The alcohol levy review - an ongoing OIA saga

I keep a bit of a watching brief on the old BERL social cost of alcohol figure. It turns up in weird places. 

As aide memoire, BERL produced the number as commissioned work in the late 2000s that was meant to follow the method set by Collins & Lapsley in Australia. 

The Collins and Lapsley method has a few problems. But BERL compounded those problems with choices that seemed designed to generate a larger number for the tallied social costs. 

For example, Collins & Lapsley had aetiological tables that tried to attribute the fraction of different disorders that might be attributed to alcohol use. Their tables had a few disorders where the aetiological fraction was negative because drinking reduces the incidence of that disorder. BERL decided that, because they were only looking at harmful drinking, it was ok to just set all those cells in the table to zero rather than maintain a number showing benefits (and consequent reductions in net harm). 

Matt Burgess and I went through the BERL report, seeing what the number would look like if more standard method were followed. For example, BERL counted as social cost to the country every dollar spent on alcohol, including every dollar spent on excise, by those drinking more than about 2 pints of beer a day. Drinkers' spending on beer is a social cost only in the sense that private costs are part of social costs. And since benefits enjoyed by drinkers would need to be netted for any sensible net cost figure, the whole thing was a bit suspect. 

BERL responded to the critique by updating the figure to no longer count as a social cost drinkers' spending on alcohol excise, but let the rest stand. 

Brad Taylor joined Matt and me for an update to the review in 2011, when we went through the underlying Collins & Lapsley work. We adjusted upward the revised BERL figure, but the majority of the BERL-tallied costs were either double-counting or costs far better considered private than external and social. 

BERL provided an updated figure in 2018, but it turned out just to be the old figure multiplied by GDP growth over the period. Which could be fine if the initial number were sound (it wasn't) or if alcohol social costs scaled with GDP (they don't necessarily, and especially where alcohol consumption was declining over the relevant period). 

And the whole thing is a bit silly where the measured social cost really doesn't matter. The policy question is always whether any intervention, whether excise or otherwise, provides net benefits. Interventions can fail to do so despite very high measured social cost; they can also provide benefits even if social costs are low. The only reason for generating large social cost numbers is to motivate "something must be done" responses. 

Anyway. 

The number turned up again in last year's "Independent Review of the Alcohol Levy Stage 1: Rapid Review". The work for the Public Health Agency was undertaken by NZIER and Allen + Clarke. 

The work included this section:

90. The cost of alcohol-related harm to New Zealand society is significant. This section provides a summary of existing estimates of the cost of alcohol-related harm in Aotearoa New Zealand. 

91. The most recent study to quantify the social cost of alcohol in Aotearoa New Zealand was conducted by BERL in 2009. Commissioned by ACC and the Ministry of Heath, the report aimed to quantify the social cost of alcohol and drug related harm looking at the personal, economic, and social impacts. While the estimate of the social cost of alcohol-related harm in Aotearoa New Zealand published by BERL in 2009 and updated in 2018, or rather the methods used to generate it, have been criticised by some commentators, it has been widely cited in the alcohol-harm research and policy space in New Zealand over the last 14 years (BERL, 2009; Nana, 2018). The Law Commission’s 2010 report on the review of the regulatory framework for the sale and supply of liquor also cited the BERL 2009 report. 

92. In 2018, the updated estimate of the social cost of alcohol, based on the BERL methodology, was calculated to be $7.85 billion per year (Nana, 2018). This estimate included costs resulting from justice, health, ACC, social services, unemployment, and lost productivity. Intangible costs such as years of life lost from premature death, lost quality of life, child abuse, sexual abuse, and impacts on victims of alcohol-caused crime are also relevant to assessing the overall impact of alcohol-related harm on society. The 2018 update did not include intangible costs. A recent Australian Study found that in Australia $48.6 billion AUD of intangible costs could be attributable to alcohol (National Drug Research Institute, Curtin University, 2021). 

This section seemed particularly poorly undertaken. Citing the 2018 figure seemed particularly odd where the thing was just the old number multiplied by cumulative GDP growth. 

It's also incorrect to say that the 2018 update didn't include intangible costs. Intangible costs of lost life and lost quality of life were included in the 2009 figure, and the 2018 figure just inflated the old number by GDP growth.  

Paragraph 91 alludes to that 'some commentators' have criticised it, but said nothing about the nature of those critiques or who made them. Were the concerns trivial or notable?

Meanwhile, the bibliography included these two relevant references that weren't included in Para 91:

Crampton, E. (2018). The alcohol cost ‘zombie’ has returned. 

Crampton, E., & Burgess, M. (2009). The Price of Everything, The Value of Nothing: A (Truly) External Review Of BERL’s Study Of Harmful Alcohol and Drug Use (Working Paper No. 10/2009).

The 2009 piece was my original critique of the BERL figure with Matt; I'd have preferred the updated critique from 2011. The 2018 column had my initial guess that the updated BERL figure was just an inflation and population growth adjustment; my 2019 column had Ganesh Nana's confirmation that the new figure was the old figure inflated by cumulative GDP growth. So I'd have pointed to the 2019 column instead. 

But the authors clearly knew about my critiques. That they were in the bibliography suggested that there might have been more fulsome discussion of those critiques in earlier drafts. 

On 6 September 2023, I sent an OIA request to the Ministry of Health asking for all early and working drafts produced by NZIER [Paragraph 14 of the report said that NZIER undertook the analysis of existing data and evidence]; for correspondence between and notes from conversations between MoH, HPA, Allen + Clarke and NZIER regarding NZIER's analysis; and, for any peer review of the report. 

On 15 September, MoH replied saying that the correspondence would be extensive and that I needed to refine the request if I wanted to get anywhere. 

I replied immediately asking them to prioritise delivery of early and working drafts, and any peer review. I also suggested prioritising correspondence and relevant notes from meetings between and among MoH, HPA, and Allen + Clarke regarding the NZIER report. 

On 6 October, I reminded MoH that the refinement of my request only asked that they prioritise two parts of the request, and should not have triggered a clock reset; the requested information was due.

On 17 October, I had a reply from the Public Health Agency's Ross Bell. He noted that they'd considered the refinement as having triggered a time extension. But more substantively, they refused early and working drafts, as well as peer reviews, under 9(2)(g)(i) to protect free and frank expression of opinions. 

I proceeded immediately with the Ombudsman. 

On 16 November, the Ombudsman's Office commenced investigation. 

On 13 December, the Ombudsman's Office advised that the Ministry was prepared to reconsider its decision with respect to final drafts and asked whether that would be sufficient. I wouldn't know until I'd seen any released documents - if the released drafts let me see what had happened in the relevant section, that would be fine. If they didn't, I'd need to see more. I'd have to wait. 

On 2 February, a Senior Investigator at the Office of the Ombudsman noted that the Ministry had advised it would be providing a partial release, and asked whether I wished that they review the withholding of the earlier drafts; I noted that I couldn't know until I'd seen what they would release.

On 4 March, the Office reported that they were still chasing the Ministry about the later drafts. 

On 11 March, the Ombudsman advised that he had sent a letter to the Ministry recommending that the documents be released immediately and apologise for the delay.

At close of business on 14 March, the Ministry of Health released the later drafts. Ross Bell, Group Manager, Public Health Strategy & Engagement at the Public Health Agency, apologised for the delay and any related inconvenience.  

While those drafts did include some annotations from "KT" and Te Whatu Ora, they did not provide much light on what had happened with the section on alcohol social cost. The earliest draft was substantially similar to the final. 

So I still cannot really tell what happened. 

The bibliography references to the critiques suggest that, at minimum, those references were included as a citation in an earlier draft of Para 92. It's possible that an earlier version included more substantive discussion of those critiques, but it's hard to say.

