When forming my value judgments regarding “moral vices”, I like to listen to the Dubliners.  Having a proud Irish heritage helps in this regard, and I feel that they raise a number of important points regarding addiction to common commodities I can relate to (alcohol, women, cigarettes, roving).

Listening to their songs recently, two underlying points suck out – points I felt would be useful in informing part of the debate on alcohol regulation.

1.  Wild Rover(ing), experience, and maturity

Running through my head early in this post is the song “Wild Rover“.

Supposedly it was initially a temperance song, but its ended up being related to drinking.  I can understand how this double meaning has come about – and I think that the drinker’s interpretation carries a greater grain of wisdom.

The song tells us of a man who, earlier in his life, drank too much, caused harm, and was generally anti-social.  However, either through luck or hardwork he has aquired wealth.  Although this wealth is alluded to as physical wealth it is possible to interpret this as some form of mental wealth in my opinion.  He has now learnt to steer away from drinking and other anti-social behaviours and aims to lead a mature life.

Those that push temperance would call drinking the main demon of this peace – therefore he stopped drinking and is a better man.  Therefore, they believe that taking away the drink would make us all more respectable citizens.

Even if we are, for some reason, trying to push a situation where people are more mature, banning alcohol is not the only conclusion from this man’s life journey.  It was the fact that he experienced hardship, the fact that he saw his weakness and dealt with it, that made him a stronger man.  In that sense, the experience of drinking and the realisation of mistakes have lead him to a situation where he now can be mature and responsible.  In the absense of drinking, he would have shown immaturity in other ways – and some of these ways may have been MORE harmful or may have taught him less about who he is.

Ultimately, wisdom is not something that be passed down from on high – it comes from experience.  Teaching people about the costs of their actions and how they influence the outcomes of other people are valuable things – it is knowlege that can help this process.  But only through experience can people truly learn “maturity” – it is not something society can force on people.  Hell, we all make poor choices – and expecting legislation can be introduced to prevent that is at best naive and at worst domineering.

2.  Alcohol vs generic social pressures:  The desire to regulate the desire

Even so, alcohol is a costly substance.  This is something we can all agree on – and something that ‘All for me grog’ makes patently clear:

Through addiction to alcohol this man has lost everything.  Not only that, he bet his wife and sold her off!!!  This has to be one of the most extreme cases of alcohol addiction, and I do find it personally abhorent.

However, I would like to point out that pretty much all the costs are internalised – apart from the costs to his dear wife.  Even then though, she did choose to be with him – and we shouldn’t really set policy based on the fact that some people make dumb choices with regards to their own welfare right …

Now we can all agree that it sounds like alcohol has ruined this man’s life – or more aptly that he ruined his own life with alcohol.  However, what is the best way to treat this?  Restrictions on the time of sales and additional taxes (so that he stocks up and starts drinking earlier in the day and has to sell all his positions even sooner) or additional spending on the treatment of alcohol addiction so he can pull his way out.  I’m probably in the later camp.

I would also add that this is not the only form of seemingly mad addiction the Dubliners looked at, there was also the case of the ‘Black velvet band‘.

In this song, the man throws away everything on the back of his crazed passion for a woman.  In fact, this situation leads to an actual externality – a guy is pickpocketed.  Furthermore, the man facing this addiction ends up in jail with nothing.

The outcomes in this song also seem very poor, however we don’t see legislation against falling in love with attractive, and badass, women.

Does this mean that we are willing to treat different decisions inconsistently just “because” – or does it mean that, once they are finished with alcohol regulation they are going to regulate the women/men you are allowed to date …

In other countries there are often many competing institutions offering odds on various events, including sports. In fact, there are now many companies that operate across borders in many countries,  such as BetFair and Bet365.*

The lack of competition in the betting market in New Zealand stifles innovation in the betting options they offer. One recent pundit proclaimed the TAB “the most conservative betting agency in the world”. Essentially the TAB has no incentive to innovate, as they know punters have limited ability to legally gamble through other avenues.

