Alcohol regulation: economists would do it better

The NZ Law Commission is on the way to cutting back on the availability of alcohol. Their justification is twofold:

  1. The contribution that excessive use of alcohol led to law and order problems in the country.
  2. The serious health and injury effects from alcohol consumption, as well as a list of other social harms.

And the principle they used to weigh these issues: harm minimisation. What, you say: What about weighing the benefits? What indeed! Eric Crampton takes to the second point of the report thoroughly:

The study counts as costs reduced labour productivity. … 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.

Not only do they miscount costs, but they also fail to take into account any net benefits: the enjoyment of drinking, or the higher salaries that come with it.

And that’s before we turn to the first point: growing lawlessness. The police report over 10,000 offences last year from alcohol related offending, up from 1,200 in 2002. What they don’t report is that, in 2002, councils got the right to create liquor ban zones. So what was not previously an offence now accounts for 90% of the offences reported by police as alcohol related. If you take them out of the picture, since 2003, alcohol related offending has dropped every single year to now be comfortably under 1,000!

Now I can accept that police resources may have been diverted away from catching people who are lawless to catching people carrying around a beer, which would result in a decrease in the numbers of those offences. However, to conclude from that fact situation that we have a growing problem of lawless, alchol related offending seems a stretch to me. Breaching a liquor ban does not indicate unruly behaviour, which is surely what we ultimately want to avoid.

The real problem here is not the decision that the Law Commission has reached, it’s the process they took to get there. They’re charged with carefully considering what laws might be altered or introduced to make NZ better off. That sounds something like welfare improvement to me. Yet what they’ve done is deliberately misconstrue the facts and ignore everything that might have militated towards an alternative outcome. It seems that they already knew what they wanted to do before they sat down to think about it, and didn’t even pretend to consider alternatives. That saddens me, because it is exactly the sort of paternalistic, arrogant attitude that Matt’s been accusing the civil service of recently. And if you can’t trust lawyers then who can you trust???

  • looks the government is being a little more sensible about this

    http://www.stuff.co.nz/national/politics/2365995/Key-Can-t-punish-everyone-for-youth-benders

  • @agnitio
    Ha, do you sometimes get the feeling that John Key gets his ministers to take extreme positions just so that he can be the voice of moderation? 😛

  • I cannot understand how the BERL report can be seen to be the basis for policy conclusions. It’s an accounting exercise at best. If BERL had any amount of academic integrity, it would be violently protesting the current use of its report. Their silence says something.

  • I totally agree. It doesn’t seem like a solid investment in the integrity and independence of their brand.

  • “I could produce, using the same methodology, a report showing the massive social costs of the existence of BERL, the consulting firm that put out this report. First, assume that their reports have zero value, then add up all the costs of the researchers that waste their time writing them, then add up all the time we waste reading and complaining about them….”

    LOL

  • @Eric Crampton

    I’m guessing their silence says they have done what they were paid to do and am now just hoping the whole thing will go away. Economic prostitution.

  • @Paul Walker
    Well, insofar as they did what the client wanted for acceptable monetary compensation. I suppose that they’ve done what they were contracted to do and have no reason to comment further.

    I have more of a problem with teh Law Commission than BERL’s report. To estimate benefits and compare them would have taken a lot more time and money which BERL weren’t given. I’m not even sure, on reflection, that their report’s been misrepresented: it’s just that the LC has taken a gross harm minimisation approach. We may agree that it’s the wrong way to make policy, but I don’t think they’ve been at all sneaky about it. They explicitly asked BERL to estimate gross costs and then explicitly formed legal recommendations to minimise it.

    I think the only point of dispute is a value judgment over whether that’s an appropriate approach to policy-making. Which I don’t think it is. But that’s not BERL’s fault.

  • Hmmmm, on skimming the beginning of the report perhaps I’m being too charitable to BERL. They explicitly say they will estimate ‘net social cost’ but then go on to estimate ‘avoidable social cost’ which seem like vastly different things. Either the first was a really, really bad typo or they’re wilfully misrepresenting what they did. I’d like to believe the former, but it’s hard to do.

  • @rauparaha

    If nothing else BERL should have made the LC very aware of the obvious shortcoming of what they have done. In particular they should have made the point to the LC that such a report cannot be the basis for policy making and thus is by and large useless for that purpose. The way the LC has used the report doesn’t suggest that BERL has done this and if they have why hasn’t BERL come out and said so publicly. If they really have pointed out the shortcomings of the report, BERL must know by now it is being misrepresented.

  • MattYoung

    Perhaps the economists could go down and buy me another bottle of brandy.

