Sunday, 18 February 2018

Pharmacy smokes

Pharmacies in New Zealand aren't the most competitive. We have a bizarre rule requiring that majority ownership of any pharmacy must be held by a pharmacist. It's just dumb. We don't require that restaurants be owned by trained chefs; we don't require that bookstores be owned by licensed authors; we don't require that vegetable shops be owned by registered farmers with a Bachelors in Agricultural Sciences. 

But only a pharmacist can own a pharmacy because somehow training as a chemist is exactly what you need to be able to run a retail operation.

All that's to say that there can be rents available in pharmacy because of stupid entry restrictions.

So Otago went and surveyed 30 Wellington pharmacies asking them if they'd like a monopoly on cigarette sales. Otago University wants to ban cigarettes everywhere, and the path to doing that can involve making it a hassle to get cigarettes. So making them available only in pharmacies can be part of that.

Pharmacies have some local monopoly power given the entry barriers caused by the ownership restrictions. Their markups on cigarettes could consequently be a fair bit higher than that seen at the local dairy.

And despite that, pharmacist support for selling smokes wasn't all that high.
Pharmacies may consider selling tobacco to help achieve New Zealand's "bold measures" of being smokefree by 2025, a research survey finds.

The small-scale University of Otago survey asked 30 Wellington pharmacies in 2015 if they would consider filling the void of tobacco sales if they were phased out in supermarkets, convenience stores, petrol stations and tobacconists.

It was a very likely option for 20 per cent of participants, but the majority of pharmacists said they were somewhat likely (43 per cent) to sell tobacco if the strategy was proven to be effective elsewhere.

However, pharmacists were concerned the sales could decrease safety through tobacco-related crimes like robberies and staff abuse, increase foot-traffic and work-load, and potentially damage the "health professionals" image of New Zealand pharmacies.
I don't get how a survey of 30 pharmacies asking them whether they'd like to be the sole suppliers of cigarettes gets to be a peer-reviewed journal article.

But it is kinda interesting that places that hold all kinds of high-demand products - all the prescription narcotics - and already have security measures in place for those restricted drugs, are scared to stock tobacco because it would make them a target for robberies.

Saturday, 17 February 2018

Cannabis cross-price elasticities

It's been a bit of an open question whether legalised marijuana would lead to more or less alcohol use.  If the two goods are complements, say if people liked drinking while consuming cannabis, then any increase in cannabis use could yield greater alcohol use. If they were substitutes and people smoked instead of drinking, alcohol use could drop.

RAND surveys some of the more recent evidence. 
Different studies also examine different time periods, and the laws have been changing over time. Early state laws (such as the medical cannabis legislation California passed in 1996) tend to allow broader qualifying patient conditions, legal home cultivation and less oversight of dispensaries. Differences in policies may lead to different effects on cannabis use, and possibly alcohol use. And the laws' impact may evolve over time as the market expands or as federal enforcement shifts.

A recent working paper out of the University of Connecticut and Georgia State University has received a fair bit of attention as the latest in this series of attempts to shed light on the issue of whether alcohol and cannabis are substitutes or complements based on evidence from medical cannabis laws. The authors examined changes in alcohol sales at grocery and convenience stores and other outlets. They found that cannabis and alcohol are strong substitutes, with medical cannabis implementation being associated with a 15 percent reduction in monthly alcohol sales.

That is a surprisingly large effect, equivalent to what we would predict if the price of alcohol increased on the order of 30 percent. The effect seems especially large considering that during the study period of 2006 to 2015, the newer state medical cannabis programs that drive the main result were more restrictive and had low participation rates, typically involving less than 1 percent of the population (PDF). Of course, these medical laws could have effects that reach beyond the registered patient population if they made it easier and cheaper for non-patients to access cannabis, or if the laws caused the public to change its attitudes about cannabis and alcohol use more broadly. Much more needs to be learned about what's driving the results in this working paper.
They warn that these results on medical marijuana might not apply to recreational cannabis laws, as alcohol tax revenues in Colorado and Washington have remained fairly stable since marijuana shops there opened.

Friday, 16 February 2018

Housing stocktake

I'm both late and early to this particular party.

Phil Twyford this week announced the results of his commissioned stocktake on the housing crisis. The housing shortage is real and the consequences are substantial. Infrastructure funding constraints block housing supply increases. Given the shortage of housing, the accommodation supplement is likely to be soaked up mostly in higher rents.*

I did like Henry Cooke's noting of something missing
He insisted in the morning the effort was not political and to a certain extent, Twyford would have wanted some solid figures on this made public. But this was unabashedly political.

The report's authors - all well-respected professionals - clearly come at the issue from the left. People who agree that there is a housing crisis but focus on issues of planning rather than rental regulation like Eric Crampton were absent.
I would fill in a couple of missing blanks, though I really like the report overall. I'm late to the party as the report was out earlier this week, but I'm also early since I've been watching this file for a while.

Tenants' Rights

If housing supply remains completely messed up, then there can be a case for strengthening tenants' rights. Just as with the accommodation supplement, the inelastic side of the market bears the burden. Regulating better quality for tenants will mostly be an imposition on landlords, rather than tenants, in an inelastic market - though there can always be undesirable side effects.

But if housing supply is fixed, then the incidence shifts. You then can easily wind up in spots where people would have been happier paying lower rent for a less well maintained property, or having fewer flatmates in a less well maintained property, but aren't able to. If supply is working properly and is relatively elastic, more of the cost is passed through to tenants by exactly the same logic that has landlords currently reaping the benefits of the accommodation supplement.

There's also a fun intersection with the government's proposed change to the bright-line rules on investment properties. Background: New Zealand doesn't have a capital gains tax, but if your income comes from putting time and effort into shuffling capital around, you're going to be taxed on that gain as income. And that's not nuts. National had used a two-year bright-line rule which said that if you flipped investment properties purchased less than two years ago, you were probably buying and selling properties as income so the gain was taxable. Labour's extending that to five years.

But think on the timing. Suppose you bought a house three years ago and rented it out. New rental standards will force you to take on more debt than you're comfortable with, or are able to take on. So you decide to sell your investment property because of the change in investment conditions, not because you're trying to bank capital gains or because you were trying to profit by flipping properties as income. Under the new bright-line rule, more of those sellers will be caught for tax on any increase in their property's value. I wonder how many of the more highly geared ones will find this difficult.

Accommodation supplements and state housing

The report also recommends increasing the state housing stock, noting sharp increases in the waiting list. But this too should be seen in the context of the current crisis. When Council won't let people build, you'll automatically get more applications for state housing because of overcrowding and high rents in private markets.

National recognised that it made little sense for government to own housing stock when the needs of the people it is trying to help change a lot over time. If locational preferences change, it's hard to move state houses. If family configurations change, you can't easily shift around how many bedrooms are available in a state house. And if you sell a state house on a large lot in a desirable location, you can unlock funds that would let you help far more than the one family being helped by the state house.

And so National was trying to shift away from state housing, much of which was due for renewal anyway, and towards more flexible arrangements paying people cash and letting them use the accommodation supplement to get the kind of housing they needed where they needed it. You know how Trump is looking to screw up SNAP in the US by giving people a box of basic food items rather than the current cash transfer that lets them buy the food that makes sense for them? Giving people an accommodation supplement lets them find the accommodation that's right for them instead of a box of house that might not.

But that policy is not nearly as effective as it could be, and is far more expensive than it should be, when Councils don't let people build. The costs of housing assistance, as the report notes, were $1.977 billion in 2017. Recall that core government spending in New Zealand in the last fiscal year was about $80 billion. So 2.5% of core spending went towards accommodation supplements, with much of the benefit enjoyed by landlords rather than tenants in an inelastic market. And nobody in National could or would displace Nick Smith from the housing portfolio.

That failure hardly makes a case for a renewed state housing push though. Rather, it makes the case for immediate liberalisation of zoning rules in Auckland eliminating most of the viewshafts and allowing far more density in the places people want to live. You'll get affordable housing if you let people build the mid-tier density that's missing in Auckland: a lot more terraced housing in the inner suburbs. More people on less land per person through taller dwellings, fewer parking spaces, and smaller yards combine for more affordable rentals. Allowing expansion at the city's fringes prevents the price of inner-city land from being unduly bid up.

The report isn't really about policy - it's about the symptoms of the current mess. But the prescription for those symptoms has to depend on whether the underlying cause of the disease is going to get treated. And I have every expectation that Twyford is serious about getting at the underlying constraints on supply. Let's take a somewhat crass analogy. Suppose a person with cancer has two options: palliative care with a lot of opiates and a low life expectancy, or aggressive chemo that has been shown to be very effective for this type of cancer. If you're going to go with the chemo and fix the underlying problem, you're not going to need the palliative care.

Fixing the underlying supply issues and infrastructure financing would do a lot to fix the symptoms the report identifies. I worry that, if those aren't fixed, neither the private sector nor Kiwibuild can really get going (and if they are fixed, Kiwibuild is hardly needed). And we'll still be hitting capacity constraints in the construction sector.

I wish government could focus on just getting the underlying regulatory and funding issues sorted out rather than trying to be a huge property developer at the same time.


* Fun to see that Labour's report is making this correct point. The relatively inelastic side of the market bears the cost of a tax or enjoys the benefit of a subsidy. And so econometric results from 2005's housing market are of little use in determining the incidence of the accommodation supplement in 2017, like I'd noted last year.

Four day weeks?

The Dom Post asked me for comment last week on Perpetual Guardian's trial of four-day work weeks. They wanted to know whether I were pro or con. I couldn't really do that: how am I or anyone else outside of the company to know what works best for them? I'm totally 'pro' their being able to try this out, but how could anybody be for or against it as a general policy?

So I gave them this instead, celebrating that companies and workers still have the freedom to come to whatever arrangements work best. For some it could be four day weeks, but it would hardly work for all. 
New Zealand's relatively flexible labour markets allow this kind of innovation, but we should not take them for granted.

Australia's Awards system, for example, is far more prescriptive about the pay and conditions that must be in place in every workplace.

The rules might make sense if one size really did fit all firms in any given industry, but the market is more complicated than that.

If Perpetual Guardian's experiment works for them, firms facing similar circumstances will have to take notice. If it fails, they can revert to the more standard five-day week.

The costs or benefits either way fall with them, so they have every reason to have thought hard about this.

But when regulation sets the conditions across a whole industry, experimentation like Perpetual's becomes much too hard.

And if MBIE gets things wrong, firms and workers bear the costs.

Let's celebrate Kiwis' ability to innovate, while we still have it.

Risk premiums and the gender wage gap

A few days ago, this study of gender pay differences for Uber drivers came out. The key finding, that women earned 7% less than men, was stunning because Uber uses a gender-blind algorithm. The figure below was the most interesting one from the study as it summarized the differences in pay quite well.
The Uber study found a wage gap determined by men being more likely to drive quickly, to take jobs at riskier times, and to take jobs to riskier places. But without the kind of microdata that Uber has, and if you didn't know that fares and pay were set by a gender-blind algorithm, you might have been quick to conclude it was just discrimination.
However, there are hard to properly measure in order to assess the share of the wage gap truly explained by discrimination. Here with the case of Uber, we can get an idea of the amplitude of the differences. Male Uber drivers prefer riskier hours (more risks of having an inebriated and potentially aggressive client), riskier places (high traffic with more risks of accidents) and riskier behavior (driving faster to get more clients per hour).  The return to taking these risks is greater earnings. According to the study, 20% of the gap stems from this series of choices or roughly 1.4 percentage points.

I think that this is significantly large to warrant further consideration in the future in the debate. More often than not, the emphasis is on education, experience, marital status, and industry codes (NAICS code) to explain wage differences. The use of industry codes has never convinced me. There is wide variance within industries regarding work accidents and diseases. The NAICS codes industries by wide sectors and then by sub-sectors of activities (see for example the six-digits codes to agriculture, forestry, fishing and hunting here). This does not allow to take account of the risks associated with a job. There are a few study that try to account for this problem, but there are … well … few in numbers. And rarely are they considered in public discussions.

Here, the Uber case shows the necessity to bring back this subtopic in order to properly explain the wage gap.
It'll be interesting to watch where the current NZ government takes pay equity legislation.

Monday, 12 February 2018

Environmental economics

In the current edition of the NBR ($), I remind people that standard mainstream economics textbooks have plenty of ways of dealing with environmental effects. We hardly need to shift to some sustainability-based alternative.
Auckland has congested roads not because of any need to replace mainstream economics with a sustainability-based alternative. Auckland’s congestion problems have rather less to do with failings of economic theory and rather more to do with central government’s refusal to allow Auckland to use mainstream solutions.

The case for better water management also seems clear. When the US had problems with acid rain from excess sulphur dioxide emissions, it implemented a cap-and-trade regime to reduce emissions to sustainable levels. Inefficient plants shut down, others cleaned up and acid rain ended.
I conclude:
Shifting from standard economic models to sustainability-based alternatives risks losing the scale provided by mainstream methods for weighing alternatives, making it too easy to adopt policies that cost the country far more than the value provided.

The political right has framed sound policy addressing externalities as being too costly for economic growth. In doing so, it made it too easy to cast economic growth as the enemy of sustainability.

We need to re-emphasise the parts of the mainstream economic textbooks that are hardly new but are true.
There's too much of the David Suzuki critique flying around.

Thursday, 8 February 2018

Informative advertising

New Zealand's in a fun legal limbo right now on e-cigarettes. Everybody knows that the Ministry of Health is soon to be liberalising, so the de jure restrictions that prevent selling of nicotine-containing e-liquids aren't being enforced. It's pretty easy to get vaping liquid.

In some ways, whatever regulatory regime comes out of this will be more restrictive than the current de facto status quo.

But if legalisation makes it easier for providers to advertise, that could be for the good.

Dhaval Dave and coauthors find that FDA restrictions on e-cigarette advertising in the United States prevented people from quitting smoking. From their abstract:
Only recently introduced into the U.S. market, e-cigarettes have been aggressively promoted, and use is increasing rapidly among both adults and youths. At the heart of the regulatory debate are fundamental questions regarding whether e-cigarettes will draw cigarette smokers away from a dangerous habit or lure new initiates into tobacco use. We provide some of the first causal evidence on whether e-cigarette advertising on television and in magazines (which comprise about 90% of total media spending on e-cigarettes) encourage adult smokers to quit. We find that the answer to this question is a tentative yes for TV advertising but no for magazine advertising. Our results indicate that a policy to ban TV advertising of e-cigarettes would have reduced the number of smokers who quit in the recent past by approximately 3%, resulting in roughly 105,000 fewer quitters in that period. On the other hand, if the FDA were not considering regulations and mandates that would likely eliminate many e-cigarette producers during our sample period, e-cigarette ads might have reached the number of nicotine replacement therapy TV ads during that period. That would have increased the number of smokers who quit by around 10%, resulting in an additional 350,000 quitters.
To paraphrase Dr Strangelove, building a much less harmful alternative to combustible cigarettes doesn't do you nearly as much good if you can't tell anybody about its existence.