Wednesday, September 27, 2006

A Berkeley Urban Design Expert's Advice for China

I must be getting older. I now am interested in the articles printed in alumni magazines. Below, I report a piece by UC Berkeley's Dean of the College of Environmental Design. His Berkeley Team attempts to "green" China's urban development. He emphasizes that his suggested policies are more costly upfront but offer significant future savings and reduced environmental impacts.

While I greatly admire his plans, I did not see much serious discussion in this article concerning what are the causal forces that determine vehicle use in a growing country such as China. In the United States, rising incomes and employment and population suburbanization have contributed to increased vehicle use. Will similar trends arise in China's major cities? Could Dr. Fraker be right that investments in environmental design could cause Chinese cities to be much more energy efficient than U.S by the year 2050?

Unforbidden cities
by Harrison Fraker Jr.
Can a new type of "gated community" reverse China's ecological debacle?

When I asked one of my Chinese hosts to give me a tour of his city's best new housing project, I never imagined it would inspire a Berkeley team to propose revolutionizing how the Chinese develop their new communities.

We set out from the Urban Planning and Design Institute's offices in a black diplomatic car, whose siren I quickly learned allowed us to exercise authoritative traffic privileges. Our route out of metropolitan Tianjin, China's third largest city, took us along a major arterial corridor to the northwest, which was clogged with traffic of a chaotic type unmatched in the U.S. Intersections, even though signalized, presented a terrifying game of "chicken." Cars, trucks, and buses wove through an equal number of bicyclists (often with multiple passengers or goods) and pedestrians. The dust and pollution were so intense that most bicyclists wore facemasks. With siren blaring, we sped along the shoulder past what appeared to be an unending series of developments, including a new college campus, high-tech office parks, and multiple high-density housing developments. As far as the eye could see, the entire landscape seemed under construction.

The scale of infrastructure construction to support this kind of hyperdevelopment in China is hard to imagine. It is estimated that China builds more than fifty 300-megawatt coal-fired power plants per year. California has only built 36 in the last five years. China is undertaking the largest road construction program in the world, equivalent to the U.S. Interstate highway system begun in the 50s. The capital and material costs of this effort are increased by the fact that in most areas of infrastructure China is playing catch-up. For example, an estimated 60 percent of existing sewage is dumped into rivers, untreated. Not only is the cost of building sewer mains and centralized treatment plants for new development staggering, but also, without cleaning up the existing sewers, the polluted rivers magnify the challenge of delivering sanitary drinking water. Some urban planning scholars question whether the current rate of development is economically sustainable, but if it is, it is estimated that China will double the size of its built environment in the next 20 to 30 years-the equivalent of building two new Great Britains.

When the pollution and CO2 emissions from the congested arteries are combined with that from the power plants required to meet the energy demands of new development, the impact on both China's public health and on global climate change presents major challenges for the years ahead. Four-fifths of China's largest cities have unacceptable air quality, resulting in more than 600,000 premature deaths from asthma, emphysema, and lung cancer. Currently it is estimated that China is responsible for 25 percent of the world's CO2 emissions (the U.S. is at 30 percent). At its current rate of development, China is projected to surpass the U.S. in the next few years.

Mounting scientific evidence has shown conclusively that the current cycle of global warming is not natural but attributable directly to man-made CO2 emissions; and while the projections vary in magnitude (from 2-10¾ C), the projected impact of global warming on the earth's natural systems is catastrophic. On balance, the question becomes: Can the world dramatically cut back its CO2 emissions to avoid these catastrophic scenarios? The responsibility falls on the U.S. and China to show the way.

Fortunately, China has recognized this challenge and it has been seeking the best urban planning and design advice and concepts from around the world. Our Berkeley team was invited by the Tianjin Urban Planning and Design Institute to assist the city of ten million residents in developing principles and prototypes for compact, transit-oriented, commuter gateway neighborhoods promoting efficient land use, and relying more on public transportation and bicycles and less on cars. With half the population living outside Tianjin proper, the city recognized that it was necessary to build a public transit system of subways, light-rail, and connecting buses in order to avoid the traffic congestion afflicting Beijing and Shanghai. Having completed two of seven planned light-rail lines, the city sought advice on how to guide development around the station stops. The College of Environmental Design responded by forming an interdisciplinary team of faculty and students from each of its three departments-Architecture, City and Regional Planning, and Landscape Architecture and Environmental Planning-to come up with design proposals that address critical real-world problems. The Tianjin Urban Planning and Design Institute funded the semester-long project, which included a week-long visit to the Chinese city followed by analysis and preliminary designs. In Berkeley, three Chinese scholars joined the 15-member team to help inculcate the project with the nation's cultural and practical realities. But what unfolded during the semester was largely due to the impact of what we found during our Chinese tour.

At our destination, we passed through an entry gate, where we were saluted by two uniformed guards, and proceeded to an elegant marketing showroom complete with a scale model of the entire development and elaborate models of each unit type for sale. The plan was based on repetitive blocks of townhouses and flats; their designs were of high quality, similar to what might be seen in Holland, Germany, or Scandinavia. Vehicular and pedestrian access to the housing units was provided by uniform street grids with limited parking at the units and overflow parking along a fence forming the community's perimeter. Much attention had been paid to landscape design. Streets, sidewalks and pathways of various paving materials were shaded by an array of trees. The project also featured several small parks, schools, a small central commercial area, recreation facilities, and a lake with multiple high-rise residential towers overlooking it.

I quickly estimated the density at approximately 75-100 units per acre (San Francisco averages approximately 35 units per acre). As I explored the project with my Chinese host, who was justifiably proud of its design quality, it dawned on me that what was being sold was a gated, privatized urbanity-a carefully controlled development with an urban theme but without any of the nitty-gritty reality of the city. Moreover, the gated entry gave residents a sense of belonging to a privileged community. It was hard not to interpret this as a form of social segregation.

Our hosts showed us multiple examples of the same model throughout the city-gated superblocks within a grid of new arterial streets at approximately one-mile or 1.2-mile intervals. One opportunistic developer was already in the process of building a gated superblock on the site where we were asked to explore transit-oriented development. Immediately, we became concerned. The project under construction effectively served only the residents within the gated community, blocking pedestrian and bike access to the light rail station for anyone else. Residents of other developments would be forced to walk or bike a mile or more to get around the first development. I wondered: Did our Chinese hosts not see this contradiction? Were they looking for alternatives?

We also knew Chinese gated superblocks comprise the largest part of China's overall development efforts, which are among the most ambitious construction undertakings in the history of the world. The Chinese are building 10-15 gated superblocks every day, equal to 10-12 million housing units per year (10 times the U.S. average). The process benefits from a clear definition of roles. The city builds the new system of arterial roads and then sells the superblock development rights to a developer, who is responsible for constructing a prescribed number of housing units at specific unit sizes, and for providing all internal community facilities and infrastructure, including commercial shopping and offices, schools, recreation facilities, parks and landscaping, and all internal roads, sewage lines, water and power distribution. The process depends on the support of a centralized infrastructure of power plants (usually coal fired) and electric power lines, sewage treatment plants (including sewer mains), and a sanitary water supply provided by the city or provincial utilities. The developer just "plugs in" to these services.

While highly efficient at providing housing, an array of negative consequences has emerged from China's gated superblock model. With a single entry/exit, and barriers to those outside the immediate gated community, the pattern almost guarantees that people will be forced to use cars on trips that are now walked or bicycled by 80 percent of the residents. As vehicular traffic grows, streets will become congested, creating corridors of pollution similar to what we saw on our tour. This traffic pattern will also remove people from the pattern of streets and alleys that has supported the rich and diverse urban culture of traditional Chinese cities for millennia.

Preliminary calculations revealed that 30 percent of China's CO2 emissions could be directly attributed to the construction, transportation and power generation required to build and operate these superblocks. The Berkeley team quickly realized that by developing principles and prototypes for transit-oriented neighborhoods, it could address half the problems of the impact of the car.

But what if we thought bigger? What if our designs could also generate all the community's energy by employing renewable sources on site, treat all wastes, and provide most of the water? If China's fundamental unit of development could become resource self-sufficient (i.e., carbon neutral) in its operation, and if it could replicate and spread throughout the world, this would be a major force in reversing global climate change.

With this larger goal in mind, the Berkeley team spent the semester creating an entire system-including, but beyond transit-oriented neighborhoods-to consider all potential sources of energy and waste flows that might make the neighborhood resource self-sufficient. First the team tackled the challenge of making the project transit friendly. They came up with a system of designated streets and blocks with mid-block greenways reserved for pedestrians and bicycles. These greenways connect to a network of parks leading directly to transit stops. In this way pedestrians and bikes are given a privileged, independent route to transit. At the same time all the streets are carefully designed to accommodate bikes and pedestrians; but by creating an independent system, the bicycle and pedestrian congestion at intersections is greatly reduced. With such a walking and bicycle friendly neighborhood, dependence on the car as the primary mode of transit can be reduced and the vehicle miles traveled reduced, with CO2 emission reduced as well by 75 percent. Car ownership (an estimated 12,000 to 14,000 cars are being added to China's streets every day) is not discouraged, but the car becomes a convenience for recreation and selected uses, rather than a necessity.

