Why are poor nations poor?

This from NPR's Plant Money,

The planet's rich nations met this week to discuss, among other issues, ways to help the planet's poor nations.

But those poor (and developing) nations have their own group. It's called the anti-G20, in a nod to the G20 collection of industrialized states. The anti-G20 met at the U.N. last month, where Nobel Laureate Joseph Stiglitz and Martin Khor explained what keeps impoverished countries down. Answer: Their debt to the IMF and wealthier nations.

What is interesting is that the picture that goes with the story has the title,

As of December 2008, Zimbabwe owed $4.69 billion to international creditors.

Are they really trying to argue that Zimbabwe is poor because of its debt to the rest of the world? What about the policies of a guy called Robert Mugabe?

Anyway at Cafe Hayek Russ Roberts writes

There are plenty of things rich countries do to make poor countries poor. Refuse to trade with them. Give the thugs who run the country money. But this IMF argument has always struck me as strange. The poor countries are poor because they IMF expects them to pay back the money that the poor countries borrowed? How do the loans get made in the first place? Don't the thugs who borrow the money bear some of the responsibility? How would forgiving those loans solve the problem?

Good questions.

Interesting blog bits

1. William Easterly on The Pope, the G8, and the “Man in Charge” Fallacy. No one is in charge, just don't tell the Pope. Tom M at Defective Equilibrium discusses the issue here.
2. Kiwiblog on Labour and Hitler. New Zealand continued to push for negotiations with Hitler even as Britain declared war, while still honouring a trade agreement made with Germany in 1937. Who knew? BK Drinkwater comments here. Not PC here.
3. Lawrence H. White asks Can the Monetary System Regulate Itself? Our current system, no, but a free banking system on a gold standard, yes.
4. Alex Tabarrok on Markets in Everything: Dead and Live Souls.
5. Enrico Spolaore and Romain Wacziarg discuss Kinship and conflict. Can trade and democracy promote peace or is armed conflict deeply rooted in cultural, ethnic, and religious differences? This column introduces a novel way to estimate the direct effect of long-term relatedness on the risk of international conflict and finds that, while democracies and open economies are less conflict-prone, the risk of conflict is actually greater among more closely related populations.
6. Akhil Shah on Taxes. Taxes, on the face of it, may not seem a threat to liberty, but the scale of tax rises that we are facing for a large part of this century mean that they will have a substantial impact on our lives and liberty. This posting is talking about the UK but the basic ideas apply more generally.
7. John Macilree notes that Fuel prices bouncing back up. The prices of aviation jet fuel and residual fuel oil (RFO) used in ships are on the raise. Is this good or bad? Depends on what's driving it.

Money from nothing?

Over at ThinkMarkets Gene Callahan writes

Again and again, I run across this complaint that fiat money “is money created out of nothing.” This is supposed to be an argument against fiat money, but, in fact, I take it to be a substitution of sloganeering for scientific analysis.

He continues,

I believe that fiat money is created from a government’s ability to collect taxes, combined with the fact that it promises to accept the pieces of paper in payment for those taxes. My hypothesis, as this point only a suspicion, is that the “backing” of fiat money is first and foremost its ability to pay tax obligations to the government, and that’s its value for other uses is anchored in this ability, just as the value of gold as money is initially anchored in its value in all non-monetary uses.

I would think that the fact that the government is willing to take money as payment for taxes provides a reason for everybody else accepting it. Think of a situation where there were more than one supplier of money, say each private bank offered its own notes and coins. But the government would only accept one of these currencies for the purpose of paying taxes. Which currency do you think would quickly become the median of exchange?

The reply to the response to the criticism of the original (updated x2)

As most of you will know, on Monday, BERL released a statement rejecting criticism of their alcohol study. Now Matt and Eric have completed their reply, available in full here (pdf) .

Eric outlines the highlights here. To me the two most important responses from Matt and Eric are to do with the consideration or non-consideration of benefits in the BERL report and the issue of rationality.

First benefits,

They say that we misinterpret their brief and consequently fault them for things that were never within their remit: specifically, that they do not include the benefits of alcohol.

It is certainly true that benefits were not within the RFP. We noted as much throughout our report, and in our executive summary. However, counting benefits as being precisely equal to zero is what allows BERL to count private costs as social costs. As BERL correctly notes at page 173 of their report:

When measuring the social cost of harmful AOD use, known private costs should generally be excluded…because private costs are offset by private benefits, so there is no net social cost

They there cite Collins and Lapsley, their primary source, as warning against the counting of private costs. They then go on:

In the case of harmful drug use, however, individual decisions are not necessarily made on a rational basis, that is, a decision where the consumer equates their costs and benefits. We argue that the consequences of irrational consumption decisions lead to private costs that are borne by the rest of society, and hence should be included as social costs… We assume that it is irrational to drink alcohol to a harmful level and that harmful alcohol use has zero private benefit.

