Friday, September 30, 2005

Responsive Local Government and Chemical Leaks in New Jersey

New Jersey Chemical Leak Disrupts Morning Commute
By JOHN HOLL (source 9/30/2005 New York Times)

"A chemical leak at a swimming pool chemical plant in Kearny, N.J., this morning snarled the morning commute by closing the Pulaski Skyway and had local officials warning of potential health risks to residents with respiratory problems. The leak occurred around 8:30 a.m. when about 1,000 pounds of trichloroisocyanuric acid, a chlorinating agent and disinfectant used in swimming pools, began to decompose sending a plume of gas into the air. By 10:30 the leak had been contained, though there was an ongoing release of gas that was being filtered through an air pollution control device, or scrubber. A reading from inside the building found that there were three to five parts-per-million of chlorine in the building. Authorities urged residents to stay indoors with their windows closed and told drivers in the area to roll their windows up."

I was not a good chemistry student in college so I don't know how a severe a public health threat this shock could have been but I'm struck by the fact that the social environmental costs of this accident appear to be quite small because the problem was quickly identified and fixed and the public was notified concerning what self protection steps should be taken to reduce exposure risk. The main losers from this shock seem to be the diverted morning commuters.

It would interest me what would have happened if this same industrial accident had taken place in a developing country. How much greater would the damage have been? A competent local government represents a type of insurance policy against risk but I have never seen anybody try to quantify how effective is this insurance. In similar sized cities around the world, how many people die from fires and industrial accidents in richer cities versus poorer cities? How much is risk exposure reduced by in richer cities because of "good governance" and well functioning competent officials?

Thursday, September 29, 2005

Can Socially Responsible Investing Green Our Economy?

“The myth about environmentally and socially responsible investing is that as an investor, you have to give something up - investment quality, portfolio diversification, or fund performance. At Sierra Club Mutual Funds, we beg to differ. While you do your part to protect the planet for your children and for future generations, we do ours by seeking attractive investment opportunities in well-known companies that meet strict Sierra Club social and environmental guidelines (”

Suppose that there are millions of rich people who only want to invest their assets in “Green” companies. How do such Investors determine which companies are Green and which are Brown?

This Green Mutual Fund takes a stand. “We exclude companies that fail to recognize and minimize environmental costs. We do not invest in companies that are not proactive in the reduction of toxic emissions.”

Do you notice the problem here with regards to asymmetric information? How does this Fund know if the CEO of the firm is “internalizing” environmental costs? What information does the Sierra Club Mutual Fund use to partition firms into those that are “naughty” and those that are “nice”?

The second part of the quote suggests that they use the U.S Toxic Release Inventory “reduction of toxic emissions” but this data set is self reported by firms and as I understand it the Federal Government does not do an audit of whether these firms are telling the truth about their emissions.

So, if a past “Brown” firm changes it ways and greens its production process how would the Sierraclub Fund know this? If the Sierra Club Fund keeps labeling such a firm a “Brown” firm then this firm will not be rewarded for changing its ways. My point is that the SRI industry would be a more effective force for greening capitalism if the accountant’s information about firms’ actual environmental performance was up to date and complete. With incomplete, out of date information about a firm’s environmental performance the SRI funds are much less likely to achieve their goals.

One way to achieve the SRI goal would be if there could be 3rd party certifiers (like auto mechanics who inspect a used car before it is sold) to examine a firm to determine its environmental impact and how it has changed over time. In this case, firms who know they are “clean” who have been given a bad grade by the Sierra Club Mutual Fund could request a certification to signal to the Jane Fondas that they are clean and merit SRI investment.

Wednesday, September 28, 2005

Disasters as Policy Catalysts

Hurricane Katrina may lead to some new regulations for FEMA. 9/11 changed more than a few government regulations. Unexpected shocks affect interest group politics. While this statement is easy to state and is intuitive and there are case studies to back it up, it is pretty difficult to formally test the hypothesis that disasters cause new regulations to be enacted.

In a new empirical history paper, Louis Cain and Elyce Rotella's paper titled Epidemics, Demonstration Effects and Municipal Investment in Sanitation Capital provide historical city level evidence supporting the "salience hypothesis". Over the period 1899 to 1929, they document that a mortality shock in a city was often closely followed by a notable expenditure increase on water supply improvements in that city. They define a mortality shock as a year in which the actual waterborne death rate was more than one standard error above its trend in that city over the period 1899 to 1929. In 69 of the 98 observed mortality episodes, city expenditure on water supply subsequently increased by more than one standard error above the city’s trend.

Do environmentalists need disasters to rally their diffused interest group? Could Katrina be such a disaster to convince "NASCAR dads and soccer moms" that if climate change causes more Katrinas then out of self interest we need to do someting about greenhouse gas production?

Who Will Win the 2005 Nobel Prize in Economics?

On October 10th 2005, somebody will win the Nobel Prize in economics. I hope my wife wins it this year. Excluding my immediate family, I'd like to take a look at the possibility set. I apologize if I excluded you from this elite list.

1. Nobel prize in environmental economics to Weitzman, Nordhaus

2. Nobel prize in trade theory to Bhagwatti and Dixit

3. Nobel prize in President Bush praising to Krugman and David Brooks

4. Nobel prize in behavioral stuff to Richard Thaler

5. Nobel prize in contracts to Hart, Holmstrom, and Oliver Williamson

6. Nobel prize in development economics to Dasgupta and Deaton

7. Nobel prize in finance to Fama

8. Nobel Price in mechanism design to Milgrom, Myerson and Maskin

9. Nobel prize in family economics to Mincer and Pollak

10. Prize in Political Economy to Alesina, Persson and Tabellini

11. Prize in Modern Macro to Barro and Sargent

Since last year's prize went to macro guys, I don't see how this field can be recognized again so soon. Personally my favorites in this list are 1,9,2.

Monday, September 26, 2005

Future Public Health Challenges in New Orleans

Public health researchers are always looking for “natural experiments” to study how environmental quality impacts health. Researchers examined how much hospitalization rates fell by in the vicinity of a dirty steel plant when its unionized workers went on strike. Other researchers tested for how much did air pollution decline when the 1996 Atlanta Olympics started. This event led to a sharp decrease in driving and activity in this city and researchers tested for how much did smog related hospitalizations decline by.

Does New Orleans offer such a “natural experiment”? Will we learn new facts about how “sludge” and dust exposure affect human health? There would seem to be a huge self selection issue of who returns to this city to be “treated”.

Here are the facts about pollution exposure now.

1. The most immediate threat is bacteria which exceed health standards by a factor of 10.
2. Katrina flooded 25 major and 32 minor sewage-treatment facilities, releasing hundreds of millions of gallons of sewage into the city. Decaying animal and human remains also are contributing bacteria.
3. Health officials recommend that everyone in the city wear a respirator mask. As the city dries out, dust will be a problem. Breathing dust under any circumstances is unhealthy, but the dust in New Orleans may contain contaminants. Oil products are the most prevalent contaminant in the water and sludge, coming from refineries along with submerged cars and gas stations.
4. Testing also has found slightly elevated levels of lead, arsenic and other metals, as well as pesticides and herbicides. These come from flood runoff as well as household and industrial sources.
5. Cleanup efforts will have to reach the lowest layers of sediment and debris before long-term health threats can be determined, a process that will take weeks.
6. As untreated floodwater is pumped into Lake Pontchartrain, the lake has taken on a distinct septic smell, Mann said. Like the floodwater and sludge in New Orleans, the lake has lots of bacteria but doesn't have high levels of toxic chemicals.

Governance and the City: New World Bank Evidence

A recent World Bank Study (see World Bank Policy Research Working Paper 3712, September 2005) has the ambitious goal of quantifying which cities around the world are “well run”. A revealed preference test might study whether home prices are high and whether net migration flows are positive. But such evidence would only be suggestive because the locality might be booming despite the public sector not because of the public sector.

Here is their approach “With these measures, we construct a vector of urban governance indicators which we use to test the impact of urban governance on city performance. The vector consists of measures of voice and participation and transparency and accountability which we take from the UN database. We also use measures like illegal financing, state capture, bribery in utility, and bribery in judiciary from the Kaufmann, LĂ©autier, and Mastruzzi (KLM) database. Finally, we construct a dynamic indicator of city transparency which uses proxies like, whether a city has a web page, what information is included in the web page, whether the city budget is publicly available on the web or whether companies can register on the web.”

