The cost of getting it wrong: Berl alcohol report fundamentally flawed
Two economists have come out swinging in their analysis of a BERL report used as the basis of the Law Commission’s review of alcohol.
In a Canterbury University working paper titled “The Price of Everything, The Value of Nothing: A (Truly) External Review Of Berl’s Study Of Harmful Alcohol and Drug Use” economists Eric Crampton and Matt Burgess argue that Berl inflates the costs of alcohol by several orders of magnitude – and fails to note any benefits whatsoever.
“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.
The Berl report has a headline figure of $4.8 billion for the social costs of alcohol, which Law Commissioner chief Sir Geoffrey Palmer has contrasted with the $516 million currently received via the excise tax on alcohol.
But Messers Crampton and Burgess point out, the headline figure includes the costs of producing and distributing half the alcohol consumed in this country and note that, “A funny thing happens when a product is deemed, by assumption, to have zero benefits. Everything associated with that product then becomes a cost.”
Because of the methodological errors and Berl's willingness to count costs borne by the drinker as social costs, Messrs Crampton and Burgess contend that the actual external costs of alcohol consumption total only $662.3 million - roughly in line with the excise tax take in the 2005/2006 fiscal year of $516 million.
The two say their findings are comparable to a 2002 Treasury study, which found that tax revenues approximately match the external costs of alcohol use, leaving little room for additional taxes and regulations to improve things.
“The Berl report cannot form the basis for any reasonable consideration of the welfare effects of alcohol policy. We cannot derive sensible welfare or policy conclusions from studies that consider the costs of everything but the value of nothing."
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Comments and questions27
the wowsers - including his righteous indulgence Sir Geoffrey "I know better than you about how much you should drink" Palmer - are being shown up for their one sided analysis of these issues.
Excellent work guys.
And a shout out to Epic (pictured) too!
Cant wait for the Berl report used for the law commission review of Obesity - it will include the cost of Everything!
alcohol costs the nation $4.8b. Yeah Right!
Lies, damn lies and statistics. Nice work guys.
Are these people serious ... Palmer was always away with the fairies ... let's for god's sake focus on some real meaningful issues here. No matter what the figures and how they're measured/reported, it aint going to change human habits. Let's discuss real issues that matter ... like how the health vote is going to become more efficient through slashing obvious wastage .... like Palmers and the rest of the academics fees perhaps !
A bit of a stretch to take the word of economists that another economists work is 'fundamentally flawed' dont you think? Did you bother to get BERL's comment on the review?? I have read both pieces and while BERL report might seem to show a large number, it only claims to report the cost, not the net costs at the Uni economists claim it should. I am getting a bit sick of people who are stuck in the academic bubble and never has a real job and think they can talk about the real world like they have been part of it.
Does any one know who paid for this report?
The BERL report was paid for by the government, while Dr Crampton and Mr Burgess's analysis of it was conducted for free.
To have completed this report within two months would have committed a substantial amount of time and some costs from both authors and the seven contributors. I am obviously a little cynical that they would do this for free?
Dear anonymous,
Dr Crampton is an economist employed by Canterbury University; presumably part of his role there is to publish research and analysis.
Kind regards,
Mitchell
A lot of real interesting University research and analysis has corporate, government or charitable sponsorship.
Cheers AW
I have been flicking between both reports and one of the big critiques by Dr Crampton and Mr Burgess was on the Labour Costs or the loss of potential income through illness, injury or death. BERL calculated this at $1,478M. However the researchers somehow recalculated this as a beneficial economic profit of $126M? Can someone please explain how does the economy profit from people not working because of alcohol/drug related illness, injury or death???
I want them to come do my quarterly P&L :)
Cheers
Dr Crampton said he did the analysis because he was "sufficiently annoyed about how Berl's been treating this." And because he's quote: "stupid"... It started as a mere blog post before becoming the more extensive critique.
He's explained to me the differences in methodology as to how they arrive at their Labour Costs figure - but it took about 10 minutes and is too long to post here. Basically think pecuniary advantage: a drunk driver who kills themselves creates a benefit to others by not conusming all the resources they otherwise would, which is then shared by the rest of us.
