Thursday, August 21, 2014

An Unconventional Economics Textbook

While some leading economists are selling their textbook for $103 and other stars are selling theirs for $209, you can purchase my "Fundamental of Environmental and Urban Economics" book for $1.  I use
this book in my environmental economics course at UCLA as my main text but I think that anyone who is teaching environmental economics or urban economics can use this as a supplement for their course.  While this book's layout will not win any style prizes, its substance is pretty good.   For those who have wanted to see how a University of Chicago trained economist thinks about mainstream issues at the intersection of environmental and urban economics, you won't be disappointed.   I've set the price low because I want folks to read it.   A few people are buying it.  Maybe I need to offer a deeper subsidy to encourage more readership?

I'm posting this now because a new academic school year is about to start and I'm looking for brave young professors who are willing to experiment with a different type of textbook.  All of my lecture materials can be accessed here.  

Wednesday, August 20, 2014

Coastal Real Estate and Emerging Flood Risk: The Case of "Old Greenwich" CT

The NY Times offers some suburban sociology as it profiles the NYC suburban town of "Old Greenwich".  Has this coastal town learned any lessons from Hurricane Sandy? Has its residents in low lying areas now taken precautions so that the next storm causes less damage?

Here is a direct quote:

"The housing market is just now emerging from a nearly two-year slump induced by Hurricane Sandy. Flooding in low-lying areas and a wind-driven fire that destroyed three waterfront mansions “left a bit of a scar,” said Gary Cunningham, a former stockbroker who now develops single-family homes in Old Greenwich and is the managing partner of Core Properties.

Uncertainty around the Federal Emergency Management Agency’s flood zone remapping and new insurance rates also caused buyers to temporarily back off. These fears appear to be easing, however, Mr. Cunningham said. And he is further encouraged by recent revisions to the town’s building regulations for flood zones.

If the last three months are any indication, buyer confidence is back in a big way. Since June, at least four waterfront properties have traded above $6 million; the most expensive, a 7,700-square-foot colonial on Greenwich Cove, closed at $13.05 million."

So, there are two different issues here. The greater metro NYC housing market is hot.  Have real estate buyers "forgotten" about storm risk?  Or have home owners taken costly precautions to protect themselves?  A sociologist might go door to door asking survey questions to answer this question.  How might an economist answer this?  

Suppose that the flood maps are sharply delineated so that homes that are in very close proximity (such as 1/2 mile) differ with respect to their flood risk.  This would allow for a regression discontinuity design so that the researcher would test whether similar homes (in terms of square footage, year built) in the same geographic vicinity sell for a much lower price if they are in the FEMA flood zone relative to similar homes located just outside of it.   If there is no statistically significant difference in average prices between these homes, then either there is no perception of differential risk among recent buyers or the home buyers are convinced that they have access to private self protection strategies to offset the risk that mother nature is posing.

An even cleaner test of risk perception would be if FEMA announced that it would not offer any disaster relief $ to this area.  In this case, if there continues to be no price premium between the two sets of homes I listed above then this would be even stronger evidence that coastal households believe they can self protect.

Why do I reject the hypothesis that the home buyers are unaware of the true risks?  When you make an expensive multimillion dollar investment, you have the right incentives to engage in the due diligence of discovering what risks you are exposing your loved ones and your stuff to.  We are adults.  Caveat Emptor!

Sunday, August 17, 2014

Olive Oil Production as a Test of Our Ability to Adapt to Climate Change

Joe Romm's blog reports some doom and gloom about olive oil production.  This tasty (and healthy) oil is mainly grown in Spain, Italy and Greece with these three nations producing 97% of the European Union's total production and the EU produces 73% of the world's olive oil output. (Source).  Spain produces 62% of the EU's total and it is suffering from mega-drought.  What will be the short term and medium term consequences of this drought?  Given that this production is highly spatially localized, what adaptation could occur?    The Internet says that olive oil can be preserved for two years so storage will be one adaptation strategy as future "Hotelling inventory" papers will be written.   As of now, I will merely leave this as a challenge that we face. Will for profit farmers figure out a way to adapt? Will households who use olive oil figure out strategies to adapt?  This would appear to be a case where the pessimists are right that climate change will cause large impacts on our well being (as measured by lost consumer surplus).  Are they right? I will report back on this.

Saturday, August 16, 2014

Who Plans for the Future?

A fundamental question in social science focuses on whether individuals are consistent in how they make choices over time and in different settings.   If we are consistent in how we prioritize then we are less likely to regret our choices.  Psychologists tell complex stories that we are every changing shape shifters while economists tell a much simpler story that we know our utility function U(c) and we enter the market to purchase goods to maximize that well defined function.  In recent years, economists such as David Laibson have explored the middle ground of how to formally model such time inconsistencies.  Here is Laibson's most famous paper on hyperbolic discounting.  

This is a long winded way of introducing a new paper by Lamar Pierce that was profiled in the NY Times.  He has been able to access data that reports a person's investments in their 401k retirement plan and indicators of their personal health.  He finds a positive correlation. Those who save for the future are also healthier.   Here is a direct quote:

"The results echo previous research showing that some people are more predisposed than others to invest in the future. But much of that work, Dr. Chapman said, has been in the area of addiction — why heroin addicts, say, think differently about future consequences than nonaddicts. And this paper adds another interesting twist: The results come not from a laboratory experiment but from real-world data.

The researchers gleaned the findings from a trove of financial and health information that a midsize industrial laundry company in the Midwest collected from its employees, with their consent. The data was gathered anonymously by a third party and in turn provided to researchers at the Olin Business School at Washington University in St. Louis.

Broadly, the researchers looked at employees’ contributions to their 401(k) plans and compared them against various measures of their health, including blood test results; cholesterol, kidney and iron levels; exercise frequency; and whether they smoked."

To an economist, these findings suggest that there is a person specific trait such as self control and patience such that people who have a high amount of this unobserved attribute save more for the future and invest more in staying healthy.

The key public policy question is whether this unobservable is a fixed trait or whether it can be built up like a muscle?  The Nobel Laureate Gary Becker and my friend Casey Mulligan wrote an important paper on this subject back in 1998.  They argue that education has a causal role in increasing patience.  If this is true, then this is good news for both mitigating and adapting to climate change because it will be easier to adapt and to enact low carbon policies in a world with more future oriented individuals.

Thursday, August 14, 2014

Summing Up the Entire Climate Change Adaptation Debate in Two Anonymous Comments

Read this ABC News story about heavy rain and then read the comments. You will see a large number of "climate change deniers" saying that rainfall is cyclical and cracking some funny jokes but then read these two separate comments.

KittyTroll 2 hours ago 0 1
Problem is too many CONCRETE buildings and poor drainage systems! Over Development IS The Problem ! Not the Rain! Heck in most cities they should have patrols to clean drains ( but they don't ) and rebuild the drainage systems should be Mandatory -no it's not even considered or they say too late now! Hogwash!

HBa 1 hour ago 0 0
So you are saying the drainage system caused the record 13.75" of rain.

