Thursday, May 29, 2008

Winner Takes All in the Race to Document Cross-City Differences in Per-Capita Greenhouse Gas Emissions

Academics write at a leisurely pace. Perhaps an upcoming NBER Summer Institute deadline or a January AEA Session date makes you pick up the pace to actually meet a deadline. In March 2008, Ed Glaeser and I released this report where we used a variety of data sets to measure a standardized household's greenhouse gas emission if this household lived in 66 major metropolitan areas (i.e Houston, Los Angeles, Boston etc). The Glaeser/Kahn Short Report on the Urban Greenhouse Gas Footprint

We continue to refine our approach and will pretty soon release our academic paper as an NBER Working Paper. This paper uses 10 different data sets to generate our estimates. We have micro data on transportation and gallons of gasoline, data on home electricity use, natural gas use, home fuel oil use, commercial building energy consumption, electric utility emissions factors etc. We need micro data to standardize the data. If rich people live in New York and poor people live in New Orleans, New York will look "brown" not due to urban form and climate but due to income effects. The poor do not have the resources to consume a lot and this shrinks your footprint.

Unknown to me, we had a rival on the "big think" points of our study. Brookings contracted with a talented team to write their own study on rankings cities with respect to their carbon footprint. Here is their report;

Brookings Brief

The New York Times has picked up the story based on the Brookings study and I am a pinch envious. In our defense, I bet that our study's core methodology is more rigorous and more accurate than theirs but their ranking looks a fair bit like ours. California's cities rank great because of the climate, that the electric utilities use natural gas rather than coal, and households consume relatively little electricity in California.

In hindsight, I wish that I had made a bigger public relations push with our study as we continued to refine it for academic reviewers.

May 29, 2008
Urban Areas on West Coast Produce Least Emissions Per Capita, Researchers Find

The West Coast’s metropolitan areas had among the lowest carbon emissions per capita in the country in 2005, according to a new ranking of 100 urban areas.

The region’s mild climates, hydropower and aggressive energy-reduction policies give its residents smaller carbon footprints, on average, than those of their counterparts in the East and Midwest.

The Honolulu area ranked No. 1 in the study, from the Brookings Institution, followed by the area including Los Angeles and Orange Counties in California, the Portland-Vancouver area in the Northwest and the New York metropolitan area. A cluster of Rust Belt urban areas were at the bottom of the rankings, including Toledo, Cincinnati, Indianapolis and Lexington, Ky., which ranked last.

The authors offer a partial portrait of overall emissions, concentrating on residential electricity and fuel use and the mileage traveled by cars and trucks — factors that contribute about half of overall carbon emissions. The calculations do not include industrial emissions, those from commercial or government structures and those from air, rail or sea transportation. But they provide a new look at metropolitan areas.

The report was accompanied by policy recommendations, including federal legislation setting a price on carbon emissions, increasing financing for energy research and development, revising federal policies that reward states with high levels of travel and fuel use and providing more, and more predictable, financial support of mass transit.

While the report did not go into the precise causes of each ranking, it provided hints at the factors that correlated with higher or lower scores. Population density and the availability of rail transportation were associated with lower per capita carbon emissions; the Los Angeles area is the most densely populated in the country, according to Brookings figures.

Other metropolitan areas in the top 25 included Boston, Buffalo, Chicago, New Haven, Poughkeepsie, N.Y., and Rochester.

Also associated with high rankings were government policies that promoted energy efficiency, particularly electricity rate-setting policies. Rate-setting by state regulators has traditionally been geared to make more money for a utility if it sells more electricity. While rates may remain relatively low, pleasing customers, utilities have little incentive to encourage energy conservation.

“The worst footprints are in the traditionally regulated states,” said Marilyn A. Brown, a professor of energy policy at the Georgia Institute of Technology, who is one of the report’s three authors. “Utilities are reacting to what turns a profit for their shareholders,” and get no economic benefit from conservation, Dr. Brown said.

The Washington metropolitan area ranked No. 100 in per capita residential carbon emissions and No. 89 on the overall list; also in the bottom 25 over all were the Augusta, Ga., Birmingham, Ala., Knoxville, Tenn., Nashville, Oklahoma City and St. Louis metropolitan areas.

“The Washington, D.C., metro area’s residential electricity footprint was 10 times larger than Seattle’s footprint in 2005,” the report said. “The mix of fuels used to generate electricity in Washington includes high-carbon sources like coal while Seattle draws its energy primarily from essentially carbon-free hydropower.”

By contrast, California set extensive energy efficiency requirements for home appliances; per capita energy use has remained largely flat in the state for 30 years. This factor, combined with its low-carbon electricity and warmer climate, were the most likely reasons that 8 of 10 California metropolitan areas ranked in the top 25 on the Brookings list.

Among the report’s recommendations was a change in federal law that would require home sellers to disclose the annual energy costs of the dwelling in the years before the sale.

The combination of transportation and residential emissions data sometimes masked the forces driving a region’s per capita carbon emissions up or down.

For instance, the proximity of a port, with its related freight traffic, depressed the overall scores of some areas, including Jacksonville (No. 80 over all) and Sarasota, Fla. (No. 81) and the Riverside-San Bernardino area east of Los Angeles (No. 32).

Considering only residential emissions, Jacksonville and Sarasota ranked Nos. 42 and 46, respectively; the Riverside area ranked No. 4. But both Florida areas have ports, and the Riverside area is the destination of many trucks carrying freight from the ports of Los Angeles and Long Beach. All three ranked near the bottom on the list of transportation-related carbon emissions per capita.

The measurement system was created by three Brookings authors — Dr. Brown, Frank Southworth, who is on the senior research staff at Oakridge National Laboratory, and Andrea Sarzynski of the Brookings Institution.

Wednesday, May 28, 2008

Will this Blog Become a Civil War Blog?

I don't believe in "lock in" effects. Looking back to August 2005 when this fascinating blog started, I chose the bland titled of "environmental and urban economics" because that was an accurate description of what I was working on. I continue to work on these topics but at the same time I'm also doing other stuff. I'm Chairing a search to find a new Director of the UCLA Institute of the Environment. So, I may rename this blog "Director Search Update" and provide real time details about what really goes on in our committee behind doors. I have also just purchased a house 300 yards from UCLA. Someday, our handsome son will thank us. This house is 200 yards away from the UCLA sororities. So, in a few years this blog could be renamed "Teenagers Gone Wild: The Story of a Middle Aged Man wondering where his hair and son went".

Finally, Professor Costa and I have a new book that Princeton Press will publish in late 2008. Wise bloggers are already talking about it: An Important Blog Entry . When my War book is published, I will have more and more to say about war and courage.

I am now in the planning stages of writing a 3rd book. In this book, I take on my UCLA colleague Jared Diamond's concerns about the limits to growth. He called his last book "Collapse", while mine is tentatively titled "Expand".

My 10th Wedding Anniversary is Tomorrow

Academic economists often marry academic economists. Why? Well, I can't answer that but permit me to offer one salient data point. A 1998 Event that you weren't invited to .

As I think back over the 10 years that have flown by, I wondered whether it is rare for a couple to reach this milestone. The quant guy in me turned to the The Marriage Duration Calculator . Its output reveals that given my "observables" the probability that our marriage would last this long is 89%. The bad news is that if we are the average couple with these observables then our probability of still being married 20 years after our wedding date 5/29/1998 is only 59%. What happens in the second decade of marriage? Do men reveal their dark side that lurking behind our clean, kind ways is an angry Sith Lord? I'm looking forward to finding out.

I thank Dora for participating in this ongoing field experiment.

Tuesday, May 27, 2008

Ecological Economist Leads a Shareholder Rebellion at Exxon-Mobil

Most shareholders purchase a company's stock in order to raise their rate of return (adjusted for risk). The Rockefeller shareholders may have a more complex objective function. In addition to the usual risk/return criteria, this article below highlights that 73 of the 77 Rockefellers seek that Exxon-Mobil actively engage climate change mitigation and invest in renewables. Is this a "free lunch"? A little bit like the Porter Hypothesis(, an optimist here would argue that Exxon will get even richer by going green. I certainly hope this is the case but this article provides no evidence on the cost to the company and the likely expected PDV of the benefits from pursuing the "green strategy". Exxon has a lot of smart people already working there. Given that they haven't chosen this path, does this suggest that Exxon's CEO views this proposal as likely to lower Exxon's rate of return?

Gary Becker wrote a famous PHD thesis at Chicago on the economics of discrimination. He argued that a monopolist could sacrifice some of his profit by pursuing other goals such as nepotism or hiring only from a specific demographic group (white men) even though others might be more productive per $ of salary paid.

This case study below sounds like a similar situation. The Rockefellers can afford to have Exxon earn a lower rate of return on their investment.

I got to know Neva Goodwin because we both worked at Tufts for several years. She co-leads GDAE. This is an ecological economics think tank. Unfortunately, this group chose to conduct little empirical research and really had no interest in interacting with "mainstream" environmental economists such as me and Gib Metcalf. This raises the bigger issue of how ecological economists and "neo-classical" economists interact. The short answer is that they don't.

This article below is an interesting case study of high profile shareholder revolt in the name of green issues. The Preemption literature says that if Neva G. is succesful here that this may green smaller companies who will take green steps to ward off shareholders getting angry.

In a world without free lunches, will other share holders get angry if companies go green and going green is costly for the bottom line? My bottomline here is that this article is really weak on the expected costs from the policies that Neva and the other rockies are pushing.

May 27, 2008
Rockefellers Seek Change at Exxon

HOUSTON — The Rockefeller family built one of the great American fortunes by supplying the nation with oil. Now history has come full circle: some family members say it is time to start moving beyond the oil age.

The family members have thrown their support behind a shareholder rebellion that is ruffling feathers at Exxon Mobil, the giant oil company descended from John D. Rockefeller’s Standard Oil Trust.

Three of the resolutions, to be voted on at the company’s shareholder meeting on Wednesday, are considered unlikely to pass, even with Rockefeller family support.