Table 1: Variable Legend and Data Sources

Access to Water UN Observatory, 1998
Access to Sewerage UN Observatory, 1998
Access to Electricity UN Observatory, 1998
Access to Telephone Lines 1 UN Observatory, 1998
Access to Telephone Lines 2 EOS, 2003 1 Quality of Infrastructure EOS, 2003 1 Quality of Electricity EOS, 2003 1 Access to Cell Phones EOS, 2003 1 Access to Internet in schools EOS, 2003 1 Bribery in Utility EOS, 2003 1 State Capture EOS, 2003 1 Informal Money Laundering EOS, 2003 1 Street Crime EOS, 2003 1
Red Tape Cost of Imports EOS, 2003 1 Bribery to Affect Laws EOS, 2003 1
Diversion Public Funds EOS, 2003 1 Illegal Party Financing EOS, 2003 1 Bribery in Permits EOS, 2003 1 Bribery in Tax EOS, 2003 1 (
Soundness of Banks EOS, 2003 1
Trust in Politicians EOS, 2003 1 Organized Crime EOS, 2003 1
Quality of Postal System EOS, 2003 1 Health Access Gap EOS, 2003 1 Offices of major advertising,
Global City financial & accounting firms Hundreds 114 261
City Population Logs 134 410

Website Dummy City has a website (KLM 2003) City website has info on how to
Business Dummy City website has info on city Budget Dummy
City has port facilities (KLM
Port Dummy 0 - 1 (yes) 134 411
Capital Dummy City is the capital (KLM 2003) 0 - 1 (yes) 134 411

I would think that these researchers would want some measure of whether the citizens of the city actually get to vote in a kosher election. Does democracy improve urban governance? I hope it does! Iraq may soon offer an interesting test of this hypothesis. Singapore would suggest that I am wrong that the Arrow Impossibility theorem pops up as heterogeneous interest groups within a city cannot agree on urban priorities and problems fester.

I would also be interested in competition between cities within the same nation. If Detroit gets a reputation for being a low governance city, do businesses move to the suburbs of Detroit or to another center city? Is there a “race to the top” such that urban competition puts a check on the ability of politicians to steal from the tax base?

Sunday, September 25, 2005

Even Short Run Gas Demand Curves Slope Down!

The New York Times has been doing some high frequency econometrics to study how Americans have responded to higher gasoline prices. “For three straight weeks, Americans have been buying less gasoline than they did a year ago. Consumption is dropping at a rate not seen since drivers were waiting in gas lines back in the early 1980's. And people are turning to mass transit in record numbers in some cities.” (Go Ahead and Drive Less, if You Can By DANNY HAKIM and JEREMY W. PETERS)

But Americans consumed an average of 8.8 million barrels of gas a day for the week ending Sept. 16, down from 9.4 million the week before Hurricane Katrina struck New Orleans and roughly 200,000 fewer barrels per day than in mid-September last year. (Nice Double Difference by the Times!)

The article continues: “So how much can Americans cut back on their driving? How much time behind the wheel is discretionary? Consider that the average American household used its cars and trucks for 496 shopping trips in 2001, according to an exhaustive survey of 160,000 Americans conducted by the Transportation Department. Trips were 7.02 miles in length, on average, for a total of 3,482 miles per household per year. That much driving could almost get you from New York to Juneau, Alaska, give or take a few hundred miles.
That's a lot farther than in 1990, when the average household's shopping trips could only get you from New York to Denver. Part of the difference stems from the fact that the length of an average shopping trip was 5.1 miles in 1990. Blame greater suburban sprawl for longer trips these days.”


1. How have drivers ages 16 to 30 and 65+ responded to the oil price increase? I would predict that they reduced their driving trips by more than people ages 31 to 65.
2. The article argues that cities with good public transit systems such as Boston, San Francisco and Washington DC have seen increased public transit use
3. Food can be stored. People may be purchasing more food at the supermarket and making fewer trips there.
4. Many households have more than one car. To economize, households may actually be driving together and doing chores together that they used to do separately when gas was cheaper.
5. It will be interesting to see if other discretionary margins like restaurants and movies in suburban malls report lower sales revenue as “cheap” suburbanites stop driving there.
6. I would hope that some public health official is doing a study on whether people in medium density cities are now walking more. Has obesity increased because oil prices fell?

Saturday, September 24, 2005

Gas Taxes and Political Economy

Environmental economists have convinced themselves of the benefits of raising gasoline taxes. Politicians seem to be slow to embrace this proposal. Why? New Yorker magazine’s James Surowiecki has a good explanation. The New Yorker has better cartoons and sometimes better analysis than the American Economic Review!

PUMP PRESSURE James Surowiecki on why the gas tax won’t budge.
Issue of 2005-09-26

“Of course, in political terms the gas tax’s virtues—simplicity, transparency, immediacy—are vices. Politicians prefer complex systems that allow them to satisfy particular constituencies, reward supporters, and disguise the true costs of things. And, strangely enough, voters implicitly prefer indirect taxes to direct ones. So it may be that the gas tax will remain one of those economically sensible ideas that are doomed to fail.”

This quote highlights a point that pro-economists do not devote enough attention to. When is transparency bad for policy implementation? In the sense that building coalitions to support a particular public policy may be more difficult if people directly see the costs and benefits of the proposal. Another example is social security. This program redistributes money across income groups but people do not know this.

Friday, September 23, 2005

Green Homes and Household Energy Demand

My Tufts colleague Bill Moomaw is pursuing an unusual goal. He wants his total net annual energy consumption for his home to equal zero. This distinctive business week article tells you about Bill's plan but I couldn't find any discussion in the article concering how costly it is to make your house so "productive".

As usual, I'm interested in the question of heterogeneity. How many Bill Moomaws are there in the world? Are they 15% of the population? How many people would invest in such green homes? Is there learning by doing on the supply side? If home builders had more practice building "green homes" would they become much more productive at making them and the cost of production would fall? Are there economies of scale in producing inputs to such homes such that the average cost would fall as more Bill Moomaws invest in such homes?

Here is this very interesting article.

Business Week 9/20/2005

Meet the Moomaws. Their goal is to build a retirement home in New England that will produce as much electricity as it consumes

Ask the average person to describe their dream retirement home, and what will you hear? Visions of high ceilings, gourmet kitchens, an expansive yard, maybe even a Jacuzzi. Bill and Margot Moomaw, a couple from Massachusetts, have a totally different kind of dream: They want a retirement home so efficient that it actually produces as much electricity as it consumes.

Now, three-or-so years away from retirement, Bill, a 67-year-old professor of international environmental policy at Tufts University, and his wife, 64, are about to break ground on a painstakingly planned low-energy dream home in Williamstown, in Western Massachusetts (see "The Moomaw's Model Home"). While the house will employ a lot of special technology, ranging from solar panels to a geothermal heat pump, the first rule is that their future residence house must look and feel "normal."

MODERN LIVING. The architecture will match turn-of-the-century New England-style houses in the area. And the home will have a TV, computers, a washer/dryer, and other typical amenities.

"We're not going into a cave and using candles," says Bill. "We want to show that you can [be energy-efficient] by buying common brands" adds Margot. "You just have to do careful shopping."

The Moomaws couldn't have picked a better time to reduce the amount of outside energy they consume. Heating oil and natural gas prices have reached record highs in recent weeks, as supply lines and refineries have been shut down by Hurricane Katrina and increasing global demand continues to put a pinch on supply. No less a consideration, U.S. power grids are increasingly coming under strain.

"THE LEARNING CURVE." Building the home will be no small task. The couple, who have two children in their thirties, have spent the past year calculating all of the details, translating each and every component of their home life into a complex energy-arithmetic problem.

Starting with how much power they can create with the 63 solar panels they'll be installing on the roof, they've examined exactly what level of insulation the house will need, the precise position where it must sit on the lot to get optimal heat from sunlight in the winter, and even the right model of dishwasher and brand of light bulbs.

Energy-efficient living isn't a new interest for the Moomaws. The couple's first venture into the area was during another period of skyrocketing oil prices, in 1973. Back then, with Bill a young member of the chemistry faculty at Williams College in Williamstown, Mass., the couple started making adjustments to their house to make it less dependent on oil in order to both help the environment and save money.

Their project started with window replacements and new insulation. Four years later, they bought a solar-powered water heater. "We've been on the learning curve since then" says Margot, "and have always made incremental improvements" on subsequent homes.

