Tuesday, February 28, 2006

Environmental Tradeoffs

I am in sunny California giving seminars at a variety of schools out here but I am keeping up with East Coast news. This New York Times editorial below sketches an interesting dilemma for environmentalits; the siting of a locally annoying green technology (wind turbines). Clearly, the Coase theorem should be applicable here. In the parts of Cape Cod where these wind turbines would be located perhaps home owners nearby should receive some compensation for the implicit takings if their view and overall quality of life will be impeded. How much money? That should be negotiated.



February 28, 2006
Editorial
Sneak Attack on Cape Wind
Any serious effort to deal with global warming and oil dependency is going to outrage somebody. Whether it is a proposal to import liquefied natural gas to reduce the use of a dirtier fuel like coal or to build a nuclear plant for the same reason, someone in the neighborhood is going to scream.

So it is with an ambitious proposal called Cape Wind, a large wind farm that a Massachusetts energy company wants to build off Cape Cod, about six miles from shore. The proposal involves constructing 130 giant turbines whose windmill arms would reach 400 feet above the water. They would be visible, though barely so, on the distant horizon.

The benefits of this project are enormous in terms of local air pollution, global warming and other problems associated with the burning of fossil fuels. Cape Wind would displace 113 million gallons of oil per year (or 570,000 tons of coal, or 10 billion cubic feet of natural gas), while generating three-fourths of the energy needs of the Cape, Nantucket and Martha's Vineyard. It has the support of residents, regional newspapers and just about every major environmental organization in America.

Nevertheless, a group called the Alliance to Protect Nantucket Sound — which includes ordinary folk but is bankrolled by some very rich people with very nice views — has spent large sums lobbying against the project. The group has raised concerns about threats to marine and bird life, all of which are being addressed in environmental impact studies. But their biggest beef is about the sheer proximity of the turbines. Their preferred outcome is to wait until the technology is available to build wind farms much farther out to sea, a delay the country simply cannot afford.

Into this debate steps Don Young of Alaska, the Republican chairman of the House Transportation and Infrastructure Committee. Mr. Young has fashioned an amendment that he apparently intends to attach to a financing bill for the Coast Guard when that bill reaches a Senate-House conference committee. Committee chairmen often act imperiously in this way, even though the amendment has never been debated by either house.

The amendment would ban the construction of wind turbines within 1.5 nautical miles of a shipping lane or ferry route. That would kill Cape Wind, parts of which would come within 1,500 feet of a ferry route. Mr. Young says he's concerned about safety. Yet offshore oil rigs are allowed within 500 feet of shipping in this country. And Mr. Young has no objection to a wind farm in Long Island Sound that would lie only 1.65 miles from shipping.

It's clear that Mr. Young's sole purpose is to kill Cape Wind. It's not clear why he wants to do this — Nantucket Sound, after all, is a long way from Alaska. Whatever his reasons, his colleagues in the House and Senate — reliable environmentalists like Olympia Snowe of Maine, for instance — cannot let him get away with it.

Cape Wind has been the subject of endless environmental reviews. We believe it should be approved. But if there are objections to be made, they should be made in the open and not by stealth.

Friday, February 24, 2006

Coastal Cities and the War on Terror

Does Terror impose equal risks on all people in the United States? It seems clear that urbanites who live and work in dense, coastal areas are at greater risk to bear the costs of the next surprise attack.

A cliche from the last presidential election is that the Republican majority is based on rural votes and suburban votes. If urbanites vote for the Democrats, then under Republican rule do urban threats receive the efficient amount of Homeland Securty funds to protect them from anticipated threats?

What do the words efficient amount here mean? We would need to prioritize what threats we face and know what is the production function mapping an increase in Homeland Security expenditure on activity j into how much this expenditure reduces terror risk. For example, if we hire more airplane luggage inspectors does this reduce the probability of another 9/11 or merely displace it from a plane to a dirty bomb brought through a container? It strikes me that this is an important example that cross-elasticities matter! But, I'm not sure how to esimate these.


February 24, 2006
Port Agency to Break Lease in Bid to Block Dubai Sale
By PATRICK McGEEHAN

The Port Authority of New York and New Jersey will break the lease of a big container terminal at Port Newark to stop a company based in Dubai from taking over part of the operation there, the agency's chairman said yesterday.

Anthony R. Coscia, the chairman, said the company that holds a lease on the terminal through 2030 violated the contract by selling a half-interest in it to Dubai Ports World without seeking the landlord's approval. He said the Port Authority would ask a judge in New Jersey Superior Court in Newark today to affirm its right to end the lease.

"Fundamentally, this is a landlord-tenant dispute," said Mr. Coscia, who is a lawyer. "We're terminating their lease because they sublet illegally."

Separately, the State of New Jersey sued the federal government in United States District Court in Trenton yesterday afternoon to block the Dubai deal. The lawsuit said Bush administration officials failed to fulfill their duty to fully investigate the national security implications of the transaction.

The Dubai company has agreed to pay $6.8 billion to buy Peninsular & Oriental Steam Navigation, a port operator based in London. One of the subsidiaries it would acquire, P & O Ports North America, owns half of the company that operates the Port Newark Container Terminal.

Andrew Rice, a spokesman for P & O and Dubai Ports World, said neither company would comment on the litigation.

Last night, Dubai Ports World said it would "not exercise control" over its new operations in the United States while the White House tried to calm opposition in Congress.

New Jersey's suit argues that the federal Committee on Foreign Investment in the United States, which approved the deal last month, has not provided Gov. Jon S. Corzine with the information he needs to protect the state's residents. By withholding it, the suit argues, the committee is interfering with the sovereign rights of the state provided by the 10th Amendment to the Constitution.

The suit asks the court to order the committee to conduct a full investigation of the Dubai Ports World and to share information they gather with New Jersey's Office of Counterterrorism. As defendants, the suit names the heads of the federal agencies that make up the committee, including John W. Snow, the treasury secretary, Condoleezza Rice, the secretary of state, and Donald H. Rumsfeld, the secretary of defense.

"Our federal suit is really about information," Mr. Corzine said, at a ceremony to swear in Zulima V. Farber as attorney general. But he went on to criticize the decision to approve the deal quickly.

"This is very poorly executed foreign policy," Mr. Corzine said. "This should have been reviewed at the highest levels."

The suits were the first by public agencies in the growing controversy over the sale to Dubai, though Mr. Coscia said other port officials were considering taking similar action.

Like Mr. Corzine, Port Authority officials have been frustrated at their inability to obtain information from the Treasury Department about the committee's review. But the Port Authority's only power to slow or block Dubai Ports World from arriving as a tenant rests in the lease.

There was no pending dispute with the operators of the container terminal before the Dubai deal surfaced. But, Mr. Coscia said, the lease states that a tenant must get the agency's approval of a transfer of ownership interest.

"Our approval wasn't sought, so we haven't provided it," he said.

One complication of the dispute is that another port operator, A. P. Moller-Maersk, is caught in the crossfire. Maersk, a Danish company, planned to maintain its half-interest in the terminal but could soon be without a lease to operate at the port.

The Port Authority's message to Maersk, Mr. Coscia said, was, "We're sorry you're in the middle of this, but you're in the middle of this."

A spokeswoman for Maersk in New Jersey declined to comment.

David W. Chen contributed reporting from Trenton for this article.

Wednesday, February 22, 2006

The Weakest Link and the War on Terror

In 2001, the Nobel Prize in Economics was awarded for research on asymmetric information. I didn't win this prize but I do see the relevance of this research for the current debate concerning the UAE purchasing port access in many of our major cities.

You don't have to be Joe Stiglitz to appreciate that these companies know that they have private information about what goes on in their business. Homeland Security will not be able to monitor them 24 hours a day 365 days a year. If terrorists can infiltrate the top ranks of these businesses then they could arrange to have dirty bombs delivered through such ports.

This raises an interesting risk counter-factual. What is the current probability that a dirty bomb could be delivered through such a port when the British control it (see below)? What is the increase in the probability of such a successful "import" if the UAE controls it? Economists think at the margin! Well, what is the marginal increase in the probability of this bad event?

Do we believe in the precautionary principal? How can the UAE guarantee that they will screen their employees? Do they have the right incentives to do a good job here? If the USA could make a credible threat to punish the UAE if a bad state of the world occurs, then the UAE would have the right incentives.

This raises the larger question of when does ownership rights affect economic outcomes? The coase theorem originally claimed that they didn't matter. Grossman and Hart might disagree!

Note the simple political economy below that politcians whose constituents live near these ports are going crazy to not give the UAE the benefit of the doubt. Who do you trust? What are the unintended consequences of the rest of the world thinking that the USA doesn't trust them?

The rational terrorist will search for the weakest link in our homeland security chain. The airports look pretty safe. This port option must look tempting.

Bush Unaware of Ports Deal Before Approval

By TED BRIDIS, Associated Press Writer1 hour, 2 minutes ago

President Bush was unaware of the pending sale of shipping operations at six major U.S. seaports to a state-owned business in the United Arab Emirates until the deal already had been approved by his administration, the White House said Wednesday.