The resolutions ask Exxon to take the threat of global warming more seriously and look for alternatives to spewing greenhouse gases into the air.

One resolution would urge the company to study the impact of global warming on poor countries, another would encourage Exxon to reduce its emissions and a third would encourage it to do more research on renewable energy sources like solar panels and wind turbines.

A fourth resolution, which the Rockefellers are most united in supporting, is considered more likely to pass. It would strip Rex W. Tillerson of his position as chairman of Exxon’s board, forcing the company to separate that job from the chief executive’s job.

A shareholder vote in favor of that idea would be a rebuke of Mr. Tillerson, who is widely perceived as more resistant than other oil chieftains to investing in alternative energy.

The Rockefellers say they are not trying to embarrass Mr. Tillerson, also Exxon’s chief executive, but think it is time for the company to spend more of its funds helping the nation chart a new energy future.

“Exxon Mobil needs to reconnect with the forward-looking and entrepreneurial vision of my great-grandfather,” Neva Rockefeller Goodwin, a Tufts University economist, said in a statement to reporters.

“The truth is that Exxon Mobil is profiting in the short term from investments and decisions made many years ago, and by focusing on a narrow path that ignores the rapidly shifting energy landscape around the world,” she added.

The resolution on Exxon’s chairmanship was offered for several years before the Rockefellers became publicly involved and last year was supported by 40 percent of shareholders who voted. Royal Dutch Shell and BP already separate the positions of chairman and chief executive, as do many other companies.

“You need a board asking the tough questions,” Peter O’Neill, a private equity investor and great-great-grandson of John D. Rockefeller, said in an interview. “We expect the company to figure out how in this changing world to adjust.”

Kenneth P. Cohen, vice president for public affairs at Exxon, said the shareholders pushing the resolutions were “starting from a false premise.” He added that the company was already concerned about “how to provide the world the energy it needs while at the same time reducing fossil fuel use and greenhouse gas emissions.”

Fifteen members of the family are sponsoring or co-sponsoring the four resolutions, but it appears that some have much more solid support in the sprawling family than others.

Mr. O’Neill said that 73 out of 78 adult descendants of John D. Rockefeller were supporting the family effort to divide the chief executive and chairman positions. The goal of that resolution is to improve the management of the company, which could strengthen its environmental policies and improve more traditional pursuits like exploring more aggressively for new oil reserves.

David Rockefeller, retired chairman of Chase Manhattan Bank and patriarch of the family, issued a statement saying, “I support my family’s efforts to sharpen Exxon Mobil’s focus on the environmental crisis facing all of us.”

The Rockefeller family has always been identified with oil and the legacy of Standard Oil, but for several generations, it has also been active in environmental causes and acquiring land for preservation. John D. Rockefeller’s grandsons devoted themselves to conservation issues, and Rockefeller charitable organizations have long promoted efforts to fight pollution.

Ms. Goodwin, one of the most vocal Rockefellers on the environment today, is co-director of the Global Development and Environment Institute at Tufts.

In recent years, family members have quietly encouraged Exxon executives to take global warming seriously, but their private efforts did not go far. Until now, they have avoided publicity in their efforts, and the youngest Rockefeller generations have generally shunned attention.

Exxon executives said the company spent $2 billion over the last five years on programs to reduce emissions and improve efficiencies and had plans to spend $800 million on similar initiatives over the next three years. They said the company reduced the release of greenhouse gases from its operations last year by 3 percent, and it was working with Stanford to research biofuels and solar and hydrogen energy.

Since taking over the company two years ago, Mr. Tillerson has gradually shifted the company’s positions away from those of his predecessor, Lee R. Raymond, who was considered a skeptic on the science of global warming.

But with gasoline prices soaring and concern growing over global warming, Exxon, the biggest of the investor-owned oil companies, is a target for politicians and environmentalists. Chevron, BP and Shell, Exxon’s largest competitors, have given their investments in renewable fuels a much higher profile.

Similar or identical environmental proposals have not passed at previous Exxon shareholder meetings, but the public support of the Rockefeller family has given old efforts new energy.

The involvement of the Rockefellers, said Robert A. G. Monks, a shareholder who has been urging a separation of the chairman and chief executive jobs for years, shows that “this is not just a matter of the self-appointed good guys against the cavemen, but also a matter of the capitalists wanting to make money.”

Nineteen institutional investors with 91 million shares announced last week that they would support resolutions asking Exxon to separate the top executive positions and tackle global warming. They included the California Public Employees’ Retirement System, the California State Teachers’ Retirement System and the New York City Employees’ Retirement System.

California’s treasurer, Bill Lockyer, who serves on the boards of the two California funds, said the company’s “go-slow approach” on global warming “places long-term shareholder value at risk.”

Under Exxon’s rules, a shareholder proposal that passes is not binding without the support of the board. But Andrew Logan, director of the oil program at Ceres, a coalition of institutional investors and environmentalists, said, “boards tend to strongly consider proposals that get significant support.”

Paul Sankey, an oil analyst at Deutsche Bank, said that he thought a separation of the chief executive and chairman jobs might be a good management move and that “we might see a mild benefit to Exxon’s public image.” But he added, “On balance, we wouldn’t expect any change in strategy.”

The Fraternal Order of Police, which represents public safety officers, whose pensions are invested in Exxon, has publicly opposed the shareholder effort to change company policy.

“The Rockefeller resolution threatens to degrade the value of Exxon Mobil,” the organization wrote in a letter to Mr. Tillerson that criticized the splitting of the top executive jobs.

Monday, May 26, 2008

Do "Kyoto Style" Environmental Treaties Promote Economic Integration?

Chicken and Egg issues are at the heart of what economists are supposed to be doing. Do you have a clever instrument? Is "clever" a nice word? Andrew Rose and Mark Spiegel ask an interesting question in their new NBER paper titled: "NON-ECONOMIC ENGAGEMENT AND INTERNATIONAL EXCHANGE: THE CASE OF ENVIRONMENTAL TREATIES". They ask; "when nations work together on international environmental issues does this facilitate economic interaction?". To my naive eye, this is a hard question. A Princeton PHD would demand that they come up with a randomization device that forces pairs of nations to work together one environmental issues. The Princeton researcher would then do a before/after comparison to see whether the two "randomly paired" nations increase their economic interactions relative to control groups (pairs of nations that were not randomly paired to work together). Can this "ideal" be approximated using instruments that can be constructed? In the intro, the authors do a good job sketching reverse causality stories related to; "if two nations trade together a lot for exogenous reasons, they may work together to mitigate tragedy of the commons issues."

This paper has clear policy implications --- The Bush Administration will always have to wonder whether it would have been able to form an International Iraq coalition had it been a better global citizen on issues that interested Western European nations and the U.N.


Andrew K. Rose
Mark M. Spiegel
Working Paper 13988
1050 Massachusetts Avenue
Cambridge, MA 02138
April 2008

1. Introduction

Countries, like people, interact with each other on a number of different dimensions. Some interactions are strictly economic; for instance, countries engage in international trade of goods, services, capital, and labor. But many are not economic, at least not in any narrow sense. For instance, the United States seeks to promote human rights and democracy, deter nuclear proliferation, stop the spread of narcotics, and so forth. Accordingly America, like other countries, participates in a number of international institutions to further its foreign policy objectives; it has joined security alliances like NATO, and international organizations such as the International Atomic Energy Agency. In this paper, we concentrate on the interesting and under-studied case of international environmental arrangements (IEAs). We ask whether participation in such non-economic partnerships tends to enhance international economic relations. The answer, in both theory and practice, is positive.
Memberships in IEAs yield costs and benefits. A country can gain directly from such interactions; its air might be cleaner, or there might be more fish in the sea. However, some gains can be indirect. For instance, countries with long horizons and low discount rates might be more willing both to protect the environment and to maintain a reputation as a good credit risk. If they can signal their discount rate through IEA activity, participation in IEAs may indirectly yield gains from improvements in credit terms. Alternatively, countries that are tightly tied into a web of international relationships may find that withdrawing from one domain (such as environmental cooperation), may adversely affect activities in an unrelated area (such as finance). The fear of these spillovers may then encourage good behavior in the first area.
Our theoretical analysis begins with an extension of the “reputation spillover” concept introduced by Cole and Kehoe (1997). In our model, countries – or rather, their policymakers –
differ in their attractiveness as borrowers. Formally, we model these differences as differing discount rates among borrowing country governments, but one could envision alternative differences, such as disparities across countries in the perceived cost of default on external debt obligations. We concentrate on the example of discount rate differences in our theoretical model for analytical tractability, but we do not intend to suggest that this is the only source of heterogeneity in creditworthiness across countries.
With differing discount rates, more patient governments choose to join a greater number of environmental treaties; this sends a credible signal concerning a country’s debt capacity. Creditors respond by lending the country more capital. The predictions of this model are multilateral, since membership in IEAs is easily-accessible common knowledge. A country that joins more IEAs enhances its reputation with all nations.
This multilateral model is an intuitive start. Still, it misses the possibility that membership in an IEA may confer special advantages to its members; if Argentina defaults on its Brazilian debt, Brazil can retaliate by failing to support Argentine environmental initiatives. We thus extend the model to accommodate bilateral spillovers. We allow a creditor to respond to default by reducing the debtor’s gains from involvement in mutual IEAs.1 This extended model demonstrates that cross-country economic interaction can be a function of solo and/or joint participation in environmental treaties. Succinctly: the more international environmental commitments that countries make individually and in common, the easier is economic exchange between the countries.2
We then take these ideas to the data. Using a cross-sectional gravity model to control for other phenomena, we find that participation in IEAs is indeed positively associated with the international exchange of assets. This confirms the notion of positive spillovers between
environmental cooperation and economic exchange. Moreover, we find that multilateral IEA participation is not a sufficient statistic to explain bilateral economic exchange; joint IEA participation is also related to asset cross-holdings. We corroborate these findings using a panel of data that includes bank loans and FDI. We use a number of instrumental variables to show that our empirical results do not depend on the assumption that causality flows simply from environmental engagement to economic exchange. Our empirics thus support our extended model with both a reputation effect and some sort of bilateral punishment mechanism.
A brief survey of the literature section is provided in section 2, while our theoretical framework is developed in the following section. The empirical work is presented in section 4. The paper ends with a brief conclusion.
2. Literature Survey
The concept of reputation spillovers arose as a response to the Bulow and Rogoff (1989b) challenge to the sovereign debt literature. In their seminal paper, Bulow and Rogoff cast doubt on the possibility of sustainable sovereign lending based solely on the desire of borrowers to maintain their reputations. They demonstrated that such relationships would not be sustainable, because a borrower would eventually prefer to default on its debt and “self-finance” its consumption-smoothing.
This challenge was addressed in a series of papers by Cole and Kehoe (1995, 1997, 1998). They show that the problem with reputation-based borrowing stems from the fact that a borrower able to replicate interactions with other creditors receives only transient benefits from such relationships. At some point, the benefits of maintaining a reputation fall sufficiently that default and subsequent self-finance is the rational response. However, Cole and Kehoe (1995)
show that the desire to maintain other interactions with creditor nations may support debt, provided that these other relationships are not transient but enduring. Cole and Kehoe (1998) demonstrate that the desire to maintain reputations in enduring relationships can support a debt relationship with transient benefits. Cole and Kehoe (1997) show that the desire to maintain an enduring relationship can support a transient debt relationship in a simple trigger-strategy model, where a creditor responds to default by breaking off debtor relationships with enduring benefits.3 We borrow this modeling strategy below in our theoretical work.
Other signals of creditworthiness have also been examined in the literature. Milde and Riley (1988) argue that borrowers can signal the quality of underlying investments through the magnitude of borrowing. Alternatively, borrowers may resume payments subsequent to default, either to affect bargaining negotiations (e.g. Gale and Hellwig, 1989) or to signal government stability (e.g., Cole, Dow, and English, 1995). Similarly, creditworthy borrowers may signal their types by pursuing fiscal contractions (e.g. Drudi and Prati, 2000), enduring costly recessions prior to defaulting, as in Alfaro and Kanczuk (2005), or by accepting rescheduling packages at tough terms as in Spiegel (2005).
On the other hand, default decisions can themselves be signals of other types of information. Sandleris (2006) develops a model where government default decisions provide information about economic fundamentals that affect private sector behavior. He shows that the desire to signal to the domestic private sector that fundamentals are good can be sufficient to generate lending in an environment without default penalties.
A different literature of relevance concerns the formation and characteristics of IEAs; references here include Barrett (1994), Carraro and Siniscalco (1998), and Finus et al (2005). Most of the literature is skeptical about the ability of voluntary self-enforcing IEAs to improve

