Saturday, August 30, 2008

Alcopops tax revenue refunded to who?

The alcopops tax has yielded a great deal of revenue although the bill justifying the tax may now not be passed by the Senate.  Apparently then the government has to return the revenue to the party who bore the tax.  The nominal incidence of such a tax is on the alcohol producers but, if demand is relatively inelastic - and that's what the solid revenue yields suggest - then the effective incidence is mainly borne by consumers so they should get most of the rebate.  It would, however, seem totally impractical to effect such rebates. 

I find it surprising that consumers are called upon to pay a tax that has questionable legality.  If the tax is not approved by the Senate that will be its status. I can't for the  life of me work out how Labor will get out of this mess.

To be clear I do support this tax and hope the Coalition will switch and vote for it. Its effectiveness will not be zero even if demands are quite inelastic.  Note that those who criticise it on the grounds that youth entirely switch to other sources of alcohol need to explain why the tax yields in fact such a lot of revenue. The existence of close substitutes suggests elastic not the inelastic demands that seem to prevail. Moreover this is consistent with average price elasticities on alcohol of around -0.6.

While the alcopops tax will not eliminate the problem of excessive youth drinking, it will help. Other measures - education and negative advertising - are a further useful component of a policy package.

Thursday, August 28, 2008

Climate change adaptation for natural resources

I am presenting a talk on the topic above to the Australian Agricultural and Resource Economics Society (AARES) Victorian Branch August meeting tomorrow, Friday 29th August, from 12-30pm (sharp) to 2-00pm, upstairs at the Elephant and Wheel Barrow pub (cnr Bourke and Exhibition St, Melbourne).

If you wish to attend you must register with  I thought I might enjoy myself afterwards on SouthBank and would like to catch up with city-based blog readers.

Macquarie Bank another domino to topple?

I dont have time to comment on this review but as I have suggested in the past the future of Macquarie Bank and its 'millionaire factory' is being increasingly questioned. In my earlier post I noted that Enron analyst Jim Chanos described Macquarie as a Ponzi scheme.

Certainly the spinoff firms from Macquarie are not doing well and I get nervous in the current circumstances when firms sell assets and use the proceeds to support their share price. I am also nervous when (for whatever reasons) major investments like TransUrban are making losses of $142 million when these investments are basically supported by mountains of debt. Macquarie does not seem to have a lot of free capital to cover itself against shocks and to ride out an expected economic downturn.

Electricity privatisations opposed by Libs & incentive contracts in schools supported by Labor

My former student colleague NSW Liberal Party leader Barry O'Farrell finally rejects proposed electricity privatisations in his state and sides with the union thugs while Federal Labor's Ear Wax Monster, Kevin Rudd, endorses earlier Liberal proposals to put schools of incentive contracts - money will be withheld if they do not provide decent academic outcomes - inviting attacks from his Labor state Government colleagues and the neanderthal teacher unions.

I am not sure if the ideological inconsistencies here are an instance of 'Tweedledum-Tweedledee' convergence or just opportunism. Farrell is desparate to win power in NSW and Rudd is suffering the perception of being a big talker but not doing much. Where are the computers that were to be provided to every school student?

O'Farrell's rejection probably means that the NSW electricity sector will not be privatised which should please those in the union movement who want high wages but low production efficiencies. This move seems blatantly political - as Catallaxy points out it runs against Liberal Party philosophy - there is widespread popular opposition to the privatisations.

I support Rudd's revisionist attempt to reinstate Liberal Policy although it is clear he faces opposition within the State Governments. If the States cave in and support the Rudd proposals they will be revealled to be the party-political hacks and hypocrites they are.  Of course ingenuity is required to get the contracts working efficiently but the suggestion in the Rudd proposal to pay good teachers more if they work in underperforming schools sounds a promising way of offsetting the inefficiencies that will be intensified if poor performing schools only attract the worst teachers.

Tuesday, August 26, 2008

Congestion pricing again & again

The Victorian Government have again acted to close off debate on the possibilities for road pricing in Melbourne. I understand that most politicians are spineless but allowing the debate to develop on this issue while remaining nominally separate from it would not have hurt these politicians much. I presented my views on these issues with Professor David Hensher from the University of Sydney on the PM radio show yesterday.

We lack real leadership in Australian politics. While our major agricultural region, the Murray Darling Basin, is facing the prospect of significant longer-term destruction and our cities are becoming congested, unpleasant places to live politicians offer us FuelWatch and token apologies to aboriginals as priority policies.

Monday, August 25, 2008

Adjusting to carbon pricing - yes it hurts, but not that much

The BCA, Saturday's Australian and many of the weekend newspapers have finally twigged to the notion that charging for carbon emissions will cause discomfit.  It will. Indeed, the objective of levying a carbon charge is to generate discomfit.  The type of discomfit that will motivate firms and consumers to use less energy, to switch to non-polluting sources of energy and generally to reorient their behaviour so that it alligns with social costs. Some supporters of  activist climate change policy in seeking to encourage community acceptance of carbon pricing have played down its costs but yes they are there.

The costs are not - as Ross Gittins points out this morning - overwhelming costs. Large polluters who will feel the effects of carbon pricing can pass those costs onto consumers, can reduce waste and can seek less polluting technologies.  The sky will not fall in. Incidentally the proposed emissions trading scheme sets a maximum price for emissions that limits the scale of required firm adjustments.  Big business should stop behaving like rent seekers with a belly ache.

Wednesday, August 20, 2008

Taking a break from routine in Sydney

I am taking a brief respite in Sydney for a few days. I am presenting my paper 'Some Economics of Adaptation to Climate Change' (based on this and this) in the Agricultural and Resource Economics Department at the University of Sydney on Friday 22nd August from 3-00 to 5-00 pm in the R.D. Watt Building. Readers can contact the Department if they wish to attend. I can be contacted via this Department.