The 2nd comment is a standard "climate change has caused the surplus rain".  The 1st comment is the smart one. Note the focus on unintended consequences and simple strategies for urbanites to adapt to the "new normal". That's the Climatopolis logic and this is how we urbanites will adapt.

Wednesday, August 13, 2014

The Consequences of Ideology

Chilton and Posner have released a new working paper  analyzing documenting that among law professors at elite law schools that the faculty's scholarship is shaped by their personal ideology.  Scholars who donate $ to Democrats are more likely to write liberal scholarship.  It is unlikely that the causality runs in the reverse direction such that one's flavor of scholarship shapes who one gives $ to.  The Law is a distinctive research field that so many papers do not use quantitative methods. By not locking one's self into the formal hypothesis testing framework (featuring data collection, data cleaning and the possibility of ex-post replication and robustness tests), the scholar has more freedom to expound on her personal world views.

The bigger point of this new research is the causal role in how personal ideology infuses through our life.   As usual, this raises the issue of where ideology comes from. Social scientists have had much more success studying the consequences of ideology than in studying its causes. Parsing out how much of your world view is due to your parents, friends, society, the time when you lived (i.e Woodstock and Vietnam for boomers), is a tough question.

As I have said many times, my recent focus has been the causes and consequences of environmental ideology.

Here are some of my recent consequences of environmental ideology papers;

  1. Matthew J. Holian & Matthew E. Kahn, 2014. "Household Demand for Low Carbon Public Policies: Evidence from California," NBER Working Papers 19965, National Bureau of Economic Research, Inc.
  1. Costa, Dora L. & Kahn, Matthew E., 2013. "Do liberal home owners consume less electricity? A test of the voluntary restraint hypothesis,"Economics Letters, Elsevier, vol. 119(2), pages 210-212.
  2. Dora L. Costa & Matthew E. Kahn, 2013. "Energy Conservation “Nudges” And Environmentalist Ideology: Evidence From A Randomized Residential Electricity Field Experiment," Journal of the European Economic Association, European Economic Association, vol. 11(3), pages 680-702, 06
  3. Siqi Zheng & Matthew E. Kahn, 2013. "Understanding China's Urban Pollution Dynamics," Journal of Economic Literature, American Economic Association, vol. 51(3), pages 731-72, September.
  4. Michael I. Cragg & Yuyu Zhou & Kevin Gurney & Matthew E. Kahn, 2013. "Carbon Geography: The Political Economy Of Congressional Support For Legislation Intended To Mitigate Greenhouse Gas Production," Economic Inquiry, Western Economic Association International, vol. 51(2), pages 1640-1650, 04
  5. Siqi Zheng & Matthew E. Kahn, 2013. "Does Government Investment in Local Public Goods Spur Gentrification? Evidence from Beijing," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 41(1), pages 1-28, 03.

  6. Dastrup, Samuel R. & Graff Zivin, Joshua & Costa, Dora L. & Kahn, Matthew E., 2012. "Understanding the Solar Home price premium: Electricity generation and “Green” social status," European Economic Review, Elsevier, vol. 56(5), pages 961-973.

    • Inc.
  7. Zheng, Siqi & Wu, Jing & Kahn, Matthew E. & Deng, Yongheng, 2012. "The nascent market for “green” real estate in Beijing," European Economic Review, Elsevier, vol. 56(5), pages 974-984.

  8. Kahn, Matthew E., 2011. "Do liberal cities limit new housing development? Evidence from California," Journal of Urban Economics, Elsevier, vol. 69(2), pages 223-228, March.
  9. Matthew E. Kahn & Matthew J. Kotchen, 2011. "Business Cycle Effects On Concern About Climate Change: The Chilling Effect Of Recession,"Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 2(03), pages 257-273.
    • Inc.
  10. Glaeser, Edward L. & Kahn, Matthew E., 2010. "The greenness of cities: Carbon dioxide emissions and urban development," Journal of Urban Economics, Elsevier, vol. 67(3), pages 404-418, May.

  11. Kahn, Matthew E. & Vaughn, Ryan & Zasloff, Jonathan, 2010. "The housing market effects of discrete land use regulations: Evidence from the California coastal boundary zone," Journal of Housing Economics, Elsevier, vol. 19(4), pages 269-279, December.

  12. Kahn Matthew E & Vaughn Ryan K., 2009. "Green Market Geography: The Spatial Clustering of Hybrid Vehicles and LEED Registered Buildings," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(2), pages 1-24, March.
  13. Kahn, Matthew E., 2009. "Regional growth and exposure to nearby coal fired power plant emissions," Regional Science and Urban Economics, Elsevier, vol. 39(1), pages 15-22, January.

  14. Kahn, Matthew E., 2007. "Do greens drive Hummers or hybrids? Environmental ideology as a determinant of consumer choice," Journal of Environmental Economics and Management, Elsevier, vol. 54(2), pages 129-145, September.

Tuesday, August 12, 2014

Human Ingenuity and Farmer Adaptation to Climate Change

Somewhere Julian Simon is smiling.  Even NPR is reporting how proactive farmers are making investments to reduce the output risk they face from climate change.   A direct quote:

"He (Gene Snetselaar) says farmers are buying new equipment to cope with the weather changes, including adding planters so they can get crops in faster during a wet spring, and new grain wagons with tracks like a military tank, instead of wheels."

Human capital is proving to be a useful input in devising new solutions for farmers. Here is another NPR Quote:

"In a test field east of Des Moines, Iowa, Watkins and Iowa State University agronomist Matt Liebman are looking for a way to help farmers adapt to soil erosion caused by torrential rain events that are becoming more common.

Liebman has helped develop a new technique for curbing erosion by planting strips of native prairie plants at strategic locations within cornfields. The deep-rooted, resilient prairie plants can help hold the soil in place as climate change produces more violent storms with heavy rains.

"We slow down the water, and allow more of it to seep into the ground, rather than run off," Liebman says. "We want to retain the nutrients that might be washed out into the stream and keep them on the crop fields.""

Julian Simon repeatedly reminded the "doom and gloomers" of the power of human ingenuity in the face of an anticipated challenge.  Climate change will offer the ultimate test of Simon's optimism.   Are we nimble problem solvers or are we ignorant victims who are blissfully unaware of what we have collectively unleashed?   I'm with Simon.

Now the $64,000 dollar question is how much of climate change's impact will be offset by human ingenuity? The reason this is such a hard question to answer is that we would need a good climate model of what climate change will do to us both individually and collectively and we would need an economic model of how successful will endogenous technological innovation will be.  What will be the price and quality of a highly energy efficient air conditioner in the year 2050?   While I don't know the answer to this question, I believe in a law of large numbers that if enough entrepreneurs recognize the potential profits they could earn devising such an adaptation friendly product then at least one of them will succeed and we will all benefit.  While Zuckerberg and Bezos focused on the Internet as their pet focus, future entrepreneurs will focus on climate change adaptation. Perhaps Elon Musk's many children have inherited their dad's good nose for hard problems that offer big economic and social returns.  

