Wednesday, December 31, 2008

Predictions for 2009

Economists are well know for their ability to Predict the future.

Prediction #1: The Dow Jones Index on January 1st 2010 will be 9,000

Prediction #2: The February 2009 Super Bowl winner will be the Colts over the Giants as one Manning will hug another Manning and the parents will cry and be interviewed.

Prediction #3: Obama will enact a gasoline tax floor such that the price of gasoline will never fall below $4 a gallon.

Prediction #4: Bill Clinton will defect and will run for the Presidency of Georgia.

Prediction #5: Alex Kahn will win the 2010 Clark Medal in Economics for his fundamental work on the economics of Lego.

Prediction #6: Obama will raise taxes on all households who earn more than $200,000.

Prediction #7: China's purchases of U.S T-Bills will fall sharply as it redirects its investments into Chinese infrastructure on roads, power plants and other home productive projects.

Prediction #8: The U.S inflation rate will rise to 10% per year.

Prediction #9: The world price of gasoline will rise to $3 a gallon

Prediction #10: UCLA will continue its resurgence as its faculty becomes younger and its research flow more vibrant than other universities including Columbia, Duke, Washington University and other northern California universities.

Friday, December 26, 2008

Sit and Wait: The Option Value of Investment Delay During a Deep Recession

How does a recession end? The clichĂ© story told about World War II is that there was exogenous sharp increase in demand and America’s factories went back to work to supply the needed war supplies.

In that case, the government sent clear signals concerning what it needed and in what quantity. In 2009’s recession, the signals are more murky. You don’t have to be a good game theorist to foresee a complicated signaling game. Each business, ranging from cars to banks, must ask itself; “what is the probability that we will get a government bailout? If we get one, how big will it be? Can we, and should we, take actions today to increase or at least not decrease the likelihood that we receive a government bailout/handout?”. So the "poison pill" defense in business is to hurt your business to make it less desirable as a takeover target, in this case I'm wondering whether a "poison pill" makes a firm more likely to receive a public bailout.

So in my "model", during a recession firms can engage in Keynesian government rent-seeking (seeking a bailout) or engage in productive re-organization. My claim is that many firms now believe that the former activity is more profitable than the second one and in aggregate this will hurt our economy's macro performance.

How would a business plan if it knew that the President was Milton Friedman and that he could credibly commit to bailout no one. In this case, during the 2009 recession the business would say to itself “we will sink or swim based on our own decisions”, such a firm would use the recession to reorganize and focus on future sectors of growth and perhaps even retool to get ready for the next boom.

These stark differences in the firm’s investment behavior crucially depend on the firm’s expectations of “who” is the government that it is playing a strategic game against.

While it is individually rational for each firm and at risk industry to sit still and act like a victim (each has an incentive to appear to be passive victims who do not control their destiny and to convey that innocent people will suffer if they are not protected ---- i.e their blue collar workers) as they await the Obama Team’s largess, in aggregate such actions prolong the recession as more time passes and real reorganization does not occur.

I have tried to read Keynes on several occasions. What I don’t see being discussed in the original text or by Paul Krugman is a clear statement concerning how diverse firms form expectations of the marginal benefits of hiring new workers and how such firms choose the capital stock such that the marginal benefit of hiring new workers (and retaining incumbent workers) remains high. After all, national employment rates will rise if labor demand increases. Implicitly, the Keynesian crew is arguing that a President who can engage in a massive “New Deal” can shift expectations and this will bring about new investment. This represents a massive “average treatment effect” of the form:

Expect Recession to Persist into 2011 = c + b*1(Engage in Big New Deal) + U

where 1() is the indicator function that equals one if a President starts an enormous public works campaign.

The empirical hypothesis is to test whether the coefficient "b" is less than zero.
Do Government stimulus programs shift expectations to raise hope and belief and reign in the crazed "animal spirits" such that prosperity will return?

It seems like behavioral economics (which started in micro-economics) now has merged again with macro-economics to give us a multiple equilibrium model such that the brave government is the only economic actor who can save us from dooming ourselves to chaos and revolution. This sounds a bit heroic to me.

I am arguing that the expectation of a “New Deal” may slow down and retard private investment, not due to crowding out due to higher interest rates, but due to rent seeking as industry seeks to look weak and needy.

In a world where firms recognize that investments in capital are sunk irreversible investments, facing uncertainty such firms always had an incentive to delay such investments. Now they have a second incentive to delay (namely hope for a bailout). In aggregate such choices add up.

Sunday, December 21, 2008

The Dark Side of Social Networks: Trust and Bernie Madoff

Dora Costa and I have a new book recently published by Princeton Press . The book focuses on the causes and consequences of social networks during the U.S Civil War. In the final chapter we discuss what is known about the "dark side" of social capital. Bernie Madoff represents an example of what we didn't talk about. In our chapter, we discuss examples such as the Ku Klux Klan and terrorist groups. Both groups are aided by the close social ties between their members.

What is my point about Bernie Madoff? The New York Times is running long articles making the point that because Bernie was jewish, lived in a nice part of New York City and attended the right social events and looked avuncular that rich jewish households trusted him and didn't ask any questions.

Trust crowds out investor effort as households didn't bother to ask the tough questions and do the basic "due diligence" before investing their $.

To repeat my point, suppose that New Yorkers don't like Republicans from Alaska --- based on Gary Becker's work on the economics of discrimination --- a Republican from Alaska would only be able to attract New Yorkers to invest in her funds if she did a fantastic job explaining every bit of her business plan; the burden of proof would be on her and she would need to be 150% above the bar for New Yorkers to invest in her.

In a world where effort is costly and people are lazy, we need less trust --- both trust in government bailouts (due to ex-post moral hazard) and ex-ante trust in the Madoffs in the world. In a dog eat dog world, each decision maker would need to do his own research before investing.

Saturday, December 20, 2008

California Per-Capita Electricity Progress: Who Gets Credit?

Are you a good data sleuth? here is a puzzle. Yes, California has a temperate climate that doesn't require much air conditioning but take a close look at this picture below. Note the "divergence big time" between California's per-capita electricity consumption relative to the rest of the nation. Who gets credit for this green progress? The de-industrialization of California? Effective energy policy? New capital investments by for profits minimizing expected PDV of electricity bills? All? Neither?

A new Stanford paper takes a look at this important issue. Jim Sweeney's Paper . Sudarshan and Sweeney give policy 20% of the credit. That appears to be smaller than the conventional wisdom.

Here is another picture that I like. I see the power of liberal ideology. From this graph you can't tell if this power is from a displacement effect such that energy intensive activity migrates away from these states or if environmentalist states are able to "treat" energy intensive activity to reduce its energy intensity.

Gearing up for 2009

My wife and I have owned a Los Angeles home for 6 months now. The UC is our lender. According to the paperwork we received today, at the rate that we are paying down our principal debt we will own this home outright in 100 years. I take a long term perspective. I don't believe that Bernie Madoff invested any of my money.

While the world looks to Washington for a bailout, I have my eyes set on San Francisco. The Annual Economics meetings are taking place in a city that I like. I don't attend the meetings when I don't like the city. It is true that for 90% of the nation's economists that a trip to SF is a production. But, it is a green city and it will be 55 degrees and foggy each day.

The Annual Meetings offer the opportunity to see old friends and to learn some economics. Dora will have the pleasure of participating in a lot of junior recruiting for UCLA. I will be talking and talking and talking and hanging out in the book area. Our Princeton Press book is now available and I'm hoping that Princeton will allow me to give them away for free.

While I am proud of this publishing success, I have also suffered great personal defeat. I was recently notified by the Association of Environmental and Resource Economists that I lost out to at least 2 candidates in a vote consisting of 4 candidates to be a Director of this Association. Like Ralph Nader, John Kerry, Al Gore, Jesse Jackson, McCain, I will have to live with this stinging defeat. I campaigned hard and spent roughly $40 million dollars in my attempt to win the election. Most of that money was spent on buying cable TV time where I read from my published papers. I also mailed out checks to voters who I thought were just at the margin of voting for me or not.

Fortunately, I can look forward to my winter 2009 Environmental Economics class where I will teach 140 students the joys of environmental economics. I hope that at least one of these talented young students can achieve what I could not. What textbook do I use for my course? Here is the whole thing .

Wednesday, December 17, 2008

Evaluating Geoengineering Approaches for Mitigating Climate Change

More environmental economists should follow Scott Barrett's lead and work on the social science of geoengineering. Here is Scott's paper . What can economists add to this "science stuff"? We have studied choice under uncertainty and this appears to be classic example. You can talk about Knightian Uncertainty but the analysis will quickly return to what Marty Weitzman discusses here .

No quick or easy technological fix for climate change, researchers say

UCLA scientist sees many geoengineering plans as 'preposterous'

Stuart Wolpert,

Global warming, some have argued, can be reversed with a large-scale "geoengineering" fix, such as having a giant blimp spray liquefied sulfur dioxide in the stratosphere or building tens of millions of chemical filter systems in the atmosphere to filter out carbon dioxide.

But Richard Turco, a professor in the UCLA Department of Atmospheric and Oceanic Sciences and a member and founding director of UCLA's Institute of the Environment, sees no evidence that such technological alterations of the climate system would be as quick or easy as their proponents claim and says many of them wouldn't work at all.

Turco will present his new research on geoengineering — conducted with colleague Fangqun Yu, a research professor at the State University of New York–Albany's atmospheric sciences research center — today and Thursday at the American Geophysical Union's annual meeting in San Francisco.

"We're talking about tinkering with the climate system that affects everybody on Earth," said Turco, an atmospheric chemist with expertise in the microphysics of fine particles suspended in the atmosphere. "Some of the ideas are extreme. There would certainly be winners and losers, but no one would know who until it's too late.

"If people are going to pursue geoengineering, they have to realize that it won't be quick, cheap or easy; indeed, suggestions that it might be are utter nonsense, and possibly irresponsible. Many of these ideas would require massive infrastructure and manpower commitments. For example, one concept to deliver reflective particles to the upper atmosphere on aircraft would require numerous airports, fleets of planes and a weather forecasting network dedicated only to this project. Its operation might be comparable to the world's entire commercial flight industry. And even after that massive investment, the climatic response would be highly uncertain."

Given the difficulties of reducing greenhouse gas emissions, the idea of a simple large-scale technological solution to climate change can seem very appealing.

"Global warming due to carbon dioxide emissions appears to be happening even faster than we expected," Turco said. "Carbon dioxide emissions are continuing to grow despite all of the warnings about climate change, despite all of the data showing such change is occurring and despite all of the efforts to control carbon emissions. The emissions are rising, in part, because China and India are using increasingly more energy and because fossil fuels still represent the cheapest source of energy.

"If we continue down this path, the climate is likely to change dramatically — major ice sheets could melt, sea levels could rise, it may evolve into a climate catastrophe. So it is tempting to seek an alternative response to climate change in case we can't get emissions under control. The result is that more and more geoengineering proposals are surfacing. Some of the people developing such proposals know what they're talking about; many don't."

Turco and Yu have been studying a particular geoengineering approach that involves the injection of nanoparticles, or their precursor gases — such as sulfur dioxide or hydrogen sulfide — into the stratosphere from aircraft or large balloons.

While our climate system normally involves a balance between incoming sunlight and outgoing heat radiation, excess atmospheric greenhouse gases trap additional heat and cause the Earth's temperature to rise, Turco noted. "One way to control the potential warming is to reduce the emissions of greenhouse gases," he said. "We haven't been able to get a handle on that. Another idea, instead of reducing emissions, is to somehow compensate for them."

The idea of injecting sulfur dioxide or other toxic gases into the stratosphere in gaseous or liquefied form would mean that planes or balloons would have to fly as high as 13 miles — higher than any commercial aircraft can reach. And the amounts involved range to many millions of tons.

"Some of these proposals are preposterous, mind-boggling," Turco said. "What happens, for example, when you spray liquefied sulfur dioxide into the stratosphere? Nobody knows."

In a study published earlier this year, Turco analyzed what happens when a stream of very small particles is injected into the atmosphere. He showed that when the particles are first emitted, they are highly concentrated, collide frequently and coagulate to much larger sizes than expected.

"To create the desired climate outcomes, you would need to insert roughly 10 million tons of optimally-sized particles into the stratosphere," he said. "You would have to disperse these particles very quickly over the entire stratosphere or they would coagulate into much larger sizes. At such enhanced sizes, the particles do not have the same effect; they're much less effective in forcing climate compensation. In the end, you would have to fly thousands of high-altitude jets every day to get enough particles into the atmosphere to achieve your goal. And this activity would have to be sustained for hundreds of years."

The basic idea behind stratospheric particle injections is that the Earth's temperature depends on the reflectivity of the atmosphere. About one-third of the energy from the sun hitting the Earth is reflected back into space. That fraction is called the "albedo." If the albedo increases, the average global temperature decreases because less energy is available to warm the planet. So if we can increase the albedo sufficiently, we can compensate for global warming.

"The size distribution of the particles is critical," Turco said. "If the particles are too large, that will actually create a warming effect, a greenhouse warming. Small particles are not useful because they don't reflect much radiation; you need something in between, and we have shown that is hard to achieve reliably."

Turco and Yu have simulated, for the first time, the actual injection processes that might be used, focusing on the early evolution of the injection plumes created from aircraft or balloon platforms. They used an advanced computer model developed by Yu to calculate the detailed microphysical processes that ensue when reactive, particle-forming vapors are emitted into the atmosphere. They also accounted for the photochemical reactions of the injected vapors, as well as the mixing and dilution of the injection plume.

"We found that schemes to emit precursor gases in large quantities would be extremely difficult to design and implement within the constraints of a narrow tolerance for error, and in addition, the outcomes would be very sensitive to variables over which we would have little control, such as the stability and mixing conditions that occur locally," Turco said.

"Advocates of geoengineering have tried to make climate engineering sound so simple," he added. "It's not simple at all. We now know that the properties and effects of a geoengineered particle layer in the stratosphere would be far more unpredictable, for example, than the physics of global warming associated with carbon dioxide emissions. Embarking on such a project could be foolhardy."

How can global warming be combated?

"We must reduce carbon emissions," Turco said. "We need to invest big-time in alternative energy sources with minimal carbon footprints."

The research is federally funded by the National Science Foundation.

UCLA is California's largest university, with an enrollment of nearly 38,000 undergraduate and graduate students. The UCLA College of Letters and Science and the university's 11 professional schools feature renowned faculty and offer more than 323 degree programs and majors. UCLA is a national and international leader in the breadth and quality of its academic, research, health care, cultural, continuing education and athletic programs. Four alumni and five faculty have been awarded the Nobel Prize. For more news, visit the UCLA Newsroom.

Some Subtle Thinking About Keynesian "G" and Crowding Out

The New York Times Letter to the Editor are always funny. There is true competition to publish there and the cream of the crop usually are pretty good. This one gets an A+.

To the Editor:

It is amusing that Andrew M. Cuomo, who owes his whole career to his dad, may not get the Senate seat of Hillary Rodham Clinton (who owes her whole career to her husband) because David A. Paterson (who owes his whole career to his dad) may give it to Caroline Kennedy (who owes her whole career to her dad).

You would think a state as large as New York could find someone who deserves something on his or her own.

David Machlowitz
Westfield, N.J., Dec. 16, 2008

Nepotism and social networks may be part of the returns for going to elite schools. Whether a clever economist can quantify this remains an open question. What would be the right control group? People who go to Harvard classes but make no friends while there? (this might be a select sample).

Switching Subjects, there is an interesting debate going on here:
Mark Thoma's eloquent statement on crowding out in good times versus in recessions

One new thought;

Thoma appears to give little weight to the long run productivity effects of "creative destruction". In his model, there is an unemployed army of people doing nothing but watching TV at home. These individuals would love to work at their original wage but nobody will hire them at that wage so they are wasting time.

Think of Detroit today. Would the U.S economy as a whole be richer in 2015 if Detroit's workers recognize that the "Big 3 jobs aren't coming back" and these households move to more productive regions with newer capital and more pro-growth economic policies? Thoma's New Deal will slow down this out-migration from this slow growth region. (Similar to proping up Eastern Germany after German unification).

Consider the following dynamic game theoretic argument. If firms anticipate that real wages are declining, then they are more likely to make irreverible investments in factories and other capital that are complements of labor. So you are more likely to buy left shoes if right shoes become cheaper.

Workers are more likely to upgrade their human capital and skills when the opportunity cost is low.

So my point is that the Thoma focus on the very short run plays down the importance of a dynamic economy investing in new capital (both factories and skills) to get ready to be productive in the future.

Thoma might counter that an unemployed worker starts drinking booze and this degrades his skills in an economy with skill degradation (i.e duration dependence).

So, this debate hinges on whether recessions are the right time for economy wide re-organization and capital investment in worker skill upgrading? If so, does a Keynesian Green New Deal or regular New Deal actually slow down worker skill investment (as they take new post office jobs) and firm investment and re-organization (as General Motors keeps making cars that people don't want).

If productive firms (i.e google) anticipate that this costly New Deal will lead to future inflation and future higher taxes then does this retard their capital investments now?

Tuesday, December 16, 2008

LSE Alumni Dues

I am a 1987 graduate of the LSE. I wasn't the only American walking around there. The joke was that LSE stood for Let's See Europe. I studied economic history and econometrics there. I don't believe that I was Dudley Baines or E.H Hunt's best student but I did learn a few things and I met some very smart people who helped push me to work harder and to not be so smug. The LSE continues to help me. For both of my books, they have been kind enough to spread the word to their vast network. Here is the new one; The LSE alumni booklist provides a short blurb on the Costa/Kahn book (look under k)

I now own 10 copies of the book and I must admit that it looks good. It is hard to believe that it actually exists. I hope somebody reads it!

Monday, December 15, 2008

Causality Questions

Do you ever wonder what causes what? I know that my lectures cause my students to fall asleep but I'm not sure what else I know about causality. Robert Gordon asks a tight causal question in his new nber working paper; "Did Economics Cause World War II?"

Did Economics Cause World War II?

Robert J. Gordon

NBER Working Paper No. 14560
Issued in December 2008

---- Abstract -----

Historians have long recognized the role of economic resources and organization in determining the outcome of World War II: the Nazi economy lacked the economic resources and organization to oppose the combined might of the U.S., U.K., and U.S.S.R. A minority view is that the Germans were defeated not by economics, but by Hitler's many strategic and tactical mistakes, of which the most important was the invasion of the Soviet Union. Compared to this debate about the outcome of the war, there has been less attention to economics as the cause of World War II.

This is a review article of a new economic history of the Nazi economy by Adam Tooze which cuts through the debate between economics and Hitler's mistakes as fundamental causes of the outcome. Instead, Tooze argues that the invasion of the Soviet Union was the inevitable result of Hitler's paranoia about the land-starved backwardness of German agriculture as contrasted with the raw material and land resources of America's continent and Britain's empire. The American frontier expansion that obliterated the native Indians provided Hitler with a explicit precedent, which he often cited, for pushing aside the native populations in the east to provide land for German Aryan farmers.

Germany's agricultural weakness is summarized by its low land-labor ratio, but Poland and the Ukraine had even less land per person. Thus simply acquiring the land to the east could not solve Germany's problem of low agricultural productivity without removing the native farming populations. Far better than other histories of the Third Reich, Tooze reveals the shocking details of General Plan Ost, the uber-holocaust which would have removed, largely through murder, as many as 45 million people from eastern agricultural land. Tooze, like the Nazis before him, fails to emphasize that the solution to Germany's agricultural problem was not acquiring more land for the existing German farm population, but rather by raising the land-labor ratio by making the existing German land more efficient, mechanizing agriculture and encouraging rural-to-urban migration within Germany.

This paper is available as PDF (210 K) or via email.

Sunday, December 14, 2008

New Trade and the Environment Research

When I was a graduate student over 15 years ago now, my midwestern university didn't offer any courses in international trade or environmental economics. I have tried to overcome my upbringing by doing some work at the intersection of these fields. I will let you judge whether this empirical work is good. My new NBER paper (joint with Lucas Davis) on Trade and the Environment .

If you are a labor economist, I would encourage you to take a look at our paper. We breathe some new life into the canonical Roy Model, we assemble some very funky data sets, and we document that old durable goods whose lifespans are endogenous and depend on trading possibilities are important determinants of both local and global pollution levels.

In my humble opinion, this is a pretty subtle paper that explores a number of ideas while trying to keep the empirics relatively simple.

Our focus on consumer activity and in particular used vehicle purchases distinguishes this study from most empirical trade and the environment papers.

Here is an example of what I've done on pollution havens in the past:
Kahn 2003

Arik Levinson has a nice new paper revisiting these issues by taking a careful look at intermediate inputs in production.

Arik's 2007 NBER paper .

Switching subjects, as I've boasted the other day --- the Costa/Kahn book will be available starting this tuesday. If you are in Los Angeles, UCLA will be putting on a parade to celebrate this event.

Saturday, December 13, 2008

Costa/Kahn Social Capital Book Will Be Available Starting 12/16/08

Malcolm Gladwell's formula for success includes luck and practice. Meatloaf said that 2 out of 3 ain't bad but what about 1 out of 2? Like Allen Iverson, I don't practice. When predicting whether a book will succeed timing (i.e luck) is crucial. Some great books have recently been published by prominent economists. At least so far, the popular media has not embraced them to the degree that I thought they would. Clearly, the "Recession" has crowded out a lot of intellectual discourse on important long run policy issues. The lesson is that timing matters.

Dora and I are hoping that we may luck out and have better timing with the launch of our new book. We hope that the Recession is now slightly "old news" --- with the Obama Team coming in; are people now ready to talk about issues concerning the causes and consequences of community and our individualist society's willingness to sacrifice?

Costa/Kahn Heroes and Cowards: The Social Face of War (Princeton Press) I am looking forward to 12/16/2008. It is thrilling to open a box of books and to see your book just sitting there. It beats a stack of paper reprints!

Innovative Ideas on International Carbon Markets

UCLA's Kal Raustiala presented a recent paper of his at the IOE a few weeks ago. Kal wants to see an international carbon market get up and running. While he had several interesting things to say, I'd like to focus on just part of the argument.

To simplify, suppose that the world has just 2 nations called A and B. Nation A is a transparent, verifiable nation where if the nation says it has reduced its carbon emissions by a ton then it has and it is costless to verify that it has.

Nation B is an opaque corrupt nation. If it says that it has reduced its carbon dioxide emissions by a ton then there is only a 10% chance that it is telling the truth and a 90% chance that it is lying. Assume that these probabilities are common knowledge.

In a world trading market, Rustalia and Keohane want the world price of carbon to differ across nations. Similar to finance models of a "risk premium" nations that have a reputation for telling the truth "nation A" in this case, will be able to sell their carbon credits at higher prices (9 times higher in this case) than nations who lie (nation B).

Why is this the case? Rustalia and Keohane want to hold the buyer of the permits libel. So suppose an investor buys a Hummer plant and anticipating that this pollutes needs to offset this by buying carbon credits.

In the Rustalia world, the investor will say to himself; I can either buy permits from Nation A or Nation B. I know with certainty that if I buy from A that i have achieved the carbon reductions that I need to while if I buy from B I'm buying a gamble because the auditers may ex-post determinet that they did not reduce the carbon that they promised and then I will be sued. Anticipating this, I prefer to buy from A. In equilibrium, A will be rewarded for being a truth-teller because they can sell their endowment of permits at a higher market price than B.

This incentive system should create a race to the top as nations will have an incentive to gain a good reputation for being transparent about their carbon reductions. Corrupt nations will be punished.

An extension of this idea; Suppose that I am a dirty factory that creates a lot of carbon in production. The pollution havens hypothesis would predict that I will go to nation B with its corrupt culture. I'm still puzzling over this but I'm wondering whether the Rustalia/Keohane idea encourages pollution havens due to opportunity cost.

If the dirty factory locates in nation A , and A has to use its valuable permits to cover this pollution then A loses the opportunity to sell its credible valuable excess permits at its world price. Anticipating this, NAtion A would not let the factory open within its borders while a low permit price nation loses less from welcoming them.

Note that a key issue in Rustalia and Keohane's idea is environmental accounting. There has to be a credible "Standard and Poors" who cheaply goes around the world each year verifying which nations abated the tons of carbon that they promised to do. Now what information must be collected to figure this out?

In this paper , Glaeser and I show how hard this is to do in the United States just for household carbon emissions. In on going work with Rui Wang and Siqi Zheng, we are now turning to Chinese cities to measure emissions. Theorists have a good life!

Friday, December 12, 2008

Celebrating Diversity Among Economists

Who says that economists agree? Here are 8 deep thinkers thinking in public. The New York Times should conduct more of these "focus groups". Diverse Views on how to end this recession.

I also thought that this editorial about our oceans was quite good. The last paragraph talks about the social reinforcement of shaming people into thinking about the consequences of their actions. A Hidden Camera should be used to judge whether these messages are effective.

December 12, 2008
The Oceans’ Shifting Balance

Most of us understand that what we give off in the form of exhaust — from cars and manufacturing and energy production and burning forests — makes its way into the atmosphere, and is responsible for changes in the global climate. What is less familiar is the fact that the oceans are absorbing as much as a third of the carbon dioxide being emitted into the atmosphere.

The effects are already being felt. That added carbon dioxide is slowly making the oceans less alkaline and more acidic, altering the chemical balance on which much of oceanic life depends. Carbon dioxide reacts with seawater to form carbonic acid, a process that consumes carbonate ions. Those ions are necessary for the chemical reaction used to form calcium carbonate, the structural element in corals and the shells of many marine animals.

As the oceans acidify, shells will simply dissolve. The growth of coral reefs will slow, and their structural integrity would be weakened, making them more vulnerable to storms and erosion. That would be a catastrophic loss. The list of potential long-term effects to oceanic life is only beginning to be explored.

Scientists have understood ocean acidification for a long time. But what they are learning now is how quickly it is increasing, in step with increases in atmospheric carbon dioxide. New studies show that if carbon dioxide emissions continue at current rates, shells and corals could begin to dissolve — especially in the southern oceans — within 30 years. Observations from many places, including the Caribbean Sea and the Pacific Ocean, suggest that ocean acidification is proceeding much faster than anyone had thought.

Combating a change as fundamental as this requires a fundamental change in awareness and behavior. What is needed is a mental stencil of the kind you find near storm drains in Los Angeles that say: “This Drains to Ocean.” A third of whatever we emit in the way of carbon dioxide ultimately drains to the ocean, which is all the more reason to curb emissions quickly.

Thursday, December 11, 2008

Radio Appearance

Yesterday I listened to Paul Krugman's 2008 Nobel Prize Address, I thought that he did a great job. I don't expect to be offered that platform but I was offered an open mike on KPCC Radio in Los Angeles and here is what I had to say; Matthew Kahn quoted on Radio Segment on Evaluating AB32's Consequences

University Endowment Income as a Substitute for Venture Capital in Making the Green Push?

Harvard has a lot of smart faculty, students and staff. Is their collective wisdom sufficient for them to successfully pick future green winners and achieve the "win-win" of a high risk adjusted rate of return and to finance the next Prius and "Green Google"? Marty Weitzman doesn't think so (see below). Generation after generation of students hope that their school will make moral investments rather than following the banker's orders to maximize the risk adjusted rate of return and then spending this extra interest earned on things that John Rawls would approve of. Look at Bill Gates, he played hard ball in making his trillions and now he is saintly as he gives them away. That is the separation theorem in a nutshell.

This smart student appears to believe in a cache and fads model that if Harvard embraces something that in a Malcolm Gladwell sense that this will set off a craze of interest and "followers" will follow and mimic Harvard's lead. This is possible but as an empiricist I would like to see some evidence of whether this is true and what are the consequences of such social herding.

Harvard Crimson
Going Green with Harvard's Green
Published On 12/10/2008 11:51:13 PM

This piece ran as part of our focus on Harvard's endowment.

The green banners of sustainability have inspired action around campus, from rallies to individual students watching their energy consumption. Small scale efforts are a good start, but Harvard can make a greater impact by using some of its endowment to actively contribute to efforts to mitigate climate change.

Like any large corporation or university, Harvard has of course suffered large losses because of the current financial crisis. The most recent estimates put the damage at around $8 billion dollars, while the New York Times has warned that substantially more might be lost from harder-to-assess investments, some of which have not been revalued since Wall Street’s crash. Such a bleak financial picture has caused talk of tightened budgets, not spending sprees.

However potent the financial crisis may prove to be, it has not diminished Harvard’s standing as one of the world’s most recognizable educational institutions. Using the intangible power of institutional recognition, Harvard could back its much-fĂȘted sustainability initiative with tangible, large-scale efforts. In order to accomplish this goal, Harvard should invest in alternative energy initiatives and set an example for other large institutions or corporations. A statement of this kind would demonstrate a serious commitment to solving the global problem of climate change by using its ample financial resources. These efforts could become even more valuable if they could be rendered profitable through the generation of alternative energy or other products.

Like any other project built on youthful enthusiasm and the desire for real change in the world, any plan to use Harvard’s endowment for environmental initiatives must be tempered with a dose of reality and understanding. For example, Martin L. Weitzman, a professor in the economics department, argues that the impact of Harvard’s endowment on the alternative energy field would be relatively small and limited to its symbolic significance. Instead, Dr. Weitzman favors large, sweeping public policy changes, such as a stiff tax on carbon emissions, in order to check the emission of harmful greenhouse gasses.

By combining Weitzman’s solution and the willingness of many students at the College to make a real difference in their carbon footprint, it’s possible to imagine a scenario where Harvard could serve as a test case of sorts. By recording every student’s energy usage and charging them accordingly, the administration could create real monetary incentives for students to live a greener lifestyle.

Alternatively, one could use the power of positive incentives and design a system where students could receive discounts on their term bill based on reductions in their carbon consumption. Either way, the choices and sacrifices to be made in reducing the emissions would educate students about the very real challenges we face in combating climate change.

Admittedly, the real impact of these initiatives would be relatively small. Harvard may have billions of dollars to work with, but that sum is a drop in the bucket when one considers the size of the American economy. We should not, however, be overwhelmed simply because the task of lowering carbon emissions is so large. Investing some of the endowment in new initiatives or in establishing Harvard as a carbon-tax test scenario obviously won’t solve the problem alone. But just because these efforts have no guarantee of concrete success does not mean they are not worthy undertakings. The entire nation will have to make sacrifices for us to really combat carbon emissions, but it can start at Harvard.

Until we can inspire our nation to move with a united effort to mitigate climate change, Harvard must take the lead in building a sustainable future. University Hall can hang all the green banners it wants, but Harvard must take real financial and social action if it wants to be a true champion of the environmental cause.

Alexander R. Konrad ’11, a Crimson editorial writer, is a history concentrator in Quincy House.

Wednesday, December 10, 2008

California's AB32: One More Time

Starting in 2006, California has defied standard "free-rider" logic and has ambitiously pursued a sharp unilateral reduction in its greenhouse gas emissions. Free rider logic would say that this makes no sense. Self regulation is costly and given that greenhouse gas emissions are a world public bad that the private benefits to California from reducing its emissions will be tiny. Consider this arithmetic. If the USA produces 25% of the world's GHG emissions and if California produces 25% of the nation's emissions (this is too large a share); then California currently produces 1/16 of the world's emissions. If we reduce our emissions by 50%, then global emissions decline by 1/8 = 12%. That's a "medium sized" global reduction but India's and China's growth will soon swamp that. Only if AB32 causes new technological advance that wouldn't have happened in the absence of regulation can one truly make the claim that AB32 will achieve its global goals of slowing climate change.

Californians (including myself) have supported AB32. As I have stated before, California has always been an environmental leader/"Guinea Pig". The state's population is not typical of the country. There are more environmentalists here than in other states. I'm worried that if we don't get the details right in designing AB32 that there will be a political backlash against this policy (perhaps 5 years from now) when its true costs from being poorly designed become apparent.

Recently, I have been asked to comment on a series of economic models that have been used to predict AB32's likely effects on the California Economy. To keep this blog post short, these models optimistically predict that AB32 is a riskless "free lunch" with negative net-costs that will help the local economy grow.

For a lot of details please read these;

Sacramento Bee Story on Climate Change Mitigation's Likely Economic Effects in California

Six External Reviews Including Mine

Here is the crux of the issue. Take a random Joe the Plummer. If I approach him and say that I'm offering him a "free lunch", he has no incentive to think hard about the choice that I offer him. When we know that a specific policy (such as AB32) offers benefits but involves costs, we have the right incentives to think hard as voters and policy analysts to get the details right, the implementation issues to help to minimize the costs of the given policy. In the case of AB32, there are many of such details. How much to rely on the Renewable Portfolio Standard? How to design the coming "cap and trade" program for emissions trading? Whether AB32 is a "good policy" hinges on these micro policy design issues. Realistic expectations of the challenges we are committing ourselves to under AB32 helps to put our "feet to the fire" to think things through and to get the details right.

Tuesday, December 09, 2008

Intergenerational Transmission of Human Capital and Non-Cognitive Skills

Rather than using the PSID or european data sets to look at correlations across generations, I work backwards from the New York Times obituary section. Jim Morrison was a star student at UCLA. I don't believe that he took any of my classes but he would have done well had he taken my environmental economics class. His father was also a very successful man. Their respective occupations appear to have little in common but perhaps the same skills that payoff in the military hierarchy also payoff in singing on the Sunset Strip and writing poetry?

New York Times
December 9, 2008

George S. Morrison, 89, Admiral in Tonkin Gulf and Singer’s Father, Is Dead

George S. Morrison, who commanded the fleet during the Gulf of Tonkin incident that led to an escalation of the Vietnam War and whose son Jim was the lead singer of the Doors, died Nov. 17 in Coronado, Calif. He was 89 and lived in Coronado.

He died after a fall in the hospital, his daughter, Anne Chewning, told The Associated Press.

Aboard the carrier Bon Homme Richard, Mr. Morrison commanded naval forces in the gulf when the destroyer Maddox engaged three North Vietnamese torpedo boats on Aug. 2, 1964. A skirmish and confused reports of a second engagement two days later led President Lyndon B. Johnson to order airstrikes against North Vietnam and to request from Congress what became known as the Gulf of Tonkin Resolution, allowing him to carry out further military operations without declaring war.

Mr. Morrison’s relationship with his famous son was difficult. In “The Doors by the Doors” (Hyperion, 2006), he is quoted as saying: “I had the feeling that he felt we’d just as soon not be associated with his career. He knew I didn’t think rock music was the best goal for him.”

George Stephen Morrison, known as Steve, was born in Rome, Ga. His father was a railroad worker. He graduated from the Naval Academy in Annapolis in 1941 and, as an ensign, witnessed the Japanese attack on Pearl Harbor on Dec. 7, 1941.

His wife, Clara Clarke, died in 2005. Besides his daughter, Anne, of Thousand Oaks, Calif., he is survived by his son Andrew, of Pahoa, Hawaii. Jim Morrison died in Paris in 1971.

In the last year of World War II, Mr. Morrison flew combat missions over Wake Island and Honshu, Japan. After the war, he was an instructor for secret nuclear-weapons projects in Albuquerque and earned a Bronze Star in the Korean War.

Mr. Morrison was promoted to rear admiral in 1967 and in 1972 became commander of naval forces in the Marianas, where he organized relief efforts for nearly 100,000 Vietnamese refugees sent to Guam in 1975. Mr. Morrison donated items of his son Jim to the Rock and Roll Hall of Fame, including school report cards and a Cub Scout uniform.

Monday, December 08, 2008

Boys versus Girls One More Time: New Evidence from UCLA on Nature Over Nurture

So if you believe in dynamic skill complementarity (see skill begets skill) and there is an initial sex gap in spatial skills, does this "snowball" into any gender differentials in later life socio-economic outcomes?

Dec. 8, 2008

Psychologists report that a gender gap in spatial skills starts in infancy

Men tend to perform better than women at tasks that require rotating an object mentally, studies have indicated. Now, developmental psychologists at Pitzer College and UCLA have discovered that this type of spatial skill is present in infancy and can be found in boys as young as 5 months old.

While women tend to be stronger verbally than men, many studies have shown that adult men have an advantage in the ability to imagine complex objects visually and to mentally rotate them. Does this advantage go back to infancy?

"We found the answer is yes," said Scott P. Johnson, a UCLA professor of psychology and an expert in infant perception, brain development, cognition and learning. "Infants as young as 5 months can perform the skill, but only boys — at least in our study."

"We've known for approximately 30 years that men and women can see an object from one perspective and then recognize that object after it has been rotated in space into a new position," said David S. Moore, professor of psychology at Pitzer College and Claremont Graduate University, both in Claremont, Calif., and an expert in the development of perception and cognition in infants. "In addition, while we have known that all people can do this, it turns out that men are quite a bit faster at it than women are. Previous studies have shown that this sex difference can be detected in children as young as 4 years of age, but our study is the first to have successfully found a way to assess the situation in young infants.

"Although we did not expect to find any sex differences in babies this young, our results suggest that the 5-month-old boys in our study used mental rotation to complete our task while the 5-month-old girls in our study did not," Moore said.

However, with most psychological characteristics, Johnson and Moore note, there are no differences between groups of men and groups of women.

Mental rotation involves taking a mental representation of a three-dimensional object and imagining it in a different orientation — basically rotating the object in your mind.

Moore and Johnson will report their findings in the Dec. 12 issue of the journal Psychological Science.

The psychologists tested 20 boys and 20 girls in the study, each 5 months old.

They used a common method in infant perception research: They had the infants look at something repeatedly until their amount of looking waned to less than half its original level. The researchers showed them a computer-generated image of a 3-D object that resembled an "L," constructed of multicolored cubes. Once the infants were bored with the object, the researchers showed them the same object from a different vantage point, and then the mirror image of the object.

"We're requiring the infants to rotate mentally in three dimensions," Johnson noted.

The 5-month-old boys looked at the mirror image about 1.5 seconds longer than they looked at the more familiar image, a "statistically robust difference" (although girls looked at both images longer than boys did), Moore and Johnson report. The 5-month-old girls looked at the mirror image for slightly less time than they looked at the familiar image.

The boys looked longer at the mirror image, the researchers said, because they recognized that the mirror image was completely new and that the other object was simply the original L-shaped image they had become bored with, shown from a different vantage point — a task that required them to rotate the remembered original object mentally.

"We don't know why men are better than women at this task or why boys are better than girls at this, but we do now know that this difference extends all the way back to 5 months of age," Johnson said. "We have shown that this gender difference is present in a pre-verbal population, a population too young to have learned it from manual experience with objects or from extensive learning processes, although learning certainly could be involved."

"We are interested in this question because the visual-spatial skills of male and female adults, on average, are different, and as developmentalists, we are interested in exploring the origins of these differences," Moore said. "While we believe we have found a phenomenon worthy of additional study, good science entails a circumspect approach to our conclusions; it would not be prudent to draw particularly strong or wide-ranging conclusions from the results of this single study."

The research was federally funded by the National Institutes of Health.

UCLA is California's largest university, with an enrollment of nearly 38,000 undergraduate and graduate students. The UCLA College of Letters and Science and the university's 11 professional schools feature renowned faculty and offer more than 323 degree programs and majors. UCLA is a national and international leader in the breadth and quality of its academic, research, health care, cultural, continuing education and athletic programs. Four alumni and five faculty have been awarded the Nobel Prize. For more news, visit the UCLA Newsroom.

Bob Hall Echoes Austan Goolsbee on the Consequences of a Federal Demand Push

What will be the general equilibrium consequences of increased government spending? For those sectors where supply curves slope up, someone is going to get a raise. Who are these luck folks? Bob Hall may know . Here is his quote on the unintended consequences of fiscal New Deal Stimulus package;

"Thus a program that funnels money to construction firms and their workers mainly raises their incomes and employment levels and has relatively little effect elsewhere. Rebuilding aging interstates and upgrading the energy efficiency of public buildings calls for highly specialized skills. A large-scale infrastructure program will drive up the profits of the limited number of firms capable of doing this type of work and drive up the wages of the skilled workers who know how to do the work."

This point echoes much earlier work presented in Austan Goolsbee's 1998 Academic Paper on the incidence of increased Federal Demand for wages of the skilled. In a nutshell, when labor supply curves are sloped steep, rising demand doesn't create jobs, it raises wages for the incumbents.

Austan Goolsbee
University of Chicago, GSB,
American Bar Foundation,
and National Bureau of Economic Research
Presented at the A.E.A. Meetings, Chicago, Illinois
January, 1998


Conventional wisdom holds that the social rate of return to R&D significantly
exceeds the private rate of return and, therefore, R&D should be subsidized. In the
U.S., the government has directly funded a large fraction of total R&D spending. This
paper shows that there is a serious problem with such government efforts to increase
inventive activity. The majority of R&D spending is actually just salary payments for
R&D workers. Their labor supply, however, is quite inelastic so when the government
funds R&D, a significant fraction of the increased spending goes directly into higher
wages. Using CPS data on wages of scientific personnel, this paper shows that
government R&D spending raises wages significantly, particularly for scientists related to defense such as physicists and aeronautical engineers. Because of the higher
wages, conventional estimates of the effectiveness of R&D policy may be 30 to 50%
too high. The results also imply that by altering the wages of scientists and engineers
even for firms not receiving federal support, government funding directly crowds out
private inventive activity.

DON'T INFER that the take away point here is that the Keynesian G will simply raise wages of the skilled. That's not my point but my point is to think through which sectors have low barriers to entry such their supply curves are flat (i.e elastic).

Saturday, December 06, 2008

The December 11th Vote on AB32's Implementation

Most people do not like attending meetings but this sounds like an important one . I read that Professor John Weyant will be there. I'm hoping that academics are well represented at this meeting. As Business Week discusses, there are a number of fascinating and important issues that are up for debate; Evaluating AB32's Economic Consequences when you anticipate "Knightian Uncertainty"

Friday, December 05, 2008

Proof that Economics is Making Progress

In the midst of this financial crisis, some nerdy economists are wondering whether we are as smart as we thought we were. If you economists need an ego boost, this analysis and discussion will convince you that we are still wise in the ways of the force .

The Benefits and Costs of Renewable Portfolio Standards: How Risky is "Green Power"?

We all solve portfolio problems. How to invest your money across different assets to maximize your risk adjusted return? Today Universities wish that they held cash rather than Chrysler stock. In the case of energy supply, do you rely on cheap dirty coal fired plants or do you believe in learning by doing effects of "going green" and demanding that 30% or more of your state's power come from renewable sources such as wind and solar? There is an ongoing debate about the likely costs of pursuing this green strategy. You can see some of my thoughts here where I discuss the uncertainty introduced by AB32's mandate that 33% of California electricity come from Renewables (the RPS) by the year 2020. Here is what the New York Times has to say.

New York Times
December 5, 2008
The Energy Challenge
Energy Goals a Moving Target for States

In hopes of slowing global warming and creating “green jobs,” Congress and the incoming administration may soon impose a mandate that the nation get 10 or 15 percent of its electricity from renewable sources within a few years.

Yet the experience of states that have adopted similar goals suggests that passing that requirement could be a lot easier than achieving it. The record so far is decidedly mixed: some states appear to be on track to meet energy targets, but others have fallen behind on the aggressive goals they set several years ago.

The state goals have contributed to rapid growth of wind turbines and solar power stations in some areas, notably the West, but that growth has come on a minuscule base. Nationwide, the hard numbers provide a sobering counterpoint to the green-energy enthusiasm sweeping Washington.

Al Gore is running advertisements claiming the nation could switch entirely to renewable power within a decade. But most experts do not see how. Even with the fast growth of recent years, less than 3 percent of the nation’s electricity is coming from renewable sources, excepting dams.

“I think we are really overselling how quick, how easy and how complete the transition can be,” said George Sterzinger, executive director of the Renewable Energy Policy Project, a Washington advocacy group.

More than half the states have adopted formal green-energy goals. In many states the policies, known as renewable portfolio standards, are too new to be evaluated. But so far the number of successes and failures is “sort of a 50-50 kind of affair,” said Ryan Wiser, a scientist at Lawrence Berkeley National Laboratory and co-author of a recent report on the targets.

Connecticut and Massachusetts have made their utilities pay for missing targets, and utilities in Arizona and Nevada are lagging. California and New York appear almost certain to miss deadlines that are looming in the next few years.

A few states have met their goals, or even exceeded them. One big success has been Texas, which has capitalized on a wind power boom and already exceeded its 2015 goal. The state gets 4.5 percent of its electricity from the turbines. New Mexico’s big utilities are at 6 percent renewable power, within striking distance of the state’s 10 percent goal by 2011.

The structure and aggressiveness of the targets varies widely among states — some have been able to meet their goals because they set relatively modest ones in the first place.

For instance, Maine set a goal of 30 percent renewable power by 2000 — an impressive-sounding target that was essentially meaningless because the state was already getting close to half its electricity from sources that counted against the goal, including dams. (A more recent law requires development of new renewables in Maine.)

In those states that set aggressive goals and have had trouble meeting them, a big hurdle has been building power lines that could transmit the electricity, Mr. Wiser said. Another has been the utilities’ inability to secure enough long-term contracts to buy renewable power.

While the country has no shortage of entrepreneurs hoping to build wind turbines and solar arrays, they have been slowed by problems like finding suitable sites, overcoming local political opposition and securing financing. In a few cases, including some in upstate New York, allegations have been made that the developers bribed officials to win approval of their projects.

Many energy experts embrace renewable power standards as a policy mechanism to promote green energy, but with a nationwide standard starting to seem likely once Barack Obama and the new Congress take power, these experts are ratcheting down expectations of what can be achieved in the near term.

In fact, as utilities seek to meet growing electricity demand, they still turn most often to fossil fuels, rather than the sun or wind.

In New England, the trend is to build more plants that run on natural gas and oil, not wind, said Gordon van Welie, chief executive of the entity that operates New England’s power grid.

Similarly in California, John White, executive director of the Center for Energy Efficiency and Renewable Technology in Sacramento, noted that since 2002, when state legislators passed a renewables requirement, the state has installed 16 times as much capacity from natural gas plants than from renewable energy.

Indeed, California is the prime example of a state reaching high and falling short on renewable-power goals. Big utilities there are supposed to get 20 percent of their electricity from renewable sources by 2010, and most are expected to miss that deadline.

San Diego Gas & Electric gets a mere 6 percent of electricity from renewable sources, and the state’s other big utilities — Pacific Gas & Electric and Southern California Edison — are at 14 and 15.7 percent, which includes some dams. (The Edison number is a 2007 figure; the other two are more recent.)

Fines for missing the targets can run to $25 million a year, but because of fine print in the regulations, the San Diego utility and Pacific Gas & Electric said they did not expect to incur fines; a representative for Southern California Edison said he was not sure.

The utilities cited a catalog of reasons for falling short. These include stop-and-start federal tax incentives for renewable power, problems finding reliable suppliers among the many young and fragile start-ups in the industry, and difficulty getting transmission lines built and obtaining permits to build solar stations and wind farms.

“Not every part of the country is equally blessed in terms of having locations for renewables,” said Debra L. Reed, president and chief executive of San Diego Gas & Electric, which is having trouble getting new transmission lines built to an area with a lot of sunshine.

Moreover, for utilities, the effective goals keep changing. As customers’ electricity use rises, so does the amount of renewable-derived electricity the utilities must produce to meet their targets. “When you’re judged based on customer demand, you’re always chasing a moving target,” said Stuart R. Hemphill, vice president of Southern California Edison, which serves a fast-growing population.

New York is another case study. The state gets 19 percent of its electricity from decades-old hydroelectric plants, well above the national average. It wants to add another 5 percentage points with other renewables by 2013, but transmission is a barrier, and the state has not secured nearly enough renewable electricity to meet its goal.

Even in states that are making good progress toward their targets — like Texas, New Mexico and Wisconsin, according to Mr. Wiser — efforts could be undermined by the still-unfolding credit crisis. The squeeze is falling especially hard on renewable energy projects, because nearly all the expenses for such plants are upfront capital costs financed by debt, with little in “pay as you go” costs like fuel.

Small solar start-ups are being hit hard, but bigger companies face challenges, too. The billionaire Texas oilman T. Boone Pickens wants to build a huge wind project in the panhandle of Texas, but even he has been hampered by difficulty borrowing money.

The only mechanism the states have to force utilities into line is to fine them for not meeting the targets, but such costs would ultimately be passed on to electricity customers or company shareholders, neither of whom would look favorably on politicians who imposed such a burden in tough times.

That may explain why most of the penalties issued to date have been modest. In 2006, the payments totaled around $18 million for Massachusetts and $5.6 million for Connecticut, and virtually nothing in any other state, according to Mr. Wiser’s report.

Despite the difficulties, the power quotas have proved politically popular — so some states are trying to raise their targets. California’s governor, Arnold Schwarzenegger, is undeterred by the state’s difficulty meeting its present target; he signed an executive order recently raising California’s target to 33 percent of power from renewables by 2030. Minnesota and Massachusetts have recently raised their quotas.

Experts said that without far more attention to the practical barriers, including the lack of lines to carry power, those new goals will be as difficult to meet as the old ones.

A national standard, if the government decided to impose one, would put an even greater premium on new power lines, because more electricity would need to be moved from parts of the country with abundant wind and sunshine to the great cities where power is consumed.

Mr. Wiser said, “It comes down in a lot of ways to transmission, ultimately.”

Thursday, December 04, 2008

Chapter One of the Costa/Kahn New Book: Heroes and Cowards

We hope that our new book's arrival time is well placed. We hope that you are tired of talking about recession, the Obama Cabinet, the N.Y Giants and bullet wounds, foreclosure, Bernanke, Hank Paulson, Keynes, Iraq, Tom Brady, University Endowments and you are now ready to think about the costs and benefits of living and working in diverse communities and social interactions and social capital during the U.S Civil War. We are hoping that you are interested in why some people are willing to sacrifice while others do not.

Chapter One

Princeton Press Website for the Book

Wednesday, December 03, 2008

UCLA's Institute of the Environment Issues a New "Report Card"

I am preparing a popular article on the "geography" of green products. So, the Prius tends to be found in Malibu and Santa Monica but not in Beverly Hills. This piece may soon appear as a UCLA Institute of the Environment Report Card Brief. Today, my colleagues have issued a new article on an important public health issue. I encourage you to tread this; New UCLA Institute of the Environment Report Card Piece on Air Pollution

And if you have more time on your hands, please take a look at this;
Previous IOE Report Cards

I find that these report card pieces are very useful punchy overviews for undergraduate classes. Smart,motivated high school students who are interested in environmental issues would benefit from reading these.

Field Experiments and Hawaii

The New York Times today has an interesting article providing details on how online advertisers are experimenting to learn about what makes an advertisement effective in a world filled with diverse shoppers. Field Experiment on Effective Advertising . By randomly manipulating the ad's color, type font, message and images seen these firms can test out on you how you respond to different stimuli. You don't know that you've participated in an experiment and the firm gets the data generated by your clicking patterns. What interests me here is "longitudinal data". If I log on a week later, does google confront me with ads configured to my type? So if I like ads that have photos of bald economists and I have revealed this odd behavior in the past, does Google now confront me with pictures of bald economists in the new set of ads to entice me to keep clicking? This could lead to fascinating data measuring how diverse we really are as measured by marketing efforts.

While social scientists tend to claim that we differ on observables such as age, gender and ethnicity and education, is it the case that even within well defined demographic cells (i.e white male 42 year old PHDs) that there is larger diversity wthin demographic groups than across average demographic group means? (i.e average 42 white males versus the average 66 year old black women?)

Switching to Hawaii, this is an interesting "guinea pig" article;

New York Times
December 3, 2008
Hawaii Endorses Plan for Electric Cars
SAN FRANCISCO — The State of Hawaii and the Hawaiian Electric Company on Tuesday endorsed an effort to build an alternative transportation system based on electric vehicles with swappable batteries and an “intelligent” battery recharging network.

The plan, the brainchild of the former Silicon Valley software executive Shai Agassi, is an effort to overcome the major hurdles to electric cars — slow battery recharging and limited availability.

By using existing electric car technologies, coupled with an Internet-connected web of tens of thousands of recharging stations, he thinks his company, Better Place L.L.C. of Palo Alto, Calif., will make all-electric vehicles feasible.

Mr. Agassi has succeeded in assembling a growing consortium of national governments, regional planning organizations and one major car company. Tuesday’s announcement follows earlier endorsements from Israel, Denmark, Australia, Renault-Nissan and a coalition of Northern California localities supporting the idea leading to the deployment of an electric vehicle with a range of greater than 100 miles, beginning at the end of 2010 in Israel. The company plans test deployments of vehicles in 2009 and broad commercial sales in 2012.

Mr. Agassi has raised $200 million in private financing for his idea. In October, he obtained a commitment from the Macquarie Capital Group to raise an additional $1 billion for an Australian project.

On Tuesday, he said that he was optimistic about his project despite the dismal investment and credit markets because his network could provide investors with an annuity. Users of his recharging network would subscribe to the service, paying for access and for the miles they drive.

Given the downturn in the mortgage market, he said that investors are looking for new classes of assets that will provide dependable revenue streams over many years. “I believe the new asset class is batteries,” he said. “When you have a driver in a car using a battery, nobody is going to cut their subscription and stop driving.”

Mr. Agassi has argued that even if oil prices continued to decline, his electric recharging network — which ideally would use renewable energy sources like solar and wind — could provide competitively priced energy for a new class of vehicles.

He supposes that his network idea will be appropriate first for “island” economies that typically have significantly higher energy costs, and then will become more cost-competitive as it is scaled up.

“We always knew Hawaii would be the perfect model,” he said in a telephone interview. “The typical driving plan is low and leisurely, and people are smiling.”

Hawaii is a relatively small market with high energy costs. The state has about 1.2 million cars and replaces 70,000 to 120,000 vehicles annually.

Drivers on the islands also rarely make trips of more than 100 miles, meaning there will be less need for his proposed battery recharging stations. Part of Mr. Agassi’s model depends on quick-change service stations to swap batteries for drivers who need to use their cars before they have completely recharged their batteries.

Peter Rosegg, a spokesman for the Hawaiian Electric Company, said that Better Place would become a major customer for electricity and was also planning to invest in renewable energy sources that would be connected to the electric grid.

“It’s going to be a nonexclusive agreement, but so far they’re the only one that has shown up,” Mr. Rosegg said.

In late November, the mayors of San Francisco and other major Bay Area cities endorsed the Better Place network to help create an electric recharging network by 2012. The company estimates that it will cost $1 billion to build a charging network in the Bay Area that may create as many as half a million charging stations.

Despite challenges, the Better Place model is promising, said Daniel M. Kammen, a professor in the Energy and Resources Group at the University of California, Berkeley. It could appeal to owners of fleets of vehicles and to early adopter customers who are willing to work through the difficulties that will inevitably accompany a new transportation system. “It has a lot of promising features,” he said.

Monday, December 01, 2008

The Capital to Labor Ratio Increases in Academic Psychology as Neuroscience Booms

Have you ever wondered what is going in modern academic psychology departments these days? If you have, keep reading. I have been frustrated by how expensive are the entry costs for using these fMRI machines. I have a creative research prposal that I haven't been able to get off the ground because nobody will lend me time on their fMRI machine. Researchers in this field publish papers based on studies of 8 subjects. I'm hoping that President Obama takes some of the $2 trillion dollar big push and invests in green fMRI machines for every department at every university.
From the issue dated December 5, 2008

Psychology Departments Are Changing Their Behavior
Neuroscience brings pricier laboratories and new collaborations


It is hard to open a newspaper without finding a story about how neuroscientists have linked some part of the human experience — fear, gambling, memory, hunger — to activity housed within our skulls. For many psychologists, these revolutionary discoveries about the brain have been thrilling.

But the neuroscience revolution has also brought a set of difficult, and not always comfortable, changes in university-based research psychology. The same technologies that allow scholars to probe the structures and functions of the human brain are also causing profound alterations in the structures and functions of psychology departments. Curricula, hiring patterns, budgets, and tenure-and-promotion expectations are all shifting rapidly.

A generation ago, most research psychologists worked in small teams and with small budgets. Today, large psychology departments typically include big laboratories. The neuroscientists there work and publish in teams with as many as eight members, and their equipment costs can run into the millions. Down the hall, their more traditionally oriented colleagues continue to work in smaller teams, with much smaller budgets, and sometimes at slower paces.

That is not to say that there is a bitter cultural divide within psychology. On the contrary: Most research psychologists say that this has been an exciting and fruitful era for combining neuroscientific and non-neuroscientific insights. (There are occasional flare-ups — often about access to federal research money or about breathless news-media accounts of brain-imaging studies — but in general, everyone gets along.) The challenge is not intellectual harmony but cross-disciplinary coherence.

"The individual investigator who has a great idea and can follow that idea with a couple of graduate students over a 10-year period — that era is probably gone," says Alan M. Kraut, executive director of the Association for Psychological Science.

In neuroscientific work, Mr. Kraut says, "you can't know enough on your own. If you're doing brain imaging, you have to have a methodologist on your team, and you might want to have a physicist."

Mr. Kraut points to his association's past president, John T. Cacioppo, a professor of psychology at the University of Chicago who recently co-wrote a well-received book about loneliness. Mr. Cacioppo himself is apparently far from lonely: As the director of Chicago's Center for Cognitive and Social Neuroscience, he oversees large federal grants, several laboratories, and a small army of graduate assistants. Mr. Cacioppo "is almost like the manager of a corporation," Mr. Kraut says. That sort of role is familiar in departments of biology and physics. But for psychologists, it is something new under the sun.

Roughly half of the young scholars recently hired to tenure-track positions in Mr. Cacioppo's department had extensive graduate-level training in magnetic resonance imaging and other tools of neuroscience. "But that's not a requirement for us," says Mr. Cacioppo, who emphasizes that his department continues to hire people with more-traditional training. The important thing, he says, is that the two groups are encouraged to communicate and collaborate with each other.

"There used to be a strong tension between neuroscientifically and behaviorally oriented psychologists," Mr. Cacioppo says. "But no longer do those two groups seem to be spinning away from each other. That's a new and important development. They're working together. And the training we offer reflects that."

Bernadette M. Park, a professor of psychology at the University of Colorado at Boulder, agrees with Mr. Cacioppo that the two camps are no longer at odds.

"Neuroscience has played about the role it should in the social sciences," Ms. Park says in an e-mail message. "It would be silly for social psychologists to not make use of neuroscience techniques to learn what we can about the connection between mental processes and social behavior. At the same time, it would be silly of us to imagine we can just study patterns of brain activation devoid of measures of social behavior and hope to really learn about social beings."

One of Ms. Park's former students, Joshua Correll, is an assistant professor at Chicago. Mr. Cacioppo says that Mr. Correll is a good example of a young scholar who does not have intensive training in neuroscience but who is happy to try such techniques.

Mr. Correll studies how (possibly unconscious) racial prejudice can affect police officers' split-second decisions about whether to fire their guns. Most of his studies are simply done in front of computer screens. But recently he has been placing electrodes on his research subjects' heads to measure brain activity known as "event-related potentials" while they complete the experiments.

This technique, known as electroencephalography, is much cheaper and less cumbersome than functional magnetic imaging, but it yields less-detailed information about brain activity.

Like many other departments, Chicago has recently expanded its neuroscience course requirements for doctoral students. At the top-ranked programs, even students who intend to become clinical psychologists must take several courses in biological psychology. "At Indiana University, a student almost has to get two Ph.D.'s — a Ph.D. in clinical psychology and a Ph.D. in cognitive psychology," Mr. Kraut says. "And I think that's the future of the field. You can't simply be unidimensional in psychology anymore."

And today almost every young research psychologist, whether neuroscientifically inclined or not, completes a postdoc before entering the job market. People are entering tenure-track jobs with more publications under their belts than was the case two decades ago, according to Richard A. Carlson, a professor of psychology at Pennsylvania State University's main campus Park.

But Mr. Carlson adds that when some of those publications have five, six, or seven authors — which is often the case in neuroscientific work — it can be a chore to unthread how much credit each person deserves. "It is sometimes difficult to weigh the value of collaborative work with multiple authors, and this is a frequent subject of discussion in our promotion and tenure committee," he says.

Change in Research Priorities

Even as they collaborate more frequently with neuroscientists, many traditionally trained psychologists have the uneasy feeling that they no longer have much access to federal research support. In 2004 the National Institute of Mental Health announced a sweeping reorganization of its research priorities. Since that year, a much higher proportion of its grants have gone to studies with neuroscientific or genetic components.

Jennifer Crocker, a professor of psychology at the University of Michigan at Ann Arbor, has received grant money from the institute since 1998 to support her studies on how people pursue a sense of self-worth (and the sometimes-destructive effects of that pursuit). But she has been told that her grant will not be renewed after it expires in March, because the institute no longer finances basic behavioral research.

In an e-mail message to The Chronicle, Ms. Crocker says that she respects the mental-health institute's right to set its own priorities. But she says that its recent overwhelmingly biological emphasis is a mistake.

"Genes, childhood environments, and their effects on the brain no doubt play a role," she says, "but this view is unlikely to ever account for much of the variance in mental illness, even for highly heritable illnesses such as bipolar disorder. And it neglects the role of current social motivations, cognitions, and experiences, which can lead to changes in symptoms in surprisingly brief periods of time."

A similar story is offered by Nancy Darling, an associate professor of psychology at Oberlin College who studies adolescent couples. Ms. Darling says that she gladly includes physiological measures when appropriate. But in the current climate, she feels compelled to add biological components to each and every grant proposal, even if they don't really fit the particular study.

Taking these measurements, she says, means that her studies are much more expensive, and also means that she works with smaller and less diverse population samples.

Mr. Kraut sees a serious problem here. "Everybody, I think, would recognize that behavior is ultimately the result of biological, environmental, and genetic processes," he says. "But that doesn't mean that every study needs to have a biological component. That's sometimes a hard message to get through to those who control funding."

Mr. Kraut would like to see new large-scale support for behavioral research, probably based in some other unit of the National Institutes of Health.

But despite his wish for more behavioral research, Mr. Kraut says that neuroscience has made this the most intellectually exciting period for psychology that he can recall.

"We're thriving together," he says. "It has been psychologists who have come in with more rigorous thinking and who have raised the level of the game for neuroscience. When you read about them in the newspaper, they might be called neuroscientists. But they got their Ph.D.'s in psychology, and usually they're teaching in psychology departments."
Section: The Faculty
Volume 55, Issue 15, Page A1

Green Jobs: The Debate Continues

Can the Green Obama Push create new jobs, end the recession and green the economy? Here is a quick sketch of two possible pathways.

Pathway #1:

Reform the tax code such that we raise the carbon tax and we cut income taxes. Gib Metcalf of tufts is working on such proposals;

This would get the incentives right to green our economy in terms of power plants, building energy consumption and vehicle fleet economy. While it is difficult to precisely estimate how many "new jobs" this bundled tax policy would generate, I am optimistic that it would accelerate the economy's transition to a green, growing economy.

Pathway #2:

If President Obama pursues this "New Deal" style green big push such that he commits the government to purchase large amounts of solar panels and other green infrastructure, then it better be the case that there are sharp "learning by doing" effects for producers of green output.

Learning by doing simply means that a firm's average cost of production declines as cumulative experience increases. If this is the case, then government can help an immature new technology such as renewable energy compete against dirty incumbents (such as coal fired powered plants) by promising to purchase the first generation of expensive products. This is a credible signal to businesses of a a "Field of Dreams" effect. If firms build a green product, then government will buy it. If such firms gain valuable experience from selling to government and then lower their cost of production (through learning by doing effects), then government can eventually phase out the subsidies and the new green technology can cost-effectively compete against the dirty incumbents.

Economists continue to debate whether learning by doing effects are large enough so that we can be optimistic that government can trigger this "green push".

Here is a good article from Business Week

Green Biz November 26, 2008, 5:00PM EST text size: TT
Can Obama's Stimulus Plan Spur Green Jobs in the U.S.?

Barack Obama's energy plan seeks to turbocharge America's eco-friendly businesses and keep jobs at home. But the hurdles are high

By John Carey

Barack Obama's plan to pull the country out of recession has a strong green hue. Conventional wisdom says Washington won't have the stomach or the dollars to tackle long-term issues like climate change or dependence on foreign oil when the economy is in the tank and oil prices have plunged. Wrong conclusion, Obama says. These problems, "left unaddressed, will continue to weaken the economy and threaten national security," he said on Nov. 18 in a video message to a climate summit meeting in California.
His fix? Obama plans to set ambitious targets for reducing emissions that cause global warming—and to invest $15 billion or more per year in energy efficiency, renewables like wind and solar, biofuels, nuclear power, and "clean" coal. Beyond the environmental benefits, says the President-elect, the investment "will also help us transform our industries and steer our economy out of this economic crisis by generating 5 million new green jobs that pay well and can't be outsourced."
Whether or not a "green" stimulus will create millions of American jobs is hotly debated by economists. On the one hand, the seeds of the transformation have already been planted thanks to market forces, such as overall higher energy prices, and government policies like tax credits for renewable energy. But there are also major questions. Many executives and experts say the most effective policy to push America toward a clean, efficient energy future is putting a price on emissions of greenhouse gases like carbon dioxide, thus raising the price of energy. That's a tough sell now to Americans struggling to pay their bills. There's also a danger that the government could steer investments to the wrong technologies. Remember synfuels, President Jimmy Carter's experiment to reduce dependence on foreign oil? Most important, a green stimulus plan from Uncle Sam may end up sending billions of dollars to foreign companies instead of to Main Street, since the U.S. lags in such crucial industries as solar panels and wind turbines. Will green technologies become today's VCRs and flat-panel TVs, invented in the U.S. and commercialized elsewhere?
But the fear of enriching overseas companies simply makes a green stimulus more necessary and urgent, proponents argue. Without a plan like Obama's, which would expand U.S. markets for new technologies, American companies may fall even further behind. Michael R. Splinter, CEO of Applied Materials (AMAT) in Santa Clara, Calif., is a believer in the need for government support. Splinter has seen his business of supplying equipment for factories to make solar panels soar beyond his wildest projections. But 97% of the company's equipment goes to foreign manufacturers, who then sell panels in the U.S. It seems like the U.S. has "given up on manufacturing," Splinter laments. "Right now we are on a path to being a second-tier player in clean energy technology."
A plan like Obama's could turbocharge American industries, Splinter and other executives say. Why have European companies become world leaders in wind and solar power? Because a number of governments guarantee that anyone who supplies renewable power to the electric grid will get a premium price for that power. That cost is then passed along to customers.
Similar incentives could work magic in the U.S., says Lester Brown, president of the Earth Policy Institute. America already has a vibrant green-energy sector, so the transformation could be rapid. There are upward of 3 million Americans employed in green jobs, ranging from renewable-power startups to businesses with products that reduce waste and pollution or boost energy efficiency.
And even when goods come from foreign companies, some of the jobs will be in the U.S. One growing trend is for European and Asian manufacturers to build factories in America so they can be closer to what promises to be the world's largest market. Spanish wind company Gamesa is bringing 1,000 jobs to several factories in Pennsylvania and its North American headquarters in Philadelphia. In Memphis, Sharp opened its first plant outside of Japan for making solar panels.
Some green industries are homegrown by nature. Biofuel refineries need to be built near the crops that provide the feedstock. Even more jobs would be created by making U.S. houses and buildings more energy efficient, argues economist Robert Pollin of the University of Massachusetts, Amherst. "There is about $26 billion in retrofitting on public buildings that could be done the day after legislation is signed," Pollin says. "The job impacts are very high. Each $1 million in spending would bring about 18 jobs."
What could Washington do to grow the green economy? Limit emissions of greenhouse gases, thus raising the price of using fossil fuel and steering the industry toward more environmentally friendly alternatives. Continue or boost tax credits for biofuels, wind, and solar. Make infrastructure investments, such as building transmission lines needed to bring power from large solar power plants in the desert or from North Dakota's windswept prairies. And increase federal dollars for energy research and development, aiding programs that have withered during years of declining funding. All of this, proponents say, would foster enough innovation to help American companies leapfrog their overseas rivals. "America's future depends on our ability to spark an energy revolution," argues Massachusetts Institute of Technology President Susan Hockfield.
Skeptics wonder, however, if such a sweeping transformation is possible. "The optimist in me wants to believe it," says Matthew E. Kahn, an economist at the University of California, Los Angeles. "The cynic in me asks, is this like FDR jobs creation in the guise of green jobs?" Kahn believes that rather than spending federal dollars, the best approach is simply increasing the price of carbon—which is politically difficult.
Passing Obama's green stimulus package will be an uphill battle, and its success if implemented is far from certain. But the nation's financial mess is so bad that the President-elect has a freer hand. He also needs to show action on climate change to help restore America's reputation around the world—and to bring China and India on board. The surge earlier this year in oil prices (expected to rise again after the recession ends) even has brought traditional opponents of renewable energy and climate action to the bipartisan table, as long as they get expanded drilling rights. Says Thomas J. Donohue, president of the U.S. Chamber of Commerce: "Energy policy can create jobs, give an economic lift, and get us out of this ditch."
with Adam Aston

Carey is a senior correspondent for BusinessWeek in Washington.

Why Is the New Deal Back in Style?

Paul Krugman writes "Right now there’s intense debate about how aggressive the United States government should be in its attempts to turn the economy around. Many economists, myself included, are calling for a very large fiscal expansion to keep the economy from going into free fall. Others, however, worry about the burden that large budget deficits will place on future generations."

What are the unintended consequences of a huge growth in Keynesian public spending Future inflation and new expectations of future inflations; business lobbying for bailouts and special programs for their favored projects (i.e rent seeking).

My moderate proposal here would be to return to "Rubin Economics" of balanced budget and public investment in deep R&D so that we can keep our technological edge and keep our universities great.

Historians should explain to us how the New Deal has come back in Vogue. Is it FDR's classy style?

"John Hawkins: Switching gears again here, in your opinion, what caused us to pull out of the Great Depression? Was it Roosevelt's policies, WW2...

Milton Friedman: Roosevelt's policies were very destructive. Roosevelt's policies made the depression longer and worse than it otherwise would have been. What pulled us out of the depression was the natural resilience of the economy + WW2.

You know, it's a mystery as to why people think Roosevelt's policies pulled us out of the Depression. The problem was that you had unemployed machines and unemployed people. How do you get them together by forming industrial cartels and keeping prices and wages up? That's what Roosevelt's policies in the New Deal amounted to. Essentially, increasing the role of government, enhancing the monopolistic position of labor, and creating as I said before the equivalent of price fixing cartels made things worse. So most of his policies were counterproductive."

Rajan's Thoughts on rules versus Discretion

Prescott Nobel Prize and rules versus discretion redux