The Oil Drum has recently presented a fascinating one-sided debate in which many folks mocked economists for not understanding key issues related to Peak Oil . As an economist, who is married to an economist and spends 85% of his academic time with other economists, it was quite good for me to see how smart people think about a key policy issue.

Steve Levitt posted a very reasonable discussion of his optimism that incentives for conservation and production would play a key role in mitigating any future “oil crisis”. The responses posted to Oil Drum boiled down to calling him “naïve” and ideologically driven in his faith in free markets.

While no economist can predict what “magic bullet” will allow us to substitute away from oil, is it such a horrible bet to claim that in a world with millions of inventors and billions of venture capital dollars that somebody will come up with a “Google” like idea for re-inventing vehicles to green them?

Why is oil different from other commodities? The Oil Drum is riding high now that oil prices are so high but the Oil Drum is not clear on how it knows that demand elasticities are close to zero and supply elasticities are close to zero. In the very short run maybe this is true but Keynes is wrong --- in the long run we’re not dead—we’ve substituted to something new.

This whole discussion brings me back to Paul Ehrlich. I read something by Prof Ehrlich claiming that the reason his predictions in Population Bomb turned out not to be true was because of his book. Warning people of a coming crisis, stopped the crisis.

Everyone knows that expectations play a key role in economic life. If I expect to live to be 100 years old, I save more than if I expect to live to age 45. How do people and firms form expectations over the future price of oil? If people expect that the price of oil will stay or rise above $3 per gallon, we all agree that buyers will demand "greener" vehicles and producers would invest more in green R&D to develop such vehicles.

Economists such as Manski of Northwestern have been working on methods to elicit individual's subjective guesses about future unknown events. For example, we'd each love to know what the price of oil will be in the year 2008. Suppose that today 65% of car drivers thought that the real price of oil will be above $4 per gallon. This "fat right tail" of the distribution would create demand today for green car purchases between now and the year 2008.

In a recent posting, I discussed a moral hazard problem that may or may not be true. If people today believe that government will step in and take activist steps to "guarantee" that prices do not soar to such hights then fewer "green cars" will be demanded today and suppliers will be less likely to develop them.

This is the reason that stories such as:
http://news.yahoo.com/s/ap/20050829/ap_on_go_pr_wh/katrina_bush , do not make me happy.

I agree with some folks who commented on my last posting that activist government may not really be able to make a real dent in reducing oil prices by shifting supply but the key issue is perception. Do "the people" believe that they are implicitly insured against rising oil prices? If they believe that the government is protecting them then they will invest less in "self protection" such as buying a green car or configuring their lives such that they can easily substitute away from oil when its price rises.

So this is really a posting about free market environmentalism. If the government could pre-commit to not get involved with the oil market how would this affect the demand and supply for green cars?

Between 1980 and 2002, India experienced fourteen major earthquakes that killed a total of 32,117 people while the United States experienced eighteen major earthquakes that killed only 143 people. A disproportionate share of the deaths caused by such environmental shocks as earthquakes, floods, cyclones, hurricanes, and extreme temperature events are borne by people in developing countries. The Intergovernmental Panel on Climate Change reports that 65% of world deaths from natural disasters between 1985 and 1999 took place in nations whose incomes were below $760 per-capita.

In a recent paper published in the May 2005 issue of Review of Economics and Statistics titled “The Death Toll From Natural Disasters: The Role of Income, Geography, and Institutions”, I used several data sets to investigate what types of nations suffer the least when disasters strike. Income matters! There is no Environmental Kuznets Curve for deaths from disasters. Fewer people die from comparable shocks (measured by the Richter scale for Earthquakes) in richer nations relative to poorer nations.

Why is income such a good “insurance policy” against such shocks? Rising incomes lead people to purchase higher quality structures that might be better able to withstand natural shocks. Richer people will demand homes located in safer communities and homes that are built out of stronger more durable materials. Once the shock has taken place, death counts can be higher if the nation does not have access to good medical care and emergency treatment and crisis management. Government regulation also plays a role in protecting the populace in richer nations. Richer nations will be able to invest and enforce zoning and building codes. Building codes internalize externalities of structural soundness of a building and this has a social value that the owner is unlikely to internalize and it improves the quality of life of people in an immediate vicinity affected.

