Friday, July 31, 2009

Sexy Sociology

My students should think about transferring from UCLA to UCSB. They can get away from me and Mike Jura teaching "Energy and the Modern Economy" and instead take this sexy course. Now I understand why we got hit with this pay cut. UC faculty need to do a better job explaining why we are relevant and helping this state today and helping to build the human capital of the state's next generation of workers. When the LA Times portrays us like this, it doesn't help.

How am I helping this state? Why don't I deserve a 84% pay cut? We have torn out the grass in front of our house and thus use little water. In the midst of this drought, I no longer shower. We pay our taxes (and now the City of Los Angeles small business tax). We commit no crimes, create no litter, do not smoke, do not use the public schools, we recycle nicely. We drive 4 miles a week. I made the mistake of agreeing to serve on some University wide Academic Senate committees and I try to be nice to people, especially people who I don't know or who are students and staff.

In terms of ideas, I think that I have a lot of them and I'm able to sell some of them at a positive price. I'm teaching undergrads, graduate students, PHD students, writing articles, writing a new book, advising some companies and trying to help the Air Resources Board with the implementation of AB32. I try to talk to reporters to get my name and UCLA's name into the news. What do all of these small activities add up to? It isn't too sexy but that has been my choice.

This is my last blog entry for a week. I will be in Berkeley trying to inject some of the local progressivism into my cynical bones. You might see me on the Berkeley campus monday. I will be there to discuss "green buildings" with one of the greats on that mildy impressive campus.

What is UCLA's Edge?

Is it Kareem? Walton? Wooden? or Jared Diamond? I'm slightly concerned that our students believe it is this. Most of the faculty do not participate in this bonding activity. My old University (Tufts) faced the same issue and the President lost points with the beer drinkers by revealing himself to be "old school". I must admit that I'm a hypocrite and now that I'm not a kid anymore I believe that University = the mind and nothing else.

The Perils of Urban Life: Falling Tree Branches

Even Arrow and Debreu would have trouble placing a probability on all of the "states of nature" that can take place in New York City. I had foreseen choking on a bagel, being hit by massive buckets of pigeon turd, and falling down a manhole but I hadn't thought of this one.

We have to live somewhere, are cities much more risky than the countryside? This raises old questions about risk perception over; job loss, crime, pollution exposure, freak events (like the one linked to above), even risk from divorce. I'm guessing that relationships are less stable in cities but that must be someone's choice. How risk averse are we?

Now, I can't answer any of these questions but I am working on the question of; "given the current baseline risk of living in cities, how much will climate change increase risk in day to day quality of life in different types of cities in the year 2075?"

UPDATE: But rural life also has its risks. The Tierney Lab provides a "heads up" about Mad Cows.

Thursday, July 30, 2009

Real Time Environmental Research: Booms are Good for Building Environmental Voting Coalitions

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.

Wednesday, July 29, 2009

Some Questions for McKinsey About its New 1.2 Trillion Dollar Energy "Savings" Report

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!

Why Do Academics Spend Time Consulting?

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."

Tuesday, July 28, 2009

The Art of Predicting Behavior when People Differ

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.

Monday, July 27, 2009

Credible Promises

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.

Sunday, July 26, 2009

California Pension Financing and the Risk/Return Tradeoff

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?

Saturday, July 25, 2009

Who Can Adapt to Climate Change?

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.

Friday, July 24, 2009

Conducting Evaluation Studies Without a Dependent Variable: The Case of the Teachers Unions

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.

Women's Standard of Living Under Communism and Capitalism: Nixon vs. Khrushchev

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.

Thursday, July 23, 2009

Upcoming Trip to Beijing

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.

The President's Press Conference on Health

Professor Obama sees an inefficient health care system. Health is a prominent example of "household production theory". You do not have an innate desire to take blood pressure medication. Such a drug is an "input" into feeling good and not having a heart attack. The President has claimed that if doctors were compensated for keeping you healthy rather than being paid for by "fee for service", we would have a win-win of healthier people at a lower social cost.

How would this work? First, patients would need to be randomly assigned to doctors. If doctors could choose their patients, then doctors would cherry pick the healthy ones and would be paid a lot of money for "keeping them healthy" but we all know the counter-factual here. The healthy would be healthy even if Dr. Nick from the Simpsons' was their doctor.