Defending the deal anew, the administration also said that it should have briefed Congress sooner about the transaction, which has triggered a major political backlash among both Republicans and Democrats.

Bush on Tuesday brushed aside objections by leaders in the Senate and House that the $6.8 billion sale could raise risks of terrorism at American ports. In a forceful defense of his administration's earlier approval of the deal, he pledged to veto any bill Congress might approve to block the agreement involving the sale of a British company to the Arab firm.

Bush faces a rebellion from leaders of his own party, as well as from Democrats, about the deal that would put Dubai Ports in charge of major shipping operations in New York, New Jersey, Baltimore, New Orleans, Miami and Philadelphia.

While Bush has adamantly defended the deal, the White House acknowledged that he did not know about it until recently.

"He became aware of it over the last several days," McClellan said. Asked if Bush did not know about it until it was a done deal, McClellan said, "That's correct." He said the matter did not rise to the presidential level, but went through a congressionally-mandated review process and was determined not to pose a national security threat.

"The president made sure to check with all the Cabinet secretaries that are part of this process, or whose agencies or departments are part of this process," the spokesman said. "He made sure to check with them — even after this got more attention in the press, to make sure that they were comfortable with the decision that was made."

"And every one of the Cabinet secretaries expressed that they were comfortable with this transaction being approved," he said.

Commerce Secretary Carlos Guiterrez, told The Associated Press in an interview: "They are not in charge of security. We are not turning over the security of our ports. When people make statements like that you get an instant emotional reaction."

Treasury Secretary John Snow said failure to complete the transaction would send the wrong message overseas.

"The implications of failing to approve this would be to tell the world that investments in the United States from certain parts of the world aren't welcome," Snow told reporters Wednesday following a speech in Connecticut to a fuel cell manufacturer. "That sends a terrible message."

The sale's harshest critics were not appeased.

"I will fight harder than ever for this legislation, and if it is vetoed I will fight as hard as I can to override it," said Rep. Pete King, R-N.Y., chairman of the Homeland Security Committee. King and Democratic Sen. Charles Schumer (news, bio, voting record) of New York said they will introduce emergency legislation to suspend the ports deal.

Another Democrat, Sen. Bob Menendez of New Jersey, urged his colleagues to force Bush to wield his veto, which Bush — in his sixth year in office — has never done. "We should really test the resolve of the president on this one because what we're really doing is securing the safety of our people."

McClellan dismissed any connection between the deal and David Sanborn of Virginia, a former senior DP World executive whom the White House appointed last month to be the new administrator of the Maritime Administration of the Transportation Department. Sanborn worked as DP World's director of operations for Europe and Latin America.

"My understanding is that he has assured us that he was not involved in the negotiations to purchase this British company," McClellan added.

"In terms of David Sanborn, he was nominated to run the Maritime Administration because of his experience and expertise," the spokesman said. Sanborn is a graduate of the U.S. Merchant Marine Academy. He is an operations professional.

Earlier, several lawmakers determined to capsize the pending sale said they would not be deterred by Bush's veto threat.

Sen. Joseph Biden (news, bio, voting record), D-Del., said the bipartisan opposition to the deal indicated "a lack of confidence in the administration" on both sides. "Sure, we have to link up with our Arab friends but ... we want to see and those in Congress want to know what ... safeguards are built in," Biden said on ABC's "Good Morning America."

Bush's veto threat sought to quiet a political storm that has united Republican governors and Senate Majority Leader Bill Frist of Tennessee with liberal Democrats, including New York Sens. Hillary Rodham Clinton and Schumer.

To assuage concerns, the administration disclosed some assurances it negotiated with Dubai Ports. It required mandatory participation in U.S. security programs to stop smuggling and detect illegal shipments of nuclear materials; roughly 33 other port companies participate in these voluntarily. The Coast Guard also said it was nearly finished inspecting Dubai Ports' facilities in the United States.

Frist said Tuesday, before Bush's comments, that he would introduce legislation to put the sale on hold if the White House did not delay the takeover. He said the deal raised "serious questions regarding the safety and security of our homeland.

House Speaker Dennis Hastert, R-Ill., asked the president for a moratorium on the sale until it could be studied further.

Lawmakers from both parties have noted that some of the Sept. 11 hijackers used the United Arab Emirates as an operational and financial base. In addition, critics contend the UAE was an important transfer point for shipments of smuggled nuclear components sent to Iran, North Korea and Libya by a Pakistani scientist.

___

Associated Press writers Ben Feller, Will Lester, Terence Hunt, and Devlin Barrett in Washington, Matthew Verrinder in Newark, N.J., and Tom Stuckey in Annapolis, Md., contributed to this report.

Tuesday, February 21, 2006

The Weakest Link: Cross-Nation Disease Contagion and Poor Nations

Too much of modern environmental economics focuses on localized externalities such as air and water pollution. I wonder if this interesting New York Times editorial reported below highlights what 21st century environmental economists will focus on? In a Globalized economy where people come and go. If a poor nation's weak governance means that it doesn't handle public health challenges then these problems become rich nation's problems.

Migration and global travel spread risk. Todd Sandler of USC has done serious research on this "weakest link" issue. In this case, the weakest link appears to be Nigeria. An interesting public goods implementation issue arises. How can rich developed countries transfer money to LDCs to help them implement anti-disease programs? Will these nations simply pocket the money? Are there unintended consequences of sending them money? For example, if we pay Nigeria to kill "evil" chickens then do they have an incentive to increase the supply of these birds so that they keep getting paid? My point is that if they actually solved the problem the $ would be cut off. Anticipating this, do they have the right incentives to solve the problem?

This would appear to be an important example of how economic development is good for the environment! This editiorial makes the problem sound closely related to poverty and a lack of education.

February 21, 2006
Editorial
Playing Chicken With Bird Flu

Bird flu has spread to several new countries in recent days, but the most worrisome by far is Nigeria. Health experts have dreaded the arrival of avian flu in Africa, a continent where the backyard chicken is everywhere and veterinary health systems are nowhere.

Nigeria has reported avian flu in several states in the country's north. But the outbreak began on Jan. 10 or earlier, and it took Nigeria 20 days to send samples to a lab that could test them. The government has announced quarantines on the affected farms, but visiting reporters say that no quarantines exist and that some of the farms have not even been visited by animal health officials. Nigeria is paying far too little for each chicken it kills; that approach ensures that farmers will hide their flocks.

Avian flu can be controlled. In the past three years, bird flu broke out in Malaysia, Korea and Japan, and all three countries eradicated it, thanks to early warning and quick action that eliminated the flu by killing only a few thousand chickens. Those countries had systems in place to test animals regularly and respond rapidly to reports of signs of danger. But there is no effective veterinary surveillance in most poor countries. Since each bird-to-human transmission gives the virus another opportunity to mutate into a form that could cause a pandemic, the health of the whole world could depend on constructing it.

Humans are often plagued by zoonotic diseases, which arise first in animals. In last few years we have had SARS and West Nile and mad cow diseases, to name a few. Avian flu is now attracting the attention and money that could help nations build up their veterinary services and control these threats.

The World Organization for Animal Health faces overwhelming challenges in improving veterinary services for these regions and controlling bird flu outbreaks. The backyard chicken, kept by hundreds of millions of people in poor countries, has more contact with wild birds and with people than its industrial cousin. The families who keep chickens have not been educated about the dangers, and barefoot children continue to play with sick poultry. Agricultural officials vaccinating poultry can spread disease as they travel from farm to farm, and chicken-killing teams may be poorly trained and easily corrupted.

A conference in Beijing in mid-January raised $1.9 billion in pledges to fight avian flu. Some of the money will go toward veterinary services, but it will be slow in coming and there are emergencies now. Rich countries should be sending platoons of veterinary experts to help Nigeria and its neighbors.

Sunday, February 19, 2006

Risk Perception

There is an interesting economics literature vaguely titled as "lulling". If New York City's Central Park is now viewed as safe, then muggings there could actually increase as more people go out for Midnight jogs during good weather.

An unintended consequence of safety regulation is that people can be "lulled" into thinking the product is safe and this leads them to reduce their own costly precautionary actions. For example, if you view medicines as "child proof" you may leave them out in front of your kids rather than hiding them. This literature has claimed that such required regulation can backfire if self protection was initially effective and if such actions are crowded out by government regulation.

The article below tells a slightly similar story. If people perceive that a city is safe, more people will move there.

Homeland Security faces some tricky tradeoffs these days of prioritizing which risks (man made like Terror or God made like storms and levee protection) to tackle first.

This article below highlights a game of chicken played by locals and the feds. If the Feds could pre-commit and say "We will not bail you out if a disaster occurs." This would give incentives to at risk cities to collect property taxes to make ex-ante investments in minimizing the impacts of natural disasters.


Development Raises Flood Risk Across U.S.