I post this today in the face of the hurricane striking New Orleans. There will certainly be property damage but given the advance notice and the mandated evacuation deaths will be minimal.

Does economic development exacerbate or mitigate urban environmental problems? The environmental Kuznets curve literature continues to debate this question. In my book manuscript titled Green Cities, I explore what we now know about this topic. Today, Jim Yardley in the New York Times’ piece “Beijing’s Quest for 2008: To Become Simply Livable” explores some of the challenges this growing city faces.

Beijing has a major incentive to “green” itself. The 2008 Olympics will be held there and the world will be watching. The city has a master plan with the vague goal to become a “city suitable for living”. What exactly does this mean? Should the 15.2 million inhabitants of the city simply be polled asking each “do you like your city?” “Is your quality of life higher than it was 4 years ago?” Instead, Yardley’s article points to objective measures of quality of life such as gridlocked traffic, air pollution, garbage and water supply.

Critics claim that the city needs more planning. This strikes me as ironic. If a non-democracy like China can't implement plans, who can? It is claimed that rampant development has destroyed much of the historic old city and made a mess of the emerging new one. The quotes in the article sound like a replay of New York City’s Robert Moses’ critics such as Robert Caro in the Power Broker. As I recall, the Moses story is that in his quest to build highways to connect the New York City suburbs such as Long Island to Manhattan he destroyed many old neighborhoods. These tended to be neighborhoods where minorities with little political clout lived and these individuals received no compensation for their loss. To quote Yardley’s article “More recently, the hutongs have been steadily demolished, dislocating untold thousands of people, to make room for the thousands of development projects swallowing the city.”

Are the critics right that planning improves urban quality of life? In theory, planners can internalize externalities that profit maximizing developers would ignore. But in the real world, do planned cities yield better cities? People keep moving to Las Vegas and other sprawl cities, many people are voting with their feet that they like sprawl.

Similar to the Robert Moses case in New York City, a fascinating issue arises concerning “What is good urban policy?” Any policy change involves winners and losers. In basic econ, we teach if the winners win more than the losers lose, then this is a good public policy. Unfortunately, from the standpoint of pareto optimality, the losers are rarely compensated. Anticipating that they will not be compensated, the losing interest group has every incentive to kick up a political fuss. Perhaps in a non-democracy such as China, this doesn’t matter.

The New York Times article highlights that China is in the midst of a major urbanization trend. Where should all of these rural people who are moving to cities live? 300 million people are expect to migrate to cities in the next 15 years. Beijing will sprawl in the country side.

Vern Henderson at Brown has documented that despite the popular fascination with mega-cities, much urbanization takes place in medium size cities getting bigger. If rural migrants have many choices over what urban areas to go to, then they can "vote with their feet" and avoid cities known to have major environmental problems.

Oil Drum and other blogs are drawing wide attention debating whether we are near an end of the oil age. The Oil Drum pointed me to a 8/13/2005 letter by Matt Simmons in the Washington Post that argued that Daniel Yergin is too optimistic about the future of oil. I have a few questions for Mr. Simmons.

He highlights that he has recently conducted an intensive study of oil production capabilities in Saudi Arabia and has concluded that “obscure Saudi technical papers create serious doubts about Saudi claims of adequate supplies of oil for decades to come. The Saudis and OPEC have been quietly admitting that they will not be able to meet world oil demand in 10 to 15 years which is at odds with Yergin’s Cambridge Energy Research Associates and other optimists.”

Taking Matt Simmons’ findings to be true, he has performed an important task. The 2001 Nobel Prize in economics was awarded to Akerlof, Spence and Stiglitz for their work on asymmetric information. Capitalist markets function better when buyers and sellers are equally informed. Famous examples of the problems of asymmetric information include the market for used cars; sellers sell only “lemons” and potential buyers cannot cheaply certify product quality and the market for health insurance; only sick people want to buy it.