Thursday, May 22, 2008

Curbing Carbon from Cars

I thank Jan Mazurek for sending me this "heads up" on new proposed Senate legislation. Will the Senate simultaneously pass this bill and offer a gas tax holiday? Net Zero?

As urban crime falls, as the Baby Boomers get older, as household size shrinks --- these forces all encourage people to live at higher density BUT what about firms? Google's campus is not located in a center city. They have a cute little building in Santa Monica but I doubt that 5,000 people work there. As I have written about many times, when people work in the suburbs --- they tend to live in the suburbs and drive a lot. Are there any market forces encouraging jobs to move back to downtown? Good urban research has documented that information technology has encouraged firm fragmentation such that the deal makers are located downtown while the middle management is exiled to the suburbs.

Curbing carbon from cars

Posted By Sen. Tom Carper On 5.06.2008

This summer, the U.S. Senate is expected to consider groundbreaking,
bipartisan legislation to reduce our country’s greenhouse-gas
emissions. Through this bill we would harness market forces to fight
manmade climate change and reduce emissions from power plants,
factories, office buildings, and vehicles.

It might surprise some to learn that transportation is the
fastest-growing source of carbon emissions. To address this,
legislation was signed into law last December to require cars to
average 35 miles per gallon (mpg) by 2020, up from 25 mpg today. Our
current climate-change bill includes a provision to require cleaner

But we need to do more to address how far people drive. Since 1970,
overall energy consumption - in spite of vehicle fuel-efficiency
improvements - has grown by 41 percent. This is partly because the
vehicle miles traveled in the United States grew 148 percent. This
increase is largely due to longer commutes and shifts in driving
patterns, not population growth. In fact, population growth accounts
for only 38 percent of the increase in vehicle miles. Between 2005 and
2030, consumption is expected to increase another 59 percent.

Across much of the United States, driving is essential to accomplish
the smallest errand. In most places, one cannot get to work, pick up
kids from school, or buy a gallon of milk without burning at least a
gallon of gas. There simply is not reliable transit to take people
where they need to go. Many kids can no longer walk to school safely,
because they live in communities that are designed more for the
automobile than for the pedestrian. Along many busy roads, there
aren’t even any sidewalks to accommodate anyone who might want to walk
instead of drive.

Living in a sprawling area without transportation options can double a
family’s greenhouse-gas emissions. The negative consequences go beyond
the effects on the environment. Longer commutes and increased driving
distances cost time and money. Many American families must own
multiple cars and spend more time away from home. This means less
money to invest in your home or child’s college fund-and less time to
spend with family.

The climate bill that will be considered by the Senate would place a
“cap” on carbon-dioxide emissions and establish a market in which
polluters could buy and sell permits to release those emissions. The
proceeds from the sale of these emissions permits would raise
trillions of dollars that could be used to support the deployment
alternative energy, fund research into clean technologies, and address
our growing transportation needs.

The current legislation provides some funding for transit - about $500
million a year - but this is less than half of what we spend annually
on public transportation; if anything, we should be spending more than
we have in the past to meet the large and growing need for transit

Additionally, we need to invest in sidewalks and crosswalks that will
make our neighborhoods more walkable. Furthermore, we should offer
incentives for development patterns that encourage people to walk
rather than take a car everywhere they need to go.

We must offer Americans alternatives to car travel if we are going to
be successful in reducing greenhouse gas emissions and weaning
ourselves from foreign oil. Fortunately, such measures also have the
welcome effect of allowing Americans to spend less time and money
stuck in traffic. In other words, this policy is good for working
families, good for the environment, and good for our economy.

That’s why I’m backing it, and that’s why the Senate should include it
in the climate-change bill this summer.

Article printed from Ideas Primary:

URL to article:

San Francisco's New 4 Cents a Ton Carbon Dioxide Tax: Could Behavioral Responses Be Enormous?

Ed Glaeser and I have a new paper where we assume that the social marginal cost of an extra ton of carbon dioxide emissions equals $43. With this number in mind, it is funny that the progressive green city of San Francisco is applauding itself for implementing a $.04 tax per ton of carbon dioxide. Now, I know that in this world of behavioral economics 4 cents is "far" from zero but $43 is far from $.04!

Dan Kamen celebrates this first step. Details on the San Fran Carbon Tax

Under what scenarios is he right? One optimistic story is that this is like entering a swimming pool. You first put your toes in and when you get used to the temperature, you jump into the water.

It would interest me whether Mayor Gavin N. has a plan to ratchet up this tax to a higher $ amount once people get used to the idea of paying for this "free good".

Tuesday, May 20, 2008

Some Accurate Reporting about UCLA's Economics Department

Economists like gossip. I don't know why. Don't we have better things to do? Aren't the stakes pretty low? We all have good jobs. We all are well fed. Stop complaining and get back to work. But, before you do so think of the rising UCLA's Economics Department. While this article below provides only 1 paragraph on our recent success (and doesn't provide details about the successful senior recruiting by UCLA's Public Policy School and the Anderson School), the punchline cannot be denied. UCLA has recovered from the exodus of some talented people who left in recent years. Everyone can be replaced and we've been able to replace these "important" people. Call it addition through subtraction.

David Warsh
May 20th 2008

Episode III of Keeping the Wolf at Bay, in Which the Wolf Bites Itself

If you had a sharp eye out, you would have been struck last week by the full-page advertisements in the front section of The New York Times burnishing the reputation of the University of California at Los Angeles. In one, studio chief Sherry Lansing (and UCLA alumna) asserted, “It’s Clark Kerr’s fault!” (Why? His long-range plan for California’s higher education system greatly over-performed.) In another, property baron Richard Ziman beckoned “Welcome to the Capital of Now.” (That would be the City of Angels, naturally, “an extraordinary mass of medical, scientific and high technology that dwarfs the Silicon Valley and Greater Boston combined.”)

Why the timing? Well, it was just after the May 1 deadline for undergraduate acceptances. And it was just before the May 15 deadline for the acceptance of offers of faculty appointments. With tax revenues falling, the state of California is under severe budgetary pressure; its publicly-supported universities are facing raids from better-funded private institutions. So naturally California universities are eager to thump their chests, and ginger the legislators in Sacramento who vote their appropriations. In a similar vein, the flagship Berkeley campus announced last spring that it had raised a $1.1 billion war-chest of private contributions with which to defend its turf.

Senior faculty offers are one way the most famous and best-heeled departments build strength – a little like the trading system in major league sports. UCLA, which last year was threatened by mass defections, did better this year. Chairman Gary Hansen reported five new hires, one of them senior (Adriana Lleras-Muney, a health economist, from Princeton), and three in applied micro. Along with two senior hires last year (historian Dora Costa, from Massachusetts Institute of Technology, and econometrician Rosa Matzkin, from Northwestern University), four junior faculty and a couple of key promotions, that goes a long way toward re-establishing UCLA’s traditional balance and approach.

Meanwhile, Berkeley, which had feared a possible tipping point, beat out the University of Chicago for the services of Yuriy Gorodnichenko, a young and exciting macroeconomist from the Ukraine, and hung onto David Card, the husband-and-wife team of Christina and David Romer, Charles Jones, Raj Chetty, and several other prominent faculty members, at least for now.

The the really big news of this recruiting season came from Harvard University, where president Drew Faust earlier this month overrode the recommendation of the economics department and vetoed an offer to Mrs. Romer, an economic historian and macroeconomist.

