Thursday, August 30, 2007

Urban Peepers and High Stakes Testing

We return to UCLA this sunday. This year, I'm hoping to try out for the football team like Robert Redford in the Natural. I've always said that the academic summers are too long. I need a little bit of structure in my life to get work done. Yesterday, I took my first exam in more than a decade. I used to be a good test taker but yesterday I flunked the California written exam for getting a driver's license. My score of 29 out of 36 just missed. After a night of studying and worrying and having my six year old son lecture me about different rules of the road, today I scored a 32 and passed. Next time I give an exam at UCLA, I will have more empathy for my students.

Today, I opened up the New York Times and read this funny editorial. The unsigned editorials in the New York Times are usually awful. We know that the Times doesn't like President Bush. The editorial page seems to believe that they need to make this point daily. I wonder who is the "marginal" reader whose opinion may actually be changed by reading such consistent editorials. Fortunately, today the Times delivered a novel piece concerning the costs and benefits of living in a densely populated city. My son does want a telescope but he is interested in the stars.

August 30, 2007
Jeepers! Peepers in New York

In the list of wrongs that needed righting, the subway peeper is probably not too high on the average New Yorker’s anxiety list. Still, City Councilman Peter Vallone Jr. of Queens thinks it is time to make something he calls “nonconsensual voyeurism” illegal.

Mr. Vallone’s target is a creep who loiters under certain subway stairs and peers upward at women. Rather than something simple, like a fence, Mr. Vallone has written a law that would levy a fine up to $500 and up to 90 days in jail for ogling a person’s “sexual or intimate parts” for more than a brief period. The councilman says he has crafted this legislation narrowly, but if voyeurism ever really becomes illegal, it’s time to build more jails in New York City.

For better or sometimes worse, New York is a city of exhibitionists. One of the many reasons people come to New York is to show off. And since New Yorkers feel they have seen it all, each new wave brings a need for latecomers to preen and posture in even more outrageous ways. Like wearing a boa — not the feathers, the snake. Or playing the guitar in Times Square in your underwear. Or teetering on heels so high they should come with a discount at the podiatrist.

New York is also a city full of spectators. There are probably many more New Yorkers who own binoculars than there are New Yorkers who love birds or opera. And why are the sales of telescopes over the moon in a place where, on most nights, it’s impossible to make out the big dipper? And, the newest, fanciest most expensive apartment buildings are made of the newest, fanciest and most expensive glass.

Nobody wants some sicko drilling a peephole in their locker room wall or private hotel room. But this ordinance feels like something akin to outlawing wolf whistles from a construction site and, then, banning the corresponding hand signal from the street.

Tuesday, August 28, 2007

Economists versus Psychologists: A Case Study for Telling Us Apart

The rise of behavioral economics has blurred the lines between rational choice economics and psychology. Today the New York Times offers a "quiz" to determine which camp you belong to. Read this interview below and think about Dr. Gigerenzer's work. Are you convinced by his empirical methods he sketches below?

Again like Dan Gilbert (Harvard's Stumbling guy) he pays little attention to heterogeneity. What % of people are like Ben Franklin (see below) and what % are gut check people? Does the same person act more like Mr. Spock when making important choices such as who to marry or what university to go to versus less important decisions such as what to order for dinner tonight.

If a person knows that she is a "slow information processor" who finds calculating costly, can she delegate the decision to somebody she trusts who has a comparative advantage at using more information? Consulting firms play this role in business. As long as people know that "they don't know", don't they have an incentive to "outsource" the hard thinking to someone else especially when the cost of a "bad decision" are high? so for example, a parent of a teenager can "outsource" a new stereo decision for the family living room to a teenager. I see no agency problem arising here. This is why I find Barry Schwartz's work over-stated --- He has claimed that capitalism offers us too much choice and that we get tired and frezied by too many permutations and combinations of items to choose from.

August 28, 2007
Through Analysis, Gut Reaction Gains Credibility

Two years ago, when Malcolm Gladwell published his best-selling “Blink: The Power of Thinking Without Thinking,” readers throughout the world were introduced to the ideas of Gerd Gigerenzer, a German social psychologist.

Dr. Gigerenzer, the director of the Max Planck Institute for Human Development in Berlin, is known in social science circles for his breakthrough studies on the nature of intuitive thinking. Before his research, this was a topic often dismissed as crazed superstition. Dr. Gigerenzer, 59, was able to show how aspects of intuition work and how ordinary people successfully use it in modern life.

And now he has written his own book, “Gut Feelings: The Intelligence of the Unconscious,” which he hopes will sell as well as “Blink.” “I liked Gladwell’s book,” Dr. Gigerenzer said during a visit to New York City last month. “He’s popularized the issue, including my research.”

Q: O.K., let’s start with basics: what is a gut feeling?

A: It’s a judgment that is fast. It comes quickly into a person’s consciousness. The person doesn’t know why they have this feeling. Yet, this is strong enough to make an individual act on it. What a gut instinct is not is a calculation. You do not fully know where it comes from.

My research indicates that gut feelings are based on simple rules of thumb, what we psychologists term “heuristics.” These take advantage of certain capacities of the brain that have come down to us through time, experience and evolution. Gut instincts often rely on simple cues in the environment. In most situations, when people use their instincts, they are heeding these cues and ignoring other unnecessary information.

Q: In modern society, gut thinking has a bad reputation. Why is that?

A: It is not thought to be rational. One of the founders of your country, Benjamin Franklin, suggested to his nephew that when he made important life decisions, he should do it like a bookkeeper — list all the pros and cons and then make the decision, after weighing everything. That is the classical rational approach.

Q: I make my decisions that way. What’s wrong with it?

A: In some situations, that demands too much information. Plus, it’s slow. When a person relies on their gut feelings and uses the instinctual rule of thumb “go with your first best feeling and ignore everything else,” it can permit them to outperform the most complex calculations.

In the 1990s, I was living in Chicago, where there are high dropout rates from the high schools. People often asked, “Is there a way to know which school has the lowest dropout rate?” There existed data measuring different cues of school performance: the pay of teachers, the number of English-speaking students in a class, things like that.

I wondered: could one feed these into a computer, analyze them and obtain a prediction on which high school produced the fewest dropouts? We did that. And we were astonished to find that computer-based versions of Franklin’s bookkeeping method — a program that weighed 18 different cues — proved less accurate than going with the rule of thumb of “get one good reason and ignore the rest of the information.”

Q: What was the “one good reason” that got you the right answer?

A: Knowing which school had high daily attendance rates. If two schools had the same attendance levels, you needed one more cue — good writing scores — and then you could ignore the rest.

Q: You are the author of a famous study on how people use instinct in investing. Why this topic?

A: Because intuition often underlies stock picking. Ordinary investors will frequently pick a company they’ve heard of before. We call this the “recognition heuristic,” and it basically means “go with what you know.” I was curious: is this effective? In the 1990s, we interviewed 360 pedestrians in Chicago and Munich. We asked if they were familiar with the names of German and American corporations traded on the stock exchange. Using the names of the most frequently recognized companies, we then made up investment portfolios.

After six months, the high-recognition portfolios, on average, gained more value than the Dow and DAX markets and some big-name mutual funds. The high-recognition portfolios did better than a portfolio we created from randomly picked stocks and another made up of low-recognition stocks. Over the years, we’ve repeated this experiment twice, in different ways. Each time, the intuitive wisdom of the semi-ignorant outperformed the calculations of the experts.

Q: Have you considered going to your pedestrians for investment advice?

A: Yes! I did that once. I invested $50,000 in high-recognition stocks picked by the least stock-savvy group we studied, those German pedestrians. Their portfolio went up 47 percent in six months, as opposed to the 34 percent gains made by the German stock market as a whole. This was during a bull market.

Q: Where can gut instincts fail?

A: Here’s an example: after 9/11, many Americans stopped traveling in airplanes and drove on highways instead. I looked at the data, and it turned out that in the year after the attacks, highway fatalities increased by an estimated 1,500 people. They had listened to their fear, and so more died on the road. These kinds of fatalities are easily avoided. But psychology is not taken very seriously by governments. Most of the research about how to combat terrorism is about technology and bureaucracy — homeland security. In this case, educating the public about their own gut reactions could have saved lives.

Q: Some of your critics say that gut instincts just aren’t scientific. What’s your answer?

A: We study these things, where intuition is good and where it’s not. One should also not overlook that in science itself, you need intuitions. All successful research scientists function, to a degree, on gut instincts. They must make leaps, whether they have all the data or not. And at a certain moment, having the data doesn’t help them, but they still must know what to do. That’s when instinct comes in.

Q: Do you think of yourself as intuitive or rational?

A: Both. In my scientific work, I have hunches. I can’t explain always why I think a certain path is the right way, but I need to trust it and go ahead. I also have the ability to check these hunches and find out what they are about. That’s the science part. Now, in private life, I rely on instinct. For instance, when I first met my wife, I didn’t do computations. Nor did she.

Q: Shakespeare’s “Hamlet” is about a young man who doesn’t respond to his first best instinct, which is to avenge his father’s murder by killing his uncle. If Hamlet had listened to his gut, how would the play be different?

