Tuesday, 3 May 2016

In search of Arrow-Debreu worlds

I remain a bit puzzled as to why I have been utterly unable to convince any insurer to provide me a quote for earthquake insurance for Wellington.

I've mooted the product before; I've stripped it down here to what I think is its simplest form.
In short, I want insurance against a large Wellington earthquake. If the risk is on the order of 1/10 for a large one sometime over the next century, that’s about 1/1000 annual risk. I’d like to purchase a contract that provides a large lump-sum payment if a sufficiently large earthquake hits Wellington. I’m sure there’s a way of specifying a set of legal conditions that would effectively say “If something at least as substantial as the 2011 Christchurch event happens in Wellington, this contract pays out.”

As first cut, I’d suggest basing it on the Modified Mercalli reading for downtown Wellington, with a trigger at MM 9 or higher. The 1855 earthquake was MM10, but nothing else higher than 9 has been recorded in Wellington since colonisation. The Christchurch February quake was MM 9. We would need to check that MM ratings applicable to downtown Wellington are reported for larger events farther from downtown.

I’ll explain why I want this contract, and in doing so potentially explain the size of the potential market.

I was in Christchurch for the 2011 event. That event resulted in substantial uninsurable losses not just from the event, but from the post-earthquake experience. Businesses who had continuation insurance found themselves out of luck when Council barred their entry to their premises: acts of Council are not covered. Homeowners who thought they were insured to a rebuild-as-new standard found themselves instead with revised standards for reinstatement methods that left them substantially worse than prior to the event.* And the process, involving large-scale coordination failures between EQC and private insurers, let things drag out for years. I never want to go through that again, and I suspect that many who experienced Canterbury would appreciate a different kind of contract.

A large lump-sum pay-out that comes if the insured event happens requires no lengthy claims adjudication process: the MM9 quake either happened or it did not. No assessors need argue about whether anything on the house were pre-existing damage. There’s no interface between EQC and anyone else arguing about whether something is over or under-cap.

Instead, I hike out of town with my family as best I can, start my life over somewhere else in the world with the resources to do so comfortably, and have a real estate agent pack out our house and sell it as-is, with all earthquake claims transferring to the new owner to deal with.

There has been sufficient press around the problems in Canterbury post-quake insurance that many owners in the Wellington area would be aware of the problem. Simply announcing the existence of the new insurance product would undoubtedly lead to press coverage that would help to attract new customers.

Moreover, I expect that this is something you could and should take worldwide. California and the rest of the Pacific Northwest, Japan, and other places offer a bundle of offsetting uncorrelated risks that could build a pool for purchasing reinsurance against claims. If you look at the Pacific Northwest, many homes are uninsured because earthquake insurance for natural disaster is too costly, but it’s too costly at least in part because insurers face costly assessment and dispute processes after an insured event, where homeowners will be tempted to pass off pre-existing damage as being due to the event. Insurers then face very uncertain overall liability. With my proposed product, the pay-out is known with certainty: if the event does not happen, claims are zero; if it does happen, the pay-out is the total sum. It is then more like life insurance than like any standard homeowner insurance.

Please let me know if this is a product you think could be developed, or if there’s something obvious I’m missing explaining why this cannot easily be offered.
The only explanation that makes any sense to me thus far is that contracting costs are non-trivial and fixed, that the potential number of customers for such a product is smaller than I would anticipate, and so it is worth nobody's while to develop the contract and set up the reinsurance. The alternative is that insurers are leaving dollars on sidewalks because they're too conservative; in a world with insurance against your celebrity endorser's disgrace, that doesn't seem immediately plausible.

If the actuarially fair price for a $1m payout for a 1/1000 annual event is $1000, I'm happy to pay the standard insurance multiple over the actuarially fair rate for the contract.

* Since then, the High Court has - five years after the earthquake - issued a declaratory judgement that repair to an "as new when new" standard specified in insurance contracts actually means that the repair has to be to that standard, updated to meet current building code. EQC had been instead rebuilding to an alternative standard that MBIE came up with, in which notched bearers, jack and packed piles, and floors up to 5 cm out of level counted as good enough. And those with the patience to go through the whole rebuild process again can now presumably go back to EQC for a do-over. This Press editorial is also good.

