Alcohol is famous for its ability to cause stupidity. As with most other drugs, this property doesn’t solely apply to chronic abusers – it also applies to policymakers and opinion writers, even the sober ones. Drugs and alcohol are second only to immigration as a leading cause of utterly stupid articles.
Now, I’ve written plenty on this blog in the past about how nannyist fools lie about the levels of drink-related violence and disease, and adopt completely the wrong policies for cutting alcohol consumption even if it were a good idea to do so.
So, in the interests of balance, today I’m looking at a piece from Harry’s Place that opposes a minimum price for alcohol. Now, there’s nothing wrong with opposing a minimum price for alcohol, mostly because it’s an attempt to solve a problem that doesn’t exist. But the piece in question manages to seize upon all the stupidest grounds for doing so that it possibly could.
Its starting point is that alcohol is price-inelastic:
Certain products – the classic example being alcohol – do not respond in the typical way to price changes in the market. A price increase does not lead to a significant drop in demand. People simply grin and bear the price increase.
There’s only one small problem: this is bollocks. According to actual evidence (Table 7), the price elasticity for alcohol is around -1; in other words, a 1% rise in price leads to a 1% fall in consumption. While the various studies vary in terms of total magnitude, all show that price elasticity is significant. A rise in the price of alcohol does, empirically, lead to a cut in alcohol consumption.
Impressively, the article goes on to get worse:
Far from reducing alchol-related social ills, arguably, it may even have the opposite effect. It will make social drinking at pubs even more expensive relative to wholesale drinking. People will end up drinking more at home, quaffing back the artificially inflated (but still cheaper) supermarket booze in the environment most likely to encourage them to destroy their livers, beat up their spouses and neglect their children, and to cause accidents at work even more than before.
The problem here is that alcohol minimum pricing proposals that have been made for the UK by even vaguely serious organisations have been talking about a minimum price to the consumer.
Let’s assume the minimum price at retail is set at 50p a unit. If I’m a manufacturer of gin, I don’t have to worry whether Tesco are paying me 50p a unit when they buy a truckload of gin from me to sell in their shops, and I don’t have to worry whether Mitchells & Butlers are paying me 50p a unit when they buy a truckload of gin from me to sell in their pubs. Rather, it’s Tesco’s responsibility not to sell you a bottle of gin for less than GBP14, and it’s M&B’s responsibility not to sell you a shot of gin for less than 50p.
Now, at the moment you can buy a bottle of gin for way under GBP14 in any supermarket, but you certainly can’t get a shot of gin for under 50p in any pub. The same would apply to beer as well: a 50p/unit minimum price would ban pubs from charging less than GBP1.25 for a pint of Kronenbourg, which none of them currently do, while banning supermarkets from charging less than GBP1 for a tin of Kronenbourg, which all of them currently do.
In other words, there’d be a significant impact on supermarket prices, but no impact on pub prices. So there’d be a significant decline in home consumption, but no decline in pub consumption. Which, if you believe that there’s a binge drinking problem with evil effects that are made worse by drinking at home (not, of course, that any evidence is produced for this one either), would be a good outcome.
Rather depressingly, Tim cites the HP piece as an example of lefties understanding economics. Which I suppose is true, in that it’s using the cargo-cult sense of economics that glibertoonians often base their arguments on – relying solely on half-remembered theory from the sixth form, missing obvious theoretical points out (whether because they’re inconvenient or because you’re slapdash, who can say?), not testing your theory against empirical data because you can’t be bothered, not doing sums because they’re hard, and coming up with clownish bullshit that even a GCSE economics teacher would grade as “F minus, see me”. In that sense, it’s absolutely spot on.
I am also sceptical that enough people respond to a rise in the price of alcohol by starving their babies so it shows up in the statistics.
jeebus, -1? I find that pretty hard to believe! (which is not to say it's wrong) I suppose there's a big difference in price elasticities when all alcohol prices are moving in tandem (i.e. as general taxation on alcohol changes) and a price elasticity when you change the price of beer alone and people substitute into cider, wine etc. My lazy scan didn't tell me which type of elasticity they were measuring.
an elasticity of -1 says that if they cut alcohol taxes so beer was sold at cost + markup (what, £1 a pint?) the whole nation would be permanently shit faced.
Table 7 shows price elasticities ranging between -0.23 and -2.00, depending on the study and the type of sale. They might average at around -1, but so what? That doesn't make -1 the figure to use, with this much variation. Why could this have come about?