Without that assumption, BERL could not count private costs as socially relevant. Their entire method hinges critically on that they have decided to assume zero gross benefits to drinkers of their drinking. So while benefits were outside of the RFP, they have taken a very strong position on the absence of benefits: a position without support in the economic literature. It consequently is fair game to critique BERL for counting the benefits as being equal to zero. And we do not understand how BERL can say with a straight face "we cannot accept criticism for not covering issues that were outside the project's brief" when their entire method is built on their having brought it into the project's brief.

If benefits are outside the remit, the proper approach is to consider only external costs. At minimum, BERL should have apportioned its cost tally between private and external costs. Instead, they termed all costs as social costs. (Emphasis added.)

Second, the response to the often repeated claim about rationality,

BERL concludes by rehashing their favorite trope: world-view and rationality. Never mind that we have, ad nauseum, shown that none of our results hinge on assuming perfect information, perfect foresight, or perfect rationality. The prior link is the most exhaustive coverage, but the same issue has been covered here and here as well. And I re-iterated it at the NZEA conference with both Nana and Slack in attendance. Instead of providing any reason why the analyses above are wrong, BERL instead reiterates the perfect rationality tropes and throws in personal attacks by suggesting that we think drink driving and murder are perfectly ok.

I had wondered earlier about the claim BERL made about not providing policy analysis. I wrote,

They are not providing policy analysis? Why does he [Slack] think the Ministry and ACC asked for the study if not for policy purposes? What other purpose could it have? And note the use of the report by the Law Commission. If the BERL report isn't providing policy analysis, why haven't they not pointed out this fact given that the Law Commission seems to very clearly want to use it for policy analysis purposes?

Matt and Eric close their reply with

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.

Read both the highlights here and the full 10 page reply here (pdf). Note that the full reply includes a summary of issues that Matt and Eric have raised that BERL have so far failed to address.

Update: BK Drinkwater notes Hurly-BERLy: Burgess And Crampton Respond.

Update 2: Kiwiblog has More on BERL. DPF writes

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.

Counting a murder's utility (updated)

In the comments section to the posting Of externalities, elbows, and knowing one from the other over at Offsetting Behaviour, Brad Taylor tries to make sense of Adrian Slack's (in)famous 'Eric is comfortable with murder' comment:

Giving Slack the benefit of the doubt, maybe he was saying that you're likely to count the utility of the murderer as a benefit partially offsetting the cost to the murdered, whereas the BERL authors are not because society deems that sort of utility as inadmissible.

This does raise the question, Why do economists take into account a murder's utility? Or, more generally, why consider any criminals utility?

There are two basic reasons.

First, one of the reasons for taking a economic approach to the study of law is that it provides a framework for answering questions about what the law ought to be, what rights we ought to have. We begin with the premise that one should design legal rules to maximise the size of the pie and little else. In particular we assume nothing at all about the sorts of things we expect legal and ethical rules to be based on: desert, rights, justice, fairness. Starting with this premise, economic theory enables us to produce a long list of prescriptions as to what law should be like. They include things like: Theft and murder should be punished. Contracts should be enforced. The imposition of criminal penalties should require higher standards of proof than the imposition of civil penalties. And so on.

David Friedman has written,

We start with economic efficiency and end with conclusions that fit reasonably well both existing legal rules and our ethical intuitions. Somehow we get out quite a lot more than we put in. That is one of the reasons the project is interesting.

An alternative would be to not treat all benefits to everyone equally, but rather to first sort people into the deserving and the undeserving, the just and the unjust, the criminals and the victims, and count only the benefits of the "good" people-the deserving, the just, the victims. But this amounts to simply assuming our conclusions. Any benefits that my accrue to "bad" people don't count, so rules against "bad" people are automatically efficient. You cannot deduce moral conclusions from economics if you start the economics by assuming the moral conclusions.

What acts are or are not crimes is one of the things that the economic analysis of law is supposed to help us determine. Murder may be a simple case, but what about speeding? What about breaking into an empty house when you are lost and starving? What about slugging someone who has the presumption to suggest that Word is better Latex? Economic analysis provides a framework within which to answer questions such as these. On the other hand, if we treat it as an elaborate system for justifying the answers we already have, we will learn little that we do not already know.