I have been thinking generally about climate change adaptation issues and have started to get involved in some urban issues and, more directly than in the past, on issues in agriculture. Melbourne has a fascinating early climate change adaptation proposal that focuses on reversing 'heat island' effects, recycling stormwater (Melbourne faces dramatic water shortages) as well as policies for handling sea level change. The proposals for agriculture involving recognising the good aspects of climate change - the gains should come prior to 2050 before carbon concentrations really start to bite - and accounting for the net costs that will occur thereafter. Many of the agricultural adaptations will develop endogenously as farmers respond myopically to market forces and do not call for policy action. Others such as R&D and urging uptake of new technologies require a policy push as do any sought-after structural assistance programs.

On water the proposals of Young and McColl make a great deal of sense to me. The difficulty of managing water resources is reduced to a measurement problem with the environment and agriculture taking fixed proportions of what is available after basic flows in systems such as the Murray-Darling are guaranteed.

More on these things when I return - I am drafting a paper on these issues at present.

Large US bank to fail claims Rogoff as RBA scrambles to reverse tough stance

Former chief economist at the IMF Kenneth Rogoff claims the world is only midway through a major financial crisis with the worst yet to come.  He forecasts a major US bank will fail as the bloated US financial sector restructures.  I wonder if Australia's RBA have made the same inference with their recently unprecedented moves to preannounce an interest rate decrease with a veiled warning to the oligopolistic banks that they must pass on the decrease.  It is worrying and I would not be buying bank shares at present.

For the life of me I cannot understand why the RBA could not persuade the ACCC to reject the St George-Westpac merger.  As I have previously argued this merger should have been rejected and the 'four pillars' policy strengthened not weakened.  Bank customers in Australia are getting a bad deal at the expense of bank shareholders.

Interestingly, Rogoff rejects US Federal Reserve moves that have cut interest rates to only 2% arguing they willl be severely inflationary.  Australian official rates have been a long way above this which accounts for the strength, until quite recently, in the Australian dollar.   The RBA remain concerned with inflation and continue to the concerned with a possible wages explosion under Labor as interest rates are eased.

Tuesday, August 19, 2008

Medium term climate forecasts – tell the truth & promote understanding

I recently posted on the foolish claims of Andrew Bolt that climate change had ceased in 1998. Among the points I made was that Bolt had used work of a certain German institute to back his claims when elementary care would have showed Bolt that, although this institute had argued that the rate of growth in warming might undergo a temporary slowing - the rate of increase was expected to resume and in no way rejected claims that long run climate was driven by atmospheric CO2 levels.

The distinction between medium term climatic trends and longer-term trends are beautifully discussed in the current NewScientist. The editorial to this issue argues that medium term climate forecasts – forecasts over the next 10 years or so - are a function of oceanic temperature oscillations whereas, yes, longer-term changes are driven by CO2 concentrations.

Short-term trends do suggest a future moderation in the rate of temperature increase but this implies nothing at all about longer-term temperature changes which are still inexorably forecast to continue to rise. NewScientist’s argument is that such short-term forecasts should be accurately reported even if sloppy commentators such as Andrew Bolt use this information to try to dispel the anthropogenic global warming hypothesis. Who could sensibly disagree? If temperatures do take a temporary dip this might create a slowing in impulses to manage climate but it is better to try to educate the public on the distinction between medium and long-term trends.

Long-term trends are driven by CO2 concentrations but medium term trends – whether the drought will continue to impact adversely on the Murray-Darling Basin – is a function of what is happening in the oceans. It takes a long time for the temperature of the oceans to change so the ability to predict what will happen iks not an impossibility. Most of the medium term climate on earth results from energy exchanges between oceans and atmosphere rather than overall changes in the temperature of the planet. The drought in Australia is then attributable to low water temperatures north ofr Australia and the expected duration of the drought can be understood by understanding these slowly involving temperatures.

I recommend the NewScientist article – a good read.

Sunday, August 17, 2008

Winning isn't everything

Joshua Gans is 'over the moon' because his daughter won a sports event. With some qualifications he asserts winning is everything. Its a very American attitude and one I don't agree with particularly in relation to kids sport where I think the key objective for the vast majority of kids is to participate - to enjoy participating in a healthy activity. Assuming Joshua's type of elation feeds back into the incentives influencing sports participation decisions by youth it seems to me unhealthy for those who don't really need to win and don't in fact win. The key reward from sport is to the individual in terms of enhanced individual physical potentiality not their ability to rank themselves ahead of other competitors.

Nor, for that matter, am I overly concerned with the signalling function of education - the important issue is to add value not to order students 1,2,...N. Again the ordering is irrelevant because it does not map into something that reflects significant value in any field of life. From an individualistic perspective the point is to realise individual potential not to be ahead of the other guy.

For the same reasons I try not to be particularly interested in social star rankings based on power and wealth. Trying to have more money than the next guy is the source of 'rat race' externalities in work effort while the pursuit of power helps create that class of psychopaths who have miserable lives (they can never be happy themselves) and impose misery on their subordinates in business and administration.

Winning isn't everything. The point is to enjoy yourself - to realise your own potential - and not to concern yourself unduly with how you compare with others in terms of running races - either sporting or economic. This is, of course, an ideal and difficult to achieve.

Wednesday, August 13, 2008

Taxing Sin: some economics of smoking, gambling & booze (revision 1)

This is a draft of a paper I am preparing. Comments very appreciated.

