Wednesday, June 1, 2011

A Critique of Carpenter and Dobkin (Part Deux)

We recently debunked a new study by economists Carpenter and Dobkin (2011) that has apparently concluded that lowering the drinking age from 21 to 18 will lead to an 8% increase in deaths among 18-20 year olds and an estimated externality cost of $12 million per 100,000 person years (or $1.44 billion per year), for a combined "social cost" of nearly $10 billion per year.  (There are about 12 million people in that age group.)  The cost estimates were (most ironically) based on the increase in death, injury, and crime that occurs upon turning 21, and the authors suggest that the same would happen for 18-20 year olds if they were allowed to drink legally.  While we believe these estimates are grossly overstated (and most likely just represent delayed rather than decreased costs when the legal drinking age is 21), let us take these estimates at face value for a moment for the purpose of a proper Pigouvian analysis.

First, lets examine the other side of the ledger.  For one, there is the potential 3% increase in wages for each year of education in which alcohol is consumed (versus not consumed), presumably due to increased human and social capital formation.  One study even found that men who go to bars once a month or more make 7% more in wages compared to those who do not--which is significant since under the current laws, most 18-20 year old drinkers do their drinking in locations other than bars.  Since Carpenter and Dobkin estimate that the proportion of drinkers among young adults increases by 6.1 percentage points (or a 10% relative increase) upon being able to drink legally, one could say that, based on per-capita personal income figures for 2009, an economic benefit of roughly $1-2 billion per year in the long run would result from lowering the drinking age to 18.  Tax revenues that fill government coffers (to the tune of $5.6 billion per year for the general population) are another benefit of alcohol, and foregone drinks translate to foregone taxes.  Americans consume 8.4 liters of alcohol per capita, or about 117 billion standard drinks per year in total, making that a tax benefit of about $0.05 per drink.  Since Carpenter and Dobkin estimate that an additional 547 million drinks total will be consumed per year if the drinking age was reduced to 18 (which we strongly doubt, but let's go with it anyway), that would be a benefit of $27 million per year.  However, that only includes excise taxes.  When all taxes are taken into account, beer sales alone bring in about $30 billion per year, so we estimate that total alcohol brings in at least $40-45 billion, or $0.40 per drink.  Using that figure, lowering the drinking age to 18 would yield $219 million to the economy.  The fact that more drinking would occur in bars would only boost that number even higher.  Due to the uncertainty over health benefits of moderate alcohol use for young adults, we exclude them from our calculations.

We also need to examine the externalities of the 21 drinking age itself.  There is the cost of enforcement, of course, which while we don't know the exact number, we do know that states receive $25 million each year from the feds for the purposes of underage drinking enforcement.  Since states most likely spend their own money as well on this effort, this is a lower-bound estimate of the real number, which we believe is probably double that.  But some of these funds would still be spent if the drinking age was 18, so we'll stick with the $25 million figure for now.  We also know that due to the laws' ineffectiveness, numerous other ancillary laws (dram shop, social host, use and lose, keg registration, etc.) are often used to prop up the 21 drinking age.  There are also significant opportunity costs to enforcing all of these laws, so that fewer resources are devoted to real crimes, including violence and drunk driving.  Also, the estimates of the costs of legal alcohol use by 18-20 year olds should be adjusted downward, since forcing alcohol use underground makes it more dangerous than it has to be.  The penalties for those who do get busted can be quite harsh in some states, and when you criminalize normative behavior you also create costs such as an increased number of individuals with criminal records, which limits their job opportunities in the future and hinders their ability to become productive members of society.  There are also increased court costs and increased lawsuits as well.  Other costs, such as loss of social cohesion and loss of civil liberties are probably very high (and many would even say priceless), but exceedingly difficult to measure.  But for now let's estimate all of these total externalities conservatively at, say, $200 million per year.