  • @MattYoung
    I’m sure Matt would drink some jager with you:)

  • I’ve updated comments over on Offsetting Behaviour. Have fun!

  • Adrian Slack

    This is a personal rather than professional response (as the study’s senior researcher), as I know Matt N.

    First in response to “BERL should have made the LC very aware of…”. We didn’t prepare the report for their consumption. As with anything that enters the public domain, it is the consumer’s right to interpret it as they see fit and for them to take responsibility for their reaction to it, not for the author to manage their response to it.

    “Eric Crampton takes to the second point of the report thoroughly” – from a position underpinned by strong rationalist assumptions and a non-verifiable argument (e.g. if someone consumes a good the claim that the private benefits must equate or exceed the costs is not verifiable).

    Counting the costs (or benefits) of non-harmful consumption were irrelevant as they do not impose a social cost, and benefits were out of scope. But including either of these components would have no net impact on the estimates for non-harmful use.

    Valuing the benefits to harmful users is a complicated area. Consumption decisions by addicted, intoxicated or problematic users are likely to violate some of the rationalist assumptions underpinning conventional consumer choice theory. It is unlikely that many harmful drinkers, for example, rationally decide (or can be modelled as deciding) about their drinking behaviour and career prospects. Labour-leisure choices are typically taught that way at an undergraduate level, and provide useful insights, but the assumptions underpinning these models do not hold universally.

    Low risk drinkers, for example, are affected at work on average one day in four years. This is more likely to reflect a poor, impulsive (and time inconsistent) decision than a calculated choice. Moderate drinkers are affected only about a day per year, but it is unlikely that an employer will employee for having a hangover the day after the end of year party. Employers do not willingly contract in to this kind of behaviour, but bear the costs.

    For high risk drinkers, employers have difficultly identifying, let alone punishing, such behaviour. In practice, there is a myriad of reasons that the costs of such behaviour represent externalities rather than internally and rationally borne costs. These might include the relatively low importance of reputation (and therefore reputation risk) in industries that harmful alcohol users are employed in or the difficulty for employers in identifying and documenting alcohol-related problems.

    To paraphrase Dr Cullen, it takes a peculiarly warped sense of values to equate the output lost due to premature mortality with rational consumption choices. Equivalently, people whose drinking makes them unemployable (resulting indirectly in output losses) are more likely to be trapped by addiction than making a rational career choice. The professional who might be modelled using the equivalent variation argument who tosses up between preparing for work the next day or having another beer is unlikely to fall into this category.

    You can argue your case for the assumptions and perspective you would use, and the emphasis that you would put on Homo Economicus. The research sought to answer a set of questions, with no restrictions from the client on the method beyond it being internationally recognised and no conclusion in mind. The report was upfront that it was commissioned research, what its aims were, that it was conducted independently, and that it was externally peer reviewed by leading academics in this field.

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  • Thanks for taking the time to reply, Adrian. I’m sorry if my comments caused offence. I have replied in a new post to clarify my position on the matter:

    http://www.tvhe.co.nz/2009/04/30/alcohol-and-addiction-part-ii/

  • Adrian Slack

    @rauparaha
    Not at all. It’s nice to see the work getting talked about, and to contribute to that discussion where possible. But as we all do, I have to prioritise how much time I can throw into this versus all the other things on my plate.

    BTW, I should have noted in the first line that I know Matt N AND rauparaha – given that Matt didn’t create this post.

  • @Adrian Slack

    A couple of quick points.

    “We didn’t prepare the report for their consumption. As with anything that enters the public domain, it is the consumer’s right to interpret it as they see fit and for them to take responsibility for their reaction to it, not for the author to manage their response to it.”

    But some indication that such a report is not a good bases for policy would be helpful. Policy should be based on net benefits, that is benefits minus costs, not just cost considerations. And if the conclusion are being used wrongly why should you not complain?

    (e.g. if someone consumes a good the claim that the private benefits must equate or exceed the costs is not verifiable).

    Revealed preference?

    “It is unlikely that many harmful drinkers, for example, rationally decide (or can be modelled as deciding) about their drinking behaviour and career prospects.”

    What of rational addiction models.

    “For high risk drinkers, employers have difficultly identifying, let alone punishing, such behaviour. ”

    Why? Punishment seems easy. Don’t promote them or fire them, for example. If you can’t identify them how big can the problem be?

    “To paraphrase Dr Cullen, it takes a peculiarly warped sense of values to equate the output lost due to premature mortality with rational consumption choices.”

    Why? This could just be the result of a trade-off between quality and quantity.

