SciBlogs

The way we live now Donal Curtin Oct 26

Today’s release of the September quarter Consumer Price Index incorporated the latest three-year review (pdf) of spending patterns, and some other changes, notably using technology to capture the prices of many consumer electronic goods. Instead o…

Do we need some JOLTS? Donal Curtin Oct 22

…JOLTS being the Job Openings and Labor Turnover Summary that the American Bureau of Labor Statistics (BLS) publishes every month. You can find the text of the latest one here and it’s on FRED (the St Louis Fed’s economic database) if you’d like to d…

Wellington bleg: good high schools for music Seamus Hogan Oct 21

The staggered move of Offsetting Behaviour to Wellington will soon be completed. I will be following Eric to the capital having taken a position at the School of Government at Victoria University, starting in the new year.When Eric was about to ma…

Inequality narrative-buster Eric Crampton Oct 18

It’s been pretty clear that income inequality in New Zealand has been stagnant for at least the last decade or two. It rose in the late 80s and early 90s, but nothing much has happened since then.And whenever I point it out on Twitter, against assertio…

Three decades later, still bonkers Donal Curtin Oct 17

Last week the Australian Productivity Commission came out with a couple of reports, on the Aussie dairy trade (pdf) and on Aussie retailing (pdf). I wrote up the dairy one because it had various angles relevant to us, notably some discussion of our Fonterra-centred industry structure, a good smackdown of the ‘national champions’ idea, and some useful analysis of the economics of the global dairy trade.
I’ve only just got round to taking a squizz at the retail report, and it’s equally good. It points out, for example, that a lot of planning/zoning regulation can be both inefficient and anti-competitive, and that there’s a reasonably straightforward path to fixing both problems:

Two reforms have been identified as being of particular importance: first, the need to
reduce the number of business zones and increase the permissible uses of land (to reduce
prescriptiveness) within these zones; and second, to remove consideration of the effects on existing individual businesses from the approval process for development applications (to avoid anticompetitive outcomes) (p11)

The Commission is strongly of the view that state, territory and local governments can
assist consumers and the retail sector by developing and applying zoning policies that
ensure the areas where retailers locate are both sufficiently large (in terms of total retail
floor space) and sufficiently broad (in terms of allowable uses, particularly those relating to business definitions and/or processes). This would allow new and innovative firms to enter local markets and existing firms to expand (p11)

As an example of how those reforms would work, the Commission had heard submissions about high rents being charged to retail outlet tenants by shopping centre owners, and while it noted that following best practice in leasing wouldn’t be a bad idea, it also found that “the root cause of most retail tenancy lease problems are unduly restrictive planning and zoning controls that limit competition and restrict retail space, particularly in relation to shopping centres. Addressing the latter would also resolve many of the problems in the retail tenancy market” (p12).
More generally, the report got me thinking about how far Australia, and New Zealand, have got with pro-growth, pro-efficiency, pro-competition deregulation. Because, as this report found, despite years and years of economic reform, there are still thickets of regulation that are absolutely bonkers.
Three examples. I’ll let them speak for themselves, other than to note the Aussie Commission comment (p113) that “In many cases, these [trading] rules are anachronistic and have no apparent rationale”.
Here’s a map of trading hours regulation in Western Australia (p7, repeated on p113).

And here’s a decision tree on whether you’re allowed to open for business in Australia on Easter Monday (p114).

And here’s what Woolworths discovered about trading rules in Western Australia for its Masters Home Improvement Stores (which are like Mitre 10 or Bunnings Warehouse megastores):

in Western Australia, regulations prevent Masters Home Improvement stores from trading in line with the hours enjoyed by other hardware stores. To be eligible to trade as a ‘domestic development shop’ Masters must only sell those goods that are prescribed by the Retail Trading Hours Regulations 1988. The regulations prescribe a list of what a ‘domestic development shop’ can sell, which gives rise to all sorts of inconsistencies and anomalies. The regulations allow the sale of:
• light bulbs but not light fittings
• outdoor lighting but not indoor lighting
• kitchen sinks but not dishwashers
• wood-fire heaters but not gas heaters
• indoor television antennae but not outdoor television aerials (p10)

