Tuesday, March 31, 2009

Another Successful UCLA Graduate: Game Theory Translates into Great Poker Playing

I've been arguing that the Obama Administration needs to think through the game theoretic implications of some of its well meaning policies. Bank bailouts, auto bailouts, strategic subsidies will have a number of consequences on how for profit firms position themselves and make their investments. I don't believe that the smart Obama Team has an applied game theorist on the payroll? Last Week's New Yorker Magazine highlights what game theorists are doing given that they are not serving our country. Consider UCLA's Chris Ferguson .

Green Concrete

Conventional concrete production is quite energy intensive. Technological progress is taking place. Here is some good news about the diffusion of a new approach to concrete. Are there barriers to the adoption of this approach? This raises the fundamental question for free market environmentalists; can improvements in technique (emissions per unit of economic activity) decline faster than the scale of activity increases (population and per-capita income growth)?

Monday, March 30, 2009

UCLA's Magali Delmas' Research on "Green Business"

It turns out that you can be a productive academic while living in California. One doesn't have to play tennis each day in the 4pm sunshine. Who would have guessed? What is my evidence? Don't look at me. I'm semi-retired. Today, my sole goal is to teach and to amuse blog readers and to talk to random reporters. But, I have great colleagues. Please take a look at this profile of Magali Delmas reported here on Green Business Research at UCLA's Institute of the Environment

Berkeley Electronic Press Publishes the Kahn/Vaughn Classic

At $2 a gallon, should I stop writing papers about the Prius? I don't think so. You wouldn't want to read my papers about the financial crisis. I am a fan of creative destruction and would ask the Obama Administration to sit back and let the chips land where they land. But, they wouldn't listen to me. I vote for decentralizing power rather than having Washington D.C seize it. So, permit me to keep writing about the Prius.


Dear colleagues,

I recently published a new article in The B.E. Journal of Economic Analysis & Policy (Contributions), and thought you might enjoy reading it. You are invited to download the full text at no charge from the journal's website; feel free to forward this along to any other colleagues who may be interested.

Kahn, Matthew E. and Vaughn, Ryan K. (2009) "Green Market
Geography: The Spatial Clustering of Hybrid Vehicles and
LEED Registered Buildings," The B.E. Journal of Economic
Analysis & Policy: Vol. 9 : Iss. 2 (Contributions), Article
2. DOI: 10.2202/1935-1682.2030 Available at:
http://www.bepress.com/bejeap/vol9/iss2/art2

This paper uses zip code level data to investigate the spatial distribution of two major "green" products. Using data from California, we document where hybrid vehicles cluster within the state. Using data for the entire nation, we study where LEED registered buildings cluster. By creating a novel measure of community environmentalism based on revealed preference political data, we document that green products cluster in environmentalist communities.

To receive email alerts of other articles in The B.E. Journal of Economic Analysis & Policy, sign up at http://www.bepress.com/bejeap.

Sunday, March 29, 2009

Everybody is "Somebody" in Los Angeles

Every sunday morning, we go to the Beverly Hills farmer's market. This is the only driving we do each week (4 miles round trip). At this market, I wonder if famous Hollywood types are walking past me and I don't recognize them. As I waited on line at the Bakery stand, the woman in front of me told the merchant how great he is on TV. She then explained to her son that he is a stuntman on the TV show "PrisonBreak". I took a closer look at this guy and he does look like the lead actor on that show. Every week, I talk to him and buy $20 worth of stuff but I never knew that I was talking to a star. He told me that he does get paid more for more difficult stunts (Adam Smith and Sherwin Rosen would be happy) and he has said no to doing some stunts.

Dora and I are hoping that some Hollywood bigshot will want to take our book Heroes and Cowards and turn it into a movie. Now I have learned that I should simply hand out free copies of this book at the farmer's market.

Saturday, March 28, 2009

Spring Break is Over

Spring Break means different things to faculty and students. Since I can't remember what it was like to be a student, I will focus on what faculty do on Spring break. We took our charming son to Joshua Tree National Park . I was counting lizards and spotting a variety of cactus types.
Since we don't own a television, we use our night time at Motels to catch up on what everyone else is watching. My 7 year old and I bonded over Caddyshack. My wife didn't want him watching Goodfellas. In Caddyshack, Rodney was a very funny guy but Chevy Chase is over-rated. My son rooted for the gopher. This morning we watched the History channel where we learned about the history of the potato chip.