The second reason that it makes sense to include the costs and benefits to criminals in our calculations, even if we agree that it is good to prevent crimes, is that we must still decide how good it is and hence how hard it is worth trying to do it. Compare the case of a poor man who shoplifts to survive with that of an arsonist who burns down buildings for the fun of it. In any given year each happens and imposes costs when it does. Let us assume that the two result in the same level of costs. Both people are, obviously, committing crimes we would like to prevent. But we are willing to go to a lot more trouble to stop the arsonist than to stop the shoplifter because his crime is such a waste.

So, economic analysis should give equal weight to the costs and benefits of murderer and victim. As Friedman writes

If doing so produces the conclusion we want-that murder is a bad thing-that is interesting. If it does not, that too is interesting.

Update: Eric the murdering economist comments on The murderer's utility over at Offsetting Behaviour and gives up murder for amateur moral philosophy. Or is he just trying to murder moral philosophy?

Now, if the conclusion of a serious study found that murderers' enjoyment of crime were greater than the cost imposed on victims, in other words that allowing murder is Kaldor-Hicks efficient, I'd then take off my economist's hat and put on my amateur moral philosopher's hat and say that murder should nevertheless be illegal because it infringes the victim's rights and because, as amateur moral philosopher, I really don't mind discounting the utility of rights-violators all the way down to zero. But I would be taking off my economist's hat when doing so. If economics gives us the efficiency-based case against murder, as I rather expect it would, so much the better. But if it doesn't, it's far better to present the economics straight up, and then present the value judgments separately, than to pervert the economic analysis by doing things like, oh, declaring at the outset that the murderer gets no utility and that a total discounting of the murderer's utility is consistent with good economic practice.

A market solution

Don Boudreaux writes to the New York Times on the subject of oil speculators and their effect on the fluctuation in oil prices,

The Obama administration believes that the price of oil is fluctuating too much, and it blames speculators - whom it wants to rein in ("U.S. Considers Curbs on Speculative Trading of Oil," July 8).

Rather than issue new regulations that might distort prices - prices that typically convey important information about market conditions - Mr. Obama and his lieutenants can better address this problem by themselves becoming speculators. Whenever they believe that speculators are driving oil prices too high (and, thereby, setting the stage for these prices to "fluctuate" back downward) Team Obama can go short in oil. Likewise, whenever they believe that speculators are driving oil prices too low (and, thereby, setting the stage for these prices to "fluctuate" back upward), Team Obama can go long in oil.

Not only will these brilliant public servants earn personal fortunes in the oil market, they'll also, in the process, mute the allegedly excessive price fluctuations (because, for example, selling oil short when its price is rising adds supply to the market today, thus relieving the pressures pushing today's price upward). And because Mr. Obama & Co. would use their own resources, we the public will be better assured that their actions aren't driven by opportunistic politics.

The only problem with this solution to the "problem" of price fluctuations is that if Team Obama did it, they would not, of course, risk their own resources. They would like all politicians and bureaucrats use other people's money, and waste a huge amount of it in the process.

New blogger at Offsetting Behaviour and rationality

There is a new co-blogger at Offsetting Behaviour, Seamus Hogan, see here for Eric's, very Eric like, introduction. Seamus's first posting in on A word after the final word on rationality.

Seamus opens his post by saying

The background for this was the session of the NZAE meetings last week when the BERL report on the costs of alcohol was presented. There we heard again the suggestion the question of whether the costs drinkers impose on themselves should be included as costs in a cost-benefit calculation is simply a matter of one’s “world view”. That is, the suggestion is that if you believe that consumers are the best judges of their own well-being then, by definition, any costs consumers impose on themselves are offset by equal or greater benefits and so can be excluded, but if you believe that some consumers make decisions that they will come to regret, these consumers incur non-offset costs that should be included.

I am from the first school of thought, even if ex post it turns out we suffer costs, this doesn't mean ex ante we made a bad decision which the government should have corrected for us. If I kill myself playing rugby, does this mean I was stupid to play rugby and that we should ban it?

Seamus continues,

Now, my world view is for the most part closer to the first than the second, although I don’t hold dogmatically to this view. That is, I believe that although consumers can and do make mistakes, they mostly are better judges of their own well being than are government officials, or at least are entitled from a personal-liberty perspective to make their own mistakes. Call that “world view 1”. But for the purposes of discussion, let us assume “world view 2”, which is the empirical and ethical assumption that people can make mistakes that can and should be averted by government policy. The question I want to address is what is how, or indeed if, that world view can be incorporated into cost benefit analysis (or just cost analysis).