A: This is not a scientific kind of question. But the play would have been shorter and probably fewer people would have been killed.

Saturday, August 25, 2007

Insurance Premiums as Market Signals; Implications for Adapting to Climate Change

In the absence of government intervention, insurance prices would be high in areas that the actuaries identify as having high a high risk of being "attacked" by mother nature or other more human threats. If government caps insurance premiums and promises to bail out ex-post "victims" of such events, how much does this distort the locational choice of people and firms?

I've grown more interested in this subject as I've been thinking about how to design incentives to reduce the adaptation costs in the face of climate change. Below, the New York Times has a nice piece touching on the efficiency and equity implications of different incentive regimes.

On an unrelated note, I have cleared out of my Boston home and now am a Californian. On the plan ride back, I read half of Gilbert's "stumbling upon happiness" ---- given Steve Levitt's quote on the back cover --- I expected that I would love this book. To be honest, I really liked the start and then the book tails off. Gilbert is a good writer but the book is odd. I will provide a blunt review of it soon. If this popular book really reveals his research, he needs to think more about "heterogeneity" and about revealed preference. More soon.

Who Will Pay for the Next Hurricane?

Published: August 25, 2007


AS the second anniversary of Katrina approaches, residents in hurricane-prone areas are still concerned that they cannot obtain insurance to cover damage to their homes from future disasters. Specifically, the decision by State Farm, Mississippi’s largest insurer, to discontinue selling new policies on homes and small businesses there has sent shock waves beyond the state. Banks that normally require homeowner’s insurance as a condition for obtaining a mortgage are also not sure what impact this will have on their clients’ ability to buy such coverage.
The insurer’s motivation is economic. Rates are regulated by the states, so insurers are often restricted in the premiums they can charge. In addition, State Farm faced a lawsuit contending it was liable for flood losses from Hurricane Katrina. Homeowners’ policies cover only losses caused by wind in such storms; flood coverage is provided by a separate policy as part of the National Flood Insurance Program. The state of Mississippi, however, charged that insurers were responsible for hurricane damage from Katrina because surging floodwaters were caused by the wind. State Farm eventually won the case, but it was a costly process and led to its decision to discontinue selling new policies.
State Farm’s decision is only the tip of the iceberg of a much broader problem: how this country can reduce future losses from natural disasters and aid victims in their recovery efforts. Because of increasing development in hazard-prone areas and the effects of climate change, we are in a new era of catastrophic losses from natural disasters. Ten of the 20 most costly natural disasters have occurred during the past five years — all 10 of them hurricanes, typhoons or tropical storms.
The four hurricanes in Florida in 2004 (Charley, Frances, Ivan and Jeanne) collectively totaled more than $29 billion in insured losses; Hurricane Katrina is estimated to have cost insurers and reinsurers $45 billion.
At the same time, victims have complained about receiving substantially less than the actual costs of rebuilding or repairing the damage. Many have turned to the Small Business Administration for low-interest loans; however, a property owner is eligible for a loan only if he or she can show the ability to repay it. Hence, low-income residents must find other assistance.
We need a new approach to financing the costs of natural disasters and to encouraging individuals in hazard-prone areas to undertake mitigation measures. Two principles, which appear to conflict with each other, are guiding a large-scale research study being undertaken by the Wharton Risk Center in conjunction with Georgia State University and the Insurance Information Institute (as well as with firms and organizations from the public and private sectors, some of whom pay for this research).
Principle 1: Risk-Based Premiums. Insurance premiums should be based on risk to encourage individuals to reduce their vulnerability to catastrophes.
Principle 2: Dealing With Equity and Affordability Issues. Any special treatment given to lower-income residents in hazard-prone areas should come from general public funding and not through artificially low rates.
Principle 1 is important because it provides a clear signal of relative risk to those living in areas subject to natural disasters, as well as those who are considering moving into these areas. Risk-based premiums also enable insurers to give discounts to homeowners and businesses who invest in cost-effective loss-reduction measures. If the premiums are not risk-based, insurers have no economic incentive to offer discounts. In fact, insurers forced to charge artificially low premiums prefer not to offer coverage because it is a losing proposition in the long run. More generally, those living in hazard-prone areas should have safer structures and buy enough insurance to cover their losses from a future disaster.
Principle 2 reflects a concern for low-income residents in high-hazard areas who will face large premium increases if Principle 1 is followed. Today, in many Gulf Coast states, premiums in regions subject to hurricane damage are highly subsidized because of rate regulations imposed by state insurance commissioners. If insurers are permitted to charge risk-based premiums, homeowners in hurricane-prone areas will pay considerably more for coverage than they do today.
To deal with the affordability issue, the state or federal government could provide some type of insurance vouchers to low-income residents. It could work like the food stamp program, in which families are given vouchers to buy food based on income and size of family. A homeowner in a hazard-prone area would pay an insurance premium that reflects risk, and then get reimbursed by the state for part of the increased cost. The amount of reimbursement would be determined by income and the premium charged. Under such a voucher system, insurance could reward individuals for undertaking risk reduction measures by lowering premiums.
Principle 1 gives us a better chance of making our hazard-prone areas safer and affordable. Principle 2 implies that we as a society need to recognize that all taxpayers will have to bear a share of this cost. Rather than waiting for the next catastrophe, we can take constructive steps now to protect those in harm’s way. In the process we will reduce the likelihood of having to deal with another Katrina-like disaster.
Howard Kunreuther, co-director of the Risk Management and Decision Processes Center and a professor at the Wharton School of the University of Pennsylvania, is a co-editor of “On Risk and Disaster: Lessons from Hurricane Katrina.”

Tuesday, August 21, 2007

Does Child Obesity Cause School Absences? Correlation versus Causation?

This paper cited below presents an interesting fact based on some 5th grade kids. The heavy ones miss more school. So, to build up human capital do we ban fries and oreos? Or do we search for a 3rd factor (such as parental and child patience and self control) that determines both a child's weight and devotion to school?

The good news here is that statistical analysis offers an easy test of this claim. The authors could have surveyed 1,000 kids by following Victor Fuch's strategy in an old NBER paper. He played games with individuals to learn about whether they prefer $100 now or $300 2 years from now. While I"m simplifying, he used this game to identify impatient people (those who took the $100) and patient people (those who waited for the payoff). His simple game took an "unobservable" (self control) and generated an observable measure of it. He then documented that controlling for age, education and race, more impatient people were more likely to smoke.

I tell you this tale because these fat kid authors should have done the same thing. Suppose they had followed Fuchs and estimated this "patience" variable. They then could have augmented their basic statistical model and estimated:

absences from school = controls + b1*weight + b2*patience + U

and then test whether b1>0, without controlling for patience and self control
their estimates are biased toward finding that b1>0.

the key counter-factual is "if a kid randomly gained weight would he miss more school?" possible but i think this is classic selection issue over what we learn
about a kid's "unobservables" from observing his/her weight.

August 21, 2007
Vital Signs
Patterns: Weight May Influence School Attendance

The more overweight a child, the more likely he or she is to be absent from school, a new report suggests. Researchers studied 1,069 fourth- to sixth-grade students in nine schools in Philadelphia. They recorded height, weight, sex, race and days absent for each. The study appears in the August issue of Obesity.

The scientists classified each child in one of four weight categories by body mass index: underweight, normal, overweight and obese. On average, underweight children were absent 7.5 days, normal weight children 10.1 days, overweight children 10.9 days and the obese 12.2 days. Even after adjusting for race, ethnicity, age, sex and school attended, being overweight remained a significant predictor of absences.

Statistical analysis showed that weight, sex, age, school and race accounted for 11 percent of the variance in absences, meaning unknown factors are involved. The authors acknowledge that it is unclear whether the increased absences significantly affect overweight students’ performance.

Andrew B. Geier, the lead author and a doctoral candidate in psychology at the University of Pennsylvania, doubts that sickness among overweight children causes absences. “Even in fourth grade,” he said, “I believe that psychosocial factors, not physical ones, are keeping overweight kids from going to school.”

Saturday, August 18, 2007

Big Dig Redux? How Would You Minimize Corruption in Big City Infrastructure Projects?

Today the New York Times editorial page endorses bigger government. Perhaps C + I + G = Y, but what units is "G" measured in? What is "high quality" government services and how do we design contracts and accountability to achieve this? I agree with the Times that clean, high quality water may be a good investments for cities. This EPA price tag of $277 billion dollars over 20 years caught my eye. Will this be a national "Boston Big Dig" with cost over-runs and ex-post questionable quality? How would the EPA write contracts and set up its regulatory oversight to guarantee that this wouldn't be a major waste of money captured by government sub-contractors?

This smells like a great example of asymetric information and perhaps the EPA should buy Laffont and Tirole's Procurement textbook and read it.

August 18, 2007
Keeping Cool, Clear Tap Water

Americans have some of the best water in the world — a bragging point that seems to have gotten lost lately, even by those who take their daily exercise by waving the flag. Perhaps it is because the bottled water industry markets their product with waterfalls and soothing colors to make it seem like the clearest, cleanest, healthiest drink on earth. Unfortunately, that marketing can make tap water seem less clear, less clean and less healthy. When New York City did a survey on tap water recently, one youth was asked whether he drank from the public water fountains. “Yes,” he said, “but I’m going to die.”