Now we are back in West LA. There are many papers I hope to finish this spring so I'm hiding. Nothing personal but when I feel the urge to write and be productive --- I have to ride this wave while it lasts. You won't be able to find me for the next 10 weeks! I keep getting requests from people to do this and that. I'm starting to see why older guys get grumpy. I'm getting grumpy.

I can smell summer time. It was 80 degrees here and it felt like a summer day. If you are looking for something interesting to read you won't find it here. But, let me point you in the right direction; try this Some Arithmetic on the Carbon Footprint of a Burger

Wednesday, March 25, 2009

Profiles of Two Types of Economists

Larry Summers generates a lot of media attention. I know that he has an impressive head but does all of this attention displace coverage of other productive economists?





Dear Reader, I would ask you to contrast Dr. Summers with these two micro economists.



Paying more, getting less from prisons

By Steven Raphael and Michael A. Stoll

What is the optimal level of incarceration? The simple answer is something like: The same amount as there are criminals. The real answer is: the level that provides California the best social outcomes overall.

Crime rates are down, and yet prisons are more crowded than ever. The number of people imprisoned has more than doubled over the past decades. The Bureau of Justice Statistics reports that in 2008, there were more than 1.5 million people in federal and state prisons, up from about 320,000 in 1980; the equivalent figures for California were 165,000 in 2008 and about 38,000 in 1980.

The costs are staggering. The recently passed 2009-10 California Budget allocates $9.6 billion to the Department of Corrections and Rehabilitation, much higher than the $6 billion budgeted for the University of California and the California State Universities combined. Of this amount, $5.4 billion is slated for adult corrections, and with about 165,000 adults incarcerated in state prisons in California, this amounts to a cost of about $32,000 to incarcerate one prisoner per year, much more than the annual tuitions at UC or CSU.

Many are now opposing the growth in imprisonment on the grounds that the costs far outweigh their potential crime-reducing benefits. They point to evidence suggesting that the crime-abating effects of increasing incarceration have declined as the incarceration rate has reached new levels.

As we have expanded the scope of offenses punishable with imprisonment, we are incarcerating increasingly less dangerous offenders, thus reducing the marginal benefits in terms of crime reduction associated with further increases. And then there are the collateral damages, including an erosion of family and community stability among certain demographic groups, depressed labor market opportunities for ex-offenders, and accelerated transmission of communicable diseases such as AIDS among inmates and their nonincarcerated partners.

The recent expansion of the prison system has mostly been fueled by incarcerating marginal offenders, or those charged with lesser offenses. But incarcerating these marginal offenders comes at great cost. These costs not only include the expenses associated with policing and adjudicating the offense, building and maintaining prisons and supervising prisoners. They also include, among other factors, that prison itself could heighten one's propensity to offend, especially for first-time offenders charged with lesser offenses, that children of the incarcerated and formerly incarcerated are more likely to commit crimes and go to prison, and that society loses through the lost productivity and taxes because of the lowered employment and earnings of the formerly incarcerated.

How did we get to this point? More than 80 percent of the increase in imprisonment over the past three decades was driven by policy changes in sentencing and enforcement. Only about 20 percent of the increase is due to increased criminality. The combination of procedural and substantive sentencing reforms over the past two decades including, among others, minimum mandatory sentencing, truth in sentencing and stiffer punishments for those convicted of certain drug crimes, drove much of the increase in imprisonment.

Restoring judicial discretion in sentencing and removal of mandatory sentencing on drug crimes would go a long way toward improving the situation. California, which has some of the strictest parole terms in the nation, also sends a large percentage back to prison by way of technical violations of parole terms.

Incarceration isn't the only way to prevent crime, and alternatives can provide just as much bang for the buck. Preschool enrichment strategies, other educational options and crime-diversion programs are more socially attractive and cost-effective than our current reliance on incarceration. With these, we can get the same or better crime-fighting benefits while expending much less on direct and collateral costs of imprisonment. California would also benefit from increased tax payments and restitution, as well as increased child-support payments from those who would have gone on to prison instead.

Continuing to support existing incarceration policies makes no sense from either a social justice perspective or a cost-benefit analysis.

Raphael, acting dean and professor at the Goldman School of Public Policy at the University of California Berkeley, and Stoll, chairman and professor of public policy at the School of Public Affairs at the University of California Los Angeles, are the editors of “Do Prisons Make Us Safer?” published by the Russell Sage Foundation.

Sunday, March 22, 2009

Empirical Behavioral Economics in Sports Illustrated

In my humble opinion, the dudes of economics write too many sports papers. Would women journal editors accept these? But, this week's Sports Illustrated reports evidence that will thrill behavioral economists and annoy Milton Friedman and his other bald intellectual grandchildren.

This Sports Illustrated article focuses on pro athletes who were paid millions of dollars but are now bankrupt. The article hints that these guys do not abide by the permanent income hypothesis. They over-consume out of current income. They trust too many friends and partners with their money and they hang out with too many young ladies who want a share of their winnings. Ex-Post , the athletes have regrets and wish that they had met with a financial planner at the start of their career and given up some of their financial freedom in return for a smoother consumption stream.

One story here is that the typical pro athlete doesn't have much education and low-education guys are on average more likely to act "behavioral". Randomly assigned talent and a large amount of $, they are impatient and front load their pleasure. Once the party is over and their capital stock is now zero, they wish they could hit the reset button. Perhaps, they have followed their dynamic utility maximizing path given their rate of patience?

Saturday, March 21, 2009

Sell Westwood, Los Angeles Real Estate and Buy Detroit Real Estate?

The average home near UCLA sells for $1.3 million dollars. This blog claims that the average home in Detroit is priced at $13,000. So, one can trade 1 Westwood house for 100 Detroit homes. Is this a good deal? Could climate change make this a good deal by the year 2100?

Searching for Government Revenue to Balance Obama's Budget

Larry Summers and Ben Bernanke and the rest of the smart Government economists owe us answers to this short multiple choice test. How will we balance this budget? A. carbon tax revenue, B. higher progressive taxes C. China will buy more low interest rate USA bonds , D. inflation, E. unexpected economic growth translating into more tax revenue. F. Scale down the government "Big Push" on all of its new social dimensions. Hint, there could be more than 1 correct answer here.



Source: NY Times

Friday, March 20, 2009

Prius Communities in Southern California

I know that gas is cheap now and the economy is in recession. Despite these facts, it is still interesting to know where are the "green" geographical clusters of areas where people are buying hybrids.

In this piece (written for a popular audience), I "name names" providing "green consumer city" rankings for cities within Los Angeles County and Orange County. Malibu does pretty well! Such "green consumer" clusters provide a purchasing power base for attracting green businesses and represent guinea pigs who will be willing to buy the first generation of new green (unproven) products. Society needs such guinea pigs.

Here is the LA Times Blog writeup.

Here is the UCLA press release.

I was told that some newspaper reporters said that "we already knew this". While there is some truth to this claim, it creates a dangerous situation for ambitious academics. It suggests that we can only make the newspaper if we say something "wild and crazy" or if we work on topics that are wild and crazy. Do we want to encourage such extremism?

Wednesday, March 18, 2009

Australian National Radio Interview on Costa/Kahn Social Capital Book

Here is our interview from last night when Dora and I were interviewed on Australian National Radio. I thought that this was a high quality interview. We did a good job explaining why our book is interesting and what it is actually about.

You won't hear from me for at least two days because I will be up at UC Berkeley hanging out with old friends and talking about energy.

Monday, March 16, 2009

An Appropriate Swimming Pool for a L.A Economist who doesn't Like to Swim

Yes, this city is living through a drought but if we could find a way to earn just a few more dollars, here is a house that would be worth the price. Check out the swimming pool. While over 15% of LA homes have swimming pools, note that this swimming pool starts outside and then runs "inside" of this home as part of it is under a ceiling such that it looks like you can dive into it from the Living Room. That is pretty cool.

I have a draft set of notes for an environmental economics book. At a royalty rate of $7 a book and with 1 million new environmental economics students each year, this could be an easy purchase. Can you find the fallacy in this arithmetic?

On a more serious note, today my environmental economics class ended. 171 students were enrolled. My fellow environmental economics teachers, how many of you teach that many students in an elective class? The class enrollment has doubled every time I have taught it at UCLA. Tufts wouldn't let me teach undergraduates. The opportunity to be back in the undergraduate classroom has lifted me to try harder and to even care. I really like teaching undergraduates. They are cynical and immature and they make me feel young.

My goal is to have 1000 students in this class in two years. Knowing my luck, UCLA will continue to give me only 1 TA but my man Ryan Vaughn is worth any other 15 TAs so he can take care of the horde.

At a time when people question the wisdom of economists (not named Krugman), I am helping to restore confidence in our economy and our subject matter. To paraphrase Karl Marx, "Economists of the world, Unite!"

Does Government Infrastructure Investment Raise Economic Growth?

Twenty years from now cross-sectional empirical macroeconomists will benefit from all of the "experiments" that nations are running today as they seek the magic formula for growth. China is entering the game with its own "home improvement" projects. See the China's Big Keynesian Push. This will certainly create a lot of construction jobs. Will it have long run value added? What trade within cities and across cities will be facilitated by this investment?

How will the Chinese central authorities guard against corruption and avoid Boston Big Dig cost over-runs?

The urban economist inside me would like to know more about the spatial distribution of this Keynesian "G". Which favorite cities get a disproportionate share of this expenditure? Which cities does Beijing favor and why is this the case? Will their focus continue to be East coast cities with an emphasis on exporting to the West?

Dora the Explorer

I know that I'm married to a prominent academic but I didn't know that she would make Yahoo News today.

At the end of the week, I hope to make the California newspapers but I will wait and won't count my chickens before they hatch.

Sunday, March 15, 2009

Some Links for Green Intellectuals

While many people may read the NY Times piece today on whether MBA curriculum is still "relevant", I would have you look at these two articles. Solar and the Cities and Chile and Water Markets.

Severin Borenstein has a nice quote in the solar piece. The reporter has clearly set him up to play the "bad cop" and disagrees with him in the next paragraph. But, Severin is saying something deep that needs to be discussed. Wishful thinking doesn't always help to form "good" public policy.

In the Chile case, The Times appears to be trying tell a cautionary tale of allocating resources to those who value it the most. Owens Valley here in California still gets people pretty worked up. Read my review of Gary Libecap's book on this topic.

While economists love "efficiency" (i.e that a meat hater shouldn't end up with a meat pizza at a party), you people seem to be not be too interested. Why? We are all poorer from this "deadweight loss".

Saturday, March 14, 2009

The Clone Wars

There are a lot of Matt Kahns on facebook. Given that I don't want these other guys to drag down my good name, I may need to copyright this name to protect myself. I am against those who are against intellectual monopoly.

March 2009 UC Energy Institute Power Conference

I try to keep my carbon footprint small by saying "no thanks" to most invites that involve leaving LA. But, here is one that I can't resist; UC Energy Institute's 2009 POWER Conference . Next thursday, I will fly to Berkeley and I'm looking forward to it.
I encourage you to register!

Here is the dream team of topics;

Fourteenth Annual POWER Conference on
Energy Research and Policy

March 19 - 20, 2009


Clark Kerr Campus
Joseph Wood Krutch Theatre
2601 Warring Street
University of California, Berkeley

Click to Register: http://www.regonline.com/POWER2009



THE CONFERENCE

New this year, the University of California Energy Institute's Center for the Study of Energy Markets (CSEM) will hold a two-day research conference on energy markets and regulation. The POWER conference will expand to an extra day and include topics on natural gas, gasoline, and environmental regulation. Thursday, March 19th, will be devoted to natural gas and gasoline research papers and discussions in a format similar to that of the POWER conference. Friday, March 20th, will cover the traditional POWER conference research topics on electricity markets and regulation. Register for one or both days and hear about the newest research findings on the energy and environmental issues facing us today.



AGENDA:

DAY 1: MARCH 19, 2009

8:00am-9:00am: Registration and Continental Breakfast

9:00am - 9:15am: Welcome

------------------------------------------------------------------------

9:15am - 12:00pm

"Clearing the Air? The Effects of Gasoline Content Regulation on Air Quality"
Maximilian Auffhammer (University of California, Berkeley) and Ryan Kellogg (University of Michigan)

"Greenhouse Gas Reductions under Low Carbon Fuel Standards?"
Stephen P. Holland (University of North Carolina, Greensboro), Jonathan E. Hughes and Christopher R. Knittel (University of California, Davis)

Discussants:
Wolfram Schlenker (Columbia University)
William Koetzle (Chevron Corporation)

BREAK: Refreshments Served

"Price Leadership and Coordination in Retail Gasoline Markets with Price Cycles"
Matthew S. Lewis (The Ohio State University)

Discussant:
Michael Noel (University of California, San Diego)

------------------------------------------------------------------------

12:00pm - 1:25pm: Luncheon

------------------------------------------------------------------------

1:25pm - 5:00pm

"How Do Gasoline Prices Affect Fleet Fuel Economy?"
Shanjun Li (Stony Brook University), Christopher Timmins (Duke University) and Roger H. von Haefen (North Carolina State University)

"Using Loopholes to Reveal the Marginal Cost of Regulation: The Case of Fuel-Economy Standards"
Soren T. Anderson (Michigan State University) and James M. Sallee (University of Chicago)

Discussants:
Mark Jacobsen (University of California, San Diego)
Anthony Eggert (California Air Resources Board)

BREAK: Refreshments Served

"The Allocative Cost of Price Ceilings in the U.S. Residential Market for Natural Gas"
Lucas W. Davis and Lutz Killian (University of Michigan)

"Residual Supply Curves for Canadian Natural Gas within the North American Network"
Rocio Uria and Jeffrey C. Williams (University of California, Davis)

Discussants:
Paul Carpenter (The Brattle Group)
Peter Reiss (Stanford University)





DAY 2: MARCH 20, 2009

8:00am-9:00am: Registration and Continental Breakfast

9:00am - 9:15am: Welcome

------------------------------------------------------------------------

9:15am - 12:00pm

"To What Price of Electricity Do Customers Respond?"
Severin Borenstein (University of California, Berkeley)

"Does Daylight Saving Time Save Energy? Evidence from a Natural Experiment in Indiana"
Matthew J. Kotchen and Laura E. Grant (University of California, Santa Barbara)

Discussants:
Matthew Kahn (University of California, Los Angeles)
David B. Belzer (Pacific Northwest National Laboratory)

BREAK: Refreshments Served

"An Assessment of the New York Independent System Operator"
Edward Kahn (Analysis Group) and Susan Tierney (Analysis Group)

Discussant:
Paul Joskow (Sloan Foundation and MIT)

------------------------------------------------------------------------

12:00pm - 1:25pm: Luncheon

------------------------------------------------------------------------

1:25pm - 5:00pm

"What Do Emissions Markets Deliver and to Whom? Evidence from Southern California’s NOx Trading Program"
Meredith Fowlie (University of Michigan), Stephen Holland (University of North Carolina, Greensboro) and Erin Mansur (Yale University)

"Regulation, Allocation, and Leakage in Cap-and-Trade Markets for CO2"
James Bushnell (University of California, Berkeley) and Yihsu Chen (University of California, Merced)

Discussants:
Ellen Wolfe (Resero Consulting)
Charlie Kolstad (University of California, Santa Barbara)

BREAK: Refreshments

"Links between Wholesale and Domestic Retail Electricity Prices in the UK?"
Monica Giulietti (Aston Business School), Luigi Grossi (University of Verona), and Michael Waterson (University of Warwick)

"How Do Firms Exercise Market Power in Hydro Dominated Markets?"
Sean D. McRae and Frank A. Wolak (Stanford University)

Discussants:
John Panzar (Northwestern University)
Steve Puller (Texas A&M University)

------------------------------------------------------------------------

5:00pm - 6:00pm: Reception





DIRECTIONS AND OTHER LOGISTICS

Driving Directions and Parking Information

Directions for BART Riders

Friday, March 13, 2009

Buy Heff's House and Become My Neighbor

A mere $28 million dollars can get you a nice house in Westwood. This house is currently owned by a famous dude and you would be living within 1 mile of me. We could go jogging together? I could offer you some economics lessons?

If you click on these 3 links you will see my detective work as I pinpointed the house. Maybe I should start selling "Star Maps" like the guys on Sunset Blvd. near UCLA. Whenever a Star Tour Bus does pass Holby Park (on their way to Aaron Spelling's estate), I always wave and hope to be recognized. The fans on the bus offer me a tepid wave back.

But, back to Heff.

http://guests.themls.com/profile_page.cfm?mls=09-354711&tab=search

http://www.500smapleton.com/

http://news.yahoo.com/s/afp/20090313/en_afp/ushousingsexpeople

Unintended Consequences of Jump Starting the Economy

As the NIH and NSF are flooded with new grant proposals by patriotic academics seeking to do their part to jump start our lethargic economy, who will actually read these brilliant grant proposals? What is the social cost of this "excess refereeing"? If new ideas are the key to economic growth, could an unintended consequence of this expansion in reviewing crazed ideas actually be a further economic slump in the long run as researchers will have less time to think as we spend our scarce hours reviewing each others' proposals? As a patriot, I will not review any of these new grant proposals! To be serious for a moment, what will be the average quality of the marginal proposal that now will be funded with this $ push?


"The American Recovery and Reinvestment Act and the $21.5 billion directed to various federal agencies for research offers tremendous opportunities for the campus. As a result, we anticipate that there will be a major surge in campus research activity. The UCLA Office of Research Administration is preparing for a sharp increase in the volume of proposals that will be submitted within the next few months, the new information that must be captured, and the quarterly reports that will be required."

The Consequences of China Fearing U.S Inflation

Larry Summers needs to credibly signal China that the U.S Keynesian push will either be followed by strong economic growth (raising tax revenue) or that he has the power to reverse this "Big Keynesian G" in 2 years and raise taxes (reducing the budget deficit) so that the U.S doesn't start printing $ (inflation) to pay back bond holders. I wish him good luck. Will the Congress reverse incumbent programs in 2 years? I see a time consistency problem. Do you? We will get a nice test of general equilibrium theory if China starts to build highways with its capital rather than lending it to us. How high will our interest rates rise?


China

Returning to environmental economics; here are 2 interesting articles;

Solar power price premium --- in this case which communities will sign up for this power? Will the median voter want it? You know my answer;
see my 2007 JEEM paper; http://mek1966.googlepages.com/greens.pdf


hybrid pricing

Tuesday, March 10, 2009

A Radio Appearance

I enjoyed participating in this discussion. In this recent Radio Interview, I was asked to comment on the market for green convenience shopping and in particular a new Los Angeles store called Locali. http://www.localiyours.com/ . My inner economist wants to know whether the recession has sharply reduced its sales? Or , is green unaffected by business cycles?

In the past folks argued that recessions were good for the environment as the scale of the dirty factory production decreased. But, green technique effects are likely to be boosted more during boom times as companies seek out market niches and some consumers are willing to pay a price premium for these products. If there is Learning by doing and social learning, some of these products will take off as the word about their quality spreads and average costs fall with the learning by doing effect. During a recession such new products are not rolled out , the basic R&D to develop them may be rolled back and consumers will have less freedom of choice in 5 years because the pipeline gets scaled back.

So, my point is that this recession could have medium term effects on retarding the green technological advance of our economy. If President Obama could pass a carbon tax, then the whole story would change but that is a subject for another day.

Sunday, March 08, 2009

Clash of the Titans: Sachs on Krugman

I am not a macro-economist and I do not play one on TV but the Krugman/Sachs discussion below seems to revolve around why did U.S interest rates get so low and that demand curves slope down. When interest rates were really low (and John Taylor says way too low), we borrowed a heck of lot. Now somebody had to lend us that $. How does Chairman Greenspan sleep? He should re-enroll in a different econ PHD program and redo his studies. Rules over discretion!

Did Dr. Sachs call Dr. Krugman to congratulate him on winning the 2008 Nobel Prize? In Cambridge in 1979, was the smart money bet on Sachs, Summers or Krugman to be the first Nobel winner?


New York Times
March 8, 2009
Letter
Blame for the Global Crisis
To the Editor:

In “Revenge of the Glut” (column, March 2), Paul Krugman repeats the claim that Asia caused the current global crisis by oversaving. He writes that after the Asian financial crisis of 1997-98, the emerging economies of Asia amassed “huge war chests of foreign assets” and that “most of that money went to the United States — hence our giant trade deficit.”

But the numbers don’t add up. The Asian developing countries ran a combined current account surplus (net lending to the rest of the world) of $38.3 billion in 2000, while the United States ran a whopping current account deficit of $417.4 billion.

By 2004, the United States’ deficit had swelled to $625 billion, against a surplus of developing Asia of $82.5 billion.

In fact, the Federal Reserve created two bubbles, the dot-com bubble (1998-2001) and the subprime bubble (2002-7), and these substantially raised American borrowing from the rest of the world. Now the whole world pays the price.

Nobody else made us do it, least of all the developing countries of Asia.

Jeffrey D. Sachs
New York, March 3, 2009

The writer is director of the Earth Institute at Columbia University.

Saturday, March 07, 2009

Ed Prescott Comments on Climate Change Mitigation Efforts

I just stumbled upon this powerpoint slide by the Nobel Laureate Ed Prescott. He writes clearly. I wonder whether he debates any environmental economists at ASU about point #3? This slide refers to three challenges he foresees (in 2006) for the U.S if it wants to keep its economy growing. In hindsight, this list omits some factors that bug Dr. Stiglitz and Dr. Krugman.

Dr. Prescott writes:

"Three Dangers

1. The U.S. Congress will increase tax rates and depress the American economy
This is happening in Germany, Hungary, and Italy

2. Anti free-trade, anti-globalization sentiment will become dominant

3. Crazy things will be done in a futile effort to reduce greenhouse gases"


http://new.istiseo.org/eng/conv2006_2.php


THE EUROPEAN COLLOQUIA” FIRST EDITION: AN ENORMOUS SUCCESS

Although at its first edition The European Colloquia in Prague on the 30th of November 2006 has been a magnific success.
The presence of three Nobel laureates in Economics, such as James Heckman, Joseph Stiglitz and Edward Prescott, together with outstanding international economists, introduced by the Presidence of the Czech Republic made the first I.S.E.O commitment taking place abroad an incredible opportunity to spread the economic culture.
Moreover the participation of the Czech President, who decided to attend the conference not just for the opening ceremony but presenting his own speech, gave to the congress an incredible importance.
An unexpected success witnessed by an incredible large audience (more than 400 people) arrived in Prague to attend the congress: entrepreneurs, members of the academic, politic and social world coming from Eastern European Countries accepted with enthusiasm the invitation received by I.S.E.O together with representatives from the world of finance invited by Pioneer.

The European Colloquia definitely represented a enormous pride for the I.S.E.O Institute, as a proof of the hard job done since its foundation.

A Typical Home for Sale Near UCLA

As President Obama and his braintrust search for the right "treatments" for reviving this economy, perhaps he should encourage developers to build more homes like this one and then have Chairman Bernanke offer the $ to allow households to purchase such homes. This would create jobs and it looks like a nice house.

AB32 and Economic Analysis

I've achieved some of my life's goals but today I can check off another one. I have published a letter in the San Diego Tribune. Below, I report letters by Rob Stavins and myself. I must admit that Eric Maskin's NY Times Letter published today is even better. Why did I write the SD Tribune? I was misquoted there a week ago and felt that I should try (in 200 words or less) to state my "true" views.


http://www3.signonsandiego.com/stories/2009/mar/07/lz1e7letters20148-letters-editor/?uniontrib

Educators respond on climate plan

Regarding “Scrutinize climate plan/Air board member Roberts should throw weight behind Senate bill” (Editorial, March 1):
The Union-Tribune indicates that in my review of the California Air Resources Board's economic analysis of its AB-32 implementation plan, I said “it was so 'terribly deficient' that it would harm efforts to deal with climate change.” You are correct that I characterized the economic analysis as “terribly deficient,” but did not imply in my commentary to CARB that “it would harm efforts to deal with climate change.” Looking toward the future, I noted in my comments that “I regret very much this inescapably negative conclusion, because of my desire to help CARB develop and execute a sound economic analysis,” and, I might add today, a sound policy going forward.

ROBERT N. STAVINS

Cambridge, Mass.

The editorial stated UCLA economist Matthew Kahn said “sharply higher energy costs mandated by the new rules would take a heavy toll on California manufacturers and their 1.5 million employees.” I am shocked by this interpretation of my review of the economic analysis of the scoping plan. As of today, we simply do not know how electricity prices will be affected by AB-32 regulation. Even if electricity prices rise, some California manufacturing firms will thrive as AB-32 creates new business opportunities for firms that produce energy efficient goods. The legislation is likely to have some negative effects for energy intensive manufacturing firms. The net effect of this job creation and job destruction is hard to measure. I would be greatly surprised if AB-32 imposes a “heavy toll” on California manufacturing.
California's economy has the ability to reinvent itself in the face of opportunities and shifting incentives. For the record, I am a supporter of AB-32. This regulation offers large environmental benefits and is likely to impose only small net economic costs.

MATTHEW E. KAHN

Los Angeles

Friday, March 06, 2009

Time Consistent Greenhouse Gas Mitigation Policy

The New York Times is reporting that the Governor of New York has unilaterally given a waiver to dirty power plants allowing them at zero cost to not have to comply with greenhouse gas mitigation measures; Evidence from New York .

Economists have a fancy word for this; "time inconsistent policy". If business people anticipate that politicians cannot credibly commit to keep certain policies in place and that lobbying can reverse these policies, then many dirty firms will not invest in costly "green" technology but instead will hire firms to lobby the political leaders.

The same issue will arise when President Obama enacts carbon regulation. If business leaders believe that future Republican Presidents will weaken such regulation, then they will invest less today to "be green" and this will keep their marginal abatement costs high. The net effect of such political business cycles is that we will have more trouble reducing our GHG emissions and the issue of adaptation will grow in importance.

Thursday, March 05, 2009

Profiles in Courage

Two economists should probably not reproduce. But when it happens, it happens. We never know what goes on at our kid's school. But, the kid on the right looks happy. this photo was taken on a 65 degree day at the Getty Museum field trip.

The Arts Section of the NY Times Discusses Modern Economics

A few months ago, the New York Times Arts Section had a picture of Lars Hansen as it discussed the merits of the Milton Friedman Institute at the University of Chicago. Today it quotes David Card on how academic economics evolves over time. These truly are strange days. Where is Jim Morrison when we need him?

The author, patricia cohen, was hinting that economics is "conservative" and that even as the world changes that we don't change. We are vested in "out dated" math skills and modes of free market thinking --- in the name of self protection we teach future generations this "worthless" stuff --- not because its correct or helpful for explaining and predicting human behavior but because it increases the demand for us --- raising our status and raising our salaries.

I would disagree. The above argument is baloney. Paul Kruman won a nobel prize for helping to bring about a "pardigm shift". Economists will not give up on our supply and demand model. What will go is the representative agent model of macro-economics. This model assumes that all consumers are identical (the average guy) and all producers are identical (the average firm). There can be no contagion in such a model, there can be no "domino effect".

We need richer models featuring more consumer and producer diversity and we need better models of "spillovers". If I buy a Hummer, that pollutes your air but in the absence of a pollution permit market--- I ignore this effect.

In the case of the housing market, how did people form expectations that home prices would always rise? Or did they anticipate that they could bet that they would and if home prices fall that the Obama Administration would bail them out? There are hard game theoretic strategic issues that affect household choice. If government provides ex-post insurance or promises to do so, this creates incentives for ex-ante risk taking. If Fannie Mae and Freddie Mac had never existed (and Milton Friedman would have supported this), would there be so many home owners in foreclosure today?

Dr. Cohen raises some interesting points but she should have spoken to Jim Heckman and Gary Becker about these issues. If she is going to point a finger (or the finger) at the Univ. of Chicago then she should speak to the University's stars.

Wednesday, March 04, 2009

Glaeser's Output Keeps Rising

Ed Glaeser is a productive man. Here is his new Editorial in the LA Times. I am familiar with the subject. If you'd like to read our academic paper on this subject then go to Glaeser/Kahn paper .

One valid criticism of this work is that we need to factor in the carbon content of shipping water to thirsty California cities. Currently the pricing (at a penny a gallon or less) is so crazy that this encourages waste. This energy/water footprint would be much smaller under "sensible" pricing.

Tuesday, March 03, 2009

Facebook as a "Time Machine"

The Scarsdale High Class of 1984 appears to be back. I'm not sure why I signed up on Facebook but for a nerdy guy, I now have a lot of "friends". The old High School gang is reforming in cyberspace. I thought I have a good memory but I must admit that I've had to stare hard at some of the photos to recall who some people are. Many of the women have taken on some dude's last name and I've had to stare at these names and face to try to recall who they are and what we talked about 25 years ago. 25 years is a long time. somehow my college drinking and graduate school studying have erased a lot of my memories of High School. I do know arithmetic. It causes me some pain to realize that I'm closer to age 65 than to being a high school graduate.

Fortunately, academic economists age slowly (at least above the neck and below the hair line). There are plenty of guys (like Larry Summers) in their middle 50s who still view themselves as the young turk. That allows even younger guys to convince themselves that our best work is still in front of us. Facebook reminds me of who I was but I doubt that 25 years from now that I log onto Facebook to connect to an academic economics webpage of "friends". Google allows me to connect to what I want to read and think about and that's sufficient for me.

Is Facebook evil? Is it best to leave the past alone and to move forward? What is the cost of re-establishing these past social networks? They must crowd out something?