By any measure, Mrs. Romer is one of the most distinguished women in economics, co-director of the National Bureau of Economic Research program in monetary economics, a member of its business cycle dating committee, former vice president of the American Economic Association (and, probably, a future president), Guggenheim Fellowship recipient, member of the American Academy of Arts and Sciences, and winner of the Berkeley Distinguished Teaching Award.

The Harvard offer to her, and a Kennedy School offer to her husband, a prominent macroeconomist, had been widely reported in the profession and, at Berkeley, greatly feared. The pair had been instrumental in putting the graduate program there back on its feet, after their arrival from Princeton in the early 1990s. Because each has an aging parent in Massachusetts, and because two of their three children will be attending the Massachusetts Institute of Technology in the fall, the Harvard offer was viewed as being, as one colleague put it, “less of a bullet than a small nuclear device” aimed at Berkeley macro.

Given the difficulty Harvard has had hiring female professors – its treatment of women was a proximate cause for the resignation of president Lawrence Summers in 2006 – the decision to reject the offer came as a shock. Mrs. Romer was to have replaced retiring economic historian Jeffrey Williamson. Is the Harvard department, generally considered to be the best in the world, stupid for having voted its offer? Is the profession foolish for having elevated Mrs. Romer to its upper ranks? Faust’s decision is completely unexplained. Nor is it likely to be, at least by her.

Even more so than at other leading universities, Harvard’s appointment process is cloaked in secrecy. Once the department votes, as many as twenty letters are written, asking outside authorities to evaluate half a dozen possible candidates, among them, presumably inconspicuously, the target of the offer. The package is forwarded to the dean of the Faculty of Arts and Sciences, who then asks department members to write privately to evaluate the offer. An ad hoc committee is appointed to advise the president, consisting of two or three outside experts, plus Harvard’s academic deans.

The day of the meeting arrives: witnesses are called serially before the committee, including those in the department who may have opposed the appointment. In the privacy of the Perkins Room, as the president’s conference room in Massachusetts Hall is known, a minority can advance arguments which in the department’s meeting had failed to carry the day. Often the university president presides; sometimes the provost. The emphasis is on privacy and discretion, but the aim is establish the true merits of each claim. In the end, the decision is the president’s alone.

A decision to overrule an appointment after an ad hoc proceeding isn’t unheard of, Harvard veterans say; it’s part of the president’s job (or at least it used to be: one rumor has it that Faust has sought to end the traditional presidential involvement in all ad hocs; it is possible she delegated the decision). But neither does it happen often, for such decisions inevitably are embarrassing to all concerned. Their after-effects linger for many years. Initial efforts uncovered no one in Cambridge willing to talk frankly about the affair. “They screwed up very badly,” said one well-regarded and presumably well-informed senior figure.

They? “You will not extract any more details from me.”

A Harvard professor shed at little more light: “the debacle — and it truly was a disaster — reflects the dysfunctionality of Harvard University, not on Christy Romer.”

Inevitably, details will begin to leak out. For instance, Mrs. Romer is known to have been a member of a 2002 visiting committee that criticized the Harvard economics department for its treatment of women faculty and graduate students. There will be many calls on Faust, Harvard’s first female president, to explain. The episode is likely to be seen as being profoundly embarrassing to Harvard – a red flag to those who consider it a haven for misogynists, and a warning to precisely those outsiders whom it says it is eager to attract. “It just makes every other recruitment that much harder,” said a veteran of the appointment process.

Meanwhile, the Berkeley department, among the top seven or eight in the nation, has a new lease on life near the top of the heap. And UCLA, among the top dozen faculties of economics, suddenly has perhaps the highest proportion of females of any major department in the world.


Monday, May 19, 2008

Collapse: Will We Run Out of Food?

Forget Peak Oil, this book review below argues that we are on the verge of Peak Chicken, Peak Tuna and Peak Prunes. Perhaps, in that state of the world you will substitute to double stuff oreos? I know that only nerds read the New Yorker but now that I've moved away from New York City --- I like this magazine. My son likes its cartoons. Bee Wilson blames fat Westerners who like to eat too much and the governments that subsidize our farmers. It will interest me if there are any good agricultural economists who will enter this public debate. what would Milton Friedman say? Would he argue in favor of getting rid of all farming subsidies? Are there any externalities here? Clearly, this article hints at tragedy of the commons problems and environmental externalities associated with production processes such as pig poop (see below).

The New Yorker Magazine Book Review
The Last Bite
Is the world’s food system collapsing?
by Bee Wilson May 19, 2008

Food;Roberts, Paul;“The End of Food” (Houghton Mifflin; $26);Malthus, Thomas;Agriculture;Demographics;Population Growth

In his “Essay on the Principle of Population,” of 1798, the English parson Thomas Malthus insisted that human populations would always be “checked” (a polite word for mass starvation) by the failure of food supplies to keep pace with population growth. For a long time, it looked as if what Malthus called the “dark tints” of his argument were unduly, even absurdly, pessimistic. As Paul Roberts writes in “The End of Food” (Houghton Mifflin; $26), “Until late in the twentieth century, the modern food system was celebrated as a monument to humanity’s greatest triumph. We were producing more food—more grain, more meat, more fruits and vegetables—than ever before, more cheaply than ever before, and with a degree of variety, safety, quality and convenience that preceding generations would have found bewildering.” The world seemed to have been liberated from a Malthusian “long night of hunger and drudgery.”

Now the “dark tints” have returned. The World Bank recently announced that thirty-three countries are confronting food crises, as the prices of various staples have soared. From January to April of this year, the cost of rice on the international market went up a hundred and forty-one per cent. Pakistan has reintroduced ration cards. In Egypt, the Army has started baking bread for the general population. The Haitian Prime Minister was ousted after hunger riots. The current crisis could push another hundred million people deeper into poverty. Is the world’s population about to be “checked” by its failure to produce enough food?

Paul Roberts is the second author in the past couple of years to publish a book entitled “The End of Food”—the first, by Thomas F. Pawlick, appeared in 2006. Pawlick, an investigative journalist from Ontario, was concerned with such predicaments as the end of the tasty tomato and its replacement by “red tennis balls” lacking in both flavor and nutrients. (The modern tomato, he reported, contains far less calcium and Vitamin A than its 1963 counterpart.) These worries seem rather tame compared with Roberts’s; his book grapples with the possible termination of food itself, and its replacement by—what? Cormac McCarthy’s novel “The Road” contains a vision of a future in which just about the only food left is canned, from happier times; when the cans run out, the humans eat one another. Roberts lacks McCarthy’s Biblical cadences, but his narrative is intended to be no less terrifying.

Roberts’s work is part of a second wave of food-politics books, which has taken the genre to a new level of apocalyptic foreboding. The first wave was led by Eric Schlosser’s “Fast Food Nation” (2001), and focussed on the perils of junk food. “Fast Food Nation” painted an alarming picture—one learned about the additives in a strawberry milkshake, the traces of excrement in hamburger meat—but it also left some readers with a feeling of mild complacency, as they closed the book and turned to a wholesome supper of spinach and ricotta tortellini. There is no such reassurance to be had from the new wave, in which Roberts’s book is joined by “Stuffed and Starved: The Hidden Battle for the World Food System,” by Raj Patel (Melville House; $19.95); “Bottomfeeder: How to Eat Ethically in a World of Vanishing Seafood,” by Taras Grescoe (Bloomsbury; $24.99); and “In Defense of Food: An Eater’s Manifesto,” by Michael Pollan, the poet of the group (Penguin Press; $21.95).

All of these authors agree that the entire system of Western food production is in need of radical change, right down to the spinach. Roberts opens with a description of E.-coli-infected spinach from California, which killed three people in 2006 and sickened two hundred others. The E. coli was traced to the guts of a wild boar that may have tracked the bug in from a nearby cattle ranch. Industrial farming means that even those on a vegan diet may reap the nastier effects of intensive meat production. It is no longer enough for individuals to switch to “healthier” choices in the supermarket. Schlosser asked his readers to consider the chain of consequences they set in motion every time they sit down to eat in a fast-food outlet. Roberts wants us to consider the “chain of transactions and reactions” represented by each of our food purchases—“by each ripe melon or freshly baked bagel, by each box of cereal or tray of boneless skinless chicken breasts.” This time, we are all implicated.

Like Malthus, Roberts sees humanity increasingly struggling to meet its food needs. He predicts that in the next forty years, as agriculture is threatened by climate change, “demand for food will rise precipitously,” outstripping supply. The reasons for this, however, are not strictly Malthusian. For Malthus, famine was inevitable because the math of human existence did not add up: the means of subsistence grew only arithmetically (1, 2, 3), whereas population grew geometrically (2, 4, 8). By this analysis, food production could never catch up with fertility. Malthus was wrong, on both counts. In his treatise, Malthus couldn’t envisage any innovations for increasing yield beyond “dressing” the soil with cattle manure. In the decades after he wrote, farmers in England took advantage of new machinery, powerful fertilizers, and higher-yield seeds, and supply rose faster than demand. As the availability of food increased, and people became more prosperous, fertility fell.

Malthus could not have imagined that demand might increase catastrophically even where populations were static or falling. The problem is not just the number of mouths to feed; it’s the quantity of food that each mouth consumes when there are no natural constraints. As the world becomes richer, people eat too much, and too much of the wrong things—above all, meat. Since it takes on average four pounds of grain to make a single pound of meat, Roberts writes, “meatier diets also geometrically increase overall food demands” even in those parts of Europe and North America where fertility rates are low. Malthus knew that some people were more “frugal” than others, but he hugely underestimated the capacity of ordinary human beings to keep eating. Even now, there is no over-all food shortage when measured by global subsistence needs. Despite the current food crisis, last year’s worldwide grain harvest was colossal, five per cent above the previous year’s. We are not yet living on Cormac McCarthy’s scorched earth. Yet demand is increasing ever faster. As of 2006, there were eight hundred million people on the planet who were hungry, but they were outnumbered by the billion who were overweight. Our current food predicament resembles a Malthusian scenario—misery and famine—but one largely created by overproduction rather than underproduction. Our ability to produce vastly too many calories for our basic needs has skewed the concept of demand, and generated a wildly dysfunctional market.