Luckily, he’s wrong. The public water supply in this country is generally so good that bottlers of several leading brands of water have recently explained to consumers that their product originally springs from the tap. The problem is that it won’t stay so good without more government help.

Pipes and tunnels are aging fast with many of these subterranean networks nearly a century old. In 2003, the Environmental Protection Agency estimated that it would take nearly $277 billion to keep the nation’s water distribution systems up to par over the next 20 years. That is a lot of money. And to get the necessary federal, state and local funds, it will take a lot of public support for a system people blissfully take for granted.

The fear is that if too many people convert to bottled water, there would be even less political support for such spending. The last thing America needs is two water streams — one for the rich and another for the rest of us.

Right now most drinking water experts see little difference between bottled water and tap water. The E.P.A. already requires public systems to test for 96 contaminants and to release their findings to the public. The bottled water industry is regulated by the Food and Drug Administration, which requires many of the same tests — but a lot less frequently. And the F.D.A. reports are tucked away in the Washington bureaucracy. Both agencies could tighten those regulations and test for more contaminants. And the F.D.A. needs to make the results of their bottled water tests readily available to the public.

Any discussion about public water needs to mention the weak link: the pipes from the public system to your home faucet. In some cities, like New York, a substance is added to the water to help keep metals from leaching from older pipes — theirs and yours. Some health officials advise letting the water run for a minute to get the lead out, literally. And home filters are mostly about taste, although the some experts recommend filtering water for the young, the old, the infirm and the pregnant.

Filtered or not, American tap water is a national treasure that badly needs a little public respect and a lot of public funding to go with it

Friday, August 17, 2007

My New Favorite Newspaper: The Ottawa Citizen

I guess that I'm not a loyal guy. I switch sports teams depending on who is winning. Now I've learned that I switch newspapers depending on who is writing interesting stuff. Dan Gardner is! Below he refers to a paper published in the December 2006 issue of the Journal of Economic History. A copy of the paper is posted here

Forging A New Identity: The Costs and Benefits of Diversity in Civil War Combat Units for Black Slaves and Freemen.
(Dora Costa and Matthew Kahn). Journal of Economic History. 2006. 66(4): 936-62.

Dan also mentions our "forthcoming book". The book "Heroes and Cowards" will be published next year. If you like to bet, put your money on Princeton Press as the press that will publish it!

The math of diversity

Dan Gardner
The Ottawa Citizen

Friday, August 17, 2007

The official line on diversity has never wavered. Diversity is good. Diversity makes communities more interesting, livelier, stronger.

Lots of people have never bought that line. Diversity spells division, they insist. Diversity means cities fractured into ethnic enclaves and schools that resemble Babel. Diversity means the grandchildren of immigrants cheering when a foreign team beats Canadians.

With criticism of diversity treated as something unsavory, even racist, critics have tended to speak only sotto voce. But the decibels have grown a little since Robert Putnam, a Harvard political scientist, published the results of a new study that concludes the official line on diversity is wrong.

"Diversity, at least in the short run, seems to bring out the turtle in all of us," Putnam wrote.

Academics call the connections people form with others "social capital." In a community with plenty of social capital, people get involved and help out. Where social capital is low, people will step over your prostrate body as you bleed on the sidewalk. Putnam's massive study - based on more than 26,000 interviews - concludes that diversity diminishes social capital.

People trust each other less and they withdraw from their communities and neighbourhoods, Putnam wrote, leaving them to "huddle unhappily in front of the television."

Grim stuff. And credible, too. Robert Putnam is an acclaimed academic. In the 1990s, he shared thoughts with Bill Clinton in the White House. He's also a liberal who was so bothered by his findings that he delayed publishing his research so he could look for errors or alternative explanations. He didn't find any.

Putnam's study is also credible because it's only the latest to come to the same conclusion. "There are costs to diversity," says economist Matthew Kahn from his office at the University of California at Los Angeles. In 2002, Kahn and his wife, fellow economist Dora Costa, reviewed the literature and found that in the previous five years, 15 papers had explored the effects of diversity. All found diversity weakens communities.

People living in diverse settings are less likely to trust others, to give to charity, to volunteer, or even to fill out census forms. In a phrase, they are worse citizens.

So social science has spoken. Diversity divides. And multiculturalism is madness.

Well, not quite. That's the crude version of the research touted by conservative bloggers and columnists.

One fact that should never be overlooked is that diversity isn't permanent. People from different ethnic groups meet, talk and move in next door. Some marry and have kids. Lines shift and blur. Sometimes they disappear: There was a time not so long ago that Italians were a despised, marginalized, ghettoized people within North America, but today they are the old stock wrinkling their noses at the strange habits of newcomers.

This is why Putnam is careful to note that the costs of diversity apply "at least in the short term."

There's another kicker conservatives have missed. Most of the research has looked at the effect of ethnic diversity. But some researchers, including Kahn and Costa, have also looked at the effects of income diversity. And not only did they find that it, too, reduced social capital, "we found bigger effects for income diversity," Kahn says. Conservative pundits have somehow overlooked that finding.

The most important thing to bear in mind, however, is that while there may be costs associated with diversity, there are also benefits. "Economists yell and scream that every treatment has to be evaluated for both costs and benefits," Kahn says, sounding rather exasperated.

Quantifying the benefits of diversity isn't easy. What's the value of the diverse restaurants in a diverse city? How can we count and weigh the new ideas generated when diverse perspectives are shared? Jane Jacobs worked on these questions. So have others. But the math of diversity remains elusive.

Kahn and Costa made a brilliant contribution to this effort by looking at the experience of black soldiers in the American Civil War.

I know that sounds obscure but it's actually quite relevant. In the Union army, soldiers served in companies of 100 men and for a long list of reasons - which Kahn and Costa detail in a forthcoming book - the way those companies were assembled made them an almost ideal experiment in the effects of diversity.

In this experiment, a homogenous company is one made up mostly of former slaves from the South or mostly black freemen from the North. A diverse company was one that mixed the two.

For the army, diversity was not good. More soldiers went AWOL in diverse companies, the researchers found. More deserted. "In the short run, the combat unit benefited from homogeneity fostering social capital and thus minimizing shirking," Kahn and Costa write.

But diversity was good for soldiers. Those who served in diverse companies were more likely to move to a new town after the war, to choose a new name, to become literate. "In the long run," Kahn and Costa write, "men's human capital and information was best improved by serving in heterogeneous companies."

All this makes intuitive sense. Put dissimilar people together and they simply will not interact as well as a bunch of guys from the old home town. But give it time. Exposure to a mix of cultures, experiences and ideas broadens and improves us in ways that hangin' with the homeys doesn't.

As with anything that carries costs and benefits, the trick with diversity is to make sure the benefits outweigh the costs. How do we do that? That's a huge question and I have no problem admitting I can't answer it.

I am pretty sure about the first step, however. We have to acknowledge that the rosy official line on diversity is far too simplistic. We also have to realize that the same is true of the line the critics are pushing.

Once we are rid of dumb dichotomies we can get on with making the most of diversity.

Dan Gardner's column appears Wednesday, Friday and Saturday.

© The Ottawa Citizen 2007

Thursday, August 16, 2007

Public Relations and the Modern Academic

Suppose you went to the Harvard Economics Department or the Kennedy School and you surveyed senior faculty asking them how much time a week do they talk to reporters, what would the average be? Would the mean be lower if you surveyed Yale's Economics Department? If so, why?

With the rise of popular books and popular blogs, many academics are raising their popular profile and there appears to be infinite demand for our witty quotes in the popular media.

Public relations is a fascinating topic. In today's New York Times Arts section, Patricia Cohen has a piece titled "Backlash over book on policy for Israel". John Mearsheimer and Stephen Walt have guts. They are about to experience an old fashion beatdown. How do you go about quantifying which interest groups are powerful? What is their counter-factual for testing their claim about the power of the "Israel Lobby"? If we are addicted to oil and the oil is in the Middle East, why hasn't "self interest" led us to ditch Israel? I mention public relations here because it will be fascinating to hear how these fancy academics speak to the media and make their politically incorrect case for their ideas. What national debate could it start? Will Hilary Clinton wave this book around at the next debate? Will she stand on 9 of them to look taller when she debates Big Fred Thompson?

Since I will return to Boston for 1 week and won't be blogging, I thought I'd leave you with UCLA's public relations take on a new paper of mine. UCLA has a great public relations crew and here is a good example of what they do.

Environmental Shocks Reduce Likelihood of
Pro-Green Votes by Members of Congress

Conventional wisdom holds that environmental disasters lead Congress to toughen regulatory standards. But a new UCLA study has found that members of Congress were less likely to vote pro-green positions in the wake of catalytic events than for other environment-related legislation during the same period.

The reason? Legislation following environmental disasters is typically written by those with strong pro-environment voting records who propose more radical legislation. , such legislation often/tends to over-reaches, leading moderates and anti-environmentalists to vote against such bills.

