Wednesday, April 23, 2014

The Chronicle of Higher Education's Piece on Piketty and Modern Economics

The Chronicle has a lot to say about Thomas Piketty and modern economics.   Piketty has done a great job assembling new data sources to document long run trends in inequality.  As I understand it, his explanation hinges on how the returns to capital and the rate of economic growth evolve over time.   If the return to capital is greater than the rate of economic growth then economic inequality increases as the "rentier" capitalists become relatively richer.

At the University of Chicago, we were taught that human capital is the ultimate capital stock.  How does human capital fit into the Piketty framework?   When you die, your brain can't be handed to your children. You build up your brain during the investment period and then you earn a flow of income during your productive years.   Human capital investment offers both a high return and is risky.  If you get hit by tree branch, you lose your productive capacity.

Imagine an economy in which the market risk free interest rate is 3% and the economy is growing by 2%.  Piketty would say that because r > g  that inequality will rise.

If owners of physical capital invest in other people's human capital, then this would tend to flip the inequality (I believe that increases in the stock of human capital would feed through a Lucas or Romer growth model into a higher rate of g).   Why would owners of physical capital invest in people? They would do so depending on the risk/return frontier for the set of all assets they are considering investing in. Imagine if  a mutual fund that consists of a 10% stake in 1000 people's future earnings. Some of these people will succeed while others will fail but this portfolio would give the capitalist an incentive to "buy in".

My point is that Piketty's argument hinges on market structure for investing in human capital and the general equilibrium incidence of such investment.   The rich can be a catalyst to a rising "g" if there are complete markets for investing in human capital of young people.   Jim Heckman should discuss how the Heckman Equation links to Piketty's argument.

Tuesday, April 22, 2014

Adaptation Entrepreneurship and Harvard Business School

"Years of Living Dangerously" was aired at Harvard Business School recently.  Of course, the creators of this Showtime Show hope to motivate voters to support a carbon tax.  I wish that they succeed.   But the HBS students offer a different pathway for coping with climate change. HBS is full of future corporate leaders in finance, entrepreneurship and management.  Many of these young men and women will work in developing nations where the growth is now taking place.  The crisis of climate change creates opportunities for creating products that help us to adapt.  The future economic growth directed towards building and distributing such products achieves a "double bottom line" of creating economic growth and shielding consumers (who purchase these products ranging from better housing to air conditioners) from the blows of climate change.

Showtime's impact is more likely to occur through encouraging adaptation investments rather than by accelerating the mitigation movement's political clout.   Intellectuals need to start thinking about men and women as voters (where they free ride) versus as self interested consumers and investors.

Monday, April 21, 2014

The Urban Economics of Climate Change Adaptation

I'm on a bus heading to Cornell University.  Tomorrow, I will give a talk titled; "Adapting to Climate Change: An Urban Economist's Perspective".  Click on the link to see my slides.   My optimistic talk poses some questions for macro modelers such Prof. Nordhaus and Prof. Weitzman.  For young scholars seeking exciting research questions, I pose dozens of riddles that I expect will set an agenda.  There is a lot of work that needs to be done on a range of environmental and urban economics issues focused on the system of cities and the role that urbanization will play in protecting us from climate change's blows.

Tuesday, April 15, 2014

The Silver Lining of Beijing Smog?

The China Daily  reports that foreign firms in China are seeking out 2nd and 3rd tier Chinese cities that feature blue skies because Beijing is just too polluted.  The introduction of a competitive system of cities would make urban China an even stronger nation.  The centralization of the powerful government in Beijing means that rent seeking firms have had strong incentives to locate in Beijing as they seek to curry favor with the central government.   Ades and Glaeser analyze the same issue in the case of South America.

An unintended consequence of decentralizing economic activity to 2nd and 3rd tier cities would be to create a system of cities in which firms sort across space based on the comparative advantage of different areas (i.e cheap land, cheap labor, cheap electricity, access to export markets) and workers sort across space based on their skills and their human capital.  In the U.S such sorting is common, if China can retreat from central planning then its economic growth will accelerate.

Monday, April 14, 2014

Liberal Cities and the High (Median Rent/Median Household Income) Ratio

The NY Times  reports that there are many liberal cities where the median rent divided by the median household income is greater than 30%.  The Times interprets this fact that the middle class can't afford to live in a series of cities ranging from Los Angeles, to Miami to San Francisco to NYC.   Interestingly, College Station Texas also has a high ratio.