The team then focused on how to supply energy for a high-density, superblock community. Conservation and implementing designs that best responded to the climate appeared to be the most cost-effective strategy for reducing both energy consumption and demand. By careful application of passive solar design principles and natural cooling (using shading and ventilation), we determined that heating loads could be reduced by 80 percent and cooling loads by 60 percent. The challenge became how to provide the back-up heating and cooling, and the electricity for lighting and appliances.

A combination of renewable strategies was discovered. By putting photovoltaic panels (PVs) on the roofs and also using them as sun shades for south-facing windows, we calculated we could deliver approximately 40 percent of the electric load to energy efficient appliances. Adding wind conversion machines atop tall buildings (approximately 20 to 30 per neighborhood) would provide an additional 40 percent of the electric load. The balance of the electric load, plus gas for cooking and domestic hot water, could be provided by biogas generated from a combination of sewage, food wastes, and green wastes from the local landscape, trees, and urban agriculture. In this model, the high density of housing (150 units to the acre) became an environmental asset by providing the concentration of waste required to produce sufficient energy. An integrated system was also preferable in that it could spread the workload and could be sized for optimum cost effectiveness; no energy storage was required.

In addition to transportation and energy, water supply and wastewater treatment were equally important to these newly-designed communities. The buildings could collect all rainwater in cisterns for supply, and recycle "gray" water for low flush toilets. Ground water would be either absorbed directly on site or collected for landscape irrigation-there is no storm water runoff. Wastewater produced when bacteria digest and decompose biological matter in an oxygen-free environment (producing methane as an energy source) is treated naturally and recycled also for irrigation. This water system could provide as much as 75 percent of the needed water.

The team also restricted impermeable paving materials to the travel lanes of the streets. All parking areas, sidewalks and courtyards were proposed to have porous pavers. By absorbing storm water run-off on site, the design eliminates the cost of storm water piping, and, more importantly, it provides natural irrigation and soil aeration, making it possible to plant a more extensive "urban forest." Providing extensive tree coverage for the streets, sidewalks and parking areas has a triple environmental benefit. First, the shade in the summer reduces the "heat island" effect by as much as 3 to 10 degrees; not only making the public realm more comfortable but also reducing air conditioning loads by 10 to 15 percent. Second, by selecting appropriate species of trees and planting and harvesting them in sequence, all the CO2 generated on the site can be absorbed. Finally, the trees, clippings and prunings provide additional biomass for the biogas digesters. One of the most important parts in the whole system is the role of the streets, courtyards, greenways, and parks-the landscape-in enhancing environmental quality. By employing the most advanced "green" design principles, only 40 percent of the land is covered by buildings, the rest, 60 percent, is public and semi-public open space.

While the streets, sidewalks and parking areas constitute a fifth of the land coverage, the remaining mid-block courtyards, greenways and public parks are double that figure. Half of the larger landscape can be used for recreation and at least half of it for local, organic community gardens, providing as much as 30 percent of the produce needs of the neighborhood. As with the "green" streets, the green wastes from the urban agriculture and urban parks contribute significant biomass to the biogas digesters. By conceiving of the landscape, infrastructure, and buildings as a whole system design, the neighborhood becomes as self sufficient as possible.

As the project progressed, the Berkeley team became more and more excited by the potential for the whole system design concept to be a real breakthrough, to be a reproducible model for sustainable development throughout China and the developing world. The buildings are platforms for producing energy from renewable sources such as wind and sun. Sewage is not treated and dumped, but processed into energy, fertilizer, and water for irrigation. The landscape is more than eye pleasing; it is a multi-functional contributor to the systems. There is little or no waste, and all energy is generated on site. Most importantly, the neighborhood becomes essentially a self-sufficient unit, a circular system. It does not require the construction of expensive new power plants, new sewage treatment and water supply outside the system.

But just as the team became more convinced that the design made environmental sense, difficult challenges emerged.

The new design requires a radical transformation in the development process. In addition to constructing housing units, the developer has to build a comprehensive, on-site utility system of energy production, water supply, and sewage treatment, which is beyond the developer's traditional scope of work. It requires getting approvals through government agencies that are narrowly proscribed and not accustomed to thinking across their jurisdictions. Most importantly, it requires design and construction professionals to share responsibility and to work collaboratively, to which they are unaccustomed. It requires paying 15 to 20 percent of the costs up front. Even though the life cycle costs are significantly less than the cost of constructing new centralized utilities, the question becomes: Who owns, operates, and maintains the system, and how are they compensated for the service? Some models exist for funding and operating on site systems, but none is as comprehensive and integrated as the one proposed. (Since China is behind in providing centralized infrastructure, many developers have had to provide selected utilities, usually sewage treatment, on site). Despite these institutional and bureaucratic challenges, the economic and environmental benefits of the proposed system offer creative business opportunities for the neighborhood and the city.

Still, the design team realized that the hardest obstacle to overcome would be the social and cultural demand for a "gated" identity. The concept of a gated community is ingrained in Chinese consciousness by the Forbidden City, the emperor's own gated community. The traditional Chinese courtyard house, the hutong, is a form of gated community for families, with its walled precinct, gated entry and assembly of buildings around the courtyard. We've tried to provide a similar gated identity, but not at the superblock scale, nor at the scale of individual units, but at an intermediate, urban block scale. The system has the advantage of keeping select streets open and walkable to transit and services while creating semi-private, gated courtyards in the middle of blocks. The concept has a further advantage. The blocks can be designed to accommodate between 100 and 300 families, a scale that sociologists argue is a manageable size for knowing your neighbors and promoting a sense of community.

Even though the challenges are daunting, the inherent qualities in the design provide many opportunities and rationales for overcoming them. The upside potential, economically, socially-and especially environmentally-is almost irresistible. What is needed is proof that such an integrated design can work.

Fortunately, the Gordon Moore Foundation has recognized this fact. It has made a multi-year, multimillion-dollar grant to Berkeley's Institute for the Environment (B.I.E.) to enhance worldwide capacity for sustainable urban development. The Sustainable Neighborhood Project is part of the grant.

With a workable prototype, China's unique top-down/bottom-up planning and development process has the capacity for rapid deployment of such a model. The central Bureau of Planning and Reform would approve the model as fulfilling the goals of China's 11th Five Year Plan for conversion to a "circular economy." The Ministry of Construction would promulgate the detailed design guidelines, creating a standard template for design approval. Finally, the mayors, who are evaluated each year by the party, would be measured in part by how extensively they had applied this basic unit of development. Through this process, the potential for replication is almost unlimited. Currently, several cities are vying for the opportunity to build one of these prototypes, resource-self-sufficient, transit-oriented neighborhoods. Paradoxically, while China is presently the source of some of the planet's most serious environmental problems, it also has the greatest capacity for change.

Harrison S. Fraker Jr. is dean of the College of Environmental Design.

The "Silver Lining" of Rust Belt Decline Revisited

In Chapter 4 of my new Green Cities book, I discuss at length the environmental benefits of de-industrialization. The New York Times offers a nice case study today. While the article simply polls just a few people, the Times found some people in Steubenville Ohio who would prefer the "good old days" featuring polluted air and steel jobs versus clean air and no steel jobs.

Relative to the boom years, this town's population has declined but the city is greener. Bruce Sacerdote of Dartmouth is conducting a broader study of this same point. How do "post-industrial" Rust Belt cities evolve over time?

While the Times article doesn't mention it, I bet that home prices in Steubenville are really low. This could attract poor people to migrate to such an area. The article does not touch on whether mobile industries are migrating to this area to take advantage of low land prices and low wages. If we look at a map, is Steubenville within 75 miles of any major cities or is it physically isolated? Many upper New York State communities are close enough to NYC to transform into "country estates" for the wealthy. Such rural "consumer cities" would be one re-development strategy now that this area has been "greened"

New York Times

September 27, 2006
Steubenville Journal
As a Test Lab on Dirty Air, an Ohio Town Has Changed

STEUBENVILLE, Ohio, Sept. 23 — For three generations, people here commuted beneath the scraggly bluffs along the Ohio River to jobs where they made the steel from which 20th-century America — the cars, the skyscrapers, the cans — was built.

Then, starting in the 1970’s, Steubenville residents began contributing more personal raw material to a different sort of endeavor. They provided details about their lung function and cardiac rhythms, about the manner of their lives and the cause of their deaths, to the science on which 21st-century air pollution policies are built.

Data from Steubenville have played a central role in many decisions by the Environmental Protection Agency on air pollution regulations, including two of the more controversial — one in 2005 setting the first limits on mercury emissions, and another last week to tighten one but not both of the standards for lethal fine soot particles.

Three decades ago, Steubenville’s reputation for having the country’s foulest air made it a magnet for researchers in the young field of environmental epidemiology.

“Steubenville is a perfect environmental laboratory,” said James Slater, a chemistry professor at Franciscan University of Steubenville. Two large steel mills and two plants that turned coal into furnace-ready coke for those plants operated nearby, he said, and the Ohio River Valley is prone to temperature inversions that trap polluted air. “We have it all,” Dr. Slater said.