There is a long history of governments taxing activities they disapprove of. In 1604, England’s King James I concluded that tobacco smoking was ‘a custom loathsome to the eye, hateful to the nose, harmful to the brain, dangerous to the lung’ (Brandt (2007, p. 21)). He responded by increasing the import duty on tobacco by 4000 per cent – an early hefty tax on ‘sin’. This was a severe response but non-tax restrictions at this time in history were more severe. In Turkey, Sultan Murad IV had pipes driven through the noses of those found smoking either immediately before or after their beheading! Indeed, Murad IV would patrol the streets and, if he saw a soldier using tobacco or alcohol, would kill the soldier on the spot with his mace.

Despite these discouragements alcohol consumption, smoking and gambling continued to flourish even though they remain heavily restricted in modern times. In Australia, cigarette taxes amount to about $5 on a 20 pack. Alcohol is taxed in various ways. Full strength beer is taxed at $38 per litre of alcohol, spirits at $60-42 per litre alcohol while wine is taxed on its value (ATO, 2008). These charges add significantly to the cost of having a drink. Finally, gambling taxes, particularly those imposed on the most popular form of legal gambling in Australia, namely on gaming machines, provide 9.5 per cent of ‘own source’ state government revenue (Commonwealth Grants Commission, 2008).

Taxes on sin goods need not target sin

Taxes can be levied on ‘sin goods’ on grounds that have nothing to do with their claimed propensity to corrupt morals. Since taxes are needed to fund public spending, one way of selecting them is to find goods yielding much tax revenue but which impose low distortionary costs. Frank Ramsey (1927) showed the best way to do this was to levy taxes on goods in inelastic demand. Cigarettes, alcohol and activities, such as compulsive gambling, have inelastic demands because they are addictive. Taxing sin goods therefore yields good revenues while not impacting much on economic activity.

These revenue objectives provide part of the explanation for current taxes on sin. Tobacco demand elasticities lie between -0.25 to -0.5 so a 10 per cent tax increases tax revenues by 5 to 7.5 per cent (Chaloupka et al., 2001). Price elasticities for alcoholic beverages are around -0.6 so a 10 per cent tax augments revenues by 4 per cent (Selvanathan et al., 2004). The evidence on gambling is mixed since, as has been known from Suits (1979), the demand for gambling on such things as horse racing is probably elastic suggesting a limited ability to yield tax revenues. But with respect to repetitive gambling activities such as gaming machines – these are more addictive - work by this author suggests relatively inelastic demands and good revenue yields.

While governments are often accused of hypocrisy in seeking revenues rather than the moral good in taxing sin, a sensible view is that they are following recommendations of public economists who advocate such taxes when demand elasticities are low. Of course governments are using the fact that these goods are perceived as ‘sinful’ as low resistance ways of accessing revenues. However if the demand for sin goods is inelastic, policies designed to yield revenue do so because the policies will be ineffective in reducing sin (Johnson & Meier, 1990).


Another reason for taxing sin goods arises from the externalities associated with their consumption. These are costs imposed on non-consumers by the consumption by others.

For example, cigarette smoking has dangerous effects on bystanders who inhale secondary smoke. Evidence suggests that exposure to such smoke is the most dangerous environmental exposure confronted by US citizens (NCI, 1999). This is, for example, a health concern for non-smokers married to smokers - lung cancer risks of a non-smoking spouse increase by 20-30 per cent and heart disease risks by 23 per cent (Hirayama, 1981). There are also specific dangers to children from passive smoking including increased risks of respiratory disease (DHHS, 2006). There are also damages to workers if co-workers or customers smoke in their workplace.

Excessive alcohol consumption is associated with violence, particularly within the family, while excessive alcohol consumption is the largest single cause of deaths on our roads. Around 28.5 per cent of road deaths among those aged under 65 are due to alcohol. This is a particular problem for young drivers. A driver aged 20+ who has consumed 6 standard drinks has 12 times the chance of a fatal car crash than a sober driver while, for drivers aged 16-19, the risk is 100-times that of a sober driver (Phelps, 1997).

Other alcohol-linked externalities include foetal alcohol syndrome inflicted on infants when mothers consume alcohol during pregnancy (Clarke, 2008). This reduces infant IQ.

Finally, although only 2.1% of Australians are ‘problem gamblers’, five times this percentage (comprising mainly family and work colleagues) are adversely impacted by gambling (Productivity Commission, 1999). These social costs take a terrible toll through interpersonal conflicts generated and problems in workplace performance.

Nevertheless externality arguments for taxing cigarettes, alcohol and gambling are often weaker than public finance reasons because externalities are associated with misuse rather than use per se and often have relatively low cost. The external costs associated with cigarettes are estimated at 40 cents US per pack (Gruber, 2002) and, while this is not negligible, it is dwarfed by private mortality costs of smoking for men of $222 US per pack (Viscusi and Hersch, 2007).

A more effective way of addressing externalities is often to restrict specific activities related to the external damages rather than penalising consumption generally.

For example, with respect to smoking, a better policy to reduce passive smoking damages is to restrict smoking in certain situations rather than taxing smoking per se. This is the motivation for banning smoking in the workforce, in entertainment venues and even in private cars with non-smoking occupants. The latter reform was initiated in South Australia but has now either been introduced elsewhere or is about to be. Smoking in the home that causes damage to children can be discouraged by using ‘moral suasion’ arguments which articulate the health implications for children and others of secondary tobacco smoke.

Likewise, while drinking is the major cause of traffic fatalities, the issue is not drinking per se but drinking before driving. Taxing alcohol at moderate levels will reduce this but the more sensible way to tackle accident externalities is to provide information on accident risks, particularly among adolescents, and to rigorously punish those who threaten life by driving while intoxicated. Booze buses that randomly check for intoxicated motorists, with particularly stringent restrictions on young drivers, are a more effective way of tackling this specific behaviour than low taxes on alcohol. The option of setting very high taxes on use penalises the 74 per cent of Australians who consume alcohol at levels that impose low social costs (Clarke, 2008).