The TAB have started opening more interesting books on the FIFA World Cup, such as whether Lionel Messi will score more goals during the campaign than the All Whites combined (Messi the hot favourite at $1.55!).

If the gambling market were officially opened up to competition I suspect we would see a lot more of this innovation.

*I’m not sure of the legal status of these organisations in New Zealand, although I understand it is possible to open accounts with them (legally or otherwise).

That is the first sentence from this newspaper article.  Now I have no doubt that the introduction of the pill led to a higher steady state level of promiscuity.  Yet, there is an undercurrent of negativity in the article – suggesting that this is a bad thing.   However, this is not necessarily the case.

This illustrates to me one of the issues that often makes explaining economics, or even trying to do analysis, difficult – moral relativism.  In the current case, the existence of the institution of marriage and the idea of low numbers of sexual partners is seen – in of itself – as a good thing.  People have followed a rule of thumb that the given set of outcomes in the social situation they are the best outcomes.  Anything that in turn undermines those institutions is “bad”.

I use the term moral relativism because that sort of behaviour is indicative of it – what people view as the appropriate set of institutions is based on the set of institutions that are in place at the time.  When we look back at what people believe is “morally right” we will often see rules based on the society they are in not some underlying true prior morality (although I believe that does exist to some degree as well).  As a result, if we try to say that the underlying situation has changed (the pill has turned up) and these old institutions that were optimal are now suboptimal, people get annoyed.

Economics is a great social discipline, because it tries to side-step the issue of moral judgments (and thereby the issues associated with moral relativism) for as long as it can in the process of analysis.  So following a “shock” an economist will try to describe the social elements, the trade-offs involved, the change in choices, how the corresponding change in institutions and choices impacts on future choices, and eventually where the social situation will settle.  Once we understand how the “distribution/allocation” of things changes, we can mix in some value judgments and come to a conclusion.

In the case of the pill, it seems highly believable that the introduction of something that made sex with a lot of partners much less costly lead to a lot more sex – that is fine.  However, we can’t conclude whether this is a good or a bad thing until we introduce value judgments to our analysis.

Those that are anti the pill will say that the introduction of the pill lead to greater promiscuity, but also made it more costly for people who didn’t want promiscuity to not be promiscuous – as a result, people who would have preferred a low sex but married social equilibrium may be worse off.  This analysis is fine, but it does rely on a set of value judgments.

Personally, I think the final steady state from the introduction of the pill will end up with more mature and responsible discussion around sex and relationship.  We can hardly say that the institutions of marriage and religion led to “magically optimal” outcomes in these matters – and people that bemoan the loss of such institutions are often looking through very rose tinted glasses.  Social interactions between people are supposed to be difficult, and I am sure individuals and the institutions that surround them will evolve in interesting ways given the pill.  However, my belief that the ultimate outcome will be better is again based on my set of value judgments.

This makes sense, previously people purchased the junk on the basis that someone else would pay for it – high return low risk!  Now that they have to face the real risk profile they are like “f**k that”.  However, Bloomberg (or at least David Kovacs) stated:

The reason the market is horrified now is Trichet said it’s not even being discussed. Smart investors are basically selling risk(y) assets

No s**t.  An asset appeared low risk, and now it is high risk, and the expected return is (at most) unchanged – so the risk adjusted return is lower.  No wonder they want to sell.

Now we are in a crisis, and if there is a run on good quality debt because of concerns we have to do strange things – sure.  But we need to come up with a system that rips this moral hazard out of the system.  It is the moral hazard that helps to drive crisis after crisis ultimately.

At the time National called the interest free loan scheme “irresponsible”. Since coming to power in 2008, however, they have maintained the policy, presumably for similarly cynical political reasons as led to the policy being introduced in the first instance.

As a result of the policy, students have been encouraged to borrow more and pay back less. Debt has ballooned. There are obviously other factors to take into account, such as increasing student numbers during the economic downturn. Nonetheless, it is clear that when given the option of borrowing interest free money, those with student loans have limited incentive to pay anymore than the minimum from their loan, for which they might as well borrow the maximum.