They had it worse, a half-century ago. Much of that pollution, along with a noxious odor that seemed part burnt toast and part burnt metal, has disappeared along with the jobs at the larger steel plant, across the river in Weirton, W.Va. As the pollution receded, mortality rates declined.

This trend factored into seminal studies on the health consequences of air pollution, including an oft-cited 14-year research project on the health impact of soot concentrations in six industrial cities. Douglas Dockery, a professor at the Harvard School of Public Health, led the research. Between the first period of the study, from 1974 to 1989, and an eight-year follow-up period, from 1990 to 1998, soot concentrations declined 24 percent and mortality rates dropped 19 percent.

Steubenville “provided the benchmark that we compared everything else to,” Dr. Dockery said, and the study was a crucial underpinning of the first federal regulations on soot, which went into effect in 1987.

In Steubenville and the other cities, Dr. Dockery recruited older adults and first graders.

“I loved it when we got pulled out of class,” said Dr. Slater’s daughter Beth Atkinson, now 38 and a homemaker in Skaneateles, N.Y. She remembered her classmates filing up to the stage of the Steubenville elementary school.

“There were three different machines, three different lines,” Ms. Atkinson said. “You had your own tube. They hooked it up to each machine.” Then, “when you blew on it, the plastic part would go up.”

As the daughter of a chemist, she said she had an idea that the people with stronger lungs could make the plastic rise higher in the tube, and she wondered about the harm caused by the pollution.

“I’d picture some ‘Little House on the Prairie’ place,” with clear air and blue skies, she said. “I’d imagine those children blowing into the machine. I’d wonder how much they could blow. I’d wonder if our lungs would be as good as theirs.”

The studies — at least three are under way right now — have been going on so long they have involved two generations. In the late 1990’s, Ms. Atkinson’s nephew, Wesley Myers, then about 9, lugged a small air-sniffing backpack everywhere he went for two weeks. “Every half-hour I had to write where I was, what I was doing,” said Wesley, now a senior at Catholic Central High School in Steubenville. “I did it for the money” — $100 — he said.

Dr. Slater, Wesley’s grandfather, is the scientist on the scene for researchers from Harvard and the University of Michigan. He tends a cluster of monitors on the Franciscan campus, harvesting the data.

He takes visiting scientists to the Hunan restaurant in the old downtown, where Alice Wong, the proprietor, remembers the visitors’ tastes, if not their names. “The Harvard people, they liked vegetable fried rice,” she said.

Other residents, who remember when the air was dirtier and the streets and their bank accounts were fuller, speak of the scientists and their science less fondly, linking them to the town’s decline. From 1980 to 2000, census figures show, the Steubenville-Weirton population dropped faster than that of any urban area in the nation.

Franciscan University’s executive vice president, Bob Philby, recalled that when the subject of pollution came up among steel mill workers in the 1970’s, “They would say: Don’t go there. That’s pay dirt.” Since then, 9 of 10 steel jobs have vanished.

Jim DiGregory, whose family owns a garden center, was born in Steubenville in 1926, nine years after the entertainer Dean Martin. Mr. DiGregory and his wife, Loretta, were part of the original Harvard study.

Decades ago, the air “didn’t smell too good,” Mr. DiGregory said. “Maybe people died from it. But who knew what they died from then? They’d say, ‘He died of old age.’ They’d say it if he was 60 years old.”

His wife died in 1988 from a rare heart ailment, becoming part of the studies’ mortality statistics. He still fills out postcards the researchers send to see if he is still alive. Is the air cleaner? “Yes.” Is it worth the trade-offs? “I don’t think so.”

The town of 19,000 has half the population it did 60 years ago, and the outlook of many residents has changed. “Certainly 30 years ago, that was a prevailing sense here in the valley that if there’s dirt on the air there’s food on the table,’’ said Adam Scurti, 61, a lawyer. “Now, that would not be tolerated.”

Tuesday, September 26, 2006

In this age of e-mail, do academics receive interesting snail mail?

I showed up to work today and actually received two interesting letters. One was from Robert Axelrod and the other was from Ken Arrow. Professor Axelrod is a University Professor at the University of Michigan. I have never met him. I am a recipient of a mass mailing inviting me to China. Here are some excerpts,

"I am honored to invite you to participate in an international professional and cultural program. People to People Ambassador Programs is develping a delegation of professionals speacializing in political science to meet in China in May 2007. ... The estimated cost per delegate or guest is $4,995 U.S dollars"

Well I have 2 things to say to Dr. Axelrod. I am not a political scientist and I'm not going.

Ken Arrow's letter meant more to me. I had the opportunity to get to know Ken when I was a Visiting Professor at Stanford economics a couple of years ago. I sent Ken a copy of my "Green Cities" book and he was kind enough to send me a note. Not all recipients of my book have been so kind!

I hope Ken won't mind if I quote his letter. He wrote: "Thanks for the copy of your new book: Green Cities: Urban Growth and the Environment. It looks to be a very thorough study of the environmental implications of cities. I shall look forward to using it."

Several other economists have sent me kind notes about my book and this has boosted my confidence.

Dora and I are now writing a book about social capital. If you expect to receive a free copy of that book, I'd like to hear some praise for Green Cities! How's that for bundling!?

Monday, September 25, 2006

Big Questions in Environmental Economics

I have just returned from a great environmental economics conference in Vail, Colorado. A foot of snow was dumped on me but that couldn't stop me. At this conference, we discussed many environmental issues. One researcher pointed out the puzzle that there has been a sharp membership decline in the Association of Environmental and Resource Economists (see Is that surprising and what does this trend mean? A pessimist might state that as a sub-field that environmental economics is a "fashionable" field that goes through booms and busts and right now the field is in a rut. An optimist might counter that one can infer little about the state of academic environmental economics from macro trends in membership.

In this posting, I would like to make the case that there are many exciting research questions in environmental econ. These are not in any particular order.

1. The economics of climate change --- in particular how large are the economic costs caused by climate change? Which industries bear these costs? Which geographical areas around the world will bear them? How costly is it given current technologies to self protect to minimize climate change's impact on our quality of life? Under what circumstances are governments forward looking and making investments to pre-empt significant costs from taking place?

2. The induced innovation hypothesis --- as prices for resources rise -- how much "green" R&D is triggered and how quickly do new ideas diffuse from rich nations who develop these ideas to LDCs?

3. valuation of non-market goods --- given improvements in health care and improvements in many indicators of urban environmental quality -- has diminishing returns kicked in --- in the United States? Do we in 2006 value a marginal improvement in the environment less than in the past?

4. In rapidly growing nations such as India and China, what are "good" public policies? Which U.S policies such as catalytic converters for cars are too expensive to be adopted there?

Wednesday, September 20, 2006

Explaining Declining U.S Energy Consumption per $ of GNP

At Tufts, we started our seminar series yesterday. Gib Metcalf gave a fascinating talk on explaining state/year trends in U.S energy intensity. The ratio = (energy consumption/real GNP) has been declining from 1970 to the present with the OPEC price shocks. Why is this the case?

For some general information see here:

For a copy of Gib's paper go here:

Gib utilized an approach that allowed him to estimate each state's energy intensity in each year between 1970 and today. His approach controlled for sectoral composition shifts. A low energy intensity means that a state is consuming little energy relative to the size of its economy.

His key explanatory variable was the real price of energy. He estimated large price elasticity effects. As the real price of energy increases, energy intensity declines. This is an important finding for mapping through the real effects of how price signals help to "green" our economy.

This result builds on the recent induced innovation literature documenting the invention and the diffusion of green durables as the price of energy increases. For an intuitive example, consider the growth in hybrid vehicles on the roads recently as the price of gasoline has soared.

Before I forget, have you bought my book?

Sunday, September 17, 2006

A Serious Dose of Environmental Economics

There are too many economists writing papers about speed dating. I would prefer to read papers about what happens to economists when they participate in speed dating markets! I mention this because later this week I will be attending a conference in Vail where there will be 20 enviro econ presentations over 2 days. I hope that coffee will be provided at a low price! I expect that I will be able to stay awake because both the topics and presenters look quite interesting (see I expect to lower the overall average with my talks on Prius and Hummer demand.

I did manage to read part of the New York Times today. The Week in Review's front page reported about a fun revealed preference study that Harvard always wins in head to head competition (see Poor Duke seems to receive really good press coverage these days. Coach K needs to dominate the action some more.

The Times should have investigated a little bit more. It focused on 18 year old's choices but what about 22 year old graduate students who get into Harvard and yy graduate school where do they go? What about 27 year olds choosing between being assistant professors at Harvard and yy? What about 40 year olds choosing between being full professors at Harvard and ZZ? Harvard would do pretty well on these criteria also!

If you are reading this blog to learn about how my book is doing, there here is an update. I sent my parents 2 copies and they liked it. I've mailed out some copies to some friends and I'm eager to hear back from them. Ed Glaeser liked parts of it. I won't tell you which parts. I'm now waiting for the Brookings Press to send out copies to the print media, and big bloogers. I can't say that that I feel the excitement in the air. But trust me, the book isn't bad.