I've asked the Ombudsman to form a determination around those earlier drafts' discussions of the costs of alcohol-related harm.

I suspected that the first draft from NZIER included substantive discussion of the relevant arguments. NZIER aren't idiots; they know this stuff. It's in the bibliography, so it was there at some point. 

If there had been more substantive discussion, was it excised at request of Allen + Clarke, or at request of the Public Health Agency?

In either case, the effect is a document sent to the Minister, advising on the alcohol health levy, that provides a fairly one-sided view on alcohol social costs. 

I yesterday received an additional bit from the Ministry, which might speak to the Public Health Agency's views on things:

Kia ora Eric,

Further to the below email sent to you containing the reconsidered documents of your OIA (ref. H2023031477), the Ministry has identified a paragraph pertaining to yourself in one of the early draft documents. While the Ministry is maintaining its position on withholding the early draft documents under 9(2)(g)(i) of the Act, the following excerpt is being released to you under section 16(1)(e) of the Act: 

So it seems that early drafts did include substantive discussion of my critique of the BERL figure, and that someone caused it to be erased.

I'd also note that I was discussant at the NZAE meetings on the BERL paper in 2009. It was standing room only, because my critique of the BERL paper had already been released. The Ministry could consider asking any economist in the room whether my critique was just a me-thing, or whether the profession broadly shared my concerns.

I did that work as an academic in the Department of Economics at Canterbury, five years before I joined the Initiative, and two years before doing any industry-funded work. The funded 2011 work [funded by NABIC] discovered an error in the earlier unfunded work that had us revise upward the earlier estimate of alcohol social cost. 

I note that Ross Bell, now relevant Group Manager at the Public Health Agency, was Executive Director of the Drug Foundation when the BERL figure was originally being critiqued. 

Here is the issue of the Drug Foundation's "Matters of Substance" newsletter that included discussion of the controversy around BERL's number. It would be surprising if Bell were not aware of the difficulties with BERL's figure. He had the masthead editorial on the issue of their newsletter in which my critique of the BERL figure was discussed. 

I'll look forward to seeing whether I can get any further with this via the Ombudsman. 

In the meantime, it looks pretty obvious that the Public Health Agency was very happy to put a biased document up to the Minister as advice - whether they requested that outcome directly, or had Allen + Clarke do it.

A provisional health warning on advice from the Public Health Agency may be in order. At least until we can figure out what the heck is going on over there. 

And a reminder that government-commissioned reports face censorship regimes. If the Ministry doesn't like what it says, well, the offending bit gets disappeared. As an offending bit here seems to have been disappeared. 

Ouch

Kate MacNamara reports on problems at the Productivity Commission:

The Productivity Commission delivered a new inquiry into immigration last month, at the same time that it is facing its own story of migration: an exodus. It involves a string of departures that have not yet been stemmed by an independent HR investigation and a slew of recommended remedies.

A distinct wave of resignations began in February last year, when two of the independent Crown entity's principal advisers left. In subsequent months they were followed out the door by six more staffers, including two lynchpin managers, each of whom had been directing one of the commission's two inquiries of the time. The eight departures in 2021 made up more than half the commission's 15 employees (the head count as of January 1, 2021, including one part-timer).

An HR review called late last year found problems at the commission including a troubled transition under the leadership of Ganesh Nana, who became chair on February 1, 2021. It also found an uneasy relationship between the new chair and many staff, especially senior ones. While efforts to improve staff retention are underway, at least four more employees have resigned from the commission in the first half of this year. Of the senior leadership team described in commission documents at this time last year, only one of the five remains.

It's well worth reading the whole thing. 

Kate picks up what I'd considered to be the most scathing part of the Review.

Under the heading "staff engagement with the Commissioners", the report found: "With two Commissioners being relatively new, a greater level of presence and interaction with staff, both formal and informal, would help build the relationship to support communication and the interchange of information and ideas. This is especially important for the Chair, with some staff having limited understanding of how he sees his role and what he brings, both as an economist and as a person."

Ouch.

I'd also received the Review by OIA. If you wanted to read the full report, I've put it up here. Not sure if ProdComm has it more widely available. 

I still remember when BERL was a swear-word in Treasury, for stuff like its report on alcohol costs...

MacNamara's piece is well worth the Herald subscription charge, if you want to learn more about the gutting of Wellington's institutions. 

Afternoon roundup

The worthies on the closing of the browser tabs:

• A database of global film subsidies. Remember that the only winning move is not to play. 


• "Somewhat perversely, some local councils and contractors are putting workers back on the shovel, because that way they can get Ministry of Social Development funding to train up six workers – whereas using a diesel excavator would train only one person."


• The latest Neumark metastudy on minimum wages.


• Can't kill a zombie stat. RNZ repeats the dodgy BERL alcohol cost number. So does Stuff. Remember: the $7.8b number is just the old dodgy number from over a decade ago, multiplied by GDP growth over the period. That's it. It starts with a dodgy number, then inflates it using a dodgy method that requires that alcohol cost be a constant fraction of GDP. Me on this in the Dom, a couple years ago. 


• Looks like there are going to be delays to any NZ sanctions regime on Russian-held assets. I really don't know why we have an Overseas Investment Office if they can't even figure out how to do this. 


• Lots of NZ kids don't really know how to write or do math.
• Government is subsidising new boilers for some greenhouses and food processors. There is absolutely no need to do this. Process heat is in the ETS. 

Who would you have picked to run the Productivity Commission?

The National Business Review ($) has a roundup of reactions to Ganesh Nana's appointment as head of the Productivity Commission. It includes some minor comment from me, and you can probably guess what I think about it.

But it also includes this somewhat intriguing bit from Sam Warburton:

Former Treasury Economist Sam Warburton said he could not name an economist in the public realm that would be suitable for the commissioner role at the moment - a comment that spoke to the credibility of the profession, which he said had not been high for the past few years.

Imagine that you're the recruiter tasked by Grant Robertson with finding the right candidate. You want a Commissioner who is a credible economist, who is respected by the profession, who has some profile beyond other economists, who is able to communicate to a broader audience, and who has public sector nous. 

It's a somewhat difficult Venn diagram to construct, and especially if you layer on the obvious political constraint that you can't select someone who's relatively 'dry' on economic issues. 

But it's still hardly an empty set, even if we restrict ourselves to people currently in the country. 

I would have hoped that Arthur Grimes and John McDermott would have been on that list. I don't know whether Arthur would have left Vic for it, or John would have left Motu, but you'd think a recruiter would have called them up to check. Norm Gemmell would have been a great pick, but I'm not sure whether Robertson would have seen him as too dry? 

There are Motu-affiliated folks who've done interesting work in the productivity space. Dave Maré and Richard Fabling in particular. But they haven't done as much public-facing work, so would likely be ruled out on those grounds. 

Tim Maloney at AUT should also have been on any reasonable short-list. He's not just done interesting work on labour markets, he's also served as Chief Economist at the Ministry for Social Development. Rhema Vaithianathan at AUT could also reasonably have made the list, though perhaps a bit further down only because her work is further from core productivity issues. 

Who do you think should have been ahead on the list? Leave out anyone who'd be ruled out as being too dry. Imagine yourself as an honest recruiter for Robertson for the position, knowing full well that folks like my excellent colleague Bryce Wilkinson would never be considered. 

Who would you have called? 

Update: A few additions to the shortlist, via Twitter, and others that have come to mind:

• Gail Pacheco (via Tony Burton; I'd not considered those currently in at the Commission)
• Bill Rosenberg (via Mike Reddell; I'd not considered on same basis as Gail)
• Alan Bollard (via Fran O'Sullivan)
• Tim Hazeldine
• Bob Buckle 

I can't believe we're still talking about the dumb BERL number

Sunday night, TV3 started in on what looks to be a series on the evils of alcohol. 