“Environmental disasters polarize the Congress; they’re not uniting Congress,” said Matthew E. Kahn, a professor at the UCLA Institute of the Environment. “Environmental disasters give environmentalists the upper hand by changing the parameters of debate. In the aftermath of a shock such as the Exxon Valdez oil spill, the news media provide extensive coverage, members of Congress know that voters expect them to ‘do something, and environmentalists are aware that they may be able to enact ‘greener’ legislation. The polluter faces a nasty public relations problem and must decide how to lobby the Congress and the people to minimize the extra regulation it faces due to the event.

“The result,” Kahn said, “is often legislation that goes too far and turns off those who had taken the pro-environment position on other legislation in the same year.”

Kahn’s research is published in the August edition of the peer-reviewed Journal of Risk Uncertainty.

Kahn, an environmental economist who writes frequently about the costs and benefits of environmental regulation, detailed the voting records of U.S. House of Representatives members on 380 pieces of environmental legislation from 1973-2002. He utilized League of Conservation Voters records to identify significant legislation and whether a yes or no vote was considered pro-environment. He then compared those votes with the votes on 15 bills proposed in the aftermath of five well-known environmental disasters:

• Love Canal, New York. In 1978, President Carter declared a state of emergency near an industrial and chemical waste landfill after residents complained of high cancer rates, birth defects and other health problems and state officials found elevated levels of contaminants in the air and soil.

• Three Mile Island. The partial meltdown of a reactor at a nuclear power plant in Middletown, Penn., on March 28, 1979, was the most serious accident in U.S. commercial nuclear power plant history, although there were no deaths or injuries among plant workers in neighboring communities.

• Bhopal, India. A Union Carbide pesticide factory plant sprang a leak on Dec. 3, 1984, releasing thousands of gallons of highly toxic gas that killed more than 2,000 people.

• Chernobyl. On April 25-26, 1986, the world’s worst nuclear power accident at a plant 80 miles north of Kiev, in what is now Ukraine, killed more than 30 people immediately and force the evacuation of some 135,000 people in a 20-mile radius.

• Exxon Valdez. On March 24, 1989, a tanker spilled nearly 11 million gallons of oil into Alaska’s Prince William Sound.

All five events received extensive coverage in the news media, and Congress significantly increased the number of hearings to consider legislation – key elements of a “shock” that shapes public debate.

“I found that the average representative reduced his or her pro-environment voting propensity on catalytic bills relative to his her pro-environment voting record in the same calendar year on non-catalytic bills,” said Kahn, who holds a joint appointment in the UCLA Department of Economics. Kahn emphasized that the environmental shocks didn’t lead to reduced regulation, only a reduction in the propensity of individuals to vote the pro-environment position on the key bills identified by the League of Conservation Voters.

Love Canal was associated with the greatest increase in pro-environment votes and the greatest increase in regulatory activity, while the other events led to relatively minor expansion of regulatory programs. This may be explained by the sheer number of hazardous waste sites in the United States and the ineffectiveness of fines or other incentives to prevent contamination that had already occurred. Hence, the post-Love Canal creation of the massive Superfund program requiring the U.S. Environmental Protection Agency to rank sites for cleanup. In contrast, Chernobyl had little impact on the Nuclear Regulatory Commission, perhaps due to the limited number of nuclear power plants in this country.

“These five cases highlight that regulatory growth is least likely to take place after shocks when there are relatively few polluters who need to be regulated, such as power plants, or when existing profit-maximizing firms such as oil companies and manufacturing plants can be encouraged to alter their behavior based on credible fines or fear of social sanction,” Kahn said.

Nevertheless, Kahn said, the research has significant implications regarding the potential effect of well-publicized, non-environmental shocks, such as the 9/11 terrorist attacks, the recent bridge collapse in Minneapolis and consumer product recalls. He urged further research.

“If more ambitious risk regulation is voted on in the aftermath of shocks, does it raise the likelihood of more socially inefficient regulation being adopted as passions flare?” Kahn said. “Alternatively, do such shocks raise the likelihood of socially beneficial regulations being enacted because they helped diffused interest groups to work together against the tightly organized polluters?”

Tuesday, August 14, 2007

Some Arithmetic on the Cost of NYC Traffic Congestion

The Times is reporting that NYC will receive roughly $350 million federal dollars to address congestion. The article is vague about what is the "treatment" and how it could "cause" a reduction in congestion. But, let's ignore this detail! Given that time is our most scarce asset (except for bloggers and blog readers), what is congestion costing NYC?

“The average New York commuter now spends 49 hours stuck in traffic every year, up from 18 hours in 1982,” she said. “While some may be content to accept growing gridlock as a way of life, Mayor Bloomberg is not going to let traffic rob the Big Apple.

I will never understand how the Texas Transport Institute generates these numbers but let's take them seriously.

So the average commuter faces 31 hours more of commuting in NYC than in 1982. Suppose that there are 4 million commuters and the average after tax hourly wage is $15.

Aggregate willingness to pay to return to 1982 (ignoring guys who have lost their hair and their willingness to pay for that scarce commodity) = $1.9 billion or roughly $500 a commuter per year.

In this age of IPODs and blackberries, cool cars, and good sound systems in cars, is the cost of commuting really $15 an hour? I recognize that if your kid is sick and you need to get home quick, you'd be willing to pay a great deal to have a short commute that day.

New York City has experienced job decentralization and thus with many job centers there are suburban residential communities with close access to work. In a diverse society, there will be self selection --- those who don't mind commuting will live further from work.

So, I still wonder what is the real cost of big city congestion in a world where people can get things done while commuting and those who hate commuting have the choice of living closer to work. Perhaps an equity argument can be made that the lower middle class are "stuck in traffic" without fun toys to play with and not able to afford housing close to work. But, we then get into a question of what price per hour of their time do we use to translate the 31 hours (listed above) into a $ cost of congestion?

Monday, August 13, 2007

Could Energy Economics be the Next "Big Thing" in academic economics?

During the fall 2007 quarter, I will co-teach a new course at UCLA titled "Energy and the Modern Economy". My partner will be an astro-physicist named Mike Jura. I must admit that I feel for Mike. How many times do such smart guys get stuck with a guy like me? I've been trying to do my homework here. In my defense, in the past I've published several papers on energy demand and sprawl and hybrid vehicle demand. Still, I'm trying to get my hands around the topic of "what is energy economics?" and how do I cover it in my 5 weeks of the quarter?

My friends at UC Berkeley were kind enough to give me there course notes. They approach the topic from an industrial organization perspective (think of OPEC as a cartel or the California electricity crisis in 2000 being caused by strategic behavior of individual power plants ) while I want to approach this topic from an environmental perspective.

I'm toying with trying to take my lecture notes and turn them into a short book but we will see about that. Now that my first lecture is approaching, I'm wondering why I agreed to do something new. I always respected that Robert Lucas would offer new courses at Chicago but most guys don't bother to do this.

Could energy economics become big? My friend Gib Metcalf is hard at work on this subject. The policy relevance of this topic is obvious. The NBER has remained its environmental group the environmental and energy group. Energy embodies several key issues such as innovation, environmental externalities, national security, uncertainty, huge upfront investments, insecure property rights. In short, this is serious stuff!

I'm always searching for more good material and I found this today at Starbucks.

Promoting low-carbon fuels for California's energy future

Mike Wirth

Monday, August 13, 2007

The University of California report on implementing the governor's Low-Carbon Fuel Standard (LCFS) is an important signpost to California's energy future. The architects of the LCFS acknowledge we need major technology breakthroughs to meet its goals. What California also needs is policymaking that unleashes - not shackles - the power of the market.

By reducing the carbon intensity of transportation fuels 10 percent by 2020, the LCFS is designed to accelerate the development of efficient, low-carbon fuels in California's energy portfolio. This has never been tried anywhere in the world.

Meeting the LCFS goals will require the development of entirely new fuels - whether they be new low-carbon ethanol, biodiesel or other fuels. The California Air Resources Board recently made a change that enables an increase of ethanol in gasoline from 6 percent to 10 percent. That's a start, but to achieve the ultimate goals of the LCFS, we need to move beyond corn-based ethanol. The real promise - and the real challenge - of the LCFS is in developing new technology that will allow nonfood sources, such as wood pulp or agricultural waste, to be used for renewable fuels. This will liberate us from the no-win scenario of our fuel sources competing with our food for land use.

The search for this new fuel technology will require the kind of pioneering approach for which California has become renowned. Public-private research partnerships are vital if we are to realize the vision and businesses need to come together to collaborate on emerging technology, as Chevron and Weyerhaeuser Co. are doing to conduct advanced R & D in commercial-scale biofuels production using plant fiber and other cellulose-based materials.

But new technology is just one part of the equation. Economics is another. How can California policymakers develop a program that has the greatest likelihood of success? By using the power of the market to encourage investors to develop commercially viable low-carbon fuels - and here's how:

-- Focus the program on liquid fuels for cars and SUVs, rather than non-liquid fuels or diesel for heavy duty vehicles. Liquid fuels for cars and SUVs are the largest sector of petroleum products and offer the biggest market for any potential new fuels, so let's get this right first.