By ANDREW BRIDGES, Associated Press WriterSat Feb 18, 10:30 PM ET

Concentrated development in flood-prone parts of Missouri, California and other states has significantly raised the risk of New Orleans-style flooding as people snap up new homes even in areas recently deluged, researchers said Saturday.

Around St. Louis, where the Mississippi River lapped at the steps of the Gateway Arch during the 1993 flood, more than 14,000 acres of flood plain have been developed since then. That has reduced the region's ability to store water during future floods and potentially put more people in harm's way, said Adolphus Busch IV, a scion of the Anheuser-Busch brewing family who is chairman of the Great Rivers Habitat Alliance.

Similar development has occurred around Dallas, Kansas City, Mo., Los Angeles, Omaha, Neb., and Sacramento, Calif., said Gerald Galloway, a professor of engineering at the University of Maryland.

"The half-life of the memory of a flood is very short. You can already hear it in Washington, D.C.: New Orleans where?" Galloway said of the lack of action in the aftermath of Hurricane Katrina last summer.

The research was presented Saturday at the annual meeting of the American Association for the Advancement of Science.

In California, development in the Sacramento-San Joaquin delta, where flood control efforts first started in the mid-1800s, represents a major risks to cities such as Stockton as they expand, said Jeffrey Mount, a professor of geology at the University of California, Davis.

"We are reinventing Katrina all over again," Mount said.

Mount estimates a two-in-three probability over the next 50 years of a catastrophic levee failure in the massive delta region east of San Francisco.

Even a moderate flood could breech the delta's levee system while a larger one, perhaps following an earthquake, would inundate the region, Mount said.

The Sacramento-San Joaquin delta, which covers 738,000 acres, receives runoff from more than 40 percent of California. Much of the land is below sea level and relies on more than 1,000 miles of levees for protection against flooding, according to the California Department of Water Resources.

"In California, we know that we have two kinds of levees: Those that have failed and those that will fail," Mount said.

The lack of coordination among local, state and federal officials after a flood was evident with Katrina. Similarly, even before a storm hits, coordination on issues such as land use and development is a problem, Galloway said.

"Local land decisions later result in cries for federal help. Does that make sense? No," Galloway said, adding that the federal flood program was "rudderless."

Nor do efforts to guard against floods automatically reduce risks, said Nicholas Pinter, a professor of geology at Southern Illinois University.

Pinter said as much as 85 percent of the Mississippi in St. Louis is confined behind levees, which have raised flood levels 10 feet to 12 feet higher than they were just a century ago. That parallels the situation in New Orleans, which suffered catastrophic flooding when levees failed in the wake of Katrina.

Bolstering levees may lure more people onto flood plains, Mount said. In California, the modest investment required to shore up a levee protecting farmland can result in a dramatic increase in the value of that land, Mount said. That in turn increases the likelihood a farmer will sell out to developers, ushering in the construction of houses on what had been flood plain.

"You actually spur development. It's a self-fulfilling process," Mount said.

In the St. Louis area, there has been an estimated $2.2 billion in new construction on land that was under water in the 1993 flood, Pinter said. New Orleans probably will not be immune to that same lack of foresight, he said.

"If you want to look at what probably — unfortunately — will happen in New Orleans in the next 10 years, look at what has happened in St. Louis in the last decade," Pinter said.

The weather situation, too, may worsen, said Anthony Arguez, of the National Oceanic and Atmospheric Administration.

"As the climate warms, we expect more extreme precipitation events. That means what once might have been a 100-year flood might be a 50-year flood," Arguez said.

Norbert Schwartz, director of the mitigation division of the Federal Emergency Management Agency's Chicago office, did not dispute that there has been a "substantial" amount of construction on lands abutting levees across the United States.

But he said the national flood insurance program saves $100 billion in potential flood costs each year.

Environmental Disasters as Regulation Catalysts?

I wonder if I'm the only blogger who sometimes runs low on ideas worth posting? To fill this void, here I post the introduction of a new working paper of mine. For a low price, you will soon be able to download: "Environmental Disasters as Regulation Catalysts? The Role of Bhopal, Chernobyl, Exxon-Valdez, Love Canal, and 3 Mile Island in Shaping U.S. Environmental Law".

INTRODUCTION

Unexpected events such as environmental catastrophes capture wide public attention. Soon after such shocks, new regulation is often enacted. For example, the famous 1969 fire on Cuyahoga River in Cleveland began when sparks from a train ignited debris that was floating in a slick of oil and chemicals. Three years after this fire, the Clean Water Act was passed.

Do such events cause new regulation? Such environmental shocks often have a catalytic effect of generating massive media coverage that galvanizes the public. Kuran and Sunstein (1999) provide a compelling case study of the media “snowball” surrounding toxic waste dumped at Love Canal.

“A kind of cascade effect occurred, and hence in the period between August and October, 1978, the national news was saturated with stories of the risks to citizens near Love Canal. The publicity continued in 1979 and 1980, the crucial years for Superfund’s enactment. There can be no doubt that the Love Canal publicity was pivotal to the law’s passage in 1980. In that year, Time magazine made the topic a cover story, and network documentaries followed suit. Polls showed that eighty percent of Americans favored prompt federal action to identify and clean up potentially hazardous abandoned waste sites. Congress responded quickly with the new statute (Kuran and Sunstein 1999).”

This paper seeks to test this catalyst hypothesis with a focus on environmental shocks. I first document that five major environmental shocks, 3 Mile Island, Chernobyl, Bhopal, Love Canal and the Exxon Valdez oil spill, received extensive media attention after the events took place. I then examine how such media attention might affect the pressure group competition between interest groups (Olson 1965). I argue that salient events can mitigate the free rider problem among diffused consumer groups by galvanizing this group. Environmental shocks may shift the “balance of power” encouraging environmental interest groups and their Congressional Representatives to push for more aggressive environmental regulation.

Using a panel data set on Representative voting on 371 major environmental bills over the years 1973 to 2002, this paper examines Congressional Representatives’ voting patterns on environmental legislation before and after these five catalytic events. This paper’s empirical contribution is to conduct an event study to see whether individual Representatives are “shocked” by environmental disasters to increase their probability of voting the pro-environment position on environmental legislation. The fundamental empirical challenge is to construct credible counter-factuals. How would Congress have voted had the five disasters not taken place? What legislation would have been voted on?

My empirical approach relies on the panel nature of my data set. I observe the same Representatives’ voting patterns in years when disasters did and did not occur and voting on issues directly related and unrelated to these disasters.
I report evidence that representatives are less likely to vote the pro-environment position on legislation tied to catalytic events. I argue that this counter-intuitive finding is generated by selection in the bill generation process. In the aftermath of catalytic events, environmental interest groups pursue more ambitious legislation because they sense that the public cares about this issue.
I document a significant degree of heterogeneity with respect to the catalytic voting effect. Three Mile Island, Love Canal and Bhopal are events where I find evidence of a positive catalytic effect on pro-environment voting propensities for many different types of Representatives. I also document significant voting heterogeneity with respect to observable attributes of Representatives. Liberal Northeastern Democrats who receive a small share of campaign corporations from corporations are the most likely to increase their propensity to vote pro-green in the aftermath of these environmental disasters. Republicans sharply reduce their pro-environment support. Thus, these events appear to polarize rather than unify the Congress in its formation of environmental law.

This paper builds on the environmental literature that has examined the determinants and timing of when new regulations are adopted. Typically, environmental economists have focused on per-capita income as a key force (Seldon and Song 1995, Grossman and Krueger 1995, Dasgputa et. al 2001). This paper also contributes to the recent literature on the role played by the media in determining economic outcomes (Gentzkow and Shapiro 2006, Hamilton 2004, DellaVigna and Kaplan 2005, Eisensee and Stromberg 2005, Mullainathan and Shleifer 2005).

Saturday, February 18, 2006

The Curse of Natural Resources?

An interesting economics debate has asked whether a nation's endowment of natural resources is a "curse" or a "blessing" for economic development? Jeff Sachs has argued that in South America nations endowed with a lot of oil and other natural resources experience slower economic growth. Gavin Wright's historical examination of the United States (a nation with a lot of natural resources) convinces him that Sach's thesis does not generalize. Wright argues that it takes physical and human capital to access the natural capital.

What is the causal story? If human capital and good institutions are the key to economic development, how can oil "get in the way"? While you could imagine that a Saudi Arabia could use its natural resources to build its own Harvard and transition into sustainable development, we do not observe such OPEC nations making such investments. Instead, the cliche is that such nations morph into "vampire states". Thousands of political insiders accumulate the natural resource wealth and do not work while the vast majority of the nation lives in poverty. As long as there is oil, this is an equilibrium.

In this New York Times article below, the story in Chad is even worse as the government uses its oil revenue to fight wars.

While we have bankruptcy law for companies, we do not have similar laws for "broken" nations. Who decides whether another nation's government is disfunctional?


February 18, 2006
Chad's Oil Riches, Meant for Poor, Are Diverted
By LYDIA POLGREEN and CELIA W. DUGGER

NDJAMENA, Chad, Feb. 11 — Students from the Institute of Mongo have everything they need to learn: desks, computers, professors, notebooks and inquisitive minds.

The only thing missing is the school itself. Their country's newfound oil wealth is supposed to build it in their hometown, about 275 miles east of here, but after three years it is still not ready. So they study in borrowed classrooms here in the dusty capital.

"It's a long time we wait, but this is Chad," said Abdelraman Choua, 22, a computer science major from Mongo. "We are always waiting."

Such is reality under a World Bank-supported program that was supposed to harness this impoverished African nation's oil wealth for the benefit of its poorest citizens. A $4.2 billion oil pipeline has generated $399 million for Chad since mid-2004, but the spending of the money has been seriously marred by mismanagement, graft and, most recently, the government's decision that a hefty share can be used to fight a rebellion.

And now the approach, once envisioned as a model for the development of other African countries, seems to be on the verge of collapse. In recent weeks, Chad seriously weakened a law that dedicated most of its oil revenue to reducing poverty and reneged on its deal with the World Bank. In response, the bank suspended all its loans to the country.

What is happening in Chad, a Central African country twice the size of France, is an important test of the idea that international institutions like the World Bank can influence governments of poor countries to spend newly tapped riches on their people instead of using the money to further entrench themselves in power.

The proposition is particularly challenging as oil prices surge, because now nations like Chad can attract investors who make few or no demands on how the profits are spent.

High-level talks in Paris to resolve the crisis with Chad ended inconclusively this month, though World Bank officials still hope for a settlement that preserves the government's promise to use its oil money to build schools, clinics and roads rather than to support an army that has recently experienced a rash of defections among rebellious officers.

As a rising tide of oil money flows to poor African countries in the coming years, the bank will have little choice but to grapple with its role.

"It's not clear at all how to get your hands around it," said Paul D. Wolfowitz, who became president of the bank last summer. "But I think to stand back and say the whole thing is a dirty business and we in the World Bank don't want to have anything to do with it is very shortsighted."

Africa is in the midst of an oil boom, with countries that have already struck oil aiming to double production by the end of the decade.

Billions of dollars have been invested in new production capacity, much of it to feed a thirsty American market. The United States already gets about 18 percent of its oil from sub-Saharan Africa, a share that will rise in coming years and could outpace imports from the Persian Gulf, experts say.

But the United States also faces fierce competition for Africa's oil from countries like China, Taiwan, India and Malaysia.

From Angola to Nigeria, Gabon to Sudan, riches from oil have often ended up in the pockets of the ruling elite, inciting conflict over the spoils. In Congo, the off-again-on-again fight over a very similar issue, that vast country's mineral riches, has killed four million people, more than any conflict since World War II. Most died of disease and hunger as wars over diamond and copper mines raged.

Chad has been ranked with Bangladesh at the world's two most corrupt countries by the corruption watchdog Transparency International. The hope that Chad would chart a more humane path fractured when its Parliament voted recently to soften the oil revenue law, allowing the money to be diverted.

"We have our backs against the wall," said Hourmadji Moussa Doumgor, Chad's minister of communications, explaining that the nation was out of money and facing a rebellion from former soldiers seeking to overthrow President Idriss Déby. "We have lived without oil in the past, and we are prepared to do it again to preserve our dignity. And there are other partners we can pursue."

That Chad's government faces a crisis is beyond doubt. Civil servants went on strike for weeks when their salaries were not paid for several months, and retired people have not received their benefits since 2004. The ailing Mr. Déby, president since 1990, is facing an armed rebellion in the east of the country. Some experts say he may believe that he needs money now to buy weapons and the loyalty of restive military officers.

The crisis in Darfur, the region of neighboring Sudan that borders Chad, has also put enormous pressure on Chad, which is now host to 200,000 Sudanese refugees. Complicating matters, Chad and Sudan have accused each other of supporting rebels on each other's soil.

Chad has demanded that the consortium led by Exxon Mobil that built the pipeline begin depositing the oil royalties directly in the country's central bank rather than an account designated in its agreement with the World Bank. Chadian officials said they were prepared to "close the faucets" of the oil pipeline if no settlement was reached.

Exxon, responding to written questions, said only that it hoped that the bank and Chad could address Chad's financial distress while preserving the poverty-reduction framework.

The Exxon-led consortium was willing to build the 665-mile pipeline from landlocked Chad to the sea only with the World Bank's backing, said Rashad Kaldany, director of oil, gas and mining for the bank and its private investment agency, the International Finance Corporation. With Chad's history of civil war, ethnic strife and corruption, its oil lay untapped for decades because no one was willing to put capital at risk here.

In 2000, the bank approved the project and lent Chad $37 million for its stake in the pipeline, while its finance agency lent the companies building the pipeline $100 million. Their support was conditioned on Chad's commitment to adopting a law requiring that most of the oil revenue go to poverty alleviation.

The royalties were to be deposited in an offshore account, and an independent oversight committee was to vet, approve and monitor all spending.

But once the oil revenues began to flow into the government's coffers in 2004, the model program quickly ran into trouble.

"This project could not survive contact with the reality of Chad," said Gilbert Maoundonodji, who runs a Chadian nonprofit group that investigates petroleum spending in the country. "It is the most corrupt country in the world."

The oversight group officially charged with monitoring the oil spending laid out a damning catalog of malfeasance and bungling last May, from overspending on office equipment to bungling or abandoning entire public works projects.

In the town of Moïssala, a water tower was approved, and an advance of $360,000 paid to the builder. But when monitors checked its progress, they found no water tower, and no one in the local government had ever heard of the project.

Many of the wells that were supposed to be dug in rural areas were still unfinished, while others were dug, but not deeply enough. The builders filled them with water from a cistern to try to fool the inspectors, said Thérèse Mekombe, vice president of the oversight panel.

The group found that the Ministry of Higher Education had bought a computer for $5,300, a secretary's chair for $3,600 and scooters that should have cost $1,000 for triple the price. Companies that won contracts to make desks for schools used scrap wood, producing desks with bucked legs and tops.

The Ministry of Health commissioned a clinic in the town of Bierre, but the builder abandoned the site with no explanation.

The largest amount of money — $51 million through last year — has been devoted to public works, mainly roads. Of that, $48 million has been assigned to a partnership formed between a foreign construction company and a company led by President Déby's brother, Daoussa Déby, according to the oversight committee.

Government officials say Daoussa Déby's company won contracts though competitive bidding and got so much of the work because few companies have the capacity to complete big projects. Asked about the propriety of a member of the president's family receiving so much money, Mr. Doumgor, the government spokesman, shrugged.

"This is universal," he said. "The ones who have the big fortune, all the money, are those in power. I don't say it's right, but it is the same in every country."

The panel's findings toughened the World Bank's reaction to Chad's insistence that it needed to change the law regulating how it spent the oil money, said Ali Khadr, the bank's director for Chad.

The bank told Chadian officials it was willing to consider amendments to the law, but first wanted Chad to explain its deepening fiscal woes. "They kept saying to us: 'No, no, no, there's no time for that. You're either with us or against us,' " Mr. Khadr said.

Members of the oversight committee and outside watchdog groups say the bank did not do enough to ensure that the monitors had adequate resources.

Mr. Khadr disagreed. For its first three years, the bank and its International Finance Corporation provided $1.3 million to support the oversight committee's operations. The publication of its critical report was itself "pretty good evidence that its capacity, if not ideal, is at least adequate," he said.

But Ms. Mekombe of the oversight committee said that even when the monitors documented problems, their recommendations were often ignored, while officials and companies cited as corrupt were never investigated by the government. "All the work we have done, all the sacrifices we have made, sometimes I think it is all for nothing," she said.

Critics say the bank moved too hastily to move the project to completion before this unstable, corrupt and autocratically-governed country was ready for it. Though aware of the risks, bank managers said they felt that other investors with no stake in poverty reduction would eventually build the pipeline anyway.

Mr. Kaldany, the bank's International Finance Corporation official, pointed out that another oil project just over the border in Sudan had been undertaken by a consortium led by China with no controls on how the government spends the money.

Indeed, as oil prices have soared, even difficult-to-reach fields with low-quality oil like Chad's have become attractive to investors. And as flawed as the reality of Chad's experiment has been, even some of its fiercest critics say they are glad the World Bank is here.

"Without the World Bank, we would be in an even bigger disaster," said Boukinebe Garka, a labor union leader. "Someone else would have built the pipeline, and then we would be in the same situation as Angola or Sudan. At least now we have some control, even if it is not perfect or even very good. It is a start."

Lydia Polgreen reported from Ndjamena for this article, and Celia W. Dugger from Washington.

Friday, February 17, 2006

Are Great Economists Great Leaders?

We teach comparative advantage in all of our courses but do we believe that it applies in our own lives? If ability were truly one dimensional, then the best economists would be the best chess players, the best cooks and the best University Presidents. In recent years, Jim Heckman has devoted considerable research (see http://www.nber.org/papers/w12006) on this topic. It builds on his re-examination of Charles Murray's Bell Curve. How are skills formed? How do people self select what field to work in given their skills and emotional talents?

All economists start out the same way. When we receive our PHD and land a first academic job, we seek to publish our research and teach. As economists age, they branch out. Some consult for the private sector. Some consult for the public sector (i.e go to Washington). Some become Deans. An elite few become media celebs such as Sachs and Krugman.

The Presidents of Yale and Harvard are both distinguished economists. While Yale is never in the news, people have told me that Dr. Levin is succeeding there. Why? In what settings will an economist succeed as President? Harvard and Yale are roughly comparable schools. Their presidents are roughly equal in raw IQ (I guess). Given these similarities, why are the outcomes so different?

My conjecture is that "soft skills", people skills, is vastly under-estimated by nerds (perhaps because we don't have them) as a valuable asset in navigating through one's life.


Summers' Backers Worry He May Leave
Pinker: President should defend himself—or “let’s just get a namby-pamby”
Published On 2/17/2006 5:16:47 AM
By ANTON S. TROIANOVSKI
Crimson Staff Writer

“No nation, no matter how strong, can stand alone in the world without friends and without allies,” Lawrence H. Summers told the Chicago Economic Club in October 2003.

Could the same be said of a University president?

At the most vulnerable juncture of his half-decade at Harvard’s helm, Summers now faces a fuming Faculty with few vocal supporters by his side.

And many of his longtime allies are expressing disaffection with what they see as the president’s ineffective leadership.

“If he’s going to be like every other college president—just a caretaker, fundraiser, and a mouther of platitudes—then why do we need someone who’s also going to offend people?” said psychologist Steven Pinker, who was one of Summers’ most prominent supporters last year.

“If all he’s going to do is roll over and let the Faculty do business as usual,” Pinker continued, “then let’s just get a namby-pamby like all the other university presidents.”

In the meantime, the six people who hold the key to Summers’ fate have stayed mum in the midst of the crisis. Last year, the Harvard Corporation, the governing board with exclusive power to fire the president, released two statements in support of Summers.

But on Wednesday, Corporation member James F. Rothenberg ’68, the University treasurer, declined to say whether the board still has confidence in the president.

“I can’t comment on that,” Rothenberg said, during an interview about a $50 million fund for Harvard faculty that he helped develop. “When the Corporation wants to communicate with The Crimson about that topic, it will.”

With the Corporation still silent, Summers’ supporters fear that the president’s critics on the Faculty might be successful in unseating him this time around.

Professor of Economics Edward L. Glaeser, another prominent Summers backer, said, “I lose sleep over this—that is a true fact.”

He said that the anti-Summers camp is “very strong” and “very dedicated.”

“I’m not in any sense impugning their motives,” Glaeser said. “On some intellectual level, I certainly believe that they’re wrong. But I have enormous respect for them as people.”

“And when you have so many smart people rail against you who are so committed, you’ve got to be worried,” Glaeser said.

‘NOT MAKING ANYONE HAPPY’

Summers’ problem, as many of his supporters see it, is that he has tried, unsuccessfully, to appease his critics—and in doing so, alienated his proponents.

“I think the problem now is he’s not making anyone happy,” said Pinker, the Johnstone Family professor of psychology. “He’s made his critics think he’s weak, and made it a little harder for his supporters to find anything to support.”

Pinker’s comments were striking because the psychologist had been so outspoken in his support of Summers during the thick of last winter’s women-in-science storm. In a late January 2005 interview with The New York Times, for example, Pinker hailed Summers as a “refreshing” change from past presidents.

But asked on Wednesday whether he still had confidence in Summers, Pinker hesitated, then qualified his response.

“Yeah, but—I’d like to see a little more positive leadership,” Pinker said.

Another well-known Summers supporter, Kenan Professor of Government Harvey C. Mansfield ’53, also said he wanted the president to respond forcefully to his opponents.

“He needs to start defending himself,” Mansfield said, “and to answer and refute his miserable critics.”

Summers now faces the daunting task of galvanizing his backers without further antagonizing his foes.

Professor of Public Service David R. Gergen, who advised four U.S. presidents and also counseled Summers during last year’s crisis, said, “My sense is that there are significant reservoirs of support for him around the University.”

“What I don’t know is how well they will come together in coming days,” Gergen said.

Glaeser likewise expressed doubts about the solidarity of the pro-Summers camp. “There are less people who are in a very strong, emotional, ready-to-fight-for-Summers place, and that’s a bit of a cost of moving hard to placate your opponents,” Glaeser said.

Summers, of course, would be hard-pressed to listen to his supporters and reassert forceful control over the University without angering his detractors even more.

“If he would go that route, I think he’d have an even more rebellious faculty on his hands,” according to James T. Kloppenberg, the Kemper professor of American history.

Finding a middle ground might now be the president’s ultimate challenge-—an impossible one, say some professors from both camps.

“I don’t think that there is a conciliation option right now,” Glaeser said.

SILENCE AT THE TOP

With the Faculty and the president at an apparent stalemate, Summers’ supporters this week echoed some of his critics in saying that only the silent and secretive Corporation could defuse the current crisis.

Last spring, the Corporation released two statements affirming its confidence in Summers—one on the day the president released the transcript of his remarks on women in science, and a second statement just hours after the Faculty voted a lack of confidence in him last March 14.

The Corporation has yet to make any sort of statement regarding this month’s firestorm. But Glaeser said the board must go beyond issuing press releases.

“What I’m actually looking for is Mr. Houghton to actually attend a Faculty meeting and make it clear what the rules are going forward,” Glaeser said, referring to James R. Houghton ’58, the Corporation’s senior fellow.

“Because, clearly, the University is not entirely well,” Glaeser continued. “It clearly needs a degree of institutional support that, I think, Summers on his own doesn’t have.”

And Pinker, while saying he wasn’t sure if the Corporation should take any public steps, said he hoped the board would, at least, intervene privately with the president.

“I would like them to give some guidance to Summers and to say, ‘Things aren’t going well. You’ve got to either bring back some leadership and make sure that trains run on time and start new initiatives that you originally wanted to bring—or else get out of the way,’” Pinker said.

Mansfield, too, said an intervention by the Corporation is the only way out of the crisis—but that Summers must speak up, as well.

“For him to stay in office, the Corporation needs to stand behind him,” Mansfield said. “I think they should do so in chorus with President Summers himself.”

‘RULE BY THE MOB’

Many of the president’s backers said they were surprised by the strength of anti-Summers sentiment at the Feb. 7 Faculty meeting—which may explain why so many of his strongest supporters were absent from the session.

“I mean, this was like someone having a heart attack,” said Lee Professor of Economics Claudia Goldin. “This was not like the patient had diabetes and we knew there was a problem.”

Allison Professor of Economics Lawrence F. Katz, like Goldin and others, called on the president’s critics to lay out their specific concerns.

“People are somewhat befuddled and bewildered by the current responses,” Katz said.

During last year’s crisis, Goldin said, people had “real gripes”—“I would talk to them and try to understand it.”

Those gripes, Goldin said, included specific incidents involving Summers and Faculty members. For instance, “‘I met him at this thing and he didn’t say hello.’ Or, ‘he didn’t shake my hand,’ or, ‘his underwear was showing,’” she recounted.

But Goldin said she didn’t understand the cause of the current crisis because she saw professors blaming Summers for the problems of outgoing Dean William C. Kirby’s Faculty of Arts and Sciences (FAS).

Asked what she thought of the “paralysis” of the Faculty that some professors cited at last week’s meeting, Goldin replied: “A paralysis of what, of FAS? That’s the dean’s fault, not Larry’s fault.”

“This is rule by the mob,” she added.

That “mob” might not reign at all of Harvard’s schools, though.

Alan M. Dershowitz—the Frankfurter professor of law who went on ABC’s “Nightline” last year to defend Summers—noted, like many of the president’s supporters, that FAS is just a part of Summers’ constituency.

“I think he has very widespread support around the Law School,” Dershowitz said. “I think a lot of people at the Law School think of Arts and Sciences as unrepresentative of the faculty of Harvard University in general.”

Dershowitz, who is among those who view the fight over Summers’ presidency as one about intellectual freedom, said he will teach a course at the Law School next year inspired by Summers’ tenure.

It will be called “Taboo.”

—Javier C. Hernandez contributed to the reporting of this story.

—Staff writer Anton S. Troianovski can be reached at atroian@fas.harvard.edu.

http://www.thecrimson.com/article.aspx?ref=511391

Tuesday, February 14, 2006

The New York Times has a Harvard Fixation

Harvard is a great University. I taught there from 1996 to 1998 and I was married in its Faculty Club. That said, the world spends too much time thinking about this place. I asked my father why the New York Times devotes so much ink on this one joint. He said: "Everyone has either gone there or been rejected by them." I hope that Larry Summers enjoys seeing his name in the New York Times. I sometimes wonder whether if the Presidents of Princeton or Stanford lit themselves on fire would this merit a mention in the Times?

You tell me, is this a newsworthy article? I do like Ed Glaeser's quote at the end of the piece.

February 14, 2006
Harvard's President Is Again at Odds With His Faculty
By ALAN FINDER

CAMBRIDGE, MASS., Feb. 13 — A year after weathering a no-confidence vote by the faculty, Harvard University's president, Lawrence H. Summers, is facing another showdown with dissident faculty members, raising new questions about his ability to maintain control over the university and perhaps even to remain in office.

The latest conflict was set off by the abrupt announcement late last month that William C. Kirby, the dean of the Faculty of Arts and Science, the university's largest school, would step down in the summer. The arts and science faculty has scheduled a vote on Feb. 28 on a new resolution of no-confidence in Mr. Summers.

"I believe that the business of the university has been seriously compromised by this bad leadership and it has become evident to a lot of people on campus," Mary C. Waters, a sociology professor, said in an e-mail message.

Mr. Kirby, a professor of Chinese history, has said the decision to relinquish his post was reached mutually with Mr. Summers, but many professors say they view it as a forced resignation, particularly because The Harvard Crimson, the student daily newspaper, quoted unidentified university officials as saying Mr. Summers had pushed out Mr. Kirby.

Professors are now demanding a significant role in the selection of a new dean, a decision that is ordinarily the province of the president and the six other members of Harvard's governing board. Mr. Summers has already agreed to give the faculty a bigger role than it has played previously, but some professors have begun calling for his removal from the process altogether.

Some faculty members also say they would like the university's governing board, the Harvard Corporation, to force Mr. Summers to resign. Some professors have begun talking about adding a vote calling for Mr. Summers's removal to the Feb. 28 agenda, along with the no-confidence resolution.

"Is it not time to reverse this tide of chaos and dysfunction, to appoint an acting president, and to allow a new presidential search to be initiated?" Farish A. Jenkins Jr., a professor of biology, recounted telling Mr. Summers at a closed faculty meeting last week.

Mr. Summers has declined to comment, and it is not clear where the board stands. Several members did not return phone calls seeking comment. Mr. Kirby, who will remain a Harvard professor, declined Monday to discuss his relationship with the president or the circumstances of his resignation.

He spoke instead about ways he said the arts and science had improved in his four-year tenure. "We've overseen a period of faculty growth in the last four years larger than the growth we've had in the last 40," Mr. Kirby said.

Mr. Summers's critics said the anger unleashed by Mr. Kirby's pending departure was comparable to the uproar last winter over the president's suggestion that women's "intrinsic aptitude" might contribute to their low number in science and engineering.

At the extraordinary meeting of the Faculty of Arts and Science last week, about a dozen professors, including at least one department chairman, spoke bluntly to Mr. Summers for an hour about their deep reservations over how he ran the university. Several suggested that it was time for him to step down.

They cited deficits in the budget of the Faculty of Arts and Science; what they described as a slowdown in the hiring of new faculty members in disciplines not favored by Mr. Summers; the departure of a number of senior administrators; and a $26.5 million settlement by Harvard of a civil suit filed by federal prosecutors that involved investments by a Harvard economics professor, a friend of Mr. Summers, who was working on a federal contract to help privatize Russia's economy.

No one stood up to defend the president, although he still appears to have considerable support among some segments of the faculty.

This latest debate comes after a relatively quiet fall semester. Mr. Summers survived the controversy that roiled the university last year, despite the no-confidence vote by the Faculty of Arts and Science in March, which passed 218 to 185. The governing board has continued to back Mr. Summers.

Mr. Summers embraced a series of recommendations made in May by two committees he appointed on how Harvard could better recruit, support and promote women for the faculty, especially in science and engineering. He appointed several of his most public critics within the faculty to senior positions. And he apologized repeatedly for his remarks about women in science.

Some of the president's supporters said his critics were now emboldened precisely because he sought accommodation last spring.

"I think they feel that he is more and more vulnerable, because when he was attacked, he did not defend himself," said Ruth R. Wisse, a professor of Yiddish and comparative literature. "I think that this is a posse looking for excuses to lasso its target."

The Crimson has twice written editorials in the last week chiding the faculty as allowing grievances with Mr. Summers to distract from what it said were more important matters, like revising the curriculum.

The newspaper came strongly to the president's defense in an editorial Monday, saying he had done nothing conspicuously wrong, as it says he did a year ago in his comments on women and science, and did not warrant another vote of no-confidence. "The time has come to move past the melodrama that plagued last year," the editorial said. "Summers has done his part; faculty members must do theirs."

Professors who support Mr. Summers say he has been moving Harvard forward.

"I think he's been a terrific president," said Edward L. Glaeser, an economics professor. "There's no question that he's made some mistakes, but governing Harvard is very difficult."

Dr. Glaeser added, "The idea of tossing the president out of the dean selection process strikes me as a really dangerous break from Harvard tradition."

Several supporters said the attacks on Mr. Summers had their root in political differences.

"These people are mostly the feminist left and its sympathizers," Harvey Mansfield, a professor of government, said of the president's detractors. "They fear that affirmative action will be abolished or diminished. They want more diversity, which means, paradoxically, more people like themselves. They want to run the university, and I think that Larry Summers wants to take it in a different direction."

Many professors, though, continue to chafe under Mr. Summers, saying he has not altered his abrasive personal style or brought order to the university. "The faculty didn't have the sense that the president had really turned the situation around," said Everett Mendelsohn, a professor of the history of science.

Judith L. Ryan, a professor of German and comparative literature, who introduced the no-confidence resolution, said, "He's a superb economist, but he has less experience in other fields." Ms. Ryan added: "And we're troubled by that. And we're troubled by his emphasis on subjects that are of interest to him."

Jonathan D. Glater contributed reporting from New York for this article.

Monday, February 13, 2006

Rent Control in NYC and Rent Hikes

Randy Crane of UCLA has started up a new urban planning blog (see http://planningresearch.blogspot.com/ ). It is quite thought provoking.

Today Columbia University's student newspaper has a piece that hints at the endowment effect. If you live in a NYC rent control apartment, how much should your landlord be allowed to raise your rent each year? The article hints that the incumbents have a "constitutional right" to stay in their apartment regardless of market signals and opportunity cost. The endowment effect must be very strong here!

The New York City housing market is very strange featuring this mixture of expensive free market apartments and this substantial share of rent controlled housing units. Does any other city in the USA have such a mixed system? Perhaps San Francisco? Do any cities featuring significant % of Republicans living in the city feature such free market aversion?

When I lived in NYC, it looked to me that there were a lot of rich people living in rent control apartments. These savvy people knew how to play the system to get what they wanted. Somehow I find the free market "fairer" as we are all charged the same equilibrium price.



Rent Limits Upped
New State-Imposed Ceiling Will Allow 8.2 Percent Hike

By Lauren Hovel
Spectator Staff Writer

February 13, 2006

Tenants in rent-controlled units in New York City may soon be subject to a rent increase of 7.5 percent.

The change comes under a state system intended to make rents reflect fluctuations in buildings’ operating costs, which some tenants feel is outdated and unfair.

Rent increase for rent-controlled units occur under a Maximum Base Rent program regulated by the Department of Housing and Community Renewal. Under the rent-control system, each apartment has an MBR which the state raises every two years. In 2006-2007, the law calls for an MBR increase of 8.2 percent allowing landlords to raise rents 7.5 percent.

“The system of rent increases is arcane and fundamentally unfair,” said Jenny Laurie, a representative of Met Council on Housing, a tenants’ rights organization. “The MBR is based on a formula set in the late ’60s and early ’70s, which is completely out of sync with today’s housing market.”

Currently, rent control applies to any apartment in a building constructed prior to 1947 and in which its tenants have lived continuously since 1971 or before. The city’s rent-controlled tenants are an average age of 70 years and earn an average income of 20,000 dollars a year.

“It’s a population that cannot afford a 7.5 percent increase a year,” Laurie said. According to Laurie, for the average tenant on rent control, over 30 percent of income is spent on rent.

“Once our rent reaches a certain amount, the rent control will no longer apply, so the 7.5-percent increase will make our rent-control disappear much more quickly,” said Jessica Robertson, BC ’07, who lives in an apartment on the Upper West Side that her grandparents bought in 1956. “It makes the time limit on how long I can pay a rent that is a reasonable price a lot shorter.”

A public hearing will be held on Mar. 10 to evaluate the acceptability of the proposed MBR. A state official who asked not to be named said the 8.2 percent is not set in stone and could be changed at the hearing. However, Laurie said the MBR is not likely to change, since it is established by a formula embedded in law.