Michael Pollan writes that the food business once lamented what it called the problem of the “fixed stomach”—it appeared that demand for food, unlike other products, was inelastic, the amount fixed by the dimensions of the stomach itself, the variety constrained by tradition and habit. In the past few decades, however, American and European stomachs have become as elastic as balloons, and, with the newly prosperous Chinese and Indians switching to Western diets, much of the rest of the world is following suit. “Today, Mexicans drink more Coca-Cola than milk,” Patel reports. Roberts tells us that in India “obesity is now growing faster than either the government or traditional culture can respond,” and the demand for gastric bypasses is soaring.

Driven by our bottomless stomachs, Roberts argues, the modern economy has reduced food to a “commodity” like any other, which must be generated in ever greater units at an ever lower cost, year by year, like sneakers or DVDs. But food isn’t like sneakers or DVDs. If we max out our credit cards buying Nikes, we can simply push them to the back of a closet. By contrast, our insatiable demand for food must be worn on our bodies, often in the form of diabetes as well as obesity. Overeating makes us miserable, and ill, but medical advances mean that it takes a long time to kill us, so we keep on eating. Roberts, whose impulse to connect everything up is both his strength and his weakness, concludes, grandly, that “food is fundamentally not an economic phenomenon.” On the contrary, food has always been an economic phenomenon, but in its current form it is one struggling to meet our uncurbed appetites. What we are witnessing is not the end of food but a market on the brink of failure. Those bearing the brunt are, as in Malthus’s day, the people at the bottom.

Cheap food, in these books, is the enemy. Roberts complains that “the attributes of food that our economic system tends to value and to encourage”—like cheapness—“aren’t necessarily the attributes that work best for the people eating the food, or the culture in which that food is consumed, or the environment in which it is produced.” Cheap food distresses Raj Patel, too. Patel, a former U.N. consultant and a current anti-globalization activist, is an excitable fan of peasant coöperatives and Slow Food. He lacks Roberts’s cool scope but shares his ambition to connect all the dots. Patel would like us to take lessons in “culinary sensuousness” from his “dear friend” Marco Flavio Marinucci, a San Francisco-based artist and, apparently, a master of the art of “gastronomical foreplay.” Patel regrets that most of us are nothing like dear Mr. Marinucci. We are all too busy being screwed over by the giant corporations to take the time to appreciate “the deeper and subtler pleasures of food.” For Patel, it is a short step from Western consumers “engorged and intoxicated” with cheap processed food to Mexican and Indian farmers committing suicide because they can’t make a living. The “food industry’s pabulum” makes us all cogs in an evil machine.

It’s easy to see what Roberts and Patel have against cheap food. For one thing, it’s often disgusting. Roberts has a powerful passage on industrial chicken, showing how its vile flesh is a direct consequence of its status as economic commodity. In the nineteen-seventies, it took ten weeks to raise a broiler; now it takes forty days in a dark and crowded shed, because farmers are under constant pressure to cut costs and increase productivity. Every cook knows that chicken breast is no longer what it once was—it’s now remarkably flabby and yielding. Roberts reveals that poultry experts have a term for this: P.S.E., or “pale, soft, exudative” meat. Today’s birds, Roberts shows, are bred to be top-heavy, in order to satisfy consumers’ desire for “healthy” white meat at affordable prices. In these Sumo-breasted monsters, a vast volume of lactic acid is released upon death, damaging the proteins—hence the crumbly meat. Poultry firms deal with P.S.E. after the fact, pumping the flaccid breast with salts and phosphates to keep it artificially juicier. What they don’t do is try particularly hard to prevent P.S.E. They can’t afford to. The average U.S. consumer eats eighty-seven pounds of chicken a year—twice as much as in 1980—but this generates a profit of only two cents per pound for the farmer.

So, yes, cheap food can be nasty, not to mention bad for farmers and the environment. Yet it has one great advantage that neither Patel nor Roberts fully grapples with: people can afford to buy it. According to the World Bank, four hundred million fewer people were living in extreme poverty in 2004 than was the case in 1981, in large part owing to the affordability of basic foodstuffs. The current food crises are the result of food being too expensive to buy, rather than too cheap. The rioters of Haiti would kill for a plate of affordable chicken, no matter how pale, soft, and exudative. The battle against cheap food involves harder tradeoffs than Patel and Roberts allow. No one has yet discovered how to raise prices for the overfed rich without squeezing the underfed poor.

If Roberts’s overarching thesis is simplistic, he is nevertheless right in his scathing analysis of some of the market alternatives. The conventional view against which Roberts is arguing is that the food economy is “more or less self-correcting.” When the economy gets out of kilter—through rapidly increased demand or sudden shortages and price rises—the market should provide the solution in the form of new technologies that “push the Malthusian monster back into its box.” This is precisely what Malthus is thought to have missed—the capacity of a market economy to turn pressures on supply into innovations that can meet future demands. But endless innovation has now generated a series of demands that are starting to overwhelm the market.

Roberts depicts the global food market as a lumbering beast, organized on such a monolithic scale that it cannot adapt to the consequences of its own distortions. In a flexible, responsive market, producers ought to be able to react to a surplus of one thing by switching to making another thing. Industrial agriculture doesn’t work like this. Too many years—and, in the West, too many subsidies—are invested in the setup of big single-crop farms to let producers abandon them when the going gets tough. Defenders of industrial agriculture point to its efficiency, but Roberts sees instead a system full to bursting with waste, often literally. American consumers demand huge amounts of cheese and meat. One consequence is the giant “poop lagoons” of Northern California. In traditional forms of mixed agriculture, animal manure is not a waste product but a valuable fertilizer. By contrast, the mainstream food economy is now dominated by monocultures in which crops and animals are kept apart. This system of farming has little use for poop, despite churning it out in ever-increasing volumes. The San Joaquin Valley has air quality as poor as Los Angeles, the result of twenty-seven million tons of manure produced every year by California’s cows. “And cows are relatively benign crappers,” Roberts points out; hogs—mass-produced to meet the demand for bacon on everything—are more prolific. On June 21, 1995, Roberts tells us, a hog lagoon burst into a river in North Carolina, destroying aquatic life for seventeen miles.

Repulsed by the sordid details of meat production, some consumers turn to fish instead. Yet the piscine world is subject to the same market paradoxes as meat. In “Bottomfeeder,” Taras Grescoe confirms that there are still plenty of fish in the sea. Unfortunately, these are not the ones that people want to eat. Aside from pollution, the oceans would be in quite a healthy state if consumers were less reluctant to eat fish near the middle or bottom of the food chain, such as herring, sardines, and mackerel. We would be healthier, too, since these oily fish are rich in omega-3, the fatty acid in which the Western diet is markedly deficient. Instead, we clamor to eat top-of-the-food-chain fish such as cod and bluefin tuna, many of whose stocks have collapsed; they will soon disappear from the seas altogether unless demand drops. So far, as with meat, the opposite is happening. With increasing affluence, the Chinese are developing a taste for sushi, which could soon see every last piece of glistening toro disappear.

Fish “farming,” with its overtones of pastoral care, sounds like a better option, but Grescoe—who has travelled around the world in search of delicious and rare seafood—shows that it can be more damaging still. As with chicken, out-of-control demand for once premium foods has translated into grotesque and unsustainable forms of production. A taste for “popcorn shrimp in the strip malls of America” translates into the cutting down of tropical mangrove forests in Ecuador and the destruction of wild-shrimp stocks in Southeast Asia. Grescoe quotes Duong Van Ni, a hydrologist from Vietnam, where warm-water shrimp farms feed the insatiable Western appetite for all-you-can-eat seafood-shack specials and prawn curries. “Shrimp farming is so damaging to the environment and so polluting to the soil, trees, and water that it will be the last form of agriculture,” Ni says. “After it, you can do nothing.” Our thirst for cheap salmon is similarly destructive, and the results are as bad for us as they are for the fish. The nutrition expert Marion Nestle warns that you should broil or grill farmed salmon until it is well done and remove the skin, to get rid of much of the toxin-laden grease. As Grescoe remarks, if this is the only safe way to eat this fish, wouldn’t it be better to eat something else?

The one thing farmed salmon has going for it is that the fish are, as Roberts says, “efficient feed converters”: salmon require only a little more than a pound of feed for every pound of weight that they gain. The trouble is that the feed in this case isn’t grain but other fish, because salmon are carnivores. Fishermen are granted large quotas to catch fish like sardines and anchovies—which are delicious and could be eaten by humans—only to have them turned into fish meal and oil. Thirty million tons, or a third of the world’s wild catch, goes into the manufacture of fish meal and oil, much of which is used to raise farmed salmon. Farming salmon, Grescoe says, is “akin to nourishing tigers and lions with beef and pork,” and then butchering them to make ground beef. The farming of herbivorous fish such as carp and tilapia, by contrast, actually increases the net amount of seafood in the world.

The great mystery of the world’s insatiable appetite for farmed salmon is that it doesn’t taste good. Grescoe, a Canadian who was reared on “well-muscled” chinook, gives a lurid description of the farmed variety, with its “herring-bone-pattern flesh, barely held together by creamy, saliva-gooey fat.” A flabby farmed-salmon dinner—no matter how much you dress it up with teriyaki or ginger—cannot compare with the pleasures of canned sardines spread on hot buttered toast or a delicate white-pollock fillet, spritzed with lemon. Pollock is cheaper than salmon, too. Yet in the United States there is little demand for it, or, indeed, for the small, wild, affordable (and sustainable) Northern shrimp, which taste sweeter than the watery jumbo creatures that the market prefers.