Seamus goes on to argue that,

It would seem that to use dollar values to calculate the costs of alcohol that irrational drinkers impose on themselves, you can’t adopt world view 2

Seamus concludes this discussion by saying,

In short, the point here is that one is free to take a world view that people are sometimes not fully rational or informed, and to devise paternalistic policies based on that world view. But don’t use a false precision of dollar values, or use the technical apparatus of a valuation technique that depends on an assumption of rationality for its internal consistency.

Where is the externality here?

A question rightly asked by Matt Nolan over at TVHE. Matt writes

There have been wild debates surrounding the BERL report into the social costs of alcohol. I haven’t read the report, I haven’t read the replies, I have to admit I have been busy.

However, in one of Eric Crampton’s many posts on the issue I see that generally an externality from lost output, excessive unemployment, and forgone wages has been assumed in the discussions. I’m sorry but what?

And he argues

The labour market is a market, how can we have an externality when there is a market with a market price (wages). Yes, alcoholics produce less, less of them are employed, and they tend to have lower wages – but this isn’t an externality it is part of the market process. They are paid less because their marginal product is lower, and they are willing to be paid less because the benefit they receive from consuming alcohol is sufficient compensation – this is a completely internalised decision for the drinker isn’t it, so where is the social cost.

And don’t say it is too the firm – the firm can set a lower wage because of the fact that the marginal product of this worker type is lower.

All of which makes good sense.

Matt goes on to say that market failure could occur due to adverse selection. A firm hires someone without knowing their drinking habits and they could therefore end up with a low productivity/high drinking worker. But the firm can fire the worker, in extreme cases, or adjust future wages to take into account the lower productivity. In either case the bad effects of the drinking appear to have been internalised.

And thus no externality.

Councils and revenue

This posting comes from Homepaddock,

A tap delivering spring water outside Speights brewery is used by hundreds of Dunedin people a day in search of something superior to the city’s supply.

But now the city council has put pay and display parking metres in the street and people are worried they’ll have to pay while they fill their containers with water.

The chances of getting a ticket in the few minutes it takes to fill a bottle or two aren’t great. But you’d think a council which knew its city would have had the wit to put a five minute free park beside the tap.

May be they do know their city well and see this as a simple way to increase revenues a bit. It may turn out that your chances of getting a ticket are high; the more tickets, the more money the council receives. It wouldn't be the first time this sort of scheme has been tried by local governments.

More blog comment on the BERL report

Lance Wiggs, a new blog to me, comments on the BERL report under the heading Fix the Berl report on alcohol and drugs.

The title says pretty much all that needs to be said. Lance writes

While the level of professionalism to produce a credible report should command the (apparently) $135,000 fee, I am disappointed that people inside both Berl and the Department of Health are not reacting to the responses – indeed it seems defensive. While there has been some good robust discourse, but it seems a bit tit for tat, and much as we like to see a good fight, I’d rather see a quest for an agreed answer.

and importantly

On such an important topic I feel that the only thing that matters is that we get the facts straight – and I would dearly like to see a re-worked and perhaps expanded paper that can be acceptable to academics, media, the public and even bloggers.

With reference to BERL, Lance says

Their paper was presented at the NZ Economists Association Conference last week, but sadly I only saw the last few minutes. (I was diverted by a macro economic discussion of the global financial crises). I did see the reply, given by Messers Crampton and Burgess (below) but sadly at this standing room only event, the question period was killed in favour of lunch.What I did observe from the back of the room where several covered smiles and quiet snickers – while the sheer number of people in the room made it feel like a veritable lynch mob.

More concerning to Berl is that my understanding is that Berl are not revising the report in light of the academic and media criticism. I could be wrong, and I hope so, but I had a very brief chat with one of the authors at the conference – but he wasn’t happy talking to “a blogger”.

Lance closes his comment by asking, Where to next?

We are now waiting for the Law Commission’s policy document – and the reaction to that will be interesting. Indeed the Berl report has probably had the effect of increasing awareness of the forthcoming policy and thus activated many people whom otherwise would not have been engaged. Like me.

And me.

EconTalk this week

Paul Collier of Oxford University talks with EconTalk host Russ Roberts about the ideas in his new book, Wars, Guns, and Votes, a study of democracy and violence. Collier lays out the incentives facing a dictator who is considering the seductive appeal of holding an election. He defends his empirical work that forms the basis for many of the policy ideas in the book. Collier then makes the case for international military intervention to support democracies in poor countries.

BERL rejects criticism of study (updated x4)

Or so says Adrian Slack. (But then he would, wouldn't he) From the BERL website comes this response to Burgress and Crampton. And I would have to say I'm somewhat underwhelmed by it, but here it is anyway:

BERL’s recent study into the Costs of Harmful Alcohol and Other Drug Use has prompted some criticism from some quarters. In particular, economists Crampton and Burgess have written a critique of our report. BERL soundly rejects the criticism contained in the Crampton and Burgess’ critique and stand by the validity of our work.