-- Encourage innovation and investment certainty with a milestone-based approach. The first milestone could be a requirement for 200 million gallons a year of truly breakthrough low-carbon California transportation fuel by 2012. Setting interim milestones through 2020 provides a stronger incentive for new technologies to develop and allows the state to assess the progress being made. If we meet the early milestones and the emerging technology proves to be commercially viable, there will be more certainty and an incentive to invest the billions of dollars needed to produce the fuel in meaningful quantities.

-- Reduce the economic burden of compliance and impact to markets by enabling California's fuel providers to trade credits. A flexible credit trading program amongst providers would help achieve the goal of the LCFS in the most cost-effective manner. Lower costs are good news for everyone, especially for consumers.

While we work to develop the new technologies that can make this program successful, it's important to remember that the Low-Carbon Fuel Standard remains an experiment, and California is the testing ground. The policy decisions made today will determine whether the consumers of the future are well served in terms of supply, affordability and quality.

It is a huge challenge to re-engineer an energy supply system and marketplace that have been a hundred years in the making. California has placed a stake in the ground, and it falls to us all to meet that challenge.

Mike Wirth is executive vice president, downstream, for the Chevron Corp.

This article appeared on page D - 9 of the San Francisco Chronicle

Saturday, August 11, 2007

Renters of the World Unite: May Interest Rates Keep Rising!

As a renter, I'm starting to like what I'm seeing in the over-heated Western Los Angeles housing market! My question for Big Ben Bernanke regards China's foreign reserves. Suppose you were China's Secretary of the Treasury. If you stopped investing in U.S T-bills, what else could you do with your money? What risk adjusted rate of return could you earn in Africa or Europe? I'm not a great macro-economist but I wonder what would happen to U.S interest rates if China sold off a large number of the bonds it holds?

Are you convinced that there is an "externality" justification for the Fed to get involved and preempt a "liquidity crisis"?

Why didn't the government get involved and cap Los Angeles home prices at $1.5 million when they started to rise sharply over the last 5 years?

August 12, 2007
In a Spiraling Credit Crisis, Large Mortgages Grow Costly

When an investment banker set out to buy a $1.5 million home on Long Island last month, his mortgage broker quoted an interest rate of 8 percent. Three days later, when the buyer said he would take the loan, the mortgage banker had bad news: the new rate was 13 percent.

“I have been in the business 20 years and I have never seen” such a big swing in interest rates, said the broker, Bob Moulton, president of the Americana Mortgage Group in Manhasset, N.Y.

“There is a lot of fear in the markets,” he added. “When there is fear, people have a tendency to overreact.”

The investment banker’s problem was that he was taking out a so-called jumbo mortgage — a loan greater than the $417,000 mortgage that can be sold to the federally chartered enterprises, Freddie Mac and Fannie Mae. The market for large mortgages has suddenly dried up.

For months after problems appeared in the subprime mortgage market — loans to customers with less-than-sterling credit — government officials and others voiced confidence that the problem could be contained to such loans. But now it has spread to other kinds of mortgages, and credit markets and stock markets around the world are showing the effects.

Those with poor credit, whether companies or individuals, are finding it much harder to borrow, if they can at all. It appears that many homeowners who want to refinance their mortgages — often because their old mortgages are about to require sharply higher monthly payments — will be unable to do so.

Some economists are trimming their growth outlook for this year, fearing that businesses and consumers will curtail spending.

“In the last 60 days, we’ve seen a substantial reduction in mortgage availability,” said Robert Barbera, the chief economist of ITG, a brokerage firm. “That in turn suggests that home purchases will fall further. Rising home prices were the oil that greased the wheel of this engine of growth, and falling home prices are the sand in the gears that are causing it to grind to a halt.”

At the heart of the contagion problem is the combination of complexity and leverage. The securities that financed the rapid expansion of mortgage lending were hard to understand, and some of those who owned them had borrowed so much that even a small drop in value put pressure on them to raise cash.

“You find surprising linkages that you never would have expected,” said Richard Bookstaber, a former hedge fund manager and author of a new book, “A Demon of Our Own Design: Markets, Hedge Funds and the Perils of Financial Innovation.”

“What matters is who owns what, who is under pressure to sell, and what else do they own,” he said. People with mortgage securities found they could not sell them, and so they sold other things. “If you can’t sell what you want to sell,” he said, “you sell what you can sell.”

He recalled that the crisis that brought down the Long-Term Capital Management hedge fund in 1998 started with Russia’s default on some of its debt. Long-Term Capital had not invested in Russia’s bonds, but some of those who owned such bonds, and needed to raise cash, sold instruments that Long-Term Capital also owned, and on which it had borrowed a lot of money.

It appears that in this case, securities backed by subprime mortgages were owned by people who also owned securities backed by leveraged corporate loans. With the market for mortgage paper drying up, and a need to raise cash, they sold the corporate securities and that market began to suffer.

The Wall Street investment banker who wanted a jumbo mortgage had a good credit score, and is not a subprime borrower. But private mortgage securities are now hard to sell, leading to his problem. In the end, he was able to get a mortgage with a lower interest rate, but it will adjust in five years, possibly to a much higher level.

The size of the rate increase he faced is unusual. But all jumbo lenders have raised rates. reports that conventional 30-year mortgages cost about 6.23 percent now, less than they did a few weeks ago, due to a decline in Treasury bond rates. But the average jumbo rate is now 6.94 percent. The spread between the two rates rose from less than a quarter of a percentage point to more than two-thirds of a point.

Jumbo mortgages are most important in areas with high home prices, most notably on the East and West coasts. “In California, it has shut down the purchase market,” said Jeff Jaye, a mortgage broker in the Bay area. “It has shut down the refi market.”

The problems with subprime mortgages erupted as home prices began to slip in some markets, making it harder to refinance mortgages. There were reports that a surprisingly large number of loans made in 2006 were defaulting only months after the loans were made.

Many of those mortgages had been financed by securities, highly rated by credit agencies, that suddenly seemed less secure than they had. Hedge funds that owned those securities, and had borrowed against them, were asked to put up more money to secure their loans.

Two Bear Stearns hedge funds were forced to liquidate, and investors lost everything. Investors shied away from buying new mortgage securities, and several lenders went out of business, unable to finance the mortgage loans they had promised to make.

With the credit gears clogged, there has been a sudden lust for cash at many levels of the financial system. Last week banks in Europe and the United States tried to borrow so much money that central banks had to step in to keep interest rates from rising.

“What I suspect is that there is a demand for credit by institutions that don’t want to sell the securities they own, because the bids are so low, and the banks are extending credit to them,” said William L. Silber, a professor of economics and finance at New York University and the author of the book “When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America’s Monetary Supremacy.”

Fannie Mae and Freddie Mac, the government-sponsored enterprises, can still purchase mortgages and issue securities, guaranteeing that the underlying mortgages will not default. Those guarantees are still accepted by investors, and borrowers who meet their standards — meaning they can get so-called conforming mortgages — still can borrow. But those who want larger mortgages, or cannot make down payments, face a harder burden.

Homeowners with adjustable mortgages can refinance them at any time, so long as they qualify for a new loan, so some facing a payment increase may be able to wait it out and refinance later, if the market improves.

There have been sudden changes in the mortgage market before, but this one may be both more severe and more damaging than those in the past.

In past years most borrowers had 30-year mortgages with fixed rates. If such borrower kept his job, he usually could meet the monthly payments, even if the value of the home had declined so much that he could not et a new mortgage.

Now, however, many mortgages call for sharply rising monthly payments after a few years, and borrowers were given loans without regard to their ability to meet the higher payments. Lenders assumed the mortgage could be refinanced, and that rising home prices would assure repayment of the loan. It became common to offer homebuyers loans to finance the entire purchase price of a home.

In June, banking regulators ordered that adjustable-rate loans be given only to borrowers who could afford the rate at which it was likely to be reset, meaning that many borrowers would not qualify for refinancings even if their homes had not lost value. Such a rule three years ago might have prevented the crisis, Mr. Barbera said, but imposing it now may worsen the problem.

Investors made the mistake of assuming that housing prices would continue to rise, said Dwight M. Jaffee, a real estate finance professor at the University of California, Berkeley. “I can’t believe these sophisticated guys made this mistake,” he said. “But I would remind you that lots of investors bought dot-com stocks.”

He added, “When you are an investor, and everybody else is doing the same thing and making money, you often forget to ask the hard question.”

And that is how a problem that began with Wall Street excesses that provided easy credit to borrowers — and made it possible for people to pay more for homes — has now turned around and severely damaged the very housing market that it helped for so long.