Now don't forget transport economics. Doctors are located at a physical place and different neighborhoods of different racial and income levels are located at different distances from the Doctor. You don't have to be Hotelling to anticipate that Doctors in an inner city tough community will demand an "adjustment" because their patients will be sicker than the average. So, how will the Obama Team's pay to these doctors work? Will it be based on a "value added" criteria relative to a baseline? But who will determine what the baseline health of these residents is?

This is a similar issue when we reward teachers for student test scores. What is the right control group? The national average? The child's score at the start of the year?

Perhaps a solution is "Yardstick competition". Suppose that for each person, we knew five of his family members and five of his friends at work and in the residential community. If there were a set of observable indicators such as a cholesterol reading, one could calculate group averages and compare the individual's time series of cholesterol readings to these two peer groups. If the individual improves relative to the peers, the doctor team gets a bonus. This approach would control for a number of trend issues. Basic statistical techniques could be used to correct for age differences but the key issue is identifying a valid control group for identifying quality doctor "inputs" when they are delivered.


Swithing Subjects: Here is the future of UCLA. Like Elton John, He is a Rocket Man.

Wednesday, July 22, 2009

Understanding the U.S Military's Suicide Rate

This Columbia Univ. research project sounds interesting. Will the researchers have new things to say about the effects of social interactions in the modern military? If you are close to others in your unit and they die in combat, does this raise the probability that you subsequently commit suicide? If you feel you have let the unit down due to your mistakes does this increase the probability of suicide (especially in cohesive units)? Thus, could there be more suicide in more cohesive units?

What types of modern military units are more cohesive? During the U.S Civil War, Dora and I document that more homogenous units featured more group loyalty. Is that still true today? Or has the modern military figured out how to create a "melting pot" so that people from different backgrounds and ethnicities all feel like a "band of brothers"?

What role does leadership play here? Are commanding officers aware of which soldiers are close to the breaking point? Do soldiers have an incentive to hide their pain out of fear of being dismissed or blackballed? Has the modern mental health movement made progress in the Military removing the stigma of admitting that one needs help and thus early interventions lower suicide risk? If so, then this should affect the time trend.

UCLA Sociologists Take a Stand on UC Funding Priorities

My Colleagues at UCLA Sociology have taken a gutsy stand on what the future UC funding priorities should be. I agree with their points and I bet that 98% of the UCLA economics department would also agree. You don't have to be Bill Clinton to anticipate that the median voter among the UC faculty (across the 10 campuses) will not like this proposal. It has a whiff of elitism but ask yourself; what would Larry Summers do? If his next job is President of the UC (I'm kidding), would he keep the status quo?


UPDATE: I found this interesting quote at the bottom of the blog entry from above:
"What a pity that some UC faculty seem more interested in crowding aboard the life-raft than in working together to prevent the ship from sinking."

This made me feel a pinch guilty. Am I part of mad scramble kicking aside "women and children" as I try to save my own ass and escape the Titanic alive? In this case, what does "working together" mean? Not complaining about the huge paycut and the prospect that the cut will persist for more than 1 year? What is the co-operative solution here? The UC must confront that it has too many objectives that it tries to achieve all at the same time. It has not prioritized. People would like to see clear signals from President Yudoff on how we will maintain "excellence". Such signals would calm people down and reduce the concern that UC has a long run problem. Some people are talking about self-fulfilling Prophesies. If excellent faculty leave and we can't recruit new risk averse excellent faculty from other universities, then the UC will sink. To stop a "bank run", a bank has to signal that it could pay back people's deposits if the people want their money. But, when people know they can get their money back then they no longer panic and the bank run ends. How do you build confidence that an institution will remain excellent? Raw $ is one such signal but clear leadership is another.

The Future of California's Economy: Legalized Pot Exporter

Comparative advantage is a fascinating topic to economists. What is California's economy's strength? I have naively assumed that it was in skilled industries (i.e Google) but this article says that our future is with Cheech and Chong. California has the political world view and the soil to grow a lot of pot. We could finally make Milton Friedman proud of this state. This article discusses some of the details and the politics.