Sunday, August 10, 2014

Is a Hard Life Inherited? An Economist's Perspective

Nicholas Kristof has written a very good piece in the NY Times.  He sketches the life cycle of his friend Rick Goff who hasn't lived up to his full potential and he warns Ivy League graduates to be less smug and tells them that they were born on 3rd base and don't "deserve" the full credit for their lifetime of success.

On some level this is the usual crowd pleasing stuff that the NY Times writes.  It is read by a group of liberal intellectuals worried that the world is going to hell.   After documenting genuine serious issues, Mr. Kristof wimps out in offering his solutions to the challenges. To quote him:

"This crisis in working-class America doesn’t get the attention it deserves, perhaps because most of us in the chattering class aren’t a part of it. There are steps that could help, including a higher minimum wage, early childhood programs, and a focus on education as an escalator to opportunity. But the essential starting point is empathy."

Let me make a counter-offer;   Suppose that the next President of the United States commits to;

1. Universal pre-K provided by the private sector
2. a carbon tax of $30 a ton for CO2
3.  abolishing the minimum wage
4. Forcing every state in the nation to be a right to work state
5.  Using the revenue collected from #2 to reduce the marginal tax rate by 10 percentage points

This set of policies together would set our domestic economy on the right course for long run growth.

Note that this bundle of policies includes items that anger the left and the right.  Standard coastal liberals will be horrified by #3,#4 and #5.  Republicans will be offended by #2.   Note that this proposal is self financing and would be budget neutral.

More employers would take a chance on hiring workers because they would know that they could fire workers.  U.S manufacturing would become more competitive due to factor #2 and #3 and some manufacturing jobs would return to the U.S.

Both the right and the left are stubborn about experimenting with the status quo policies. If the world is "going to hell", why isn't each party willing to experiment?

Note Kristof's pessimism that new generations of kids never stood a chance.  If he believes his own thesis, what policies is he willing to support to change this?   The crowd pleasing "formula" is to tax the rich to pay for new publicly provided roads, airports and pre-K.  That's okay but I doubt that this alone will make a dent in the problem.  The standard NY Times solution smells of using the pain that the declining lower middle class are feeling to increase the size of government and that borders on "human shields" rather than being a sustainable solution to the challenge that we face.  

Friday, August 08, 2014

Does Inequality Lower Economic Growth?

Both Paul Krugman and John Cochrane have recently demonstrated that they continue to be among our top .1% economists.   As they raise their game, this increases inequality among academic economists (as measured by idea generation) and it has slowed down my own economic growth because I'm not working on my five revise and resubmits at journals and instead I'm going to blog about their thoughts.

I do not know Paul Krugman but one of his life goals seems to be to nudge Greg Mankiw.   Greg has written a great textbook.  For reasons I can't explain, I keep a copy of his 5th edition of his Principles book in my living room.  On page 258 of this text,  Greg states that there is an efficiency/equity tradeoff.  Will he need to rewrite this section?  Have we been teaching Econ 101 students the wrong stuff for 9000 years?

In his NY Times piece today,  Dr. Krugman takes a step towards Jim Heckman's human capability work and suggests (without explicitly saying this) that poor kids do not choose their parents and that many of these kids have been under-invested in so that they do not achieve their full potential.  In a counter-factual world where we tax the rich and invest in the Heckman Equation agenda, these kids will accumulate more human capital and in aggregate we will be a richer nation.

John Cochrane is an excellent Chicago Economist and wants to "see a model" that links rising inequality to lower economic growth.   Here is  a great quote from his blog in which he is not directly commenting on Krugman but instead is offering his thoughts on a related strange report by some business economists;

"OK, so the idea in this report is that somehow, truck drivers in Las Vegas found out that hedge fund managers in Greenwich CT were upgrading from Gulfstreams to 737s. This made them feel bad, so they went out and took out huge mortgages that they had no chance of repaying. When house prices went up, they refinanced and bought TVs giving them even less chance of paying off their mortgages. Now they're broke and not spending a lot. And "spending," not productivity is the key to long-run growth.

At best this is a theory of boom and slow recovery. But growth and inequality is about the long run. Why were we growing too slowly in the 2000s?"

He writes well!    Note that the key point that Dr. Cochrane is pursuing is to use the tools of micro economics to analyze the broad Krugman conjecture that inequality is slowing down US economic growth.    What is it about inequality that chokes off growth?   In Dr. Krugman's piece he appears to have a Robert Frank rat race vision that elite institutions such as his Princeton have a finite number of slots and that as the rich get richer they purchase the key inputs that give each of these fat cat's kids a probability of 1 of getting admitted to the Ivy League.  With these fat cat's kids accepted, there are no slots for the Horatio Algers and they suffer defeat. This waste of talent adds up to our becoming a poorer nation because Horatio could have been the next Krugman or Zuckerberg if only he had gotten into the Big Leagues.

Note the strong belief implicit in Krugman's setup  that the supply curve of elite slots is highly inelastic.  We only have finite slots of Ivy League education. We only have a finite set of slots to live in San Francisco.   A key micro economic question is how can we reconfigure capitalism to make the supply curve for such goods more elastic!  Less regulation and more innovation would achieve this.  Dr. Krugman seems to be taking the "zero sum game" notion as a law of physics.    I hope that he is wrong here but he may not be.

Consider the rise of the MOOCs.  If there is some very talented poor person in India (think of the Mathematician Ramanujan), such a guy may not get into Princeton but he can now assemble a pretty close substitute using the Internet for free.  This is an empirical question.   Ignoring the beer, the football games and social life,  how close do MOOCs approximate the intellectual experience for a motivated person?

While I don't fully believe this example, my point is that MOOCS create a more elastic supply curve (for those of you who don't know economics this means that more slots at elite schools now exist at the same price).    This is an example of how induced innovation solves a social challenge.

If Paul Krugman is going to embrace the Heckman agenda, he must explain why the public sector should be trusted with the extra tax revenue collected from the rich to fund the universal pre-K that Heckman (and I) support.  Why won't public sector unions simply grab this $ in terms of higher than market wages?

Is Dr. Krugman willing to simultaneously endorse massive increases in pre-K investment and a Milton Friedman style private voucher program?    Together these policies might achieve his goal of creating a fairer and richer society.

Tuesday, August 05, 2014

Some Foreshadowing Regarding How We Will Adapt to "6 Hideous Realities We Must Face"

Larry Schwartz offers a teachable moment.   In his Salon piece, he lists six challenges that climate change will pose for us and he is pessimistic about our ability to continue to thrive in the face of these challenges.  Here is list of his big six;

1.  Summer heat
2. drought
3. coastal flooding
4. specie extinction
5. storm intensity
6.  famine

 1.  Go to Singapore and you will see a rich, well functioning city that demonstrates that people can be productive and happy in the heat and humidity once air conditioning is provided.  This city really comes to life at night after the sun has set.  In a safe city,  people go out at night and have  great time.  For those who find it too hot, there will be Northern latitudes to move to.  Perhaps Canada's population will grow to 2 billion by the year 2050?    Canada's land area is 3.9 million square miles. If 2 billion people live there, this would yield an average population density of 512 people per square mile.   Given that Hong Kong's density is 65,000 people per square mile, this suggests that space won't be a limiting factor.