The Ministry of Health says harm from alcohol is now costing New Zealand more than $7 billion every year. In fact, every Kiwi pays $1635 a year fixing up the problems from alcohol.

Investigations Reporter Michael Morrah visited the frontlines with Auckland Police in the first part of his 'Because it Matters' series.

The Ministry of Health might have been one of the co-commissioners of the BERL report, but it's not a Ministry of Health figure.

Last year, BERL updated their 2009 figure on the social costs of alcohol. I critiqued it over at Newsroom (ungated); while BERL then did not reply to my requests for the workings underlying the figure, it looked like an inflation and population update of their 2009 figure.

The number got a lot of press again a couple of weeks ago; Alcohol Action NZ was running their annual temperance meetings, and so everyone was lining up to cite the big number. This time, BERL confirmed for me that the figure is an update of the 2009 one - but rather than an inflation/population update, it's an update taking the social cost of alcohol as a constant fraction of GDP. So it's inflated by nominal GDP growth over the period.

I went through it all again in the Dom Post.

The past fortnight brought a lot of headline stories about the social cost of alcohol. Felix Desmarais' article for The Dominion Post warned that alcohol costs $5 billion. The New Zealand Herald's headline warned of a "$70b social cost", citing Alcohol Action New Zealand's rolling up 10 years' worth of alleged costs.

If you thought those numbers referred primarily to the costs of alcohol-related crime, or to alcohol-related health care costs, you shall be forgiven. Social cost figures should refer to some cost borne by people other than drinkers themselves – external costs, as economists tend to put it. But Berl's number really is not that.

The Dom switched BERL to Berl; I'm pretty sure it's an acronym requiring capitalisation. Oh well.

I was pretty surprised to see the BERL number resurrected last year. The number didn't go well for them in '09.

And since memories seem short these days:

• Me on BERL's assertion that differences between us on the matter stemmed from differences in world view;
• Seamus on the same issue

Zombies live

Nine years ago, BERL put out its study on the costs of alcohol use.

They're now pushing an inflation-adjusted version of the figure. The figure isn't good, and that they're pushing it now is worse.

The study was riddled with problems and became a laughingstock among economists. Among the methods BERL used to get a gigantic figure on the costs of harmful alcohol use:

• Including every dollar spent by drinkers on alcohol if they consumed more than a medically-set threshold. You can't do this unless you're assuming that there are zero benefits associated with those drinkers' consumption. The threshold was equivalent to about two pints of strong beer per day. That's more than I drink, but it's odd to assume that folks consuming at that level get zero benefit from it.
• Oh - that spending included excise tax. They included the excise tax paid as a social cost. So whenever you increase alcohol excise tax, you increase the measured social cost of alcohol unless consumption drops by at least enough to offset the increased expenditure per-unit. They eventually fixed that part when I mocked them for it; dunno if the updated figure includes excise paid by heavier drinkers as a social cost or not. 
• Double-counting by including lost output among those who die early because of excessive alcohol use, and the value-of-statistical-life measure used by MoT which is inclusive of all costs of death including lost output.
• In tallying health costs, they took Collins & Lapsley's aetiological tables that give the proportion of the burden of each disorder associated with alcohol use, then zeroed out all the disorders where alcohol reduces health costs. 
• In tallying crime costs, they used a survey of prisoners who were asked how much alcohol contributed to their offending. Possible answers were "not at all", "a little", "some", "a lot", or "all". If the offender said at least "some", BERL attributed 100% of the costs of that crime to alcohol. 
• Oh - they also counted the lost output costs of incarceration by assuming that those in jail would have been on the average wage otherwise. That doesn't make any sense unless you're trying to inflate figures. 

I could go on. The full tally is summarised here; the full report is here. Remember Marge listing Homer's failings at Catfish Lake? Anyway, maybe about a fifth of BERL's tallied figure could plausibly count as policy-relevant costs under more normal ways of handling things. 

BERL did not come out well from that study. Nana had to defend it on Jim Mora's show. That did not go well. It was called "Shonky" by a Treasury Deputy Secretary in the National Business Review - but I understand they had to pull back from that because the reporter had characterised it to the Dep Sec as a cost-benefit assessment that had forgotten to run the benefits side rather than as a cost-of-illness study that included a pile of private costs as net social costs by assuming the associated benefits to be zero. 

They presented it at the NZAE meetings; I was discussant. It was standing-room only because Matt Burgess and I had released our review of the report ahead of the meetings.

Geoff Palmer defended the study, and hired Marsden Jacob Associates to back him up on it since he was using it in his Law Commission review. They presented it as an independent review, but note that it's Marsden who was presenting at the anti-alcohol conference this past week. I'd summarised the Marsden-Jacob review here. 

This past week, BERL provided an updated measure at an anti-alcohol conference. The reporter who called me about it said it was an inflation-adjustment of the old figure rather than new workings; I haven't seen the new figure's workings to check. It's a higher figure than you'd get by inflation alone, so I expect they took the per-capita equivalent of the old figure, inflation adjusted it, then inflated by population increase over the period - but I don't know for sure.  

Eric Crampton, from think tank NZ Initiative, said many of Nana's figures were based on the 2009 study which had been mocked in economic circles for things such as double-counting and counting factors that shouldn't be counted.

Using total cost figures to inform policy was useless in cases such as this. For example, raising excise on alcohol may penalise moderate drinkers but studies showed would only slightly deduce what heavy drinkers drank.

That's not quite right. I'd said that my remarks were based on the 2009 study and would apply to the current one to the extent it relied on the old one. I haven't seen the new one.

But there are two big annoying things.

First, we're again back in the "let's make a big stupid number" world rather than thinking about cost-effectiveness. 

More worryingly, it appears BERL no longer worries about reputation cost associated with that prior work, which was plausibly by now well behind it. Why would you tie your name back to that mess now? None of the plausible answers are good. 

Handbags?

The NBR last week featured New Zealand's economic research outfits. We're a pretty diverse group. The New Zealand Initiative conforms most closely to the classic think-tank model, albeit one funded by member subscriptions, while others, both for-profit and not-for-profit, do a mix of commissioned work and a bit of public interest work. The NBR's Jaime Ball writes:

If the idiom is true that “he who pays the piper calls the tune,” could it be that most economic research institutes in New Zealand are leading the rest of us on a merry dance?
The lion’s share of research stems from work commissioned, or paid for, by such persuasive pipers: the public and private sector client.

His description of the different players seemed about right, though he mostly lets the different organisations tell their own stories.

Oliver punted Jaime over to me on the question of whether there are problems in commissioned numbers in New Zealand public policy debate. I pointed him to the examples of the old PWC report on adult and continuing education, where they got a big number on the social benefits of adult and continuing education by assuming that taking a night course in cooking halves your risk of committing any crime. I also pointed to BERL's work on the social cost of alcohol.

Ball's article today hit that topic.

“I’ve seen a few really shonky kind of studies,” New Zealand Institute Initiative’s head of research Dr Eric Crampton says of his 11 years in New Zealand. [EC's edit]
“I think the main problem that we have is in defining who the ultimate consumer of these numbers is.
“So the commissioning agency in some case might not want to know the real number. They might just want to have a number that can show up on the headlines for a few days and put it into the public debate around the time some policy is being decided upon.”
Dr Crampton says this country has got a problem in that it has fairly thin markets.
“There isn’t that many people who will go in and take a look at how these things are constructed and offer a critique of them. We also have a problem where in small markets people can be a little bit reluctant to critique other people’s numbers, because there would be turnabout.”

The article's headline, "When Research Goes Wrong: Handbags Fly Five Years Later" doesn't give quite the right impression. I was asked about whether there are problems with commissioned figures; I pointed to some, and not just BERL's. All fun though.