STILL ON THE GRID. This time they want a real challenge. When they met with a local engineer and architect to talk about their plans, the first proposal was to make their new home an Energy Star house -- a special classification awarded by the U.S. Environmental Protection Agency for homes that use 30% less energy than the average for similar size residences.

That classification can entitle homeowners to special perks and rebates from their utility, but the Moomaws weren't satisfied. "We said, 'Well, that's pretty good,'" recalls Margot. "But we thought we could easily get to just 50% to 70% of normal energy use. [So we made] the stretch goal a 100% reduction."

To realize this won't be as easy as just installing a bunch of solar panels and cutting themselves off from the power grid. New England isn't sunny enough for that, and batteries used to store solar power can be expensive and inefficient, says Bill.

BUYING -- AND SELLING. So the couple plans to engage in a seasonal give-and-take with the local utility. During the winter months, when days are short and direct sunlight is scarce, they'll get most of their energy from the local power grid.

In the sunny summer, the Moomaw's 63 solar panels will collect and store more than enough energy for their needs, and the couple will sell the excess back to the local utility. At the end of the year, they hope, the total net energy consumption will add up to zero.

Thursday, September 22, 2005

Chicago Crime Dynamics

Below I report a Figure showing how the Murder Count has evolved over the last 20 years in center city Chicago. Why did murder soar in the late 1980s and fall so fast in the 1990s? Can legalized abortion explain these wild dynamics? Unleaded gasoline? Crack Cocaine? The 1990s economic boom? Michael Jordan and the Bulls winning those NBA titles? This picture is hard to read but the murder count peaks in the low 900s in 1991.

I don't think that I can answer those questions. Dan McMillen and I are starting a project where we examine another question. We know that murder is more likely to take place in poor minority communities. As the murder count has fallen, how much has quality of life in these communities improved? How much have home prices increased by in these communities? Have employers increased their hiring in these communities because of this increase in perceived safety?

Urban economists are well aware that urban safety is a key part of achieving an urban revival. But I don't think that we've done enough work fleshing out the core facts for major cities.

Oil Prices and the Greening of Ford Motor Company

In response to rising gasoline prices, Ford Motor Company is greening its fleet. If gas prices stay high, even Dick Chaney may buy a fuel efficient car. But, there is a second social incentive that could encourage people to buy green cars. As the quote below highlights, CEO Ford believes that his company can distinguish itself from other car makers by "going green". Economists are always interested in cases when competition leads to a "race to the top". Environmentalists often argue that competition leads to a "race to the bottom" as companies ignore environmental impacts of their products to minimize the cost of production. The reason why this pessimistic logic is wrong in this case is that vehicle purchasers may feel some social "warm glow" by purchasing a vehicle that does not contribute to climate change. They can drive this green car in public to showoff that they are "good people". I recognize that free rider theory would say that each person is too small to make a difference but the New York Times keeps quoting people who want to experience the "warm glow" effect. The proof will be whether this new generation of vehicles sells.

September 22, 2005
Ford Plans to Build a Lot More Hybrids
By DANNY HAKIM (New York Times)

DEARBORN, Mich., Sept. 21 - The Ford Motor Company plans to increase production of hybrid electric vehicles tenfold, to 250,000 vehicles annually, by the end of the decade, executives said Wednesday.

By 2010, the company said that more than half of its Ford, Lincoln and Mercury models would offer the technology as an option, accounting for roughly 8 percent of the three brands' current sales.

Ford said that it would also increase the number of models that can run on ethanol, a corn-based fuel, and also took a small but unusual step, for an automaker, to counteract global warming.

Ford and other automakers are challenging in court a much more ambitious effort in California to cut car and truck emissions of gases linked to global warming. William Clay Ford Jr., Ford's chairman and chief executive, has long been outspoken on environmental issues but has also been constrained by his company's financial distress. At a news conference Wednesday, he said an environmental strategy would be part of a two-pronged approach to restoring Ford's North American profitability.

Both Ford and General Motors are losing billions of dollars at home, though Ford remains profitable globally. While Mr. Ford is developing a traditional turnaround strategy that will include job and cost cuts, he said his company had to be known for more than that.

"Our road to recovery will really be built on two things," Mr. Ford said. "One will be a cost-cutting, capacity action, which you would consider hard-nosed business decisions. But that also is not enough. Today was about what's going to take us in the future, what's going to differentiate us from other companies and what are we going to be known for."

Wednesday, September 21, 2005

Urban Governance when the Poor and Rich live in Center Cities and the Middle Class Suburbanize

We all know that over the last 100 years, people and jobs have suburbanized as transportation costs have declined and household incomes have increased. How has this trend affected center city governance in the United States? In an editorial in the 9/21/2005 New York Times, Joel Kotkin points out “Democrats have long drawn their moral, economic and electoral strength from the cities. Yet this urban dominance has its negative side. Despite all the self-congratulatory hoopla about an urban renaissance, prevailing demographic and economic trends show a persistent shift from cities toward the ever-expanding suburbs and exurbs.

And the political result? While cities go overwhelmingly Democratic, the party loses national and state elections. In 1952, for example, New York City accounted for almost half of the voters of New York State; today it accounts for less than a third. It doesn't help that most liberal cities now aspire to become "cool cities" - playgrounds for the ultrarich, nomadic singles and childless couples. By focusing on Wi-Fi zones and loft conversions while schools crumble, liberal cities are essentially ignoring middle- and working-class strivers, particularly those with children.”

Kotkin does not delve into another theme that interests me. How would center city urban governance evolve if the middle class also lived there rather than the suburbs? In the center cities, the rich send their children to private schools, play at private clubs, use private vehicles rather than public transit. While this group pays taxes (if their accountants are mediocre), they have little stake in the quality of urban local public goods with the exception of police protection. Since the rich demand very few public services, they have little incentive to monitor urban politicians. Also, there are not that many rich people even in major cities. A mayor who knows that he needs the median voter to vote for him may not mind alienating the 5% of the city who are rich.

The key counter-factual here is if the middle class had a greater presence in cities how would this affect urban governance? Would there be less corruption and more competence? The middle class are large in number, educated, and they use public services thus they would represent a disciplinary force on a mayor who might pursue his own agenda if the knows that he can get away with it.

If the median voter in a city such as Detroit is a poor person rather than a middle class person, how does this change the set of services and taxes that the center city Mayor enacts?

Tuesday, September 20, 2005

Urban Poverty and Transport: The Case of Mumbai, India

I know relatively little about day to day urban live in major cities in developing countries. Thus, I was quite interested to read a new paper by World Bank researchers where they surveyed 5000 people in Mumbai, India concerning transportation patterns and commute times. (see World Bank Policy Research Working Paper 3693, September 2005 Greater Mumbai Region (GMR), which constitutes the core of the Mumbai metropolitan area. The GMR, with a
population of 11.9 million people in 2001, occupies 468 sq. km. This makes Mumbai one of the most densely populated cities in the world.

I know that the poor in such countries do not own cars but I did not know how far they walked to work or how long their commute takes.

Here are some interesting facts from their study:

1. Regardless of where they live, the poor, on average, commute shorter distances than the non-poor, implying that they work closer to home than non-poor households. The fact that the poor work closer to home than the non-poor could be due to commuting costs: rail and bus fares are a higher percent of income for the poor than the non-poor. It
is also the case that the poor live farther away from train stations than the middle class. (These facts fit what Glaeser, Rappaport and Kahn find in Poor in Cities, the poor use a slow cheap technology while the rich who have a higher value of time use a fast, expensive transport technology).

2. As expected, poor households make fewer trips than wealthier households and rely more on walking than on motorized transit regardless of where in Mumbai they live. This is true both for the journey to work (66% of commuters in poor households either
walk or bicycle to work v. 45% for all households) and for non-work trips. Over 30% of poor households do, however, use rail and bus for commuting, and those that do spend a significant fraction of their income on transportation--17% in poor households where the main earner commutes by train and 19% in poor households where he or she commutes
by bus.

3. Although most people--regardless of income--have some form of healthcare provider within a 15 minute walk from their homes, the poor travel more to obtain healthcare because they are farther away from relatively low cost service at municipal hospitals.

4. Perhaps the most striking feature of commuting behavior in Mumbai is the distribution of commute distances. The commute distance with the highest frequency is only 1-2 km, and more than 40% of workers (50% of poor workers) are commuting less than 2 km. The distribution, however, has a long tail. Approximately 19% of all workers and 11% of poor workers commute more than 10 km. The mean one- way commute distance is 5.3 km for all workers and 3.9 km for the poor.