Thursday, September 14, 2006

Life Expectancy by State: Selection or Treatment? You Decide

Harvard is always in the news. Today, its scholars have calculated life expectancy (measured in years) by state. Clearly, Bill Clinton didn't do enough good deeds for Arkansas and we should all move to Utah. I'm not sure if this is an "apples to apples" comparison. This would be a more interesting set of facts if "similar" people were being compared across states. Is living in the District of Columbia really that bad for one's longevity (treatment)? Or do people with less health capital move to D.C (selection)?

Life expectancy by state, according to a study in the online science journal PLoS Medicine:

State Life expectancy Rank

Ala. 74.4 48

Alaska 77.1 26

Ariz. 77.5 22

Ark. 75.2 43

Calif. 78.2 10

Colo. 78.2 12

Conn. 78.7 4

Del. 76.8 29

D.C. 72 51

Fla. 77.5 21

Ga. 75.3 41

Hawaii 80.0 1

Idaho 77.9 15

Ill. 76.4 33

Ind. 76.1 37

Iowa 78.3 7

Kan. 77.3 24

Ky. 75.2 42

La. 74.2 49

Maine 77.6 20

Md. 76.3 35

Mass. 78.4 5

Mich. 76.3 34

Minn. 78.8 2

Miss. 73.6 50

Mo. 75.9 38

Mont. 77.2 25

Neb. 77.8 16

Nev. 75.8 39

N.H. 78.3 6

N.J. 77.5 23

N.M. 77.0 27

N.Y. 77.7 19

N.C. 75.8 40

N.D. 78.3 8

Ohio 76.2 36

Okla. 75.2 44

Ore. 77.8 17

Pa. 76.7 31

R.I. 78.3 9

S.C. 74.8 47

S.D. 77.7 18

Tenn. 75.1 45

Texas 76.7 30

Utah 78.7 3

Vt. 78.2 11

Va. 76.8 28

Wash. 78.2 13

W.Va. 75.1 46

Wis. 77.9 14

Wyo. 76.7 32

Wednesday, September 13, 2006

A Statistical Analysis of Library Use at the University of Chicago: A Case Study of Nerd Power!

The article I report below from the University of Chicago Alumni Magazine highlights why this university has achieved such prominence. The University of Chicago wanted to understand how its heterogeneous students demand library services. The library bundles multiple activities. It is a place one can do research, a place to study, and a place to socialize.

Dr. Abbott is clearly a smart man but somehow he was suckered into doing an indepth statistical analysis of library use. Some of the results are not shocking. Most students never take out a book from the library while a small fraction of nerds check out countless books. Faculty use the library by day and undergraduates use it by night. Abbott refers to this as "temporal zoning".

He reports one interesting result that Internet use and time spent at the library are complements. This is similar to Ed Glaeser's work that has argued that information technology increases the demand for living in big cities. Once you make new contacts face to face, you can use IT to stay in touch with them.

Heavy connections

The more today’s Chicago students use electronic research materials, the more they do research the old-fashioned way.