Returning to Simmons, his findings help level the information “playing field”. If oil consumers, auto makers, and rival oil producers thought that Saudi Arabia has been telling the truth by claiming that it has ample reserves then this retards the incentive to invest in green cars, conservation and new exploration. By “getting the information out”, utility maximizing consumers and profit maximizing firms will now have an incentive to respond. If General Motors had thought that Saudi Arabia has ample oil, it may have invested little in green car development and ex-post greatly regretted this decision once the “truth” is revealed.

I would like to ask Simmons; “If every person on the planet read your report on the Saudi’s oil overstatement of reserves, would you still think that we’re heading into a “crisis”?” Does Simmons believe that “educated” economic agents can adjust to the now anticipated decline in Saudi oil production? A vast majority of economists would say yes.

A second issue here is whether Simmons’ evaluation of Saudi Arabia’s reserves is kosher. Turning to game theory, if Saudi Arabia will not allow in an independent team of auditors to measure their reserves, does this signal that Simmons is right?

If a capitalist firm such as General Motors knows that “it does not know” the truth about an important future event, such as Saudi oil supplies, how does it plan for this event? Does it take a risk averse strategy and invest more in fuel efficient vehicles?

Bloggers are not paid for the quantity or quality of their entries. Usually, suppliers produce zero when offered a price of zero. Why is the supply curve for blogs different than the supply curve for hotdogs?

One explanation is complementarities. Camera companies may give away free film to sell more cameras. Bloggers may give away their thoughts for free in return for two expected payments. First, we may view this as good advertising for our published academic research. If I impress you with a good blog, you might use Econlit or google scholar to track down some of my formal work. Second, some bloggers may be using their blog entries to signal to journalists that they could offer a good quote on a particular policy issue. In this sense, blogging is a type of advertising that may help reporters cheaply locate the “spice” they are looking for.

Another obvious reason for why bloggers blog and may even invest a fair bit of time at this activity is status. What can a middle aged academic who is not at a top 20 research institution do to raise his visibility? Academic economists rarely go to the library and actually read the American Economic Review or other leading journals. Blogging is a relatively cheap way to reach others. Blogs like all ideas are public goods. The Internet offers a zero cost distribution network to billions of people. Somebody out there may even consider some us to be clever and insightful.

How much do people gain from reading economics blogs? Since the price equals zero for accessing everyone’s blogs, we have no way to sketch out a demand curve and measure consumer surplus. In recent years economists such as Hausman have used statistical methods to measure the consumer surplus from new goods such as Cell Phones and HoneyNut Cereals. But putting a dollar value on the benefits of economics blogs would be harder problem to solve.

Blogs and the Grand Canyon are both “non-market” goods. Perhaps surprisingly, it is easier to measure the value of the Grand Canyon because we can use Travel Cost methods. Intuitively, if I see you drive your family from Chicago to the Grand Canyon using $700 in hotel bills and $400 in gas and time spent commuting, then you must value visiting the Canyon by at least $1100. Otherwise, you wouldn’t have chosen to make this trip. If we collected data on how much time different readers spent reading blogs and knew each reader’s value of time (hourly wage), then this information could be used to generate a lower bound on the value of blogs. We need to open up some markets here and see whether people vote their wallets. David Warsh may offer one market test.

David Warsh of Economic Principals is thinking of having a two tiered pricing system where blog readers who have sent him $50 per year gain early access to his weekly columns. It will interest me how many people take him up on this offer. Some leading economics blogs ask readers for contributions. Are economics blog readers free riders? Somebody has to act in accord with economic theory!

For the last month, I’ve been pretty carefully reading many economics blogs. I’ve wondered what determines whether a site is popular and I’ve tried to learn about what blog authors consider to be a “good posting”. In my opinion, a large (90%?) of the blog entries posted on Economics Roundtable require no graduate training in economics to produce. Is this surprising? Is this bad?

Many blog entries seek to help readers save time by pointing them to interesting articles out there on the web. These bloggers are economizing on transaction costs for time poor readers. The bloggers have paid the search costs of finding interesting stuff for like minded readers and are kind enough to lead the readers to these posts. These blog entries sometimes offer a witty line or two about the posting and then verbatim quote the source. In many cases these quotes are not from the American Economic Review or NBER but instead are from popular outlets such as the New York Times, Wall Street Journal or the Economist.