Given that the current food economy is so strongly driven by appetite, it does seem odd that so much of the desire is for such squalid and unsatisfying things. If we are going to squander the world’s resources, shouldn’t it at least be for the sake of rare and splendid edibles? Yet much of what is now eaten in the West is not food so much as, in Michael Pollan’s terms, stuff that’s merely “foodish.” From the nineteen-eighties onward, many traditional foods were removed from the shelves and in their place came packages of quasi-edible substances whose selling point was nutritional properties (No cholesterol! Vitamin enriched!) rather than taste. Pollan writes:

There are in fact hundreds of foodish products in the supermarket that your ancestors simply wouldn’t recognize as food: breakfast cereal bars transected by bright white veins representing, but in reality having nothing to do with, milk; “protein waters” and “nondairy creamer”; cheeselike foodstuffs equally innocent of any bovine contribution; cakelike cylinders (with creamlike fillings) called Twinkies that never grow stale.

Pollan shows that much of the apparent abundance of choice available to the affluent Western consumer is an illusion. You may spend hours in the supermarket, keenly scrutinizing the labels, but, when it comes down to it, most of what you eat is derived from the high-yield, low-maintenance crops that the food industry prefers to grow, and sells to you in myriad foodish forms.

“You may not think you eat a lot of corn and soybeans,” Pollan writes, “but you do: 75 percent of the vegetable oils in your diet come from soy (representing 20 percent of your daily calories) and more than half of the sweeteners you consume come from corn (representing around 10 percent of daily calories).” You may never consciously allow soy to pass your lips. You shun soy milk and despise tofu. Yet soy will get you in the end, whether as soy-oil mayo and soy-oil fries; ice cream and chocolate emulsified with soy; or chicken fed on soy (“soy with feathers,” as one activist described it to Patel).

Our insatiable appetites are not simply our own; they have, in no small part, been created for us. This explains, to a certain degree, how the world can be “stuffed and starved” at the same time, as Patel has it. The food economy has created a system in which some have no food options at all and some have too many options, albeit of a somewhat spurious kind. In the middle is a bottleneck—a relatively small number of wholesalers and buyers who largely determine what the starving farmers produce and what the stuffed consumers eat. In the Netherlands, Germany, France, Austria, Belgium, and the United Kingdom, there are a hundred and sixty million consumers, fed by approximately 3.2 million farmers. But the farmers and the consumers are connected to one another by a mere hundred and ten wholesale “buying desks.”

It would be futile, therefore, to look to the food system for radical change. The global manufacturers and wholesalers have an interest in continuing to manipulate our desires, feeding our illusions of choice, stoking our colossal hunger. On the other hand, if desires can be manipulated in one direction, why shouldn’t they be manipulated in another, more benign direction? Pollan offers a model of how individual consumers might adjust their appetites: “Eat food. Not too much. Mostly plants.” As a solution, this is charmingly modest, but it is unlikely to be enough to meet the urgency of the situation. How do you get the whole of America—the whole of the world—to eat more like Michael Pollan?

The good news is that one developing country has, in the past two decades, conducted a national experiment in a more sustainable food system, proving that it is possible to feed a population less destructively. Farmers gave up synthetic fertilizers and pesticides and replaced them with old-fashioned crop rotations and mixed livestock-crop operations. Big industrial farms were split into smaller coöperatives. The bad news is that the country is Cuba, which was forced to make the switch after the fall of the Soviet Union left it without supplies of agrochemicals. Cuba’s experiment depended on its authoritarian state, which commanded the “reallocation” of labor from cities to farms. Even on Cuba’s own terms, the experiment hasn’t been perfect. On May Day, Raúl Castro announced further radical changes to the farm system in order to reduce reliance on imports. Paul Roberts notes that there is no chance that Americans and Europeans will voluntarily adopt a Cuban model of food production. (You don’t say.) He adds, however, that “the real question is no longer what a rich country would do voluntarily but what it might do if its other options were worse.” ♦

What Should Established Economists Do All Day Long?

I have taken a week off from blogging as I traveled to the World Bank, the National Science Foundation and Moshe Buchinsky's great summer home near Big Bear Lake 100 miles East of LA. Now, I'm back and I have things to say. Yesterday's NYT Book Review included a review of Jeff Sachs' new book (see below). How should a guy such as Jeff Sachs allocate his scarce time? We know that Dr. Krugman has reallocated his time away from the peer review process.

Here is a set of activities to choose from:

A. Peer reviewed writing for academics
B. journal editing
C. graduate student advising
D. University Committee work
E. consulting for private sector
F. textbook writing
G. public consulting (i.e World Bank/United Nations)
H. OP-ED writing and "big think" popular books

Why do so many prominent academics at a young age reduce time devoted to "A"? I don't believe that Larry Summers couldn't write a high quality academic paper at the tender age of 53. Why doesn't he want to? He can't fear lowering his average. Has he really said it all? Is it ego? That he derives more pleasure influencing Washington than Littauer? Does he feel altruism for the 32 year old future stars who want to publish in the AER and would be crowded out by his paper if he published it?

Perhaps the answer is a taste for variety. Having achieved category "A", why not try something new? It is also true that these other categories offer millions of $ for the successful and Steve Levitt has helped raise the demand for "big think economists" to record heights. Is this a good thing? Is the competitive equilibrium a pareto optimum?

It would be exciting to be at a university where all of the faculty are committed to category "A". Does it exist?

Here is a high quality reviewe of Sachs' new book. I plan to buy it.

May 18, 2008
Costs of Living
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Economics for a Crowded Planet.

By Jeffrey D. Sachs.

386 pp. The Penguin Press. $27.95.

The timing for Jeffrey D. Sachs’s new book on how to avert global economic catastrophe couldn’t be better, with food riots in Haiti, oil topping $120 a barrel and a gnawing sense that there’s just less of everything — rice, fossil fuels, credit — to go around. Of course, we’ve been here before. In the 19th century, Thomas Malthus teased out the implications of humans reproducing more rapidly than the supply of food could grow. In 1972, the Club of Rome published, to much hoopla, a book entitled “Limits to Growth.” The thesis: There are too many people and too few natural resources to go around. In 1978, Mr. Smith, my sixth-grade science teacher, proclaimed that there was sufficient petroleum to last 25 to 30 years. Well, as Yogi Berra once may have said, “It’s hard to make predictions, especially about the future.”

And yet. Even congenital optimists have good reason to suspect that this time the prophets of economic doom may be on point, with the advent of seemingly unstoppable developments like climate change and the explosive growth of China and India. Which is why Sachs’s book — lucid, quietly urgent and relentlessly logical — resonates. Things are different today, he writes, because of four trends: human pressure on the earth, a dangerous rise in population, extreme poverty and a political climate characterized by “cynicism, defeatism and outdated institutions.” These pressures will increase as the developing world inexorably catches up to the developed world. By 2050, he writes, the world’s population may rise to 9.2 billion from 6.6 billion today — an increase of 2.6 billion people, which is “too many people to absorb safely.” The combination of climate change and a rapidly growing population clustering in coastal urban zones will set the stage for many Katrinas, not to mention “a global epidemic of obesity, cardiovascular disease and adult-onset diabetes.”

Sachs smartly describes how we got here, and the path we must take to avert disaster. The director of the Earth Institute at Columbia University and the author of “The End of Poverty,” Sachs is perhaps the best-known economist writing on developmental issues (or any other kind of issues) today. And this is Bigthink with a capital B. “The very idea of competing nation-states that scramble for markets, power and resources will become passé,” he writes, introducing a reasoned plea for one-worldism. As the kids in “High School Musical” sing, we’re all in this together. “In the 21st century our global society will flourish or perish according to our ability to find common ground across the world on a set of shared objectives and on the practical means to achieve them.” By working together and harnessing the productive genius of the public and private sectors, Sachs argues, we can build sustainable systems, stabilize world population at about eight billion and end extreme poverty by 2025.

The bien-pensant classes, of which I count myself a paid-in-full member, will coast through this well-constructed book (sipping fair-trade coffee, nibbling organic carrots and pausing to catch the headlines on National Public Radio) and nod along through the primers on greenhouse gases, China’s development and the potential for carbon capture; the digs at President Bush; and the call for the creation of seven global funds concentrating on areas like agriculture, the environment and infrastructure. In a particularly trenchant passage, he gently fillets critics, like William Easterly, who have argued that foreign aid doesn’t work. (Aid money spent bringing fertilizer to India in the 1960s, Sachs notes, yielded spectacular returns.) And it’s refreshing to hear a distinguished economist declare that markets alone can’t get us out of the mess markets have created.

There are a few discordant notes, however. Sachs too frequently lapses into a sort of reductio ad PowerPoint. It seems every catastrophe can be averted if we take fewer than 10 simple steps. Sachs presents “four compelling reasons why the poorest countries need to speed the demographic transition,” “a list of seven requirements to enable family planning programs to accelerate the decline in fertility” and “six steps to transform” American “security policy into a workable framework for the 21st century.” Of course, that last list is really much longer. And anybody who was involved with post-Soviet Russian economic reforms, as Sachs was, knows that altering and redesigning complex systems isn’t a matter of following simple best practices and blueprints. Politics, greed, folly, venality — in short, human nature — always intrude.

Which gives rise to another quibble. Sachs is remarkably fluent on noneconomic issues like technology and science, but, to my mind, he doesn’t pay sufficient deference to the disciplines of politics or psychology. A study of the United Nations should call into question the effectiveness of global decision-making. Yes, trade, technology and common markets are eroding borders separating nations, thus enhancing the potential for collaborative, transnational policies, but there’s an equally powerful countertrend of people clinging fiercely to national and ethnic difference — see Tibet, Kosovo and Kenya. And if a Houston oilman can’t make common political cause with the poor immigrant worker who tends his lawn, how can we expect him to do so with a factory worker in China? Sachs notes that each nation “faces a distinctive challenge based on its own unique geography, demography and history,” but he doesn’t fully tease out the obstacles to progress these conditions present.

As for psychology, the cool, persistent logic that powers Sachs’s prose doesn’t account for the many irrationalities embedded in personal economic choices, and hence in the global system at large. The subtext of Sachs’s argument is that we could solve all the problems we face — from global warming to persistent poverty — if only we acted in a rational, commonsensical manner. But the growing cadre of behavioral economists has highlighted the myriad ways in which fear, neurosis and desire influence economic decisions large and small. I would have enjoyed seeing Sachs take a detour into the behaviorists’ lounge to see how we could create structures and incentives that would encourage irrational people to engage in the sort of rational collective and individual action he urges.