Tuesday, July 21, 2009

Green Jobs: A Case Study of New Boat Toliets

What sectors will produce new "green jobs"? Now I know the answer --- the boating sector! I have always been worried about boater used toliet paper polluting our water and now I can rest peacefully. Here is the headline: Swash Eco-Seat Allowing Boaters to Cast Away Their Toilet Paper Advanced Toilet Seat from Brondell Reduces Waterway Sewage


Contact:

Tricia Kent
Director
Avalon Communications
http://www.avalon-comm.com


San Francisco, CA – July 21, 2009 – The estimated 70 million Americans who are expected to hit the waterways this year can cast away more than just their cares when they set sail. Now they can also leave the toilet paper behind. Innovatively designed with a water wash cleansing system, the Swash Eco-Seat by Brondell is the eco-friendly boater’s answered prayer. By installing Eco-Seats on their vessels, boaters can reduce toilet paper use by 75 percent, thereby drastically cutting back on waterway sewage. In the process, they can also save themselves the all-too-frequent headache of clogged heads.

According to a recent “Women’s Health” magazine article, “The average ship has hundreds of bathrooms and produces 210,000 gallons of sewage per week.” And it’s not just large vessels that are contributing to the problem. Much of this waste can be attributed to the massive amounts of toilet paper being used.

Indeed, toilet paper manufacturer Charmin estimates that “on average, consumers use 8.6 sheets per trip – a total of 57 sheets per day. That’s an annual total of 20,805 sheets.” Therefore, a typical 3,000-passenger ship on a week-long journey uses 1,197,000 toilet papers sheets each day. If that same ship were to replace all of its toilet seats with a Swash Eco-Seat, the number of sheets consumed on the same voyage could be reduced to 299,250.

Norio Sugano of Sausalito, Calif., is the proud owner of the Seeker (Tatoosh 51) sailboat. He recently installed a Swash 250 toilet seat in his forward cabin and a Swash 550 in his aft cabin and is enjoying no longer having to worry about clogged heads. He had this to say of his experience, “My installation went very quickly. I just replaced the old toilet seat with the Brondell unit. In the period [since their installation], both units have been working extraordinarily well. What’s more, I have not purchased any toilet paper since I installed the Swashes. The leftover toilet paper has been used to wipe around the toilets. The Swash actually works and benefits me. Overall, I highly recommend these advanced toilet seats, not only for boating, but for regular households as well.”

Sugano closes on a valid point. While disposal of sewage on the high seas is a complicated process that is mandated by laws, seafarers, obviously, aren’t the only ones who produce it. Landlubbers are just as likely to overdo things in the TP department. By installing a Swash Eco-Seat in their homes, individuals can not only cut down on sewage, but they can also enjoy the product’s additional benefits like heated seat warmer, remote control and heated dryer.

Boaters who are seeking an easier and eco-friendlier way to deal with their sewage can visit Brondell’s Swash Eco-Seat line online at http://www.brondell.com. Interested media may arrange a meeting with company management by calling (772) 633-8337.



About Brondell

Based in San Francisco, California, Brondell is a privately held developer of innovative, quality bathroom products. Brondell currently sells the Swash™ line of high-tech toilet seats in retailers across the United States and Canada. The company also manufactures the Breeza and Breeza Warm seats, which feature an innovative design and patent-pending 4-stage deodorizing system that automatically eliminates bathroom odors at the source. Both lines reflect Brondell's commitment to quality product design. All of the company’s offerings deliver comfort and cleanliness to young and old alike, setting a new standard for luxury and personal hygiene in the bathroom.

###

Can We Adapt to Climate Change?

Reality Television offers an optimistic "yes" . In ongoing work, I will be linking what I learn from watching that show to my recent work on the micro-economics of climate change.

Monday, July 20, 2009

Do Beliefs Translate into Behavior? Evidence from Plump Doctors

People love pointing out hypocrisy. Why? I have no idea. In this NY Times article, heavy doctors wrestle with how to give advice to young patients on weight loss.