2. Drought?  California is in drought right now and the way to solve this problem is to raise water prices. We are incredibly inefficient in our use of water and with the rise of smart meters and Big Data we have no excuse to not introduce 21st century technology and real time pricing.   Gary Becker argued that as the inefficiency of public policies increase that this raises the likelihood of efficient reform.  Climate change and the drought challenge offers a nice test of this hypothesis.  

3. Coastal flooding --- if we anticipate this problem, are the people who live in these areas truly victims?   As I argue in Climatopolis if insurance companies can raise premiums in increasingly risky areas then this will direct economic activity to higher ground.  Place based policies that implicitly subsidize coastal living are the real problem that creates "humans shields" and places coastal people at risk. Coastal people want to have their cake and eat it to. They want to live a beautiful place at increased risk of disaster and if such disaster occurs they want to use "other people's money" to rebuild for them.  If we remove this spatial moral hazard effect then at risk coastal areas will depopulate.  No buildings live forever.  Rational investors will not invest in upkeep if they anticipate that these structures will be underwater in the near future. Read my paper with Devin Bunten where we talk about the future of Miami in the face of climate change.

4. Specie extinction --- ecologists are hard at work on this topic.  Why is Dr. Schwartz so pessimistic about creatures' ability to adapt?  He should read some of the work of Dov Sax.  The difference between people and creatures is our brain capacity and our ability to form expectations of the future and our access to markets.  These dimensions give us a huge advantage in adapting to the new threat of climate change.

5. Storm Intensity --- See #3 above.  In addition, if we anticipate more intense storms in the future then we build a real estate capital stock that can take a punch.  As I showed in my 2005 RESTAT paper, richer nations suffer fewer death from natural disasters.

6.  Famine?   Mr. Schwartz will continue to have plenty to eat because of world free markets in agriculture.   Trade occurs when there are mutual gains to buyers and sellers from trading with each other.  In a world of free trade, where food can be stored and futures contracts can be purchased, there will be many ways to hedge risk of bad crop output. GMO crops will be used.   Farming's spatial location will be diversified so that we grow wheat in many different locations.   He ignores that the world's population will soon stabilize because we are moving to cities and women have greater labor market opportunities in cities and thus work more rather than staying home with multiple kids (think of Hilary Clinton and Chelsea).

Salon magazine should not be confused with Slate.  I prefer the quality of the articles in Slate.

Monday, August 04, 2014

A Western Coastal Liberal State Blockade Limiting Exports of Coal to China?

This article suggests that a coalition of liberal Vancouver, Washington, Oregon and California may all limit the ability of Montana and Wyoming of shipping their coal to China.  In Econ 101, we teach that boycotts don't work because somebody will have an incentive to purchase the good at a low price and violate the boycott.  But, this Econ 101 logic abstracts away from geography and ideology. Permit me to explain.  Look at a map and you will see that the cheapest way to get coal from Wyoming to China is through some liberal states. If these states refuse to build a port to allow such shipments then the transportation costs of a mutually beneficial trade between Wyoming and China go way up.  Will the coal be shipped through Mexico?  Liberals clustering on coasts has been a favorite research topic of mine but now it appears to have implications for trade in natural resources and endogenous impediments to such trade.  Why would liberal areas engage in such a boycott? To reduce the threat of climate change, we need to burn less coal and keep it in the ground.  By erecting barriers to world trade in coal (i.e not building ports for shipping coal between nations), this may increase the likelihood that the coal stays in the ground.  

Sunday, August 03, 2014

How Will Climate Change Impact Transportation Logistics?

The global economy relies on shipping things from origin to destination.  Think of Amazon's core business.  Amazon doesn't produce anything.  Instead, it takes orders from urban households and ships them stuff that it buys from wholesalers and sells it to you for a retail price.  Supermarkets play the same role.  Each day commuters ship themselves to their office and then back home.  This piece suggests that climate change could disrupt such shipments.   If this claim is true, then the annual cost of climate change could be quite high. Here is a quote:

"In other words, climate change could mean “sun kinks” could warp train tracks in the heat, airplanes will be more expensive to fly, highway surfaces could soften in heat waves, roadways and bridges could be washed away in rising seas and storm surges, and storms in the open ocean could increase the cost and risks associated with shipping.

Those are the findings of a new report, “Climate Change: Implications for Transport,” released Monday by Cambridge University and sustainable business advocacy group Business for Social Responsibility (BSR) outlining what the conclusions of the Intergovernmental Panel on Climate Change’s Fifth Assessment Report mean foThese scenarios could certainly play out but the endogenous innovation literature teaches us that when we anticipate a problem that there is profit on the table for that firm and engineers who design a solution.  Note my optimism about the power of human ingenuity.  Note the fatalism and pessimism of the authors of this piece.

I do not mean to say that endogenous innovation is a "free lunch" but the key issue here is what is the marginal cost to society of figuring out new solutions to the new issues we will face caused by climate change.  The pessimists phrase the issue as one of "doom" rather than one of adjustment costs and learning and experimentation.

If train tracks warp in the heat then cooling substances will be needed to reduce this scenario.  Trucks and Waterways may be used instead of train tracks to move goods.  Having "redundant" backup plans is a form of insurance against such scenarios.

If highway surfaces soften in heat waves then new "green paving surface" can be used to cool the pavement.

If there are storm surges on the open ocean then we need bigger shipping vessels that can handle such big waves.

For each of the challenges that the article names, yes there will be losers but there will also be winners among those who can design new solutions.   How can we have put a man on the moon, decoded the double helix, created Facebook and Google but we aren't able to solve the engineering challenges posed above?  I reject this pessimism about our ability to cope with an anticipated threat.

Friday, August 01, 2014

Intellectual Growth

From 1993 to 2000, I served as a junior faculty member at Columbia University.   Today, I received an email from Columbia's Academic Commons informing me that there have been 6580 downloads of papers I posted there in the 1990s.    Re-reading some of the papers makes me cringe.  On the one hand, I see many good ideas that subsequently generated some citations and contributed to several active literatures.  On the other hand, I see raw papers that were not well written.   The referee process has a lot of value added.

Of this group of papers, the biggest hits based on Google Scholar are;

1.   Kahn and Matsusaka 1997       187  cites  ,   This paper collected county level voting data on more than a dozen California environmental voting initiatives to study the correlates of "pro-green" voting.  Robust evidence of the role that education plays in supporting green voting and affected industry counties voting against.

2.  Kahn 1999 on Rust Belt Decline,     53  cites  ,   First paper to measure the reduction in pollution in cities such as Pittsburgh brought about as an unintended consequence of Rust Belt industrial decline.  So, this is the reverse of the rise of "Satanic Cities".  Pollution drops as dirty industry collapses.

3. Cragg and Kahn 1997 on Climate Demand  ,    98 cites    (conditional logit study of state to state migration to measure the willingness to give up consumption = (income -rent) for better climate amenities and how this varies by age and education of the migrant.