By Andrew Abbott, AM’75, PhD’82

If you have been wondering for years whether it’s true that students make love in the stacks of Regenstein, I’m sad to say that I can’t tell you the answer. But I can tell you that more students take a nap in Regenstein than ask a librarian a question. I can tell you that almost a fifth of students eat food in Regenstein outside the cafĂ© on most of their visits. And much more important, I can tell you that the electronic library revolution seems—paradoxically—to be raising rather than lowering usage of the library’s physical materials. All these are results of the 2005 survey of library usage conducted by the Provost’s Task Force on the University Library.
The task force, convened by Provost Richard Saller in April 2005, conducted the survey as part of its effort to understand the current state of the University’s libraries. Our aim in conducting a survey was not to plan the future by projecting current trends; our vision for the library’s future must rest on a theory of library research, not on rationalizations of current behavior. But Regenstein’s double function as both a major research library and a study hall for undergraduates and early-career graduate students means that any plans for the building must understand the behaviors of the nonresearch users as well as of the researchers.
Going into the survey, our thinking about student library use was guided by vague opinions and precise but hard-to-interpret utilization figures. Faculty opinion sensed a move toward informality. Many found Regenstein noisier, less welcoming. Some thought it a “student union.” Turnstile data revealed some striking shifts. Over the four-year period 2000–04, undergraduate entries to Regenstein were up 40 percent. To be sure, part of the rise reflected the College’s expansion and the building of a huge dormitory next door, but even controlled for demographic expansion, the undergraduate entry rate was up nearly a third. In contrast, undergraduate circulation rates had declined slightly. Graduate entry and circulation figures revealed no noticeable trends.
There is little detailed information on longer-term trends. We know that around 2,500 patrons per day used the library in the mid-1970s and that roughly the same number of materials were checked out then as now. Because there were half as many students, rates of use were obviously far higher in the mid-1970s. But by the mid-1990s—an era for which there is detailed information—use had fallen dramatically. One main culprit was the personal computer, whose immobility in the pre-laptop, pre-wireless era meant users tended to take research materials out (to the home or office where the machines were) rather than use them in the library. The other culprit was the coursepack (and later, electronic reserve), which reduced the reserve use that provided almost half of library circulation in the 1970s.
By 2005 it was apparent that usage of all kinds had picked up again. To analyze that usage, in spring 2005 the task force commissioned a Web-based survey, which was developed and administered by the University Survey Lab. The sample of 14,000 included all registered students across the entire University. Overall response was 42 percent—and well over 50 percent in the groups which turnstile evidence tells us are the library’s major users: students in the College and graduate students in the Humanities and Social Sciences. But there were plenty of nonusers in the data; nearly a quarter of respondents, for example, did not take a single book out of the library last year. Thus, the data seem to provide a reasonable representation of student library use and opinions.
Of the 5,700 respondents, about two-thirds named Regenstein as their most used library. Another 10 percent favored Crerar, 10 percent claimed no favorite, and the rest were scattered around the system. Of the 90 percent who named favorites, 15 to 20 percent said they had spent less than ten hours in their “most used” library during the entire spring quarter. In other words, about a quarter of all respondents had no real connection with a University library as a physical entity, although they may have used library-licensed electronic sources remotely. Indeed, only about 1,200 respondents said that their primary study space was Regenstein, as opposed to, say, another library or a coffee shop or their residence. Extrapolation suggests that the “primary study space” clientele for Regenstein is between 1,500 and 2,000 students—or considerably less than half of the University’s 4,500 undergraduates.
Under the admittedly lax ten-hour criterion, about 2,600 respondents called Regenstein their most used library, and nearly all the findings below are based on their answers. We asked dozens of questions about their usage of the library, as well as about their desiderata, their demographics, and so on. The main usage questions included 41 different types of activities. Participants were asked if they did these things never, sometimes, on about half their visits, on most of their visits, or on all visits.
To the extent that Regenstein is a student union, it is so at a time that doesn’t interfere with its research mission.
After much preliminary statistical analysis we grouped this information into eight major scales. Five were direct measures of library usage. A traditional research scale combined activities like checking out a book, browsing the shelves, using printed library material without checking it out, or using the online catalog. A second scale charted the use of online databases, while a third pulled together use of online resources like the Research Libraries Group catalog, Worldcat, bibliographic search engines, subject guides, and online reference works. A fourth scale tapped use of specialized resources: archives, special collections, microforms, and CD-ROM databases. The fifth measure looked at circulation, taking data directly from library records.
Because research is not the only use of the library, these scales were complemented by three others charting more mundane matters. One was a purely social scale: items about meeting new people and hanging out on A-level, the undergraduate study space that is a major campus social center after 10 p.m. Another scale comprised items about use of library computers for assignments. Finally, there was a scale originally imagined as an indicator of the library’s status as a student union. Students were asked if they used the library to take a study break, make a cell phone call, answer a cell phone call, arrange to meet a friend, bump into a friend and chat, use e-mail, eat food brought into the library, eat food bought in the library coffee shop, surf the Web, or shop on the Web. It was, in fact, a laundry list of things that many faculty considered antithetical to serious use of the library.
This “student-union” scale produced the first surprise. The task force had expected an inverse relationship between the student-union scale and the traditional research scale. But there was no relation whatever, at the individual level, between being high or low on the traditional research scale and being high or low on the student union scale. The scales measure different things. The first measures traditional research practices; the other measures what for Chicago’s current students—both graduate and undergraduate—is a particular way of doing everyday life. Choosing to arrange your everyday life in this technology-based, somewhat sociable way is unrelated to whether or not you are a strong or weak user of traditional research practices.
It followed that our model of “student union versus research facility” was also wrong. While there is a negative relation between the purely social scale—the A-level scale—and the traditional research scale, the library’s A-level, social side is essentially an evening affair, when, as the turnstile data demonstrate, faculty and even graduate students are simply not around. To the extent that Regenstein is a student union, it is so at a time that doesn’t interfere with its research mission. A kind of “temporal zoning” keeps the two uses out of each other’s way.
There was a distinct difference between research and study use. Using library computers for assignments was much more characteristic of undergraduates than of graduate students. Undergraduates were also much more likely to bring materials of their own (books, notes, etc.) into the library. By contrast, graduate students were much higher on the traditional research scales. These three facts made a single consistent point about research versus study.
One hesitates to underscore this contrast, for fear of showing once again that sociology is the science of demonstrating the obvious. But we should recall the old joke about the mathematician who spends two days proving that he was correct in his offhand statement that some step in a proof was intuitively obvious: it is better to be safe than wrong. So it is important that we can say on the basis of real evidence, not hearsay, that undergraduates predominantly—almost overwhelmingly—use Regenstein as a study hall, bringing material there and doing assignments there. Graduate students use it predominantly as a research site. This is not an absolute difference by any means, but it is a strong theme throughout the data.
The pattern is driven to a great extent by the College curriculum. Both the Core and much upper-level undergraduate teaching emphasize careful analysis of a small number of selected texts, usually purchased. Indeed, when looked at by College year, all of the research scales—traditional research, both electronic scales, circulation, and even special resources—jump up slightly from first- to second-year (as students move out of the full-time Core) and take a somewhat more substantial jump up from third- to fourth-year as the honors students write BA papers and finally have to dig into the library seriously.
Although early-stage graduate students echo the undergraduate pattern of bringing their own materials and using Regenstein as a study hall, most graduate student use is research: graduate students were a full point higher on the traditional research scale. This means they averaged a point higher on each of the scale’s eight items, where “a point higher” means the difference between “sometimes” and “about half the time” or between “usually” and “always.” It’s a big difference—one that holds up for circulation levels and for use of specialized resources. More important, the graduate students’ edge also held up for both online-database use and electronic-research use. Even though the undergraduates were much higher on electronic-database use than on any of the other electronic measures, the graduate students were higher still.
This means that there was no evidence that younger people were somehow “more electronic.” Graduate student respondents, after all, averaged eight to ten years older than College respondents. Yet they made more use of electronic resources. And, as we saw earlier, they were also equally likely to conduct everyday life electronically.
The research-use data provide the surprising conclusion to this syllogism. The more an individual uses books, the more he or she uses electronic-research resources, and vice versa. The finding holds not only at the group level—graduate students are higher on both scales—but also at the individual level. This seems like very strong evidence in favor of a synergy hypothesis—that use of one of type of material is likely to reinforce the use of the other. At the very least, the survey data provides no evidence that traditional research practices are being replaced by electronic ones. Thus, the replacement hypothesis—a standard idea in library literature—must be rejected.
Hits on the library’s licensed electronic databases do show the one grain of truth in the mountain of the replacement falsehood. The main electronic workhorses—receiving the majority of total hits—are JSTOR and Elsevier Science Direct, which are merely delivery systems for journals. What’s being replaced is one type of material (journals) and that only in the final delivery stage: now people find journal articles online and print them directly. We know that users make hard copies, by the way, because more than half of all JSTOR hits result in a printing. At least in the humanities and social sciences, neither faculty nor students seem to read articles on screen.
THE DISCUSSION SO FAR CONCERNS LARGE CATEGORIES OF USERS—undergraduates, graduate students in this or that division. But there is much variation within these categories. It is clear from the survey—as from circulation data—that research use of the library is heavily skewed. Asked by the provost to facilitate the research enterprise, the task force had to ask in turn, Who, really, are the constituents of that enterprise, the heavy users of the library?
Gross circulation figures (from 2003–04) give some sense of who these heavy users are. Out of some 33,000 cardholders, about 13,600 “users” actually took out at least one book. About ten percent of those users provided 50 percent of all circulation. At the other end of the scale, the lowest 50 percent of users provided only 10 percent of the circulation. (Remember, this definition ignores cardholders who didn’t take out a book—a group that includes one quarter of Chicago undergraduates in a given year.) Basically, the library’s heavy users in circulation terms are the approximately 1,000 people (7 percent of the total users, 3 percent of all cardholders) who take out more than 100 books a year, providing close to 40 percent of all circulation. This group included about 80 faculty, about 500 PhD-level graduate students, about 100 MA-level graduate students, and about 140 undergraduates.
But the survey offered a more detailed way to characterize the students among these heavy users. We took our “never” to “always” scales, lumped together the top two categories—“usually” and “always”—and called that heavy use. We lumped the bottom two categories—“never” and “sometimes”—and called that light use. We left the middle as medium use. For circulation, we called 100-plus heavy use and 50-plus medium use. This created low, medium, and high ratings for each of our five research scales—traditional research, circulation, other resources, electronic databases, and general electronic sources. People with high levels on more than one scale were our student “heavy users.”
Believe it or not, 13 student respondents ranked high on all five scales. Another 56 rated high on four out of five; 163 on three of five, and 330 on two of five. This makes a total of 562 “heavy users” on two or more scales. In rough terms, Divinity School graduate students are 7 percent of these, social-sciences graduate students about 30 percent, humanities graduate students just under 50 percent, and undergraduates about 12 percent. Thus, although their rate of heavy-research use is quite low, the sheer numbers of undergraduates mean that they still make a significant contribution to the library’s heavy-user population. As a result, the library staff has to serve three very different types of heavy user—faculty, graduate students, and undergraduates.
As we saw earlier, these heavy users pursue their work in a library that is mostly filled with students using Regenstein as a study hall. But observational studies sponsored by the task force make it clear that study and research use live together in surprising harmony. Even at its heaviest use—just before exams when a third or more of the seats in Regenstein are occupied—the building is remarkably quiet and orderly, especially as one gets further away from the first-floor entry space. And fortunately, many of the things that can be done to improve Regenstein’s utility for its heavy users can be done without impairing its utility as a study hall for the perhaps 1,500 undergraduate and early graduate nonheavy users for whom it is their principal place to do assignments.
The task force went into its study knowing about the differences in graduate and undergraduate use and the largely graduate nature of the heavy-user community. But the noncorrelation of a student’s electronic everyday life with his or her research practices surprised most of us, and the powerful positive correlation between electronic- and traditional-research practices was quite unexpected. Such findings underscore the need to plan the library’s future not by extrapolating trends or imagining a speculative techno-utopian facility, but by thinking long and hard about the library-research process, the library-research community, and the specific ways in which both can be helped by a transformation of the library that has served the University so well for so long.
Andrew Abbott, AM’75, PhD’82, the Gustavus F. and Ann M. Swift distinguished service professor in sociology and the College, chaired the Provost’s Task Force on the University Library. His mother was a librarian.

Tuesday, September 12, 2006

Review Copies of Green Cities: Urban Growth and the Environment

I now own 100 copies of my new puke green colored book; "Green Cities: Urban Growth and the Environment." If you are interested in environmental and urban issues, you might want to read this piece of work! Here are some details.

If you are a teacher and are looking for a free copy, here the details for how to get your hands on one:

I've learned that Hilary Clinton was right. It takes a village to write a decent book. While, I"m the only author listed on the front cover --- many people helped me and I won't forget that. If you are considering writing a policy relevant book, I highly recommend that you consider submitting to the Brookings Press. The review process was fair and the editorial comments and overall editorial team did great work that greatly improved my overall book. If the book still stinks, you should see my first draft!

Can Fear of Air Travel Delays Increase Support for Greenhouse Gas Reduction Policy?

Does the typical person in the United States have a private incentive to root for new costly public policies to preempt climate change? Adam Smith taught us to focus on self interest as a motivator. About a year ago, I thought about writing a crazy paper that fear of air travel delays caused by climate change would be sufficient (given our high value of time) to encourage us to vote for green climate policies.

Instead of actually writing the paper, I will "publish" it here in Matt Kahn's Journal of Economic Insanity (the JEI).

The paper's intro would make the deep point that:

1. Climate change may impose real costs
2. The world is only slowly adopting market incentives to encourage induced innovation and to reduce demand for greenhouse gas producing fuels
3. everybody is free riding and hoping that China and India "green" themselves
4. everyone blames the U.S for not taking a leadership role

The paper's core theme is that under certain parameters the U.S has an incentive to take a leadership role even if we don't care about climate change as an environmental threat.

The paper's main point would be that time is our more scarce commodity. More and more americans fly each day. Given all the hubbing in air travel, weather storm induced bad weather such as rain increases flight delays and messes up the general hubbing network system. Self interested plane travelers lose extra time to climate change and this is costly. Anticipating this, U.S voters demand a policy response.

The Weak Link: I did a little bit of investigation and couldn't figure out how to do some serious empirical work fleshing out how much time would be lost in delays at airports do to changes in weather conditions. For example, United's hub is in Chicago. How much worse will Chicago's weather conditions be due to moderate climate change? Would airlines reoptimize and move their hubs to "unaffected" cities if climate change takes place?

If you are looking for a "wacky" thesis topic, please take this one. In return, you should go to Amazon and buy my "Green Cities" book. Tomorrow, I will actually receive a copy of my own book. I look forward to reading it!