Why might liberal cities be increasingly unaffordable?    Recall that the ratio has median rent in the numerator.  Liberal cities tend to be desirable places in terms of quality of life (in part because of all of those wise urban planning policies) and this raises demand but they are also very hard places to build in (because of all of those wise urban planning policies).  You do not need to be an A+ student in intro econ to know if demand is high and supply is low that market rents will be high.   What about the denominator?  Liberal cities have high a series of regulations that make it difficult for businesses to thrive and this may inhibit middle class income growth.

So, if the NY Times is serious that it is urgent for major cities to reduce their rent to income ratio then it should endorse a relaxation of restrictions on real estate developers and on local businesses.  This is how the free market would address this social challenge.  What is the NY Times' preferred solution?

Sunday, April 13, 2014

An Explanation for Why the IPCC's Reports are Increasingly Ignored

An old literature in economics states that only "new news" moves markets.  Do the recent IPCC reports say anything new?  Those who know that climate change is a major challenge "learn" that they were right.  Those who deny that climate change is happening or believe that we will adapt to these new challenges learn little from these reports.  Who is at the margin who might learn something from these consensus documents?  

 The IPCC would be wise to engage in much more geographic specificity where they should have country experts speak about specific regions within each nation to discuss challenges that the region faces, is climate change causing these challenges?  What adaptation strategies can be used to protect the place and the people?  Is the free market up to the challenge? Are government officials taking action?  The answer that will appear again and again is poverty and corruption is inhibiting adaptation.  So, this suggests that economic development, educational attainment, and political competition are needed to help the poorest nations to adapt.

Why are the IPCC's Reports Increasingly Ignored?

While the NY Times covers new IPCC reports with front page stories,  Google Trends reveals that the rest of the world isn't listening.  Look at this graph below.  From 2007, do you see a time series trend down? Why?

Friday, April 11, 2014

Why Does UCLA Now Have Two Institutes of the Environment?

My tenure at UCLA is at the Institute of the Environment.   This Institute conducts research and offers many undergraduate classes focused on the intersection of environmental science and environmental policy.   Yesterday, it was announced that the UCLA School of Law is launching the Emmett Institute on Climate Change and the Environment.   Everyone at UCLA is grateful to Dan and Rae Emmett for their generous gift to UCLA.

But, I'm an economist and I ask questions about the use of scarce resources and the incentives of a non-profit organization to optimize.    Why does it make sense to have two Institutes on the same campus that study the same issues?  Yes, I understand that the Emmett Institute has a legal focus but at the end of the day their researchers are really talking about economics and policy.  

I could go a step further and ask why does UCLA have three Institutes of the Environment?  The Luskin Center for Innovation is doing excellent work on related topics.    

A good sociology study could be written on universities and the coincidence of wants.  Donors want to create something new.  Entrepreneurial faculty want to be Kings and recognized for what they created.   As these "marriages" between donors and individual faculty take place, new centers continually pop up.

Rather than creating just a few centers of excellence and building them up (like the University of Chicago), it appears that UCLA continually  expands in terms of breadth. Are there costs to such "horizontal growth" (which is sometimes called sprawl)?

Thursday, April 10, 2014

Some Comments on the New LA 2020 Report

Civic leaders in Los Angeles have released a reasonable new report listing action items for improving the city's economic performance and quality of life.  Here is a link to the LA Times article about it.

I must say that the report's first two policy proposals are goofy.  Here is the first one

1. Create an independent ‘Office of Transparency and Accountability.’

What do these words mean?  This entity already exists and it is called UCLA and USC.  Both strong universities have a number of urban scholars who could be paid small amounts of money (perhaps $10,000 to commission a data driven report on how the city is performing.   This would be a better use of money than hiring 10 new government employees at $100,000 each and each of them does not have a Ph.D and doesn't know how to analyze "big data".  Such professors would be "arm's length" from the politicians and wouldn't have a conflict of interest.   The Luskin School has plenty of faculty who do contract work for the state of California, why aren't these scholars doing contract work for the city?  There would be ways to design such research contracts so that the researchers would have their autonomy and would not be punished for "bad" findings.  Through competitive research the truth will emerge and accountability can be achieved.  

2.  Create a truly independent oversight and rate-setting body for DWP.

DWP is a public sector job maximizing sluggish institution.  This agenda is very good for its incumbents but not good for its customers, tax payers, or the environment.   DWP's union leaders are smart people who know they have a very very good deal. They are not going to allow anyone to mess with that.

Wednesday, April 09, 2014

.7 Miles Away from My House in Little Holmby

Could you live happily in this home?  It is .7 miles away from my house and you can live in this 27,000 square feet of interior space for just $25 million bucks.   If you are considering being my neighbor, click here for a virtual house tour.