The study commissioned by the Dept of Health shows elasticities around 30% the level of those shown by a study commissioned by the drinks industry, with the biggest difference being in spirits on sales where the estimate ranges from -1.73 to -0.23. So:
1. The studies have found results convenient to their sponsors.
2. You can't reliably measure price elasticity of booze; at least, these people haven't managed it.
Luis:
C'mon. You know that empirically derived elasticity stats are only reliable for smallish changes. Hence why the Laffer Curve, although obviously accurate for drawing a line between 0%, 50% and 100%, is otherwise nonsense.
Peter:
You're proving the opposite of what you think you're proving, AFAICS. The DoH say that price is inelastic, so a price change doesn't affect sales all that much, so the Harry's Place conjecture is right and the policy is nonsense. The Treasury and the industry say that price is elastic, so a price change does affect sales and the policy isn't nonsense. Whereas in real life, the DoH supports the policy, the Treasury doesn't, and the drinks industry pretends not to.
(in the interests of blogging history, Matt Turner's Simply Red album is the prize for anyone who can explain why the drinks industry *pretends not to*…)
John, I wasn't trying to prove anything, as such. Just remarking that the figures plainly aren't reliable.
FWIW, I think there's a weird mix of puritanism, authoritarianism, gesture politics and economics at work here. I'd prefer to see public order dealt with as such, and the government f*@k off when it comes to people's drinking habits.
It doesn't really matter what the elasticity is to criticise the piece, as that states it is zero.
gpwm
although still reasonable to wonder whether elasticity is substituting into different booze or no booze. but as matthew says, it doesn't matter to your main point at all
Rather depressingly, Tim cites the HP piece
Why depressing? Pigs seek out truffles, rainwater flows to the sea and Worstall gets things wrong. It's just the majesty of nature, going about its way.
Well, Portman & the people they represent don't (publicly) support it, as their shtick is basically that alcohol problems derive not from alcohol itself (which can therefore be promoted to the nth degree) but from the irresponsible behaviour of a minority of preloading party animals and lone-drinking saddoes (and never mind the effect of alcohol promotion on the size of those groups). The problem's the right tail of the distribution, is basically what they're saying, and they're basically right – except that their own actions and the policies they support have the effect of making the tail longer and fatter.
As for why they *really* support it, deep down – or at least wouldn't be too bothered if the government found some way to square it with EU competition law – the answer is simple, and actually rather bizarre: what's being proposed is an increase in the retail price, not an increase in the duty which makes up a large component of that price. In other words, the government's not asking the supermarkets to give it more money, but to keep more for themselves. The proposal as it stands doesn't mean that supermarkets would make more money so much as lose less – and they may have good reasons for preferring to lose the money they're losing at the moment – but that's just the immediate effect. The minimum unit price will set a floor – and, in commodity pricing just as much as collective wage bargaining, raising the floor raises the entire scale. And, since this increase in price isn't driven by (or even accompanied by) a rise in duty, all those price rises higher up the scale are clear profit. It's profit to the retailer, admittedly, but ultimately that's good news for the producer as well – a retailer taking 25% off the top is in a better position to lose a couple of % than one who's only taking 15%. Everybody wins! Except drinkers, obviously, but they're actually part of the problem we were trying to solve in the first place.
Phil: I agree with your take on the minimum price; I've made the point in comments elsewhere, and possibly in previous blogposts. It doesn't strike me as bizarre at all, though: any manufacturer of any commodity would be pleased if the government set a minimum price that anyone could sell that commodity for, as long as said minimum price was below or equal to the profit-maximising price (which is likely).
Yes, it's the same Phil. Here's the link I forgot to add, on loss-leaders.
I don't think it's at all bizarre that the retailers welcome it – the bizarre part is that this is how it's being proposed. When you've got a commodity where a large part of the retail price is tax, and the government wants to increase the retail price, raising the tax seems like a no-brainer.
Yes. Presumably TAX EVIL TAX BAD, GORDON BROWN TAXED AND SPENT, WE ARE COALITION, WE NO TAX, or something.
if you believe that there’s a binge drinking problem with evil effects that are made worse by drinking at home
This is an interesting point. There are really two questions here: is there a good argument for policy aimed at changing the amount people drink? And is there a good argument for policy aimed at changing where they drink it?
Strikes me that, from a public order point of view, we might be a lot better off if people stayed at home and got smashed rather than going out, with all the mess and crime and noise and violence that the latter involves.
The public order argument about home drinking – and I don't have a dog in this fight, just relaying What People Claim – is that kids will drink a bottle of vodka before going out, and then be Crazy Fighting Nutters, whereas in Days Of Yore they'd've been drinking bitter in pubs and therefore be both broke and bloated by 11pm…
The best approach in that case would surely be to stop kids going out altogether.