Cheers,
Mitchell
Thanks, many people would struggle to understand that type of methodology. I went through the $126M calculation a couple of times and each time left me with more questions than answers. If you compare the two reports the BERL report is more readable than Dr Cramptons.
Lets hope he has not used his annoyance to fuel the very answer he was seeking?
The downside of this is that its very timing of the media release now casts the seed of doubt on the Select Committee members deliberation over the Bill. This may be the tiping point needed to dismiss the Bill.
Cheers
Be as cynical as you like about it. I have, unfortunately, have only taken on this project as a part of my normal duties as a university lecturer. Critic and conscience of society. We occasionally do that kind of thing.
First, I only wish that I'd been commissioned to do this work. Then I'd have money in my pocket instead of a bill for the press releases. I did it as part of my research time at the University of Canterbury.
Second, if you're finding my report too opaque, I've been trying to produce a less opaque version over at offsettingbehaviour.blogspot.com . I'm there slowly working through all of the adjustments we've made.
In response to the particular question about the negative number: we first fix errors in BERL's number, then split out the external costs which are small -- most costs are borne by the drinker himself. BERL lists as a benefit that folks dying early don't spend about $300 million on consumption and those resources are then available to others. We list that as an external benefit but we match it with an internal cost to the drinker. External costs for that line item then turn negative: benefits. I discuss this at length on the blog above.
Anonymous at 11:15 am on June 19, 2009: you're right, it was a substantial amount of time and effort, much more than I had anticipated. A lot of late nights and quiet weekends with a full time (non-academic) job during the day. Eric outlines our motivation on the latest post on his blog. A combination of a) a desire not to see bad policy follow from what looked like some bad economics, and b) a reluctance by BERL to publicly correct some misinterpretations of what they had done. BERL was, it seems, happy to see their report used in ways its methodology couldn't support. So we thought we'd fill the breach and try to put things right.
It was a bigger job than we thought because almost every page of BERL's report made claims that we thought were untrue or misleading or inconsistent in some way. My favourite is page 173 of BERL's report. Something for everyone on that page.
It turns out making a bad argument is a lot easier to write than rebut.
Heh, snap.
So why not just merely present your research to the Select Committee like all other people are presently doing?
I am still trying to figure out why BERL would go and exagerate their figures by 3000%.
"I am still trying to figure out why BERL would go and exagerate their figures by 3000%."
1) they actually believe the number (and I hope not)
or
2) they knew that the people paying them wanted a large number (so they gave them one)
The Law Commission is who's currently reviewing alcohol regulations. Whatever they propose will eventually get to select committee, but it isn't there yet. They seem to be putting way more weight on the BERL report than it deserves; we're hoping to intervene a little earlier in the process than Select Committee.
I could only agree with 99% of the comments above especially the first one that suggested that the Wowsers are back in town and backed by a former Labour Prime Minsiter as head of the Law Commission - Control, Control, regulate and price out of the average person's pocket - don't worry for the vast majority of consumers who know how to drink - ignore the the parents whose ability to control their children and tax the hell out of the majority of those that are law abiding. This is 1929 stuff and should be thrown out.
Alcohol is a legislatively contolled substance, it was never a free market comodity. The lowering of the purchase age, the proliferation of alcohol into our corner dairies, the continued breach of sales to minors, the ineffective penalties for sale to minors, the ineffectiveness of education campaigns, the lack of community input, the historically weak LLA decisions. These are all fueling a welcome and overdue change to liquor licensing.
All these acuzations brought to Berl should, in my opinion, be tempered by the fact that although the prices may be very big, they used those profits to build several private drug rehab centers for all those who need it! Since the authorities don't seem to intend to have such initiatives, those who have should be congratulated!
In most countries, the commercial production of alcoholic beverages requires a license from the government. the taxes are high and for that the alcohol beverages are expensive. even so the consume is high. my advice is to consume less alcohol. and for those who want to quit drinking alcohol a men's drug rehab is the best solution. we became slaves of the government by being addicted to alcohol.
I don't think that they used the money to build several rehabilitation centers. They used the money in personal purpose. For instance, I know from a reliable source that dual diagnosis rehab Florida centers are founded and maintained from private funds. The Government doesn't want that its citizens to get well, but to spend money on booze, because some of this money will go to the state budget.
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