Looking at both sides of the ledger, lowering the drinking age to 18 would now give a net social cost of $7.5 billion, including a net external cost of $1 billion per year.  However, if we take into account that the increased wages would be taxed as well, the estimate of the net external cost (which is really the only cost that matters for public policy) drops to about $800 million.  And if we use a somewhat smaller value for the statistical value of a life than Carpenter and Dobkin used (there are many legitimate values given in the economic literature), the estimate shrinks even further to as little as $500-750 million.  And if a less conservative estimate of the externalities of the 21 drinking age law, say, $200-500 million (remember the measurement difficulty) and hedonic effects of alcohol are factored in, you're now talking chump change, at least relative to our society's $14 trillion GDP. 

A remaining externality gap of at most a few hundred million dollars could easily be made up by raising the alcohol taxes, especially since this has also been shown in several studies to reduce traffic fatalities and other alcohol-related social ills, especially among young people.  And at least one economist, Donald Kenkel (1993), considers higher alcohol taxes combined with a drinking age of 18 to be more socially efficient than a drinking age of 21.  Raising the tax rates to a level that would increase the price of alcohol by as little as 12% could theoretically be enough.  In another paper published the same year, he also notes that tougher penalties for drunk drivers would be more efficient than a 21 drinking age as well.  And we at Twenty-One Debunked believe that Pigouvian taxation (for all ages) makes far more sense than prohibition of drinking for 18-20 year old young adults.

Remember, as we have noted in previous posts, that we do not believe that Carpenter and Dobkin's estimates are accurate, and that several studies have debunked the claim that the 21 drinking age saves lives on balance, and even the claim that it leads to large reductions in alcohol consumption.  Any reductions that do occur are really just delays.  Thus, since our analysis assumes Carpenter and Dobkin's estimates to be reasonably correct, we still understate the net benefits to lowering the drinking age by a great deal.

A proper Pigouvian analysis of young adult drinking would also consider the marginal social cost (MSC) versus the marginal private benefit (MPB) of alcohol consumption, in this case for 18-20 year olds.  While this is not easy since we have yet to encounter any serious quantitative analysis of these parameters, we at Twenty-One Debunked believe that, as for those over 21, there does exist some level of consumption (which we do not attempt to quantify here) above which MSC exceeds MPB and below which MPB exceeds MSC.  This can be logically inferred from the fact that a heavy-drinking minority cause the majority of the problems associated with alcohol consumption, while most drinkers are non-problem drinkers.  Thus, the goal of public policy should be to reduce alcohol consumption to a socially efficient level via taxation and/or other cost-effective means.

Of course, there are some folks who believe that for people under 21, the most socially efficient level of consumption is zero (i.e. the marginal social cost exceeds the marginal private benefit at all nonzero levels of consumption), making outright prohibition of drinking for that age group the only solution.  We clearly disagree with that statement, but what if it somehow was true?  We know that underage drinking cannot be practically eliminated even under the strictest current regimes, but we could do a thought experiment.  What if, in a relatively Orwellian version of the future USA, our nation decided to fit everyone between the ages of 13-20, inclusive, with a SCRAM bracelet that monitored the alcohol in their sweat 24/7, and then had the bracelet removed upon turning 21?  Costs for all those bracelets, which are currently $300/month/person, would total up to a whopping $90 billion per year.  Even neglecting all other costs to the economy (i.e. lost revenue), transition costs, loss of liberty, and negative hedonic effects, this value would exceed even the most liberal estimate of the total social costs of underage drinking ($60 billion) by $30 billion--a massive net deadweight loss.  Clearly, this is not a viable option by any stretch of the imagination!  And the only other way to guarantee that no one drinks a drop before turning 21 is if no one has kids--which would ultimately lead to our extinction. 

Besides, the cost of "overage drinking", at least in terms of lives lost, is FAR worse than the cost of underage drinking.  That's the pink elephant in the room that the pro-21 crowd doesn't want to talk about.

Let America be America again, and lower the drinking age to 18.  If you're old enough to go to war, you're old enough to go to the bar.  'Nuff said.

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