Matt Nolan

Why are they making my beer more expensive?

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Pressure from parliament has led to supermarkets finding a way to collude and increase prices for alcohol sales. That is what I read from this article in the Herald.

Of course it is being framed this way so that it sounds like a winner:

The two big supermarket chains say they have stopped selling alcohol below cost as a “loss leader”, after claims the cheap deals lead to alcohol abuse

What a load of rubbish.

As long as the tax associated with alcohol consumption represents the costs and benefits (a hard issue as has been discussed in many places) then we don’t need to fluff around with this type of rubbish – as the price would represent market competition AND the social cost, thereby implying that the choices being made are in the social interest. But instead, in order to seem hard on something people view as a vice supermarkets have been pushed into a situation where they can collude in order to increase profits.

How? Well, it is true that alcohol is being treated as a loss leader. But its effectiveness as a loss leader depends on the price charged by the other firm. Under the guise of “the social good” the supermarkets have been able to agree to both increase prices slightly – keeping the relative “loss leader” advantage while making more money off alcohol sales.

It just goes to show – when people start getting the government to pressure firms based on the arbitrary morals they want to force on society, we will end up being taken advantage of by someone. I want my cheap beer back …

Update:  Paul Walker and Brad Taylor both have good posts on the issue.  Starting from this comment Agnitio brings up interesting points regarding how to view the socially optimal price in this setting – his criticism of my view is very good, even if I don’t agree with it yet (you can tell it is a good criticism because my defence isn’t very clear – the best I can do is say that it is a transfer from producers to beer consumers, but the GE impact is foggy).

Matt Nolan

Dom post article: Beware those bearing gifts of productivity

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Article is here.

Discussion on Rates Blog is here.

Money quote:

Both political parties are unwilling to face that, with respect to government policies, there is a fundamental trade-off between some social values (fairness, justice, etc) and the level of productive activity.  This trade-off is one of the primary reasons for the existence of government – and yet neither of the political parties seem willing or able to recognise it.

As a result, next time we hear the government discuss the importance of productivity, or we hear some international body talk about the goal of productivity growth, let’s try not to forget that there is a trade-off – and let’s ask exactly what this trade-off is.

jamesz

Weight and global warming

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While searching for articles about fat taxes I came across this piece about fat and global warming:

Overweight people eat more than thin people and are more likely to travel by car, making excess body weight doubly bad for the environment, according to a study from the London School of Hygiene & Tropical Medicine.

They estimate 10% increased emissions from being overweight. Sadly I don’t have time to read the original articel right now, but at least the newspaper’s conclusion sounds shaky. For a start, do fat people eat any more than slim people of the same weight? Are the decisions to overeat and drive more both explained by unobserved cultural factors, rather then one explaining the other? Read more

jamesz

Alcohol regulation: economists would do it better

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The NZ Law Commission is on the way to cutting back on the availability of alcohol. Their justification is twofold:

  1. The contribution that excessive use of alcohol led to law and order problems in the country.
  2. The serious health and injury effects from alcohol consumption, as well as a list of other social harms.

And the principle they used to weigh these issues: harm minimisation. What, you say: What about weighing the benefits? What indeed! Eric Crampton takes to the second point of the report thoroughly:

The study counts as costs reduced labour productivity. … If we only count costs, then these get included: costs to society via lost output and costs to the government via reduced tax revenues. But if we worry about NET costs rather than gross costs, these have to disappear. Why? Because if I decide to drink and be less productive at work, I’m less likely to get a promotion or a salary increase. My productivity affects my wages. If I decide to be less productive and have a lower expected salary path, that’s between me and my employer: I’m bearing the costs. If I decide to do it, that’s prima facie evidence that I weigh the benefits as greater than the costs.

Not only do they miscount costs, but they also fail to take into account any net benefits: the enjoyment of drinking, or the higher salaries that come with it. Read more

Matt Nolan

UK continues to dig a bigger economic hole

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In a sign of the times, the government in the United Kingdom is talking about increasing the top tax rate from 40% to 50% to fund part of their burgeoning budget deficit. A few points about this they may have forgotten:

  1. High income earners are likely to be more responsive to an increase in tax rates (at the margin) – as a result, by increasing tax rates at the top, we are pushing our most talented workers out of the labour force,
  2. The deadweight loss of taxation increases at a faster than linear rate – implying that for each 1% of tax we add we get a greater level of lost surplus than for the previous 1%.
  3. Highly skilled labour is more mobile – as a result, a lift in tax rates for the highly skilled will lead to them moving overseas. When the UK does this it is a good thing for countries like Aussie and NZ – but not for the UK.
  4. Highly skilled labour is able to “move income about” more easily. For example, if the corporate tax rate remains well below 50%, highly skilled individuals may find ways to set up companies and shift part of their income into the corporate tax bracket (Note this relies on being able to include a lot of spending as a business expense methinks). When this occurs corporate tax take will rise, but the increase in income tax revenue will be much weaker than expected.
  5. An income tax is also a “tax on business” – the relative split depends on the “incidence of tax”. As a result, a lift in the top tax bracket implies that there will be more pressure on firms that hire skilled labour – not really the best move when these industries are already credit constrained …
  6. By increasing the tax on income we will drive down the incentive to invest.
  7. Skilled and unskilled workers are complements – by reducing the incentive to hire skilled workers, you also reduce the incentive to hire unskilled workers. As a result this will drive down demand for unskilled workers, lowering wages and increasing unemployment.

Thank goodness economic policy in New Zealand makes more sense 😉

The Times joins in the fun.  And the Guardian illustrates that it doesn’t understand point 7 (among other points).

Matt Nolan

Interest free loan lollyscramble part II

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Not content with the interest free student loan scheme the government has decided it might be time to add an interest free home loan scheme (ht Rates Blog).

Now, this is essentially a transfer from everyone (taxpayers) to first home buyers and the people they are selling to.  In such a situation I have to ask why?  It certainly doesn’t seem fair to take money from people and give it to first home buyers and the section of the property market they are involved in … (disclaimer:  I would be able to get the loan as I would be a first home buyer – just like I have an interest free student loan.  This doesn’t stop me as an economist saying that they are bad policies)

The government says it is to “encourage building” – if this is the case, then why this scheme?  Why not a direct subsidy to home builders.

Furthermore, why do we want to encourage building – why aren’t we doing enough building.  The answer I believe is that in the current environment residential builders are credit constrained – so why doesn’ the government just offer them loans (at a MARKET rate of interest).

Bad policy idea …