Does invested $1 in retrofitting saves $6 in health expenditure? @PhilTwyford @PeterDunneMP @AndrewLittleMP

Various bold claims have been made about the payoff from investing more in retrofitting insulation into housing. The government recently spent $600 million on such retrofitting of insulation.

https://twitter.com/PhilTwyford/status/728137160113557505

There is a private member’s bill before Parliament to introduce minimum standards for rental properties with regard to insulation and other matters. Little is by the Leader of the Opposition Andrew Little said for the consequences for rents of this additional expense to landlords.

Ian Harrison of Tail Risk Economics initially estimated that the $600 million invested in retrofitting of insulation will save barely half of that:

After correcting for this major error and taking a more realistic view of the benefit estimates in other studies, the net benefits of $630 million disappear.

The $600 million insulation investment will probably generate benefits of closer to $170 million, for an economic loss of $430 million.

After meeting with Ian, I read through the rather dull background documents behind a cost benefit analysis relied upon by the government to spend the $600 million dollars.

The most interesting part of the cost benefit analysis is most of the benefits come from fewer cardiovascular related hospitalisation of the elderly and not from respiratory diseases among children.

I found the error was far more fundamental than a incorrect transfer of a calculation between tables discussed in the first publication by Harrison. I had to read the background documents several times to understand what had been done wrong.

The cost benefit analysis for the Warm Up New Zealand Heat Smart Programme assumes that the number of elderly occupants of the newly insulated house increases by one each year and after 5 years, one of these dies but is replaced by a new elderly occupant.

We have modelled the probability of a vulnerable person avoiding mortality as a result of the intervention. The probability of this is (112.7/1000)*0.27= 0.03 (3%). We treat avoidance of mortality by treatment in each year as independent events.

The multi-year benefit calculated above would accrue based on the life years gained as a result of deaths avoided in year one.

However, we would expect these benefits to accrue in year two for different vulnerable individuals (aged 65 and over with a cardiovascular related hospitalisation in previous 18 months), and for different individuals again in every subsequent year that the treatment continues to have an effect, i.e. an on-going stream of benefits of $1,050.74 per year. This assumes a constant proportion of people aged 65+ who have recently been hospitalised with circulatory problems….( p.38).

In the first year of the new insulation, the first occupant benefits and the net present value is included in the benefit cost analysis calculation – the erroneous benefit cost analysis calculations which its authors still defend.

In the 2nd year, another elderly person moves into that same house and the same calculation is done for them. In the following year, yet another elderly person moves into the same house and the net present value calculation is repeated.

By the end of 5 years, there are 5 occupants in this house all benefiting from the same insulation investment. In the 6th year, the first elderly occupant dies to be replaced by a new elderly occupant who then gains from the insulation upgrade.

There was double counting of the number of people who benefited from the insulation as Iain Harrison explains

The analysis assumed that there was not one, but five occupants who had been hospitalised with a cardiovascular illness in the previous 18 months in each of the relevant insulated houses. There should have been only one such occupant.

The retrofitting of insulation was estimated to cost $600 million. Iain Harrison estimated the benefits to be $300 million, not $1.2 billion. That is a benefit cost ratio of 0.5.

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Source: Iain Harrison, The mortality reduction benefits of insulation: the error identified.

@jacindaardern @NZLabour’s Healthy Homes Bill will raise rents to poor tenants and students

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Source:  David Friedman, Chapter 1: What Does Economics Have to Do with Law?

The LDP on Marijuana Legalisation

Does ethical investing pay? Barrier Fund and Ave Maria Catholic Values Fund head to head

Virtue is not its own reward if you invest in the Ave Maria Catholic Values Fund which is AVEMX in the head-to-head comparison with the Barriers Fund, formerly the Vice Fund. The Ave Maria Catholic Values Fund return since inception was 5.63% as compared to the 9.95% return of the Barrier Fund.

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Source: VICEX – USA Mutuals Barrier Fund Investor Class Shares Mutual Fund Quote – CNNMoney.com

The S&P index grew by 8 .34% since the inception of the then Vice Fund, now the Barrier Fund. Such is the price of risking of going to hell if you lose Pascal’s wager by investing in tobacco, alcoholic beverage, gaming and defence/aerospace industries.