[...]

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.

Further, we totally reject suggestions that we adopt assumptions to provide solutions favourable to the client. BERL’s reputation has been built over 50 years of existence and our message is clear: BERL does not write ‘reports to order’. As is the case with this study, where robust evidence is not available, we adopt conservative assumptions or ‘average’ values for parameters.

The Crampton and Burgess critique is fundamentally flawed in that it:

* misinterprets the study’s brief and, on this basis, employs an inappropriate framework for its analysis
* makes some simple, factual errors about our method and the information used
* uses assumptions with a cost-deflating bias, reflecting their own world view.


The project brief

BERL’s report states up front that it is a cost study and uses an international methodology developed by the WHO. The Ministry and Health and ACC’s purpose for the study was, to “[a]ccurately quantif[y] costs… pertaining to alcohol and other drug related harm”.

Despite this information, Crampton and Burgess misinterpret the project’s purpose. They select a framework that is inconsistent with the purpose and proceed with their analysis on the basis of an unsound premise. They argue for the case that all drinking is a rational choice, but take a middle road assuming that for all drinkers the individual benefits offset private costs. They then assume that the majority of costs considered in the BERL study are fully borne by the individual and net out, and assert that these costs are not relevant to policy.

The project brief was not to assess benefits, nor to provide policy analysis. The brief was to quantify the costs of harmful use of alcohol and other drugs using an internationally recognised method. Indeed, the initial request for tender to which BERL responded, stated “You shall complete a cost analysis using an accepted framework and deliver a report on the costs of alcohol and other drug abuse to New Zealand.” Further, the WHO International Guidelines was provided as an example of an “accepted framework”.

The result: a clearly written report soundly based in economic theory.

The Ministry of Health and ACC, as part of good research commissioning practice, required the near-final report be sent for peer review. Australian economists and international experts in this field, Professor David Collins and Professor Helen Lapsley, peer reviewed the report. The reviewers stated “the report is a well-researched report, soundly based in economic theory and quite clearly written…. our overall conclusion that the research has certainly been conducted at a very acceptable level.”

Peer review was also sought from relevant government departments, so they had the opportunity to ensure that the assumptions and use of data relating to their sectors were appropriate.

BERL carefully considered and incorporated the reviewers’ comments into the final report as appropriate. The reviewers noted that “there is often no uniquely acceptable methodology. Frequently the methodology is to some extent determined by issues of data availability. The report provides sufficient information on methodology and data sources for readers to make their own judgments about the quality of particular sub-estimates.”

(A selection of) Their errors

Crampton and Burgess make some simple, but substantial, factual errors. As an illustration, Crampton and Burgess incorrectly cite and misinterpret a New Zealand study on the level of unemployment caused by harmful alcohol use.

They state, “Rayner et al show… that our overall unemployment rate is 10 percent higher than it otherwise would be: in other words, the difference between 4% and 4.4% unemployment”. Rayner et al (1984, p48) clearly state, “For a given employment rate (say 66%) it was assumed that alcohol consumption caused the reduction in paid employment from the national rate (76%) to the given rate.” That is, a 10 percentage point difference, i.e. between 24% and 34% unemployment, which is consistent with the figure we use. This simple, but substantial, error cuts BERL’s social cost estimate by over $830 million (or almost 30 percent of the tangible costs of harmful alcohol use).

A second example of where Crampton and Burgess have got it wrong is that they do not correctly count insurance costs. They assert that BERL double counts insurance costs and that a “tallying of costs should include either the insurance costs or the amounts paid out: not both”. An insurance company’s total costs include both its overheads (fixed costs) plus its claim payouts (which vary with the level of claims). The BERL study correctly, and sensibly counts, the share of insurance companies’ overheads and the actual cost of property damage due to harmful alcohol use.

Their assumptions: a cost-deflating downward bias

Crampton and Burgess use a range of cost-deflating assumptions. For example, they assume that New Zealander drinkers would fare worse in the labour market, even in the absence of harmful drinking. That is, they assert that harmful drinkers would have worse labour outcomes even if they didn’t drink to a harmful level. This ignores the possibility that some extremely successful people may also be heavy drinkers. Indeed, some of these people may be even more productive if they did not suffer alcohol-related problems.

In the absence of robust evidence either way, BERL uses average figures based on New Zealand data. We take a middle line. In the absence of harmful alcohol use these people may have better or worse labour outcomes. We assume, for example, harmful drinkers would be like other New Zealanders – some with depression, some very successful, some who may have depression and be successful. We openly provide sufficient information for others, such as Crampton and Burgess, to draw their own conclusions.