My interest in beliefs and behavior mainly focuses on how environmentalists live their lives relative to a Dick Cheney. Do Greens Walk the walk? Eric Morris and I argue that the answer is yes in this paper . Or to rephrase --- we argue that greens are not hypocrites.

NBER Summer Institute 2009

To my friends enjoying the very cool air conditioning in the Sonesta Hotel, I say hello. If you yearn to hear what I have to say then go here. Why am I not here with you?

Well, for one thing I have heard almost all of the papers that will be presented at the conference and I believe in diminishing returns. That is a not a great justification but we had also heard that the NBER gift this year was not a Prius and that was a turnoff. More seriously, I had to take my time to craft this letter (see below).

What am I really doing? Well, it is summer and I'm trying to do some research and flying cross-country in coach does not help me make progress. Also, why leave LA? Furloughs and pay cuts make me ponder this question but while here, why leave? I love LA! Randy Newman was ahead of his time. I lived in Boston for 9 years of my life and I've seen every inch of cambridge.



Dear Concerned Citizens,

I am a supporter of AB32. While it is extremely difficult to measure the likely future costs and benefits of this regulation, I believe that this legislation will help our state and our nation make the transition to a more energy efficient economy. The knowledge gained during this transition is a public good that can be transfered to other nations such as India and China and in aggregate this will reduce global greenhouse gas emissions.

I am not a supporter of past economic analysis of the impact of AB32.

In the fall of 2008, I wrote a review of the AB 32 Economic Analysis. This Analysis used computable general equilibrium models to analyze the likely effects of AB 32 on the California economy. The Analysis Report concluded that a "free lunch" would take place. This highly optimistic report concluded that AB32 would cause both reduced greenhouse gas emissions and increase California's prosperity. While I wish this is true, the formal modeling techniques used to generate these results are not credible. I pointed out numerous issues with the models used to generate these predictions.

During the 2009 calendar year, two events have taken place that reduce my concerns about the costs of AB32 for California's economy.

1. In June 2009, the American Clean Energy and Security Act (Waxman/Markey) passed in the House of Representatives. As the rest of the nation must mitigate its carbon emissions, concerns about "leakage" and migration of California jobs to less regulated states such as Nevada vanish. If California enacted AB32 and the rest of the nation took no carbon mitigation steps then "leakage" and dirty activity migration, would have been an important issue.


2. In new research joint with Professor Erin Mansur of Yale Business School, I am investigating whether manufacturing employment's locational choice is sensitive to local electricity prices. In preliminary work, we find that only a subset of manufacturing industries including primary metal manufacturing, and paper manufacturing are locating in counties with low energy prices. For most manufacturing firms, rising energy prices will not play an important role in shifting the geographic patterns of where manufacturing clsuters.

So what? If AB32 causes electricity prices to rise by 15 to 20% as we reduce our power production from natural gas and increase the power generation from more costly renewables then the Kahn and Mansur work says that this will not push many manufacturing jobs away from California.


I do believe that the energy efficiency mandates embeded into AB32 will create "new green jobs". How many? I do not know.

I am happy to continue to debate people on the merits of AB32 but I am a 100% supporter. This legislation will not prolong the California recession and it will not retard the long run growth of our great state. Instead, it will help to accelerate technological advance in a key growth industry of the future.

Sincerely,

Matthew E. Kahn

Sunday, July 19, 2009

Links for Today

Fonzie's Daughter gets married = Happy Days! and Henry Winkler now looks like Richie's dad Mr. Cunningham from the show. I have not seen the older Fonz in Brentwood but now I'm looking out for him. Here is a celebrity candid photo from the wedding. To see more of such celebrities, you usually have to attend our UCLA tuesday afternoon applied micro seminar.

LA Times piece on the challenges for Fresno farmers facing water drought.

My Book TV debut --- nobody has emailed me to tell me that they saw it.

LSE's International Growth Centre . As a 1987 graduate of its General Course Program, maybe I should start giving some $ back to my old school.

NY Times Readers Respond to a Sunday Article declaring that India has rebuffed Secretary Clinton's attempts to obtain support for a global carbon deal.