Monday, 2 May 2016

Sweet sweet leave

While I was chasing the kids on Fijian beaches last week (and not blogging), the Dom Post ran my piece on tax hypothecation and sugar taxes.
It is very, very easy to break a beautiful tax system. Here is the recipe for doing it.

Start by finding some product that seems a little frivolous – a bit of a luxury – and preferably one that's mostly used by people that the typical voter does not really like anyway. Say, for example, the fancy beard oil used by hipsters to maintain their elegant facial appendages.

Then, find some cause that nobody could object to. Something really motherhood and feijoa pie. Tieke recovery. Who doesn't love the New Zealand saddleback and support its recovery? Nobody.

Add the two together and propose a tax on hipster beard oil to help fund Tieke recovery programmes. Who could object? Hipsters are at best a mild nuisance, and at worst a looming threat to national identity; beard oil seems the height of frivolous consumption; and Tieke are a perennial entry in Bird of the Year competitions.

The bundle is an economic abomination. If Tieke recovery is the best use of the next public dollar, it is best regardless of whether we tax hipsters' beard oil. And if a tax on hipsters' beard oil is the most efficient next tax to impose, then the government should tax it regardless of whether the money raised is used to cut other taxes, fund Tieke recovery, or fund something else entirely.

But none of that much matters. Treasury would scream, because economists know that these kinds of taxes are abominations. But Labour dismissed Treasury critiques as ideological burps, and National's Gerry Brownlee has been no less dismissive of sound Treasury analysis. Politics rules in the end.

Taxing beard oil may sound frivolous, but consider campaigns to tax soda, or sugar, to fund public health campaigns. If a soda tax makes sense, then it makes sense regardless of whether the public health campaigns are the best use of funds. And if the public health campaigns are that valuable, why is the government not already cutting other less beneficial programmes to fund it?

The answer of course is that public health campaigns worth running are already largely being tried, and that a soda tax makes little economic sense – as Jenesa Jeram shows in her report, The Health of the State, released recently by The New Zealand Initiative. Putting the tax and the health campaigns together hardly improves the economics of the tax-and-spend bundle, but does make the package more politically appealing.
One Prominent Local Auckland Hipster thought the op-ed was about him. Oh, Jackson, you so vain.... But when I was thinking about something that nobody could object to, something really motherhood and feijoa pie, I remembered his perennial pro-Tieke tweets. And from there, the beard thing just kinda followed.

Note too that the case for hypothecated taxes would not at all be improved if the hipster beard thing had any connection at all to Tieke. This is pretty standard public finance textbook stuff. If the tax makes sense, it makes sense on its own. If the recovery programme makes sense, it makes sense out of general revenues.

We have hypothecated taxes on petrol, but that's really a form of user-pays. Petrol tax and road user charges reflect users' use of the roads; the roads are funded by the tax. And with RUC, vehicles that do more damage to the roads pay more. It's not perfect, but it's a pretty decent user charge. Sugar taxes aren't really a user-pays scheme for hospitals.

On a related note, John Roughan had an excellent piece on the public health campaigners' response to our report on sugar taxes and the like.

Tuesday, 19 April 2016

What's the product? Locavore edition

I've wondered how much locavore, or GMO-free, or other strong expressed ethical-preference consumers' demand is real as compared to notional. Do people really want the product they're buying to satisfy all the constraints, or do they just want the warm glow that comes from thinking that it might and that they're good people for affiliating with that kind of product?

We can think about what the two different worlds would look like and reason from there. Suppose there really were very strong effective demand for locavore products. A restaurant, or boutique grocer, catering to locavores would do a lot to demonstrate to their customers that their products meet the constraints. They'd make verifiable claims about their supply chains. If a product couldn't be sourced locally, there'd be explanations about how that product weren't local and why - like that bananas just don't grow here. And if a store or restaurant were found to have cheated, customers just wouldn't trust it any more and it would go under.

In a world where people cared about the feeling more than about the practice, stores would make unverifiable claims about supply chains. It would be ambiguous which products really were sourced locally and which had to come from elsewhere because of cost or other factors. And deception wouldn't be punished so long as the image could be maintained - customers would look for rationales for whatever had happened, and just continue eating there.