5. In a city in which 57% of works trips are 3 km or less, it is not surprising that over 40% of commuters walk to work. The respective mode shares are somewhat different for the poorest income group: 61% of the
poor walk to work, 6% ride a bicycle, 16% take the train and 15% ride the bus.

6. As household income goes up, the modal shares of bus and motorcycle increase for short to medium commutes, while the share of trips made on foot declines.

An interesting “Green City” question concerns planning for future population and income growth in this city. What are the benefits and costs of providing transportation infrastructure that mainly helps the lower middle class? Conversely, if highways are built to accommodate the commutes of the upperclass will smog pollution problems become severe as the car comes to dominate transportation shares?

Mega City Growth in Brazil

The share of urban population in Brazil increased from 58 to 80 percent between 1970 and 2000. Economic dynamics point to a process of
increased diversification among larger cities, and greater specialization among medium-sized agglomerations. In bigger centers there is a trend towards suburbanization.

These are some of the new facts reported in the World Bank Study:
Examining the Growth Patterns of Brazilian Cities
World Bank Policy Research Working Paper 3724, September 2005

The authors note that Brazil is trying to direct economic activity away from mega-cities towards “secondary cities.” Ades and Gleaser in a paper called Trade and Circuses (see Quarterly Journal of Economics) examined the determinants of which nations have mega-cities. Closed economies, dictatorships and Latin American Nations were more likely to have a very large % of their population in the largest cities.

In Brazil, the policy goal is to “to distribute economic gains more broadly and to relieve the increasing strain experienced by the fastest growing cities. This debate occurs at the national level, where the focus is on second tier cities in the lagging regions of the North and Northeast, as well as at the regional level, where states promote
development of smaller and medium-sized towns.”

INTERESTING FACTS ---For the last 30 years, Brazil accommodated its growing population through both increasing sizes and numbers of individual cities. Over 80 percent of the country's population lives in urban areas, up from 56 percent in 1970. According to estimates by the UN Population Division, the entire growth in population that is expected over the next three decades will be in cities when the urbanization rate is expected to exceed 90 percent (UN 2003; Figure 2). This will add about 63 million people to Brazil's cities, and total urban population will be over 200 million.

Turning to urban externalities the interesting question to me concerns convexity. If a mega-city of 15 million people grows by 1 million to 16 million how much worse is congestion and pollution in this city? Clearly this depends on who are these 1 million people, where they live what they consume and what jobs they do but the raw scale of this growth could exacerbate “Brown Cities” unless government is up to the job of mitigating these externalities. Turning things around, if these million people could be “deflected” to a smaller city, what is the marginal increase in pollution in those cities? Is this a zero-sum game? Intuitively even if the same pollution is merely transferred from the big city to the smaller city since the smaller city has fewer victims living there the total social damage from pollution will decline. Air pollution is a local public bad and will cause less damage in less populated areas.

I would be interested in the political economy of whether land owners in the mega cities and land owners in the secondary cities both are in favor of this government “deflection program”? Clearly land owners in the secondary cities will be helped by the growth in local demand but land owners in the mega cities will only be helped by this “exporting” if quality of life damage from local growth was very large.

Monday, September 19, 2005

What's the value-added of think tanks? Should Harvard Move to Washington D.C?

What would be the consequences for idea consumers if there were no think tanks? I see a couple of implications regarding; 1. career paths and risk taking by intellectuals, 2. Intellectual middlemen and the media, 3. co-ordination. Let me explain.

1. An old clichĂ© is that thinkers enter think tanks when their Political Party is not in power. If think tanks did not exist, would “policy wonks” go to Washington? Only risk lovers would go and try to spend their career there. The risk averse wimps would seek out the relatively scarce jobs in full time academia. Think tanks offer a type of insurance policy for leaders to hang out while out of power. You might argue that an unintended consequence of this is that Government does not attract enough “new blood”. I agree with this point but if there is learning by doing on the job then recycling is not such a bad thing.

2. Transaction Costs: Most newspaper articles quote some expert usually like a spice. Interesting recent studies have examined media bias by measuring which experts from which institutions (left wing/right wing) are regularly cited in which newspapers. If there were no think tanks, journalists would face higher transaction costs in finding an expert to quote. Do journalists have downward sloping demand curves?

3. Conferences and co-ordination problems --- Think tanks conferences help to co-ordinate where and when economists meet up. I must admit that I really enjoy the annual Brookings/Wharton Urban Affairs conference at Brookings. The papers are interesting and it attracts most of the leading urban scholars in one room for 2 days.

4. Blogs and the Internet tend to reduce the need for think tanks. I believe that blogs substitute for think tanks. Each economics blogger basically now has his own think tank except there is no lunch room or seminar. Reporters can easily google blogs to find a quotable economist. Since I started my blog, I’ve been approached by more reporters than in the past.

5. I do think that many think tanks generate "new" ideas that are real world
focused that may not have been generated had these nerds been sitting in a pure
academic setting. I realize this is a tough "what if" but hey this is only a blog!

6. Think Tank Book Publication Presses --- most academic presses are too academic focusing on small niche fields where the vocabulary is so jargon filled that only
"insiders" can read it. Such monopoly power is rarely a good thing. The Think
tanks (Brookings, Resources for the Future, AEI, Cato) produce readable books filled with big ideas.

7. Here is an open question for you. If Harvard was in Washington D.C, would there be less of a need for Washington think tanks? Would national public policy improve as its faculty and students “moonlighted”? Proximity matters and many leading minds who care about government and believe in government’s ability to improve well being are in Cambridge not Washington.

Sunday, September 18, 2005

Urban Poverty

Based on year 2000 Census micro data, 12.4% of people have incomes below the poverty line. The poor are concentrated in center cities. 19.9% of people who live in center cities have income below the poverty line while only 7.5% of suburbanites have incomes below the poverty line. 12% of rural people report incomes below the poverty line. Why do the poor live in center cities?

In an article in today’s New York Times titled “The Disaster Behind the Disaster: Poverty”, Dan Altman writes “Poverty tends to be concentrated in certain places … To fight poverty one has to understand its source. Were these places always poor? Did they become collecting bowls for poor people? Or do they make people poor?”

One dynamic explanation focuses on durable housing. Imagine a city that is a company town. In its prime thousands of people are living and working for this company (think of Rochester New York and Kodak and Xerox). Imagine if this city is located in a cold winter climate. If this company goes bankrupt, the skilled people will migrate away to another city but the housing stock remains. The supply of housing is vertical. The reduction in demand for housing translates into lower rents and this acts as a poverty magnet. As the poor move in, this can increase urban crime and hurt the quality of the public schools, this has a multiplier effect such that the skilled migrate out of the suburbs and home prices fall further. (for more details see Glaeser and Gyourko’s paper Urban Decline and Durable Housing at

Does growing up in an urban ghetto reduce the probability that a young person becomes middle class? The spatial mismatch literature used to argue that “yes” because this person didn’t have access to jobs. The second generation spatial mismatch literature argued “yes” because such young people are out of the loop with regards to information and social networks about available jobs. Sociologists would also argue “yes” because of negative peer effects. William Julius Wilson has argued that the paucity of “role models” in the inner city hurts striving youth. The Move to Opportunity research agenda has explored how changing a person’s environment affects outcomes (see Katz, Kling and Liebman’s work at The key counter-factual here is to ask: “If a random high poverty neighborhood resident were sent to a low poverty area, would this improve this person’s income prospects and other outcomes?”

A third factor that Ed Glaeser, Jordan Rappaport and I have explored is urban public transportation. In cities, you do not need to own a car to get around. Cars are expensive and the poor have a much lower vehicle ownership rate. We use several different data sets to document that public transport acts as a poverty magnet (see Poor in Cities for an old draft).

Another factor for why the poor live in cities is the generosity of local government. Public housing tends to be in center cities. This housing highly subsidized. Most of the urban poor do not live in public housing. A rough look at data from the 2003 American Housing Survey indicate that approximately 10% of poor people who live in metropolitan areas live in public housing. If the poor vote and if the poor are a larger percentage of cities, then the Mayor is more likely to offer more generous transfers to this group but facing a balanced budget condition the Mayor will have to raise taxes on the middle class and rich and this would encourage this mobile group to suburbanize. It remains an open question whether the Mayor can redistribute without losing the rich to the suburbs, this depends on whether there are offsetting urban amenities such as restaurants and short commutes to jobs to keep this group living in the center city.