A second set of blogs focuses on political economy/macro topics such as privatizing social security, the Fed’s Monetary Policy, Housing Price bubbles and the Bush Presidency. Many of these blog entries seem to feed off of Paul Krugman’s New York Times pieces; either agreeing or disagreeing with the Man. Here I am not sure how modern graduate training in economics can inform these pieces. Ed Prescott won the Nobel Prize in Economics in the year 2004 for his work on dynamic general equilibrium models applied to macro. The macro bloggers are not basing their entries and predictions based on such models.

A third set of blogs, and I view this as the minority group, are using economic theory to discuss real world issues. My favorites blogs here are Becker/Posner, Jim Hamilton, and the Freakonomics blog. I would like to hear more from Steve Levitt on that site.

In general, I am surprised by how few of the big ideas economists have generated since 1970 are reflected in the Roundtable postings. The posting rarely use incentive theory, or game theory (strategic thinking) to discuss real world issues. New empirical work is rarely discussed for helping improve our understanding of causality and what is effective policy and how we know this. For example, I really like the monthly thursday pieces in the New York Times by Alan Krueger and by Hal Varian (see page 2 of the business section). These guys are "modern". Why aren't other smart economists following their lead?

Why are modern ideas "under supplied" in this market? It must be related to supply and demand factors in the blogging market. What are the suppliers (the bloggers) maximizing? It isn’t profits! If its “hits” to their website, then we have an incentive to simplify our message to attract more folks to our sites. After teaching intro economics at Columbia for 7 years, I certainly believe that sophisticated points can be discussed without getting too fancy with math and econometrics. This is exactly what Krueger and Varian have done so well in their Times pieces.

What do blog readers demand? As I discussed above, it appears that many want to be pointed to the “new news” of the day on the topic that moves them.

My friends keep asking me: "why are you blogging?". My
quick answer is that I'm trying to learn a new style of writing and I enjoy being able to post my thoughts. My wife appreciates that I waste her less of her time with my random outbursts and that I watch less TV now.

I’ve read a post on Dan Drezner’s blog where he asked why there weren’t more top political scientists blogging. Would Roundtable be better on average if economists from the top 25 schools participated more?

For decades urban economists have tried to unravel the “chicken and egg” issue of why people who live in high poverty areas are less likely to succeed. Do such ghettos self select “bad apples” who choose to live there because of the cheap rent? Or does living in ghetto poverty have a causal scarring effect such that a person is less likely to go to school, get a job and function relative to what this person would have achieved if he had grown up in a “good” neighborhood?

While most economic empirical research is based on non-experimental data, in recent years HUD’s Moving to Opportunity program has offered a unique opportunity for leading economists to take a new look at neighborhood effects. Without experimental data, it is very difficult to disentangle the “chicken and egg” issues I mentioned in the above paragraph. Since this experiment tracks a “treatment” group and a “control” group, progress can be made in learning about the benefits of growing up in a lower poverty community.

The results of this experiment are discussed in: “ Experimental Analysis of Neighborhood Effects Jeffrey R. Kling, Jeffrey B. Liebman, Lawrence F. Katz NBER Working Paper No. 11577 (www.nber.org)

“Families, primarily female-headed minority households with children, living in high-poverty public housing projects in five U.S. cities were offered housing vouchers by lottery in the Moving to Opportunity program. Four to seven years after random assignment, families offered vouchers lived in safer neighborhoods that had lower poverty rates than those of the control group not offered vouchers. We find no significant overall effects of this intervention on adult economic self-sufficiency or physical health. Mental health benefits of the voucher offers for adults and for female youth were substantial. Beneficial effects for female youth on education, risky behavior, and physical health were offset by adverse effects for male youth. For outcomes exhibiting significant treatment effects, we find, using variation in treatment intensity across voucher types and cities, that the relationship between neighborhood poverty rate and outcomes is approximately linear.”

It is true that the authors can only study the “treatment effect impact” for those who sign up for the experiment. If the benefits of growing up in low poverty communities vary across individuals, then it is intuitive that those who think that they will gain the most from participating in this program will be most likely to sign up.