Via Thomas Lumley, here's a rather extensive story on scam-versions of buy-local in America. Most claims turn out to be wrong. Shops and restaurants that want to provide locavore alternatives find that customers are simply not willing to pay prices that are multiples of the prices that would otherwise obtain, so they fudge things. And when they're caught, and there's media coverage:
INSIDE EDITION CORRESPONDENT Lisa Guerrero wore a fitted black blazer and stilettos when she busted with her camera crew into Get Hooked, a casual seafood restaurant in Hudson that on occasion hosts micro-championship little people wrestling.

Taking co-owner John Hill by surprise, she confronted him about his “Delicious Lobster Sensation,” part of a Feb. 8 segment about the frequent fraudulence of lobster dishes.

Although the restaurant has its own fishing boats, and Hill likes to say, “Our refrigerator is the Gulf of Mexico,” its lobster roll-like sandwich is made with a commercial product that contains cheaper fish such as whiting and pollock.

After the show aired, I followed up to see how the revelation had affected the restaurant.

“We’re selling more lobster rolls now than ever, and we’re serving the same product,” co-owner Michelle Bittaker said. “What the show forgot to tell you is that the sandwich is $9.95, with french fries and coleslaw. Nobody in America could serve a real Maine lobster roll for $9.95.”

They also offer a real Maine lobster roll on their specials board, she said, 6 ounces for what she calls a more realistic $24.95.
I don't like fraud, and there's a lot of fraud in the story. But I wonder how many of the customers would really prefer knowing. Here, at least, I'd expect the Consumer Guarantees Act could have something to say. There, if customers really wanted to know, they'd make sure to buy from restaurants and shops certified externally as meeting some verified supply chain regime.

I also take it as cautionary tale about NZ agricultural imports into the US.

New Zealand has a great product story to tell: Canterbury lambs have happy lives, and even Peter Singer said it's ok to eat them so long as they're net happier existing than not and so long as their being eaten is what allows them to exist. But as for any real willingness to pay real substantial price premiums for things that are guaranteed GMO-free, or organic, or whatever else... if the restaurant next door has something with a similar label that costs half as much, well, good luck.
Rebecca Krassnoski of Nature Delivered has sold her naturally raised pork to restaurants like The Refinery and Pearl in the Grove. Here’s a little bit of her math:

Her cost to raise a pig to slaughter weight is $240 to $300, plus $50 to slaughter it and $50 to transport it. So, let’s say her total cost is $400. That whole pig, minus entrails and hair, will weigh 192 pounds. If she sells it at $3 per pound, that’s a sale price of $576.

“I make $200 if everything goes well,” she said. “That’s on a perfect day. On average, I’m lucky if I make $100 on a pig and maybe I raise 100 pigs in a year.”

Ten thousand dollars a year is not a living, she said, but “nobody wants to pay $6 per pound for pork.” Most restaurants can’t, or won’t, pay her what she needs to live.

“I can’t think of a time when my chops have been served at a restaurant on a daily basis,” she said. “I think a lot of times farmers with a good story are used as a billboard.”
Americans balk at paying $6 per pound for local natural pork. In NZ terms, that's about $20/kg plus GST.

There'll always be small niches where there are customers willing to pay a premium and who care about the authenticity of claims made. My sister's market in Winnipeg serves some of them, and she has rightly earned their trust. And I think it's great when NZ growers find ways of tapping into those kinds of North American markets.

But setting NZ policy in the expectation that there are $20 notes sitting on American sidewalks waiting to be scooped up if New Zealand could better capitalise on clean green stuff... I'm a sceptic.

Monday, 18 April 2016

Painting features as bugs

I hadn't quite understood New Zealand's carbon emissions trading scheme before I moved to Wellington. The thing seemed a little dodgy with a fair bit of reliance on dubious foreign credits. But then the genius of the thing was explained to me. I've not looked at it properly myself, but the story is interesting, and seems plausible.

It goes something like this.

