John Gibson: Your blog on my Marsden Fund project

This is an unedited Right of Reply.  I will also not comment.  You may see that John has misconceptions about our commenters – which isn’t unusual.  If you’re going to complain about it, then you’ll end up proving his point.  I suggest you stick to the topic at hand and make me proud.  Thanks.

Dear Cameron

You raised some questions today in your blog about my project which the Marsden Fund will support from 2015-17. Let me try to answer them. Please note that I am directly e-mailing you because I don’t comment on blogs. Some commentators on blogs seem impervious to evidence, so my commenting would probably be a waste of time. When I produce evidence that might be of interest to a blogger I do sometimes send it to them directly (e.g. on rising public sector wage premiums to David Farrar and on school zone effects to Eric Crampton)  so I am not opposed to blogs per se but I do prefer to limit my engagement with them. Also note, that while I am an empirical economist and so will support conclusions based on what the evidence indicates, politically I would be broadly considered as right-of-center (not that this should be relevant) and am well aware of the limits to state action and the importance of individual responsibility.

a) what is already known in NZ and why is the study necessary?

A series of studies by Wellington School of Medicine researchers along with economists from Otago and NZIER used two types of data from Stats NZ: the Household Economic Survey (HES) and Food Price Index (FPI) data. They modeled the effect of prices on the shares of the household budget allocated to a number of food and beverage groups, with “energy drinks” as one group and “carbonated soft drinks” as another. Their model examined how households altered their budget shares for each item as prices changed. Based on their results, they concluded that “a 10% tax on carbonated soft drinks could lead to a 13% decrease in population purchases of these products”. The reduced purchases were assumed to all be in terms of quantities purchased, and this evidence, along with similar overseas studies has been influential with the NZMA etc in recommending a 20% tax on fizzy drinks as one way to combat rising obesity.   

The problem is that the HES does not, and cannot, tell us the quantity of soft drinks consumed, yet it is the quantity consumed, and not the amount spent, that affects calorie intake and potentially obesity etc. Consumers may respond to higher prices by either reducing quantity (as assumed by this existing study and almost all others around the world) or by reducing quality (switching from Coke to Pams etc), or some combination of both.

While this insight might seem very simple to some of your readers, who seem to know the answers a priori, it is not something that research in either NZ or elsewhere has considered. Why does it matter? Lets say, for the sake of argument, that half the response by consumers to price rises is quality downgrading and the other half of the response is cutting quantity. If that were the case, then any proposed tax to moderate quantity consumed would be only one half as effective as expected, or alternatively, to get to a particular reduction in quantity the rate of tax increase would need to be at least twice as big. And since taxes cause costly distortions knowing what the ratio of quantity responses to quality responses actually is should be helpful to Treasury, MoH and others who might debate these issues and design policy based on the published evidence.

b) why is the study not using NZ data?

Because NZ does not have the sort of data that are needed, and it would go well beyond the funding support that the Marsden Fund can give to gather such data. In order to work out consumer responses on the quality and quantity margin, we need data on three things: (i) price, (ii) spending or budget shares, and (iii) some index of the quality of what is bought within each of the food or drink groups. In NZ we do not have existing statistical evidence on (iii), we only have (i) or (ii). To get at quality of what is purchased in NZ, one could use scanner data from bar codes, but then if we used that method of research we don’t know anything about the characteristics of the consumer (age, gender, ethnicity, education, income etc). That is the reason why most of these studies here and overseas use household survey data, like the HES, because there is interest in looking at results by different population and income groups.

Also, there isn’t very much price variation over space in NZ – the price of 600ml Coke in my local New World supermarket is probably the exact same price as that item in your local New World supermarket. So it becomes very hard to identify these price responses in NZ.

In contrast, countries like Mexico and Indonesia have huge variation over space in the prices that consumers face, because of poor marketing systems, bad infrastructure, lack of national chain supermarkets and so forth. Moreover, in Indonesia for cigarettes and tobacco, and in Mexico for soft drinks, we do have access to the required data on (i), (ii) and (iii) – demand, price and quality. The statistical agencies in those countries have gone further than almost all other countries in gathering the sort of data that we need. Partly that reflects the importance of the items in these settings, with very high rates of smoking among Indonesian males and very high per capita consumption of soft drinks in Mexico. In order to inform the practice of researchers around the world, it is important to work in settings with the best data and where the issues are most salient.

I also should say that quite a large part of the proposal, which isn’t discussed in the newspapers at all, is experimenting with low cost ways of gathering price and quality data in countries where these are not available (e.g. using smart phones and crowd-sourcing techniques). The findings from that part of the project are as applicable in NZ as anywhere else.

One last point: the Marsden Fund is paid for by NZ taxpayers, and I am very grateful for their support. However, its goals are to contribute to leading edge research which is not necessarily restricted to research that occurs in NZ or solely for NZers. Just as we in NZ benefit from fundamental research which has been done overseas, and was funded by the taxpayers of other countries, so too is our Marsden Fund research designed to be part of this global public good that can have benefits more widely than just these shores. There are a number of other funds where the NZ taxpayer supports research that is more solely aimed to benefit just NZ (e.g. MBIE, HRC and so forth).

Thanks for your time.

 

John Gibson

 


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As much at home writing editorials as being the subject of them, Cam has won awards, including the Canon Media Award for his work on the Len Brown/Bevan Chuang story.  And when he’s not creating the news, he tends to be in it, with protagonists using the courts, media and social media to deliver financial as well as death threats.

They say that news is something that someone, somewhere, wants kept quiet.   Cam Slater doesn’t do quiet, and as a result he is a polarising, controversial but highly effective journalist that takes no prisoners.

He is fearless in his pursuit of a story.

Love him or loathe him.  But you can’t ignore him.

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