A Southern Economist

I will be in Virginia next Thursday and in Georgia on Friday.   I'm grateful to my friends at James Madison University's Economics Department for giving me the chance to speak about my Climatopolis book.  When I published it back in 2010, it wasn't cool to be thinking about the micro economics of climate change adaptation.   Watch this video for a taste of my thinking.   On Friday at GSU, I'll have the chance to talk about my work on public transit buses.      People have very different reactions to this paper.  I presented it at UCLA and people really liked it.  I presented it at the Harris School at the University of Chicago and there folks were less impressed.  Live and learn!  

The Future of Middle Class Jobs in Los Angeles

The UCLA Anderson Forecast's report about the dismal conditions in the City of Los Angeles' labor market is of interest to the Wall Street Journal.     As the new Mayor reads this article, what will he think?   What he won't want to acknowledge is that a combination of pro-labor union regulations and land use regulations combine to create a stagnant local labor market.   Because LA is so wonderful,  land prices are very high here. Any business that needs land as an input in production is going to find it to be very costly to do business here.  Labor protection only compounds this issue.  The key to revitalizing Los Angeles is to go vertical and to allow parcel after parcel to be rezoned for much higher densities.  While the Mayor is a very smart guy, he can't anticipate what hipsters and idea thinkers will choose to rent the new space in these new buildings.  Drive along the Wilshire corridor in West LA and into Santa Monica and you will see an enormous waste of space. There is building after building of 2 story and 3 story buildings.  If zoning was not a binding constraint, would a 25 story building be there? Who would be in the building? What new trades and vitality would take place in a 15 million person compact LA where people walk and use the subway?

As the vibrant food trucks in LA show, when you liberate the free market from red tape --- funky new things happen. Yes, there are winners from preserving the status quo but sluggish organizations such as LADWP are not the future.

Tuesday, April 08, 2014

A NY Times Piece Examining When Green Nudges Backfire

This NY Times piece about motivating both liberals and conservatives to engage on climate change is worth reading.   Back in the 1990s, applied economists wrestled with the general issue of what exogenous variables have a monotonic impact on raising the probability of taking a given action.  See page 1343 of this paper for an example from health economics.  In the case of environmental policy, the same "treatment" (i.e hearing about Al Gore's new thoughts) may have different consequences for different people.   Some people who are sympathetic to his world view will be "turned on" by his new ideas while other people may be "turned off". A more sophisticated environmental movement would figure out how to motivate rather than demonize political conservatives.  Dora Costa and I explored some of these issues in this 2013 JEEA paper.     

Monday, April 07, 2014

The Wall Street Journal on the IPCC's New Report

Now that it is acceptable to talk optimistically about climate change adaptation, the WSJ's editorial writers are having some fun.  In today's piece, they throw some tough punches.    A more nuanced view would point readers to take a look at the IPCC's report and to Weitzman and Wagner's preview of their forthcoming book.    My view is simple;  while I'm not happy about this --- I predict that global GHG will continue to rise so that carbon dioxide levels probably reach 500 ppm in the next 25 years.   We will need to adapt to this reality. Given that the world's population will be highly urbanized at that time, the idea of the "system of cities" will become crucial.  I discuss these issues in my 2010 book Climatopolis.   We will grow our food in new places, using new technologies and international trade will play a key role in protecting specific areas from idiosyncratic shocks.  The world will learn a good lesson about how free market capitalism and the invisible hand diversifies risk.   What about fat tail risk?   I reject the view that climate change will strike every inch of the globe will equal force.  Within every continent there is "higher ground" and we will collectively retreat to those areas living in high density.

Sunday, April 06, 2014

The $1 Environmental Economics Textbook

I have updated my Amazon Book titled Fundamentals of Environmental Economics and have lowered the price to $1.  My goal here is for everyone from high school students, to university students to interested adults to be exposed to basic ideas in incentive theory applied to environmental and urban economics.  While the popular media often doesn't appear to appreciate the benefits of free markets, I want to nudge my readers to think for themselves.

Some critics have claimed that the book is light on "formalism".  That claim is incorrect. The book shows how to take basic linear regression methods and to test environmental economics hypotheses using statistical methods. The book also shows what a powerful framework basic supply and demand is and it teaches the reader how to use simple models of uncertainty to predict how decision makers will respond when they face risk.  The book also introduces the reader to dynamic tradeoffs as it teaches readers about present value calculations.   Relative to its $100 per copy competitors, I promise that this $1 is worth the investment!