4.  Kahn 1997 on the Clean Air Act  ,    90 cites  ,   first paper in the literature examining the unintended consequences of the differential enforcement of the Clean Air Act on the spatial agglomeration of manufacturing jobs.  The first draft was written in 1994 before other papers that appeared in the AER and the JPE on the same subject.

5.  Kahn 1995 on Revealed Preference  ,    75 cites    (those cities offering high wages and low rents must have low quality of life),  no arbitrage argument about bounding the total quality of life differentials between cities based on the private consumption one sacrifices by locating there.

The funny thing is that most scholars do their big work early.  As you can see (especially if you sit down and read the early drafts of my Columbia Papers),  I did not follow that path.

Thursday, July 31, 2014

Kayaking in the Pacific Ocean

While I'm well aware that I'm an "urban environmentalist", yesterday I engaged in some Robert Redford style environmentalism.  First, I took a kayak out for an hour and paddled around the best I could off of Carpinteria Beach.   Now I have a sunburn and blisters but at the time it was great.    Last night I attended a showing of the documentary DamNation. It is an outstanding film.   Before attending, I worried that it would be preachy and ignore the benefits that dams and hydro power have offered the nation.  Instead, this is a very witty film that even a two handed economist can appreciate.  The film makes a credible case that we have built too many dams in the U.S with our collection of over 65,000 dams and that diminishing returns have kicked in.  While there is a little bit too much focus on wild Salmon and the crazy guys who love them, the film opened my imagination to the benefits of allowing more rivers to "run wild".

Wednesday, July 30, 2014

The Value of Information Related to the Cost of Climate Change

The NY Times has published a fun "Room for Debate" focused on climate change fiction and the role of such work in shaping public opinion.   To say something new here, let's think about this topic through the lens of the modern field experiment literature.  I will embrace the essential heterogeneity model.

Suppose that climate change authors could randomly assign their books to adults and that adults were required to read them.  Note that this is a typical field experiment research design.  The random assignment of books removes concern that readers "self select" what books to read such that a Conservative Republican only watches Fox News.  The random assignment of the book means that this selection concern vanishes.

Suppose that Mr J and Mr Q and Ms M   are randomly assigned book #3.  Do they change their worldview because of their exposure to this treatment (the book)?

Suppose that Mr J. views all of climate change as a big hoax and simply giggles as he reads a liberal Doom and Gloom climate change fiction book while Mr Q's imagination is expanded as he thinks about scenarios that never cross his mind before.   Suppose that Ms M is a lover of all things Al Gore and eagerly reads the book.

Note the essential heterogeneity here.  J Q and M are three different types of people. They know their worldviews.   To an economist, only Q matters. He is the only one of the 3 who is "at the margin".  Mr. J dismisses climate change as a hoax.  Ms. M already is a true "believer".  

To a statistician, the key issue is what % of the population resembles Mr. Q?   For this "marginal" group, how responsive are they to new information?   If this share is small and if this group tends not to update its priors, then such climate change fiction can't change the world because opinion is already set.

To really make a difference with their message, the climate change literature experts must target the Q sub-group and figure out how to offer them a price discount for reading these books.

The same issue arises for the anti-carbon tax coalition.  Mr Q. is the swing voter. They need to target such guys and get their message out to him.

Returning to the field experiment design, the book seller does not know who in the population is J, Q or M and so the seller gives out 33% to type J , 33% to type Q and 33% to type M.

The statistician observes the population change in environmentalism and this equals:

.33*change in environmentalism of group Q given that each Q read the book.

Note that for the remaining 66% of the population who are types J and M that the treatment (reading the book) has no effect on them because they have already made up their mind.

Without targeting the treatment to the subgroup who is most susceptible to its influence, the book seller has achieved a low impact because most people are not affected by the treatment.

Tuesday, July 29, 2014

Graduate Environmental and Urban Economics Education

UCLA does not have enough Ph.D. students interested in a graduate course on environmental economics.   That's a shame but I don't take it too personally (maybe I should?).   Fortunately, the University of California's Center for Energy and Environmental Economics offers a week long summer course. Ph.D. students from all of the ten campuses are welcome to attend and I have taught in this program twice before.  This summer, I will be lecturing about China and its urban pollution challenges.  A preliminary draft of my lecture notes are posted here.    In teaching in this program, I have greatly enjoyed meeting young scholars who share similar broad interests with me.   While I greatly enjoy teaching most of my UCLA undergraduates, I sometimes envision what it would be like to be part of a University with a real commitment to graduate environmental and urban studies.  The Luskin School at UCLA does not have a Ph.D program and for folks who know me you know that I"m not an "urban planning" kind of guy.  So far, I have not been able to talk my wife into moving to Asia but I know that I could teach a popular graduate class at Tsinghua University or at NUS.

Budget Deficits and Climate Change Politics

This article highlights that President Obama and the Democrats are changing tactics in their worthwhile attempt to build a political coalition to reduce U.S GHG emissions.  The Green Team now wants to tell a narrative that the U.S will save money over the long run by reducing GHG emissions now.  The basic logic is that by spending money now that future disasters that will be costly will be less likely to occur and the savings from the avoided future disasters more than offsets the upfront costs of investment in low carbon technologies today.  Note that this is a different narrative than yelling;  "we are all going to die, we are all going to die". Instead, the issue is posed as one of intertemporal budget tradeoffs.

The key problem with this argument is the following.   Today, the USA produces roughly 20% of the world's GHG emissions.  With the growth of China and India, this percentage is likely to decline by 10% in a few decades.    Suppose that President Obama and President Hilary Clinton are successful at reducing U.S total emissions by 50% over the next two decades.   When I multiply .5 by .1 I get  5%.  This means that all of this effort will only reduce world GHG emissions by 5% if the rest of the world free rides and ignores the U.S effort.

President Obama must build a narrative to convince people that if the U.S leads that the rest of the world (including Russia and China) will follow.  I would like ask the very smart Jason Furman  --- what is the chain of dominoes such that if the U.S takes the lead that the rest of the world follows?  If we don't burn our coal, won't we just sell it to other nations who will burn it?  

If we anticipate that the rest of the world will Free Ride and won't follow our lead, is the U.S unilateral action today "good for us"?  Let's see President Obama's smart economists do some game theory!  Aren't there multiple equilibria in this game?

Saturday, July 26, 2014

Some Comments on Robert Rubin's "Risky Business"

Secretary Rubin recently wrote an Opinion Piece in the Washington Post.  Having read his autobiography (and having met him once at Brookings), I know that he is the ultimate prudent man thinking hard about future scenarios, their likelihood of taking place and the impacts of such scenarios.  In simple English, he walks the reader through some nasty climate change scenarios and stresses that Americans will suffer serious economic damage from future Hurricane Katrinas.  He thus argues that the prudent man now (regardless of political ideology) should  purchase some implicit insurance by supporting a carbon tax and thus reducing our GHG emissions.