I suppose the good news is that both Australia and New Zealand now have Productivity Commissions that are able to turn over the flat stones and tell us what they’re finding underneath, and there’s the occasional one-off inquiry like Australia’s recent Competition Policy Review that has been doing the same thing (have a read here in particular). It’s good to know that there’s still some kind of following wind to keep the momentum of reform going.
But isn’t it strange, and a bit dispiriting, that after the best part of 30 years of progress in both countries, we’re still lumbered with this kind of malarkey. And while I suspect we may not be as bad as the Aussies on most shop regulation (though I could be wrong about the  Easter trading, where our regime is probably as chaotic as theirs), I wonder what we’d find if, for example, we turned over some flat stones of our own. I wonder what’s underneath the occupational qualifications one?

Three strikes, and you’re – still going…. Donal Curtin Oct 17

In a previous post I mentioned that Australia’s Competition Policy Review had put a torpedo into the side of ‘national champions’ – requiring or allowing mass consolidation of an industry to produce what will supposedly be a more internationally competitive player.
And last week, I’m pleased to say, the drifting hulk took another blow as Australia’s Productivity Commission got it amidships with another one.
The occasion was the Commission’s report on dairy manufacturing (pdf) – the latest in an industry series on ‘Relative Costs of Doing Business in Australia’. There’s lot of interesting stuff in the report, including the short but informative Appendix B down the back on ‘Economics of dairy markets’,  but for me the highlights were the bits where the Commission responded to submitters arguing that Australia should go the Fonterra route (these are all on p3):

the Australian dairy industry is a price taker on global markets and has no capacity to alter this, irrespective of the structure of the industry. A belief that any single Australian dairy company could exert market power is not consistent with market realities

the emergence of a dominant manufacturer is not a prerequisite for developing distinctive Australian branding for dairy products

there are potential risks associated with highly concentrated industry structures if the overall performance of the industry is linked with one company

Fonterra-like arrangements are not necessary to ensure that scale benefits at the plant level are realised — indeed, there is considerable evidence that Australian dairy manufacturers are taking advantage of scale benefits where it is profitable

And the Commission wrapped it up on p8 with this:

…industry participants are best placed to balance the various tradeoffs and commercial considerations they face (such as between scale and transport costs). Other than where legitimate competition concerns are relevant…the most beneficial dairy industry structure for Australia will be determined by the market place. Attempts by governments to ‘second guess’ market outcomes to achieve a particular industry structure are fraught with difficulty, and likely to impose net costs on the industry and the community more generally. It does not require much imagination — or experience with price setting by government — to envisage highly problematic judgements in setting an Australian price (or prices) for guaranteed domestic milk supply, as occurs today in New Zealand.

The Commission also quoted (pp115-6) from a recent speech by Rod Sims, the head of the ACCC, where he said:

We are seeing a return to calls for ‘national champions’ in Australia. It is, of course, terrific when companies out compete their rivals and take on the world. The concern is when they call for restrictions on competition at home so they can better compete on the world stage. The argument is a contradiction: if you cannot beat your rivals at home how can you hope to do so overseas? Firms involved in cosy oligopolies or oligopolies in Australia are unlikely to succeed on the world stage.

So it looks as if the old rustbucket SS National Champion has now taken three hits in a row. Unfortunately, if past experience is any guide, it will manage to struggle back to port, get patched up, and in due course set out again on another hopeful journey.

Morning roundup Eric Crampton Oct 16

Short notes on the worthies from the open tabs, each of which would merit a full post in an unconstrained world.