The New York Times article states “In cities, the way forward may be to match neighborhoods with businesses for which an urban location is a plus and then to add industry specific training programs to give local workers the necessary skills.” One factor that may help the urban poor is the reduction in crime in the 1990s in big cities. This should reduce insurance rates and reduce safety concerns about doing business in the inner-city. I know of no research documenting whether an unintended consequence of reduced crime is job growth in inner cities.

While the New York Times article focused on U.S cities, it is also interesting to inquire about the rest of the world. As urbanization increases, do the poor live at the periphery or the center of cities? If jobs are centralized then I would predict that they will live at the fringe. Cities attempting to be tourist magnets would also tend to push the poor at the fringe away from the tourists.

Friday, September 16, 2005

Predicting the Future of New Orleans

In the short run, New Orleans will experience a construction boom. Who will get those jobs? Will local politicians require that locals receive a certain percentage of those jobs? Will low skilled immigrants start to move to New Orleans to work in high paying construction? I'm thinking about the medium term. Will New Orleans suffer an extreme "brain drain"?

The facts are pretty clear.

1. New Orleans has a humid climate and the skilled care deeply about urban quality of life.

2. New Orleans will have a soaked durable housing stock and the mold and the destruction will be costly to clear out. Such low quality housing could act as a poverty magnet and this will lead to "middle class flight".

3. Tourism and construction are not high skilled industries.

What could jump start this economy? I'm not even going to mention light rail transit projects, sports stadiums or cultural centers; these are not the keys to urban growth.

My one productive idea revolves around Tulane University. Permit me to digress. Last year California passed a stemcell initiative that earmarks billions of dollars to do such research. Rumor has it that leading scientists at Ivy League schools are considering moving to Berkeley, UCLA and Stanford to have access to this money.

With this in mind, could New Orleans attract and retain some skilled if the Federal Government could commit to funding grants at Tulane in this school's special niche. (I know nothing about Tulane but every serious university has a research niche).

An old question asks "Why is Silicon Valley in Silicon Valley?". If the politicians in New Orleans could answer this question, they could begin to think about how
to use the billions of dollars they are about to receive to actually create
some sustainable growth.

ON AN unrelated note, I just saw a blog asking whether companies that go bankrupt
should be excused from their past environmental obligations. Suppose that bankruptcy did provide this protection, then a perverse "option value" would be created; companies could take few costly ex-ante precautions against environmental disasters and if such a bad event occurs the company could then file for bankruptcy. There seems to be an extreme moral hazard problem here.

I would like to see a study measure how much chemical industry firms do invest in precautions that reduce the probability of another Bhopal/Union Carbide especially in an era when juries come back with pretty wild verdicts.

Thursday, September 15, 2005

How Would the Oildrum Achieve Sustainability?

Looking for activist government in your life? Let me quote the PEAKGUY from“Here's a brief summary of what I have collected that we as peak oilers (Citizens for sustainable living?) are for:

1. Insist on complete transparency of the world's oil reserves and production on a well by well basis.
2. Make national energy independence a national economic and security goal
3. Create an energy efficiency ethic in society that abhors wasteful behaviors
4. Raise fuel economy standards for passenger cars and trucks - encourage adoption of hybrids, electric plug-ins and other more sustainable automobile designs
5. Re-institute the 55 mph speed limit for maximum efficiency
6. Decrease traffic through better design, congestion pricing, more telecommuting, staggered start hours, off-peak commuting incentives carpooling, etc.
7. Invest in building and maintaining mass transit systems to connect as many communities as possible.
8. Invest in the national passenger and freight rail infrastructure
9. Revise building codes for maximum energy efficiency
10. Encourage walking, biking, line skating and all forms of self propelled transportation through clearly marked lanes and public awareness campaigns.
11. Encourage local food production, urban green gardens, farmer markets.
12. Generate as much local power as possible from solar, wind, biomass, hydro/tidal and other sustainable forms of energy

LOOKING AT this list, I like #3,6,10, the latter half of #4 and even 12. I’m not sure how he will achieve #1. I certainly wish that we could achieve #1. A couple of points about his list. Starting with #9, buildings are durables that live for a long time. Will he “grandfather” existing buildings from these laws? If so, then won’t we see a Gruenspecht effect such that developers rehab old buildings to avoid new building energy laws? I would like to see some details for why we need to achieve energy independence. We can’t import from Mexico or Canada?

The author of this post is showing a lot of confidence in government. Is government up to the job?

Wednesday, September 14, 2005

Improving Urban Governance Through a "Day of Shame"

Thomas Friedman of the New York Times has fallen in love with Singapore’s urban government. He must not be close to Michael Fay. He writes from Singapore; “Trust me, the head of Civil Defense here is not simply someone's college roommate.” What determines whether a nation’s “best minds” rise in public service?

“From Singapore's early years, good governance mattered because the ruling party was in a struggle for the people's hearts and minds with the Communists, who were perceived to be both noncorrupt and caring - so the state had to be the same and more.

Even after the Communists faded, Singapore maintained a tradition of good governance because as a country of only four million people with no natural resources, it had to live by its wits. It needed to run its economy and schools in a way that would extract the maximum from each citizen, which is how four million people built reserves of $100 billion.

"In the areas that are critical to our survival, like Defense, Finance and the Ministry of Home Affairs, we look for the best talent," said Kishore Mahbubani, dean of the Lee Kwan Yew School of Public Policy. "You lose New Orleans, and you have 100 other cities just like it. But we're a city-state. We lose Singapore and there is nothing else. ... [So] the standards of discipline are very high. There is a very high degree of accountability in Singapore."

I FIND this last quote kind of interesting. The United States has hundreds of major cities and mobility is quite high. Roughly 3% of people move across states every year. For younger, college educated people the mobility rates are much higher. In 1991, Joe Gyourko and Joe Tracy published a paper in the Journal of Political Economy where they reported evidence that home prices are lower in cities with high taxes per unit of public services. In English, this means that in corrupt, incompetent cities where government is employing lots of people but not providing basic anti-crime services, garbage pickup, fire protection and other services; they found that home prices were lower. I have always thought that this would provide an incentive for home owners to support urban politicians who could produce public services more efficiently (think of Mayor Bloomberg in NYC). Home owners could enjoy home
price appreciation if the mayor provided public services more efficiently.

This raises the question of who is the median voter in a city? If the median person is a poor, renter then such policies are more likely to persist, this would be a “Robin Hood” equilibrium.

It should be noted that urban crime is much different than flooding risk. Each day urbanites receive new information from the tabloids and just walking around the streets concerning whether their city is safe and whether the urban police are effectively battling crime. High skilled people will move away from a city that they view is unsafe and has a low quality of life.

There is no similar signal about the quality of safeguards that are supposed to inhibit natural disasters from causing major damage. No one individual is going to call in a team of auditors to audit the levee quality. Here the Federal Government could play a role of the “auditor”. Trained professionals could march into each coastal city and judge its investments in protecting the population against the next shock and then issue a “report card” to the local media. This could be like the EPA’s Toxic Release Inventory and create a “Day of Shame” for corrupt mayors.

Tuesday, September 13, 2005

Will Katrina Help Conservatives or Liberals?

An interesting discussion has been taking place between Andrew Gelman and Craig Newmark concerning how Hurricane Katrina will shape future political competition. Neither commentator mentions that this shock will change the federal/local game of “chicken”. In this game of chicken, the local government delays important investment and the problem gets worse. The locals delay because they hope that the Feds will pay a larger share of the total bill. It would interest me if Liberal Federal leadership (say under Jimmy Carter) did provide a larger % of the financing of such investments?) As I have blogged about before, if the Feds commit to telling cities that they will pay $0 for local public goods such as levees, then metropolitan areas such as New Orleans will have to devise tax systems (such as property taxes) that collect money to be spent on local public goods improvements (such as Levee upgrades). (see

Some people responded to my previous comment arguing that many mayors are corrupt and that local public goods will suffer in quality if the Feds are not involved. Other people were concerned about local governance issues. The mayor of the center city is not the mayor of the metropolitan area of places such as New Orleans. If there are transaction costs for getting richer suburbanites to work with the center city Mayor, could this inhibit the “pareto optimal” provision of local public goods?

Ultimately, I think that this shock will convince people that the federal government is not always up to the job of helping them in a crisis. Trust in the federal government will continue to decline partially because of Katrina. This will probably help conservatives.