Another example of cost-deflating assumptions, is that Crampton and Burgess assume that all productive resources can be fully and costlessly reallocated, workers bear almost all the cost and count only a “‘value added’ component of 10% as being an external cost”. In the short run, it is not necessarily the case that factors of production can be reallocated. For example, your computer does not keep writing by itself when you have a sick day. Nor may resources be freed up for others to use if a person turns up to work hung-over.

In the longer run, alcohol-related work absences or premature death may reduce the human capital available to the economy. This could be a particularly substantial effect for young people whose drinking impairs their learning, experience and job prospects. There may also be substantial complementarities between workers, so one worker’s alcohol-related absence disrupts other worker’s productivity. Rather than cherry-picking assumptions, we use average figures based as far as possible on New Zealand data and conservative assumptions.

BERL openly admit that we have no expertise in the medical field. Where necessary, BERL was guided by epidemiological experts and evidence as well as medical advice in adopting the necessary thresholds for ‘harmful’ use. The thresholds for harmful consumption, however, were only required for the attributable portion of some health, production and labour costs; all other costs were calculated based on data that show alcohol-related harm has actually occurred.

Their world view and considerations beyond the scope of the BERL study

Setting aside the issue that that the study’s brief did not include considering benefits, Crampton and Burgess assert that all harmful drinking and its consequences, such as becoming addicted, are an acceptable private choice. While a large proportion of the population drink occasionally and moderately, using alcohol in a non-harmful way, many do not. For example, more than half (54.1%) of young New Zealand males admit to drinking large amounts (six or more standard drinks) on a typical drinking occasion, and almost 50% drink three or more times a week.

BERL’s Dr Nana has publicly stated that Crampton and Burgess “had a different world view… that consumers are rational in their decisions about how much alcohol to drink”. But we would suggest that it is nonsense to argue that a drunk driver who wraps themselves around a power pole has made a fully informed, rational choice that is consistent with their long-term welfare an should be of no concern to society.

The following paragraph from Crampton and Burgess is informative. “The economic literature on alcohol and drug use contains a number of results which confound BERL’s assumptions: addiction has been found to have rational foundations, and alcohol and drug abuse tends to be a symptom of other problems; moderate drinkers, many consuming quantities above the lower bound of BERL’s harmful range, earn more and live longer; alcohol saves many more lives than it takes and has health benefits well beyond the point where BERL says harm starts and all benefits stop.”

The ‘result’ that “alcohol saves many more lives than it takes” is an assertion that requires evidence. And the idea that addiction has rational foundations clearly indicates a model view of a consumer that would be at variance others views, including those of some economists. Such a value judgement would not have been appropriate for an independent study such as ours.

The BERL study provides sufficient information for readers to make their own judgment about the costs of harmful alcohol use; it is for the reader to make their own judgments about the benefits of harmful alcohol use (something outside the scope of the project). It is for policy-makers, not BERL, to judge what set of values they use and whether they share Crampton and Burgess’ world view.

Many of these issues have been discussed before, but a couple of quick comments: As to the "[...] simple, but substantial, factual errors", adding in these unemployment and insurance costs increases the Burgess and Crampton costs by a whole $36 million, not much given the amounts being talked about in the report. For more on this point see Eric's post, Errata, at Offsetting Behaviour. That posting makes some other relevant points.

Also Slack writes

The project brief was not to assess benefits, nor to provide policy analysis.

They are not providing policy analysis? Why does he think the Ministry and ACC asked for the study if not for policy purposes? What other purpose could it have? And note the use of the report by the Law Commission. If the BERL report isn't providing policy analysis, why haven't they not pointed out this fact given that the Law Commission seems to very clearly want to use it for policy analysis purposes?

Update: BK Drinkwater notes the Hurly-BERLy: BERL Responds.

Update 2: Kiwblogs comments that BERL responds.

Update 3: Ganesh Nana repeats much of the above material in a piece in the Otago Daily Times.

Update 4: BK Drinkwater comments on the Hurly-BERLy: Nana Responds.

What is missing from the defence is this: an explanation of just why it is that people who drink >40g/day of alcohol are assumed to derive no benefit at all from their drinking; and why this assumption justifies counting these individuals' privately-carried costs as costs to society in general.

Incentives matter: airport file

Homepaddock points out Incentives work:

We saw how incentives work at Singapore’s Changi Airport.

Ground staff are paid a bonus if luggage is on the carousel by the time disembarking passengers reach it.

