Tuesday, 14 July 2020

Why consumers won't resist an anti-dumping ban on potatoes, even though they should

In my ECONS102 class today, one of the things we discussed was rational ignorance - the idea that some people who are negatively impacted by a policy will not fight against it, or even make themselves aware of it, because the monitoring costs of watching the government's decision-making are greater than the costs that the policy would impose on them. It is rational for people to remain ignorant of the policy and its consequences. The example I use to illustrate this in class is trade restrictions on sugar in the U.S. (as I outlined in this 2017 post). However, an example much closer to home could be arising this week, as Radio New Zealand reported:
Potatoes New Zealand is asking the government to ban heavily discounted frozen potato fries from arriving in the country.
It says global potato prices have collapsed and there is a mountain of product sitting in European cool stores.
Potatoes New Zealand chief executive Chris Claridge believed heavily subsidised European producers were eyeing up world markets to dump surplus product.
He said the EU currently had 2.6 million tonnes of surplus frozen fries.
Claridge said the local industry, whose annual production is only 150,000 tonnes, is already having to absorb its own large losses from the lack of demand in the past two months.
He said the industry could not wait for the fries to arrive at the wharf and cause long term harm that it might not recover from.
"We want the government to immediately implement short term safeguard measures to protect our industry from dumping. We are not asking for a handout, we are just asking for a level playing field," he said.
Let's be clear. Cheap potatoes from overseas are a good thing for New Zealand potato consumers. Banning discounted frozen potato fries from overseas would have the effect of increasing the price of fries, compared to what the price would have been without a ban. Should consumers care about this? As a group, New Zealand fries consumers will end up paying a lot more for their fries. However, individual consumers probably don't spend a whole lot of money on fries, so even if the price of fries was 20% higher as a result of the ban, the higher cost of fries each consumer faces is probably much lower than the cost (in time and effort) associated they would face in lobbying the government not to impose a ban. So, even though a ban would make consumers worse off, they are actually better off remaining rationally ignorant of any policy.

In contrast, potato farmers are likely to be made much better off if they don't have to compete with cheap imported fries. Each farmer (and farm worker) will likely gain substantially from a ban. The costs associated with not having a potato ban in place are likely to be very high for farmers and farm workers, and much greater than the monitoring costs those groups face. Farmers have a strong incentive to lobby the government to impose a ban on imported frozen potato fries (and indeed, that is exactly what they are doing).

Rational ignorance leads to a situation where, if the costs of a policy can be spread over many people, and the benefits concentrated among the few, inefficient policy (i.e. policy that reduces total welfare) and policy that protects the interests of favoured groups and makes the majority worse off, can be introduced by government almost without incident. Someone needs to stand up for the consumers before the government seriously considers this policy, because the consumers are not going to resist it themselves.

[HT: Mrs Piercy-Cameron, and see this post by Mark Johnston at Econfix that covers the topic as well]

Sunday, 12 July 2020

Lockdown and the increased demand for cosmetic surgery

Yesterday, I wrote a post that referenced the cost-benefit principle. One of the key points of the cost-benefit principle is that people try to avoid costs. When the cost of an activity increases, people tend to do less of it. And, when the cost of an activity decreases, people tend to do more of it. The definition of cost here is broad - it includes not only monetary costs, but costs that are non-monetary such as time or effort or psychic costs (which are the costs of added stress or loss of quality of life). Which brings me to this article from the BBC a couple of days ago:
Despite the virus shutting businesses across the globe, a number of plastic surgery clinics have remained open, adopting stricter measures such as Covid-19 tests and more frequent cleaning.
Clinics in the US, Japan, South Korea and Australia have all seen a rise in patients coming in for treatment including lip fillers, botox, face lifts and nose jobs...
Rod J Rohrich, a cosmetic surgeon based in Texas, said he was seeing a lot more patients. "Even more than I would say is normal. We could probably operate six days a week if we wanted to. It's pretty amazing," he told the BBC.
He said usually people would have to factor in recovery at home when considering surgery but now that many people are working from home, this doesn't need to be considered.
"They can actually recover at home and also they can have a mask that they wear when they go outside after a rhinoplasty or facelift. People want to resume their normal lives and part of that is looking as good as they feel."
One of the costs of cosmetic surgery is the time spent recovering at home. That cost might include foregone income from not working, or simply a psychic cost of wanting to avoid being seen by other people while the patient has a bandaged or bruised face.