I've been surprised by the unilateral actions some states are taking to reduce their greenhouse gas emissions. Why aren't states such as California and New York free riding? Do they think they are large enough to make a difference? What could be the mechanism?

"California, Washington and Oregon are in the early stages of exploring a regional agreement similar to the Northeastern plan. The nine states in the Northeastern agreement are Connecticut, Delaware, Maine, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Vermont. They were brought together in 2003 by a Republican governor, George E. Pataki of New York, who broke sharply and openly with the Bush administration over the handling of greenhouse gases and Washington's refusal to join more than 150 countries in signing the Kyoto Protocols, the agreement to reduce emissions that went into effect earlier this year.

Mr. Pataki, who may be considering a run for the Republican nomination for president, has refrained from criticizing President Bush directly, but he has repeatedly said that the states need to act on their own even if the Bush administration has not made the issue a priority." (9 States in Plan to Cut Emissions by Power Plants in NYT article by Anthony DePalma.)

While Mr. Pataki will score some green points for his innovative environmentalism, it seems that the real reason that states are taking action is as a form of a demonstration project to show the rest of the nation that it is feasible to do.

"We're not going to solve the problem of global warming in the Northeastern states," said Dale S. Bryk, a senior attorney with the Natural Resources Defense Council who has been watching the regional effort since it was proposed by Governor Pataki in a letter to the other governors in April 2003. "but we're showing that we have the American ingenuity to do this and we're setting a precedent in terms of the design of the program."

A second mechanism that a state such as California can point to is that its market is so large that car manufacturers have to abide by its rules. It buys enough cars that it can provide a "big push" for new technologies to be developed.

What I find interesting here is free-riding by Red State/Blue State delineation.
Red state (anti-environmentalists) members are less likely to form these regional
pacts than Blue state (greens). In a couple of years, the Red States will be free riding letting the blue states pay for their environmentalism. The Blue state environmentalists must be hoping that a future democratic president will point to their precedent to make it national policy and to coerce Red states to enact such regulation.

The New York Times reports new facts today about obesity. About 24.5 percent of American adults are obese, the report said, and in 12 states more than a quarter of all adults are obese, Mississippi, Alabama, West Virginia, Louisiana, Tennessee, Arkansas, Texas, Michigan, Kentucky, Indiana, Ohio and South Carolina. The states with the smallest percentage of obese adults are Colorado, Massachusetts, Rhode Island, Connecticut, Vermont and Montana.

Here is a map presenting the current data.



Some public health officials have blamed suburbanization as a leading cause of this trend. What would be convincing evidence that sprawl makes us fat? Ideally, we would want to randomly assign people to different population densities and weigh them 12 months from now. Suburbanites do drive more than urbanites. But suburban areas have more golf courses, tennis courts, basketball courts and easy access to other recreational facilities. Ideally, a study would collect detailed time surveys to see what suburbanites and urbanites do all day long. I have trouble believing that suburbia "causes" people to gain weight. Instead, I would argue that it is self selection due to the urban marriage market. Many urbanites are singles. If I watched TV, I could name many shows ranging from Friends to Seinfeld presenting young people without children who are mingling. Suburbia self selects married people with young children. As I've recently learned, children are quite time consuming and from personal experience I've seen that I now exercise less than I used to.

A more interesting explanation for the recent rise in obesity comes from behavioral economics. Many behavioral researchers make the point that we all have self control problems. We all have "cravings" for ice cream and other munchies. In the past, it was difficult to satisfy these cravings. Transportation costs were higher. We'd have to bake our own cookies or catch a bus to some store. Now, in this car age with easy access to 7-11 and other food vendors, we can too easily satisfy our cravings. Students have dorm room fridges and they aren't filled with fruits and veggies. While this is satisfying in the short run, in the long run we get fat. Put simply, we are now "too close" to our calories. An obvious addditional factor that has been well documented is that food producers have been too productive at producing "super sized" cheap unhealthy food. If people didn't have self control problems, this would be a "good thing". We would have access to greater variety of foods and face lower prices at the market.

Are there any policy implications here? Do you support a potato chip tax?