Is local government any better? Anti-sprawl groups have long desired metropolitan area governance structures to internalize externalities such as pollution and congestion. This would reduce Tiebout sorting. People who want really good public schools and really high taxes (think Scarsdale) would be unlikely to find such a bundle. But, the levees would be in better shape and coastal cities getting ready for climate change would make better investments.

The silver lining of this shock will be greater preparedness by coastal cities for future natural disasters.

Monday, September 12, 2005

Katrina's "Crowd Out" of Other News Coverage

I’ve noticed recently that the Iraq War is barely making the news. The media is now focused on; 1. Hurricane Katrina’s Aftermath, 2. gas prices , 3. Judge Roberts Confirmation hearings, 4. start of the school year, 5. Start of the football season. It would interest me if the Pentagon is attempting to take advantage of this “quiet period” by stepping up its operations against insurgents. The media’s role as a “watchdog” is spread thin when there are so many events taking place simultaneously. We cannot be engaged on all topics at the same time and this may provide an opportunity for our military to achieve some of its goals that it may view as not politically “sellable” when the public is focused on body counts from Iraq.

Recently, economists have been studying the media’s role in shaping how we think about public policy. I’ve always wondered why we read the news? Is it for pleasure or to acquire information? On the supply side, how does TV news and the New York Times choose what to put on its front page? Do the repeated images of New Orleans’ victims spur readers to donate more money or to support public policies that will rebuild damaged areas?

Sunday, September 11, 2005

Why are there so Few Economists in Elected Office?

The typical Senator or Representative is a lawyer. “Nearly half the members reviewed were lawyers (44.6 percent). Individuals from the business sector (13.6 percent), public service (9.9 percent) and education (7.4 percent) represented the next largest groups in Congress. Physicians were tied for ninth place, behind professionals from military, banking/insurance, and media/entertainment backgrounds.” (see

The economists Phil Graham and Richard Armey seem to be in the minority. With the exception of Senator Paul Douglas (think Cobb-Douglas!) I cannot name another economist who became a Senator. Shouldn’t Joe Stiglitz take John Corzine’s seat in New Jersey? I would also hope that Tom Sargent could defeat Hilary Clinton in New York in 2006! How much would you pay to see Robert Barro debate Ted Kennedy in a fight for an eastern senate seat?

The Hopkins piece notes that doctors are vastly under-represented in the Congress; “The politically savvy may be aware that just eight of the current 535 members and four delegates of the 108th Congress are physicians. But a detailed statistical and biographical analysis of Congressional records by Johns Hopkins researchers reveals that since 1960, a total of only 25 physicians have served in either the U.S. House of Representatives or the Senate, just 1.1 percent of 2,196 members whose records were reviewed.”

I’d like to believe that “better” policies would be enacted by Congress if 44.6% of its members were economists but can this hypothesis be tested? Can academic economists improve public policy simply by advising politicians? Few of us believe that politicians are benevolent pareto planners but leading economists continue to go to Washington to advise. Is that puzzling?

If economists would be such a useful addition to Congress as we remind our colleagues that there are “no free lunches” and that all actions have unintended consequences, why have we made so few inroads here? Is it supply or demand? Do voters not like us because we are loud and arrogant? Are we too gutless to stomach the long campaign? Does academic economics self select people who are “unelectable”? If there was campaign reform such that politicians debated each other on PBS, people watched the televised debates and then voted, would more economists try?

Saturday, September 10, 2005

Risk in Urban Life

Contemporary research indicates that life expectancy at birth has increased by about 47 years in the past three centuries, from about 30 years in 1700 to about 77 years today in OECD countries. In the whole previous history of human kind—about 200,000 years—the increase in life expectancy can have been at most five to ten years, since when life expectancy falls below 20 years, the fertility rate can not be high enough to sustain, let alone increase, the size of the population. (source Center for Population Economics at the University of Chicago). This overall progress in life expectancy indicates that many risks that we used to face from a host of diseases have been defeated.

Of course, risk remains a constant part of daily life. Is urban living becoming more or less “risky” in recent decades in the United States? I see;

1. Fewer fatal plane crashes per mile of flying
2. Lower urban murder rates since the early 1990s
3. Fewer deaths on the job due to industrial accidents or due to military service
4. Much lower levels of urban air pollution reducing health risk
5. Less drunk driving which must translate into fewer traffic fatalities per mile of driving

Many interesting facts concerning modern risk exposure are posted to: The good news is that many of these risk numbers look very small.

A Pessimist would counter that she sees:

1. future terrorist attacks in dense cities
2. more natural disasters in coastal cities caused by climate change

It strikes me that the probability of both of these latter scenarios is very low. A silver lining of Katrina is that evacuations in the face of future storms will be more effectively carried out and the human death toll will be lower.

Friday, September 09, 2005

Katrina's "Silver Lining"?

In yesterday's New York Times, David Brooks notes that a "natural experiment" is about to unfold. The Urban poor in New Orleans have been expelled from their old life. He seems to be optimistic that their quality of life could improve in the long run relative to their pre-hurricane experience.

"That's because Katrina was a natural disaster that interrupted a social disaster. It separated tens of thousands of poor people from the run-down, isolated neighborhoods in which they were trapped. It disrupted the patterns that have led one generation to follow another into poverty.

It has created as close to a blank slate as we get in human affairs, and given us a chance to rebuild a city that wasn't working. We need to be realistic about how much we can actually change human behavior, but it would be a double tragedy if we didn't take advantage of these unique circumstances to do something that could serve as a spur to antipoverty programs nationwide.

The first rule of the rebuilding effort should be: Nothing Like Before. Most of the ambitious and organized people abandoned the inner-city areas of New Orleans long ago, leaving neighborhoods where roughly three-quarters of the people were poor."

I HAVE SOME questions for David Brooks.

1. Where should the expelled urban poor live? Will he welcome them to his neighborhood? Would he subsidize their housing such that they can afford to live in his neighborhood?

2. Would he support housing vouchers such that the urban poor can afford the rent in communities where the rent is higher? Obviously, where rents are higher quality of life and local amenities are higher.

Clearly David Brooks is hoping that the New Orleans shock is so salient with the middle and upper class that these fortunate groups are willing to redistribute more in the aftermath of the shock. Do people have short memories?

3. How would David Brooks scatter the poor if he were our "benevolent planner"? Given that we don't have such a planner, will we see this group "re-segregate" even if they are given the resources to move to less poor communities?

Thursday, September 08, 2005

The Growing Supply of "Green" Products

An old question asks whether capitalism is a "friend" or "foe" of environmental sustainability? The "foe" proponents point out the scale effects of capitalism. The pursuit of the American Dream leads to more cars and more farmland paving.

Today's New York Times Personal Shopper piece by Marianne Rohrlich points out some new "green" products that may be widely purchased: "IT'S getting easier to be green, at least at home. If you thought "ecofriendly" design was only for the Birkenstock set, it may be time to take a second look."


1. Crate & Barrel has jumped on the bandwagon with the Bento collection of furniture, using boards made from pressed bamboo. The TV Cabinet - 39 inches wide, 23 deep and 66 high - has a lacquer finish; $1,399 at Crate & Barrel stores, or (800) 967-6696.

2. A king-size platform bed with attached night tables, designed by Barlas Baylar, is made from sustainably harvested American cherry wood. It uses dovetail joinery rather than screws and nails and has a hand-oiled finish rather than glue and polyurethane; $14,700 (custom sizes available) at Hudson Furniture, 433 West 14th Street, (212) 645-7800 or

3. Last year Anthony Cochran, an interior designer, and Jesse Johnson, who has a degree in environmental management, introduced the sleek Q Collection, which uses natural materials. Their ceramic garden stools are fired in a wood kiln and glazed clear, without harmful colorants; $1,625 each from the Q Collection, 915 Broadway (20th Street), Suite 1001, (212) 529-1400;

4. Horizon interior and exterior paints, by Rodda Paints, are low on volatile organic compounds and fumes. Exterior paint is $24.99 a gallon; to order, or for store locations:

I AM always amazed by capitalism's ability to create permutations of products. We are all used to choosing between BMWs versus Tercels but these examples highlight that more eco-friendly products are being designed and marketed. They do look expensive! Will you buy them? More generally, do people vote their pocketbook to enhance sustainability or do they free ride and buy the "brown product" that is cheaper?

An obvious point. People are more likely to buy the green product if they think it has a direct impact on their well being (i.e eating organic veggies) or if they gain a "warm glow" from showing off their green furniture to their friends. In this case, these products can be a form of status symbol. Like the "Mink Coat", you are signaling to your friends. The irony here is that environmentalists will applaud such signaling while they do not love mink coats!

