Welcome Hogan

I started blogging about four months ago now. So far it's been a solo act, and it's been a lot of fun. As my teaching semester rapidly approaches, it looks to be about time for me to take on a partner. And so, welcome Seamus Hogan. Seamus has the big office down the end of the hall here at the Canterbury Economics Department.

With apologies to Marginal Revolution, here is a simple guide for the potentially perplexed:

• References to cricket/rugby/separating hyperplanes. Seamus.


• References to Knight Rider/Rush/hyperdrives. Eric.


• A simple question answered with an obscure and complex analogy from Shakespeare. Seamus.


• A complex question answered with a quick simplistic regression from at-hand data. Eric.


• Finally, contrary to the distinction between Alex and Tyler, I have every hope that you'll know exactly what both of our posts mean and that we'll both make you mad as hell.

If it helps in reading our posts, imagine mine being spoken very quickly in a generic Ameri-Canadian accent, while Seamus's are spoken more slowly, in a precise Kiwi accent, but with an extra R in the word "fravorite", every time.

Welcome Seamus! We don't know if it'll be a long stint or a short one as yet; we'll see how things go.

Afternoon roundup: special narcissism edition

• Roger Kerr on the costs of alcohol


• Lance Wiggs also weighs in


• Kiwiblog on my murderous nature


• Walker's had a fair bit to say lately


• So has Drinkwater


• I'm apparently currently in the top twenty of Kiwi bloggers, and I think I'm the only academic in the list. Does that count for anything in PBRF?


• Scott Beaulier likes my explanation of the Tullock Theorem


• And finally, something utterly unrelated to me: piracy and parallel importing: the downfall of Kiwi-made pornography?

Ticking boxes

• Extroverted? Moderately.
• Disagreeable? Decidedly.
• Conscientious? Reasonably.
• Stable? Rather.
• Open? Moderately.

It seems I fit the profile.

A compelling recent paper by Alan Gerber and co-authors shows that personality and ideology are closely linked. Liberals are markedly higher in Openness and lower in Conscientiousness. Gerber et al's real contribution, though, comes when they distinguish social ideology from economic ideology. (It's almost as if they were inspired by the World's Shortest Political Quiz!)

For social liberalism, they once again find that it is associated with higher Openness and lower Conscientiousness. For economic liberalism (in the American sense of lower support for free-market policies), though, they get a much more thorough profile. Economic liberals are less Extroverted, more Agreeable, less Conscientious, less Stable (i.e. more Neurotic), and more Open. Or if you flip the perspective, free-marketeers are more Extroverted, less Agreeable, more Conscientious, more Stable, and less Open.

Errata

When Matt and I drafted our report on the BERL study, we sent it on to BERL for comment. Reverse engineering anything like this can't be done perfectly, and we didn't have access to their underlying workings, so we were looking for any bits where we misunderstood what BERL was doing. The only reply we received was that they didn't have time to look at it. So, we released it. Wednesday night, I had the chance to chat with Adrian Slack, the study's main author. He pointed out lots of areas of disagreement. On some of these, like that someone going to a company-sponsored Christmas party imposes an externality on his employer if he shows up at work hung over the next day, we're not going to agree. But, on two points, I think he was right. And so I sent him an email Sunday (or, rather, Matt did as I haven't his email address) telling him so and showing the effect on the final figures. Here are the two corrections.

First, we misinterpreted Rayner on excess unemployment. But, correcting it adds almost nothing to our overall costs. Rayner argues that about 5.15% (he uses measures for prevalence rates of 4.3% and 6%) of the working age population suffers reduced employment rates due to alcohol use. The 2004 working age population was 3,094,400. The employment rate in 2004 was 63%. So, the employment rate among 159,362 individuals was ten percentage points lower, for a workforce reduction of 15,936 individuals. BERL argued for reduced employment of 31,100 workers; we apply Rayner and get about 16,000 (our first estimate was 9,200). BERL gave a cost measure of $877.5 million. Of that, $469.25 was forgone earnings and the rest was multiplier. So, to adjust BERL's figure, we just apply the fraction [15,936/31100] to their measure of forgone earnings, [update: and make a minor adjustment for cohort heterogeneity] then inflate by our preferred 1.1 multiplier rather than their preferred 1.87 multiplier. Our costs on this measure then are $192 million in private costs and $19 million in external costs (where we'd previously said $11.1 million in external costs). So, we increase our policy-relevant costs measure by about $8 million.