All of the equity investments (which include common stocks, preferred stocks and securities convertible into common stock) and at least 80% of the net assets  of the Ave Maria Catholic Values Fund is invested in companies meeting its religious criteria as  the fund manager explains

Morally Responsible Investing (MRI) is a subset of socially responsible investing, which often screens out companies engaged in environmental issues, tobacco products, alcohol, nuclear power, defense, oil and “unfair” labor practices. MRI is different in that it screens out companies engaged in activities that are not pro-life or pro-family… 

All investments are screened to eliminate any company engaged in abortion, pornography, embryonic stem cell research, or those that make corporate contributions to Planned Parenthood

Traditional ethical funds use negative screens (to eliminate arms manufacturers and other frowned upon activities) and positive screens (to favour businesses with a good record on corporate social responsibility or that are involved in low-carbon industries etc).

why the world isn’t even more corrupt than what we observe

Landmarking Is Turning New York City Into a Life-Sized Historical Diorama 

Source: Landmarking Is Turning New York City Into a Life-Sized Historical Diorama – Hit & Run : Reason.com

Does labor market regulation really protect the interests of workers?

“Bourgeois Equality” lecture

The cost of regulation in the USA

Why Private Investment Works & Govt. Investment Doesn’t

What 3 skills do public policy analysts need?

I used to argue that the quality of public policy making would double if public policy analysts remembered the first 6 weeks of microeconomics 101 but on reflection more than that is required.

I picked up my initial insight out when working as a graduate economist in the Australian Department of Finance. That was a few years ago.

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I am now concluded that policy analysts also need to know the basics of the economics of tax incidence. Who pays the tax depends on the elasticities of supply and demand rather than who writes the check to the taxman.

The number of times that I have read media and public policy analysis saying who pays the tax is the writer of the cheque to the taxman is beyond counting.

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There is also what to do about unemployment and inflation. Do not just do something, sit there might be good advice on most occasions. As Tim Kehoe and Gonzalo Fernandez de Cordoba explain in the context of first do no harm:

Looking at the historical evidence, Kehoe and Prescott conclude that bad government policies are responsible for causing great depressions.

In particular, they hypothesize that, while different sorts of shocks can lead to ordinary business cycle downturns, overreaction by the government can prolong and deepen the downturn, turning it into a depression.

A Mall divided by different city minimum wage laws @SueMoroney @GreenCatherine

The Westfield Valley Fair Mall is half in San Jose city and half in Santa Clara city. In 2012, San Jose raised its minimum wage from $8 to $10 per hour.

National Public Radio in 2014 had a brilliant broadcast on the implications of this new city minimum wage law on the Westfield Valley Fair Mall. As the broadcast said:

This change created two economic worlds within a single, large building. Employees doing more or less the same work, just steps away from each other, started making different wages.

The radio show discussed what happened on the $8 side of the Mall and then on the $10 side through interviews with employers and workers.

On the then $8 per hour minimum wage side of the Mall, employers quickly noticed that many of their employees quit to jobs elsewhere in the same Mall. These same employees found that the quality of job applicants also fell away seriously. There were noticeable differences in the personalities traits and dress standards presented by the $8 an hour job applicants and $10 an hour job applicants.

As is to be expected because information about job opportunities is costly, some of the minimum wage employees did not know that other parts of the Mall paid more.

(This change in job turnover rates and applicant pool quality subsequent to the minimum wage increase in San Jose has implications for the inequality of bargaining power between workers and employers. Minimum wage workers do keep an eye on competing opportunities and take them up when better options arise – JR aside).

Since 2012, the minimum wage rates in the Mall have changed again: Santa Clara’s minimum wage initially increased to $9 an hour – the state-wide minimum wage, which had increased from $8 per hour; San Jose’s $10.15 per hour.

Those city minimum wages were increased further this year to $11 in Santa Clara city and $10.30 in San Jose city respectively by the respective city councils.