  • If this high court ruling holds, expect no new policies to cover full replacement. Justice Whata ruled that Vero must cover the full costs associated with reinstating a Christchurch building, even where some of those costs are due to things like requiring deeper piles than were necessary when the policy was set. I think the insurer is right that it should not be liable for costs that are consequent to changes in Council rules; alternatively, Councils could give free money to each and every person in town by requiring that, post-quake, every house be made of gold and have platinum spouting. I also do not think that Councils should be changing the building requirements for a reasonable interval between an insured event and the completion of earthquake repairs. If the building code isn’t good enough, fix it ahead of the event so that insurance pricing can incorporate a better measure of expected repair costs or so owners can insure to a higher value to allow for the higher costs.
  • Remember “Shoot, shovel and shut up“? Property owners have incentive to take defensive action before a costly regulation is put in place, even if that means destroying valuable habitat. I wonder if that’s what’s happening in this story. A church is bulldozing two houses to put up a parking lot; the street is about to be designated as a “special character area” in the Unitary Plan. Could be that they’d have held onto the houses if they’d reckoned they’d face much much higher costs if they wanted to demolish sometime down the line. I wonder whether other areas about to come under such protections are seeing similar precautionary demolitions.
  • There’d be a billion screaming anti-tobacco activists if tobacco sponsorship of an arts festival resulted in the cancellation of some anti-smoking play. Government anti-tobacco health funding of the West Australian Opera has resulted in the cancellation of Carmen because there would have been on-stage smoking; I’ve seen outcry from Catallaxy and Crikey. Nothing much otherwise. 
  • Addiction is something most addicts grow out of. I love this quote: 
    So why do so many people still see addiction as hopeless? One reason is a phenomenon known as “the clinician’s error,” which could also be known as the “journalist’s error” because it is so frequently replicated in reporting on drugs. That is, journalists and rehabs tend to see the extremes: Given the expensive and often harsh nature of treatment, if you can quit on your own you probably will. And it will be hard for journalists or treatment providers to find you.

    Similarly, if your only knowledge of alcohol came from working in an ER on Saturday nights, you might start thinking that prohibition is a good idea. All you would see are overdoses, DTs, or car crash, rape or assault victims. You wouldn’t be aware of the patients whose alcohol use wasn’t causing problems. And so, although the overwhelming majority of alcohol users drink responsibly, your “clinical” picture of what the drug does would be distorted by the source of your sample of drinkers.

    Bryan Caplan has similar thoughts

  • Political ignorance remains a major source of political failure. How can we get things right where voters fundamentally fail to understand the basics on the composition of federal spending?
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Did we lose the fiscal plot? Donal Curtin Oct 14

I’ve been engaged in a bit of tweeting to and fro about the rise in New Zealand’s government debt in recent years, and what’s behind it.The background is that there’s been a fair bit of political point-making going on about the large rise in debt on Na…

2014 Nobel Prize in economics: Jean Tirole Paul Walker Oct 14

A number of people seem more excited by this award than me, see for example, A Fine Theorem and Tyler Cowen at Marginal Revolution.

Cowen does mention Tirole’s survey article with Holmstrom on the theory of the firm which is well worth reading even if a few years old now. In a survey paper of mine on the theory of privatisation I say this about a paper by Laffont and Tirole (Jean-Jacques Laffont and Jean Tirole (1991). ‘Privatization and Incentives’, Journal of Law, Economics, & Organization, 7 (Special Issue) [Papers from the Conference on the New Science of Organization, January 1991]: 84-105.):

In the Laffont and Tirole (1991) model a firm is assumed to be producing a public good with a technology that requires investment by the firm’s manager. In the case of a public firm this investment can be diverted by the government to serve social ends. For example, the return on investment in a network could be reduced by the government if it were to allow ex post access to the general population. Such an action may be socially optimal but would expropriate part of the firm’s investment. A rational expectation of such an expropriation would reduce the incentives of a public firm’s manager to make the required investment. For a private firm, the manager’s incentives to invest are better given that both the firm’s owners and the manager are interested in profit maximisation. The cost of private ownership is that the firm must deal with two masters who have conflicting objectives: shareholders wish to maximise profits while the government purses economic efficiency. Both groups have incomplete knowledge about the firm’s cost structure and have to offer incentive schemes to induce the manager to act in accordance with their interests. Obviously the game here is a multi-principal game which dilutes the incentives and yields low-powered managerial incentive schemes and low managerial rents. Each principal fails internalise the effects of contracting on the other principal and provides socially too few incentives to the firm’s management. The added incentive for the managers of a private firm to invest is countered by the low powered managerial incentive schemes that the private firm’s managers face. The net effect of these two insights is ambiguous with regard to the relative cost efficiency of the public and private firms. Laffont and Tirole can not identify conditions under which privatisation is better than state ownership.