Nana rehashed his standard defense of the report.

Real decline?

Nolan rightly hits on a bit of chicanery in reporting on BERL's policy costings for the Greens:

Investing to maintain real spending

This one is genuinely disappointing as it seems to be an almost explicit misinterpretation of Budget forecast figures.

The numbers for claiming falling real expenditure come straight from the Treasury forecasts here, but are then deflated.  This sounds good on the face of it, and people do this all the time.  However, it ignores that there is both unallocated spending, and allowances for additional spending in future Budgets – both which largely get allocated to Health and Education on the day.

It is an “open” secret that the Health and Education numbers work this way – as both Labour and National want to announce increases in spending on these items on the day. [Note: It is just like "tax cuts to get rid of fiscal drag" - political marketing all the parties do].

Now BERL is likely aware that the Budget Economic and Fiscal Update leaves out that unallocated spending. It's right there in the darned table. Here:

So what do we have here? For each line, we have the expenditures by spending area. For example, health rises from $12,368m in 2009(actual) to $15,274 in the 2018 forecast. BERL then goes and deflates that by expected inflation; the Greens then claim that there's a real cut in spending.

Now take a look at the line reading "Forecast for future new spending". That's the line where Treasury makes its best wink-wink-nudge-nudge guess as to future operating spending announcements, some of which it's possibly already had to cost for future government policy announcements, and some of which will be based on expectations of future inflation adjustments.

When BERL runs its inflation adjusted accounting on Core Crown Expenditures, it finds a 9.9% nominal and 2.8% real spending increase over the next three years. That total Core Crown Expenditures category includes the future spending increases. Those future spending increases have not been allocated across spending categories. If it were allocated proportionately across all categories, the weighted average of the different categories' increases would wind up being 2.8% real. But BERL doesn't assume that. It just takes each line from the BEFU and inflation adjusts it while ignoring the forecast future new spending.

Nolan is right. And it's worse than that. Nolan points to the 2013 Note 8 adjustments to BEFU. The 2014 table above has the forecast increases right there in the same table where BERL would most likely have pulled its data. It would be really hard to miss it. And if you didn't miss it, it would be really hard not to know that it would be really misleading to run a deflation adjustment without incorporating future expected spending increases where some of those increases would be to offset future inflation! 

The forecast new capital spending and unallocated contingencies are in the 2014 Note 8 adjustments; there's another $2.5 billion in forecast new capital spending by 2018. None of that's included in BERL's accounting.

Nolan's evaluation, noting that he's an Infometrics economist who hadn't worked on the report:

One thing I will point out, after reading the Infometrics report for the first time, is that they don’t say the things in the Green’s summary – but if you do a costing for a party, that is the way they will sell it.  The BERL tables on the other hand do imply what the Greens take from them – and that is very disappointing as they are misleading.

So the Greens put the best spin they could on the Infometrics numbers, as would any other party. But they could have been misled by the BERL tables. And that turned into some very erroneous headlines for the Greens, and some embarrassment when the Minister of Finance used a yellow highlighter to point them to what BERL failed to notice:

@RusselNorman @stevenljoyce Here it is. P119 BEFU "Forecast for future new spending" - the line BERL missed. pic.twitter.com/V2pnaYwXdq
— Bill English (@honbillenglish) August 19, 2014

I love that our Minister of Finance will come in and correct these kinds of things, or at least somebody in his office on his behalf (who knows whether he runs his own Twitter account).

It looks like Russell Norman honestly believed that there was no provision for future spending. I wonder whether he's satisfied with the advice he received.

Alcohol Healthwatch

From the full version of the Rankine report for AHW on women and alcohol:

The BERL analysis was critiqued for its methodology by Crampton and Burgess (2009), who called the final BERL figure ‘grossly exaggerated’ (Crampton, 2009). Crampton and Burgess estimated external alcohol costs at $662 million, which they said was almost matched by the $516 million received in alcohol taxes. Crampton and Burgess cited literature indicating that drinkers earned at least 10% more than equivalent non-drinkers, that moderate drinking increased benefits from experience and education, that moderate drinkers lived longer, and that alcohol saved more lives than it cost. They also questioned BERL’s estimate that 50% of costs were avoidable. Crampton and Burgess’s conclusions were unsupported by other research reviewed above, including studies cited in section 9.1: New Zealand health benefit estimates, and section 10: Alcohol-related health problems. 

Later, related research by Crampton, Burgess and Taylor critiquing alcohol cost studies was commissioned by the Australian National Alcohol Beverage Industries Council (NABIC). Crampton presented it to the national conference of the Australian Liquor Stores Association, and at NABIC’s request spent a day in Canberra discussing the research with media and ministry officials (Crampton, 2012).

I wish that they'd cited our 2011 working paper or the 2012 NZMJ summary version. The 2009 version, referenced by AHW as a link to the blog, contained an error that we only caught on going through the Collins & Lapsley report on which the BERL report was based. The corrected figure had social costs closer to $975 million. We also there noted that we'd missed excise revenues collected at the border, for a total excise take of $713 million. We only caught the error understating alcohol's social costs when we took this on as a paid project by NABIC. So the net effect of industry funding was to substantially increase the measure of alcohol's social cost in New Zealand; I think that AHW is trying to insinuate otherwise in the last paragraph. They didn't mention that some of my current work is industry-funded, but I expect that will change quickly enough. I'd be curious to know how much money Alcohol Healthwatch sucks out of MoH every year.

One of the biggest problems in the BERL report was double-counting. We argue that you can't simultaneously count the productivity losses associated with premature mortality and the intangible costs of lives lost where the MoT survey-based measure of the value of a statistical life is inclusive of the lost productivity. BERL added both of those together, along with a strange assumption about that the economy's at full capacity so a deceased worker can never be replaced with either another worker or more intensive use of capital. They also specifically zeroed out all of the alcohol aetiological fractions where alcohol use reduces the burden on the health system, despite that their source, Collins & Lapsley, allowed alcohol to both increase and decrease burdens on the health system, depending on the disorder.

Further, whether the excise take matches the social cost doesn't necessarily imply anything about the direction of optimal regulation. If excise does more to deter drinking's harms than to curtail moderate consumption, it's possible for it to make sense to increase excise even if the total tax take is well in excess of alcohol's social costs. Conversely, if excise does more to deter moderate drinkers' consumption and to reduce heavy drinkers' consumption mostly on non-binge days, then it's harder to justify tax increases even if the total tax take is below social costs. The latter seems to be the case. We really need cost-effectiveness measures that weigh up both the value of harm avoided and the costs imposed on non-harmful consumption for any regulatory measure, whether excise or otherwise.

If we look back to Section 9 of the AHW report, they rightly note that some early studies on the J-curve combined never-drinkers with former drinkers, but take this as debunking the J-curve entirely, citing Fillmore (of course). They ignore di Catelnuovo and Donati. They note Rimm and Moats, but in the most superficial way. They write:

Rimm and Moats (2007) restricted analysis in a large prospective study to non-smoking men who exercised and ate a good diet. They found that among these men, those who drank moderately had a lower rate of coronary heart disease (CHD) than non-drinkers. They concluded that moderate drinking reduced the risk of CHD. However, the same possible confounders may apply and there are also harmful effects from moderate drinking. For women any such benefit may be outweighed by an increased risk of breast cancer.

Rimm and Moats picked a sample of very healthy men with good health behaviours. Within that group there remained strong protective effects of moderate alcohol consumption. The possibility for residual confounding among a group pre-selected for very healthy behaviours is much lower than among a pooled group with larger unobserved heterogeneity in health behaviours. And the effect was very large. I'd summarised the overall literature a while back.