We were among the first people off a Singapore Airlines flight from Christchurch last week. Our thousand acre strides helped us overtake those ahead of us on the route march from the plane to immigraation so we were first in the queue there.

Getting through those formalities took only a few minutes and our bags were waiting for us when we reached the carousel.

The science news cycle

From Phd Comics: The Science News Cycle

Incentives matter: movie file

From David Henderson at Econlog, Favorite Economics Dialogues in Movies:

Here's one of mine, from Alfred Hitchcock's Rear Window. It's about one of the most important things economics deals with--incentives. Lisa (played by Grace Kelly) and Jeff (played by Jimmy Stewart), are listening to a man in another apartment play one of his songs on a piano:

LISA: Where does a man get the inspiration for a song like that?
JEFF: From his landlord -- once a month.

Interesting blog bits

1. Don Boudreaux asks What's Behind Foreclosures? Most people think it is problems with subprime mortgages, but the focus on subprimes ignores the widely available industry facts that 51% of all foreclosed homes had prime loans, not subprime, and that the foreclosure rate for prime loans grew by 488% compared to a growth rate of 200% for subprime foreclosures.
2. Brad Taylor on Selling Weed on Twitter. California won’t let the gays marry but it does let people micro-blog (medical) drug deals.
3. Defective Equilibrium on Gender-Based Pay Discrimination and Pregnancy and a Follow-up on Pay Equity.
4. Oxonomics on The Economic Consequences of the French Revolution. Exogenously imposing the institutions of the French Revolution apparently had a beneficial impact on Western Germany.
5. Tim Harford on Why getting complicated increases the wealth of nations. One of the defining characteristics of the modern economy is that it’s awfully complicated.
6. David Galenson on Conceptual revolutions in twentieth-century art. The art of the past century was radically different from earlier art. This column says that that was a direct result of a basic change in the structure of the market for advanced art that occurred during the late nineteenth century. Indeed, contemporary art is the logical result of young conceptual innovators operating in a competitive market that has consistently rewarded radical and conspicuous innovation.
7. Mario Rizzo on Monetary Policy At War With Itself. When economists, like Paul Krugman, say that there is not enough investment spending and attribute this to a "liquidity trap" they fail to see how the central bank is contributing to the very problem they are complaining about.

BERL and rationality

Over at Offsetting Behaviour Eric has A final word on rationality, including a nice coloured graph! He addresses, once again, the argument BERL makes about the use of strict rationality in Crampton and Burgess. He points out that their critique doesn't require strict rationality, just that on average across all of the customers that BERL assumes to be "harmful drinkers", the net benefits to these people is approximately equal to the "excess costs" of irrational behaviour.

I have said previously that I don't think you can write down an utility function with the standard properties which would have the characteristics that BERL seem to want of "irrational consumers", that is, prior to the 40 grams of alcohol threshold, benefits at least equal costs; after the threshold, benefits don't just equal zero, they're sufficiently negative to precisely offset all of the gross benefits from any prior consumption. In particular I can't see how BERL's function can be continuous. So I can't see how exactly BERL are modeling the "irrational behaviour" of some drinkers.

I think I understand how Eric and Matt think about consumer behaviour but I still don't understand the BERL approach.

Palmer on BERL

The NBR report referred to in the previous post, also contains a comment on Sir Geoffrey Palmer's view of the BERL report. The NBR says

Sir Geoffrey has now said to NBR that he sought Treasury advice on the issues in the Berl report on 22 May 2009, “long before the report by the two economists that stimulated your article appeared. Furthermore, at the same time I secured further advice from another independent economist.”

In a speech to police in Nelson on 24 April, Sir Geoffrey quoted headline figures in the Berl report of $5.296 billion in social costs of alcohol (and drugs), versus the alcohol excise tax take of $795 million, as a basis for his preferred policy option of significantly raising excise taxes to cover the shortfall.

But if he only asked for advice on the BERL report in May, why was he making statements based on the report in April? Why use the report if you are not sure of its findings? And why ask for advice if you are sure of the findings?

Also the NBR reports Sir Geoffrey as saying,

"It does seem that the case for increasing the price of alcohol to ensure drinkers contribute more to the costs imposed on society is persuasive."

But he seems to have missed the entire point of the Burgess and Crampton comments, the costs of drinkers to society aren't as large as BERL claims. In fact the current level of taxes may cover those costs. As Eric points out in the comments I miss read the NBR article. The quote above comes from the April 24th speech and is not a recent comment. With luck therefore Sir Geoffrey will have read Burgess and Crampton by now and thus will not be repeating the quote above in the future.

