I have wondered whether recession reduces the median voter's desire to enact costly environmental regulations to mitigate local and global externalities and this new California PPIC New Survey supports this conjecture. I've been writing a applied econometrics paper on exactly this topic. The results are preliminary but we are finding in 3 independent data sets support for the claim that people tilt away from environmental issues and prioritize economic issues when the local economy is in recession.

Environmentalists should care about this result because they are not at the margin. They are pro-green no matter what but in a democracy -- you need 50% or more of the vote and these swing voters do care. It is ironic that greens need economic booms to help them enact policies. In many cases, we know that economic growth "hurts" the environment (think of car growth in China). But in green politics, this may not be the case.

The McKinsey Consulting firm has identified a big free lunch for how to earn a very high rate of return for making investments in energy efficiency. Roughly 35% of the gains is said to be possible from the residential sector.

I have a question for the partners of McKinsey. Are they willing to put their money where their mouth is? Will they offer my household the following contract? "Professor Kahn, your current monthly electricity bill is $100 a month. You pay us (McKinsey) $85 a month and we will pay all of your electricity bills for the next 5 years but you must let us enter your home and install energy efficiency upgrades and improvements".

This "outsourcing" of energy consumption decisions would lead to more efficient investments but would cause incentive problems because I would now face a zero marginal cost per kilowatt hour consumed. In this case, I might crank up the air conditioning but this can be anticipated. McKinsey could offer me a lower fixed price per month as long as my total consumption does not exceed a tier.

So, my point is that if McKinsey is so confident about the rate of return they are predicting --- shouldn't they stop giving advice and actually open a business and start selling their product?

Now, they may have some doubt about the demand for efficiency --- but my contract offer would induce some households to participate.

Note that my contract would help McKinsey (assuming their numbers are correct), the household would face lower electricity bills, and the electric utility would get a smaller carbon bill because it would be producing less power and this would reduce peak load issues of blackouts in the middle of the summer.

Talk is cheap, let's see some new innovative contracts from the smart guys at McKinsey!


Here is the report:

http://www.mckinsey.com/clientservice/electricpowernaturalgas/downloads/US_energy_efficiency_full_report.pdf

UPDATE: I hope that these guys are right but at the end of the day, this is a micro-econometric question. Why have diverse individuals and firms been slow to adopt energy efficient investments? Inertia? Belief that energy prices will be low in the future? High discount rate? Risk Aversion and fear of new stuff?

The way to answer this question is by running field experiments and learning about real people rather than simply grabbing a huge number of out "thin air" and hoping to get some blog media play.

I should note that a reader named Josh has asked me not to forget my comparative advantage strongly hinting that I should stick to environmental issues. I'm slightly sympathetic but the UC paycuts have made me nuts and have led me astray.

As I type this, I am writing five new papers on environmental economics: in no particular order;


1. With Dora Costa , on understanding household residential electricity consumption over time and across households as a function of demographics, ideology, housing types, climate conditions.

2. With Erin Mansur, how do industrial energy prices affect where U.S manufacturing clusters? Or will California lose manufacturing jobs because AB32 causes leakage and migration to cheaper energy states?

3. Hopefully with Matt Kotchen, how does environmental public opinion move over the business cycle? Recessions are bad for building support for tightening regulation. So this is a high frequency "J" curve.

4. With Zasloff and Vaughn on the gentrification effects of the California Coastal Boundary Zone regulation; This is "Superstar Cities" applied to the coast line

5. Adaptation to Climate Change --- this is a book --- that is now coming into focus at 200 pages and growing

So, I tell you this to pre-commit that I will return to discussing what I'm supposed to be discussing but please go find my missing 10% of my pay!

Not all of us have the same motivations. Gerald Gardner's consulting will look familiar to some labor economists. But, he did his study for the "right reasons" (to help the underdog rather than to make a buck). “What Gerry did was calculate the statistical chance that a woman could get a job in one of the male categories,” said Eleanor Smeal, the president of the Feminist Majority and a former president of NOW. “He calculated pay differentials. The disparities just flabbergasted him. He contributed the hard intellectual theory based on the math, and he made it understandable, powerfully so.”

This "research" was conducted in 1969. Is he the daddy of discrimination analysis?

Switching subjects, I must admit that this NY Times article puzzled me. In commodity markets, does speculation stabilize or destabilize price volatility?

Perhaps the advocates are saying that there is collusion and "Enron" style manipulation that speculators are betting on rather than expectations concerning market fundamentals? But, couldn't this be solved through credible SEC regulation?

If two parties are willing to trade with each other, doesn't this increase social welfare? When is there an externality spillover that negatively affects everyone else? I'm pretty sympathetic with the world view of Mr. Donohoe. Why are prices volatile?


"Craig S. Donohue, the chief executive of the CME Group, which owns both the Chicago Merc and the Nymex, denied that the volatility stemmed from financial traders. He also defended the so-called index funds that have enjoyed explosive growth in the last several years.

“Blaming speculators for high prices diverts attention from the real causes of rising prices and does not contribute to a solution,” Mr. Donohue told the commission. He warned that federal volume limits on financial traders could make things worse for consumers."

Suppose I give you information about what movies I have enjoyed in the past, and you observe my answers to your survey questions about whether I am a Rambo guy or a guy who likes to cry at the movies. Suppose that for a new movie, you observe the demographics and types of people who have chosen to see this movie and what their ex-post "grade" for the movie was. Using all of this information, can you write down a good predictive model for guessing whether I will like a given new movie? The NY Times talks about this NETFLIXs attempt to build a better model. If this company can make better suggestions to people, and people ex-post agree with their suggestions, then this company's profits will rise.

From a heterogeneity standpoint some obvious issues arise; if I am watching a movie with my wife --- are my tastes different than if she isn't around? Are my preferences a function of what movies I've seen in the last 2 months? Are there diminishing returns for "sci-fi" thrillers or increasing returns?

Like in the Dixit-Stiglitz model, do I have a taste for "diversity"? Are there people who jump around across categories?

It appears that this marketing literature will assume that a person can be modeled as a fixed effect (Kahn likes James Bond) plus a moving error term (as he gets older he likes a Bald Bond). But is the fixed effect "fixed"? Do people's tastes change? As we age? Given that age is observable this would be testable --- the challenge is modeling the dynamics of the unobserved preference shifter. For example, if I start reading books about England in the 19th century --- do I only want to see movies from that time period?

Holding observable attributes constant, how unpredictable are movie watchers? In a world featuring diversity, only the subset of movie watchers who know that they are "average" may listen to NETFLIX because they know that NETFLIX can figure out their preferences based on their data sets. The true freaks will never participate because they know that they are odd and that the NETFLIX predictions for them are unlikely to be a good movie for the particular freak in question.

For NETFLEX to make a lot of money; they need us all of us to be consistent and average (holding observables constant) so that their predictions are useful for the consumer.

Keynes didn't appreciate that it is hard to cut government spending once you start spending during a recession, so how will our budget deficit vanish to remove the temptation to print loads of new currency? This quote from Yahoo today suggests that taxes will rise sharply in two years but if I anticipate this do I save today? Will people vote for Republicans who won't follow through with this tax "medicine"?

"U.S. officials told reporters that the U.S. side stressed to the Chinese that the United States has a plan to bring the deficit down once the economic crisis has been resolved. Officials said Bernanke discussed the Fed's exit strategy from the current period of extraordinary monetary easing."

What is this plan? Democrats raise expenditure and know that they can't ex-post cut expenditure so somebody's taxes are going up. We may move to Bermuda to avoid our patriotic duty.

Dora and I have liked the "fact" that our retirement plan at UCLA is a defined benefit. The cliche is that if we stick around that when we retire that we will receive 75% of our highest salary. How will this be financed? This NY Times article makes me nervous. Now in a growing over lapping generations set up, you can fund current obligations out of taxes on the young but if the number of new employees is shrinking and there a lot of old guys demanding their pension checks then the "smart" guys who run the program better earn some extraordinary returns on their investments to finance this. But are are there investments that are low risk and high return? I don't think so. Will the California tax payers be willing to pay higher taxes to finance the "bloated" public pension budget to a bunch of old guys who are no longer contributing to the state but are owed this money as written into their past contracts? I don't think so. --- Something bad is about to happen and it is called time inconsistency.

I hope that the Calpers portfolio managers are smarter than me but I doubt it. If they can't earn a high return , what happens next as the cumulative pension payments rise and revenue shrinks?

Now that I'm studying evolutionary biology, my list of creatures who are pretty good at adapting to climate change includes; toucans and camels. Is that an exhaustive list? I hope not but that's why we do research. I'm focusing now on a rare species called humans.

Applied economists who care about causality must solve fundamental "missing data" issues. We never observe outcomes for paths not chosen. But, suppose you observe no outcomes at all. Without a dependent variable, I would like to see the Nobel Laureates in econometrics estimate a "valued added" teacher prodution function. Who are the good teachers? We know that they should be paid more but who are they? The bald? The thin? How do I know one when I see one? Are student test scores or changes in student test scores informative about teacher quality? This depends on how students are assigned to teachers and schools and what the test actually tests upon. But , some data would be nice. The NY Times discusses the missing data problem caused by teachers unions in California and New York. Please read this . Let the sun shine , I say --- I'm pro-accountability because my students score high.

Economists such as Greenwood, Goldin, Becker, Costa and Ramey have been writing about household production trends over the last 100 years but let's hear from Nixon and Khrushchev as reported in Safire's NY Times piece today.

Nixon: “I want to show you this kitchen. It’s like those of houses in California. See that built-in washing machine?”

Khrushchev: “We have such things.”

Nixon: “What we want to do is make more easy the life of our housewives.”

Khrushchev: “We do not have the capitalist attitude toward women.”

Would these "progressive" gents be offered faculty positions at UCLA's Department of Women's Studies? Prof. Khrushchev would offer some intellectual diversity, wouldn't he? He could be our Harvey Mansfield. Both are manly dudes.

To augment my sharply cut UC salary, I will be moving to Beijing for September. I will take a job as a barista at a Starbucks in Beijing. It remains an open question whether I will return. Whose future is brighter; Los Angeles or Beijing? Last year, I told my environmental economics students that I was thinking of moving to China and they believed me. So, maybe it is true. Convergence is slowly taking place between UCLA salaries and Tsinghua Univ. salaries. There must be a date t such that a professor's salary and quality of life will be equalized in Los Angeles and Beijing. Is that year going to be 2010 or 2050 or 2090? Some of us have been debating whether by 2075 will China have the world's best Universities. Will the U.S keep its edge in higher education? Or to ask my question again, do Cambridge UK and Oxford UK today give us a sense of our high quality Universities' future? The UK schools are still quite good but 80 years ago they were the best. Given China's scale and capital, will its nerds enjoy a great leap forward?

Playing devil's advocate -- I have argued that footloose faculty want to live in high quality of life cities. If China's cities become "green cities", I am more optimistic that their universities will jump up the world rankings. Their universities are hiring more faculty who have PHDs from U.S schools or have visited U.S universities.

I am excited about visiting for a few weeks, giving some lectures and looking around. My trip there will help me write a chapter of my new book on climate change and cities. There will be a China chapter.

But , on top of that I'm hoping that I can meet some policy people who have the ambition and the interest in running some field experiments to see how incentives affect behavior on topics at the intersection of urban and environmental policy. For example, we could randomize what color traffic lights are at intersections (i.e yellow, red, green) and see how many traffic accidents are caused. So this would answer the question, how useful are well functioning traffic lights in a nation where private vehicle use is skyrocketing. (I am kidding about this idea). I do have some ideas for some more substantive field experiments about how to test for how incentives can be designed to encourage carbon mitigation and reduced electricity consumption by the residential and commercial sectors.