Saturday, April 05, 2014

Suburbanites Vote Against Carbon Pricing

Here is a sensible letter published in the Sacramento Bee that argues that a carbon tax bundled with a recycling of the revenue back to households would achieve the "win-win" of incentivizing behavioral change without penalizing suburbanites for their high fossil fuel use for driving and generating electricity.   The author glosses over the point that the refund of the revenue collected from a carbon tax would be likely to be a per-capita refund and so suburbanites would still be transferring income to their center-city counterparts.

I would like to make a new point.  Folks should read my new NBER paper joint with Matt Holian.  We study the voting patterns on Prop 23 in California in the year 2009.  This proposition would have ended California's AB32.  We use block-group level data and document that suburbanites oppose this regulation. So what?      AB32 is the nation's major "green guinea pig" effort to demonstrate that low carbon regulation can simultaneously lower a state's carbon emissions while still allowing economic growth to continue.  No other state or even nation is running such a field experiment.  While liberal greens often hint that the green economy is a "free lunch", we don't know whether this optimistic statement is true or not. To its credit, California is now running this field experiment but the politicians in charge need suburban support for these programs and we find that such support is tenuous.

Permit me to make several points.

Point #1:  In AB32's current cap and trade, revenue collected is not recycled back to the public. Instead, the California treasury keeps a chunk of it and much of the revenue actually goes back to the polluters themselves to incentivize them not to leave California to areas that don't have carbon pricing.

Point #2;    Our finding that center city residents are much more likely to support AB32 (and thus to vote against Prop 23) is robust even controlling for the block group's average income and the fact that liberals disproportionately live in center cities.   So, we find that Republicans oppose AB32 and we find that suburbanites tended to oppose AB32.

Point #3: While my paper with Matt Holian only focused on California voting, my work with Mike Cragg and co-authors found that at the national level that Representatives in high carbon districts (which often are in the suburbs) are more likely to vote against national carbon mitigation legislation.

Point #4:  It is not a law of physics that suburbanites must oppose carbon pricing but the rational voter will compare the benefits versus the costs.  Liberal center city residents are likely to have higher personal benefits from supporting the regulation (i.e visions of saving the world) and to be exposed to lower costs from carbon pricing (they are already eating tofu and riding public transit) than their meat eating, SUV driving, air conditioning blasting suburban peers.  The suburbanites are likely to perceive lower private benefits and higher private costs from cap and trade policies and thus vote against it.  The center city liberals should thus consider paying the suburbanites to join their coalition.  This is Coasian logic once we agree on the initial property rights.

Here is the conclusion of our paper, take a look at the final sentence and think about it.


In recent years, California’s voters have had the opportunity to repeal the low carbon AB32 regulation and to choose whether to go forward with investing in costly High-Speed Rail.  In both cases, the voters chose the low carbon choice but there was significant spatial variation in the support for these measures.  Controlling for standard demographics such as ethnicity, education and income, we have focused on the role of political affiliation and geography as correlates of low carbon voting.  We find that political liberals consistently support low carbon initiatives. 
All else equal, those who live further from the city center are more likely to oppose low carbon policies.   The U.S is a suburban nation with the median metropolitan area resident living 9.9 miles from the city center and 25% of the population living at least 17.1 miles away from the city center in the year 2000.   Relative to nations with more urbanized populations, people in the U.S drive more, live in larger homes and consume more electricity.  This fossil fuel driven lifestyle raises the short run price of voting in favor of carbon mitigation regulation.   
 Our findings mirror nationwide findings concerning the correlates of Congressional voting on low carbon legislation such as the 2009 American Clean Energy and Security Act concludes that Representatives whose districts are rich, liberal and low carbon are much more likely to vote in favor of carbon mitigation (Cragg et. al. 2013).  
            Together these results highlight that even within a well known “Blue State” such as California that there is both an ideological divide and a city versus suburb divide on carbon mitigation policy efforts. While economists have stressed the insurance benefits from avoiding “known unknown” fat tail risks (Weitzman 2009, Pindyck 2011), subsets of voters are rejecting this vision.  
Past political economy studies have stressed that voters will oppose environmental regulations that threaten their jobs (Kahn and Matsusaka 1997).   This paper has presented new evidence on the role that residential lifestyle choices and ideology play in determining low carbon voting patterns.    Given existing technologies, our results suggest that the suburbanization of the median voter poses a challenge for policy makers who seek to have the United States lead in international efforts to sign a global carbon treaty.   