There's one other bit worth noting in Rayner, that BERL chose to ignore: Rayner says that applying the full wage costs is the upper bound, not the lower bound. Here's Rayner:

At one extreme, the economy is assumed to be at full employment, in the sense of output being subjected to a labour constraint. In this case, the loss of a person from the workforce means that the total output is reduced by the value of his/her marginal productivity, which will equal his/her gross wage if employers are profit maximizers.

The opposite extreme sees unemployment in the economy caused by demand constraint. The loss of a worker now has little output implications, since he/she can be replaced by another from those unemployed, at the cost of only a small initial retraining.

Rayner goes on to remind the reader that his use of the first assumption is an upper-bound estimate. So adding a 1.87 multiplier would be inappropriate, and so too is our 1.1 multiplier.

Second, we misread BERL on insurance overheads. It makes sense to see those as sitting alongside paid out claims on the right hand side of an equation where total paid premia are on the left hand side. But working to correct this gives us a number at substantial variance to BERL's. BERL lists insurance administration costs of $132.2 million. At page 123, BERL argues that alcohol-attributed car crashes cost $45 million in 2005/6; since car crashes make up a majority of all insurance claims, they then attribute half of all overhead costs to alcohol. Let's look to their claimed source, the Insurance Council of New Zealand. In 2006, total claims incurred were $1,609,672,399; business costs (overhead) were $762,889,565. Total "motor commercial and private" claims were $739,416,181. BERL says alcohol-attributed car crashes cost $45 million. This is 2.8% of all paid claims. 2.8% of total overhead costs is $21.3 million. If we add in property damage, we get a proportionate share of insurance administration of $28.3 million. I'm not sure how BERL arrived at its estimate of $132.2 million. We adjust upwards our cost measure from $0 to $28.3 million. I'll apportion all of this as being external assuming that insurance cannot adequately price for risk type on this margin; this is an upper bound assumption. If drunks have to pay more for car insurance, attenuate downwards our measure accordingly (or rather split some off into private costs).

So, total upwards adjustment: $36 million.

There's one other adjustment we need to make as well though. This one has been bothering me for some time, but I've only been able to check the figure today. I could earlier only find figures on excise taxes of $516 million. But I've seen them cited elsewhere as being much higher. I knew there was a portion collected by Customs as excise-equivalent duties, but I couldn't find the figure. Sam Direen points me to it (thanks!). I left out excise taxes collected of $197 million. We increase private costs of tax and external benefits of tax accordingly.

Net errata then: external costs increase $36 million, external benefits increase by $197 million. We previously found net external costs of $146.3 million. The careful reader will note that we now have a positive figure: net external benefits totaling $37.8 million. We apologize for any inconvenience our overestimate of the net external costs of alcohol may have caused any of our loyal readers. I wouldn't go out on a limb and claim that there are strong net external benefits from alcohol; rather, I'd say that both figures were effectively zero given the margins of error in this kind of work.

Evening roundup

• Andy Warhol painted Debbie Harry on an Amiga. My current computer desktop is painted up to look like an old Amiga 500's Workbench release 1.3, the computer I had in high school. Sigh.


• More from BoingBoing: Massive bank fraud on Eve Online. I wonder if Castranova's watching this one. Billions of dollars of play money traded for $5,000 in real money. From the BBC story:

  "Basically this character was one of the people who had been running EBank for a while. He took a bunch of (virtual) money out of the bank, and traded it away for real money," Ned Coker, of Icelandic company CCP which runs Eve, told the Reuters news agency.
  ...
  It has now emerged that Ricdic used the cash to put down a deposit on a house and to pay medical bills.
  "I'm not proud of it at all, that's why I didn't brag about it," Ricdic told Reuters. "But you know, if I had to do it again, I probably would've chosen the same path based on the same situation."
  Ricdic has now been thrown out of the game as trading in-game cash for real money is against Eve Online's terms and conditions.
  The rules governing play within Eve would not have sanctioned Ricdic if he had simply stolen the cash and used it in the game, nor if he had bought kredits with real dollars.

  It seems that EVE only gets upset about violating actual terms of service and requires players to otherwise come up with their own in-game sanctions: nice.