What is National’s response to the perceived student loan problem? The introduction of a $50 administrative fee that student loan borrowers must pay annually. Note that National have also provided an incentive for students to voluntarily pay back their loans through a 10% discount on their loans.

I propose a rather simpler solution. Abolish the half measures currently in place and start charging interest on student loans again. Only then will the correct incentives be instilled.

Results from a rudimentary instrumental variables strategy and accounting for whether sex is immediately preceded by alcohol use suggest that binge drinking directly leads to risky sex. Some binge drinking-induced promiscuity seems to occur among students, especially males, involved in long-term relationships

I could have told you that without doing any econometrics!

Note: I have read nothing but the abstract so can’t comment on the actual econometrics carried out!

In essence this sort of discussion is saying that we discount our future selves TOO steeply (compared to whatever the underlying presumption of a “fair discount factor” is).  Is this a fair value judgment to make in policy?  It is not one I would make, but it appears to be the basis of some overaching policies such as universal healthcare and superannuation.

In this case, we don’t need to worry about a “moral hazard problem” even though (empirically) the actions of moral hazard will appear.  Why?  Because the actors aren’t thinking about the future selves and so these “inefficient” outcomes would have occurred in the first place!  Policy helps to correct this by transfering resources to our future selves to improve outcomes relative to the REAL counterfactual (rather than the idealized one where agents choose on the basis of our subjectively fair discount rate).

I think it is important to keep this issue in mind, because it is a closet behavioural assumption behind most policy.  If we buy this value judgment, then we will believe in a larger role for government then if we didn’t.

However, even if all the premises are correct and even given significant social justice goals, I think we have to be clear regarding why we think an exemption is the way to go – and in the end I still disagree regarding any exemption.

Lets assume there is a negligible administration cost from removing the tax on certain types of food.  Even given the lack of a cost why are we taxing one good differently to another here?

The justification used is that GST is a regressive tax – well it isn’t in standard terms.  In fact it punishes those with more volatile income, not with lower lifetime income.  The more apt justification used is the fact that the poor spend more of their income on food.  However, in this case we are merely saying we want to give more money to the poor directly rather than indirectly.  If we think the income of our lowest citizen is too low as a society, we should transfer income to them – not fiddle with prices.  As a result, I do not agree with doing this on the basis of social justice – if this is what society wants just increase income transfers!

Fat tax

The only reason we would want to cut the GST off food is if we decided we wanted the relative price of food to be lower.  In the piece it is mentioned that if we cut the price of supermarket food the consumption of healthy food goes up.  Accepting the strong relationship they find (although, I would like to see the study directly – given the magnitude of the lift) we could justify some cut in the GST on supermarket food if we felt there was an externality from the consumption of healthy food.  Essentially this is the a fat tax vs non-supermarket, fattier foods.

Now for a fat tax (or non-fat subsidy) to work, we need an incredible amount of targeting.  This will either lead to a much larger administration cost (and the govt. hires people to look around and check things) or a significant increase in tax avoidance (by “recategorising” foods).  In order to adjust the relative price of food types, we have to accept that administration issues will become important!

As mentioned earlier, the fat tax is at best a second best option – in reality the problem stems from the governments refusal to make hospital policy in line with social values.

Given this, I would be against arbitrarily imposing a “anti-fat subsidy” through the guise of a cut of GST on some foods even if the administration cost was very small.

Not a fat tax?

Now it doesn’t appear that the study actually looked at a fat tax.  From the article we have:

The main findings from the survey? People, Blakely explained, kept on buying almost the same amount of saturated fats, regardless of the price and regardless of the educational material they were given. However, they used their 12.5% price discount to buy a significantly higher amount of healthier foods, and were still doing so at the end of the survey.