Wednesday, September 07, 2005

Ex-Post Transfers and Ex-Ante Risk Taking

Gary Becker posts on his blog

"However, generous private and public help to victims of terrible disasters, while highly desirable, distort such rational calculations. Congress just voted over $10 billion of relief help to victims of Katrina, the Red Cross and other private groups have already had pledges of over $200 million of private help, other nations have offered generous assistance, and the United States has the Federal Emergency Management Agency that provides substantial assistance to people and businesses in areas that are declared to be disasters. Presidents are making greater and greater use of this Act to declare regions in need of emergency assistance.

Such public and private assistance in the event of disasters make it more likely for persons, companies, and public activities to locate in high-risk areas because they will often be spared much of the losses. They also may not take out insurance against risks that would inflict large losses; for example, rather few New Orleans homeowners had flood insurance. Studies have shown a small propensity to insure against low probability natural disasters that cause great damage- see "Paying the Price: The status and Role of Insurance Against Natural Disasters In the U.S.", Ed. by Kunreuter and Roth). So private and public generosity to victims of disasters help distort many pre-disaster decisions.

This distortion goes under the name of the "Good Samaritan" paradox in philosophy and economics. To illustrate this problem, consider the behavior of loving parents toward their children. Such parents would come to the assistance of their children if they get into financial trouble, have serious medical problems, or experience other difficulties. At the same time, they want their children to use their money wisely, work and study hard, prepare for future contingencies, and lead healthy life, so that they can avoid personal disasters.

Unfortunately for the parents, children can distinguish reality from lectures, and threats that will not be backed up by parental behavior. If they anticipate that their parents will help them out if they get into trouble, and if they are not so altruist to their parents, they would consume and possibly gamble excessively, and they might quit good jobs to "find themselves". Parents might then be indirectly encouraging the very behavior by their children that they want them to avoid."

A KEY ISSUE HERE IS commitment. The loving parent cannot pre-commit to cut off
his child from transfers. William Easterly wrote a very interesting book about
his experience at the World Bank called Adventures in the Tropics. He noted
that the World Bank undercut its own mission by refusing to cut off aid to
"evil dictators". The dictators in developing countries were smart enough to know that any World Bank threats to cutoff his aid were not credible. Since he knew that the threat was not credible, he continued to mistreat his people.

The horrible irony here is that if a "bad guy" like Darth Vader ran the World Bank
then the dictator would have reformed his ways because Vader can commit to cutoff people he doesn't like. Unfortunately, liberals do not have this reputation.

A key assumption that Becker is making is that people are forward looking and anticipate future responses to their actions. For some people this is true, while other people are unlikely to be so strategic. The economics literature continues to try to study how do people form expectations of the future and how do they act upon those expectations. Becker is saying that in the absence of Government insurance , coastal economic activity would differ with respect to scale and composition such that there would be fewer "victims".

Tuesday, September 06, 2005

Measuring Chernobyl's Long Run Health Impact

The New York Times today reports "Nearly 20 years after the huge accident at the Chernobyl nuclear power plant in Ukraine, a new scientific report has found that its aftereffects on health and the environment have not proved as dire as scientists had predicted." The report was prepared by a panel of more than 100 experts convened by United Nations agencies.

It says huge compensation programs for people in the Chernobyl region have become "a major barrier to the region's recovery," both by creating a culture of dependency and by soaking up a high percentage of the region's resources. It recommends that the compensation programs be cut back.

The report, "Chernobyl's Legacy: Health, Environmental and Socio-Economic Impacts," says 4,000 deaths will probably be attributable to the accident ultimately - compared with the tens of thousands predicted at the time of the accident.

Only 50 deaths - all among the reactor staff and emergency workers - can be directly attributed to acute radiation exposure after Chernobyl's Reactor No. 4 exploded in April 1986, the panel found. The rest will be from cancer at a higher rate than would otherwise be expected in people exposed to radiation near Chernobyl in the wake of the accident.

But for millions of people who were subjected to low levels of radioactive particles spread by the wind, health effects have proved generally minimal, the report found."

I KNOW NOTHING about the Ukraine's housing market (especially under communism in the 1980s) but I would like to know the following;

1. In the aftermath of the disaster, were people allowed to migrate away to form a "moat" around the damaged Reactor?

2. How is one's health affected by radiation exposure? Does it depend on peak exposure or also on the duration of exposure? If I'm more likely to be sick if I'm exposed longer to radiation then this makes point #1 even more important.

Did the government urge people to migrate away or did they "cover up" the problem? Obviously, if people are not informed about risks they will not respond to them and take self-protective actions.

3. How much cheaper are land prices near Chernobyl relative to similar land plots that have not been exposed to contamination. This is called a compensating differential that economists measure using hedonic regressions. If there is a steep price discount for living there, have "risk lovers" chosen to live there? Who are the set of people who have lived there once capitalism came to this region? It would interest me if anybody has surveyed these folks to learn about their risk perception and their taste for gambling.

The New York Times has an intriguing 2nd paragraph concerning the unintended consequences of compensating victims. Could the same thing happen in New Orleans now? Hopefully poor people in New Orleans will get jobs in construction as people rebuild (but this assumes there is the demand for such new structures).

Monday, September 05, 2005

When Can Cities Finance their Own Local Public Goods? A History Lesson

The horrible New Orleans case study raises a fascinating issue with respect to the financing of local public goods such as flood protection. Should the Feds or the Locals be in charge of financing such self protection investments? Do the locals have the ability to finance their own self protection investments? A very nice recent case study of Local Municipal Water System Financing speaks to these issues.

David Cutler and Grant Miller, "Water, Water Everywhere, Municipal Finance and Water Supply in American Cities,

"The construction of municipal water systems was a major event in the history of American cities -- bringing relief from disease, providing resources to combat fires, attracting business investment, and promoting development generally. Although the first large-scale municipal water system in the United States was completed in 1801, many American cities lacked waterworks until the turn of the twentieth century. This paper investigates the reason for the century-long delay and the subsequent frenzy of waterworks construction from 1890 through the 1920s. We propose an explanation that emphasizes the development of local public finance. Specifically, we highlight the importance of municipal bond market growth as a facilitator of debt finance. We argue that this explanation is superior to others put forward in the literature, including disease knowledge, the presence of externalities, municipal population density, natural monopoly, contracting difficulties, corruption costs, and growth in the supply of civil engineers."

Moving forward as coastal cities face climate change shocks, I will be quite
interested to see whether cities are more pro-active in making costly investments to protect themselves. Will there be a silver lining from the New Orleans Tragedy? Will the Federal Government stop this game of "chicken" with the local cities such that cities delay making costly investments in the hope that the Feds will pay for the upgrades?

Sunday, September 04, 2005

One Lesson from New Orleans? More Cars for the Urban Poor

Among urban writers, it is fashionable to hate cars. The vehicle is blamed for causing Global Warming, paving the country side and destroying the walking center city. Permit me to say a couple of nice things about the car. The car provides access. Recent research has documented that it can help people access employment. More of New Orleans’ urban poor would have survived the disaster if they had had car access.

EXHIBIT #1: Steve Raphael and Michael Stoll published an intriguing paper for the Brookings Press see

"Our empirical estimates indicate that raising minority car-ownership rates to the white car ownership rate would eliminate 45 percent of the black-white employment rate differential and 17 percent of the comparable Latino-white differential."

How could this be? One causal explanation is that car access increases a person's ability to access jobs and reach them easily each day with a 30 minute or less commute. Public transit is cheap in terms of $ expenditure but is highly time intensive ( see

EXHIBIT #2 From today's New York Times: "Many blacks voiced suspicions that thousands of people were left to suffer and die in the floodwaters because they were, for the most part, poor and black."

Here is a "what if" for you. What if these households had access to a private vehicle? The New York Times quote hints that this group was powerless against Mother Nature. George Bush could not personally escort each individual to safety. An alternative method would have been for car enabled households to have driven themselves to safety.

EXHIBIT #3 If the Urban poor had cars, would there be greater support for public school competition and vouchers a la Milton Friedman? Armed with cars, the urban poor would have greater choice and would gain more from such competition because they could drive their kids further.

Fact: If 13% of Americans live below the poverty line are we really talking about so many new cars that congestion and pollution (the negative externalities associated with cars) would really be exacerbated? My suggestion in this post would improve the poor's quality of life at relatively low cost. I challenge you smart economists to show me the unintended consequences and deadweight loss from this proposal!!