Friday, April 04, 2014

REPEC Rankings For Research Productivity Over the Last Ten Years

I see that I'm UCLA #1 REPEC ranked economist for research conducted over the last ten years.   I like that.  What have I gotten done?  Click here.  REPEC doesn't count books or papers published in non-econ journals.  Now that I'm #1, I look forward to some competition. It will only make UCLA stronger.  I can't claim that any perks or university wide influence come bundled with this distinction but my self esteem is now 8% higher.  For the overall lifetime ranking, I'm #6 at UCLA behind Sebastian Edwards, Ivo Welch, Ed Leamer,  Richard Roll and Gary Hansen.   I'm predicting convergence.

Why are Stenographers Still Used in the Court Room?

Jobs, jobs, jobs.  The NY Times reports a sad story about a court room stenographer whose drinking impeded his ability to do his job and many court cases are now uncertain because the courtroom record doesn't exist.    Consider the following analogy;  ATM machines are to bank tellers as  Voice recorders are to stenographers.  Why haven't voice recorders and digital transcribers replaced the stenographers?  Here is what the New York Times has to say;

"Several states — Alaska, Indiana, New Hampshire, Oregon, Utah and Vermont — have adopted digital recordings as the main record of a trial, and New York uses digital recordings in Family Court and some lower-level civil courts. But efforts to expand their use have met resistance from unions representing court reporters, court officials said."

Do unions successfully thwart innovation and the introduction of technology that might reduce the demand for their services?  What is the aggregate impact of such self interested efforts for overall U.S productivity and long term growth?

What tasks can people do better than machines? What work is there left for us to do?  Do computers write better blog posts? 

Thursday, April 03, 2014

The UCLA Anderson Forecast's Quarterly Event

Yesterday, I went to downtown LA to participate in this event.  Can you spot me in this photo?  In my brief remarks, I argued that LA's unique quality of life is our economy's "golden goose".  While the two guys on the left worried about the challenges for manufacturing firms of doing business in LA,  our quality of life is actually improved by deindustrializing.    The unspoken discussion in my panel is how union rules and wages raise the cost of doing production in LA.   An alternative path for the local economy is to celebrate that this is paradise and to work the tourism angle hard and celebrate the local multiplier effect.     In this age of kicking the 1%, it is perhaps time to thank them for paying their property taxes and increasing local demand for a large number of goods and services they purchase locally.

(Left to Right) Jim Tortorelli, John Husing, Matthew Kahn and Miguel Santana participate in a discussion on job availability at the UCLA Anderson Forecast event on April 2, 2014.

The property taxes collected from the expensive homes of the 1% can be spent on worthy programs such as pre-K for all kids to build the next generation's skills.  Skill accumulation is the ultimate source of wealth in the modern economy.  Study the Heckman equation and explain to me how you are going to finance its policy ideas.

Tuesday, April 01, 2014

A Public Intellectual?

My mom always has hoped that I would evolve into becoming a minor league Galbraith as a public intellectual. In truth, my goal is to become a minor league Stigler.   Tomorrow I will be part of the UCLA Anderson Forecast's team talking about the Future of Los Angeles.   Big think!  Policy relevant!  

Monday, March 31, 2014

Feeding the World in Our Hotter Future: The Behavioral Economists vs. The Rational Expectations Crew

As I have written many times,  adapting to climate change poses the ultimate test for distinguishing the predictions of neo-classical economics from behavioral economics.   The caricature I like to sketch is Spock vs. Homer Simpson.  Spock has rational expectations while Homer (like the Titanic) walks right into the iceberg and then says "D'Oh".    The New York Times as usual embraces the behavioral economics view (that we are doomed) in its discussion of the new IPCC report.  In contrast, the Wall Street Journal buried this story with just a quick article.

In contrast the NY Times gives Prof. David Lobell of Stanford a chance to discuss his pessimism.   Here is a direct quote:

"The warning about the food supply in the new report is much sharper in tone than any previously issued by the panel. That reflects a growing body of research about how sensitive many crops are to heat waves and water stress. The report said that climate change was already dragging down the output of wheat and corn at a global scale, compared with what it would otherwise be.

David B. Lobell, a Stanford University scientist who has published much of the recent research and helped write the new report, said in an interview that as yet, too little work was being done to understand the risk, much less counter it with improved crop varieties and farming techniques. “It is a surprisingly small amount of effort for the stakes,” he said."