A final word on rationality

I have already briefly addressed BERL's argument that Matt and I assume strict rationality: we don't. Since they keep raising the argument, I'll try to kill it a bit deader this time (given my apparent murderous proclivities).

The left hand graph shows a rational consumer's decision. The consumer picks the consumption point where the marginal cost curve cuts the marginal benefit curve. The costs curve here includes price (constant) and health costs: I've set health costs as negative over the initial part of the range, then increasing in the later part. The consumer enjoys gross benefits equal to the green area plus the blue area, but incurs costs equal to the blue area. We then call the green area consumer surplus: net benefits for the consumer.

The right hand graph moves us into Slack's preferred world. Specify that the consumer's perceived marginal cost curve is the lower one, but the actual marginal cost curve is higher: there are no health benefits in the lower range and health costs mount more quickly. The consumer still chooses the consumption point that he had chosen in the graph at left, but he's chosen incorrectly. I have assumed that the consumer is irrational: he cannot tell that the true MC curve lies above the perceived MC curve. Or, you could equally assume that he's rational but has incorrect information about the true costs curve. But, does this mean that the consumer gets zero benefits from drinking? Of course not. In fact, the consumer's gross benefits have not changed at all: only his net benefits. Gross benefits remain the area under the marginal benefit curve: here, green plus purple plus blue plus yellow. However, costs are higher than he had thought: blue plus purple plus yellow plus red. Net benefits are then the green area minus the red area. The red area counts as "excess costs" of irrational behaviour.

So, has anything in our critique of the BERL report required strict rationality? No. All we need is that, on average across all of the consumers that BERL defines as "harmful", including the folks drinking 1.8 pints of beer per day, the green area approximately matches the red area. It can be the case that for some consumers the green area is smaller than the red area, so long as there are enough others for whom the green area is larger that they balance out in aggregate. So long as that's the case, worrying only about external costs of harmful alcohol use is just fine. Whether I believe the left graph or the right graph to be the correct one is utterly beside the point. We only require that green roughly matches red on average across all of BERL's "harmful" consumers.

BERL assumes "that it is irrational to drink alcohol to a harmful level and that harmful alcohol use has zero private benefit." Our approach is flexible enough to allow irrational behaviour and doesn't require the somewhat restrictive assumption that private benefits are zero.

Of externalities, elbows, and knowing one from the other

Economists tend to think that murder is a bad thing. Why? Well, despite the murderer presumably enjoying the act, his gain comes at a cost that he doesn't personally bear: the death of his victim. That's the kind of cost that economists tend to call an externality. And so economists tend to support laws against murder. We similarly tend to support laws against theft: while the thief tends to think taking other folks' stuff is a good idea, the thief's victims tend to be hurt by it and the thief won't weigh those folks' losses against his gains. In these kinds of cases, individuals' rational calculation of their own costs and benefits lead to socially bad outcomes because of the substantial external costs.

No, this isn't heading towards commentary on the Clayton Weatherston trial. Rather, consider Adrian Slack's latest response to our critique of BERL's analysis of the costs of alcohol.

“So for example someone who murders someone, from the individual’s point of view, Eric would be, I presume, quite comfortable with that. The person who decides to murder someone else makes an evaluation of what are the benefits and costs to me of this action? Society says ‘well some people do murder other people’, but society says ‘that’s not good.’”

Is this close enough to Godwin's Law for BERL to be deemed as having conceded defeat?

For the record, I do not support murder: I care about the external costs. One of our biggest critiques of the BERL report is that they conflate internal and external costs. I don't think that BERL has a ... conventional ... understanding of the difference between the two. As we reminded BERL in our report:

Externalities can be imposed on private citizens and, conversely, costs to a business of employing an unproductive worker are not externalities. Perhaps this misunderstanding contributed to BERL’s decision to count private costs as social costs. A basic staple of principles-level economics is that costs or benefits are not external if the agents are linked through a contractual nexus: the baby crying next to me on the long-haul flight does not impose an externality on me because I have chosen to buy a ticket that includes the risk of such unpleasantness and was accordingly charged less for that ticket. Similarly, a worker who slacks off on the job or takes inordinate numbers of sick days does not impose externalities on his employer. It is worrying that BERL does not seem to recognize this basic definitional issue.

Adrian, what colour is the sky in your world?