Saturday, September 03, 2005

Should We Invest to Stop Mother Nature or Terrorists? Pre-emption of Low Probability Disasters

“More people than ever are living near hurricane prone coast lines, earthquake fault lines, forest fire prone areas and in flood plains, a trend that has created a landscape of expanding risk with more people, homes and communities in danger’s path. At the same time, disasters costs have risen, posing a growing problem for insurers, governments and communities in danger’s path.” (Quote from San Francisco Chronicle’s 9/1/2005 Disaster Planning focuses on Response not preparation by Walsh, Alpert and McQuaid)

I thought that most people are risk averse. When offered $100 for sure or a 50% chance of earning $200 and a 50% chance of earning $0, most people choose the $100 option. If this is true, how do we explain why more and more people are gambling with their most valuable assets (themselves and their family’s well being)? You might say that housing affordability is pushing people to live in more and more marginal areas. While in San Francisco this might be a pinch true, there are plenty of mid-west cities with quite affordable housing.

You might say that people are ignorant about the risks they are exposing their families to when they choose where to live. This logic suggests that only salient events such as hurricane “wake” people up. Behavioral economists would add that such events lead people to engage in a “law of small numbers” such that they now over-estimate the probability of future hurricanes. Post 9/11/2001, did you believe that flying was now much less safe? For months many people did.

Why do we need salient events such as this hurricane or 9/11 to focus us on allocating resources to mitigate risks? Do people really believe that the probability of a rare event is zero until it actually happens? Actuaries are paid to estimate such probabilities. Do government policy makers ever consult these guys to help them determine what are good investments to mitigate risk exposure?

In the case of New Orleans’ levees, it appears that both the local politicians and the federal government under-estimated the probability of disaster

What role did the wrestling over whether the Federal government or state and local government should pay for levee repair play in delaying this important investment?

The key “what-if” question I have is “If coastal states knew that they would not receive a dime from the federal government to protect themselves against natural disaster, how much of their own money would they have spent on such projects?”

An interesting local public finance issue arises. When do major cities use their own tax revenues to solve a problem versus when do they allow the problem to fester and continue to lobby the federal government for the money? Many newspapers are blaming the Bush Administration for not investing in the levee repair. Under what circumstance would the Governor of Louisiana have stepped in and used state resources to pay for this?

A point that I have not seen discussed in the role of for profit insurance companies in New Orleans. Suppose they charge home owners lower premiums if the levees were in better condition. This would have provided each home owner in the metro area with an incentive to lobby local politicians to address the issue perhaps even without federal money.

Finally, a point about the victims. The New York Times says that most of dead will most likely be poor blacks. In previous disasters such as the Chicago Heat Wave a couple of summers ago, the victims were poor blacks. This suggests that investments in natural disaster risk mitigation represent a type of “redistribution” because the poor are most likely to face mortality risk from such shocks.

Several recent economic studies have shown that the U.S is relative stingy as compared to other nations rather stingy See Alesina, Alberto and Edward Glaeser, Fighting Poverty in the U.S and Europe: A World of Difference, Oxford University Press 2004. Once a Tsunami or this hurricane takes place, we are much more willing to redistribute at least for a little while. Is this strange?

Homeland Security Department is investing a fortune attempting to reduce the realization of low probability terror attacks. Should there be a Department of Natural Disaster Security? At the margin, what are the marginal benefits of investing an extra dollar in the former versus the latter?

Friday, September 02, 2005

New Orleans’ Breached Levees: Ex-Ante How Much Should Have Been Invested in the Levees and Whose Money Should Have Paid For It?

As could be expected in the midst of a crisis there is a lot of finger pointing right now. Who is to blame for exacerbating this tragedy? Paul Krugman knows who. He points his finger at the White House in today's New York Times piece ""A Can't Do Government"

I quote: "Second question: Why wasn't more preventive action taken? After 2003 the Army Corps of Engineers sharply slowed its flood-control work, including work on sinking levees. "The corps," an Editor and Publisher article says, citing a series of articles in The Times-Picayune in New Orleans, "never tried to hide the fact that the spending pressures of the war in Iraq, as well as homeland security - coming at the same time as federal tax cuts - was the reason for the strain.""

Putting on my cold economics hat, I have some questions for you and then I will discuss some simple economics of climate change and cities.

1. How much did the people of the New Orleans metro area invest in their own levees? Given that property owners and public safety in this metro area are the main beneficiary of such investments, why wasn't this sufficient incentive for the Mayor and the metro area's other political leaders to tax citizens collect the money and invest in better, more modern levees?

2. Were the political leaders of New Orleans aware that the levees were at risk to collapse? More formally, conditional that a major hurrricane struck near New Orleans what did they believe was the probability that there could be major flooding? In this state of the world, how much did they guess that New Orleans would suffer? Expected value theory would say that if the Mayor is risk neutral and he thinks there is a 5% chance of a billion dollar loss if the current levees are not improved then the expected benefits of improving the levees would be 50 million dollars. This could be compared to the costs of improving the levees and the net cost/benefit analysis would have determined ex-ante whether this was "good policy"?

To convince me that federal tax payer money was need for such a local project, you'd have to convince me that New Orleans was liquidity constrained (couldn't get a loan) or that there political leaders were over optimistic about the quality of the existing levees and thus were underestimating the benefits of upgrading the levees.

3. Repeating myself, everyone in New Orleans knew that their city was below sea-level why didn't the major property owners lobby for greater investments in "insurance policies" (i.e better levees) to reduce the probability of disaster? I realize that this is monday morning quarterbacking but it is an obvious strategy for a risk averse person and most people are risk averse.

4. Turning to climate change. Cities ranging from London to New York City are studying how climate change will affect their city's quality of life? Should such cities finance their own investments to pre-empt climate change impacts or should their federal governments subsidize such investments? Given that the major beneficiaries of such policies such as inhibiting flooding are land owners in these cities, a simple public finance argument would say that these cities should handle their own financing of "self protection" against mother nature.

I do not mean to "blame the victim" here. Instead, I'm hoping to stimulate myself here to think about what local environmental threats should be handled by local government versus when should costs be spread. There may be a terrible moral hazard here that the politicians of New Orleans delayed invested their own people's tax revenue in building up the levees because they were hoping that the Federal Government would pay the bill though the Corps Engineering program that Krugman talks about today. I hope I'm not right about this!

Thursday, September 01, 2005

The Future of New Orleans

In the year 2010, what will be New Orleans' population and employment count? What share of the population will be living in poverty? Will this poverty share increase because the middle class and rich will leave and this lowers real estate prices which act as a poverty magnet? An optimist could point to New York City today. The 9/11 attacks have not dampened that city's real estate boom or its ability to attract the best and brightest. But what about New Orleans?

What is this city's comparative advantage? I see a tourist destination. But, tourists will not be visiting this city for years. Today's New York Times business page says that New Orleans is a major hub supplying energy products around the nation and it serves as a transportation center handling farm products and other commodities delivered on the Mississippi River and by railroad.

The city does have fixed infrastructure such as Tulane University. Such research universities help to anchor some human capital to stay in the region. But as I think about the transition in the short run and medium run, will anyone who has a choice over where to live (such as an academic economist) really want to stay there?

Given the low quality of life that could be expected to persist for 10 years, how much of a brain drain will now take place?

Consider the housing market for the highly educated in New Orleans. I'm assuming that folks who owned a $400,000 house had hurricane insurance and get a big check back. Will these folks rebuild in New Orleans or move elsewhere? An interesting game of expectations ensues. If the upper middle class think that other upper middle class
households are moving away, then this will increase the likelihood that they move away. The politicians of this area need to think about how to lure this mobile
group to stay in the area.

I just told my wife about this post and she pointed out that households with big mortgages that they owe a bank will not be able to leave even if they wanted to. This "lock in" effect could help New Orleans keep some of their middle class. What will be the re-sale value of homes and land in New Orleans? New Orleans home prices will fall sharply as outsiders fear future hurricanes and do not want to live in such a depressing rebuilding area. (here I'm not even mentioning the humidity)

My point is that if people are mobile and if they care about quality of life and if New Orleans' quality of life will be awful for a long time, then this city could experience another shock of losing its human capital. A long line of urban economics research has argued that human capital is the key to urban growth. If New Orleans suffers such a brain drain, then hurricane Katrina will have an even longer impact.