While Sachs conceives of problems and solutions on a global scale, he concludes by saying that there’s plenty individuals can do. He provides a list of “eight actions that each of us can take to fulfill the hopes of a generation in building a world of peace and sustainable development.” These include learning, traveling (which involves a lot of carbon emissions) and living in a sustainable manner. But it’s hard to practice what you preach. Many of us still drive S.U.V.’s instead of compact cars because they’re more comfortable. We buy hardcover copies of “Common Wealth” (which consumes paper and energy) rather than purchasing electronic versions because we simply prefer books. In an age when we don’t need to have lots of children to work the fields, or to compensate for high infant mortality, Sachs argues that it’s both economically rational — and crucial for a future of sustainable growth — for people to reproduce at a rate close to 2.1 children per family. In his acknowledgments, Sachs thanks his three children.

Daniel Gross writes the Money Culture column for Newsweek and the Moneybox column for Slate.

Tuesday, May 13, 2008

How Should UCLA Market Itself?

I opened the New York Times this morning and on the backpage of the News Section was a picture of Richard Ziman. Mr. Ziman's investments have greatly improved my intellectual quality of life (see He has been a great friend of UCLA. On the backpage of the Times, he talked about why he loves UCLA. I liked what he had to say but it got me wondering; "who paid for this advertisement? What is its purpose?" Today's UCLA Bruin newspaper explained it to me. As undergraduates choose what university to attend, we are trying to make the case that we matter.

I certainly support this effort but I would like to see some of other important past students involved. Jim Morrison and the Doors could record a new version of "Light my Fire", "UCLA: Will Light your fire" or "UCLA Woman" instead of "LA Woman" or instead of the "The End", "None of Lectures Make you feel that they will Never End".

Kareem could teach new 18 year olds how to dunk and Bill Walton could teach all of us some of those wacky things he says during basketball broadcasts and explain his Laker son's weird tattoos (Luke W).

Personally, I believe that each faculty member should give a technical summary of his/her research on the backpage of the Times.

Ads give face to UCLA

By Constance Dillon

Tuesday, May 13, 2008

Full-page advertisements featuring prominent UCLA alumni appeared in several large publications over the past few weeks in an effort to garner attention and support for the university.

The ads, which were printed in The New York Times and the Los Angeles Times, featured explanations by individuals as to why they thought UCLA was a pre-eminent university and included titles such as “Welcome to the Capitol of Now” and “Access or Excellence?”

Among other well-known Los Angeles business officials and public figures, UC Regent Sherry Lansing and U.S. House Rep. Diane Watson, D-Los Angeles, lent their names to the campaign, titled “UCLA, Unabashed.”

The campaign cost approximately $670,000 and was in the works for over a year and a half, said Lawrence Lokman, assistant vice chancellor for university communications.

The ads were timed to run as incoming freshmen decided which university to attend in the fall, Lokman said. Many university enrollment decisions were due May 1.

“We felt that the series of messages could be very helpful and encouraging to the wonderful students that have been accepted to choose to attend UCLA,” Lokman said.

Officials said they hoped the ads would provide positive exposure to incoming students that have to choose among several universities.

“Our objective was to help ensure a successful yield, particularly of the most promising students, many of whom are sought after by other elite institutions,” said Rhea Turteltaub, vice chancellor of external affairs, in a memo to UCLA faculty.

Publication was also timed to coincide with advocacy efforts currently underway in Sacramento as state officials prepare the revised state budget for next year, Lokman said. The new budget will be released later this month.

“We believe that public institutions have a responsibility to tell members of the public what they are getting for making an investment in an institution,” said Brad Hayward, a University of California Office of the President spokesman.

Hayward said while members of the public often recognize the educational excellence of the UC, they are unaware of the broader benefits the university offers, including community involvement and contributions to the state workforce. The “UCLA, Unabashed” ads help explain the ways UCLA has impacted the Los Angeles community that people might not know, Hayward said.

History professor Norton Wise said he liked the ads because they discussed issues the media doesn’t usually address, specifically UCLA’s efforts to increase programs that work across departments. Wise is codirector of the UCLA Center for Society and Genetics, which gathers its research from several departments at UCLA.

Wise said he thinks the ads are important because they raise the issue of UCLA as public property, which requires support from the public community.

“I think we need to have a lot more discussion about the university as a public institution and its products as the common,” Wise said. “We need to be protecting that role.”

While it’s too early for UCLA to know the impact of the ad campaign on enrollment, UCLA’s alumni and state have responded favorably to the ads, Lokman said, though much feedback has been word-of-mouth. Formal surveys will poll responses over the next several months, he added.

“It’s been really great to see the pride with which people have reacted (to the ads). People in this city take a lot of pride in (UCLA) and they find the information fresh, new and interesting,” Lokman said.

Friday, May 09, 2008

Anonymity and Wikipedia: Did My Mother Write An Entry about Me?

I must admit that I've always been impressed by seeing my friends written up in Wikipedia. Its not quite People Magazine but its close enough. I haven't told these guys but I will sometimes look at:


and I say to myself; these are guys are big stars.

Now that I'm a Los Angeles native for 15 whole months, I can fully appreciate the star systems. Perhaps, one of the gods sensed my unwholesome envy of my friends. To my surprise; this has now been posted;

A "Green" Wikipedia Entry

I didn't write this and I'm now wondering if my mother did? Thanks mom. It could be one of the the 4,000 students I've taught over the years. One of them could have thought I was a pretty good teacher.

Old Mama's Boys or Mama's Old Boys: Evidence from Italy

If you are age 60 and your income goes up (bingo winnings?), does this increase or decrease the probability that your adult children live with you? In U.S history, Dora Costa documented that U.S Civil War Veterans who received generous war pensions were less likely to live with their children. It appears that in other societies, the reverse takes place.

Mama's Boys, the 60 Minutes Expose

For a more academic view of these issues in Italy, read this paper:

Thursday, May 08, 2008

California Small City Budgeting and the Economics of Local Bankruptcy

Suppose you are the budget planner ( a part time job?) for some small California town. To run a balanced budget over time, your present discounted revenues (collected mainly from property taxes) must look roughly like your present discounted flow of expenditures (mainly schools and cops and infrastructure). Can these two streams get really out of whack such that you are running a big deficit?

Case #1: If you assume that home prices will continue to rise at 8% per year, you may have a rosy forecast of your revenue stream.

Case #2: If your schools are filling with kids so that you must build new schools and if these kids have special education needs and if your public workforce has nice union wage premiums, then your expenditure side could soar.

Case #3: Consider Proposition 13 capping property taxes on long term residents, if the turnover in your city slows down such that tenure increases then there are fewer new buyers paying high market prices and locking into a high property tax payment.

So, if you were a forward looking budget dude --- do you anticipate any of these trends? Does it pay to be stupid? Will the state government (also in deficit) give your city a transfer if ex-post you run a deficit? Such dynamic incentives would cause moral hazard effects.

Will actual local quality of life suffer due to these exurban budget deficits? Will the schools get worse? Will garbage not get picked up? Will crime rise?

John Quigley has some good quotes in the article below. He is a wise man!

New York Times
May 8, 2008
City Council in Bay Area Declares Bankruptcy
VALLEJO, Calif. — In a potentially ominous harbinger for some cities in California and elsewhere, the Vallejo City Council voted to declare bankruptcy Tuesday night in the face of dwindling tax revenues, the housing market meltdown and a faltering economy.

The unanimous vote was cast after late efforts to squeeze concessions out of city employees failed and with the city facing a $16 million shortfall for the fiscal year beginning in July.

“We finally realized there are no other options,” Councilwoman Joanne Schivley, a retired banker, said. “We were going to run out of cash come the end of June. It’s not a decision that any of us took pleasure in, but there are a lot of other cities that are probably be in the same boat shortly.”

What worries some experts is that some of the problems here are all too common, a steep decrease in property and sales taxes and transfer fees as a result of weakness in the housing market.

“At one point, bankruptcy seemed beyond the pale, but it’s something that one hears about a lot more now,” said John Quigley, a professor of economics at University of California, Berkeley. “And in California, you hear about a lot of cities being pushed to this sort of thinking by the housing crisis.”

A bayside community of 117,000 25 miles northeast of San Francisco, Vallejo is the largest city in California to declare bankruptcy, though Orange County did so in 1994 after a spate of bad investments.

“With Orange County,” Professor Quigley said, “there were identifiable bad guys. This is different. Near as one can tell, this is more of a low-level infection everywhere.”

Municipal bankruptcies are not unheard of, but are often accompanied by scandal or legal losses. County commissioners in Jefferson County, Ala., are considering bankruptcy amid a federal lawsuit over payments to the mayor of Birmingham, the county seat, and a missed bond payment.

Smaller cities like Half Moon Bay, Calif., and McCall, Idaho, have also flirted with bankruptcy. In Vallejo, Council members and residents fault decisions by past Councils, including agreeing to binding arbitration for contracts with city employees, whose salaries account for nearly 80 percent of the general fund.

Like many Bay Area cities, Vallejo has struggled to keep up with demand for services as its population has grown over 20 years. “We as a state are growing by 500,000 people a year, and that is continuing to put pressure on the cities,” said Dan Carigg, the legislative director for the League of California Cities, an association for the 478 cities in the state. “And when you run short, you tend to have two choices. Cut programs or try to raise revenues.

“And when it comes to cities trying to raise new revenues, their options are very limited.”

Because of propositions approved by voters, California strictly limits increases in property taxes. And in Vallejo, public workers say the cutting has already gone too far.

“We’ve been doing more with less forever,” said Detective Mat Mustard, vice president of the Vallejo Police Officers Association, which opposed the bankruptcy declaration. “We’re going to start losing people. Who wants to work for a company or a city that’s bankrupt?”

