hear to the contrary.

I don’t think theft is the best word for it, but I agree it is illegal. PC notes however:

The way ACTA proposes protecting intellectual property–by going through people’s bags, laptops and MP3 players at airports; by holding ISPs responsible for what their customers do; etc.–-is hardly in accordance with the principle of property rights they purport to be upholding.

He says this violates the very principles they want to protect.

What I found most interesting is this comment by Eric Crampton on the post:

Strength of copyright protection has never been an absolute: it’s varied in duration and scope over the years. There’s a Laffer curve that operates in copyright as well: zero protection and fewer things will be produced, but too strong of protection and nothing is produced either.

Eric is right. Copyright is not an absolute right. It is a manufactured right that is about a balance of rights. Eric explains:

Let’s take the extreme case over on the right tail of the distribution. Every musician using a chord must pay a royalty to whomever invented that chord, then must pay another royalty to whomever came up with the chord sequence they’re using. Think much music gets produced under that regime? Nope. It’s too costly to produce anything new.

Another example is the right of a newspaper to quote something. If a politician writes on their Facebook page “I think the top tax rate should be 90%” they own the copyright to that statement. Would anyone want a society where it is illegal for a newspaper to report that statement, as they do not have permission of the owner?

Take it to blogs. Suppose copyright didn’t just protect the expression of an idea, but also the idea itself. Would you ever post anything, given fear of being sued by someone who’d previously come up with some idea you’d thought was original to you? Would Landes and Posner sue me for basically restating their argument in the first paragraph?

Spot on.

If you grant those two cases, then the optimal degree of copyright isn’t infinite. The optimal degree isn’t zero either. I’m reasonably convinced that we’ve pushed too far to the right on this curve: the costs of copyright in impeding new creation, at current legal levels of protection, exceeds the benefit of higher returns for those things that are created. And, I’d argue this is mostly due to Disney who earns more off its back catalogue than out of new production. The period of protection is too long, harm is done by excessive protection on orphaned works, and insufficient scope is given to fair use.

Copyright is for a specific term. If it was not, then every school in the western world would probably have to pay royalties to the great great great great great great great great grand nephew of William Shakespeare.

Eric makes a fair point that copyright protection is for too long a period. In the UK protection is for 50 years after making a sound recording, while in the US it is 120 years after creation.

Personally, I’d sooner see copyright abolished in favour of a solution through private contract where folks use creative commons to designate the strength of protection they’d like applied to their own works, but where also we’d deem the extant corpus of common culture (Grimm fairy tales, etc) only being available for commercial use if the folks making the film, book or whatever applied a duration of protection no greater than 20 years or so, helping to rejuvenate the commons from which they drew.

I am a big fan of Creative Commons which makes it easy for creators of works, to set their own terms and conditions of use.

In a report the is often used to justify ACE spending, the net benefit of adult community education (for 409,000) was stated to be between $4.8bn and $6.3bn annually – giving a total return of $54-$72 per $1 invested (see page 48).  Wow, really – if I could get that sort of return I would be investing in adult community education for sure.

A 50:1 to 70:1 return on every dollar spent is of course beyond implausible. I am surprised PWC allowed their name to be associated with such a nonsense report.

Bill English was quoted as saying that on the basis of the report “we would spend $10 billion on adult and community education and would have an economy that is twice the size it currently is”

Nolan looks at how they have mixed up public and private benefits:

Now the factors that are policy relevant are NOT private benefits – these help determine the market price.  They are benefits that stem from some third party, uninvolved in the transaction, gaining some benefit from the individual taking an adult community course.  And they are not “fiscal externalities” (ht Offsetting Behaviour).  So the policy relevant factors are:

• Increase in direct income:  No
• Savings in government benefits:  No
• Marginal increase in individual income:  No
• Increase in income from self-confidence:  No
• Reduction in family violence:  No
• Savings for health:  No
• Savings from crime reduction:  Potentially, partially
• Increased community involvement by individual:  No
• Higher income taxes:  No

So eight of the nine benefits are private, not public. The one public benefit is a possible reduced crime rate. But PWC have assumed that anyone doing an ACE course instantly has a 50% less chance of committing a crime. Yep – attending one Moroccan cooking course, and you are 50% less crime likely.

Dave Guerin at the very good Education Directions blog looks at the future of ACE:

The ACE market will be reshaped, rather than destroyed, because there is so much demand for such education. In 2008 there were 140,000 ACE students (EFTS unavailable)  in schools and 78,000 ACE students (4,000 EFTS) in TEIs (MOE). Enrolment numbers have been boosted by significant government subsidies and by the availability at schools of physical and business infrastructure to run community education programmes, but people still want this type of education. The subsidies are now largely gone and many schools have dropped their programmes, but there are new opportunities.