Friday, August 10, 2007

Do Public Officials Live a "Green Life" in Private? The Case of Los Angeles

Should elected officials lead by example? This Los Angeles Times reporter has done in homework. He tracked down the water consumption of many of the leading Los Angeles political leaders and showed that they often have a very big "ecological footprint". Maybe we need to cut their wages to lower their income to reduce their consumption?
The theme of "environmental hypocrisy" pops up again and again in the popular media but I don't see any environmental economists working on this. It is a difficult topic to work on because it involves private information --- namely the consumption of natural resources by people in the privacy of their own day to day life (think of Al Gore and his flying around and household energy consumption).,0,6259425,print.story?coll=la-home-center

Officials go with the flow
Despite his plea to save water, mayor and other leaders are heavy users.
By Duke Helfand
Los Angeles Times Staff Writer

August 10, 2007

Los Angeles Mayor Antonio Villaraigosa challenged residents this summer to "change course" and slash their water use by 10% in the face of a historic drought.

But records show that the mayor and several other top city officials have long been heavy water users themselves.

In Villaraigosa's case, even if he had made a 10% reduction at the two homes where he has lived since winning election in 2005, he still would have used nearly twice as much water as comparable properties in the vicinity.

City Atty. Rocky Delgadillo and Councilman Tony Cardenas surpassed the mayor, using more than twice the number of gallons over the last two years as typical property owners in their parts of town.

In fact, a review of Department of Water and Power documents shows that at least nine of the city's 18 elected leaders used higher than average amounts of water -- sometimes a little, other times a lot -- over the last two years.

Delgadillo, the largest user, consumed 2.7 times as much water at his home near Hancock Park as similar owners in central Los Angeles -- 890,120 gallons compared to a median of 328,524, according to figures provided by the DWP.

During that period, Delgadillo's water service was shut off briefly after he and his wife failed to pay their utility bill.

The DWP said it was too early to tell if any officials had cut back since the mayor called for greater conservation in June.

In a series of interviews over the last week, elected leaders were quick to say that water consumption depends on several factors, including geography, climate, lawn size, the number of people at a residence and the use of swimming pools or Jacuzzis.

Still, conservationists stressed the importance of public figures displaying thrifty ways as the city confronts shrinking water supplies and the driest season on record.

"Elected officials should lead by example," said Craig Noble, a spokesman for the Natural Resources Defense Council. "It is really hard for the public to take these kinds of exhortations to heart if the people who are telling them to conserve are not doing it as well."

The stakes throughout Southern California are high this year, given what water officials have described as unprecedented dry conditions.

That is why Villaraigosa held a news conference in June, urging Angelenos to cut their water use by 10%. Speaking at a municipal golf course in the San Fernando Valley, the mayor said conservation was a top priority because high temperatures and record low rainfall had combined with an unusually small snowpack in the eastern Sierra Nevada, a key source of water for an increasingly thirsty city.

"Los Angeles needs to change course and conserve water to steer clear of this perfect storm," Villaraigosa said then.

But DWP records show that Villaraigosa has been contributing to that storm. He and his family used 386,716 gallons of water at their Mount Washington home in the year before they moved to Getty House in October 2005, according to records and interviews. By contrast, typical property owners with similar-sized lots in that area used about 209,000 gallons.

Villaraigosa blamed his comparatively high water use at Mount Washington on gophers that chewed holes through a rubberized drip-irrigation system installed beneath his hillside backyard to protect against erosion and to ostensibly save water.

"We were unable to determine there was a leak. It's underground," he said. "We intended to conserve water by purchasing a drip water system."

Villaraigosa said he did not notice increases in his water bill because his wife handled that chore. "I didn't have access to those bills," he said.

When Villaraigosa moved into Getty House, the city-owned manor in Windsor Square already had a record as a water guzzler.

The 22,000-square-foot property, which includes a backyard fountain, a tennis court and lush landscaping, used nearly twice as much water as residential lots of similar size during the year before the mayor moved in.

After Villaraigosa arrived, Getty's water use rose to more than twice the volume of similar properties. Villaraigosa and his aides explained that the expansive house serves as a private residence and public venue and is regularly used for official city events that attract hundreds of visitors.

City officials said that low-flow toilets and showers were installed as part of an extensive restoration in the mid-1990s and that a high-tech irrigation system was added last month to conserve water.

Only five blocks from Getty House, Delgadillo has struggled unsuccessfully to curb water use at his 88-year-old home on a corner lot that is fringed with large trees, rosebushes and other lush greenery.

Delgadillo's backyard sprinkler system and his house have "had innumerable leaks over the past few years," said spokesman Nick Velasquez, adding that Delgadillo and his wife, Michelle, have "worked to identify and repair these leaks, and continue to recognize the importance of water conservation."

Even as the Delgadillos used substantial amounts of water, they saw their service shut off last year when they failed to pay their utility bill. The service was resumed after they paid.

"Like many families, my family tries to pay its bills promptly," Delgadillo said in a statement. "Sometimes, when there are oversights and the bills aren't paid on time, we get notice, and we remedy the situation."

The Times obtained water records for Delgadillo and the other officials under the California Public Records Act. The data are public only because city leaders hold sway over the municipal utility's policies.

Water use by two of the 15 council members, Jan Perry and Herb Wesson, could not be gauged because they live in multiunit buildings where it was impossible to determine individual consumption. Not enough data were available on the water use of a third member, Richard Alarcon, because he joined the council only in March.

The officials' water consumption was calculated using two sets of figures: The DWP first provided The Times with the number of gallons used by each official. Then, for comparison, the agency provided the median usage for lots of similar size in the general vicinity of each official's residence. That method allowed officials who were living in warmer areas, like the San Fernando Valley, to be evaluated against properties in their own region rather than against cooler areas such as San Pedro, where water needs can be less.

The data reveal that some City Hall leaders who portray themselves as conservationists have water-use habits that contradict that image.

Cardenas, for example, appeared alongside Villaraigosa at the June news conference calling for residents to reduce their water use. But compared to typical customers in the Valley, he used more than double the amount of water at his Panorama City home over the last two years.

He attributed the high level to his packed house: His family of six was joined by five additional relatives for a 14-month span between 2005 and 2006.

But Cardenas said that his two Labradors also were culprits, repeatedly chewing off sprinkler heads in the backyard, causing water to leak and gush. Cardenas has since given one of the dogs away and said he was trying to train the other to stop chewing. "But dogs will be dogs," he said.

To conserve water, Cardenas said, he converted more than half of his backyard this summer to concrete, paving stones and plants that require less water. He now has five sprinkler heads, down from 15. And he said he waters only at night.

"This is going to be a wake-up call for us council members and all the people of L.A.," Cardenas said. "Even though we try to conserve water, we can all do a better job."

For some officials, conservation and appearance must be balanced: Councilman Dennis Zine said he waters only three times a week at his West Hills home but makes sure to maintain the large frontyard because it's "not good for a City Council member to have an unkempt lawn when you're trying to establish a good quality of life in your community."

Some city leaders are relatively light consumers, including Councilman Bernard C. Parks, who used less water proportionately at his Crenshaw-area home than any of his elected colleagues over the last year -- only 35% of what was typical for properties of similar size.

Parks' chief of staff, Bernard C. Parks Jr., said the frugal use of water reflects his parents' busy lifestyle. "You've got two people who are conscientious over water use and also aren't home that often," he said.

City Controller Laura Chick used less than average amounts of water, as did City Council President Eric Garcetti and council members Jack Weiss, Ed Reyes and Janice Hahn. (Weiss actually used about four times the amount as Chick, but still ranks among the most water-thrifty when compared to his Westside neighbors.)

Chick said she installed cactus and other drought-resistant landscaping at her hillside home in Silver Lake to save water. "I'm really a fanatic," she said. "I don't let the water run when I'm not using it."

Other factors
But Chick and other officials acknowledged that other factors may have contributed to their low water use. Chick, Garcetti, Parks and Reyes, for example, have no front lawns. Chick and Hahn also are empty nesters.

"I can't compare to someone who has kids and does the laundry every day," said Hahn, who lives on a San Pedro hillside overlooking the ocean.

As for those city leaders who use more than their share of water, they can look to Villaraigosa for guidance. The news release he distributed at his June news conference offered "10 simple ways to conserve water."

Among the tips: take shorter showers, install "smart" sprinkler systems, stop using toilets as trash cans and fix leaky pipes.

Times staff writers Matt Lait and Doug Smith contributed to this report.

Wednesday, August 08, 2007

An Old Debate About "Sustainable Growth" Between Paul Romer and Paul Ehrlich

Don't ask me why but I was wondering what Paul Romer is writing recently so I went to his webpage. He appears to believe in quality of output over quantity. I could learn from him! I wondering if someday soon the University of Chicago will replace the graduate PHD core exams with Aplia exams. At least in that case, they would be graded?

Below I report a brief piece of a Reason Interview from 2001 where he throws some punches at his Stanford colleague Paul Ehrlich. Romer appears to be celebrating that enough beautiful minds can take a "finite globe" and create new products that allow for ever rising standard of living --- he points to sand being converted into
semiconductors. How would an ecological economist respond to this optimism? Implicit in neo-classical logic is that various capital stocks are substitutable and that price signals provide an "early warning" system if we are getting close to running out of anything crucial to survival.

reason: You have written, "There is absolutely no reason why we cannot have persistent growth as far into the future as you can imagine." Your Stanford colleague, the biologist Paul Ehrlich, disagrees. He believes that economic growth is an unsustainable cancer that is destroying the planet. How would you go about convincing people like Ehrlich that they are wrong?