Unbelievable! (updated x5)

I may have had some doubts about what goes on at BERL before now but after reading the National Business Review I really do wonder what goes on inside a BERL economists head. The NBR writes

He [Adrian Slack, lead author of the Berl report] 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.’”

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.

Seriously bizarre stuff.

Update: At Offsetting Behaviour Eric ponders Of externalities, elbows, and knowing one from the other and asks

Adrian, what colour is the sky in your world?

In the comments section to the posting, Brad Taylor tries to make sense of Slack's comment,

Giving Slack the benefit of the doubt, maybe he was saying that you're likely to count the utility of the murderer as a benefit partially offsetting the cost to the murdered, whereas the BERL authors are not because society deems that sort of utility as inadmissible.

In that case, he's saying that economists should ignore the benefits heavy drinkers get from their drinking. Even though people might enjoy getting drunk, this pleasure is too uncivilized to be accepted by society as legitimate.

Don't know I like this line of argument. There is the obvious question of, What is this "society" thing and how does it have views or preferences independent of the individuals who make up the group concerned? Or is it just that only some peoples preferences count, the "right people" are the only ones who get to have a say in what happens. It seems to say that we should only count benefits to people if BERL thinks those benefits should be counted. Well, who made BERL God? This amount to saying that benefits are benefits iff some third party arbitrarily defines them to be so, irrespective of whether or not the transacting parties think there are benefits. This would result in the government being able to get any outcome they want to pass a cost-benefit test just by determining what counts as a benefit. It makes cost-benefit analysis of government plans pointless.

Update 2: BK Drinkwater on the Hurly-BERLy: Are Burgess And Crampton Pro-Murder? BK says of the Slack's murder comment,

This is a pretty damn strong candidate for non sequitur of the year. Weak soup, indeed.

BK also notes that,

[...] BERL's decision to assign zero benefits to harmful drinkers (defined by BERL to be those who drink >40g/day) seems to rest on a sort of hyperpaternalism. That's their prerogative, I guess, but I don't want it impinging on public policy in any way.

In addition BK points us to this comment at Offsetting Behaviour by Matt Burgess which gets to the heart of the matter,

It's not a great comment by Slack, it indicates a basic misunderstanding of a number of things, it sounds desperate, and it may be aimed at smearing Eric as well, I don’t know. But the weakness of BERL’s overall response runs much deeper than this.

I haven't counted but there might be 30 or 40 specific concerns we raise about the BERL report in our critique. In the three weeks they’ve had the report now BERL has responded to perhaps 3 or 4 points, and we don’t like much of what they've said.

BERL's most repeated response is to say we assume perfect rationality/perfect information in our critique. This response achieves two things. One, it is an attempt to discredit our analysis without attacking any part of it. Two, BERL can say they didn’t make that crazy assumption – "we're the reasonable ones here".

It is of course a red herring. Let me say it again: our critique does not depend in any way on perfect rationality or information. We simply think that on the whole people drink for a reason and a better approximation to the zero benefits BERL assumes, particularly given the low threshold for harm that BERL uses, is that private benefits will roughly equal private costs. For every person who wakes up with regrets there are others who had a good time out. Show me the perfect rationality/perfect info assumption in that. Rational addiction finds strong support in the empirical literature.

In any case, BERL's argument is a non-sequitur. It does not follow from deciding consumers are sometimes irrational or imperfectly informed that all consumers drinking more than what BERL is says is harmful are irrational and that none enjoy any gross (not net) benefit whatsoever. We are still waiting for BERL’s explanation for these $2.2 billion assumptions. And still waiting for something concrete on the other $1.9 billion of problems.

The irony of Slack’s murderer comment is that he stood up at the NZAE conference and said he's not prepared to make radical value judgments.

Well said that man.

Update 3: Tom M at Defective Equilibrium considers the Amateur Philosophers at BERL.

If BERL's report was on whether or not society thought people should drink alcohol regardless of the costs, Mr. Slack (who's quote this is [the murder quote given above]) would have a point. But it wasn't a x-phi survey on folk morality, it was an economic analysis. That Mr. Slack has the two confused is perhaps revealing to the approach BERL took to the analysis. Moral philosophy has an important role to play in analysis of public policy. But:

a) It should be done explicitly, rather than hiding it in leading assumptions.
b) Economists aren't generally the best people to do it.

You would think economists out of anyone would understand the benefits of division of labour.

Update 4: Not PC asks What’s the cost of a lost reputation? And also suggests that,

[...] someone should commission research on the cost to consultants of a failed reputation. I suspect it would be much greater than $135,000.

Update 5: Kiwiblog warns us about Eric the murdering economist.

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.

and

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.