With respect to gambling there are significant social costs linked to the fact that problem gamblers move inevitably towards financial ruin – the ‘gambler’s ruin’ – and end up drawing unreasonably on family and employer resources. Families are destroyed and innocent children experience deprivation as a consequence. Here the harm is excessive gambling which can be controlled if the extent of gambling can be constrained. A difficulty is that problem gamblers have relatively inelastic demands so taxes to significantly reduce gambling need to be high. Society has made the judgement that most gamblers derive significant recreational benefits at low social cost from gambling so that hefty taxes alone would again cut into the innocent pleasures of many. Better policies would target specifically problem gambling.

Several approaches have been developed. The first protects citizens from the excessive gambling that creates externalities by using electronic player cards for repetitive forms of gaming (Dickerson, 2003). These cards are issued on the usual 100 point ID requirements of a cash card. They limit the money an individual can pre-commit to gambling. For most players preferred expenditures would be within regulated limits but, for problem gamblers, such devices limit losses. This approach is currently under consideration in Victoria and other states. Another policy that limits problem gambling is the self-exclusion option that gamblers can now exercise in all states. Gamblers who, between gambling sessions, recognise that they face self-control issues with respect to gambling can elect to have themselves excluded from gambling venues.

These policies reduce costs faced by the consumers themselves, an issue we turn to.

Taxing internalities

Apart from public revenue and externality reasons for restricting sin goods a further motivation is to reduce costs consumers impose on themselves. The main issues are whether such interventions are warranted and, if so, whether taxes are the best restriction.

Historically opposition to sin goods has been based on claimed ‘moral’ costs. Smoking has long been linked to ‘illicit’ sex. This dates at least to images of flimsily dressed wenches rolling cigars on their naked thighs in the cigar factory featured in Bizet’s opera Carmen. Alcohol too has long been viewed as destructive of work ethics and family attachments. It is commonly portrayed as a lever that promotes illicit seduction of the innocent. Gambling is often seen with standard ‘materialist’ misconceptions as a degenerate ‘service’ activity that yields no useful physical output. Indeed Alexander Pope in his Rape of the Lock gives an eloquent picture of a degraded gambling woman and the corrupting influence the practice had on her. Veblen (1899) argued that gamblers impute causality into games of pure chance – psychologists term this the illusion of control - thereby making society more stupid.

For the most part, these activities are not regarded nowadays as ‘sinful’ in a narrow moral sense. Instead they are seen as costly to the individual because they imply private health and psychological costs from licit drug consumption or financial ruin from gambling.

The health costs identified go beyond the damage bills accruing to governments. They even exceed the total health costs that accrue to governments and the individuals concerned, reflecting also loss of life and increased morbidity.

Intervening to restrict consumption raises charges of ‘wowserism’ with governments disallowing free choices. Two sub-claims support this criticism. First, that governments may not have better information than private citizens and, second, that even if citizens do hold mistaken views, that they are entitled to be wrong and it is better for them to make their own mistakes. Indeed, the claim is often that government intervention to ‘protect people from themselves’ has the moral hazard consequence of creating more dangerous, risk-taking behaviours.

Some argue that interventions to limit consumption of sin goods can be justified by considering within-person externalities or internalities (Gruber, 2002/03) arising because individuals do not account adequately for the costs of actions on their future selves. The thesis is that individual decision making is time inconsistent with today’s ‘self’ being impatient but tomorrow’s ‘self’ being patient. Planning for the distant future is ‘reasoned’ and involves low impulsiveness but short-term responses are driven by the myopic emotions. Thus agents assess risky activities by hyperbolically discounting (Ainslie, 2001) with short-term impulsiveness and long-term rationality ‘fighting it out’. Paternalist policy seeks to help the dispassionate self gain control over the emotionally-driven choices considered by a conflicted individual.

Short-term selves are supposed to be strong among adolescents who engage in socially desirable experimentation to help them define adult roles but who thereby become susceptible to risky pursuits such as drugs and gambling.

In Australia almost everyone who takes up smoking does so when young: the average age of initiating smoking is 15.9 years (ABS, 2006). Such adolescents apply high rates of discount to longer-term costs of smoking. Even if they do correctly identify these costs they substantially overestimate their ability to quit the habit. These high rates of discount decline with age so when individuals are in their mid-twenties they are less impulsive and risk-loving. They then regret their decision to initiate smoking (most smokers do regret initiating the habit!) but find it unexpectedly difficult to quit. There is again a case for intervention to limit consumption.

Similarly excessive drinking, including ‘binge drinking’, is often initiated during adolescence when neuroscientists tell us that the regions of the brain involved in executive control and motivation are underdeveloped. Moreover, the vulnerability to alcoholism is greatest among those initiating drinking early in life but those with difficulties making decisions at any age - those suffering depression, anxiety, ADHD and schizophrenia - tend to be alcohol abusers (Clarke, 2008). There is again a case for limiting consumption.

These arguments are strengthened by recent evidence suggesting specific damages to brain development from consumption of alcohol (White, 2003) and tobacco (Krystal et al., 2005) during adolescence. Also relevant are internalised damages associated with drink-driving by youth that impose drastic internalised costs.

Finally, problem gambling begins at early ages. About 33 per cent of problem gamblers began betting before they were 10 years of age with 47 per cent beginning between 11 to 18 years. These youth often have co-occurring alcohol, cigarette and other drug problems that, with gambling, are correlated with impulsivity and low cognitive control (Petry, 2005).

The ethical debate concerning the case for paternalism with respect to sin goods seems academic at least with respect to youth who make flawed decisions. It remains however to ask whether tax policies are the appropriate means of initiating restrictions.