In the absence of nationwide coverage by subsidised school providers, I expect that private ACE co-ordinators will spring up. They won’t get the same administrative  support from schools, but equally they won’t be bound by the collective employment agreement or be treated as an add-on to the school’s main business. There are still plenty of empty school rooms at night to rent at low cost too. Prior to schools getting so involved in community education, there was a thriving private market in ACE-type courses and I would expect many of the previous school-based tutors to explore new models. There are bound to be several viable models out there for ACE delivery.

If ACE does produce such huge private benefits as 50:1, there will indeed remain great demand for ACE courses – even if one has to pay say $50 for it.

Eric Cramption looks into where the nonsense about a 50% reduction in crime rate comes from, if you do an ACE course. He finds:

So folks taking adult ed courses are assumed to have a 50% reduction in their chances of committing a crime. PWC cites a 1999 working paper as evidence; a 2004 AER piece by the same author has the crime reduction associated with high school graduation as being less than half that figure (14-26%). This latter study uses a far more cautious identification strategy: changes in minimum age of dropping out of school as instrument for completion rates. And note that the numbers cited are for HIGH SCHOOL GRADUATION, not for taking a night course in Indian cooking.

Remind me to never get PWC to do a report, if I want it taken credibly.

Thank God for the Internet where we can get some solid analysis of these ever growing number of crappy reports, justifying whatever the commissioning party has asked for.

Eric Crampton has gone better than mere belief, and analysed the relationship between overall unemployment and youth unemployment.

The graph has (thanks Stephen Hickson!) the unemployment rate for those aged 15-19 and the unemployment rate for everyone else (aged 19 and up). It looks to me like the proper relationship is a combination of a level shift and a multiplicative effect. When the adult rate is very low – below four percent or so – the youth rate bounces around at a point about 10 to 12 points higher than the adult rate. When the adult rate is high, the youth rate exceeds that constant by a multiple of the adult rate. …

Both the constant and the adult rate come up highly significant. So, over the period 1986 to present, we can expect the youth rate to be 1.44 times the adult rate (the multiplicative effect – about 44% above the adult rate) plus a constant of 9 percentage points. So if the adult rate is 5, the youth rate should be 16.2. We’ve ruled out the “it’s just ratios” argument – there is a constant term in there; we’ve also ruled out that it’s just a level shift because the coefficient is significantly greater than 1.

So Eric has calculated the best fit of the data is that the youth unemployment rate will 9% higher than 1.44 times the adult unemployment rate.

He then plots the “residuals”, which is how much greater or smaller the youth unemployment rate has been, compared to what the formula predicts.

So that formula looks pretty good up until, umm well 2008. Eric continues:

If we look at the top graph, we see youth unemployment rates went up a lot during the recession of the early 1990s. But over that period, youth unemployment rates were never more than a couple of points above what the very simple model predicted (residuals graph, above). In recessions, it does look like the youth rate gets hit harder than the adult rate. But look at what happens starting around fourth quarter 2008. We now have residuals that blow up the model. Something really weird starts happening to the youth unemployment rate at the end of 2008. Youth unemployment is now about 10 points higher than we’d expect using the simple model.

And if one goes for different formulas:

I tried a few different variations allowing the constant and the slope to shift for high and for low levels of adult unemployment.  But none of that made any substantial difference.

So the conclusion:

The econometrics here are very simplistic and do nothing to account for differences in labour force participation rates or the obvious problem of serial correlation in the time series data.  But the simple model is still pretty telling.  If we allow youth unemployment rates to vary both as a level shift above the adult rate and as a multiple of the adult rate, which is what we’re doing when we run the simple regression with a constant term, we still have a jump in the current youth unemployment rate that is well above that seen in prior recessions.

My first cut explanation remains the abolition of the youth minimum wage.

Now this does not prove beyond doubt it was the abolition of youth rates that pushed youth unemployment up an extra 10%. But it is the most likely explanation.

The challenge for those who think abolishing youth rates did not contribute to the increase in youth unemployment, is to put up their own data and credible explanations to explain the massive gap between youth and adult unemployment.

Airline passengers to the United States will be isolated from other travellers at Auckland Airport and face a rigorous second set of security checks following the suspected terrorist attack on a Christmas Day flight to the US. …

The Aviation Security Service’s northern regional manager, Peter Pilley, said passengers should allow an extra hour before the departure time for their flight.

He advised people to take as little carry-on luggage as possible to speed the process.