“The 8.2 percent will probably be the final guideline, but there are things people can say [at the hearing] that may make a difference for future lawsuits,” Laurie said. “State officials will be there, so people who come and complain will be heard. They can make general complaints about how the system is run or how the agency manages the system.”

According to the DHCR’s Web site, the MBR reflects changes in real estate taxes, water and sewer charges, and maintenance costs. Many rent-control tenants also pay a fuel fee of 10 to 50 dollars per month if their landlords use oil to heat the building.

Tenants can contest a rent increase if their landlords are not providing essential services or if the building has serious violations by contacting the DHCR. Only about 60,000 apartments are on the rent-control system, as rent-control no longer applies to units when tenants move. Most apartments with rent regulation in New York City are rent-stabilized and are not on the MBR system.

Saturday, February 11, 2006

what is the best new work in economics?

It seems to me that the economics profession is dividing. This isn't the old "Keynesian/neo-classical macro divide". Smart people will disagree over what is the "best new work" depending on whether they are structural or reduced form researchers, behavioral or neo-classical researchers, and whether they do non-experimental or experimental applied work.

If I told the senior faculty of the University of Minnesota that they could hire any of Harvard's economics department 30 tenured faculty for $125,000 each, how many would they poach? My humble guess is that they would grab 3 of the 30. My point is that when we think about the "best" that implies that we agree on a single vertical ranking. Mike Tyson was the best boxer. Kasparov was the best chess player. Smart economists would differ sharply in how they rank their fellow economists.

Why is the profession dividing? I don't think there is a "core question" that everyone is focusing on. After the Great Depression, this event "focused" the best minds on why it happened and what government could and could not do to mitigate its effects. Today, Top researchers such as Levitt and Glaeser work on a wide variety of topics rather than narrowly focusing on being the world's leading specialist on x.

When I think about what excites me about modern economics, I would place high:

1. The last Clark Medalist's work on endogenous institutions. It does amaze me that we have so few data points for testing such important hypotheses. There is a fine line between a case study and a convincing two stage least squares study!

2. field experiments in settings where real people are making important life decisions

3. empirical non-market social interaction papers

4. structural estimation of games --- these papers are hard to read but empirical game theory must play a key role in the future of economics

5. Heckman's ongoing research on heterogeneity and sorting

6. research on the media's role in the economy

7. in environmental economics, the induced innovation hypothesis

http://www.marginalrevolution.com/marginalrevolution/2006/02/table_talk.html

Thursday, February 09, 2006

Cancer Death Trends as Evidence of Environmental Progress?

The death rate from cancer has been declining over time. Despite population aging, the actual count of cancer deaths has declined! Is this evidence of environmental progress? If "new toxics" were poisoning us would we see such absolute progress in an aging society? This Times article highlights the behavioral changes and improvements in health care that have played key roles in bringing about this progress. I would like to see a simple statistical study that documents time trends in death rates from cancers that might have an environmental component (such as lung cancer) with the timet rend in death rates for cancers known to not have an environmental component.

February 9, 2006
Dip in Cancer Deaths Is Reported, First Decline in U.S. in 70 Years
By DENISE GRADY

The number of cancer deaths in the United States has dropped slightly, the first decline in more than 70 years, the American Cancer Society is reporting today.

Much of the decrease is because of a decline in smoking and improved detection and treatment of breast, colorectal and prostate cancers, according to the society.

The decline occurred in 2003, the latest year for which figures are available. There were 556,902 cancer deaths, 369 fewer than in 2002. Deaths fell in men by 778, but rose by 409 in women.

"Even though it's a small number, it's a notable milestone," said Dr. Michael Thun, head of epidemiological research for the society.

Dr. Thun (pronounced tune) said the death rate from cancer had been falling by slightly less than 1 percent a year since 1991, but even so, the actual number of deaths kept rising because the population was growing and aging.

"The decrease from 2002 to 2003 means that the decline in death rates had become sufficiently large that it was bigger than the aging and growth of the population," Dr. Thun said.

"You would predict this is a trend that may have a few bumps but will continue," he said.

Dr. Robert A. Hiatt, deputy director of the Comprehensive Cancer Center at the University of California, San Francisco, said, "From the beginning of the century it's been going up and up and up, and this is the first time we've turned the corner."

Elizabeth Holly, a professor of epidemiology and biostatistics at the University of California, San Francisco, said, "It's quite good we've made some progress in our advance against cancer, but what it really is reflecting, fortunately, is a change in personal smoking habits and early detection and treatment in prostate, colorectal and breast cancer."

Tobacco still accounts for 30 percent of cancer deaths, she said, and death rates from smoking are not decreasing in women as they are in men, because women began to quit smoking later than did men.

Dr. Holly added a note of caution. "We still have some real tragedies and very substantial national failures," she said, noting that the five-year survival rate for pancreatic cancer is less than 4 percent and that African-Americans with prostate cancer have twice the death rate of other groups.

In addition, Dr. Holly said, increases in obesity could lead to increased cancer rates.

Tuesday, February 07, 2006

Negative Externalities Caused by Sleeping Pills?

The New York Times reports a "behavioral" story about excess intake of sleeping medication. What is the optimal amount of sleep for people to get each night such that they are safe drivers and reasonable people when you interact with them? For people who are unable to achieve this optimal level "naturally", what are the private and social costs of taking these pills?

The article hints at Knightian uncertainty that we don't know of all of the side effects from this medication. The good news is that if all of these people are taking this medication, then we should know soon what the side effects are.


February 7, 2006
Record Sales of Sleeping Pills Are Causing Worries
By STEPHANIE SAUL

Americans are taking sleeping pills like never before, fueled by frenetic workdays that do not go gently into a great night's sleep, and lulled by a surge of consumer advertising that promises safe slumber with minimal side effects.

About 42 million sleeping pill prescriptions were filled last year, according to the research company IMS Health, up nearly 60 percent since 2000.

But some experts worry that the drugs are being oversubscribed without enough regard to known, if rare, side effects or the implications of long-term use. And they fear doctors may be ignoring other conditions, like depression, that might be the cause of sleeplessness.

Although the newer drugs are not believed to carry the same risk of dependence as older ones like barbiturates, some researchers have reported what is called the "next day" effect, a continued sleepiness hours after awakening from a drug-induced slumber.

Ten percent of Americans report that they regularly struggle to fall asleep or to stay asleep throughout the night. And more and more are turning to a new generation of sleep aids like Ambien, the best seller, and its competitor, Lunesta. Experts acknowledge that insomnia has become a cultural benchmark — a side effect of an overworked, overwrought society.

"Clearly, there's a significant increase in people who report insomnia and, from my perspective, that is the result of our modern-day lifestyle," said Dr. Gregg D. Jacobs, a psychologist and assistant professor of psychiatry at Harvard. Or at least that is an impression that drug makers are clearly trying to capitalize on, he said.

And that concerns him and some other researchers who warn that despite their advertised safety, the new generation of sleep aids can sometimes cause strange side effects.

The reported problems include sleepwalking and short-term amnesia. Steven Wells, a lawyer in Buffalo, said he started using Ambien last year because his racing mind kept him awake at night. But he quit after only one month, concerned about several episodes in which he woke up to find he had messily raided the refrigerator and, finally, an incident in which he tore a towel rack out of a wall.

"The weird thing was that I had no recollection of it the next day," said Mr. Wells, who added that he found the episodes frightening.

Ambien's maker, Sanofi-Aventis, said the drug had been used for 12 billion nights of patient therapy. "When Ambien is taken as prescribed, it's a safe and effective treatment," said Emmy Tsui, a company spokeswoman.

A Food and Drug Administration spokeswoman, Susan Cruzan, said she was not aware of an unusual number of complaints with the drugs.

Drug makers spent $298 million in the first 11 months of 2005 to convince consumers that the sleep aids are safe and effective. That was more than four times such ad spending in all of 2004.

In the last year, much of the advertising surge has been a result of competition from Lunesta, which the drug maker Sepracor introduced last April to compete with Ambien. Through November, Sepracor led the sleeping pill advertising field, spending more than $185 million, according to figures from TNS Media Intelligence, which did not have final figures for December.

In response, Sanofi-Aventis, marketing both Ambien and its controlled-release version, Ambien CR, spent $107 million from last January through November, according to TNS. That was nearly double its ad spending on Ambien in 2004.

Even the most infrequent television viewers would have trouble missing the Lunesta ads, which feature a luna moth fluttering around the bed of a peaceful sleeper. Dr. Jacobs said that in one hour of prime-time television recently, he saw three ads for sleeping pills: two for Lunesta and another for Ambien.

"You've got the patient population being bombarded with advertising on TV," Dr. Jacobs said. "You've got increased advertising to physicians. You've got a formula for sales going up dramatically."

One financial analyst, Jon LeCroy of Natexis Bleichroeder, said Lunesta's ad campaign last fall was tied to the new season of "Desperate Housewives," whose audience is about 55 percent female. Studies have shown that women have insomnia more frequently than men.