The state-wide minimum wage in California is to increase to $15 per hour by 2020 under a law just passed. California’s current $10-per-hour minimum wage is already among the highest in the country — only Washington, DC, has a higher minimum wage at $10.50 per hour.

Getting back to what was said in the National Public Radio broadcast, the show then moved on to the Gap Store, which straddled the two city boundaries.

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Source: Episode 562: A Mall Divided : Planet Money : NPR.

The Gap Store had the option of keeping a record of how much time employees spent in each city within its store and pay accordingly under each city law. The Gap raised everybody’s wage to $10.

There was then a fascinating interview with a Pretzels store owner. The question she asked herself every time she bought anything was how many pretzels se had to sell to cover the cost. She quickly concluded that she could not sell enough additional pretzels to cover the wage rise.

There is another Pretzels store just around the corner from her in the same mall but in the other city so she could not raise her prices by that much. She had a picture of that day’s menu and price list of the competing Pretzels store on her smart phone.

She instead took a cut in her profit. This flowed back to her employers because they received an annual bonus based on 15% of each year’s profit. They did not like that reduction in their bonus.

In a delicious irony, this same entrepreneur owned another Pretzels store in a different part of the Mall but which was in the other city subject to the lower minimum wage law. She owned two of the three pretzels stores in that Mall.

She solved the problem in staff morale by rotating her staff in alternate weeks between her two stores in the same Mall but different cities and paying them accordingly.

In my opinion, this NPR story is pretty much a vindication of standard microeconomics of minimum wage laws. Minimum wage workers are alert to their opportunities and take the best ones available to them but this is not perfect because of cost of information. As Manning observed in his superb book Monopsony in Motion:

That important frictions exist in the labor market seems undeniable: people go to the pub to celebrate when they get a job rather than greeting the news with the shrug of the shoulders that we might expect if labor markets were frictionless.

And people go to the pub to drown their sorrows when they lose their job rather than picking up another one straight away. The importance of frictions has been recognized since at least the work of Stigler (1961, 1962).

As George Stigler argued, information is costly to obtain in the labour market and this leads to price and wage dispersion with this variance related to the cost of searching for information. He concluded that the one-price (one-wage) market will occur only where the cost of information about the prices (wages) offered by buyers and sellers is zero.

Finally, minimum wages rises threaten the profitability of businesses and therefore their survival. That puts low-pay jobs at risk. As Bhaskar, Manning and To (2002) explain in their survey paper on monopsony:

Notice also that because a binding minimum wage reduces employers’ profits when there is free entry into and exit out of the labor market, some employers will be forced to exit. Employer exit has a negative effect on total employment through the loss of exiting employer payrolls.

That is, although establishments that remain after the imposition of a minimum wage increase their employment, some employers are forced out of business.

Thus, minimum wages have two opposing effects: the employment-increasing “oligopsony” effect and the employment-reducing “exit” effect. The overall effect of a minimum wage depends on which effect dominates.

An increase in the family tax credit puts no jobs at risk and is a superior alternative to minimum wage laws. Minimum wage increases throw some low page workers onto the social scrapheap.

Some look upon these large minimum state and city wage increases as worthwhile policy experiments. As Dube said:

… 30 to 40 percent of the California workforce will get a raise … This will be a big experiment. It’s far outside of our evidence base… If you’re risk-averse, this would not be the scale at which to try things.

On the other hand, if you think that wages are really low and they’ve been low for a really long time and we can afford to take some risks, doing things at this scale will get us more evidence.

“Big experiments” to use Dube’s words such as these with state and city minimum wages laws are wrong as Robert Lucas explained in 1988:

I want to understand the connection between in the money supply and economic depressions.

One way to demonstrate that I understand this connection–I think the only really convincing way–would be for me to engineer a depression in the United States by manipulating the U.S. money supply.

I think I know how to do this, though I’m not absolutely sure, but a real virtue of the democratic system is that we do not look kindly on people who want to use our lives as a laboratory. So I will try to make my depression somewhere else.

Environmentalists are the biggest science deniers of all #EarthDay

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Why Do Black Markets for Marijuana Still Exist in Colorado? @PeterDunneMP

Why Is Marijuana Legal in Some States and Not Others?

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