Here is an example of a quote from his piece;

By 2050, for example, between $48 billion and $68 billion worth of current property in Louisiana and Florida is likely to be at risk of flooding because it will be below sea level. And that’s just a baseline estimate; there are other scenarios that could be catastrophic. 

Here is another quote:

And dramatically rising temperatures in much of the country will make it far too hot for people to work outside during parts of the day for several months each year — reducing employment and economic output, and causing as many as 65,200 additional heat-related deaths every year. That’s almost twice as many deaths as those caused by motor vehicle accidents in 2012.

Let's take a second look at each of these quotes;

First, let's start with damage to coastal property.  If we anticipate that this property will be flooded in the future, then its asset value will fall today.  The owner of the asset will suffer an income loss unless he figures out a way to protect it from sea level rise. If the property will literally be under water then the owner of that asset will lose $ but anticipating this, he will stop investing in maintenance of the asset so that when the flooding occurs the actual value of all of the flooded structures will be much less than the number that Mr. Rubin announced.  Doom and Gloomers always ignore endogenous depreciation in their asset impact calculations.   Unlike the Titanic, coastal property owners will strip out all of the valuables in their at risk assets and won't repaint their homes for years as "doomsday" approaches.  Yes, the land will be lost but the structures themselves will be heavily depreciated at that point.

 Second, Mr. Rubin ignores the element of the zero sum game. If property in coastal Florida vanishes, there is other property that is a close substitute for the submerged land that will go up in value as its competition vanishes.   (Recall that in the movie Superman that Lex Luthor recognized that purchasing Colorado land was a great investment because it would be beachfront property after he nuked California).  This windfall gain should be factored in by an asset expert such as Mr. Rubin!   A good accounting exercise examines the winners and losers from coastal climate shocks. His analysis implicitly assumes that there are no "winners" from the shock but think of this simple example.  Given that Coke and Pepsi are close substitutes, a labor strike at a Coke plant leads to more Pepsi sales.  Substitutes exist and they gain when a rival suffers.  Rubin is conveniently not looking at the two sides of the asset market and ignoring cross-elasticity effects. Bad economics for a Harvard man!!  In case, he is looking to refresh his micro skills, he could look at my 2014 paper with Devin Bunten where we discuss how emerging coastal flood risk should affect real estate prices and household locational decisions.

His second paragraph implicitly assumes that nobody in the year 2050 has access to air conditioning.  Powerful air conditioning is the reason that Singapore is a prosperous urban nation today.    Robert Rubin has been a leading benefactor of Michael Greenstone's Hamilton Project at Brookings.   Recently, Greenstone and co-authors have written about air conditioning's impacts on quality of life in India.  Here is a draft of the paper .  Here is a direct quote from its abstract:

"We find that a one standard deviation increase in high temperature days in a year decreases agricultural
yields and real wages by 12.6 % and 9.8 %, respectively, and increases annual mortality among
rural populations by 7.3 %. By contrast, in urban areas, there is virtually no evidence of an
effect on incomes and a substantially smaller increase in the mortality rate (of about 2.8%

for a one standard deviation increase in high temperature days)."

From a poor developing nation, we see that urbanization is a major adaptation strategy.  So, it is not a big reach to say that in the year 2050 that urbanized USA will have many coping strategies for the challenges that Mr. Rubin outlines.   The key issue with respect to extra heat is what will be the cost of buying and operating a high quality air conditioning unit in the year 2050?  Free trade with China and other exporters would be one way to guarantee that these prices are low so that the urban poor can afford them.

Dear Reader, please note that my skepticism about Mr. Rubin's arguments are based on logic and common sense. I share his big goal of the U.S adopting a carbon tax.  I support one but we need to be more honest about what real risks we face and how large these risks will be.  Mr. Rubin and Paul Krugman and Joe Romm have not figured out how to pitch these ideas to suburbanites who are well aware that they have locked into a high carbon lifestyle (see my 2014 paper with Holian).

Returning to Mr. Rubin's second quote let's focus on his eye-catching claim that of 65,200 deaths per year in future heat waves.

This crazy estimate of 65,200 extra heat related deaths a year would be horrible if true but I would ask the person who created that number the following;    who are these people at risk?  Why weren't they aware of the outdoor temperature?  Why don't we cloth them in "spacesuits" if they must work outside on such a day?  Why haven't such heat resistant clothing been invented and mass produced?  Capitalism evolves to solve our quality of life problems (look that up on your cell phone, my grandfather didn't have one in 1950).  In places such as Phoenix where it is 110F each day for weeks during summer, how many people die of heat related deaths?  How has Phoenix adapted in the year 2014?   By the year 2050, won't our strategy set be even larger?

I would ask Mr. Rubin why he is so pessimistic about the potential for human ingenuity to address many of the challenges listed in Risky Business?  Human ingenuity made Goldman Sachs into a powerhouse.  What's the difference between financial management and climate change risk management?   He would correctly say that it better to manage risk ex-ante versus letting it build up and facing its consequences ex-post. I agree with him but I think his group needs to be more honest about the potential for adaptation and who bears the losses from climate change.

Friday, July 25, 2014

Chickens in Cities

As I walk the streets of Berkeley, CA,  I hear many chickens clucking away.  Today, the NY Times presents a video profile of my Hamilton College classmate Robert McMinn.   I see that after 26 years he hasn't changed!  He has his hair and his chickens.  Time has not been so kind to me.   I have neither.   

Wednesday, July 23, 2014

Human Capital Mitigates Many Pollution Exernalities

At the University of Chicago, I was taught human capital theory by several future Nobel Laureates and Clark Medalists (Becker, Heckman, Murphy) and by a man who would have won a Nobel Prize.  None of these scholars ever mentioned the link between human capital and environmental economics.  

In this blog post, I'd like to highlight an exciting research agenda that investigates how human capital helps to reduce pollution externalities and then I will turn the discussion around and discuss how environmental externalities affect human capital accumulation.

Human capital is the investment in skills and problem solving.  A flexible person can solve a wide range of problems and such capacity helps a person thrive in the modern capitalist economy where employment sectors are constantly being hit by new shocks and face shifting competition and market conditions.

A few years ago, Nick Bloom and co-authors wrote a paper using data from UK manufacturing plants that those plants whose managers were of higher quality were more energy efficient.   I interpreted their findings to mean that more skilled managers are less likely to leave $20 bills on the ground and to achieve the efficient allocation of resources. These guys are able to read quickly and keep up on trends and to talk to a large number of experts to keep up on cutting edge energy savings technology. They are likely to be patient and willing to make long run investments that require upfront costs but yield long term energy efficiency gains.   Such skilled managers are less likely to suffer from what Frank Wolak terms the "cost of action" problem.

This discussion is relevant for an article in the NY Times today about the pollution created by the U.S  military in Afghanistan.   Our troops have been burning garbage there in open fire pits that have exposed our troops to high  levels of toxic emissions.

