The health impacts of criminalising prostitution

I've previously written about the positive impacts of decriminalising prostitution (see here and here). However, most studies on this have been conducted in developed countries. In a new article published in the Quarterly Journal of Economics (possibly ungated earlier version here), Lisa Cameron (University of Melbourne, and no relation to me), Jennifer Seager (George Washington University), and Manisha Shah (UCLA) look at a peculiar case in Indonesia. As they explain:

The study area encompasses the districts of Malang, Pasuruan, and Batu in East Java, Indonesia... As is common throughout Indonesia, sex work in East Java occurs in both formal worksites (i.e., brothels) and informal worksites (i.e., the street)...

On July 11, 2014, the Malang district government announced that on November 28, 2014, it would close all formal sex worksites within the district as a “birthday present” to Malang... 

The announcement of the worksite closures was unanticipated. To the best of our knowledge, when we conducted baseline surveys in February–March 2014, there was no expectation of the closures. In fact, we had considered conducting the research (which was originally planned to be a randomized controlled trial offering micro-savings products to sex workers) in Surabaya but had been advised by the community-based organization we were working with, whose main mission is to work with sex workers in the Malang area, that worksite closures were possible in Surabaya. We specifically selected Malang as our study site because worksite closures were not anticipated.

I guess this was a case of the researchers making the best of a bad situation. Cameron et al. started out intending to research one thing, but ended up researching something completely different (incidentally, there's been a lot of that over the last year, due to coronavirus lockdowns or just the pandemic generally).

Anyway, Cameron et al. had collected some baseline data before the criminalisation, and collected data after the criminalisation, allowing them to apply a difference-in-differences analysis. Essentially, this involves comparing the difference between Malang and the other two districts before criminalisation, with the difference between Malang and the other two districts after criminalisation. They find that:

...criminalizing sex work increases STI rates among sex workers (measured using biological test results) by 27.3 percentage points, or 58%, from baseline. Using data from both clients and sex workers, we show that the main mechanism driving the increase in STI [sexually transmitted infection] rates is a decrease in access to condoms, an increase in condom prices, and an increase in noncondom sex. Sex workers are more than 50 percentage points less likely to be able to produce a condom when asked by survey enumerators at endline, and clients report a 61 percentage point increase in noncondom sex.

None of that is good, and it extends to those that left sex work as well, and their children:

Using data obtained from tracking women who left sex work postcriminalization, we show that those who leave sex work because of criminalization have lower earnings than those who leave by choice. In addition, children of women from criminalized worksites are adversely affected—they have less money for school and are more likely to work to supplement household income.

The criminalisation also impacts the general population:

...there is a statistically significant... increase in female reports of experiencing STI symptoms in the past three months. This is consistent with a scenario in which increased STI rates among sex workers at the criminalized worksites translate into higher STI rates among clients, who then pass these STIs on to their sexual partners.

The sex market was smaller as a result of criminalisation, which was the intention of the policy. However, the unintended consequences are severe. As Cameron et al. conclude:

...from a health perspective, criminalization of sex work is likely to be counterproductive.

Indeed.

[HT: Marginal Revolution, for the working paper version last year]

Read more:

• Red light districts and house prices
• Legalised prostitution and crime

Book review: The Instant Economist

What are the key economic concepts that a manager needs to understand? That is the question that is answered in The Instant Economist, a 1985 book by John Charles Pool and Ross La Roe. This is a pop-economics book from a time when pop-economics didn't really exist as a concept. Nevertheless, it has aged really well, and is not to be confused with the 2012 book of the same title by Timothy Taylor (which I reviewed here a few years ago).

Pool and La Roe cover concepts from macroeconomics, microeconomics, and international economics, pulling out the key things that a manager needs to understand in each area, and explaining them in a quite straightforward way. The narrative style is the story of an MBA graduate whose father has sent him to talk to an economics professor because, while he understands all of the maths, he doesn't understand any of the economic intuition from his business degree. Regular readers of this blog will probably realise that is a setup I have a lot of sympathy for. Clearly though, the book was written for a different time - the professor's lunch consists only of two martinis at the staff club, just before he heads in to teach a graduate managerial economics class!

I found the microeconomics section to be particularly useful and still current. The macroeconomics is a bit dated and even the simple models of macroeconomics have moved on a bit from how Pool and La Roe write about it. The 'bathtub model' of macroeconomics was an interesting device, but probably wouldn't stand up to much scrutiny now. The international economics section is more-or-less limited to exchange rates, international investment flows, and the gains from trade.

This was a really good book, and I enjoyed it a lot. It also gave me some ideas on framing the importance of elasticities in particular for management students. Recommended!

No, economic growth won't save us from the increasing fiscal costs of population ageing

Last week I wrote a post about ageing and creating tax incentives for older people to work longer. The impetus for the tax incentives is the projected increase in the older population, and reductions in support ratios (the number of working people for each older person). However, the issue may not be as bad as assumed by most people (including me).

This new article by Ian McDonald (University of Melbourne), published in the journal Australian Economic Review (sorry I don't see an ungated version online) tells a different story. McDonald first outlines the problem:

The likely prospect of an ageing population, that is, an increase in the share of old people in the population, will put upward pressure on the level of government expenditure in the future. High government expenditures per old person multiplied by the increase in the proportion of old people in the population will drive an increase in government expenditure. This is a major fiscal challenge which we are starting to experience.