So a 12.5% drop in the price of supermarket goods lead people to buy A LOT more healthy stuff.  Four things:

1. This does not take into account what people spent their “higher income” on outside the supermarket.  Could it be that higher real income lead to more takeaways.  Without a more detailed look at incomes this is tough.
2. What income group were these shoppers?  Given that the relative price of goods INSIDE the supermarket were unchanged, why doesn’t a standard boost in income lead to this sort of massive increase in healthy food consumption (makes me suspect) – and why don’t we see these huge benefits overseas when they do have lower GST on food.
3. Incidence of tax.  If demand for healthy foods rises on the back of a cut in price, we will see the price of healthy food fall LESS than the price of unhealthy food.  This will cancel out some of these gains (even if they actually attempt to occur).
4. I would seriously like to take a closer look at the data in this study, as it is hard to tell exactly what they did solely from an article that mentions it.

Now, even if these huge estimates of the benefits of moving GST away from food are true I am forced to ask, what is the social benefit of the individuals actions here?  I understand that eating better is great for the person, however this choice set for the person could be achieved by giving them more money in the first place.

If a person then decides to spend any additional income on an xbox instead of healthy food THEY ARE SAYING they value Halo more than a longer healthier life.  Good for them – if it is that good maybe I should play Halo one day too.

The government should only subsidise if there is a social benefit – and again we come down to the second (at least) best world of it being like a fat tax.

And as I said earlier, I would be against arbitrarily imposing a “anti-fat subsidy” through the guise of a cut of GST on some foods even if the administration cost was very small.

However, then inside the article I saw it was written by a nutritionist – the worst of the prescriptive disciplines in my opinion.  Furthermore, they decided to take an entirely holistic approach to weight gain, removing any individual responsibility and blame the environment.  Namely:

Professor James said that in countries such as Britain and New Zealand, the reason for many people’s obesity was a genetic predisposition in an environment which allowed it to happen with an “out-of-control” food industry and the constant use of cars

What is this.

Like all individual choices, weight gain has several elements:

1. There are individual preferences, which are determined by genetics, history, and society.
2. There is the choice set/constraints, which is determined by society and natural endowment.
3. There is the nature of individual choice – which is determined by the person choosing.

Ultimately, the third element ensures that weight gain IS someones choice.  However, given that it is their choice we know that it is fine – as long as the individual has access to information.

The nutritionist is blaming society as he believes that people are being “forced” to consume by the very nature of the choice set they are being given.  Ok, this is a value judgment – and one I strongly disagree with.  Why?  People still choose to consume, they could physically eat less, exercise more, or change the makeup of their diet – but they don’t.  This implies that people prefer to have a higher weight than incurring the cost to have a lower weight.

Now we have to remember that there is NO social cost from people putting on weight (unless it comes from other policy distortions), and there is no “co-ordination problem” in society involving weight so there is no market failure for us to correct.  Being fat is not a crime, it is not a bad – and trying to “reduced obesity” misses the point of what policy should be doing.

Note:  You will notice I assumed no co-ordination problem.  I would like to hear people try and build up possible co-ordination problems if they have some in mind.  Implicitly, the nutritionists argument relies on a sufficiently strong co-ordination problem to function.

This brings me to the idea of “addiction”.  What is addiction, and why are we so scared of it.  Looking at a search of TVHE, I can tell that the authors here are not scared of addiction, we view it a little differently to the black and white box often given by (say) health professionals (ht Dim Post).

For me, all addiction tells us is that the consumption of the good CHANGES the costs and/or benefits of the consumption of the good in the future.  As a result, what is important is:

1. Information with regards to how addiction functions (and the costs and benefits of consumption) for people,
2. Having mechanisms available so people can “pre-commit” to consumption patterns in the face of an addictive good.

When we have these two pieces of the puzzle we can figure out what tax and what institutional policies can be established to improve outcomes with regard to the consumption of this specific good.

There is NOTHING wrong with addiction per see.  If we banned things on the basis of addiction we would ban pretty much everything.

Personally I think of addiction as follows:  A good is addictive if consuming it increases the marginal benefit of consuming it in the future and/or it increases the marginal cost of NOT consuming it in the future.  The first type of addiction is unambiguously good, the second type is not – but it is internalised as long as people know about it, and people are able to deal with issues of time inconsistency.