Sunday, September 10, 2006

The New Academic Year

As professors age, do we get less excited about the start of the new school year? I hope not. I do think that I get used to having few responsibilities each summer and it is always a little bit shocking to have to do other tasks besides for research and reading. To liven up Fletcher's first week of classes, the President of Tufts and our Provost attended our first faculty meeting. They spoke and painted an optimistic picture of Tufts' rise as a research university. They asked our faculty if we had any questions. I am sorry to report that my colleagues (including myself) didn't ask any hard questions. I did want to know how many new endowed faculty chairs in the social sciences would be created from the new capital campaign but I stayed quiet.

Tufts right now has a strange look to it with too much building repair going on. When I taught at Columbia I liked their approach of allowing buildings to simply fall apart. Deferred maintenance was the key word!

Some Random Observations

1. The Harvard Class of 2010 has arrived at Harvard Square. Last night, Dora and I took our 5 year old son to an indian restaurant near the Kennedy School. We encountered an uncountable number of happy, well scrubbed young people excited about starting their important careers in cambridge. I told my son that if he studies hard he could be one of these folks in 13 years. My son wasn't listening and didn't care.

2. Amazon's Book ranking system is cruel to authors. Last friday, my book reached a rankings low of roughly 40,000 now I see that Green Cities is ranked 250,000. Now that's a lot of volatility. A few sales here and there and you can jump over 1000000 unappreciated books. A little bit like Richard Thaler's work that people shouldn't check how their stock portfolio is doing I need a commitment device to stop checking my amazon ranking. I did e-mail Barnes & Noble that their website had some incorrect info posted about my book.

3. I read a strange article in today's New York Times Week in Review. The Public Editor went into great detail over whether photos from the recent Israel/Lebanon war were "fair and balanced". This raises the bigger question of what does the New York Times "maximize"? Is it profits? Is it the utility of its editors? Is it the learning of its average reader? If the Times claims that it is the "paper of record", what does this 3rd word mean?

My intuition is that this newspaper wants to be more than simple bathroom reading and instead to edify and cause "better" public policy around the world. As Hilary Clinton thinks about how to shape her 2008 campaign, does the Times provide a tutor for her. Does Osama Bin Laden log onto the New York Times website each day to see what the smart conventional wisdom of New Yorkers is focused on?

People Magazine does not have great ambitions. It seeks to entertain and sometimes inform. The New York Times seems to have greater ambitions and in a diverse world they face a tough task tailoring their articles. Newspapers represent bundles yet soon we will be able to unbundle (think of people's bloglines as they aggregate entries that interest them).

Wednesday, September 06, 2006

New Social Science Books by University of Chicago Graduates: Can Kahn Outsell Rosenblatt's study of snoring and cold feet in bed?

Like many economists, I'm a fan of competition. As a new book author, I am well aware that my new book faces competition from many other books. Today, when I logged on to the University of Chicago alumni website, I see that I'm in direct competition with Paul Rosenblatt's empirical analysis of how couples share a bed. While I wonder if he has a representative sample here, I must admit that his core question is pretty funny and original. It is a shame that the Clintons are not one of his data points!

If you've written an even wackier book recently, please e-mail me because I want to know who are the true "freaks" out there!

Paul C. Rosenblatt, AB’58
Two in a Bed: The Social System of Couple Bed Sharing
ISBN 0791468305
State University of New York Press
Social Sciences

Based on intensive interview data from 46 couples who share a bed, this book explores how couples learn to sleep together, how they deal with their differences and how couple bed sharing changes as the two partners' bodies and life situations change. The book explores how couples deal with cold feet, temperature preference differences, partners who steal blankets, snoring, sleep apnea, television and reading in bed, nightmares, children wandering into the bedroom, health problems, job tensions that come to bed at night, and much more. For some couples the few minutes they spend talking before falling asleep is most of their time talking each day. Many people talked about valuing the intimacy of their time in bed together and many women said that they felt safer when not alone in bed. And yet many people who were interviewed said that they would get much better sleep when sleeping alone. So for many part of the challenge of sharing a bed is living with the paradox of valuing the time together but knowing that one could sleep better if alone.
Posted 8/11/06

Matthew E. Kahn, AM’93, PhD’93
Green Cities: Urban Growth and the Environment
ISBN 0815748159
Brookings Institution Press
Social Sciences

What is a green city? What does it mean to say that San Francisco or Vancouver is more “green” than Houston or Beijing? When does urban growth lower environmental quality, and when does it yield environmental gains? How can cities deal with the environmental challenges posed by growth? These are the questions Matthew Kahn takes on in this smart and engaging book.

Written in a lively, accessible style, Green Cities takes the reader on a tour of the extensive economic literature on the environmental consequences of urban growth.
Posted 7/7/06

Tuesday, September 05, 2006

What Do Economics Professors Do All Day?

I am in strange situation. At Tufts, classes have not started yet. The Brookings Press has told me that my book has been published and that they have seen it and it "looks great". So, I feel like a guy who knows that he is a father but hasn't met his own kid. I do know that "my kid" is green because I picked such a strange cover color.

I arrived at the Tufts campus today at 1030am. Since I knew that my office PC's password has been changed, I went to the campus library to check my e-mail. For security reasons our passwords are changed on an almost monthly basis and as I get older I can only remember my e-mail password and my ATM car password. Some blog readers had mailed me some mildly interesting stuff to think about. At 11am, I met with the TAs for my microeconomics class and we had a good meeting planning out the course and their responsibilities. I then had lunch with Gib Metcalf who told me about some of his new ideas on energy supply. I realized that it is amazing how few academic economists work on energy issues. He took me over to the Economics department where the new Chair (Enrico Spolaore) was kind enough to show me the new Chairman's office and we took a look at the seminar room where we will be holding the tuesday research seminars. The room looked pretty good but it had a bad smell.

At 2pm, I met Ed Glaeser at his Kennedy School Office. He showed me some of his recent Boston Globe editorials and we talked about research. We have a 8 year old paper called "Poor in Cities" that we are optimistic could be published soon. We discussed the editor's report that we had received ---the editor's comments were quite fair. Glaeser told me about the book he is writing now on the history of major cities. It sounded quite interesting.

At 330pm, I finally made it to the NBER to do some work. I admit that I'm starting the research part of this day pretty late. But a productive guy like me can get a lot done in 1.5 hours! Go read my new book and you will see! I worked hard to finish paper #1 below.

Randy Walsh has invited me to a University of Colorado environmental economics conference. There I will present the following 2 papers in 1 hour!

1. Do Greens Drive Hummers or Hybrids? Environmental Ideology as a Determinant of Consumer Choice

2. Greens are Guinea Pigs who Purchase Sustainable Products: Evidence From Hybrid Vehicles Registrations

My problem at this conference is that it is beer hour once my talk is done. I'm worried that folks will be watching the clock if my papers stink. Conferences provide an excellent commitment device and I'm looking forward to Veil, Colorado. My wife encouraged me to stop calling it "Veal, Colorado".

To end this exciting day, I actually had to do some grading. Somehow the Fletcher School has exams that students take at the start of the term to gain an exemption from taking certain classes. I had the thrill of grading 30 of these. And people wonder why I am visiting UCLA starting this winter?

On an unrelated note, the New York Times has some interesting urban economics today.

One is on the Brooklyn developer Rattner scaling back his project by 10% to fend off critics

The other was about ethnic diversity and unrest in a small Maine town.

Sunday, September 03, 2006

Adjustable Rate Mortgages and Behavioral Economics

At lunch at a Lincoln Land Institute conference in May, Bill Fischel said something quite interesting about the economics of mistakes in the presence of uncertainty. He argued that if you know that you are making a risky choice try to make the same choice as everybody else. Similar to moral hazard "too big to fail" arguments, his point was that if everybody makes the same mistake then Congress is more likely to ex-post step in and bail out these "victims".

In this case, risk takers are in a no-lose situation. Consider this article here on signing up for a ARM mortgage loan. If interest rates stayed low and home prices soar, it is a good investment --- if interest rates rise and now you face higher mortgage payments but everyone else does also, will your Congressional Representative offer legislation to protect you?

A behavioral economist would say that the "suckers have been suckered" by profit gouging sophisticated lenders. A chicago guy who pushes a rational expectations model might be slow to view the borrowers here as naive fools. Who is right has key public policy implications. What empirical test would allow researchers to disentagle the two hypotheses?

Nightmare Mortgages (Business Week)

By Mara Der Hovanesian Fri Sep 1, 4:00 PM ET

For cash-strapped homeowners, it was a pitch they couldn't refuse: Refinance your mortgage at a bargain rate and cut your payments in half. New home buyers, stretching to afford something in a super-heated market, didn't even need to produce documentation, much less a downpayment.

Those who took the bait are in for a nasty surprise. While many Americans have started to worry about falling home prices, borrowers who jumped into so-called option ARM loans have another, more urgent problem: payments that are about to skyrocket.

Slide Show

The option adjustable rate mortgage (ARM) might be the riskiest and most complicated home loan product ever created. With its temptingly low minimum payments, the option ARM brought a whole new group of buyers into the housing market, extending the boom longer than it could have otherwise lasted, especially in the hottest markets. Suddenly, almost anyone could afford a home -- or so they thought. The option ARM's low payments are only temporary. And the less a borrower chooses to pay now, the more is tacked onto the balance.