He then goes on to summarise projections of government spending, based on assumptions about population growth, and an assumption of unchanged government policy (which is a standard assumption - we can't easily forecast what future government policy may be). He finds that various projections (by McDonald himself, and others):

...suggest that an increase in government spending due to the ageing population somewhere in the range of 4.9–7.8 percentage points of GDP over the 40‐year period seems to be a reasonable projection assuming unchanged government policy.

So, essentially the government would need to either increase spending by 4.9-7.8 percentage points of GDP. McDonald seems to suggest this is not a big deal, but given that government spending in Australia is around 40 percent of GDP, that would entail a 12-20% increase in government spending. That means taxes would need to be 12-20% higher than currently, or government services (or service quality) would need to be cut to compensate for the extra spending.

McDonald's argument that the costs are not prohibitive rests on this:

The prospect of an increasing proportion of old people raises the spectre that our continuing support will be impossible. However, this fear ignores the fact that because of the continuing growth of labour productivity, we who will finance this support will be better off than we are today and will indeed be well able to support older people.

Specifically, he finds that the increase in government spending required for the ageing population is dwarfed by the increase in GDP itself. I don't find this argument entirely persuasive, because if taxpayers were happy to give up some proportion of their income growth in higher taxes, the government could do that right now. In fact, governments tend to be moving in the opposite direction, decreasing taxes even though income per capita is increasing. That suggests that there is already an unwillingness, either by taxpayers or by government, to increase taxes to offset increased costs due to ageing.

I don't think you can just wave your hands, cite 'economic growth', and 'poof!' - all problems relating to the increasing costs of an ageing population disappear. And that appears to be what McDonald is doing. Which is disappointing - I usually like the 'For the Student' section of the Australian Economic Review, but this is one article that falls short of the mark.

Stock market falls and fatal road accidents

It is pretty well established that distracted driving is dangerous - according to the NHTSA, it claimed nearly 3000 lives in the US in 2018. There are many things that can distract a driver - mobile phones, eating or drinking, or talking to passengers. But how about emotions? The Reduce the Risk website notes that "83% of drivers think about something other than their driving when behind the wheel", and that could be a distraction.

So, I was interested to see this recent paper by Corrado Giulietti (University of Southampton), Mirco Tonin (Free University of Bozen-Bolzano), and Michael Vlassopoulos (University of Southampton), published in the Journal of Health Economics (ungated earlier version here). In the paper, Giulietti et al. look at the relationship between stock market returns and fatal car accidents in the U.S. Specifically, they use data on daily stock returns (S&P500 Index, and some other measures) and daily numbers of fatal vehicle accidents from the Fatality Analysis Reporting System (see here) over the period from 1990 to 2015. They find that:

...a one standard deviation reduction in daily stock market returns increases the number of fatal accidents by 0.6% (that is, by 0.23 accidents over an average of 37.4 daily accidents occurring after the stock market opens).

The relationship is statistically significant, but notice that the size of the effect is pretty small. The standard deviation of the daily stock market returns is 1.04 percent, with an average of 0.04 percent. So, if the stock market loses one percent on a particular day, these results suggest that there would be 0.23 more fatal road accidents that day in the U.S. 

Of course, that attributes a causal interpretation to these results, which are essentially correlations. Giulietti et al. do undertake some interesting robustness checks and falsification tests on their results, as they explain:

In the first set of tests, we exploit the timing of accidents. If the relationship that we find is due to uncontrolled-for events affecting both stock market valuation and driving behavior, we would also expect the relationship to be present for accidents happening before the opening of the stock market. However, we find no relationship in this part of the day, thus providing support for a causal interpretation of the link between stock market returns and accidents. With a similar logic, we show that there is no relationship between car accidents and lead stock market returns...

 In the second set of falsification tests, we pursue multiple approaches to compare the effect of the stock market on groups of drivers with different likelihoods of owning stocks... One approach to isolate drivers who are unlikely to hold stocks is to zoom in on accidents involving only people aged 25 or under. For this group, we do not find a statistically significant relationship between accidents and stock market performance, while we see the effect on accidents involving at least one driver older than 25... In another approach, we exploit differences in the geographical distribution of income, with the idea that people with a higher income are more likely to invest in the stock market. We consider average income in both the county of the accident and the drivers’ zip code. In both cases, we find no relationship between stock market and accidents for the lower tercile of income, while there is a strong significant relationship for the upper tercile.

Those results provide some confidence that the results aren't spurious, but still fall short of demonstrating definitive causality (and falls short of convincing Andrew Gelman as well). Underlying moods affect the stock market ("animal spirits", as John Maynard Keynes termed them), as well as affecting driving. If moods are different in higher income than lower income people, and higher income people's moods affect stock prices more than lower income people's moods, then the falsification tests based on income differences are not valid.

Probably one aspect that should be concerning is that the results appear to hold for stock market falls, but not for rises. Are people likely to be more distracted on bad stock market days than on good stock market days? I think the mechanism needs some further explanation in this respect, and until we have that, the jury is certainly out on the causal relationship between stock market returns and fatal accidents.

[HT: Marginal Revolution, last year]