Cowen goes on to say,

It’s an excellent and well-deserved pick. One point is that some other economists, such as Oliver Hart and Bengt Holmstrom, may be disappointed they were not joint picks, this would have been the time to give them the prize too, so it seems their chances have gone down.

Hart and Holmstrom’s chances may have gone up since they can now be given for their, separate and joint, work on different aspects of the theory of the firm.

Public health and market failures Eric Crampton Oct 13

I’m not particularly worried about any large-scale Ebola outbreaks in the developed world. It’s easier in the developed world to run effective quarantine and to track down those who might have been exposed to an infected and contagious person.

That certainly doesn’t mean Ebola isn’t worth worrying about. The burden of Ebola in Africa looks likely to be huge. Even where the total number of deaths remains very low relative to other African diseases like malaria, Ebola has an incomparable potential to disrupt economic activity. I’d put even odds that economic disruption caused by completely understandable fear around Ebola will kill as many people as the disease itself. When taxicabs become ways of catching disease and hospitals terrifying, and when a worker with flu symptoms could well be somebody who’ll kill all your staff if he comes in to work and touches people – it’s really not good.

Pandemic protection is a strong public good. Any dollar’s investment in pandemic protection protects everybody who could be at risk: it’s non-rivalrous. Every dollar spend improving hospitals in Africa, training doctors, providing medical equipment, and developing emergency response protocols is a dollar that protects each and every person in Africa, and by extension the rest of the world where there’s risk of pandemics’ spreading (think Bangladesh, Pakistan and India, not Europe and America). We all benefit from it. There is then a strong case for government funding of pandemic prevention efforts. There’s also a really good case for things like Kickstarter, or PledgeMe, running campaigns on it to also help out.

The World Health Organisation is the outfit that’s supposed to have an eye on the ball on this stuff. Unfortunately, in my view, the WHO has gone astray. Or at astray from what it should have been.

In the public health world, the social welfare function is either minimising the number of deaths, minimising incidence of morbidity, or maximising the number of disability-adjusted life-years or quality-adjusted life years. In economics, it’s maximising some weighted utility function. The two yield very different outcomes and are what drive my dissatisfaction with the WHO’s prioritisation.

Suppose we have several kinds of initiatives that would increase DALYs and reduce the overall burden of sickness and disease. Some of these, like polio eradication, provide health benefits without any particularly large cost as viewed by the person receiving the polio vaccine.* Nobody enjoys having polio. Nobody would voluntarily seek to have polio. If polio ceased to exist, the world would be a better place. Others of these, like regulations on soda, tobacco, alcohol, fatty foods, and salt, can increase DALYs and reduce the overall burden of sickness and disease too, but they come at a cost in terms of private experienced consumption benefits: many people like soda, smoking, drinking, and eating tasty things.

In the public health world, if a dollar’s worth of effort yields greater expected DALY benefits in dietary and lifestyle regulation than it does in pandemic avoidance, that dollar should go to dietary and lifestyle regulation. In the economics world, we start by looking for market failures and target funding where markets won’t do well on their own. And when it comes to lifestyle regulation, we need a rather harder look at things than just DALYs where choosing agents might well prefer to consume unhealthy things, at DALY cost, in exchange for current consumption benefits.

If we had to rank-order things by a very rough guess as to where the market failures are worst, I’d rank them as follows:

  1. Pandemic readiness and response, especially in developing countries;
  2. Antibiotic resistance and superbug mutation;
  3. Development of new antibiotics;
  4. Contagious diseases affecting developing countries where there’s no particular profit in pharmaceutical investment: malaria and a big pile of others;
  5. Other contagious disease investigation and response;
  6. Vaccination promotion;
  7. Poor information about risks of smoking, diet and alcohol in the third world
The first one is at the top of my list not on expected value terms but as insurance. Like global warming, bad pandemic outcomes have the potential – low probability but potential – to destroy civilisation. It’s then worth making investments in those kinds of areas not just on expected value calculations but also on an insurance argument – like Weitzman’s argument on global warming. I also think governments should be investing more in asteroid detection and response, on exactly the same kind of argument.  
Pandemic readiness provides a strong nonrivalrous benefit to everyone. Third world countries generally do not have anyone with a sufficient encompassing interest in their prevention to ensure that the job gets done, so other mechanisms are needed, whether multigovernmental investment through the WHO or philanthropic investment by individuals. Note that there are exceptions, when you have enough Foreign Direct Investment. 
Antibiotic resistance flows directly from the negative externality imposed when someone over-uses antibiotics or uses them improperly. Development of new antibiotics has little profit potential where they’re sensibly restricted to very hard cases and where governments and insurers would refuse to pay the per-dose amount that would then be needed to cover development costs. Similarly, there is little expected profit in developing cures for diseases that mostly affect very poor people and where patent protection is unlikely to be enforced. In all of these cases, prizes seem the most obvious solution for new drug development, where the funds would be provided both by governments and by philanthropists. 
Other contagious diseases and vaccination are lower on the list. Every one of us has an interest in protecting our own health. But because others bear direct contagion costs of our personal underinvestment in efforts against contagious disease, we will have less vaccination than would be optimal and less control against contagious disease. Subsidising the development and deployment of vaccines is then worthwhile. I can even see reasonable arguments for making vaccination mandatory.
Down at the bottom of the list is information-provision on lifestyle issues. There are plausible market failures around people being poorly informed about the health and addiction risks of tobacco and alcohol, and about the health risks of unbalanced diets. But a lot of observed behaviour would simply drop out of expected low life expectancies in developing countries and lower incomes, both of which increase the expected willingness to bear risk in exchange either for income or for pleasure. People doing unhealthy things isn’t itself necessarily evidence of irrationality, or bad information. 
So that’s how at least this economist would rank things. But if we ranked them by “where does a $1 do the most to improve DALYs”, we could get an entirely different outcome. It would be like an electrical engineer ranking metals by conductivity and then proposing that we use silver for our main electrical transmission lines. Sure, it’s more conductive, but it also costs more. Conductivity isn’t the best outcome measure. Neither are DALYs where some of the potential policies impose costs on consumers that are not measured or weighted or considered by the public health side. 
In the public health world, tobacco is one of the very most important things to be worried about because it ranks very highly in the DALY-reduction rankings. Tobacco is not contagious, does not have existential risk to civilisation, and in some but not all cases results from informed decisions to enjoy nicotine at the expense of health and life-expectancy. The external costs imposed by a smoker are very low relative to the external costs imposed by somebody with contagious disease. Similarly, eating a diet with too much salt mainly hurts the person choosing to eat the diet with too much salt. There could be some case for providing information to remedy any market failure based on people not knowing the full health costs of eating too much salt, but that’s about it. 
There are very real and substantial market failures in public health that are underweighted where public health advocates take a DALY-based approach rather than starting with market failures. If we look at priorities by budgetary allocations, it’s great to see the focus on polio eradication, and the other work on tuberculosis, malaria, and AIDS; the first two have strong market failure arguments justifying them. AIDS receives a lot of private funding in the developed world, but there are reasonable arguments for providing funding there in the developing world. But increasing funding allocations to lifestyle issues and to tobacco control? It’s harder to find a market failure case there.
I’m not building a straw-man here. They take “minimise burden of disease” as objective function, where every potential health cost matters equally, with no weighing of offsetting consumption benefits that come from alcohol or salty foods as compared to Ebola.

@EricCrampton That ratio is about right. The priorities (roughly) reflect the burden of disease.
— George Darroch (@mrdarroch) October 5, 2014

It worries me that journalists cannot find an after-hours WHO spokesperson on Ebola when a Spanish nurse contracts it in a Spanish hospital, that WHO officials cite being overstretched as reason for their not being able to respond as effectively to a pandemic, and that the WHO is at the very same time putting resources into e-cigarette regulation. There are opportunity costs to spending $122 million on the line item including alcohol, tobacco, drugs, and unhealthy diets.

This isn’t just a “get off my lawn and leave me alone” thing. It’s “why are you spending a hundred million bucks protecting people against themselves when you’re under-resourced for pandemics?!?” thing.

Shouldn’t we first target the health priorities that stem from market failures and impose existential risk?

Update: I’ve had request for clarification of what market failure means. My encyclopaedia entry is here. Further discussion here.

* Or at least there wouldn’t be costs to getting the polio vaccine if the CIA hadn’t managed to convince everybody that vaccinations are spy mission.

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