The coronavirus lockdown has meant that many people are working from home. So, for many people the amount of income they would forego by convalescing at home has reduced, and therefore so has the cost of cosmetic surgery. The psychic costs have likely reduced as well, as cosmetic surgery patients will face less anxiety about being seen (they can just switch their camera off in any videoconferencing). 

When the cost of something decreases, we tend to do more of it - in this case, more cosmetic surgery.

Saturday, 11 July 2020

Voting, MMP, and the futility of the electorate vote

As I will discuss with my ECONS102 class next week, one of the characteristics of rational behaviour is that it is consistent with the cost-benefit principle. That is, a decision-maker will undertake an action if, and only if, the benefits of that action are at least as great as the costs of the action.

Economists have long noted that voting seems to present a challenge to the idea that decision-makers act rationally. I don't mean that people don't make a rational decision when voting (although recent elections and referendums in the Northern Hemisphere may present some obvious counter-examples), but the decision of whether to vote or not seems to defy the cost-benefit principle.

Consider the costs and benefits of voting. A voter incurs a cost when voting, because they have to take the time to go to a polling booth, think about who they want to vote for, and complete the voting form. All of that takes time (as well as some cognitive effort, for those who do more than just blindly tick one of the boxes based on the colour of the party insignia), and that time has an opportunity cost. The voter could have been doing something else instead, and they give up the opportunity to do that other thing when they decide to vote.

What about the benefits of voting? The simplest argument for voting is that people vote because they hope that their vote is going to affect the outcome of the election. However, for the vast majority of people, their vote for a particular candidate is not going to mean the difference between that candidate winning or losing the election. So, the chances that a vote on its own makes the difference between winning and losing is vanishingly small, and because of that, the benefit of voting is also vanishingly small.

However, under an MMP voting system like that in New Zealand, it gets even worse. Under MMP, most candidates have two chances to be elected. First, they could be elected as the candidate who receives the most votes in a particular electorate. Second, they could be elected as a 'list MP', making up the numbers so that each party has a proportion of MPs that is roughly equal to its proportion of the party votes. The list is ordered, with candidates higher on the list having a better chance of being successful.

Now consider a local electorate candidate, from one of the two main parties, who has a high position on their party's list. They are almost certain to get elected as a list MP, if they are unsuccessful at winning their electorate. So, regardless of whether a voter votes for that candidate or not, the candidate will become an MP. In other words, the benefit of voting for that candidate is not even vanishingly small, it is zero! Voters might as well not bother with voting for an electorate MP, and simply complete the party vote section of their voting paper.

Consider the Hamilton East electorate. Labour candidate Jamie Strange is 42nd on Labour's list - he is almost certain to be elected as a list MP, if he doesn't win the electorate. So, voting for Strange is essentially a waste of time. National hasn't released its list yet, but National candidate and incumbent Hamilton East MP David Bennett was 24th on the list in 2017, and has likely improved his ranking since then. So, voting for Bennett is also essentially a waste of time. If you are a Hamilton East voter, your electorate vote only matters if you vote for one of the minor parties.

In contrast, an electorate vote in Hamilton West might actually matter, because Labour candidate Gaurav Sharma is 65th on the Labour list, and unlikely to get in otherwise. National candidate Tim Macindoe was 25th on the National list in 2017, and if you count from the top of this page of the National Party website, he is 23rd, so would probably get in as a list MP if not re-elected as electorate MP.