Camp Leather Neck spent $11.5 million on incinerators, but, during several inspections in 2013, the vast majority of its waste continued to be thrown into the two-story-high flames of the burn pit on the edge of the base because there was no contractor to run the incinerators. “As a result,” a previous report said, “possible long-term health risks to the camp’s personnel continue.”
The contractors had the human capital and skills to run the incineration equipment that would have reduced toxic exposure by some amount but since these guys were not around the troops were exposed to extra pollution. This is a simple example of how human capital protects us from pollution externalities. Another example is well trained nuclear engineers. The risk of another Chernobyl from nuclear power shrinks sharply if we have well trained nuclear engineers.

Now let's turn the argument around; how does pollution affect human capital?   Start with Jim Heckman's dynamic complementarity model of skill development.  A child who is sickly  learns little as a young student and may never catch up.   Janet Currie and co-authors have extensively examined how child health is affected by pollution.  A healthy child is more likely to successfully launch to grow up and achieve her full potential.  Similar work is now being done in developing countries. Authors such as Paulina Oliva are conducting important research at the intersection of labor and environmental economics.

Tuesday, July 22, 2014

Climate Change and Indoor vs. Outdoor Hockey

Ice melts when temperature exceeds 32 F.  Many Canadian kids have practiced hockey on frozen outdoor ponds and lakes. If climate change warms winters, will the quality of NHL hockey suffer?  This article says "yes".    An economist might posit that indoor hockey rinks are a close substitute for outdoor frozen lakes. While it will be more costly in terms of time in travelling to an indoor rink, players will gain from learning how to play on a "real regulation size" rink rather than on some piece of outdoor ice.   No NHL arenas are outdoors. In the big leagues everyone plays inside.

This hockey example raises a key issue for climate adaptation optimists.  In the near future, how much time will we spend outside versus inside?  How close substitutes are the two activities?   In cities such as Houston where it is hot and humid, how much time do people spend inside versus outside in summer? As we reallocate our time to cope with new climate conditions, do we lose pleasure or do we learn that walking at night and in the early morning outside is fine while during the heat of the day one spends it enjoying indoor air conditioning?

Similar with hockey, who are these Canadian rural hockey players who lose their chance to play hockey if the ice melts early?  What adaptation strategies do they have? Will their parents move closer to cities where there are indoor rinks?  The pessimists are afraid to admit that we have a large number of coping mechanisms for facing the new challenges we have unleashed.

Sunday, July 20, 2014

Apocalypse Romm

For some pessimism about quality of life in the year 2393 read this blog entry by Joe Romm.  He indicts free markets ideology with encouraging an individualism that chips away at collective action solutions. In the absence of a collective solution such as a global carbon tax, he argues that we we will face nasty days of pain caused by cruel climate change.  I agree and I disagree with Dr. Romm.

1. I agree that if we could overcome the global free rider problem, we could commit to a global rising carbon tax that would defuse the threat of climate change.   I continue to hope that small ball experiments such as California's AB32 Cap & Trade will teach the world that carbon trading can be introduced without large economic costs imposed.  Such experimentation and learning offers a possible optimistic path forward.

2. I disagree that capitalism is the sole source of the free rider problem. In poorer nations, their poverty is the cause of their unwillingness to tackle the issue and capitalism has a causal effect on reducing poverty.  In richer nations, Romm ignores issues  of political economy that some key voting blocks make their $ selling fossil fuels (think of Russia and Texas) while hundreds of millions of people live in suburban areas and have locked in to a lifestyle that is high carbon at least in the short run and thus would face higher costs in the short run from adopting a serious carbon tax.

3.  I agree that it is a deep shame that the world has not built up better global institutions for hammering out mutually beneficial treaties that embody incentive compatible terms so that every nation agrees to sign as it tradeoffs the new incentives it will face and the transfers it will receive.

Romm and the historians he favorably quotes  have a very active imagination in predicting how the world will look like in over 350 years.  Let me offer a counter-narrative that involves the power of free markets;

1.  Water pricing to reflect its rising scarcity
2.  Insurance pricing for real estate structures that reflects changing probabilities of natural disasters and other shocks
3.  improvements in air conditioning technology
4. improvements in food refrigeration technology
5.  increased international migration
6. economic development
7.  urbanization
8.  innovation in agricultural production to find robust ways to grow food across space and time in the face of volatile climate conditions
9.  rising labor market opportunities for women in cities (and thus shrinking families)

The 9 of these factors together will offset much of the doom and gloom that Joe Romm and friends sketch in their narrative.

The key feature of capitalism that Joe Romm and friends are unwilling to acknowledge is freedom of choice. The ability of individuals to express themselves through markets offers a very wide set of adaptation strategies that will only grow larger over time.  Yes, there is a role for government to provide public goods and to charge taxes to provide those goods. Yes, government should provide a basic safety net for the poor but at the end of the day --- each household makes it own choices about its conception of the "good life".  Suppliers evolve over time to deliver those products that offer them a profit. If households need more market goods to help them to adapt to climate change, the market will supply it.  Businesses in this Big Data age have strong incentives to rationally plan for emerging future demands. I would argue that Joe Romm's doom and gloom helps us to adapt to climate change by waking up entrepreneurs to dream about what new products will be in demand in the coming days of pain.  Such products will go a long way to offsetting the punch. How far will they go? That's an empirical question that merits careful study.

Don't forget what I had to say several years ago about Jared Diamond's past doom and gloom.

"“Expectations of future scarcity create incentives to innovate now. Implicit in Diamond's work is a type of mass-behavioral-economics myopia where he and a few other "wise men" are the only ones aware of the coming day of scarcity. I am more democratic and optimistic that if there is a future arbitrage opportunity that a few ambitious young capitalists will seek out the profit opportunities and be ready with the next "Toyota Prius" that will help to mitigate future scarcity challenges. (Environmental and Urban Economics)

Allen Iverson and many NBA players offer a Test of the Permanent Income Hypothesis

NBA basketball players know their age, their contract's terms and the likely length of their playing career, and they can form a good guess of their post-career earnings.  Why isn't this information sufficient for planning one's lifetime consumption so that one saves while earning the high salary and lives off the savings when the player is retired and middle aged? Wouldn't Milton Friedman view such players' upfront earnings profiles as offering a good test of his permanent income/life cycle theory of consumption?

There are investment markets that allow for income smoothing over time such that if you earn a lot of $ while young and will earn nothing while old that you can have  a very good lifetime consumption flow.   When we see cases such as the consumption dynamics of Allen Iverson,  what do we conclude?  Does the NBA self select a set of people with hyperbolic preferences?    What share of NBA players have consumption paths that resemble Iverson?   We know we can augment the consumption model to include altruism for one's extended family (his 50 person entourage) or to include Keeping up with the Jones (showing off "bling") --- must these factors be included to explain NBA player spending patterns?   What % act as if they are following Friedman's standard consumption rules?  

Saturday, July 19, 2014

The Shanghai 2014 International Forum on Public Policy and Governance

On July 5th and 6th, Ed Glaeser and I participated in a large Shanghai conference at a very elegant Howard Johnson Hotel.   Throughout the conference, a Lamborghini sports car was parked in front of the hotel. It did not belong to me.  Here my slides for my Shanghai 2014 talk.  

Here is a photo of Ed Glaeser and myself and many of our new friends.

