Friday, 3 July 2009

Public policy analysis

In an article in the Otago Daily Times today, 3 July 2009, Roger Kerr makes the obvious point that "Public Policy Requires Proper Analysis". He writes
Academics Eric Crampton of the University of Canterbury and Matt Burgess of Victoria University have performed a huge public service (not commissioned by any outside party) by exposing the flaws in a study of the social costs of alcohol.

The study was undertaken for the Ministry of Health and ACC by Business and Economic Research Limited (BERL). It was cited approvingly by Sir Geoffrey Palmer, president of the Law Commission, in a speech relating to the Liquor Review which the Commission is undertaking. BERL calculated the annual social costs of alcohol to be around $4.8 billion. Crampton and Burgess show that this is a gross over-estimate.
Kerr continues,
For the purposes of policy, the key issue is the external costs of alcohol consumption in the form of crime, publicly funded health care and road accidents.
Internalised costs, that is costs that an individual pays, may be an issues for the individual concerned, but are not an issue for public policy.
Other costs, such as lost production and lower incomes sustained by drinkers, are ‘internalised’, that is to say they are borne by consumers themselves.

Crampton and Burgess estimate that the policy-relevant net external costs amount to $146.3 million, less than 5% of BERL’s headline $4.8 billion figure.
But there are other problems with the BERL report,
BERL also ignores the benefits to consumers of alcohol consumption. These benefits are not the savings in public expenditure on health care due to moderate consumption which have been documented in medical research. These are external benefits.

Rather, they are simply the benefits people derive from the enjoyment of alcohol, and are approximated by what they are willing to pay for alcohol products.
But there is another issue highlighted by this report.
The BERL report should not have passed the smell test at the Law Commission. It is well known that some past studies have made similar mistakes.

Crampton and Burgess state that “The BERL report is wholly inadequate for use in assisting policy development.” A senior Treasury official has rightly commented that the Law Commission’s reputation is at risk if it relies on it.

Unless BERL can refute significant criticisms, the chief executives of the Ministry of Health and ACC should also be held accountable for such a poor use of $135,500 of taxpayers’ money. Indeed they should be demanding their money back.
In short, there should be quality controls on these sorts of reports. The taxpayer may well ask, what did they get for their $135,500? Why did the Law Commission use the report without, it seems, checking to to see if it did pass the "smell test"? There are important issues to do with alcohol, so important that they deserve to to be subjected to the highest quality of analysis. Kerr goes on to say,
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.
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.
Kerr closes his article by noting
The Law Commission must range broadly and look at all options in a rigorous and dispassionate way. It should not compound the flawed BERL analysis with sub-standard work of its own.
If we want quality public policy then we need quality input into the policy formation process. What the BERL report episode highlights is that some of the input into that process is not of the quality that the importance of the issue demands.

Update: BK Drinkwater refers us to a reprint of the Kerr article in the Herald with Hurly-BERLy: Roger Kerr Weighs In.


The Optimist said...

That really is shocking. I hope it is not a widespread problem.

Where do I sign to get alcohol tax removed? It is silly having to buy whisky, etc. as you fly into the country just to get a decent bottle size at reasonable cost...

bk drinkwater said...

Oops. I'm mortified I missed this first time round. I should (A), read more newspapers, and (B), check your back catalogue more thoroughly.