  • ben

    Adrian, thanks for responding to the public comments.

    First in response to “BERL should have made the LC very aware of…”. We didn’t prepare the report for their consumption. As with anything that enters the public domain, it is the consumer’s right to interpret it as they see fit and for them to take responsibility for their reaction to it, not for the author to manage their response to it.

    I have to say I find this repsonse rather disingenuous. Nobody is arguing the LC does not have the right to use your report when it’s in the public domain. What is being argued is that they have plainly not understood the mismatch between your narrow terms of reference and the wider terms required to properly assess policy. They may not realise they only have half the story they need. As author of the study you are in the best position to point out to the LC their misunderstanding. The danger is that policy is being called for on grounds that cannot be justified. With respect, this raises real questions about integrity that can be put to bed by a public statement that the analysis conducted by BERL cannot, in its current form and on its own and by design, provide any guidance to the welfare effects of policy.

    I note that you make a fundamental mistake (twice) in your executive summary by confusing costs with welfare effects. If you’re going to cling to that mistake here then you probably think the LC is using your report in exactly the way it was intended. Frankly, I think this report is going to damage some professional reputations.

    Counting the costs (or benefits) of non-harmful consumption were irrelevant as they do not impose a social cost, and benefits were out of scope.

    I’m confused by this. Aren’t these non-harmful costs ignored precisely because they are at least offset by presumed benefits of rational decision making, i.e. the net social cost is zero or positive? So you are counting benefits here. Where is the consistency?

    …and a non-verifiable argument (e.g. if someone consumes a good the claim that the private benefits must equate or exceed the costs is not verifiable).

    But that is a comment that can equally be pointed at your methodology. Defining a point of harm and then assuming zero consumption benefits beyond that appears to me to be a much stronger assumption than assuming, on average, people do things that add to well being. How exactly did BERL verify zero beenfits for all drinkers defined as drinking harmfully?

    I think I’ve said enough for now.

  • ben

    @Adrian Slack

    To paraphrase Dr Cullen, it takes a peculiarly warped sense of values to equate the output lost due to premature mortality with rational consumption choices.

    Adrian, I know you are commenting in a personal capacity, but isn’t this simply a value judgment that BERL has no specific expertise in? Yet are we to take it that this idea that maximising life expectancy is an appropriate public policy goal and an idea motivating your analysis?

    Because that is, I think, a goal that can take public policy in some very odd and tyrannical directions. Like taxing or outright banning of all activities that reduce life expectancy.

    I submit that a policy banning, say, hang gliding (which I assume shortens life expectancy relative to people who don’t run off cliffs for fun) is plainly going to lower the welfare of some rational people. Which immediately tells you that quality and quantity of life can be a trade off for rational people. From which it follows that life expectancy and welfare are not consistent with one another.

    Michael Cullen’s claim is obviously false. Rational people are willing to trade off life expectancy for life quality. Its hard to see how that is at all inconsistent with utility maximisation.

    Right. I’m off to eat my all time favourite food lasagne in the full knowledge that a chicken salad sandwich would add several minutes to my life expectancy. Call me crazy.

  • ben

    @Adrian Slack

    For high risk drinkers, employers have difficultly identifying, let alone punishing, such behaviour.

    I agree with Paul, this is an extreme take on the matter. No employers can work out who’s responsible for the combined billions of dollars in lost productivity. No promotions and no salary increases are made with any knowledge of the beneficiary’s work performance?

    An extreme assumption indeed. I’d like to see the literature supporting that claim, Adrian.

    Incidentally, I believe that single assumption – all lost productivity costs are put on the employer because the employer cannot punish workers who are unproductive due to drinking – is the reason BERL counts that lost productivity as a social cost. That’s around $2 billion right there IIRC.

    But even with that extraordinary assumption, I suspect it is still wrong, because it remains a cost between two private parties and cannot drive a wedge between private social equilibria. Is this discussed in the BERL report? With so much riding on it I hope the analysis on this is good.

  • Hi Ben, thanks for taking the time to comment. I doubt Adrian can comment further since he risks being seen as commenting on it for BERL.

    It seems that you’re relying on second or third hand information from people who’ve only skimmed the report to critique it. Many of your questions might be answered somewhere in the 181 pages of the report’s body so maybe check that out. It’s freely available at BERL’s website

  • ben

    @rauparaha

    It seems that you’re relying on second or third hand information from people who’ve only skimmed the report to critique it.

    Pot. Kettle. Black.

    Before posting on here, I have downloaded and read some of the report, and exchanged emails with the study’s author. Good enough?

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