So, this suggests that there are $20 bills lying on the ground for those agricultural innovators who think about devising more robust seeds and crops that can grow and thrive under even tough conditions such as greater variability of rainfall and heat thresholds.     Stanford University is surrounded by venture capitalists looking for the next big thing.  Is Dr. Lobell working with these investors to identify promising new technologies to feed the world?  Now that he has performed the Paul Revere task of alerting us to this problem why won't some entrepreneurial types step up and seize this opportunity?  Think of the money that can be made from selling a robust food source to a hungry world.  Could this arbitrage opportunity really remain for long?   The Chicago economists would say no but it seems that Dr. Lobell thinks like a Berkeley economist.   Who is right? The stakes are high both for the world and for economic science.   

The adaptation optimists will point out that the invisible hand will guide corn and wheat production to spatially diversify such that it is grown in places that avoid his key 86 degrees threshold.  Inventories of this output will held over time and this will allow farmers to smooth prices so that they sell inventories during times of bad weather and accumulate inventories during bumper years.  

This survivalist blog claims that wheat can be preserved for 30 years. That's a long shelf life. 

Coastal Real Estate Prices and Climate Change

Last summer, Rolling Stone magazine published a thought provoking piece about the future of Miami in the face of climate change.  Devin Bunten and I both read this piece and started talking about rational expectations. If it is "common knowledge" that Miami is doomed, why have coastal Miami real estate prices been rising recently and rising faster than the state's average?  After all, a coastal home's value is the expected present discounted value of its future rents and if Miami is flooded in 2050 and we all agree, won't this expectation be capitalized now?

Over the last few months, we kept talking about this issue. It fits into part of my research agenda on how urbanized nations will adapt to climate change.   Within a nation, there are dozens and sometimes hundreds of cities to choose to live and work. Climate change will move these cities in "attribute space".  Some Canadian cities will be warmer in winter while other coastal cities will face new serious risks. As these anticipated risks play out, how will migration and local real estate prices  be affected?  Who will lose and who will win (Canadian land owners?) due to climate change.

We have written a new paper that is available here;  

The Impact of Emerging Climate Risks on Urban Real Estate Price Dynamics

Devin BuntenMatthew E. Kahn

NBER Working Paper No. 20018
Issued in March 2014
NBER Program(s):   AP   EEE   PE 
In the typical asset market, an asset featuring uninsurable idiosyncratic risk must offer a higher rate of return to compensate risk-averse investors. A home offers a standard asset's risk and return opportunities, but it also bundles access to its city's amenities|and to its climate risks. As climate change research reveals the true nature of these risks, how does the equilibrium real estate pricing gradient change when households can sort into different cities? When the population is homogeneous, the real estate pricing gradient instantly reflects the "new news". With population heterogeneity, an event study research design will underestimate the valuation of climate risk for households in low-risk cities while overestimating the valuation of households in high-risk areas.

Sunday, March 30, 2014

Neighborhood Dynamics in New York City

The New York Post reports that Little Italy in Manhattan is shrinking as Chinatown expands.  The New York Times reports that Spike Lee is upset that African-American communities in Brooklyn are shrinking as "Girls" (white yuppies) move in.   What do urban economists think?  Scarce land is allocated to the highest bidder. Unless there is an externality, why doesn't this private valuation reflect the highest and best use of this land?   If you say that there is an externality that the historical character of the area should be preserved, this may be a fair point but a critic might ask "why?'".    Why can't neighborhoods change?  If you say that the renters who live there planted roots there and now can't afford to live there then you are making a valid point but you are saying that they have the property rights to an asset they didn't own.   That's  a dangerous precedent that borders on socialism.

So, to be fair and to be clear, I do see that there is a co-ordination problem that people who lived as renters for years in a community have revealed that they want to live there and they have developed roots there. If gentrification takes place and these individuals are displaced, they face a co-ordination issue of where they can regroup in a newly affordable community.  This transition takes time and resources and this is the cost that this group bears due to gentrification. Such transition dynamics have not been studied enough by urban economists because we haven't spent enough time thinking about endogenous social networks. Instead, we assume perfect competition, zero migration costs and a complete attribute space such that if Brooklyn becomes unaffordable that a household can costlessly move to a close Brooklyn substitute and continue to live his life.

An even more interesting issue here relates to urban politics. The political leaders in the gentrifying area were elected by the original group. Such self interested leaders will be aware that the new entrants may not support the leader and may eventually elect their own leader. This means that the incumbent political leader in a gentrifying area has strong incentives to rally around Spike Lee and "fight the power".  If the incumbent residents who are being priced out anticipate that political leaders will back their protests then this helps to solve their free rider problems and this group will gather and march and hope that the New York Times shows up to cover the rally, this in turn leads to Progressive Bill De Blasio to show up.  So, note the social dynamic here that is triggered and is self re-enforcing.   Randy Walsh and I discuss some of these issues in our new Handbook of Urban Economics chapter that I will blog about soon.