Council members disputed that public safety or the attractiveness to businesses would be reduced.

“This morning, going around town, it’s weird, because everyone’s saying congratulations,” Councilwoman Stephanie Gomes said. “Its kind of odd to say, but the mood among people is that we’re finally going to solve the problems.”

Along the main drag, Georgia Avenue, the sentiment seemed to be more bittersweet.

“I’m sad to see it go this way,” Debbie Rojas, owner of the Georgia Street Grill, said. “But I’m kind of excited for bankruptcy.”

Tuesday, May 06, 2008

Weak Institutions Cause Natural Resource Dependence: The Curse of Natural Resources Revisited

Science 2 May 2008:
Vol. 320. no. 5876, pp. 616 - 617
DOI: 10.1126/science.1154539

Policy Forum

Linking Natural Resources to Slow Growth and More Conflict

C. N. Brunnschweiler1* and E. H. Bulte2

The appreciation for natural resources as a driver of economic development has undergone a dramatic change in the past decades. Although an abundance of resources was generally perceived as advantageous until the 1980s, an influential literature emerged in the 1990s that reached seemingly opposite conclusions. The phrase "natural resource curse" was coined and, perhaps because of its paradoxical connotation, caught on in both academic and policy circles. Two prominent "dimensions" of the resource curse include the association of resources with slow economic growth [a literature inspired by Sachs and Warner (1)] and with armed civil conflict [a literature mainly inspired by Collier and Hoeffler (2)].

The causal mechanisms linking resources to slow growth and more conflict are ill understood. It is often argued that resource-rich economies suffer from weak leadership, rent seeking, and failing institutions (3). This may be either because resource profits (rents) trigger "rentier state" dynamics and the associated disconnect between the rulers and the people, or because resource rents enable autocratic and unaccountable rulers to oppress opposition (4). Resources may also invite conflict if greedy rebels seek profitable looting opportunities. Finally, dependency theories of development predict that the strategic and commercial value of resources may affect politics and economic outcomes in developing countries, as they are of interest to powerful nations and corporations. The stories associated with the curse are compelling, and ample anecdotal evidence exists to lend credibility to the key ideas.

Natural resource dependence, abundance, and economic growth. Regression fits of natural resources and economic growth 1970-2000. (Top) Natural resource dependence in 1970; (bottom) World Bank total natural wealth data (log values) measured in USD per capita in 1994.

The curse is now an immensely popular research topic and receives serious attention from multilateral agencies and nongovernmental organizations (NGOs) (5). Its increasing status within the development community is reflected by the fact that international organizations are providing advice to resource-rich developing countries on how to manage their resource base (reducing reliance on the primary products sector) and revenue streams to exorcise the curse. Some of the proposals are quite radical, such as the one suggesting to first distribute resource profits to the people and then to tax them back (6). Increasingly, there are calls to regulate international trade to face certain manifestations of the curse headon (e.g., the Kimberlite initiative dealing with "blood diamonds").
But how robust is the evidence for the curse? We believe it is actually weaker than generally perceived. A key problem of most existing analyses is that the common resource variable used in cross-country regression models is endogenously determined, and itself not invariant with respect to changes in institutional quality or conflict (the variables it is supposed to adversely affect). If so, existing empirical results would be biased.

The standard resource variable used by Sachs and Warner, as well as by Collier and Hoeffler, is primary exports divided by a measure of national income. It thus captures the resource dependence of economies, rather than abundance. A negative correlation between this variable and growth could mean that resources lead to slower economic growth, as suggested by the curse proponents. Alternatively, it could mean that poor economic development policies--leading an economy to become dependent on its primary exports--dampen growth. Similarly, although a negative correlation between the resource variable and institutional quality may imply that resources undermine institutions, it might also capture that the resource sector is the "default sector" in the absence of decent institutions when nobody is willing to invest in alternative forms of capital. Finally, a positive correlation between the resource variable and conflict may indeed mean that resources trigger conflict. But it may also be the case that conflict makes countries dependent on resource extraction--the default activity that still takes place after other economic sectors (more mobile or, perhaps, better linked to the rest of the economy) have come to a stop. If so, resources are not a curse to development, but rather a safety net to support people and economies even under adverse circumstances. The nature of the causality is, therefore, a concern.

The importance of finding an appropriate proxy for resource endowments, as well as the consequences of this proxy for econometric results, is illustrated by the simple example in the figure on page 616. At the top, a regression fit of the conventional resource variable--primary exports divided by GDP at the start of the period--on economic growth between 1970 and 2000 results in the usual negative "curse" relation. At the bottom, however, a new resource wealth variable is used, and the result is reversed, showing a positive correlation between resource abundance and growth--the curse disappears!

The resource variable used in the bottom figure is one of several made available by the World Bank (7). They capture the discounted value of expected resource rents for a future period of 20 to 25 years, calculated in U.S. dollars (USD) per capita for 1994. Contrary to the standard resource variable (which captures flows), these wealth variables estimate resource stocks--both aggregate and divided by type, such as mineral or cropland assets. They therefore offer more intuitive variables to measure abundance.

In more extensive tests, we used standard econometric techniques to shed light on the causation issue. We used a so-called instrumental variable approach to isolate effects of income and resource dependence on conflict, rather than the reverse effect (8). We do the same to isolate the effect of dependence and institutions on economic growth. We also consider the effect of resource abundance on growth and conflict, using the World Bank resource variables. A summary of representative results, including technical details about the estimation approach, is available on Science online (9). Our main results are as follows. If we adopt the conventional methodology--that is, simply assume that resource dependence is an exogenous explanatory variable in growth and conflict regressions--then our data reproduce the conventional curse results. In other words, there appears to be a significant negative relation between resources and growth, and a positive relation between resources and the probability of conflict. However, inspection of these results suggests that the conventional methodology is flawed and can produce biased results. Specifically, as discussed above, resource dependence is endogenous in the regressions (9).

After addressing the endogeneity problem, the correlation between resource dependence on the one hand, and conflict and slow growth on the other, vanishes. The correlation between resource dependence and slow growth and conflict, therefore, does not imply causation from the former to the latter. Instead, causality appears to be running from weak institutions and conflict to resource extraction as the default sector, which produces resource dependence as the final outcome. Resource dependence appears as a symptom, rather than a cause of underdevelopment. These results are robust to alternative model specifications (9).

However, as already suggested by the simple results at the bottom of the figure, our findings present the possibility of even better news on natural resources. When using the new World Bank variable to proxy for resource abundance, we find that the direct effect of resource wealth (particularly the subset of mineral resource wealth) on income growth is positive and significant. All things considered, an increase in subsoil wealth by one standard deviation--roughly the difference between Senegal and Sweden--would have brought Senegal's growth performance on a par with that of Mozambique or Kenya; not a huge improvement, but certainly not a growth curse.

Similarly, resource wealth also attenuated the risk of conflict. This is due to a positive indirect effect: Resource wealth raises income, and higher incomes, in turn, reduce the risk of conflict. Again, although the aggregate impact of resource abundance is slight--amounting to less than a 5% reduction in the risk of war in case of a standard-deviation increase in resources--it is still statistically significant. These findings are robust to using alternative measures of resource abundance, such as fuel and nonfuel mineral reserves per capita (9).

Three important caveats are relevant here. First, the number of countries in our regressions is modest (limited by the resource abundance variables). Second, consistent with most of the existing literature, our resource data do not include diamond deposits and trade flows. A focus on highly disaggregated resource measures (diamonds, but also oil) in subsequent work seems worthwhile. Third, although we believe our resource variables represent improvements over the conventional proxy, they are not perfect. Even though differences in resource stock values are driven by differences in stocks, and not by differences in local institutions (7), they are functions of historic exploration and exploitation. Therefore, they are probably not fully exogenous. The hunt for the perfect resource variable is on, but unlikely to be settled anytime soon.

Nevertheless, our cross-country estimations cast serious doubt on the paradigm of a general resource curse. It appears as if, across the board, resource riches may be associated with higher incomes and a lower risk of civil war. Although there are undoubtedly specific countries where specific resources have eroded institutions or torn countries apart in civil strife, we find this is not the general pattern. This is consistent with several case studies that fail to show a robust link between the onset of war and resource extraction (10), and with evidence that the sector involved in turning natural resources into primary products has many more positive spillovers to the rest of the economy than often are argued (11). Finally, it is consistent with the main message sent by the World Bank in its most recent World Development Report, which, after years of intellectual neglect, finally looks favorably at the primary sector.

The last word in the resource curse debate is far from having been spoken; but economic advisors should be aware that natural resources do not necessarily spell doom for development. Instead, their exploitation can be a valuable part of a sustainable development strategy.

References and Notes

J. D. Sachs, A. M. Warner, "Natural resource abundance and economic growth" (Harvard Center for International Development, Cambridge, MA, 1997).
P. Collier, A. Hoeffler, Oxford Econ. Paper (56), 563 (2004).
J. Confl. Res. 49 (special issue), (August, 2005).
M. L. Ross, World Politics 53, 325 (2001).
A. Rosser, IDS Working Paper 268 (2006);
X. Sala-i-Martin, A. Subramanian, Addressing the Natural Resource Curse: An Illustration from Nigeria (International Monetary Fund, Washington, DC, 2003).
World Bank, Expanding the Measure of Wealth: Indicators of Environmentally Sustainable Development (Report no. 17046, World Bank, Washington, DC, 1997).
W. H. Greene, Econometric Analysis (Prentice-Hall, Upper Saddle River, NJ, ed. 5, 2003), chap. 9.
Tables are available as supporting material on Science Online.
M. L. Ross, J. Peace Res. 41, 337 (2004).
G. Wright, J. Czelusta, Challenge 47, 6 (2004).



Supporting Online Material

1CER-ETH (Center of Economic Research at the Swiss Federal Institute of Technology), Zurich, Switzerland
2Development Economics Group, Wageningen University, Netherlands, and research fellow of the Oxford Center for the Study of Resource-Rich Economies (Oxcarre), Oxford, UK

*Author for correspondence. E-mail: