Alcohol submission

Matt Burgess sent off our joint submission to the Law Commission on Friday. It's available here. Highlights:

• The best available evidence shows heavy drinkers respond less to price increases than do moderate drinkers; the costs on moderate drinkers of excise tax increases are therefore much higher than the Law Commission previously believed given their assertion that heavy drinkers respond more to price increases than moderate drinkers.


• Public health measures of social costs bear no resemblance to economic measures of social costs and should be treated with skepticism.


• Economists' recommendation to focus on external costs does not depend on strong rationality assumptions.


• Alcohol and other intoxicants are substitutes; raising the price of one may induce substitution towards others. DiNardo and Lemieux find the US drinking age increase to 21 resulted in an increase in marijuana prevalence more than half the magnitude of the decrease in alcohol prevalence.


• Individuals seem to overestimate the risks of becoming alcoholics, and youths especially overestimate this risk. Worries about "imperfect information" causing too much consumption are overblown. See Lundborg and Lindgren 2002.


• Rashad and Kaestner 2004 provide some apposite warnings of drawing causal relationships from correlations between youth drinking and adverse youth outcomes; underlying variables may cause both.


• The Law Commission should weigh more heavily the costs their proposed policies may impose on moderate and sensible drinkers.

What crisis?

Lindsay Mitchell points to the newly released 2009 Social Report for New Zealand. On "potentially hazardous drinking", the Social Report notes that potentially hazardous drinking among 15-24 year olds in 1996/1997 was 40.8%; in 2006/2007, it's 41.1%.

Clearly this is such a horrible rising trend that we have to increase the drinking age to 20, where it was in 1996 before all our teens starting heading out on alcohol-fueled rampages. A recent survey showed three quarters of Kiwis believe lowering the drinking age has had a negative effect, which is clearly revealed in this shocking new data of 0.74% increase in the rate of harmful drinking.

Even worse, this massive and unprecedented increase in the rate of harmful drinking was concentrated among the most socially marginalized and disadvantaged group, European/Other, which saw an increase of 6.9%; by contrast, the Maori and Pacific Peoples groups saw decreases of 2% and 1%, respectively.

Geoff Palmer is right. It's time to increase the drinking age to 25 and brand drinkers with the sign of the A for Alcohol. Statistics don't lie, and these ones more than justify anything the Law Commission might wish to recommend.

Further on the price elasticity of demand for alcohol

The Law Commission's report claims that youth are particularly price sensitive and that heavy drinkers are no less price sensitive than moderate drinkers. As noted a couple of days ago, the latter claim is absolute nonsense. Price elasticity of demand among heavy drinkers about roughly half of that of the average. However, that average includes heavy drinkers, so it probably understates the true difference between moderate and heavy drinkers.

What though of the claims of heightened youth price elasticity? It's plausible: alcohol is also income elastic, and youth are poorer, so what you could find a higher elasticity working through that mechanism. LC cites a book by Babor which isn't available in the Canterbury library. I'll put it on interloan request, but in the meantime have gone searching for any numbers on the elasticity of youth consumption. Google Scholar has only thus far provided one estimate. Grossman, Chaloupka, et al, 1998, Economic Inquiry. They find that youth short term price elasticity of demand for alcohol is -0.41. Identical to the average found in the meta-study cited in the previous post.

Given how the LC utterly misread the literature on relative elasticities of heavy and moderate drinkers, I'm not inclined to give them the benefit of the doubt while waiting for the book on interloan. We will see what shows up in the interloans pile in a week or two.

And further on price elasticity

Seamus reminds us that we need to look at relative elasticities.

Brian Easton provides advice that the Law Commission deems "helpful". His advice is:

It is generally assumed that the demand for alcohol is largely price inelastic. However, it is believed that the main groups whose consumption is sensitive to changes in price are:

• the young;
• binge drinkers; and
• heavy drinkers.