If you are sensing that I am somewhat frustrated with the MMP voting system, you would be right. The futility of voting for electoral candidates when those candidates would get in regardless of your vote makes a bit of a mockery of the system. Are voters for Jacinda Ardern in the Mount Albert electorate simply engaged in some anonymous virtue signalling? They certainly aren't making any difference at all to the composition of parliament. Neither will voters for Todd Muller in the Bay of Plenty electorate.

What would work better? In the original MMP referendum, one of the options was called 'Supplementary Member' (which is described here). Like MMP, each voter would have two votes - one for an electorate MP, and one for a party. The party vote would only be used to calculate the proportion of list MPs each party gets, rather than the proportion of total MPs. At least then, electorate votes would count.

Another alternative, which I am quite partial to, is to have a rule that no electorate candidates can be on the party list. The reason I like this solution is that electorate MPs who are high on their party's list don't actually have to work as hard to represent their constituents as electorate MPs who are low on their party's list, because they will likely be re-elected anyway. Having electorate MPs not on the list ensures that they have the incentives to faithfully represent their electorate.

Anyway, coming back to the original point, if the benefit of voting is the chance that a voter affects the outcome of the election, then voting fails the cost-benefit test. Does that mean that all voters are irrational? Perhaps not. There is a benefit of voting other than the simple chance that a voter affects the outcome of the election, and that is the 'warm glow' feeling that a voter may receive by knowing that they have completed their civic duty. As this 2017 paper by Henrique Barros (New University of Lisbon) notes, people vote because they value the act of voting itself, rather than because they think they will influence the outcome of the election. So, perhaps voting is rational after all.

Thursday, 9 July 2020

A higher minimum wage and the choice to study in higher education

We are back into teaching next week, and one of the first things we'll discuss in my ECONS101 class is the effect of opportunity costs and relative prices on decision-making. The opportunity cost of something is what you give up in order to get it. The higher the opportunity cost of something, the less likely you are to get it. The relative price of something is its price (or cost to you), relative to the price (or cost to you of something else). When the relative price of something goes up, we tend to do less of it, and when the relative price goes down, we tend to do more of it. Notice the two concepts (opportunity cost and relative price) are somewhat similar.

On that note, this article from the New Zealand Herald a couple of weeks ago provides a good example of both relative prices and opportunity cost:
Higher minimum wages have made it less worthwhile to get an education, a new study says.
The Ministry of Education study shows that your future income will still be higher if you get a degree - but the relative advantage of a degree is shrinking.
This is partly because of educational inflation - a lot more people are getting degrees, so the relative advantage of getting one over someone else is reducing.
But it also reflects big increases in the minimum wage, which have lifted the incomes of people with no qualifications faster than average wages, so incomes have become more equal.
Higher education provides gains, in terms of higher lifetime earnings (which is a point that I'll be covering with my ECONS102 class later this trimester). However, when someone weighs up the costs and benefits of higher education, as noted above a relevant consideration is the opportunity cost of that education - the earnings that they would give up while they are studying. If the minimum wage increases, then for some students (those that would have otherwise been earning the minimum wage), the opportunity cost of higher education increases. That should lead fewer students to undertake higher education.

Another way of thinking about this is that when the minimum wage increases, the relative price of higher education (the price of higher education relative to the alternative of continuing earning without higher education) has increased. That means that higher education is now more expensive in relative terms, because some students have to give up more in order to obtain it. And that should lead fewer students to undertake higher education.

Of course, it is interesting timing to release a report that seems to suggest that fewer students the net returns to higher education have decreased, just when we are entering an historic recession. Many of the jobs that are being lost (particularly in tourism and hospitality, as I noted yesterday) are at the minimum wage level, and for those people suddenly unemployed, the opportunity cost of higher education is suddenly lower than before. As I noted in yesterday's post, that suggests that now is an excellent time to be investing in retraining, for individuals as well as for government.