The TSA directive also says passengers must remain seated for the final hour of their US-bound flight and are not allowed access to carry-on baggage or to have any items on their laps.

Eric Crampton is not impressed:

Can we reject the null hypothesis that Osama’s crew have agents inside the TSA and that their whole objective is to give these agents reasons to make travelers’ lives hell?

Heh. Not impossible. He quotes other bloggers:

Seems to me that what this, Flight 93, and the Richard Reid incident have shown us is that the best line of defense against airplane-based terrorism is us. Alert, aware, informed passengers.

TSA, on the other hand, equates hassle with safety. For all the crap they put us through, this guy still got some sort of explosive material on the plane from Amsterdam. He was stopped by law-abiding passengers. So TSA responds to all of this by . . . announcing plans to hassle law-abiding U.S. passengers even more.

9/11 did change everything. Passengers will take action now – even take on armed hostiles, rather than let them gain control of a plane. Crampton comments:

Only two things have made flying safer [since 9/11]: the reinforcement of cockpit doors, and the fact that passengers know now to resist hijackers.

He offers three theories for the new flight restrictions:

1. The TSA are in it with the terrorists to create maximum inconvenience for travelers and augment the TSA budget
2. The TSA are complete idiots
3. There’s nothing the TSA can really do, but idiots demand they do something and the only something that passengers can observe is how much they’re being inconvenienced?

I agree with Eric that (3) is marginally the most likely.

Sometime soon, we’ll see a report showing that the social costs of skiing are in the hundreds of millions of dollars. It wouldn’t be hard to produce a number that large. First, show frequent skiers are more likely to have accidents than recreational skiers.

Then, make the critical assumption that nobody could ever rationally decide to take risks – health is all that matters. Frequent skiers then are by definition irrational, and irrational people enjoy no benefits from their ski outings, no matter how happy they appear.

With this “zero benefits” assumption, every dollar spent on skiing by these harmful skiers is a social cost, as is the time these folks spend skiing. Add the realised costs from those folks who do have skiing accidents and you’d quickly have a number in the hundreds of millions of dollars, if not billions.

Such a good analogy.

Any time we make a decision that lets us enjoy a bit of fun but with some risk to our health, that decision is considered irrational and cannot generate any real enjoyment.

Consequently, benefits are either assumed equal to zero or set to an arbitrarily low level.

But is it really irrational to trade off health against other goals? I have a hard time imagining somebody for whom health isn’t a good.

But I similarly cannot imagine anybody for whom health is the only good. We all trade off risks to our health against other goals we seek, all the time.

If you saved a few dollars by not buying the most expensive baby car seat on the market, you decided that the very small extra increase in safety for your child isn’t worth the money.

If health and safety were our only goal, the world would look very different. We would all buy cars made of padded foam rubber and drive very slowly. That we don’t is strong evidence that we have pluralistic sets of values – we are not monomaniacal healthists in our daily lives.

Absolutely. You want a zero road toll. Set the speed limit to 30 km/hr.

If we tally up the social costs of driving with a cellphone, we ought to recognise that accident costs need to be weighed up against all of the benefits that drivers enjoy from being able to take the occasional call while on the road – we oughtn’t have our thumb on the scales by assuming the benefits away.

And this is why I am critical of the Government for their moves here. Nowhere have I seen measurement of the benefits vs the costs of cellphone use in cars.

For every skier who dies in an avalanche, tens of thousands of others took no fewer risks but enjoyed a great time out on the slopes. Their enjoyment ought to count for something.

And, for every drinker who dies in an accident that could have been avoided were he sober, there are countless others who simply enjoyed a good night out.

Yes. And forcing bars to close early (for example) will stop many having a good night out.

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.

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.

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.

“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.

This study takes a conventional approach for economic cost studies, which “do not attempt to fully consider the economic benefits of alcohol… and other drugs, and should not be confused with cost-benefit or cost-effectiveness analyses” (Single et al, 2003: 14).

Crampton comments:

In other words, everything is a cost. Imagine applying this methodology to anything else. What are the costs of car use? Of apple growing? Of coffee? It’s very easy to get big numbers on the cost of anything, if you don’t offset the corresponding benefits.

So lesson number one is ignore any research that measures costs only.

He looks at one example:

The study counts as costs reduced labour productivity. If you go to work with a hangover, you’re less productive. Similarly, if you spend a night out on the town rather than putting in the overtime, you’re not producing as much. If we only count costs, then these get included: costs to society via lost output and costs to the government via reduced tax revenues. But if we worry about NET costs rather than gross costs, these have to disappear. Why? Because if I decide to drink and be less productive at work, I’m less likely to get a promotion or a salary increase. My productivity affects my wages. If I decide to be less productive and have a lower expected salary path, that’s between me and my employer: I’m bearing the costs. If I decide to do it, that’s prima facie evidence that I weigh the benefits as greater than the costs.