The bill is coming due. Many of the option ARMs taken out in 2004 and 2005 are resetting at much higher payment schedules -- often to the astonishment of people who thought the low installments were fixed for at least five years. And because home prices have leveled off, borrowers can't count on rising equity to bail them out. What's more, steep penalties prevent them from refinancing. The most diligent home buyers asked enough questions to know that option ARMs can be fraught with risk. But others, caught up in real estate mania, ignored or failed to appreciate the risk.

There was plenty more going on behind the scenes they didn't know about, either: that their broker was paid more to sell option ARMs than other mortgages; that their lender is allowed to claim the full monthly payment as revenue on its books even when borrowers choose to pay much less; that the loan's interest rates and up-front fees might not have been set by their bank but rather by a hedge fund; and that they'll soon be confronted with the choice of coughing up higher payments or coughing up their home. The option ARM is "like the neutron bomb," says George McCarthy, a housing economist at New York's Ford Foundation. "It's going to kill all the people but leave the houses standing."

Because banks don't have to report how many option ARMs they underwrite, few choose to do so. But the best available estimates show that option ARMs have soared in popularity. They accounted for as little as 0.5% of all mortgages written in 2003, but that shot up to at least 12.3% through the first five months of this year, according to FirstAmerican LoanPerformance, an industry tracker. And while they made up at least 40% of mortgages in Salinas, Calif., and 26% in Naples, Fla., they're not just found in overheated coastal markets: Through Mar. 31 of this year, at least 51% of mortgages in West Virginia and 26% in Wyoming were option ARMs. Stock and bond analysts estimate that as many as 1.3 million borrowers took out as much as $389 billion in option ARMs in 2004 and 2005. And it's not letting up. Despite the housing slump, option ARMs totaling $77.2 billion were written in the second quarter of this year, according to investment bank Keefe, Bruyette & Woods Inc.

The First Wave

After prolonging the boom, these exotic mortgages could worsen the bust. They also betray such a lack of due diligence on the part of lenders and borrowers that it raises questions of what other problems may be lurking. And most of the pain will be borne by ordinary people, not the lenders, brokers, or financiers who created the problem.

Gordon Burger is among the first wave of option ARM casualties. The 42-year-old police officer from a suburb of Sacramento, Calif., is stuck in a new mortgage that's making him poorer by the month. Burger, a solid earner with clean credit, has bought and sold several houses in the past. In February he got a flyer from a broker advertising an interest rate of 2.2%. It was an unbeatable opportunity, he thought. If he refinanced the mortgage on his $500,000 home into an option ARM, he could save $14,000 in interest payments over three years. Burger quickly pulled the trigger, switching out of his 5.1% fixed-rate loan. "The payment schedule looked like what we talked about, so I just started signing away," says Burger. He didn't read the fine print.

After two months Burger noticed that the minimum payment of $1,697 was actually adding $1,000 to his balance every month. "I'm not making any ground on this house; it's a loss every month," he says. He says he was told by his lender, Minneapolis-based Homecoming Financial, a unit of Residential Capital, the nation's fifth-largest mortgage shop, that he'd have to pay more than $10,000 in prepayment penalties to refinance out of the loan. If he's unhappy, he should take it up with his broker, the bank said. "They know they're selling crap, and they're doing it in a way that's very deceiving," he says. "Unfortunately, I got sucked into it." In a written statement, Residential said it couldn't comment on Burger's loan but that "each mortgage is designed to meet the specific financial needs of a consumer."

The loans certainly meet the needs of banks. Option ARMs offer several payment choices each month. Among Burger's alternatives were one for $2,524, about what a standard fixed-rate mortgage would be on the new amount, and the $1,697 he pays. Why would his bank make the minimum so low? Thanks to a perfectly legal accounting practice, no matter how little Burger pays each month, the bank gets to record the full amount.

Option ARMs were created in 1981 and for years were marketed to well-heeled home buyers who wanted the option of making low payments most months and then paying off a big chunk all at once. For them, option ARMs offered flexibility.

So how did these unusual loans get into the hands of so many ordinary folks? The sequence of events was orderly and even rational, at least within a flawed system. In the early years of the housing boom, falling interest rates made safe fixed-rate loans attractive to borrowers. As home prices soared, banks pushed adjustable-rate loans with lower initial payments. When those got too pricey, banks hawked loans that required only interest payments for the first few years. And then they flogged option ARMs -- not as financial-planning tools for the wealthy but as affordability tools for the masses. Banks tapped an army of unregulated mortgage brokers to do what needed to be done to keep the money flowing, even if it meant putting dangerous loans in the hands of people who couldn't handle or didn't understand the risk. And Wall Street greased the skids by taking on much of the new risk banks were creating.

Now the signs of excess are crystal clear. Up to 80% of all option ARM borrowers make only the minimum payment each month, according to Fitch Ratings. The rest of the money gets added to the balance of the mortgage, a situation known as negative amortization. And once balances grow to a certain amount, the loans automatically reset at far higher payments. Most of these borrowers aren't paying down their loans; they're underpaying them up.

Yet the banking system has insulated itself reasonably well from the thousands of personal catastrophes to come. For one thing, banks can sell some of their option ARMs off to Wall Street, where they're packaged with other, better loans and re-sold in chunks to investors. Some $182 billion of the option ARMs written in 2004 and 2005 and an additional $83 billion this year have been sold, repackaged, rated by debt-rating agencies, and marketed to investors as mortgage-backed securities, says Bear, Stearns & Co. (NYSE:BSC - News)Banks also sell an unknown amount of them directly to hedge funds and other big investors with appetites for risk.

The rest of the option ARMs remain on lenders' books, where for now they're generating huge phantom profits for some lenders. That's because, according to generally accepted accounting principles, or GAAP, banks can count as revenue the highest amount of an option ARM payment -- the so-called fully amortized amount -- even when borrowers make only the minimum payment. In other words, banks can claim future revenue now, inflating earnings per share.

For many industries, so-called accrual accounting, which lets companies book sales when they contract for them rather than when they receive the cash, makes sense. The revenues will eventually come. But accrual accounting doesn't apply well to option ARMs, since it's more difficult to know if unpaid interest will ever cross a banker's desk. "This is basically an IOU that may never get paid," says Robert Lacoursiere, an analyst at Banc of America Securities. James Grant of Grant's Interest Rate Observer recently wrote that negative-amortization accounting is "frankly a fraudulent gambit. But what it lacks in morality, it compensates for in ingenuity." The Financial Accounting Standards Board, which is responsible for keeping GAAP up to date, stands by its standard but told BusinessWeek in a written statement that it is "concerned that the disclosures associated with these types of loans (are) not providing enough transparency relative to their associated risks."

Camouflaged Losses

Risks or not, the accounting treatment is boosting reported profits sharply. At Santa Monica (Calif.)-based FirstFed Financial Corp. (NYSE:FED - News), "deferred interest" -- what an outsider might call phantom income -- made up 67% of second-quarter pretax profits. FirstFed did not respond to requests for comment. At Oakland (Calif.)-based Golden West Financial Corp. (NYSE:GDW - News), which has been selling option ARMs for two decades, deferred interest made up about 59.6% of the bank's earnings in the first half of 2006. "It's not the loan that's the problem," says Herbert M. Sandler, CEO of World Savings Bank, parent of Golden West. "The problem is with the quality of the underwriting."

In the middle of one of the hottest U.S. markets, Coral Gables (Fla.)-based BankUnited Financial Corp. (NASDAQ:BKUNA - News) posted a $14.8 million loss for the quarter ended June, 2005. Yet it reported record profits of $23.8 million for the quarter ended in June of this year -- $20.9 million of which was earned in deferred interest. Some 92% of its new loans were option ARMs. Humberto L. Lopez, chief financial officer, insists the bank underwrites carefully. "The option ARMs have gotten a bit of a raised eyebrow because we generate and book noncash earnings.'s our money, and we do feel comfortable we'll get it back."

Even the loans that blow up can be hidden with fancy bookkeeping. David Hendler of New York-based CreditSights, a bond research shop, predicts that banks in coming quarters will increasingly move weak loans into so-called held-for-sale accounts. There the loans will sit, sequestered from the rest of the portfolio, until they're sold to collection agencies or to investors. In the latter case, a transaction on an ailing loan registers on the books as a trading loss, gets mixed up with other trading activities and -- presto! -- it vanishes from shareholders' sight. "There are a lot of ways to camouflage the actual experience," says Hendler.

There's no way to camouflage what Harold, a former computer technician who asked BusinessWeek not to publish his last name, is about to face. He's disabled and has one source of income: the $1,600 per month he receives in Social Security disability payments. In September, 2005, Harold refinanced out of a fixed-rate mortgage and into an option ARM for his $150,000 home in Chicago. The minimum monthly payment for the first year is $899, which he can afford. The interest-only payment is $1,329, which he can't. The fully amortized payment is $1,454, which his lender, Washington Mutual (NYSE:WM - News), gets to count on its books. WaMu, no fly-by-night operation, said it couldn't comment on Harold's case, citing confidentiality issues. A spokesman says the bank "accounts for its option ARM product in accordance with generally accepted accounting principles." WaMu has about $12 billion in loans negatively amortizing right now, up from $2.5 billion in 2005, estimates CreditSights' Hen dler. In a written statement, WaMu said "borrowers who request an adjustable loan with payment options should understand those options and potential adjustments throughout the life of the loan. We make detailed disclosures to customers that are designed to develop a more informed consumer of mortgage products and ensure that our customers are comfortable with the loan products they select."