Romer: Paul seems singularly immune to being convinced. He has been on the wrong side of these issues, so I wouldn't set that as my standard of persuading anybody. However, if I took a neutral observer who might listen to me and Paul, there's a pretty easy way to explain why I'm right and why Paul misunderstands. You have to define what you mean by growth. If by growth you mean population, more people, then Paul is actually right. There are physical limits on how many people you can have on Earth. If we took peak population growth rates from the '70s at 2 percent per year, you can only sustain that for a couple of hundred years before you really run into true physical constraints.

reason: I would remind you that Ehrlich said that there would be billions of people dying of starvation in the 1980s.

Romer: He got the potentials wrong and the time frame wrong, but it's absolutely true that population growth will have to come to zero at some point here on Earth. The only debate is about when.

Now, what do I mean when I say growth can continue? I don't mean growth in the number of people. I don't even mean growth in the number of physical objects, because you clearly can't get exponential growth in the amount of mass that each person controls. We've got the same mass here on Earth that we had 100,000 years ago and we're never going to get any more of it. What I mean is growth in value, and the way you create value is by taking that fixed quantity of mass and rearranging it from a form that isn't worth very much into a form that's worth much more. A canonical example is turning sand on the beach into semiconductors.

Sunday, August 05, 2007

The Diversity Debate

A friend of mine emailed me that I was quoted in today's Boston Globe and International Herald Tribune. Below you can read the longer article that focuses on Robert Putnam's new work on the cost of diversity. His Bowling Alone book led us to begin to do research on social capital's causes and consequences. Putnam is one of the rare social scientists (Robert Fogel is another) who generates his own large sample data sets to test hypotheses.

Dora Costa and I have written one economics survey paper that concisely highlights what empirical economists had learned about diversity's consequences for civic engagement as of 2003 (see Available here. See our paper titled "Civic Engagement".

The article's author (Michael Jonas) impressed me. In an ideal world, he would have discussed my work (joint with Dora) on the benefits of diversity (see our December 2006 paper in the Journal of Economic History). Dora and I have emphasized that diversity imposes some costs but offers other benefits such as learning possibilities.

The downside of diversity
A Harvard political scientist finds that diversity hurts civic life. What happens when a liberal scholar unearths an inconvenient truth?

By Michael Jonas | August 5, 2007

IT HAS BECOME increasingly popular to speak of racial and ethnic diversity as a civic strength. From multicultural festivals to pronouncements from political leaders, the message is the same: our differences make us stronger.

But a massive new study, based on detailed interviews of nearly 30,000 people across America, has concluded just the opposite. Harvard political scientist Robert Putnam -- famous for "Bowling Alone," his 2000 book on declining civic engagement -- has found that the greater the diversity in a community, the fewer people vote and the less they volunteer, the less they give to charity and work on community projects. In the most diverse communities, neighbors trust one another about half as much as they do in the most homogenous settings. The study, the largest ever on civic engagement in America, found that virtually all measures of civic health are lower in more diverse settings.

"The extent of the effect is shocking," says Scott Page, a University of Michigan political scientist.

The study comes at a time when the future of the American melting pot is the focus of intense political debate, from immigration to race-based admissions to schools, and it poses challenges to advocates on all sides of the issues. The study is already being cited by some conservatives as proof of the harm large-scale immigration causes to the nation's social fabric. But with demographic trends already pushing the nation inexorably toward greater diversity, the real question may yet lie ahead: how to handle the unsettling social changes that Putnam's research predicts.

"We can't ignore the findings," says Ali Noorani, executive director of the Massachusetts Immigrant and Refugee Advocacy Coalition. "The big question we have to ask ourselves is, what do we do about it; what are the next steps?"

The study is part of a fascinating new portrait of diversity emerging from recent scholarship. Diversity, it shows, makes us uncomfortable -- but discomfort, it turns out, isn't always a bad thing. Unease with differences helps explain why teams of engineers from different cultures may be ideally suited to solve a vexing problem. Culture clashes can produce a dynamic give-and-take, generating a solution that may have eluded a group of people with more similar backgrounds and approaches. At the same time, though, Putnam's work adds to a growing body of research indicating that more diverse populations seem to extend themselves less on behalf of collective needs and goals.

His findings on the downsides of diversity have also posed a challenge for Putnam, a liberal academic whose own values put him squarely in the pro-diversity camp. Suddenly finding himself the bearer of bad news, Putnam has struggled with how to present his work. He gathered the initial raw data in 2000 and issued a press release the following year outlining the results. He then spent several years testing other possible explanations.

When he finally published a detailed scholarly analysis in June in the journal Scandinavian Political Studies, he faced criticism for straying from data into advocacy. His paper argues strongly that the negative effects of diversity can be remedied, and says history suggests that ethnic diversity may eventually fade as a sharp line of social demarcation.

"Having aligned himself with the central planners intent on sustaining such social engineering, Putnam concludes the facts with a stern pep talk," wrote conservative commentator Ilana Mercer, in a recent Orange County Register op-ed titled "Greater diversity equals more misery."

Putnam has long staked out ground as both a researcher and a civic player, someone willing to describe social problems and then have a hand in addressing them. He says social science should be "simultaneously rigorous and relevant," meeting high research standards while also "speaking to concerns of our fellow citizens." But on a topic as charged as ethnicity and race, Putnam worries that many people hear only what they want to.

"It would be unfortunate if a politically correct progressivism were to deny the reality of the challenge to social solidarity posed by diversity," he writes in the new report. "It would be equally unfortunate if an ahistorical and ethnocentric conservatism were to deny that addressing that challenge is both feasible and desirable."

. . .

Putnam is the nation's premier guru of civic engagement. After studying civic life in Italy in the 1970s and 1980s, Putnam turned his attention to the US, publishing an influential journal article on civic engagement in 1995 that he expanded five years later into the best-selling "Bowling Alone." The book sounded a national wake-up call on what Putnam called a sharp drop in civic connections among Americans. It won him audiences with presidents Bill Clinton and George W. Bush, and made him one of the country's best known social scientists.

Putnam claims the US has experienced a pronounced decline in "social capital," a term he helped popularize. Social capital refers to the social networks -- whether friendships or religious congregations or neighborhood associations -- that he says are key indicators of civic well-being. When social capital is high, says Putnam, communities are better places to live. Neighborhoods are safer; people are healthier; and more citizens vote.

The results of his new study come from a survey Putnam directed among residents in 41 US communities, including Boston. Residents were sorted into the four principal categories used by the US Census: black, white, Hispanic, and Asian. They were asked how much they trusted their neighbors and those of each racial category, and questioned about a long list of civic attitudes and practices, including their views on local government, their involvement in community projects, and their friendships. What emerged in more diverse communities was a bleak picture of civic desolation, affecting everything from political engagement to the state of social ties.

Putnam knew he had provocative findings on his hands. He worried about coming under some of the same liberal attacks that greeted Daniel Patrick Moynihan's landmark 1965 report on the social costs associated with the breakdown of the black family. There is always the risk of being pilloried as the bearer of "an inconvenient truth," says Putnam.

After releasing the initial results in 2001, Putnam says he spent time "kicking the tires really hard" to be sure the study had it right. Putnam realized, for instance, that more diverse communities tended to be larger, have greater income ranges, higher crime rates, and more mobility among their residents -- all factors that could depress social capital independent of any impact ethnic diversity might have.

"People would say, 'I bet you forgot about X,'" Putnam says of the string of suggestions from colleagues. "There were 20 or 30 X's."

But even after statistically taking them all into account, the connection remained strong: Higher diversity meant lower social capital. In his findings, Putnam writes that those in more diverse communities tend to "distrust their neighbors, regardless of the color of their skin, to withdraw even from close friends, to expect the worst from their community and its leaders, to volunteer less, give less to charity and work on community projects less often, to register to vote less, to agitate for social reform more but have less faith that they can actually make a difference, and to huddle unhappily in front of the television."

"People living in ethnically diverse settings appear to 'hunker down' -- that is, to pull in like a turtle," Putnam writes.

In documenting that hunkering down, Putnam challenged the two dominant schools of thought on ethnic and racial diversity, the "contact" theory and the "conflict" theory. Under the contact theory, more time spent with those of other backgrounds leads to greater understanding and harmony between groups. Under the conflict theory, that proximity produces tension and discord.

Putnam's findings reject both theories. In more diverse communities, he says, there were neither great bonds formed across group lines nor heightened ethnic tensions, but a general civic malaise. And in perhaps the most surprising result of all, levels of trust were not only lower between groups in more diverse settings, but even among members of the same group.

"Diversity, at least in the short run," he writes, "seems to bring out the turtle in all of us."

The overall findings may be jarring during a time when it's become commonplace to sing the praises of diverse communities, but researchers in the field say they shouldn't be.

"It's an important addition to a growing body of evidence on the challenges created by diversity," says Harvard economist Edward Glaeser.

In a recent study, Glaeser and colleague Alberto Alesina demonstrated that roughly half the difference in social welfare spending between the US and Europe -- Europe spends far more -- can be attributed to the greater ethnic diversity of the US population. Glaeser says lower national social welfare spending in the US is a "macro" version of the decreased civic engagement Putnam found in more diverse communities within the country.

Economists Matthew Kahn of UCLA and Dora Costa of MIT reviewed 15 recent studies in a 2003 paper, all of which linked diversity with lower levels of social capital. Greater ethnic diversity was linked, for example, to lower school funding, census response rates, and trust in others. Kahn and Costa's own research documented higher desertion rates in the Civil War among Union Army soldiers serving in companies whose soldiers varied more by age, occupation, and birthplace.

Birds of different feathers may sometimes flock together, but they are also less likely to look out for one another. "Everyone is a little self-conscious that this is not politically correct stuff," says Kahn.

. . .

So how to explain New York, London, Rio de Janiero, Los Angeles -- the great melting-pot cities that drive the world's creative and financial economies?

The image of civic lassitude dragging down more diverse communities is at odds with the vigor often associated with urban centers, where ethnic diversity is greatest. It turns out there is a flip side to the discomfort diversity can cause. If ethnic diversity, at least in the short run, is a liability for social connectedness, a parallel line of emerging research suggests it can be a big asset when it comes to driving productivity and innovation. In high-skill workplace settings, says Scott Page, the University of Michigan political scientist, the different ways of thinking among people from different cultures can be a boon.

"Because they see the world and think about the world differently than you, that's challenging," says Page, author of "The Difference: How the Power of Diversity Creates Better Groups, Firms, Schools, and Societies." "But by hanging out with people different than you, you're likely to get more insights. Diverse teams tend to be more productive."

In other words, those in more diverse communities may do more bowling alone, but the creative tensions unleashed by those differences in the workplace may vault those same places to the cutting edge of the economy and of creative culture.

Page calls it the "diversity paradox." He thinks the contrasting positive and negative effects of diversity can coexist in communities, but "there's got to be a limit." If civic engagement falls off too far, he says, it's easy to imagine the positive effects of diversity beginning to wane as well. "That's what's unsettling about his findings," Page says of Putnam's new work.

Meanwhile, by drawing a portrait of civic engagement in which more homogeneous communities seem much healthier, some of Putnam's worst fears about how his results could be used have been realized. A stream of conservative commentary has begun -- from places like the Manhattan Institute and "The American Conservative" -- highlighting the harm the study suggests will come from large-scale immigration. But Putnam says he's also received hundreds of complimentary emails laced with bigoted language. "It certainly is not pleasant when David Duke's website hails me as the guy who found out racism is good," he says.

In the final quarter of his paper, Putnam puts the diversity challenge in a broader context by describing how social identity can change over time. Experience shows that social divisions can eventually give way to "more encompassing identities" that create a "new, more capacious sense of 'we,'" he writes.

Growing up in the 1950s in small Midwestern town, Putnam knew the religion of virtually every member of his high school graduating class because, he says, such information was crucial to the question of "who was a possible mate or date." The importance of marrying within one's faith, he says, has largely faded since then, at least among many mainline Protestants, Catholics, and Jews.

While acknowledging that racial and ethnic divisions may prove more stubborn, Putnam argues that such examples bode well for the long-term prospects for social capital in a multiethnic America.

In his paper, Putnam cites the work done by Page and others, and uses it to help frame his conclusion that increasing diversity in America is not only inevitable, but ultimately valuable and enriching. As for smoothing over the divisions that hinder civic engagement, Putnam argues that Americans can help that process along through targeted efforts. He suggests expanding support for English-language instruction and investing in community centers and other places that allow for "meaningful interaction across ethnic lines."

Some critics have found his prescriptions underwhelming. And in offering ideas for mitigating his findings, Putnam has drawn scorn for stepping out of the role of dispassionate researcher. "You're just supposed to tell your peers what you found," says John Leo, senior fellow at the Manhattan Institute, a conservative think tank. "I don't expect academics to fret about these matters."

But fretting about the state of American civic health is exactly what Putnam has spent more than a decade doing. While continuing to research questions involving social capital, he has directed the Saguaro Seminar, a project he started at Harvard's Kennedy School of Government that promotes efforts throughout the country to increase civic connections in communities.

"Social scientists are both scientists and citizens," says Alan Wolfe, director of the Boisi Center for Religion and American Public Life at Boston College, who sees nothing wrong in Putnam's efforts to affect some of the phenomena he studies.

Wolfe says what is unusual is that Putnam has published findings as a social scientist that are not the ones he would have wished for as a civic leader. There are plenty of social scientists, says Wolfe, who never produce research results at odds with their own worldview.

"The problem too often," says Wolfe, "is people are never uncomfortable about their findings."

Michael Jonas is acting editor of CommonWealth magazine, published by MassINC, a nonpartisan public-policy think tank in Boston.

Thursday, August 02, 2007

Environmental Economists Seize a Piece of the Washington Post's Editorial Page

Academic economists are all over the popular press these days. Whether we are investigating NBA referee racial bias or parking tickets at the UN or advocating higher or lower taxes for hedge fund managers, we have an opinion backed up by a rigorous model and a few favorite facts. Until today, environmental economists have not gotten their fair share of the newsprint. After all, the green economists are working on "big" issues that affect both efficiency and equity dimensions.

In today's Washington Post, Max and Richard help to level the playing field a pinch.

I had my chance next monday. The Fox News called me from their Los Angeles office to participate in a monday TV interview on explaining differences in congestion policies between Orange County and Los Angeles county as both counties attempt to deal with clogged highways. I won't be in LA on that day and so I lost my chance for 15 seconds of fame. I told the guy that I have a face for radio but he still he wanted to send a camera crew to powder me.

China's Chance to Lead
By Maximilian Auffhammer and Richard Carson
Thursday, August 2, 2007; Page A21

China is about to emerge as the world's leading emitter of greenhouse gases, a position the United States has held since 1890. Now is the time for China to take the lead in finding a way to reduce global emissions, which the United States has thus far failed to do. It should start by imposing a sizable tax on the carbon content of its fossil fuel consumption and by heading an effort among other major trading countries to do the same.
China would gain in several ways from implementing a substantial carbon tax. By reducing its fossil fuel consumption, China would prevent the deaths of hundreds of thousands of citizens because of the short- and long-term consequences of air pollution from burning coal. Investments in energy-efficient durable goods, encouraged by a carbon tax, would generate energy savings over the lengthy life of these investments. The demands of China's rapid economic growth are outstripping the country's ability to provide the infrastructure necessary for continued growth; a carbon tax would slow short-term growth and allow infrastructure investments to catch up. Ultimately, this would lead to greater long-term growth. If China fears a drag on its economy from the carbon tax, it could make such a tax partially or fully revenue neutral by reducing other taxes. For China, as for many rapidly industrializing countries, a carbon tax represents the possibility of additional payoffs. From an overall economic perspective, it would be more efficient than many other forms of taxation. It would be harder to evade and easier to collect (since a resource tax on fossil fuel use is already in place), and it would be more progressive than many existing taxes.
The alternative to a global carbon tax is to continue building on the Kyoto Protocol, which the world's industrialized countries, minus the United States and Australia, have ratified. The United States could potentially come to terms with the industrialized signatories by agreeing to effectively constrain its emissions to original Kyoto levels but with a later deadline. This would suit China's expressed desire that industrialized nations bear the burden of cutting emissions while its own economy continues to expand. However, these actions are unlikely to result in a sizable enough reduction to offset projected annual increases by China -- which are roughly equal to France's total emissions -- and other rapidly industrializing countries.
China's argument for making no substantial reductions is one of fairness: The developed countries that are members of the Organization for Economic Cooperation and Development have contributed most of the excess greenhouse gases to the atmosphere and should bear most of the burden of reducing emissions.
This position resonates strongly among developing countries but would doom the world to the potentially devastating consequences of large-scale climate change.
The only way out of this dilemma is for the world's major trading nations to come to a consensus on implementing a reasonably high carbon tax. The country with the most to gain is China. Indeed, the gains are likely to be sufficiently large that it is in China's interest to adopt such a tax even if other countries do not.
Widespread agreement among the major trading nations on a common carbon tax would disproportionately benefit China because it would be less costly for China to cut back on carbon emissions due to the relative inefficiency of China's fossil fuel consumption. These gains would be further amplified by a broader understanding that all countries would impose an import tariff equal to the agreed minimum carbon tax unless the exporting country imposed the tax (or an equivalent emissions trading scheme). This tariff would provide a clear incentive to all countries to impose the carbon tax, since the taxing country would collect the revenue.
The question is whether China is willing to lead the effort to implement a world carbon tax, which many economists believe is the best way to avoid large-scale global climate change. China's leaders would need to put future growth ahead of short-term growth and accept the burden of explaining the increase in fossil fuel prices to its people. Most important, they would have to put the Chinese people ahead of special interests that gain from continuing along the path of dirty energy.

Maximilian Auffhammer is an assistant professor in the Department of Agricultural and Resource Economics at the University of California at Berkeley. Richard Carson, a professor in the Department of Economics at the University of California at San Diego, is immediate past president of the Association of Environmental and Resource Economists.