Saturday, March 29, 2014

Roger Pielke Jr's Piece and Superman's Lex Luthor

Nate Silver's new blog is generating some readers and some excitement. University of Chicago graduates are supposed to engage in active debate about important ideas and Silver represents the UC well.  Recently, there has been quite a lot of talk about Roger Pielke Jr's post for the 538 blog.  I would like to make a few points.

I was very happy to see in the piece that he cited my work on the death toll from natural disasters.  This downward trend is caused by economic growth as shown by evidence both across countries and within countries.   It is true that in very poor nations starting to urbanize that such migration causes a diversification problem that such nations have put millions of their eggs (the migrants) in one basket (a city) and can suffer a large loss of life because of this concentration of people in a poor city.

I am not qualified to judge whether climate change is increasing the count or the severity of natural disasters. I have assumed that this is the case.  As an economist what interests me is if we anticipate this trend, what actions will we take to reduce the anticipated trend's economic impact on us?

The simplest approach is to migrate to higher ground.  With good elevators, we can build high rise buildings in relatively small spaces (look at Hong Kong).  For each nation around the world, where is the higher ground?  Why aren't developers building there? What role is the nation's government playing in encouraging coastal living through implicit subsidies?

A mistake that climate change adaptation pessimists make is their view that the real estate capital stock (homes, apartments and buildings) to be infinitely lived capital.  Such buildings live a long but not permanent life.  If a coastal building has a lifespan of 75 years then when the new news that this building is at flood risk occurs, the owner of the building faces an expected present discounted value of lower lifetime rents over the life of this building.  This is his loss.  The rational owner will choose to invest less in maintenance of the building because of the expectation of a premature "death" of this building.  While this investor loses, there are other investors who will build on higher ground who will gain new demand for residential and commercial space from those who vacate the coast.  

Do you remember in the first Superman movie when Lex Luthor invested in Colorado real estate because he planned to nuke California and anticipated that Colorado would be the new coast?  So, this is almost a zero sum game.  A flooded Miami will reform on higher ground called "inland Miami".  Yes, there will be losers bu there will also be winners and the new capital stock will be built to higher quality.

As we grow richer, natural disasters will cause greater capital damage but I bet that the ratio of (capital damaged/total value of the capital stock)  will decline over time.

As I argue in Climatopolis, the insurance industry must be allowed to price gouge to provide strong incentives for owners of coastal real estate to take proper precautions to minimize the damage that such anticipated storms will cause.

Monday Climate Change Mitigation Conference at UCLA

Here are my slides for my talk at UCLA this Monday. You will see my usual blend of humor and wisdom.  My topic is the economics of the nascent California partnership with Quebec on carbon permit trading.   Here are the details about our conference.

The California-Quebec Adventure: Linking Cap and Trade as a Path to Global Climate Action

As usual, economists will be in the minority at this interdisciplinary event.  As I get older, I actually want to return to my roots and only interact with other academic economists.   

Friday, March 28, 2014

Why is Tom Brady Moving from Brentwood to Boston?

I read in People Magazine today that NFL great Tom Brady is selling this home in Brentwood, California (located 4 miles from me) to move to Boston.  For details about this $50 million dollar home, click here. I am aware that he works in Boston but he only works there for a few months a year and the team plays many away games and he is also approaching his retirement.   A move from Los Angeles to Boston that does not appear to be work related poses a challenge to the "consumer city" theory.   This theory posits that in this footloose age that the skilled and the rich seek out the most desirable areas and thus further enhance those areas both through the property taxes that they pay and through their aggregate purchasing power attracting upscale commercial and retail activity that further enhances the glamour of a specific community and its city (go visit Brentwood to see what I mean).   While I lived in Boston for eight years, I'm not sure that I would rate that livable city in LA's league.

How Will Bangladesh Adapt to Climate Change?

The NY Times is starting to write about climate adaptation and today it has a nice set of images and words about the fate of Bangladesh.   As a climate change adaptation optimist, how much of a challenge does Bangladesh pose as a salient case?  Let's look at some data I downloaded from the World Bank's WDI data base on this nation's real per-capita GDP over the last 50 years.

Point #1 is that since 1980 there has been sharp economic growth.  While this is still a very poor nation, if this growth were to continue for another decade then more and more people in this nation will have the resources to protect themselves against the serious threat of flooding.  This of Japan, South Korea or China.  These nations were very poor in the not so recent past and yet few worry about their ability to adapt to climatic shocks.