Hard Sell

To get the deals done, banks have turned increasingly to unregulated mortgage brokers, who now account for 80% of all mortgage originations, double what it was 10 years ago, according to the National Association of Mortgage Brokers. In 2004 banks began offering fatter sales commissions on option ARMs to encourage brokers to push them, says Gail McKenzie, assistant U.S. attorney in Atlanta, who is investigating mortgage brokers for improper practices.

The problem, of course, is that many brokers care more about commissions than customers. They use aggressive sales tactics, harping on the minimum payment on an option ARM and neglecting to mention the future implications. Some even imply verbally that temporary teaser rates of 1% to 2% are permanent, even though the fine print says otherwise. It's easy to confuse borrowers with option ARM numbers. A recent Federal Reserve study showed that one in four homeowners is mystified by basic adjustable-rate loans. Add multiple payment options into the mix, and the mortgage game can be utterly baffling.

Billy and Carolyn Shaw are among the growing ranks of borrowers who have taken out loans they say they didn't understand. The retired couple from the Salinas (Calif.) area needed to tap about $50,000 in equity from their $385,000 home to cover mounting expenses. Billy, 66, a retired mechanic, has diabetes. Carolyn, 61, has been caring for her grandchildren, 10-year-old twins, since her daughter's death in 2000. The Shaws have a fixed income of $3,000 a month that will fall by about $1,000 in November after Billy's disability benefits run out. Their new loan's minimum payment of about $1,413 is manageable so far, but the fully amortized amount of about $3,329 is out of the question. In a little over a year, they've added some $8,500 to their loan balance and now face a big reset if they continue to pay only the minimum. "We didn't totally understand what was taking place," says Carolyn. "You have to pay attention. We didn't, and we're really stuck here." The Shaws' lender, Golden Wes t, says it routinely calls customers to ask them if they are happy and understand their mortgage loan.

Then there's the illegal stuff. Mortgage fraud is one of the fastest-growing white-collar crimes in the nation, costing $1 billion in 2005, double the year before. A slower housing market could foster more wrongdoing. "With a tighter market, you are going to find there is more incentive to manipulate," says Tim Irvin of Irvin Investigations & Research Services in Spring, Texas. "Brokers are having a harder time getting business, so they're getting creative."

Concerns like these haven't curbed Wall Street's hunger for option ARMS. "At a price, you can originate or sell anything," says Thomas F. Marano, global head of mortgage and asset-backed securities at Bear Stearns. Hedge funds have been particularly active, buying risky loans directly from banks and cutting out the bundlers in the middle. Kathleen C. Engel, an associate professor of law at Cleveland-Marshall College of Law at Cleveland State University, says Wall Street and hedge fund money has helped to finance widespread lending abuses, particularly among the most vulnerable borrowers.

Pros Go Unscathed

Why are hedge funds willing to buy risky loans directly? Because they can demand terms that help insulate them from losses. And banks, knowing what the hedge funds want in advance, simply take it out of the hides of borrowers, many of whom qualify for lower rates based on their credit histories. "Even if the loan goes bad, (the hedge funds are) still making money hand over fist," says Engel.

Eventually, some of it will go sour. But the Wall Street pros who buy option ARMs are in the business of managing risk, and no one expects widespread losses. They've taken on billons in iffy option ARMs, but the loans are no shakier than the billions in emerging market debt or derivatives they buy and sell all the time. Blowups are factored into the investing decision.

Banks that hold lots of option ARMs on their books will surely be hit by loan defaults in coming years. "It's certainly reasonable to expect to see some excesses wrung out," says Brad A. Morrice, president and CEO of New Century Financial Corp. But even here the damage will likely be limited. Banks use insurance and other financial instruments to protect their portfolios, and they hold real assets -- homes -- as collateral. Christopher L. Cagan, director of research and analytics at First American Real Estate Solutions, a researcher and unit of title insurer First American, forecasts total defaults of $300 billion across all types of loans, not just option ARMs, over the next five years -- less than 1% of total homeowner equity. (In comparison, JPMorgan Chase & Co. alone has a mortgage portfolio of $182.8 billion.) Cagan estimates that banks will end up losing only $100 billion of it all told.

Most of the pain will be born by ordinary people. And it's already happening. More than a fifth of option ARM loans in 2004 and 2005 are upside down -- meaning borrowers' homes are worth less than their debt. If home prices fall 10%, that number would double. "The number of houses for sale is tripling in some markets, so people are not going to get out of their debt," says the Ford Foundation's McCarthy. "A lot are going to walk."

Jennifer and Eric Hinz of Somerset, Wis., are feeling the squeeze. They refinanced out of a 5.25% fixed-rate, 30-year loan in June, 2005, and into an option ARM with a 1% teaser rate from Indymac Bank. The $1,483 payment for their original mortgage dropped to as low as $747 with the new option ARM. They say they had no idea when they signed up, however, that the low payment adds $600 in deferred interest to their balance every month. Worse, they thought the 1% would last three years, but they're already paying 7.68%. "What reasonable human being would ever knowingly give up a 5.25% fixed-rate for what we're getting now?" says Eric, 36, who works in commercial construction. Refinancing is out because they can't afford the $15,000 or so in fees. "I'm paying more, and the interest is just going up and up and up," says Jennifer, 34, a stay-at-home mom. "I feel like we got totally screwed." They say their mortgage broker has stopped returning their phone calls. Indymac declined to commen t on the loan's specifics.

Stories like these can be found across the socioeconomic spectrum, says Allen J. Fishbein, director of Housing & Credit Policy for the Consumer Federation of America. In a May focus group, the CFA found that option ARM customers at all income levels said the loans were the only way they could afford their homes. While many recognized that their mortgages could increase, "they professed complete surprise that they could increase as much as they could," says Fishbein. That lack of diligence will cost them over time.

Not that all option ARM holders go in blindly. While the loans are marketed aggressively, plenty of holders know exactly what they're getting into. Jon and Meghan Bachman of Portland, Ore., consider them wealth-building tools. "We want to own a bunch of houses," says Meghan. "We're hoping for early retirement."

So far they have stayed out of the fire. The couple, who are in their 30s, bought their first home, a 100-year-old farm house in Portland, Ore., in October, 2005, with a no-money-down loan for $200,000 from GreenPoint Mortgage, a unit of NorthFork Bancorporation Inc. By May, the value of the house had soared to $275,000. Rather than sit tight as their grandparents might have, the Bachmans, with an annual household income of $70,000, took out a home equity loan to put a $30,000 downpayment on an investment property in an up-and-coming neighborhood nearby. They pay a minimum of just $825 on their new $191,000 mortgage, and rent the house out for $100 more than that. Sooner or later, the payment will rise. Then they'll have to raise the rent to stay in the black. If the still-strong Portland housing market tanks, they could find themselves in deep trouble. It's a risk they say they're willing to take.

Public policy has yet to catch up with the new complexities of the lending industry. Comptroller of the Currency John C. Dugan, the banking industry's main regulator, wants banks to clean up their act. A source inside the federal Office of the Comptroller says Dugan intends to raise lending standards, as he did last year on credit cards, where super-low minimum payments made it improbable that cardholders would ever pay down debts. New guidelines are expected this fall.

Fair-housing pundits suggest that mortgage lenders follow the lead of the securities industry and require that mortgage borrowers be not only eligible for a product but also suitable -- meaning the loan won't impose hardship. Says Consumer Federation of America's Fishbein: Buyers have to have a "reasonable prospect of being able to handle the payments, not at the initial rate, but (assuming) the worst-case scenario."

So far, banks have shown little desire to raise their standards. In February, Golden West announced it would raise its minimum option ARM payment to 2.6% of the loan. In March, Golden West's Sandler wrote a nine-page letter to the Office of Thrift Supervision decrying the lax lending standards he was seeing. "Foolish lenders who eventually stumble under the weight of their missteps will bring down innocent borrowers with them and leave the rest of us to clean up the mess," he wrote. But on May 7, Golden West announced it was selling out to Charlotte (N.C.)-based Wachovia Corp. (NYSE:WB - News). By June it had dropped its option ARM rate back down to 1.50%. Sandler says the rates were changed according to the bank's interest rate outlook.

Analyst Frederick Cannon of Keefe Bruyette & Woods says most banks don't apologize for their option ARM businesses. "Almost without exception everyone says (the option ARM) is a great loan, it's plenty regulated, and don't bug us," he says. In an April letter to regulators, Cindy Manzettie, chief credit officer for Fifth Third Bank in Cincinnati, said it's not the "lender's responsibility to help the consumer determine the appropriate payment option each month.... Paternalistic regulations that underestimate the intelligence of the American public do not work."