Last week, Sepracor's stock jumped $8.53 in one day, after Sepracor reported a profit and remarkably strong use of Lunesta in its first year on the market, with sales of $329 million. More than 213,000 doctors wrote 3.3 million prescriptions for it last year, the company says.

Sepracor announced the addition of 450 people to its current sales force of 1,500 to increase marketing of the drug to physicians.

Sanofi-Aventis, with a sales force of 3,000, is working to shift patients from Ambien, which loses its patent protection in October, to the newer version, Ambien CR. The newer pill has a quickly dissolving outer layer meant to immediately induce sleep, with a slower-dissolving inner layer to sustain sleep.

Another drug in the class is Sonata, marketed by King Pharmaceuticals. Because it is short acting, Sonata is recommended for people who have trouble falling asleep but no trouble staying asleep.

Drugs in the class are frequently referred to as "Z" drugs, a play on both their effect and the Z's in their generic names, like zolpidem (Ambien) and eszopiclone (Lunesta). All aim at a brain neurotransmitter that is believed to reduce neural activity.

Another new entrant to the market, Rozerem, by the Japanese company Takeda Pharmaceuticals, has been available in drugstores since September but has not yet been heavily advertised. The drug works by a different mechanism from the others, acting on the brain's melatonin receptors, which are believed to play a role in sleep-wake cycles.

Mr. LeCroy, the analyst, who is also a medical doctor, predicts the advertising will intensify if Neurocrine Biosciences and its partner Pfizer are permitted to introduce their new sleeping pill, Indiplon; an F.D.A. decision on that is expected in May.

"That's going to make the competition get more cutthroat," Mr. LeCroy said, predicting that the market for branded sleeping pills, currently about $2 billion a year, could grow to $3.8 billion, even with Ambien set to go generic. "This is only going to get crazier."

The Carlat Psychiatry Report, a newsletter by Dr. Daniel J. Carlat, a psychiatrist in Newburyport, Mass., reviewed the Z drugs recently and concluded that their differences were merely subtle. But Dr. Carlat warned that Lunesta, because it was longer acting, was more likely to cause next-day sleepiness problems "in comparison with some of its cousins."

Dr. Carlat cited a 1998 study in Britain, published in The Lancet, which found that taking zopiclone, the compound known as the "mother" of Lunesta and marketed in Europe, was linked to an increased risk of automobile accidents.

But Sepracor's chief financial officer, David P. Southwell, said that Lunesta, while a chemical variant of zopiclone, was a totally different drug. He referred a reporter to the F.D.A.-approved label, which lists clinical studies of next-day effects showing there was no consistent pattern of impaired mental functioning the day after Lunesta use.

The possible role of Ambien was investigated in connection with well-chronicled transportation disasters in 2003 — the crash of the Staten Island Ferry, which killed 11 passengers, and an accident involving a Texas church bus in Tallulah, La., which killed 8 passengers. The assistant captain who was piloting the ferry, like the bus driver, had a prescription for Ambien, but there was no evidence either had taken it before the crashes.

Dr. David G. Fassler, a clinical professor of psychiatry at the University of Vermont College of Medicine, said he was concerned that the heavy marketing and prescribing of the sleep medications would lead to use in patients who have underlying conditions that are left untreated.

"I'm concerned that difficulty sleeping can be a sign of multiple disorders, including problems with anxiety and depression," he said, expressing worry that patients who are not thoroughly evaluated might be treated for their insomnia while other problems, like anxiety or decreased appetite, are not addressed.

In clinical trials, the most common side effect of the drugs, however, is that people wake up feeling sleepy the next day.

Dr. Daniel J. Buysse, a University of Pittsburgh psychiatrist who has consulted for the industry on sleeping pills, said they were a rare example of drugs in which the desired effect and the major side effect were the same thing. "One occurs when you want it, and the other occurs when you don't," he said.

Another problem associated with using sleeping pills is a condition commonly called traveler's amnesia, in reference to the frequent use by people who travel across time zones. Such amnesia can occur when people return to daytime activities too quickly after taking the drugs.

The labels carry warnings that the drugs should be used only when people can devote a full night to sleeping. In some cases, however, users have reported that they awakened during the middle of the night in sleepwalking states, but — like Mr. Wells, the lawyer in Buffalo — had no recollection of their activities.

The amnesiac effects of Ambien were a factor in the acquittal last week of a United States Air Force linguist who had been charged with raping a colleague while the two were stationed in Qatar. The woman who said she was the victim, also a linguist, testified that she was not sure whether the incident was a dream because she had taken Ambien, according to the Stars and Stripes report on the military trial, which occurred in Britain.

Dr. Buysse said such bouts of nocturnal uncertainty occur occasionally with various Z drugs.

"There have been some case reports of people who have been sleepwalking only when taking the drug," Dr. Buysse said. "I think it's rare, and it's the kind of thing that no one is going to have a very good estimate of. But if it happens to you, who cares if you're the only person of many?"

Wednesday, February 01, 2006

Ed Glaeser Questions Spending Priorities in Rebuilding New Orleans

How should New Oreleans be rebuilt? An old debate in urban economics focuses on "person based" programs versus "place based" programs. Not surprisingly, place based politicians are lobbying for some expensive irreversible investments in place based infrastructure. One of these big ticket items is a $5 billion dollar light rail route for New Orleans. In the Boston Globe editorial below, Ed Glaeser questions the wisdom of this investment. He is a wise man!


A smaller New Orleans

By Edward L. Glaeser | February 1, 2006

MUCH OF the discussion of the planned rebuilding of New Orleans has been mired in nostalgia and unrealistic expectations, and we are in danger of doing a far worse job rebuilding New Orleans than rebuilding Baghdad. The final report released by the Bring New Orleans Back Commission -- the closest thing there is to an official reconstruction organization -- provides us with a blueprint for a rebuilding process that is both wasteful and unfair.

The press surrounding the Bring New Orleans Back Commission report focused on the anger surrounding the commission's admission that not all the city should be rebuilt. But this is the one thing the commission got right. Our obligation is to people, not places, and many residents of New Orleans would be better off with cash or portable housing, or education vouchers than with tens of billions of dollars of infrastructure spending.

The commission report put its sensible recognition that not all of the city should be rebuilt amid a roster of problematic recommendations. First, the report requires neighborhoods to develop plans to justify their reconstruction, but it doesn't elaborate on what criteria will be used to judge these plans. The absence of clear, well-justified rules that will determine rebuilding, hopefully based on cost-benefit analysis, will inevitably lead to claims of arbitrariness and political decisions.

Second, the report provides no funds to those people, especially renters, who live in neighborhoods that will not be rebuilt. Much of this rebuilding will be financed by federal dollars and justified as disaster insurance for the people of New Orleans. But federal disaster insurance shouldn't just help those people who live in the fortunate neighborhoods that will be rebuilt; federal disaster insurance should provide funds to help all the hurt people in the best way possible, which may not mean providing infrastructure. Residents who lived in areas that won't be rebuilt are entitled to insurance payments that are just as generous as those going to the people in areas that will receive the benefits of federal infrastructure spending.

The weakest elements of the report are its actual spending recommendations. The largest line item in the report is $12 billion for buying housing in New Orleans. Since the report strongly supports the Baker bill, I assume that this money is to be used along the lines suggested by that bill, which advocates federal spending that could top $50 billion in a poorly conceived scheme involving buying and rebuilding homes in the region.

The vision of the bill sponsored by Representative Richard Baker, a Baton Rouge Republican, is that houses will first be bought, then rehabilitated at federal expense, then sold back to the original residents or potentially someone else. Decades of public housing projects should have taught us that the federal government is not a good real estate developer.

Moreover, the bill does nothing to take care of renters who predominated in neighborhoods Katrina hit hardest. If this law is passed, billions will be spent on outlays that will create only the slightest benefit to those Katrina hurt most. Federal purchases of homes only makes sense in areas that are not going to be rebuilt, as a means of keeping owners whole.

Finally, and bizarrely, the report spends as much space on a light rail system as it does on levees. One could easily get the idea that the best protection against future hurricanes for the federal government to spend $5 billion on light rail in New Orleans. Light rail systems almost never cover their costs, and they are almost always dominated by high speed buses on dedicated lanes.

Given the uncertainty in New Orleans's future, it seems foolish to lay down fixed rail lines, when speedy buses are readily available. After all, in the 2000 Census, 76 percent of New Orleans residents drove to work, more than 12 percent took a bus, and less than 1 percent had anything to do with streetcars or rail. The proposed spending on rail could provide more than $15,000 per adult on schooling or healthcare, which would surely help the disadvantaged of New Orleans far more than light rail.

New Orleans will remain a great city, but that great city can and should be much smaller than it has been in the past. The commission has made one big step by acknowledging that rebuilding will be incomplete, but in the future, the commission should rely more on cost-benefit analysis and less on the latest urban planning fads.

Edward L. Glaeser is a professor of economics and director of the Rappaport Institute for Greater Boston at Harvard University's Kennedy School of Government.