Young people have limited incomes so their demand for such things as cigarettes and alcohol are relatively price elastic. To this extent taxes will impact on consumption choices although it is doubtful that they would ever be the only policy instrument used in this context.

For example with respect to tobacco smoking, a 10 per cent increase in price leads to only a modest 2.4 to 4.7 per cent increase in cessation probabilities among US youth with uncertain impacts on smoking initiation (Chaloupka, 2001; Taurus et al, 2001). Increasing taxes to high levels provides stronger effects but encourages substitution of injurious home-grown tobaccos (‘chop chop’ home grown causes fungal infections of the lung) and the intensification of smoking through ‘puffing harder’. A 1 per cent increase in price provides a 0.4 per cent increase in smoking intensity and a new range of more dangerous adenocarcinomas lower in the lungs (Adda et al, 2006; Henschke et al, 2002).

With respect to youth there is a case for an infinite tax on smoking, alcohol and gambling activities by prohibiting them. Minimum pack sizes, bans on advertising and bans on smoking in entertainment venues are also ways of curbing youth consumption. Bans on selling to youth backed by stringent penalties and penalties on purchasing are also effective. Negative advertising that emphasises current costs of smoking and alcohol in terms of lost physical fitness provide disincentives for youth that are more tailored and carry greater clout than modest tax hikes.

At best, taxes will be one component of a package of policies that seek to restrict the consumption of sin goods by youth and by citizens more generally.

Final comments

Economists seeking to limit external and privately-borne costs of sin goods should devise policies that target problem areas as directly as possible. General policies that have broad impacts will generate by-product costs on non-targeted groups and bring about harmful substitutions that may lead to additional harm through unintended consequences. Taxes on sin reduce costly externalities and high personal health costs but are not the sole way of advancing this objective.

A strong argument for taxing sin goods is that the taxes yield revenue without distorting economic activity greatly and with low political flack. Such taxes do help restrict the damages consumers of sin impose on others and on themselves but almost always need to be supplemented by other policies to have significant impacts.


J. Adda, & F. Cornaglia, ‘The Effect of Bans and Taxes on Passive Smoking’, Institute for the Study of Labour (IZA), Discussion Paper No. 2191, 2006.

G. Ainslie, Breakdown of Will, Cambridge University Press, 2001.

Australian Bureau of Statistics, Tobacco Smoking in Australia – A Snapshot 2004-05, ABS Canberra, 2006

Australian Taxation Office, Excise Tariff Working Pages, Canberra, 2008.

A. M. Brandt, The Cigarette Century, Perseus, New York, 2007.

F. Chaloupka, M. Wakefield & C. Czart, ‘Taxing Tobacco’ in R. Rabin & S. Sugarman (eds) Regulating Tobacco, Oxford University Press, 2001,

H. Clarke, ‘The Economist’s Way of Thinking about Alcohol Policy’, Agenda, 15, 2008, 27-41.

M. Dickerson, ‘What if there were no problem gamblers’, mimeo, 2003.

Commonwealth Grants Commission, Gambling Taxation, Commonwealth of Australia, 2008.

J. Gruber, ‘Smoking internalities’, Regulation, Winter, 2002-2003, 52-57.

C. Henschke & P. McCarthy, Lung Cancer, Norton 2002.

T. Hirayama, ‘Non-smoking wives of heavy smokers have a higher risk of lung cancer: a study from Japan’, British Medical Journal, 1981, 282: 183–185.

C. Johnson & K. Meier, ‘The wages of sin: Taxing America’s legal vices’, Western Political Quarterly, 43, 3, 1990, 577-595.

J. Krystal, W. Mencl, M. Westerveld, S. Frost & K. Pugh ‘ Smoking causes cognitive and memory impairment in adolescence’, Biological Psychiatry, 57, 2005, 56–66.

NCI, Smoking and Health Monograph No. 10: Health Effects of Exposure to Environmental Tobacco Smoke: Report of the California Environmental Protection Agency, National Cancer Institute, 1999.

N. Petry, Pathological Gambling, American Psychological Association, Washington, 2005.

C. Phelps, Health Economics, Addison-Wesley, 1997.

Productivity Commission, Australia’s Gambling Industries, Summary Report, Canberra, 1999.

F.Ramsey, ‘A contribution to the theory of taxation’, Economic Journal, 37, 1927, 47-61.

E. Selvanathan & S. Selvanathan, ‘Economic and demographic factors in Australian alcohol demand’, Applied Economics, 36, 2004, 2405-2417.

D. Suits, ‘The demand for gambling’, Quarterly Journal of Economics, 93, 1979, 155-162.

J. Taurus & F. Chaloupka, ‘Determinants of Smoking Cessation’ in M. Grossman & C. Hsieh (eds) The Economic Analysis of Substance Abuse, Edward Elgar, 2001.

DHHS, Health Consequences of Involuntary Exposure to Tobacco Smoke: A Report of the Surgeon General. U.S. Department of Health and Human Services, 2006.

T. Veblen, ‘The sporting instinct’ in Theory of the Leisure Class, Macmillan, New York, 1899.

W. Kip Viscusi & J. Hersch, ‘The mortality cost to smokers’, NBER Working Paper 13599, National Bureau of Economic Research, November 2007.

A. White, ‘Substance use and adolescent brain development’, Youth Studies Australia, 22, 2003, 39-45.

Tuesday, August 12, 2008

Animal rights & joys of libertarian dismissal of such

This Inside-Out China blog posting pours scorn on the notion of animal rights much to the delight of Jason Soon at Catallaxy. The Chinese sometimes have an insensitive way of dealing with animals but I am not surprised that libertarians oppose criticisms of people's rights to do with non-human life what they like. It accords with their 'anything goes' philosophy - to do otherwise would be interfering with their precious individual rights and to offer what are essentially paternalistically imposed moral restrictions on such rights. Libertarians see themselves as having the right to bear arms and to kill and maim provided they do not offend Pigou - who only considered human suffering in his analysis of external costs. Who could criticise?