And if AHW were right that "for women they [the benefits of moderate drinking] are outweighed by health dangers from moderate drinking, such as an increased risk of breast cancer", then we would hardly expect to find that the J-curve is stronger for women than for men, albeit with peak protection at a lower level of consumption than for men. Again, here's di Castelnuovo and Donati:

A J-shaped relationship between alcohol and total mortality was confirmed in adjusted studies, in both men and women. Consumption of alcohol, up to 4 drinks per day in men and 2 drinks per day in women, was inversely associated with total mortality, maximum protection being 18% in women (99% confidence interval, 13%-22%) and 17% in men (99% confidence interval, 15%-19%). Higher doses of alcohol were associated with increased mortality. The inverse association in women disappeared at doses lower than in men. When adjusted and unadjusted data were compared, the maximum protection was only reduced from 19% to 16%. The degree of association in men was lower in the United States than in Europe.

They also cite bad effects subsequent to the dropping of the alcohol purchase age and ignore Stillman's findings.

An Open Letter to David Shearer and David Parker

Dear David and David,

I have read with interest the policy document you released yesterday: New Zealand Power, Energising New Zealand. I wonder if you could clarify a few points for me.

1. In the document and the associated speeches, you quote the Wolak report's figure of $4.3b of, in your words, "super profits". Have either of your read the report, or any of the trenchant criticisms of that report? (A bit egotistically, I can suggest work that I was involved in, here, here, and here, but there are others.) 
2. You say that "prices are rising faster than in many of our major competitor countries", and show a graph comparing the price trend in a number of countries since 1986. Let's leave aside the question of what is meant by "competitor country". Is it your position that prices were correct in New Zealand in 1986? Elsewhere you say that your new agency, New Zealand Power, will set prices based on operating costs and a fair return on capital. Is it your position that prices were generating a fair return on capital in 1986?
3. You say that the faster rate of price growth in New Zealand "undermines the competitiveness of our economy". But one of your graphs shows that real industrial prices have remained about constant since 1986 and commercial prices have fallen. What exactly do you mean by "competitiveness"? 
4. Your graph shows that the faster increase of prices relative to other countries has been fairly steady since 1986 albeit with an acceleration around 2000. Since your explanation for this price trend is a lack of competition in the market and the use of marginal-cost rather than average-cost pricing, is it your position that these factors have been changing steadily over the past 25 years, accelerating during the period of the last Labour government? Is it possible that the trend might be attributable to steady increases in demand over time and regulatory obstacles to power companies building new capacity? 
5. You say that selling assets will "push up power prices even more as foreign and corporate investors look to maximise profits". Is it your position that the state-owned electricity companies are not currently looking to maximise profit, even though that is their fiduciary duty under the State-Owned Enterprises Act? 
6. You state that the Wolak report found that the four big generators made "super profits of $4.3b at the expense of consumers". You also state that hydro generators earn "super profits" by using free water to generate electricity that is sold at the same price as generators using more expensive methods. Do you think this is what Wolak meant when he calculated the excess profits earned? Have you read the Wolak report? 
7. As I noted earlier, you state that price will be set based on operating costs and a fair return to capital. But the Wolak report assumed that there was excess capacity in New Zealand so that a competitive market would have produced prices based only on operating costs. Are you stating that Wolak's $4.3b figure is overstated? Have you read the Wolak report? 
8.  Drawing on a report you have commissioned from BERL, you state that your policy will create 5,000 jobs and boost the economy by $450 million per annum. In their report, BERL state that they are assuming an economy with deficient demand so that unemployed resources are avaialbe to the industrial and commercial sector with no opportunity cost. In citing that figure as an on-going per annum benefit, are you stating that it is your view that the economy will remain in a state of deficient aggregate demand forever, and that your government would take no other action to increase demand? 
9. And if you have time, could you ask BERL whether it is not an oxymorn to have a computable general equilibrium model, and then state that "the model's calculation of the impacts on the government accounts exclude the direct loss of revenue from lower generator dividends and lower tax receipts from the generator's reduced profits". 
10. By the way, did you know that one of the implicit assumptions Wolak used in his report implied that there was no efficiency loss from the putative overcharging, just a transfer from users to taxpayers? If you accept this report, wouldn't it be easier just to use the tax and benefit system to transfer money back to poorer consumers? Have you read the Wolak report?

Kindest Regards....

You can't kill a bad stat

The New Zealand Drug Foundation should know better. And yet, here we are.

The NZDF put up a Bingo card for those who support tougher regulations around alcohol with the catch-phrases they expect to show up in the debates around the Alcohol Reform Bill. The last page of it has a few problems. Alcohol Reform Bill Bingo  Among the facts, as NZDF sees things:

It's a small number who are ruining it
Since when is 785,000 a small number? That's how many "uninhibited binge drinkers" there are in New Zealand. A further 622,000 people are "constrained binge drinkers". Together that's 1.3 million people, about a third of all drinkers in New Zealand who are not drinking responsibly.

nzdrug.org/smallnumber

Ok. First off, there are 4.4 million people in New Zealand. They're claiming 1.3 million is a third of all drinkers. So they're claiming that we have 3.9 million drinkers in the country. At the 2001 census, there were about 848,000 people aged under 15. So the New Zealand Drug Foundation is claiming that every single person aged over 15, along with 41% of all of those aged 0-14, are drinkers. That seems off.

So I hit their provided link. It's a redirect that goes to an article by Sally Casswell. That article provides results from a survey where they asked a representative sample of people a bunch of questions, including whether they know anybody who they consider to be a heavy drinker. 29% of the sample reported knowing at least one heavy drinker. Now it would be a really really big mistake to extrapolate from the number of heavy drinkers known by people in the sample to a population estimate of the number of heavy drinkers because respondents could easily be referring separately to the same heavy drinker. And, Casswell doesn't do that. In fact, there's absolutely nothing at the link to back up NZDF's claim here. I think this is likely a redirect error: the study backs up the number in the next factoid, where they say "about a third of New Zealanders have at least one heavy drinker in their lives" (note that 29% is almost equidistant from a quarter and a third for rounding purposes. Since a third is 33.333% and a quarter is 25%, a third is just a pinch worse for rounding purposes than a quarter, if you want to be accurate and you like fractions. But you always round up if you want the scarier fraction).

But, because I work in this literature, I know where their number comes from. It's from an old ALAC report, cited here. What counts as an "uninhibited binge drinker"? It's awfully hard to tell from the report. They define it as:

"adults, 18+, who are less concerned with the effects of their drinking and less inhibited than Constrained Binge Drinkers. They drink regularly (often every day) and binge, mainly to unwind, and for the "buzz" and enjoyment."

By my best guess, adults who drink regularly, who sometimes binge, count as "uninhibited" if they don't seem sufficiently contrite about it in the survey questions. At page 25, they say that the main difference between constrained and unconstrained bingers are "demographic and attitudinal characteristics", with the unconstrained exhibiting a more reckless disregard for downside costs of heavy drinking. What counts as binge drinking?

"where an adult reports they have consumed the equivalent of seven (7) or more glasses of alcohol during a single drinking session."

I'll assume that they're there meaning standard drinks. Seven standard drinks, 70 grams of alcohol, is the equivalent of most of a bottle of standard strength wine (a bottle usually has 8-9 standard drinks). A half-litre of Emerson's JP is 3.27 standard drinks. So less than two pints of the JP makes you a binge drinker. Since I have about 0.6-1.3 standard drinks per typical day and perhaps once every month or two have something more like a couple pints of JP (over 3+ hours), and because I really can't see any negative consequences from my drinking pattern, I might count as an uninhibited binge drinker - it depends how often you have to binge to fall into the category. Figure 4 of that report shows that 56% of "uninhibited binge drinkers" had 3 or fewer drinks on their last drinking occasion; 25% of that category consumed 7 or more drinks on their last drinking occasion. So it's not implausible that a lot of people fall into the category. But does the category really tell us a ton about anything useful?