New Zealand's first preference is for everyone in the world to be on-board for serious GHG reduction. But we can't get to the first best directly. Plenty of countries have dodgy emissions trading regimes with credits of dubious origin. And the worst case for New Zealand isn't doing nothing. Doing nothing is bad, but even worse would be New Zealand taking GHG reduction seriously while other countries don't.

Why is that bad? New Zealand is, relatively speaking, one of the less GHG-intensive producers of milk. Our pastoral systems might not be nice for water, but they're not as bad on methane emissions as barn systems elsewhere. And NZ pushing too hard too fast on GHG abatement, when other places aren't, isn't just bad for the NZ economy. It also risks pushing production away from relatively clean NZ to places where production results in more emissions. Bad for the economy, likely bad for the environment too.

So what's the solution? NZ joins an emissions trading scheme and is happy to accept whatever dubious credits other countries are willing to countenance. Why is that good when dubious credits are, by definition, dubious? It means that New Zealand gets serious about GHG reduction whenever other countries do too. As soon as the international trading systems stop accepting dodgy credits, New Zealand stops using them too. And that means NZ is on board for more substantial climate change action at the same time that everyone else is.

At least that's the potted history I've heard around the Wellington traps. If that's what's going on, it's genius. The dodgy credits are far from hidden and far from a bug. They're a feature that lets New Zealand set up an ETS apparatus that automatically scales to being serious when it's the right time to be serious, and avoids imposing serious costs until the international community is ready to take things seriously.

The Morgan Foundation's report goes through some of this, noting that New Zealand disproportionately makes use of dodgy credits. But it draws a different conclusion than I would. Rather than follow some countries in unilaterally cancelling carry-over credits into the next round, New Zealand should be arguing that all of the trading schemes use a stricter standard on credits. Then everybody tightens up, us included.