But yes obviously I do criticise. I am not a vegetarian but a carnivore. However I resolutely oppose cruelty to animals and find despicable the killing of sentient beings for sport and the casual disregard of animal suffering and death. I assert the almost universally agreed on proposition that animals do have rights. That this is the case is obvious – even libertarians will dislike the callous cruelty displayed in the Chinese clip. Thus by consensus animals do have rights – the question is where to draw the line on such rights. My line is somewhere short of giving animals the same rights as humans but certainly to give them more rights than displayed by the Chinese sadists in the clip or those assigned by the nitwits at the Inside-out China blog.

When we kill animals for their food or other products it should be a painless death and animal lives should not be a monotone stream of suffering. In fact, for me, things go well beyond this – to the extent that animals derive pleasure from their existence – evidence convinces me they are capable of such enjoyment – I am happier, so as an economist I am interested in promoting as far as it is possible a joyous life for animals as well as humans. Animal utilities enter into my social welfare function.

In my view there is value to the notion of animal rights. The libertarian opponents of animal rights are 'barking out' an ideology that reflects their defective reason, their callous disregard for non-human suffering and their posturing to defend foolish values that promotes laissez faire in clearly inappropriate situations.

BTW look at the discussion that follows the post mentioned at Catallaxy. This site was once one of the better blogs in Australia. What has happened?

Update: For those of you too lazy to read the Inside-Out China blog article I refer to I excerpt some bits:
'Western folk, to a greater or lesser degree, believe animals have rights. ....They empathize with animals. They value animals as contributing something to our environment greater than their immediate utility to humans. I don't. I feel the same way about gorillas as most Westerners feel about chickens. Dolphins? Yum. Dogs? Can't eat my fill. And don't even get me started on minke whales, the cockroaches of the ocean.
...... there was far too much human suffering going on for me to give up any of my concern or empathy for animals...... Who cares about cattle when real people, human beings, are dying like cattle?

....If Western people want non-Westerners to be nicer to animals, they should support things that create and spread wealth—for example, free trade and globalization. .... Once China's per-capita GDP gets high enough, Chinese, like WASPS, may love animals, too'. (my bold)
In short who cares about animals - they have no legitimate rights once it is acknowledged that 'we' humans are suffering. If you want us to stop being cruel improve our well-being. This is the article that commenter libertarian Jason Soon says he recommended because it was 'well-written'. Note the view of minke whales and animals generally. This argument is not the reason libertarians defend the right to have guns and to hunt and kill animals for sport. That's just good old-fashioned 'doin' your own thing' and who could be paternalistic enough to want to deny that? Me, for one.

Monday, August 11, 2008

Should we care about future generations?

In The Age on Saturday we got a fairly standard critique of the case for addressing the global warming costs faced by future generations. Instead, it was argued, we should concentrate on the economic needs of current people. According to the author, Mirko Bagaric, future generations are non-existent ‘uncertain’ people whereas current people are ‘certain’ people who deserve greater weight in any moral calculus. More certain too than future generations are the 90,000 potential Australian’s consigned to become a bucket of blood by abortionists. Indeed, the abuses of millions of other sentient beings, such as animals slaughtered for food, deserve greater weight than uncertain future people, according to Bagaric.

These are not foolish or naive arguments at all. There is hypocrisy in much of the claimed altruism that pervades modern environmental debates. While many bleat about the need to account for the needs of future generations there is a measure of stinginess in many citizens when it comes to using tax policy as a redistributive tool or for assisting the disadvantaged.

A celebrated proponent of the view that we should place low weight on the welfare of future generations is the philosopher Derek Parfit in his fascinating Reasons and Persons. Parfit’s view is that the course of history determines who gets born since it affects which potential parents actually meet and have children. In addition the precise timing of conception determines the meeting of specific sperm with specific eggs and hence the precise children who are born. Both history and these timing events depend on the resource use levels of current people. If the current generation are not altruistic towards future generations that will determine a sp[ecific identity for their progeny. Were they conservationist the next generation would have a different identity.

Then future persons have a no right to complain about our resource conservation action since they would not have existed if things had been different. Under these circumstances current people should ‘have a party’ with respect to the earth's resources and use them to maximise their utility without concern for other than the current generation. This will optimize current welfare. Of the future generations we should be concerned with those people who actually exist rather than merely potential people. The people who do actually exist in the future will appreciate the fact that current people enjoyed a feast of resources since they would otherwise not have existed at all. Those potential people who might have existed had we employed a different current usage policy are irrelevant in the Parfit calculus.

Many economists I have spoken to reject Parfit-type arguments on the basis of overlapping generations arguments. Simply put our children do not arrive after we die but while we live our lives. For example if people live to age 80 and reproduce at age 25 then current and subsequent generations will overlap by 55 years. One suggestive strand of thinking that followed the Stern Review determines the implication of this view for the weight we should place on the welfare of future generations in terms of discounting. The claim is that social rates of discount are revealed to be low because of the way we do value our own lives and those of our children. John Quiggin has suggested that setting low discount rates makes sense if we attach plausible values to our own lives and the lives of our children at not too distant periods in the future – discounting at only 3 per cent involves attacking a 50% weighting to lives only 16 years in the future – hence the argument goes we should discount at very low rates in order to prevent such absurd undervaluations. This is a plausible argument and, consistent with the Parfit critique it relies only on observations about actual rather than potential people.

