Getting tobacco costs wrong

Jason Krupp screwed up the burden tobacco imposes on the New Zealand health system. But it's not entirely his fault. A comment on my prior post finally twigged me to how he screwed up - it should have been obvious. Again, here's what Jason wrote.

According to the World Health Organisation's Economics of Tobacco Toolkit, health costs attributed to smoking account for between 6 per cent and 15 per cent of national healthcare expenditure in developed countries.

In Australia, smoking costs equated to between 2.1 per cent and 3.4 per cent of gross domestic product.

New Zealand was not featured in the report but, if the results were comparable here, it would mean Kiwi taxpayers fork out about $7 billion a year to treat smoking-related diseases.

The first figure is a WHO estimate of the burden borne by government healthcare systems. The health budget here is a bit under $14 billion. So extrapolating from that value would give you a range from $840m - $2100m. That's well in excess of prior estimates from either the Cancer Society or Des O'Dea, but it's only 3-8 times larger than those figures. And far far less than Krupp estimated. But, with Treasury's site down as much as it has been lately, the health budget might not have been readily available.

Krupp's second line is almost certainly an estimate from the Australian Collins & Lapsley report into the social costs of smoking. I have banged on, repeatedly, about how it's easy to conflate these social cost measures with costs to the government. And that's what I think Krupp's done. He took the 2.1-3.4% of GDP estimate, read it as "costs to the health system" rather than as "costs to the country, including costs borne by smokers, and likely including some double-counting as value of statistical life estimates and productivity costs overlap." And he uses that to generate the third line. GDP is around NZD$200 billion.* Multiply that by the 3.4 upper end of the "percent of GDP" figure from Oz and you get a number that, with some upwards rounding, hits $7 billion.

I really really hate "Social costs of Blah" studies. Because it's just so easy for somebody who doesn't know the term of art employed to read it as equating to costs on the taxpayer. Just like Krupp did. "Smoking costs" turned into "Kiwi taxpayers fork out ... to treat smoking-related diseases".

The social costs of social cost studies, in screwing up how the public views the distribution of the burden of various activities and consequently making folks think a paternalistic policy is really a Pigovean one, are not insubstantial.


* I wish Stats NZ would report the actual GDP figures in its quarterly updates. It's surprisingly hard to find "What is the GDP of NZ" anywhere on the Stats NZ site. You'd think it'd be in the "Top Statistics" page; nope. Just growth rates. How about on the GDP page? Lots of link there to estimates on growth rates; can't see a "This is the GDP of NZ" one. Maybe over on National Accounts for year-end? Nope. Latest quarterly update? No. Press release on that update? No.  Why do I have to go to the IMF website and divide by the exchange rate to do this, or add up quarterly numbers from the RBNZ? Stats NZ has the number buried in Tab 6.1 of an Excel sheet here (thanks, Diana, for the pointer!), but shouldn't that be up front somewhere?

Treasury on minimum wages [updated]

Patrick Gower says:

Everyone knows it’s got bloody hard to live on the minimum wage - even John Key admits that. His defence is that a rise from $13 to $15 an hour will cost jobs. Key has used this defence in a televised debate, and he's used it to workers on the shop floor at McDonald's as seen in my story last night. But what Key doesn't want to admit, is that this claim is not the full picture and may just be fear-mongering - a rise may not cost jobs at all. That's what Treasury says in this advice from March 2010 obtained by 3 News under the Official Information Act.

Gower should spend less time reading single analysts' emails and more looking at what Treasury's actually said. He's citing a 2010 email released under the Official Information Act (don't the italics make it all seem secret and hidden and stuff?); here's Treasury in 2010 recommending that Key keep the minimum wage at $12.75 instead of raising it to $13. It's in the regulatory impact statement [ht: Greg Dwyer]. What does Treasury give as reason for recommending keeping the minimum wage at $12.75?