Wednesday, 13 April 2016

Sweet talk

Last night, I chatted with Bryan Crump on Radio New Zealand Nights about sugar taxes. When I pitched the topic a couple of weeks ago, I hadn't pegged that it would have been quite so topical in New Zealand. I was rather happy to be talking about sugar taxes the same night that the government here shot them down. I had worried that they might follow Britain's lead.
Next week, Jenesa Jeram launches her report on lifestyle regulations. Her report covers smoking and vaping, drinking, and sweet sweet sugar. The panel discussion includes IEA Fellow Jaime Whyte, Maori Party co-leader Marama Fox, and Treasury's Chief Economist Girol Karacaoglu. There may still be a couple of seats available; do come and join us if you're interested.
I usually put together a few notes for myself before my chats with Bryan. I've copied these below. They provide some of the references to studies I mentioned in the chat, and bits that we didn't get to talk about as well.
Sweet thinking: Notes for discussion with Bryan Crump, 12 April 2016
Tax and Choice
What’s the evidence on the effects of sugar taxes on consumption in the first place?
It depends on what you mean by ‘effect’. If what you want is a reduction in consumption of the taxed thing, taxes can do that. But if you want a reduction in obesity or improvement in other health outcomes, that’s harder to find.
Why? People respond to taxes in ways you might not want. If you tax sugar-sweetened beverages, but not other sugary things, then you can get a drop in SSB consumption but a rise in consumption of other sweet things, or other tasty and fattening things. You can then succeed in reducing SSB consumption but not in affecting obesity. Is it then a success or not?
Evidence? Work by Fletcher and co-authors found that soda taxes led to a moderate reduction in soft drink consumption by children and adolescents, but that this was entirely offset by increases in consumption of other high-calorie drinks.
This then leads to big problems when people start talking about the potential effects of soda taxes. It’s easy to find studies showing some effect of soda taxes on soda consumption. And that then leads folks to figure that the tax would reduce total caloric intake by that amount, but that’s just wrong: people eat other things instead. Could be other sugary, but not fizzy drinks; could be other sugary non-drink things; could be other stuff entirely. The effect of the tax on health will then depend on how much people respond to the tax, and what they shift to. Good studies will look not just at the effect of taxes on consumption of the taxed thing, but rather on obesity outcomes. And there just isn’t much there there.
But, it gets even worse.
There aren’t that many surveys out there that measure how much soda people drink. But what we do have is the Household Economic Survey. Respondents there say how much their household spent on different categories of expenditure. If you know how much a household spent on soda, and divided that by the going price for soda, you might think you have a measure of how much they consumed. And some studies use that to measure the effect of price changes on consumption. But one thing that people can do when prices change is decide to buy a discount brand instead of a named brand. The supermarket’s own brand of soda costs a lot less than Coke or Pepsi. If people shift to a lower cost product when prices go up, then you can’t really infer consumption from expenditure any more. If, after a price change, you see expenditure went down, you can’t tell if that’s because people are buying less in total, or because they’re consuming just as much as before (or possibly even more) of a discount brand instead.
If we want a specific NZ example, a HRC-funded study in the NZMJ estimated that a 20% tax on soda would avert or postpone 67 deaths per year. But that was all based on an assumed reduction in the quantity of soda consumption that comes with a 20% price change, out of that HES data. We can't really say what's happened to total consumption of something in response to a price change if the only thing we know is how much they spent on it – if they can shift to lower quality and cheaper options.
All of this means that people strongly overestimate the effectiveness of soda taxes, and do not think hard enough about what effectiveness means.
Mexico's sugar tax has been more comprehensive, with a peso-per-litre tax on sugar-sweetened beverages (not including alcoholic ones) and a relatively small tax on other sugary solids. There are a few holes in how they estimated things, but let's just take the results at face value because the technical stuff depends on whether you believe Duan smearing is appropriate in heteroskedastic data [seriously – just too technical to get into].
First, a peso per litre sounds like not very much, but if we compare it to the daily salary earned by the poorest workers in their study, it works out to 1.7% of the daily wage. The equivalent in New Zealand, as compared to a day's work at the minimum wage, would be $2 per litre. A $2 per litre tax here would likely have pretty large effects on consumption, especially among poorer people.
What did the study find? People in poor households reduced their consumption by a little over a litre of soda per month: 600 mL every 17 days. There wasn't really much effect among richer households.
And they have no way of knowing whether poor households shifted to buying sugar (which while still taxed, is more lightly taxed than sugar in a litre of soda) and making lemonade at home.
Under that kind of tax, the first thing I'd do if I were a manufacturer would be to start selling soda concentrate for people to mix at home. Why? Because 1 litre of concentrate that could make, say, 10 litres of soda attracts the same tax as 1 litre of diluted product.
What happens then when we look at the studies that do properly look at the effect of prices on obesity?
paper in Health Economics looked at soda taxes across U.S. states. Now there aren’t really “soda taxes” per se but soda is often, but not always, exempted from generalised food exemptions from state-level sales taxes. Because of that, soda can have tax rates, relative to other food products, that range from 0 to 12%. They found no relationship between soda taxes and soda calorie intake but a small increase in caloric intake from other beverages.