This argument appeals to me and resolves the issue of discounting in an intellectually satisfying way.  Thus one does not need to think vaguely about duties to future anonymous generations as Parfit and Bagaric do. The hypocrisy of displaying foresight toward future lives but disregarding disadvantage among those currently living still surprises me but presumably reflects our selfish genes.  We will incvest huge amounts in ensuring extremely good outcomes for our own children but disregard poverty in our community and around the world. There should be a less selfish balance.

Saturday, August 09, 2008

Housing stock not part of wealth?

Willem Buiter has offered the provocative view that the stock of housing should (generally) not be included as part of net wealth. As The Economist remarks:
A shift in the value of housing does not affect household wealth in the aggregate, he says, because on average everyone is a tenant in his own home. A price fall hurts those who are “long” housing assets, ie, those who own more property than they will need over their lifetime (call them landlords). It benefits those who are “short” housing, ie, those who plan to buy a property or to trade up to a bigger one in the future (call them tenants). The average experience is of an owner-occupier who plans to live in his home until he dies. Unless he worries about how much he will leave to his heirs, he is indifferent to the value of his home.
The qualifier 'generally' is needed since Buiter excludes property price changes that stem from speculative bubbles since in the Buiter model:
'should prices fall because of a bubble bursting, then there is a wealth effect. Landlords are worse off because they lose the bubble value—the part that did not reflect fundamentals. But tenants are no better off, because the present cost of future housing services is unchanged'.
Otherwise falls in house prices are transfers of wealth between landlords and potential buyers and will not have deflationary effects. They will simply be redistributions. Thus the standard sorts of wealth multipliers which are between 0.01-0.07 for rich countries (so if wealth rises by $1, spending rises by between one and seven cents) are an exaggeration. There should be no deflationary impact from the current fall in house prices to the extent these reflect a collapse in fundamental valuations.

Of course the empirical relevance of the Buiter argument depends on the extent to which current house prices are falling in response to a deflated bubble. My guess as a non-specialist macroeconomist is that this is in fact a fair part of the current story.

The complete NBER Working Paper can be sought here.

Thursday, August 07, 2008

Irreversible destruction of the Murray River's lower lakes

The imminent destruction of the freshwater ecology of the lower lakes of the Murray River on the grounds that upstream freshwater supplies are insufficient to flush them out and that stored water suppliesin the river system must be safeguarded for human consumption might well be justified on triage grounds but it is nevertheless an alarming policy failure. The present government can hardly be held entirely responsible for the current situation - this represents a policy failure by government that goes back decades. The claim by Greg Hunt that Penny Wong is behaving like Saddam Hussein in destroying Ramsar listed wetlands is completely over the top - the catastrophe that is emerging also implies culpability through the successive policy failures of Coalition governments. Of course Wong's claim that there are insufficient water resources should be thoroughly checked out but it seems likely to be an accurate summary of the current situation.

The inability of state and federal governments in Australia to reduce the excessive use of water in irrigation reflects a political failure of the Australian federal system. The only possible benefit from the destruction of these Ramsar-listed wetlands might be the impulse it provides governments in Australia to finally seek to address the environmental catastrophe emerging in the Murray-Darling as a consequence of excessive water use in agriculture. Labor is in power both federally and at state levels - it should now act to buy back excessive water use entitlements to prevent these types of situations recurring with the hope that the seemingly irreversible ecological effects of being forced to flood the lower lakes with saltwater can eventually be reversed.

Tuesday, August 05, 2008

Stephen King leaves ACCC, goes to Monash

The ACCC's Stephen King has been appointed Dean of the Faculty of Business and Economics at Monash University.  Joshua Gans provides praise for the appointment of his co-author and business partner.

I hope this appointment is a success story for Monash - a university which, in my view, has not quite lived up to its considerable potential in the economics and business areas.   In the late 1970s I visited Monash and came to the view that it would likely become one of the top economics department in Australia.  It then had resources plus a youthful dynamism but the positive outcome didn't happen. Monash has had similar opportunities since then but has suffered under a load of administrative philistinism.

Today Monash has outstanding academics including Professors Yew-Kwang Ng and Peter Dixon.  It needs to be driven in a direction that encourages scholarship and which abandons values of academic entrepreneurship and managerialism.  Stephen King probably has the required values - it remains to see what changes he can make given administrative structures that often promote administrative rather academic values.

If Stephen can achieve success in putting competitive pressures on other universities, the business and economics areas throughout Australia - including my own - will derive benefits.  It is up to the Dean incumbent to be cautious and calculating but not to lose sight of core academic goals - good teaching, good research not administrative empire building.  Overall I am reasonably optimistic that the outcome with Stephen will be an improvement that will advance business and economics education in Australia.

But time will tell.

Update: I learnt today that Professor Gael McDonald has been appointed Dean of the Faculty of Business and Law at Deakin University. Professor McDonald undertook her PhD at the London School of Economics in 1989 on 'cross cultural issues in ethics management'. She has published in 'sports management' and on 'character education in NZ schools' - I could not locate a comprehensive CV online. Professor McDonald is currently Vice-President (Research) at Unitec in New Zealand. She has held a number of senior positions, including Vice-President (International) and, before that, Dean of the Faculty of Business at Unitec. Here are some more of her recent publications.

Tipping Point on climate change?

An outstanding Four Corners show last night dealt with the melting of the summer pack ice in the Arctic as a consequence of global heating.  The reality of a 'north west passage' could become a reality by 2013 as the Arctic becomes ice free during the summer months.  The US, Soviet Union and Canada are engaged in a scramble for oil and other resources that will become accessible as a consequence of this climate change - the use of these resources will of course worsen the problem.  Shipping companies and fishery businesses are likewise scrambling for business in the newly opened up areas.

More seriously, the possibility of positive climatic feedbacks from reduced ice cover - less reflection of heat energy back into space and the possible melting of the northern permafrost - raises the realistic prospect of a climate change catastrophe that might impact on people currently living. This would markedly increase world average temperatures and substantially increase sea levels.