The economic recovery is slow and the labour market remains volatile

Overheating in China and commodity prices in Australia may increase vulnerabilities for New Zealand over the next 12 months

Increasing the minimum wage in this environment could create wage pressures (both directly through increased wage costs and indirectly through pressure on wage relativities) for employers who retained their workforce during the recession, and employers who are expanding their workforce as the economy is recovering

The Department of Labour estimates that keeping the minimum wage at $12.75 may lead to an employment gain of between 1360 and 1960 jobs

Treasury further comments:

As a proportion of the median wage, New Zealand’s minimum wage is the second highest in the OECD (in 2008)

The minimum wage has increased significantly since the late 1990s. In real terms by 63% for adults and 128% for 16 and 17 year olds since 1999 (the latter is largely likely to be due to the abolition of the youth minimum wage in 2008)

Let's recap. Gower paints Treasury as supporting a two dollar increase in the minimum wage when in fact they fought against a twenty-five cent increase in 2010.

I weep for journalism in this country. [Part one of Gower nonsense on minimum wages] Update: Here's Treasury in the Cabinet Papers from the 2010 review.

Treasury has some concerns that increasing the minimum wage may constrain employment growth and impose costs on businesses, particularly given the subdued labour market recovery, minimum wage increases over the last decade, and the level of the minimum wage relative to the average wage. There are also fiscal costs associated with an increase in the minimum wage.

While unemployment is decreasing, New Zealand’s labour market has been volatile in recent quarters. Treasury considers that increasing the minimum wage in the current economic environment would create wage pressures for employers (both directly through increased wage costs and indirectly through pressure on wage relativities) who have retained their workforce during the recession, and limit the opportunity of employers to expand their workforce as the labour market recovers.

There is also a risk that increasing the minimum wage could exacerbate New Zealand’s high youth unemployment. The unemployment rate for 15-19 year olds was 23.3 per cent in the September 2010 quarter. (New Zealand’s youth unemployment rate is four times as high as the adult unemployment rate, and the ratio is high compared to other OECD countries). International evidence indicates that increases in the minimum wage leads to employers substituting non-skilled workers (such as youth) for low or semi skilled workers, as non-skilled workers become relatively more expensive. Youth unemployment is of particular concern because it can have long-term consequences in terms of lower income and poor labour market outcomes. Ministers may wish to ask the Department of Labour to carry out more analysis on the impact of the minimum wage on youth unemployment.

New Zealand’s minimum wage has increased substantially in the last decade, increasing in real terms by 36.6 per cent for adults and 128 per cent for 16 and 17 year olds since 1999 (the latter rise is largely due to the abolition of the youth wage in 2008), compared to a 35 per cent increase in the average wage. New Zealand’s minimum wage is also high compared to other OECD countries. In 2008 New Zealand’s minimum wage as a proportion of gross median wages was the second highest in the OECD (see minimum wage review 2010 Regulatory Impact Statement, page 30, figure 4).

Treasury considers that the total fiscal costs are likely to exceed estimates provided in the paper. Other agencies are likely to be impacted by increases in the minimum wage, and bargaining by state sector employees to retain wage relativities could contribute to the fiscal cost of a minimum wage increase. ...

Odds Gower will have any shame and retract his slur on Treasury?

Dealing with uncertainty

Incoming Cera chief executive Roger Sutton said his advice from GNS Science was for:

A 23 per cent chance of a magnitude-6.0 to 7.0 quake in the next year, dropping to a 10 per cent risk the following year.

More than 90 per cent chance of a magnitude-5.0 to 6.0 shake in the next 12 months, falling to more than a 70 per cent chance in the following year.

Says The Press.

I wish I could just roll d% and have uncertainty be resolved.

Optimal planning - even just individual level "Do I fix my house or just wait a couple years" - is tough under these conditions. And things get worse at higher levels of aggregation. I'd expect that reinsurance will be unaffordable for AMI if the likelihood of another quake is around one in four. On the plus side, if everybody insured by AMI has already had their house fall over (ours hasn't), then potential value at risk from another quake is lower. The same holds for the Earthquake Commission.

The government then becomes the effective reinsurer for AMI and maybe a few other companies once current coverage is due to roll over. I hope the market would look kindly on a large bond issue should one become necessary. I hope that the election campaign will herald the kinds of structural policy changes on the spending side that will be necessary to make a successful bond issue, should one be necessary.

I hope everyone's emergency water and food stocks have been replenished.

Ugh. Ugh ugh ugh ugh ugh.