Friday, July 18, 2014

The 1% in Academic Economics Over the Last Ten Years

This REPEC index converts each economist's output (measured in 38 different categories) over the last ten years into a single index that can sorted so that 40600 registered economists are ranked.   I'm ranked #340 but I still will complain that three of my books and about 25 of my peer reviewed environmental papers are not counted (including my co-authored 2013 PNAS bullet train paper). Based on this REPEC metric, I'm #2 at UCLA with Andy Atkeson ranked in front of me at #198.    Of the top 100 economists, the University of Chicago is home to 8.  Not a bad market share!

Thursday, July 17, 2014

The Tesla Model III Will Offer a Clean Test of the Coase Conjecture

It has been reported that a $35,000 Tesla make will be sold in the year 2017.  How will the expectation that you can buy this make in the medium term affect the pricing of Tesla vehicles today?   The Coase Conjecture would predict that Tesla will have to drop its prices today if these two makes are close substitutes.  Whether they are close substitutes is an empirical question but I can offer one data point. I was preparing to buy a Tesla but I now plan to wait and buy the $35,000 version in 3 years.    Am I typical?

What is the Coase Conjecture?  These slides provide an answer;

"In the paper “Durability and Monopoly,” Nobel Laureate Ronald Coase proposes the startling
hypothesis that the monopoly seller of a durable good will tend to price at marginal cost, absent
some mechanism for committing to withhold supply. (Such mechanisms include leasing rather
than selling, planned obsolescence, increasing marginal cost (which makes delay rational), and
promises to repurchase at a fixed price.) The logic takes three steps. First, having sold the
monopoly quantity at the monopoly price, the seller would like to sell a bit more, because the
seller need not cut price on units already sold. Second, consumers will rationally anticipate such
price cuts, and thus will hold out for future prices. Third, if the seller can change prices
sufficiently fast, the path must go to marginal cost arbitrarily quickly, that is, the price will be
marginal cost. This idea came to be known as the Coase conjecture.

Essentially the Coase conjecture holds that a monopolist compete with future incarnations of
himself. Even though the most profitable course of action is to sell the monopoly quantity
immediately, and then never sell again, the monopolist cannot resist selling more once the
monopoly profit is earned. That is, subgame perfection condemns the monopolist to low profits."

My 5 Nation World Tour is Over

I have been outside of the USA for 37 days.  I went from Italy to Croatia to Turkey to Israel to China.    On Blue Sky days, I saw amazing islands as I flew from Israel to France (on my way to China). In  Turkey, I had the chance to give a talk to over 500 economists and in China a few hundred people showed up to a conference in Shanghai.  You can read the Chinese version of the remarks here.    In China, I visited Shanghai,  Beijing and Chengdu. I saw pandas and I ate turtle and pig heart and other stuff I don't even want to think about.   I toured each of these cities walking the downtowns and residential neighborhoods.

I spent half the trip with my family but went to Turkey, Israel and China on my own.  My many many friends in China took wonderful care of me.   I have acquired the ability to fly for 13 hours and sleep for 75% of it and suffer no jetlag on the back end.   I have been working on  research over the trip and now am ready to address the 4 revise and resubmits and a zillion other things I now have to get done. It is good to be home.

My only complaint about China is having Google blocked and thus not being able to search or blog or read most blogs including this one.  Still, China is a very exciting place and my two weeks there will make my book with Siqi Zheng even stronger because I have had dozens of new ideas about how to improve our project.

My friend Professor Jie Chen,
Director of Institute of Real Estate Research
Principal Investigator, Institute of Public Policy and Governance
School of Public Economics and Administration,
Shanghai University of Finance and Economics (SHUFE)

sent the following email related to our Shanghai Conference.

Dear Professor Glaeser and Professor Kahn
Many thanks for your generous support to the 2014 international forum on Global Cities Governance. It is your participation and wisdom that made the forum a great success.
Your speeches at the forum have drawn massive attention in Chinese media. Below listed are a few samples from the most influential media in China, including the People’s Daily, the Xinhua News, the China Government Website, CCTV (China Central TV), etc. Many of their reports cited your remarks on the forum and then spread your insights on urban governance across China.
An interview report of Professor Glaeser by China Business News
The online live broadcast by Sina, the largest Homepage website in China:
The full text of Professor Glaeser’s speech on the forum:
The full text of Professor Kahn’s speech on the forum:

Wednesday, July 02, 2014

Do I Want to Connect with my Mother on LinkedIn?

This is my last blog post for 3 weeks so I will leave you with a deep thought about LinkedIn connections.  I'm wondering if the rate of progress in economics would double if LinkedIn would stop sending all of us crazy emails that take time to contemplate and respond to. Here is the one I received today supposedly from my mother.

Hi Kahn,
I'd like to connect with you on LinkedIn.
Carol Kahn
Appellate Attorney

I do not believe that my mother actually sent this email because she has never called me "Kahn" before.  The only people I know who would call me that are Gary Becker and Ed Glaeser.   I certainly agree that all three of them have earned the right to call  me that.  

Tuesday, July 01, 2014

Random Thoughts

I have now spent one day in Tel Aviv and soon will fly to Shanghai.  When I am in China, this blog will not be updated because I won't be able to access it.  When I return to LA in late July, these entries will start up again.  Tel Aviv is a modern beach city. It feels like a slightly more humid Los Angeles.   Most people here are well tanned and look physically fit.

Yesterday I was in Istanbul and gave a lecture to somewhere between 500 and 1000 people.  This was a great opportunity to talk about cities and adapting to climate change. I have the feeling that I was the only University of Chicago economist in the room.   I tried my best to say some smart stuff.  In a recent post, I linked to my slides.  For reasons I don't understand, the conference organizers didn't bother to videotape my talk. I would have paid for them to have done so.   Maybe they anticipated that it would be a low quality talk?

Sunday, June 29, 2014

Some Thoughts about Istanbul Turkey

I flew from Croatia to Istanbul three days ago and have spent my time touring the city  and attending some environmental economics sessions.   I want to share some impressions of Istanbul.

1.  The city is "greener" than I expected.   We are lucky to be here at a time when the temperature is quite cool.  I had expected that local PM10 and dust levels would be higher.  The air quality is good.  The vehicle stock is newer than I expected.  Rome, Italy smells worse from their cars' emissions.   The main river is cleaner than I expected.  On our boat ride, groups of dolphins were happily swimming away.  Unlike in Rome, I have not seen piles of garbage stacked around.  I recognize that I may be spending my time in the richer part of town but I still like these features.  There are stray dogs and cats walking around and I tried to avoid them.

2.  There is a very active night life and I saw no rowdy behavior.  In terms of local demographics, this is a young city with thousands of young adults walking in certain districts late at night.

3. You can hear many Americans close to the main tourists sites and there are very aggressive business guys seeking to sell all sorts of stuff to them.

4.  I like the food here especially a liquor called Raki. 

5.  There appears to be an ongoing debate here about balancing the rights of individuals to pursue their religious beliefs while also respecting other groups who do not share such beliefs.