At page 75, the ALAC report compares uninhibited binge drinkers who drink every two to three days and who drank 7+ drinks on the last occasion with those who don't. The heavier drinking members of the uninhibited drinking cohort are more likely to be full time salary or wage earners, have higher income, and are more likely to drink with friends than to drink alone. Are any of those bad things?

But, the worst stat in NZ Drug's "Facts"? This one.

The status quo is fine.
The status quo means 1000 deaths due to alcohol every year. It means 785,000 binge drinkers. It means $72,000,000 in costs for Police, Corrections and health expenditure. It means $4.8 billion in costs to the taxpayer. The status quo means more harm.

nzdrug.org/alcoholreform

I don't know about the 1000 deaths; I hope that it's net of the lives saved by moderate drinking, but I doubt it. The 785,000 binge drinking figure seems a bit off, as noted above. The $72m figure is included in the $4.8 billion figure. And, the $4.8 billion is not a cost to the taxpayer. Again, here's BERL's cost tally:

• $1.52 billion in intangible costs of loss of life (the vast majority of which is reduced life expectancy among very heavy drinkers, with no accounting for increased life expectancy for moderate drinkers);
• $1.48 billion in labour costs of lost productivity (the vast majority of which are the forgone production of the prematurely deceased, and consequently is double-counted with the $1.52 billion above since the Value of a Statistical Life is inclusive of lost production);
• $699 million in "drug production costs", including every cent of excise paid to the government by heavy drinkers;
• $562 million in crime costs, with a ridiculously low threshold for determining what is an "alcohol-caused crime";
• $290 million in health care costs, under the assumption that there are no health benefits from moderate drinking and by zeroing-out the effects of drinking for those disorders where even fairly heavy alcohol consumption reduces the costs of that disorder;
• $200 million in road crash costs, consisting both of those very real costs that drink drivers impose on others and the costs that drink drivers impose on themselves by wrecking their cars;
• $42 million in lost quality of life, again mostly falling on heavy drinkers themselves.

When I'd gone through the figures it looked like maybe $967 million of BERL's $4.8 billion could count as an external cost by more normal method.

It's hard to kill a bad stat. Darned things keep popping up whenever somebody finds them to be convenient. 

Critique and the customer

If the point of an economic consultancy report is to convince serious officials at Treasury, the Reserve Bank, or the relevant Ministries of the economic case for something, and if the consultancy report has serious errors, you can do good by loudly critiquing it if it is wrong. Those who need to know whether the report is right will check the critiques and, if truth-seekers, will update. I understand that some of the serious folks at the Ministry of Health have strongly updated their views as to the appropriateness of Cost of Illness studies around alcohol consequent to critiques, very correctly noting that cost-effectiveness is the better measure.

But if the point of an economic consultancy report is to excite the hooples and to give a sciency justification for whatever some bunch of rent-seekers is trying to push, then critiquing it loudly only serves to provide advertising: this firm will produce the big shonky but sciency-looking number that your industry needs to get public support for whatever you're trying to push.

"Noise made, overtures to outside interests and enlistment of the hooples’ participation is what this situation demands." Al Swearengen, Episode 20, "Childish Things", Deadwood.

If that's what the reports provide, critiques might make things worse by letting the interests know who's best at exciting the hooples.

Want to show that your industry is the key linchpin for the regional economy? Want to show that your party's policy is the one for advancing economic prosperity? Yelling about how a particular consultancy produces numbers that are great for propaganda but bad for policy only serves to fuel demand where the ultimate audience are the hoopleheads.

What else can you say about a consultancy report that includes this in the concluding remarks?

The biggest cost will be loss of face for the “Mainstream Economists” especially the Bank economists, who have continually told us that this is the panacea: There Is No Alternative.  Their experiment will be at an end.

The audience isn't Treasury, the Reserve Bank, the boffins in the Ministry of Finance, academic economists, or anybody serious. It isn't you, Matt, as correct as your critique may be. Neither is it you, Paul: I watched you writing your critique as I went meta.  It's the hooples. And it's the reason that the New Zealand Economic Association really really needs an annual awards ceremony for the worst piece of economic consultancy work produced in the country every year.

So that the hooples can better be advised of the reputation of certain outfits.

Alcohol stats

I wrote this for the op-ed section of Friday's Christchurch Press. I'm currently in Oz where I'll be talking about alcohol policy for the hospitality industry association liquor retailers conference and with a few journalists. So I'm posting this Wednesday and hoping that the piece did come out in Christchurch on Friday. Anyway, enjoy. [Update: here it is!]

---

It would be pretty easy for diligent Christchurch Press readers to conclude that alcohol is the worst scourge of humanity. Doug Sellman featured several times over the last fortnight warning us all of alcohol’s dangers; health reporter Georgina Stylianou wrote two articles on a new estimate of alcohol’s cost to the Canterbury health budget. And the University of Otago’s Professor Jennie Connor told us that minimum prices are remarkably effective in reducing alcohol consumption, pointing to a Canadian study “that showed a 10 per cent increase in the minimum price of alcohol reduced consumption by 16 per cent relative to other drinks.” Connor was quoted in a Mainlander feature on Doug Sellman explaining how Professor Sellman is not in fact a wowser; presumably it’s only free-spirited libertines who write op-eds in the New Zealand Herald worrying about how Woodstock commercials encourage boys “to have sex with their best mates’ mothers” and that advertisements “encouraging middle-aged women to get their teenage clothes back on and flirt with their son’s best mates” do not contribute to a healthy society.  (30 October 2009)

I do not particularly care what the jury decides on who is or is not a wowser. But I work with and care about the numbers around alcohol policy. And the impression most readers would get from the latest reporting in the Press is a bit at odds with, well, reality.

Let us begin perhaps with Jennie Connor’s citing of “a Canadian study” on the effects of minimum pricing. Can a ten percent increase in the minimum price of alcohol really reduce total alcohol consumption by sixteen percent? No. The number is so far out of line with the vast consensusof the literature that I got in touch with Chris Auld, one of the authors of what had to have been the study Connor had read, a piece in the May 2012 issue of Addiction. And my read of his study was right. If you increase the price of beer by ten percent, you could get a reduction in beer consumption of sixteen percent, but that’s because beer drinkers move over to other alcoholic drinks. Across-the-board increases in the minimum price of alcohol have far smaller effects: a ten percent price increase reduces aggregate consumption by only about 3.4 percent, as is made reasonably clear in Auld’s paper.

That the sixteen percent figure is screamingly wrong should have been obvious to anybody who is familiar with the literature. The largest estimate of the responsiveness of alcohol consumption to price measures in Wagenaar’s 2009 survey of 112 different studies suggested that a 10% price hike reduced consumption by 8.4%; Wagenaar concluded that 4.4% is the best consensus estimate. And for heavy drinkers, it was 2.8%. Auld’s 3.4% is then right where a reasonable person would have expected an estimate on the effects of minimum prices might fall. Sixteen percent – that’s right out.

The Auld study does come out in favour of minimum prices, but in conjunction with a decrease in alcohol excise taxes: it’s then a way of increasing the cost facing heavier drinkers while doing less harm to moderate drinkers if heavier drinkers drink cheaper alcohol. I worry more that the policy does disproportionate harm to moderate-drinking poorer people.

