Alcohol costs grossly exaggerated

Two economists – Eric Crampton and Matt Burgess, has scrutinised a report by BERL, which cost the Government $135,000. The BERL report concluded the annual social costs of alcohol was $4.79 billion (and has been quoted as a reason to tax alcohol more etc), while Crampton and Burges says BERL have exaggerated costs by 30 fold. Crampton blogs:

“What we found shocked us. BERL exaggerated costs by 30 times using a bizarre methodology that you won’t find in any economics textbook,” Dr Crampton said.

“BERL has virtually assumed its answer. The majority of the reported social costs rest on two very strange assumptions which BERL has asserted without any reason or evidence,” said Dr Crampton said.

“The report assumes that one in six New Zealand adults drinks because they are irrational; that is, they are incapable of deciding what is good for themselves. BERL further assumes that these individuals receive absolutely no enjoyment, social or economic benefit from any of their drinking,” Dr Crampton said.

“These assumptions allowed BERL to count as a cost to society everything from the cost of alcohol production to the effect of alcohol on unpaid housework. That’s bad economics.”

Among other serious flaws, Dr Crampton said the report’s external peer review was done by the authors of the report’s own methodology, important findings in academic literature that alcohol had health and economic benefits were ignored, BERL did not properly warn readers about the limitations of its methodology, and used language in the report that was frequently misleading.

And that is just from the press release. The actual report is as savage as I have seen in critiquing an economic work:

This paper reviews BERL’s report, finding it contains serious deficiencies. For reasons of time, we focus exclusively on BERL’s tabulation of the costs of alcohol. Methodological errors account for approximately forty percent of BERL’s listed costs: double-counting of the costs of insurance and the costs of insured losses; counting as costs all of the alcohol consumed by harmful drinkers rather than just the portion harmfully consumed by those drinkers; incorrect use of multipliers; not accounting for cohort differences between serious alcoholics and the rest of the population in labour force characteristics; and, assuming an implausibly large reduction in crime in the absence of alcohol.

And further:

First, for alcohol consumers BERL uses an epidemiological basis to define the threshold for economic harm. This definition is crossed after 1.8 pints of beer and is low enough to catch one New Zealand adult in six. …

Second, BERL assumes all harmful alcohol and drug consumption is irrational. Irrational consumers are incapable of detecting private costs in excess of private benefits. To the extent those private costs exceed benefits, they are counted as social costs. Third, BERL assumes irrational consumers enjoy zero gross (not net) benefits, meaning all private costs are counted as social costs. The second and third assumptions are not justified – they are simply asserted by BERL. The effect of these assumptions on BERL’s cost estimate is profound. An analysis that would otherwise be confined to externalities is instead inflated by private costs.

And even more:

The credibility and independence of BERL’s work is also questionable, further limiting its usefulness. The analysis ignores most of the large body of peer-reviewed economic literature in favour of a few (mostly commissioned) reports by a very small subset of health economists whose reports have been subject in that literature to many of the same criticisms leveled here. BERL’s report can be reasonably characterized as a New Zealand implementation of a methodology developed by Professors Collins and Lapsley, cited over 100 times in the BERL report. These same authors provided the external peer review of the report.

And finally the summary:

It is customary in reviews like this to offer at least some praise, but BERL’s report has few redeeming features. Beneath its professional veneer, BERL’s report fails in multiple dimensions. Its conclusion is assumed. Its core assumptions defy both reason and the body of peer-reviewed literature. Its headline figures are overstated by an order of magnitude. The methodology is without foundation in the economics discipline, and the report has been peer-reviewed by the authors of its flawed methodology. Its literature review is highly selective. The report contains elementary errors and misunderstandings of economics, and policymakers are likely to be misled by the report’s loose terminology and spurious comparisons1
2. The BERL Study . In sum, these flaws render the report of negligible use for subsequent policy-making.

Now that is brutal. And the Government paid $135,000 for this report and the Law Commission has been citing it as a rationale for its advocacy.

I suspect the BERL report is just one of money where only costs are looked at, benefits ignored, and costs inflated to the maximum.