We get the same from the lobbyists for banning cellphones from cars. They never calculate the benefits of cellphone use in cars, just the costs.

His 33 page study looks at political ignorance. His abstract explains:

Large proportions of the electorate can best be described as politically ignorant. If casting a competent vote requires some basic knowledge of the incumbent’s identity, the workings of the political system, one’s own policy preferences and the policy preferences of the main candidates, many voters cannot vote competently.

Wittman (1989) suggests that, if ignorance is unbiased, overall results will be determined by informed voters as the ignorant cancel each other out. Lupia and McCubbins (1998) provides a mechanism whereby voters with little information can take cues from more informed colleagues in order to vote as if they had the requisite information.

Using data from a uniquely useful dataset, the 2005 New Zealand Election Survey, I show that both mechanisms fail. Political ignorance is not unbiased: rather, it strongly predicts policy and political party preferences after correcting for the demographic correlates of ignorance. Moreover, membership in the kinds of organizations held to allow the ignorant to overcome their deficiencies fails to improve outcomes. Voter ignorance remains a very serious problem.

So how does Crampton decide if someone is politically ignorant? He had five criteria:

1. An inability to correctly place National, Labour and United Future relative to each other on the political spectrum. 40% could not place them correctly as National to right of Labour, United Future to left of National and United Future to right of Labour.
2. Not understanding MMP, such as thinking the electorate vote is more important than the party vote in determining the composition of Parliament, not knowing the threshold of 5%/1 seat, for thinking FPP is more likely to have the party with the most votes have the most seats, and for inconsistencies such as saying they prefer there be only two parties in Parliament but support MMP.
3. Not knowing the term of Parliament, ot knowing enrolment to vote is compulsory and not knowing permament residents can vote (only 28% knew this).
4. Not knowing what parties formed the 2002-05 (then current) Government.
5. Not knowing the name and party affiliation of their local MP

You can quibble over individual criteria, but overall there is little doubt that those who fail most of these criteria, are not making much of an informed vote. Eric talks on his blog about the criteria here.

An economic ignorance score is also calculated based on their responses to economic questions.

So who is more or less likely to be politically ignorant. The figures below are proportions of a standard deviation, so the higher positive it is, the more politically ignorant that demographic was, and a negative figure means they are less likely to be politically ignorant:

• Follow political news on Internet -0.068
• Active member of Church -0.117
• University educated -.369
• Farming -.377
• on DPB +.149
• Left Wing -0.302
• Thought Govt was good +0.09

So those who actively identify as left wing are far less likely to be politically ignorant, but those who though the 2002-05 Labour/Progressive Government was good were more likely to be politically ignorant.

And how about voting preferences:

In the party support specifications, I restricted the sample to those reporting having voted. When they get to the polls, the ignorant are significantly more likely to support the Labour Party (4% increase in predicted probability for a standard deviation increase in ignorance) and significantly less likely to support the Green party (1% decrease in predicted probability) and United Future (0.5% decrease in predicted probability).

There are lots of otehr interesting facts too:

Other interesting findings include that voters with internet access are less likely to vote but more likely to support National, Act and United Future, that very active church members are about 8% less likely to support National and 5% more likely to support United Future, that Labour’s play for the student vote with zero percent student loans seems not to have paid off as neither current nor former university students were more likely to support Labour in 2005, that Maori were 21.5% less likely to support National in a somewhat racially-charged election, that New Zealand First drew disproportionate support both from superannuitants and from those on family assistance, that those on high incomes weren’t particularly likely to support any party but that the divorced were almost 9% less likely to support Labour and 5% more likely to support the Greens.

And Eric has a useful conclusion:

While I have shown that ignorance causes bias, it would be far too hasty to say that ignorant Kiwis are generally biased towards the New Zealand Labour Party. Results here could simply reflect incumbency bias. Alternatively, the pattern could well be explained under rational expectations where the Labour Party promised to undertake more regulatory measures to protect people from the consequences of their choices, and the politically ignorant could perhaps be more likely to be in need of such protection. Isolation of incumbency effects versus biases towards the Labour Party would require analysis of prior years of the New Zealand Election Survey when Labour was not the incumbent and will be the subject of future work.

I for one very much look forward to the future work – the 2008 and hopefuly the 2011 elections.