I was a bit more surprised to read of the new commissioned BERL report on the health costs of alcohol in Canterbury. Their prior work in the field, a 2009 study that included a measure of costs to the health system among other costs of alcohol, seemed to put a pretty heavy thumb on the scales in estimating the costs borne by the health system. My article in today’s issue of the New Zealand Medical Journal lists a few of those problems [note: link may only be active after lunchtime Friday, sorry]. While alcohol greatly increases the burden of disorders like liver cirrhosis, it also reduces the costs of cardiovascular disease. BERL here replicated work done in Australia by Collins and Lapsley (2008). But where Collins and Lapsley added up all the costs imposed by those disorders where alcohol makes things worse and subtracted from that total all the cost savings from those disorders where alcohol reduces costs, BERL simply erased any beneficial effects of alcohol for disorders including ischaemic heart disease, cholelithiasis, heart failure, stroke and hypertension.

As I had warned BERL against this kind of method when I served as discussant on their paper at the 2009 New Zealand Economic Association Meetings, I was curious whether they’d revised things. But, the new BERL paper wasn’t available. Two separate stories in the Christchurch Press, with lots of reaction quotes from doctors, were based on a paper that the reporter did not have and was not yet available for public critique. I received the paper Wednesday courtesy of the CDHB. And BERL, at footnote 14, reports they’ve done the same thing again: “The Collins and Lapsley fractions indicate some alcohol use may be beneficial for some conditions. We concentrate on harmful drug use, and assume zero fractions for such conditions.” So their measure of the costs of alcohol to the Canterbury health system relies on an assumption that there can be no health benefits from alcohol – an assumption that runs contrary to the weight of international evidence. Assuming one’s conclusions is hardly proper method.

Unfortunately, alcohol policy is one of those areas where a lot of people’s convictions about the right answer put a pretty strong lens on how they assess the literature. How often do you read that problem drinking among 15-24 year olds was no different in 2006/2007 than in 1996/1997 before the change in the alcohol purchase age? Or that per capita alcohol consumption is down substantially since 1991? Or that light drinkers have about a 14% reduction in their chance of dying from any cause than people who never drink,correcting for the host of other health-related behaviours that are usually given as reasons for ignoring the health benefits of moderate drinking?

Be skeptical of the moral crisis around alcohol.

Unquestionable costs

Back in 2009, BERL told us that harmful alcohol use cost New Zealand's health system $286 million dollars for the 2005/06 year. There were a few problems with their method. It's worth revisiting these now that a new BERL number on alcohol health costs is out. I'd critique their current numbers except, well, I'll come back to that one.

The BERL report was modelled on an Australian study by Collins and Lapsley. Collins and Lapsley used a table of alcohol aetiological fractions to assign health costs. So if alcohol is responsible for 100% of alcoholic liver cirrhosis, 100% of the costs of alcoholic liver cirrhosis are attributed to alcohol. For some disorders, alcohol consumption reduces costs to the health system. In particular, cardiovascular disease is reduced by alcohol consumption. So while someone consuming 8 standard drinks per day is likely to blow his liver out (and impose costs on the "treating bad livers" part of the health system), he'll likely have pretty clean arteries (and reduce costs on the "fixing plugged arteries" part of the health system). To get a measure of net costs you take all the fractions, some positive and some negative, and multiply by the costs of each to the health system. This will remain an imperfect measure of aggregate health costs: if moderate drinkers live longer, they'll impose greater total costs on the health system by living longer than teetotalers; if heavy drinkers die early, they'll cost the health system money early on but save the system money in the longer term. But the method gives you a first cut.

So, what did BERL do? They took Collins and Lapsley's table and surgically removed any disorders for which alcohol provided protective effects. Why? Footnote 15:

A related, but separate, issue is that of the beneficial consequences of drug consumption.  This report concentrates specifically on the social costs of harmful use.  It does not analyse the impacts from non-harmful use, such as any protective health effects of alcohol consumption.  That is, beneficial impacts of alcohol use are not included as cost offsets.

They do a bunch of handwaving about how health benefits are contentious. But their source document, Collins and Lapsley, included those benefits. And it's not a great out to say that there are no medical benefits once you get past 4 standard drinks per day. Sure, that's about where aggregate mortality risk goes past the baseline for teetotallers. But that curve is drawn for net effects: assuming away the benefits side puts a pretty big thumb on the scale in measuring total costs to the health system, especially when metastudies like Corrao's find strong cardioprotective effects well into the range where total mortality effects are pretty negative.

So after assuming away any possible health benefits from alcohol use, BERL found that alcohol imposed a large burden on the New Zealand health system. We didn't have the resources to reverse-engineer their pretty shonky zeroing-out of potential health benefits when we critiqued their study but simply noted it as something that made their figures rather higher than they should have been.

Anyway, BERL has a new figure out on costs of alcohol to Canterbury's health system. Or so reports the Christchurch Press. Their reporter, Georgina Stylianou, seems to be running off the press release here. She interviews a bunch of the usual suspects about just how awful alcohol is. Any fact checking on the figure? No. Why? The paper isn't yet released.

The report will be released in full this week and will show the range of conditions in which alcohol is a contributing factor.

Since I can't critique their new figures, I'll remind folks about what was wrong with their figures last go-round. I wonder if they've fixed anything.

It's not encouraging that the Christchurch Press seems to be playing into the media strategy that BERL and CDHB here are running: get a story on the press release, maybe another one when the report is made available; get the figures into public debate but don't let anybody have a chance at critiquing them. I'd hoped for better.

BERL and asset sales

The Greens commissioned BERL to look at the government's planned set of asset sales.

Recall that I've previously argued that the "but the bond financing cost is lower than the flow of dividends" argument is nonsense because it says the government should borrow to invest in the stock market where stock returns are higher than what the government pays in interest; it ignores that stocks are riskier assets than New Zealand government bonds.

What really matters is whether an asset is better managed publicly or privately. If the assets are more efficiently held publicly, the "loss of flow of dividends" critique can make sense: in that case, a private owner is willing to pay less for the shares than the flow of dividends is worth to the government. Otherwise, a high dividend flow just means the asset's selling price is bid up. If the private owner expects efficiency gains, competitive IPO markets push the asset's selling price to being higher than the discounted value of the current revenue stream.

So, how does BERL approach the problem? They assume that revenues from asset sales are used to build other assets that yield dividends equal to the returns on the sold assets but that time-to-build means a few years' delay in getting the flow of assets from the alternative stream. It's then not particularly surprising that they find that asset sales are a dumb idea. It would be hard to find anything other than "privatization is a dumb idea" given that starting point. They also assume that borrowing costs are lower than dividend yields and conclude that it makes more sense to borrow than to sell off assets. They do some year by year projections going forward on the basis of the assumptions, but all that time path depends on the question-begging at the outset; I'm not going to get into whether they got the time series right.

BERL also seems pretty worried about effects on the country's net external debt position. So they set up scenarios comparing asset sales, where buyers may be foreign or domestic, with a bond issue, where bonds are assumed to be bought only by domestic investors. On this basis, they find that the asset sales will hurt net foreign liabilities. Perhaps their conclusion would have changed if they considered that foreign investors do sometimes also buy our government's debt, or that domestic investors can on-sell government bonds to foreigners.

Further, when BERL makes the case for debt over asset sales based on the difference between the government's cost of borrowing and the dividend yield from state owned enterprises, they don't seem to adjust for that dividend yields tend to be higher because asset owners need a risk-based return. If it doesn't make sense to take out a mortgage on your house at 5% because you can buy stock in a company that usually pays 6% dividends, it probably doesn't make sense for the government to do it either.

As a fun robustness check, they compare their results against a scenario where the new investments yield lower dividends than the new investments. Unsurprisingly, they find that privatization is then even worse!

I'll agree with BERL that some of the benefits of partial privatization seem overwrought. I've been critical of partial privatization, and especially of starting with the energy companies. But if this is the best case against partial privatization that the Greens can come up with, it sure isn't convincing.

Previously:

• Perils of partial asset sales
• Partial Privatisation: Hazledine (vs?) Crampton edition.
• Selling assets to pay for the quake
• Optimal quake financing
• Don't sell the lines company, sell the Port.
• Sell it already
• Seamus: Justification for partial asset sales
• Seamus: Should Meridian be Privatised
• Me in response to Seamus: Voter Preferences and Electricity

A number I don't believe

Another plausible BERL estimate:

Given the make-up of the Auckland and Bay of Plenty regional economies, we illustrate the overall impact at a regional economy level of fast broadband from early roll-out and uptake. We estimate the productivity benefits of fast broadband could lift GDP by 7-9 percent above its business-as-usual level by 2025 if early roll-out, adoption and uptake is achieved. 

BERL's report on the benefits of broadband for Auckland is attached to the minutes of an Auckland Council Meeting.

I haven't the time to put into fisking this one. But a few bits of interest:

• They reckon the benefits to primary industry in the Bay of Plenty region is greater: "the estimated total regional benefit of broadband applications to the dairy production industry in the Bay of Plenty region is about $71 million. This is equivalent to about 7 percent of the export value of dairy product in the Bay of Plenty." Dairy can be made more productive by moving from zero internet to half-decent internet. Just imagine the benefits to Fonterra in being able to solve the Salesman problem if they have real-time access to milk volumes in the tanks at all the farms in the area. But I can't see how that's substantially better achieved at 10 mbps than at 500 kpbs.
• They figure the Auckland region's GDP, by 2025, is 1.8 billion dollars higher if broadband rolls out in 2012 instead of 2015. For NZ as a whole, we get a $4.7b boost. That's about a thousand dollars per capita. I can't believe that there's any difference a decade on that's discernible from noise.
• I can't help but suspect that there's rather a lot packed into the last two bits of "if early roll-out, adoption and uptake is achieved."
• They spend a fair bit of time highlighting the economic benefits of future growth in a bunch of industries where broadband hardly seems the binding constraint. Efficiency benefits of Kiwifruit farmers being able to file reports online with Zespri rather than paper forms hardly requires really fast broadband. I'm also not sure that broadband access is a bigger constraint for aquaculture than are regional consenting issues.

If the Auckland and Bay of Plenty Councils believe the results of the study they commissioned, I really hope that they go ahead and make the broadband investment using their own ratepayers' money rather than using the report to pressure Key into providing Auckland with what's mostly a private good.

HT: Henry Ergas, who's done great work debunking similar claims about Australia's national broadband network.

The Cost of Cost Studies

Back in 2009, Matt and I got a bit annoyed that BERL's estimate of the social cost of alcohol was being used for policy purposes by the Law Commission; the "social costs" it tallied included a lot of money spent by drinkers on their own alcohol, for example; Sir Geoffrey Palmer's then contrasting of the alcohol excise tax take with BERL's social cost figure was then worse than nonsense. We tore the number up and put up a working paper with some of the findings.

Last year, we were contacted by NABIC - the industry group representing Australia's brewers, distillers, vintners and alcohol retailers - asking if we might cast a similar eye over Australian estimates produced by Collins and Lapsley. We were somewhat familiar with Collins and Lapsley's method as that was the model used by BERL. And so we agreed; funding was provided via a consulting grant administered by the University of Canterbury and subject to pretty strict academic freedom provisos. For example, I insisted that we retain ownership of the produced document: if we found things that weren't particularly welcome, the document then couldn't be buried. And NABIC's been great; the only pressure we ever came under was to get the damned thing finished while the September and February earthquakes rolled on through and I was locked out of my office for considerable periods of time; we've appreciated their understanding as I've worked through the earthquake complications.

We brought in Brad Taylor to assist with the literature review; Nick Sander and Rachel Webb provided excellent additional support. I presented an initial draft of the results at the NZAE meetings in Wellington in June, then a slightly updated version of the results as part of the Dodgy Awards at the Australian Conference of Economists' Policy day. Since then, I've cleaned the paper up, partially in response to very helpful comments from co-blogger Seamus. It is now released as a University of Canterbury Economics Department working paper. Next, we'll be splitting that rather weighty tome into a couple of pieces for submission.

The biggest problem with the "cost of illness" approach used by both BERL and Collins & Lapsley is the counting of private costs as social. The innovation introduced by Collins & Lapsley, and followed by BERL, was to present the resulting figure as representing "net" social costs. Private benefits of alcohol consumption were deemed by Collins and Lapsley not to exist because consumers could not meet very stringent requirements for rationality and information. Collins & Lapsley argue that if consumers are not fully informed, consistently rational, and required to bear the full costs of their consumption, the "resultant costs" are social - in other words, there can be no private benefits to offset private costs if there exists any potential failure of the conditions of the first welfare theorem. And this is plainly nonsense: these sorts of failures can cause some deadweight costs but they hardly destroy the potential for private benefits. Collins and Lapsley write:

“Being fully informed about the private costs of abuse requires the abuser to have access to, and have the ability to process and evaluate, epidemiological information on the effects of drug use. It also requires the drug user to be able to evaluate the probable future health and other costs resulting from the drug use. It is difficult to believe that drug users, by their nature, are fully-informed, or even well-informed, about the costs of their abuse.”

We have to wonder whether the standard applied to alcohol could be applied to other forms of consumption: I don't think that I could eat a banana in a manner consistent with Collins & Lapsley's requirements because I don't fully understand how the body metabolises potassium from the banana and how that affects the balance of electrolytes* in the body. And as my wife and I have joint banking accounts, I don't bear the full costs of buying the banana. It's a strange world Collins & Lapsley work in. 

Assuming zero benefits from alcohol consumption allows Collins & Lapsley to present a measure of "net" social costs that includes private costs. If we use a more standard economic approach that only counts external costs, less than $4 billion of C&L's $15 billion can properly be counted as social cost. That's roughly on par with the aggregate alcohol excise tax take. Marginal analysis is required for assessing the adequacy of the tax regime; it's possible that an alcohol excise tax increase could be welfare enhancing even if the total cost figures roughly match the tax take. But it's unlikely. Recall that heavy drinkers are about sixty percent as price responsive as moderate drinkers; more harms likely get imposed at the margin on marginal drinkers than get averted among heavy drinkers with a tax hike. 

We also took the opportunity to revisit our analysis of the BERL figure. And, we found that we'd made a couple of errors there.

First, we realized that we had double counted when we both excluded private costs of forgone earnings and kept BERL's measure of the transfer benefits of resources released for others' consumption. BERL didn't call us on this one when they critiqued our initial study, and we didn't realize it until we had a rather more thorough understanding of the C&L model on which BERL was based. This brought the overall cost figure up from an amount trivially below the New Zealand excise tax take to an amount a bit higher than the tax take.

Second, we realized that BERL had double-counted in tallying both the costs of premature mortality and the value of forgone wages. BERL, and Collins & Lapsley, used a measure of willingness to pay to avoid loss of life in calculating the value of a life year lost through premature mortality. That figure includes all the value of forgone production and other costs of premature mortality; it's telling that NZTA figures on the costs of car crashes include the production losses from injury but no measure of forgone production with premature mortality - it's already included in the value of the statistical life lost.  So you can't count both forgone production and the value of statistical life-years lost. Correcting this did not much affect our overall figure as the vast majority of forgone production costs accrue to the drinker himself and so were already excluded as internal. But if you care more about the overall cost figure that includes both private and external costs, the double-counting adds substantially to the final figure.

We were unable to correct BERL's health cost figure to account for that they zeroed out those disorders where Collins & Lapsley concluded that alcohol consumption reduced aggregate health costs; consequently, our figure remains overstated. The true figure would have external costs rather closer to the tax take. But, again, marginal analysis would be required to assess whether excise increases (or decreases) are warranted.

Here's the presentation I gave at The Dodgies.

Who's the Dodgiest of them all? Economics and Preventative Health. on Prezi

*They're what plants like!