Severe temperature increases in turn might lead to drought in the Amazon and fires there than would release huge amounts of carbon and destroy 15% of the world's carbon absorption capacity.  The Greenland ice sheet and the ice cover in parts of the Antarctic also become vulnerable. It is an apocalytic scenario that would make an enjoyable feature film were it not so plausible and potentially destructive for our children.

The show reinforced views in the Stern Review which is excellent on these same issues and was one of the first policy oriented-documents to account seriously for the prospect of catastrophic change.

The issues raised have immense consequences for dealing urgently with global heating issues. Indeed one view is that we may have already gone too far.  The dates at which the summer pack ice was forecast to disappear has progressively shifted back from 2100 to 2070 to 2050 to 2013 ominously suggesting that the prospect of substantial damage is coming more keenly into focus.

An incidental observation - the photography in this show was superb.

Sunday, August 03, 2008

Leadership of Liberals

It is obvious to me that Brendan Nelson will not lead the Liberal Party to the next federal election. His attempt to turn the emissions trading scheme debate into a mean spirited rejection of trading unless developing countries with a fraction of our energy consumption also commit to do so means that he will lose Liberal Party supporters such as myself.

I cannot support this clown because (i) his stance is immoral; (ii) the urgency of climate change issues makes it imperative that we put pressure on other countries to act by not being hypocrites ourselves and (iii) it is unwise to be out of step with the majority of Australians who do support an ETS.

I am unsure whether Peter Costello or Malcolm Turnbull would make a better alternative leader - a leader who would regain power from Labor. Costello has the greater electoral appeal but has the liability of being a strong supporter of labour market reform that went even beyond WorkChoices. These reforms I continue to support. John Howard did too but he always figured they would be electorally unacceptible. The Liberals lost ground here after the election by whimping out like a bunch of beaten dogs when the Labor Party moved towards dismantling policy moves that fostered employment and created a more efficient workforce in Australia.

Its a simple principle. Don't abandon successful policies when opposition to them is backed in the main by a disappearing trade union movement who have zero economic intelligence - witness their stupid insistence on preserving the real wage in the face of food and oil price increases. Believe me - stripping aside party-political allegiances - there is not an economist in Australia who supports this foolish policy in private.

In addition Costello will always be viewed as being a sook because of his unwillingness to take on John Howard for the leadership (in my view, to be fair, he had no choice) and because of his early suggestion he would quit politics after the 2007 loss.

Malcolm Turnbull has lower electoral appeal according to the polls but won the day on retaining a sensible attitude to climate change. He is a mile smarter and much quicker to sense the political winds than Nelson and would make a much better PM than Rudd. He has had lower visibility and less experience than does Costello but that is changing.

Whoever the Liberals do select to replace Nelson they should back this leader through to the next election and ignore the invitation to commit political suicide with continuing leadership debates. The economic downturn and the preospect of a severe contraction of house prices will swing back those 'working families' who believed they could reliably trust the economy to Labor with its trade union debts and fundamental lack of talent.

Whoever wins the current leadership tussle I believe Julie Bishop remains a capable potential Deputy PM with Tony Abbott standing in the wings should Bishop eventually be shifted into a leadership role. Unlike Labor the Liberal Party has plenty of talent to draw on. Brendan Nelson was a 'sacrificial lamb' who probably understands his temporary role - he might be part of a Liberal front bench but not a future PM.

No, global heating did not stop in 1998

I am constantly surprised how wrong arguments are repeatedly trotted out in policy debates. They can be relentlessly refuted but, like the weeds in my front lawn, they consistently reappear. Nowhere is this truer than in the climate change debate.

Andrew Bolt claims that climate change stopped in 1998 so that current policies to address it are a waste of effort and money. These claims are comprehensively refuted here in an article by climatologists Robert Fawcett and David Jones.
‘While 1998 was the world’s warmest year in the surface-based instrumental record up to that point in time, 2005 was equally warm and in some data sets surpassed 1998. A substantial contribution to the record warmth of 1998 came from the very strong El Niño of 1997/98 and, when the annual data are adjusted for this short-term effect (to take out El Niño’s warming influence), the warming trend is even more obvious.

Because of the year-to-year variations in globally-averaged annual mean temperatures, about 10 years are required for an underlying trend to emerge from the “noise” of those year-to-year fluctuations. Hence, the fact that 2006 and 2007 were cooler than 2005, is nowhere near enough data to clearly establish a cooling trend’.
Data from three international time series and one for Australia discredit the wrong claims of Bolt. The Garnaut Review commissioned two econometricians at the ANU to examine the same vclaim of a cessation of warming. They also found that the evidence did not support the claim. So too does this study from the Yale Forum.

Bolt rejects the Garnaut findings although he agrees temperatures did rise after 1998 a bit but they have since stabilised. Hardly a compelling counterexample to the case for a continued warming trend given that he is attempting to draw inferences about the long-term trends in climate from a few year’s observations when longer-term trends, and even the short-term evidence, is inconsistent with his claims. It is interesting that one of the institutes he claims supports his views of sustained cooling says no such thing - in fact they forecast a moderation in rates of warming up to 2020 followed by a rapid resumption of warming after this date.

It is tedious to attempt to continue to have to refute the strong evidence of global warming and the case for addressing this problem now. The reason I post this claim is that the shenanigans in the Liberal Party suggest there is still a rump of climate change denialists determined to thwart action on climate change in Australia.

There is no certainty on this issue of climate change but science does not present its claims as certainties. Given that almost all climate scientists accept the reality of warming and that the counter-arguments provided seem so self-evidently weak it seems reasonable on this occasion for non-science citizens to act on the view that waiting for absolute certainty is riskier and more expensive than controlling the causes of emissions now.