BioMed Central in 2013 published a metastudy (compilation of the effects reported in lots of different studies) looking at the effects of SSB taxes. Most studies found no effect distinguishable for statistical noise. But the biggest one there reported that did find an effect argued that a 20% tax on soda would result in a 0.065 reduction in average BMI. Now the healthy BMI range goes from 18.5 to 24.99. A 0.065 change, in a range where "healthy" covers a range of 6.5 units, really isn't much. If we take someone of my height, it would be the equivalent of about 180 grams. That's maybe the difference you get if you weigh me after a meal instead of before a meal: not enough to make any kind of difference.
But even that is very likely an overestimate. Why? They looked at how a panel of households changed what they bought at the supermarket when the prices of things changed. If Coke were on special, people would buy more Coke. And so on. And that would make sense if people bought things for immediate consumption. But you can store the stuff after buying it on special, and that will look like people are highly responsive to prices – but it's not their consumption behaviour. It's purchasing when cheap for consumption over time.
So, why does the data show so little effect?
First, taxes are pretty low. Everybody says "Oh, well, taxes worked to reduce smoking, didn't they?" And they did – although the most recent tax hikes haven't done much in New Zealand. But remember that a $20 package of cigarettes has about $8 in cigarette costs and $12 in tax: the tax is 150% of the cost of the cigarettes. Is anybody talking about soda or sugar taxes anywhere near 150%? No. There's "Well, we have to start somewhere" talk, citing the tobacco precedent, but if the ultimate goal is to get to a soda tax that's up around the $1.50-$2.00 per litre mark, then I wish they'd be honest about it.
Second, soda's just different from tobacco. If you're a smoker and you're addicted to nicotine, and the price goes up, there aren't really other things you can easily switch to if you want to keep getting nicotine. You can switch down to cheaper cigarettes, and if you can navigate the crazy regime New Zealand has for importing nicotine cartridges for vaping, then you can do that. But otherwise, there aren't things people can easily shift to, so reductions in consumption mean real consumption drops. But if there's a tax on soda, there are plenty of other sweet things that people can switch to.
So, what happens if we just tax all the unhealthy things and subsidise all the healthy things?
There was a great field experiment run by Cawley, Hanks et al. Participants got a purchase card they could use at one grocery store, where all their purchases would be tracked. To encourage everyone participating to do all their shopping at that store, they gave everybody a 5% discount on any food that had any kind of health-star rating (healthy or unhealthy). During the experimental treatment period, some people then got a 15% rebate on everything combined with a 10% tax on unhealthy food, or a 5% rebate on everything combined with a further 10% subsidy for healthy foods. They amount to the same thing but the researchers wanted to see if framing mattered.
They found no significant effect on actual purchases overall, but an interesting puzzle among poorer households. Those poorer households wound up spending much more on both nutritious and less nutritious foods (spending on both went up by about $7 per week): the subsidy meant they could afford more of both, and so there wasn't any shift towards healthier eating.
This suggests that, among poorer households, the main effects of these kinds of taxes or subsidies runs through their ability to afford things in general: subsidising healthy foods may let people afford more unhealthy stuff, and taxing unhealthy foods may reduce consumption of healthy foods as people tighten their belts.
A bigger puzzle
Obesity is increasing in New Zealand and has been for a while. But if we look at the data from the 2008/2009 New Zealand Adult Nutrition Survey, the most recent one, and compare it with the 1997 survey, total caloric intake is down, and sugar consumption was either down or unchanged, depending on which kind of sugar you looked at and whether it was for men or women. See Table 9.3 at the linked report. But mean BMI increased by about 1.5 points over the period, and the proportion of overweight and obese people increased from about 50% to about 60%. If sugar is the villain, why did obesity rates jump while sugar consumption stayed stable or declined a bit?
But what is the justification?
If the problem is costs to the health care system, then we need to be careful: there's some decent international evidence that, over the long term, healthy people are the most costly: they live longer and collect more in social security.
But even without that, is the government really justified in forcing you to be part of a public health system, and then taxing and regulating you to make sure that you impose the smallest cost possible on that system? Why do we only ever seem to target health behaviours that are disproportionately engaged in by poor people? Smoking, soda, and the kinds of cheaper alcohol that are targeted by public health campaigners – those are predominantly consumed by poorer people. But consider rich people activities that have rather high per-activity costs: horseback riding, mountaineering, scuba diving, sailing, mountain biking and adventure kayaking. ACC costs of this kind of thing add up to less because fewer people do them. But 2007 stats had almost 3% of horseback riders making an ACC claim.
Further, if it's obesity and obesity's costs that are really the thing people want to worry about, and if people respond differently to different diets, then does it make more sense to tax sugar or to tax obesity directly? It sounds terrible, but the Washington Post's Catherine Rempell made the case last month. She wasn't making the case seriously: she was pointing out an underlying problem in the arguments around fat and soda taxes. If taxing obesity directly is unfair because obese people cannot control their weight, then taxing sugar can't get rid of obesity.
But all of this comes back to what works, and what you think works means. Suppose you think other people consume differently than you do because they just don't know any better. If you explain things slowly, and they don't change their behaviour, should you conclude that your information campaign failed and that you then need taxes or other harsher measures? Or that the people you were talking to never really expected that soda was a health food in the first place and didn't really want to change their behaviour?
Crossposted from The Sandpit