Easton is right that alcohol consumption is relatively inelastic: around -0.44 for beer, which means that a 10% increase in price reduces consumption by 4.4%. But we tend to expect that the folks whose consumption produces greatest harms would also be the folks whose consumption is relatively least elastic. Price elasticity basically tells us how many substitute commodities there are out there for the consumer. If the individual views there as being no substitute for alcohol, his price elasticity will be very low; if he views a Coke as being a not too bad alternative, his price elasticity will be rather high. And, indeed, what numbers I've seen on it show that heavy drinkers are less price elastic than are moderate drinkers.

If we decide to be charitable, then Easton's just reminding us that even heavy drinkers are price sensitive. Which is true. But they're less price sensitive than moderate drinkers. Even if you accept the premise that there are some heavy drinkers who could be made happier by virtue of a tax increase that helps to keep them on the straight and narrow, moderate drinkers' consumption is more strongly affected. Suppose we have a 10% price increase. Moderate drinkers reduce their consumption by about 4.4%; heavy drinkers reduce their consumption by about 2.8%.

Now, how much does a heavy drinker benefit from a 2.8% reduction in consumption? How much is a moderate drinker harmed by a 4.4% reduction? And what are the relative proportions of both in the country? BERL said that 1/6 are "harmful" drinkers, which I still think is a gross overestimate of the true proportion. But let's take it for now. It then has to be the case that a single heavy drinker reducing his consumption by 2.8% is benefited by at least six times as much as a moderate drinker is harmed by a 4.4% reduction in his harmless drinking for the tax increase to potentially be efficiency-enhancing. If the true proportion is 1/10, change it to 10 times. Recall that for the wowsers, consumption of 2 pints per day is harmful; the midpoint of BERL's "high risk" category is 110 grams: 11 standard drinks, or about 5 pints. How big a price increase would be necessary to get the high tail consumers down to "moderate" levels? Well, they'd need to reduce their consumption by about 65%. If your price elasticity of demand is -0.28, then you need a 232% increase in price to reduce consumption by 65%. And of course for that level of a price increase, the moderate drinkers reduce their consumption pretty much to zero. All of these numbers are just back of the envelope, for now. But I don't think they're far out.

The LC cites a WHO study arguing that heavy drinkers are no less elastic than other drinkers. A quick check shows the WHO is looking at 2-3 studies while the above-linked one is a meta-study of more than a hundred, with results that are near identical to another meta-study of similar magnitude. The latter, forthcoming in the Journal of Economic Surveys, doesn't give a breakdown between heavy and light drinkers, but has near identical estimates of average elasticity. I give a heck of a lot more weight to a serious meta-study, and especially when two of them give near-identical results, then to a couple of pieces picked from the potential list. If there are more than a hundred studies, you can always find a few that give you numbers you like.

Looking more closely at the Law Commission's preferred WHO finding, ... wow. Terrible work.

While heavy drinkers are sometimes thought to be likely to be less affected by price, the Committee found that the evidence does not support this belief, with higher prices affecting the amounts consumed by frequent and heavy drinkers. This finding is supported by a large body of evidence which has shown an impact of prices on harms caused by alcohol, also indicating therefore that heavier drinking has been reduced (34). Natural experiments that have occurred recently in Europe as part of changes required as consequences of economic treaties have shown that as alcohol taxes and prices have been lowered, so sales and alcohol consumption have increased (37). In some jurisdictions in Europe, special taxes have been introduced for spirit-based sweet premixed drinks, in response to increases in young people’s drinking (38). These have led to reductions in sales and consumption of the specific drinks.

Nothing in the paragraph supports the WHO's argument. Nothing. Demand curves slope downwards, that's all they're saying. All groups are somewhat elastic in that demand drops when price increases. The question at hand is whether moderate drinkers reduce their consumption by more than do heavy drinkers, and they provide zero evidence supporting their opening claim. I cannot see how the Law Commission dismissed the findings of the meta-study based on this paragraph.

Shocking.