Point #2:  Adaptation is more likely to be achieved when people anticipate the challenge.  So, how is Bangladesh adapting?  For those who want to read some serious stuff; take a look at this  and this  and this.

Point #3;  Don't forget about fertility trends and the quality vs. quantity tradeoff.

Take a look at this graph of this nation's births per woman.

Do you see the demographic transition taking place?  This nation is following a classic pattern such that the new generation of kids will have more human capital and financial capital and this will allow many of them to move to nations such as China that will need an influx of young immigrants in the near future. There are gains to trade in international labor markets.  The system of cities provides a diversified strategy for collectively protecting us from known unknowns.

Note the distinction here between damage to physical places versus people.  We will be better able to adapt to climate change if we allow for more mobility and options to locate and live your life in our hotter future.

I made all of these points in my Climatopolis.  For those who want even more optimism in your life, take a look at Matt Ridley's piece in the WSJ today. 

Wednesday, March 26, 2014

Predicting China's Real Estate Market Dynamics Using Internet Search Activity

Google has been good for me.  It has allowed me to efficiently search for stuff that interests me and it has allowed me to write several economics research papers.  People have been interested in my past work on Google Searches as a tool to learn about interest in climate change.   Now you can read a draft of my new Internet paper focused on China's housing markets and what is revealed by Chinese households' Internet searches related to their markets.  Here is our paper's title and abstract.

Internet Search Activity as Social Learning: Evidence from China's Housing Market Dynamics
Siqi Zheng
Tsinghua University
Weizeng Sun
Tsinghua University
Matthew E. Kahn*

March 25th 2014


Over the last decade, China’s home prices have soared.  Young people, especially young men, continue to want to buy homes and must choose whether and when and where to buy.  Due to fundamental uncertainty about one’s labor income path, future real estate price growth and government policy, potential real estate buyers have an incentive to seek out Internet information about evolving market sentiment.  Following a recent U.S literature, we build a 35 Chinese city real estate sentiment index that measures the degree of optimism in a local market at a point in time.  All else equal, this index predicts several important real estate phenomena and its effects differ depending on local demand side and supply side conditions.  Our findings suggest that this sentiment index proxies for a time varying housing demand shifter.  We use a household expectations survey covering seven cities to further explore the underpinnings of the empirical relationships we document.   

Tuesday, March 25, 2014

Swimming in the Pacific Ocean

I haven't swam in an Ocean for 35 years. Today, I made my comeback in the surprisingly warm Pacific.  If you had been at this beach at 5pm, you would have seen quite a sight.

Social Status and the Vertical Quality Model

This Stanford Anthropologist argues that Facebook makes us miserable.  She advances an interesting hypothesis that until people are connected to the Web that they are blissfully unaware of how little fun and status they are achieving relative to everyone else.  It is easy to "Keep up with The Joneses" when you don't know they exist.  Facebook confronts you with those smooth, attractive Joneses and the low ranked monkeys get depressed.  One study focused on this topic is discussed here.

A few thoughts;

1.  Facebook is an "opt in" technology. You can choose not to spend time on Facebook so establishing the causal effects of spending time on Facebook is tricky because the researcher must disentangle selection effects from treatment effects.

2.  Implicit in Dr. Luhrmann's analysis is a view of the world that people believe in a vertical model of quality.  For hundreds of years, economists have talked about comparative advantage rather than focusing on absolute advantage.  In an absolute advantage model, Mike Tyson is a better boxer than me, he is a better economist than me, he is funnier than me, he is more handsome than me, he cooks better than me, he is a better father than me.  Are you getting the picture here?  In the absolute advantage model, there is a single index of a person's quality (such as IQ) and we can sort people from the highest monkey to the lowest ranked monkey.

Economists reject this vision.  The comparative advantage model views people and nations as multidimensional. We make choices over what we study in college and what we focus our scarce time on.  Such investments increase your skill at one task (such as blogging) and you sell these services to the market while buying stuff that others have a relative advantage in producing.  

In a world that recognizes that there are many different skills (dancing, kissing, debating, writing, cooking, thinking, boxing); we can all be the star at something!  When I taught at Harvard I saw this first hand, Harvard had the best student in each of these subtasks and they were all delighted with themselves because they knew they were great at what they cared about.  The key here to keep your self respect and your sanity is to promote comparative advantage.   An economist is who is a good researcher and a great teacher can take pride that she is mentoring the next generation rather than thinking depressed thoughts that she won't win a Nobel Prize.  While REPEC ranks us on a vertical quality index, economics researchers ranked #2000 and higher can think of a variety of ways that makes them "better" than the #1 Dude on the list.