Friday, 8 April 2016

Water water everywhere

And oh the trolls did shriek.

Over at the Christchurch Press, I went through the current controversies about an Ashburton water bottling plant. New Zealand allocates water drawing rights through a consenting system. Government allocates drawing rights for water, but those rights aren't really tradeable other than by selling the land that goes with the consent.

All over the Canterbury plains, farmers have drawing rights for water for irrigation. New ones don't draw that much ire, but there are growing worries about nitrates leaching into groundwater and about streams drying up in Christchurch. If another typical-sized dairy operation opened up, though, there wouldn't be much hoo-hah.

But open up a water bottling plant to ship water directly to China instead of running it first through a cow to turn into milk to dry and turn into powder and waste water, well, folks get upset.

Me:
The plants draw water from the aquifer, put it in bottles, and sell it in Asia. Because New Zealand awards consents to draw water but nobody puts a price on water, critics see this as profiteering on an unpriced resource.

​At the same time, over a thousand Canterbury dairy farms put water into cows. Dr Daniel Collins estimated that it takes about 250 litres of river and aquifer water, through irrigation, to produce a litre of Canterbury milk. That will not be a net measure, as some of the irrigation does flow back into the aquifer.

But it will take many more litres of water to produce a litre of milk than it takes to produce a litre of bottled water. The milk is collected, the water extracted, and the powder is sold in China.

And so we come to what might be the Canterbury Trabant plant. Does anyone really know whether water from Canterbury's aquifers is more valuable when put directly into bottles and sold to Asia, or when it routes through a cow along the way?

How low does the price of milk have to be before it would make more sense to leave out the middle-cow?

It is a tough question to answer, and especially where water allocation is set by consent rather than through markets. East Germany allocated iron by something not that different from consents, rationing scarce resources across various industrial uses, and wound up making cars that were worth less than the inputs that went into them.

New Zealand allocates scarce water by consents, and hopefully does a better job of it. Trabants were ghastly; New Zealand milk is delicious.
I argued for a water trading scheme. Fritz Raffensperger designed one when he was at Canterbury, when Canterbury had an operations research team.

Main point of the article: why are y'all getting so upset about water being put in bottles and shipped to China when it takes (ballpark) 250 times as much water to make a litre of milk, which is then dried out and shipped to China? They're both selling water.

Main critique of the comments section: Selling water is wrong.

I'm constantly amazed that policy isn't worse than it is.

Tuesday, 5 April 2016

Against hypothecation

One of the big reasons I don't like hypothecated taxes - taxes that are tied to particular projects - is that they lead to nonsense like this:
Hey, everybody can play this game.

Would you support a tax on frappucinos if it supported orphans with cancer?

How about a tax on hipster beard oil if it supported recovery programmes for the New Zealand saddleback?

How about a daft tax on capital ownership at a high deemed assumed rate of return to support a basic income sufficiently low that there'd be massive political pressure to layer a welfare system on top of it?

Basic formula: find a product some groups would see as a bit of a frivolous luxury or as 'unnecessary' (and especially if those consuming the product can earn disapprobation from its consumption), bundle it with spending on some nice sounding thing that nobody could oppose, and tah-dah! You've ruined tax policy.

Here's a basic lesson in public finance. Set your bundle of taxes so that it raises money at lowest possible economic cost. Some taxes are actually efficiency increasing: true Pigovean taxes. Use those first. Once those are set at the right level, work your way up through other taxes until the marginal social cost of raising an additional dollar in taxes, including the deadweight costs of raising the money, matches the marginal social benefit of the next unit of public expenditure. Then stop.

If some tax you think is a good idea really is a good idea, work it into the tax base first. If the marginal social cost of raising tax revenue is then lower, you can either reduce total taxes by cutting back on the least efficient ones, or add in a bit more public expenditure on the next thing down the cost-benefit list, or a bit of both.

Think of it this way: if the tax made sense, why would it make sense only when bundled with some politically attractive spending programme?

There are a few exceptions. Road user charging through petrol charging is far more a fee for service than it is a hypothecated bundle. And some proposals levy taxes to directly tax the winners from a programme to compensate the losers: like my proposal for Canadian dairy.

But if somebody's selling you a tax-and-programme bundle, they're usually pulling a fast one. Look first, and carefully, to see if there's really good reason that the two things should be bundled together. If not, well, draw your conclusions.