Are my links correlated with Mark Thoma's"

Saturday, July 18, 2009

Poor Communities Oppose Raising LA Water Prices

The LA Times has an article today stating that communities such as Compton and Lynwood are not happy about the doubling of residential water prices over the next two years. Now it is true that if water represents a large share of household consumption that LA household inflation would jump sharply but water isn't a big budget share. Southern California is in drought and it is important that all people and firms in this region face the true scarcity signal. This article highlights though that the Central Basin Municpal Water District made one public relations mistake. It has used some of its revenue to make a $80,000 donation to the Whittier Narrows Wildlife santuary. As a guy who likes birds, I understand this but this is the problem with non-profit firms --- they have multiple objectives rather than simply focusing on profit maximization. The poor guys in Compton do not care about these birds and will be angry that their scarce dollars are being sent to protect birds.

What is the right public relations strategy for justifying raising prices sharply? Be honest about water scarcity and about the challenges we face ahead in adapting to a changing climate. The Utility should explain how the revenue collected will be used to build a pipeline for recycled water and how this "unsexy" infrastructure will help LA cope with water scarcity in the future. Just as declining crime has improved Compton's quality of life, this unseen infrastructure will play the same role and the money must be collected to pay for it.

People might be willing to pay public fees and taxes with less anger if they believe that government provides a good deal in terms of public services per $ of expenditure.

Friday, July 17, 2009

Too Much Time on Your Hands?

Wasn't that a Styx song? Well, if the answer is "yes" then I would suggest watching this several times this weekend on Book TV.

Incentives

The new issue of The Economist has some tough things to say about academic economists. Does the current deep recession show that we are bozos? Do our public disagreements over optimal policy (i.e Krugman vs. Cochrane) prove that we are all ideologues who use math to dress up our priors about how the world works as we sucker New York Times readers into believing that we truly understand the world --- versus the "truth" that we are partisans using our academic clout to push the status quo in the direction we (either "liberals" or "conservatives") want to achieve?

Permit me to respond. Incentives is idea #1 in economics. Such incentives can be about $ or social incentives.

The crisis:

1. Incentives of banks to carefully screen potential borrowers in terms of their income prospects. (These guys are paid on commission and the banks were aware that they are "too big to fail" and would be bailed out by the federal government if loans go bad).

2. Incentives of Standard and Poors and rating agencies (seeking new business and aware that if they play nice and give a "AAA" rating that this generates more business). They should be randomly assigned to the companies they rank just as accountants should be randomly assigned for firm audits.

3. Incentives of the Fed --- I don't have a great model of Alan Greenspan and what he was thinking when he sharply deviated from the Taylor Rule and dropped interest rates really low. He must have believed his own hype. Rules over discretion would solve this. Keep in mind that Greenspan faced no competition. He was a monopolist and used his strange speaking style as a barrier to entry so that nobody actually understood how this "oricle" was making decisions or what he was maximizing. Capitalism works better when there is competition. His wonderful wife Andrea could have done a better job investigating his day to day decisions and reporting on NBC.

4. Expectations of rising home prices --- this is interesting but the issue here is missing markets. If you believe that Los Angeles home prices will crash, there is no asset that you can "short". In the stock market, such positions exist. The pessimists had no way to express themselves and the information was not incorporated into prices. Incomplete markets matter! As people believed that home prices would just keep rising, this led to some marginal home buyers taking the plunge who should have kept renting.

5. Owning vs. Renting --- this is a 0,1 variable. As Joe Tracy and Andy Caplin have long stated --- we need a system that convexifies this problem so that you can own 10% of your home or 30% of your home and other people will own the rest. Yes there are moral hazard problems of maintenance contracts but more sturdy durables could solve this.

6. The foreclosure crisis --- Why don't banks just seize the homes that are in foreclosure and rent them to the current owner? This would force the banks to rewrite their asset positions and they prefer to have the full loan on their books rather than admit the truth. By dragging the current owner along and hoping he will start to pay back, the bank holds an option that could be in the money if Obama's Brainy Team can stimulate us to recovery. If Banks had to honestly and in real time state the value of their assets then they would quickly start renting to these households.

Get these "micro" incentives right and we would not have had this "macro" problem. In each case , there were interest groups with a stake in the status quo and this has nailed us good.

Green Cities Rediscover Urban Rivers

Joni Mitchell worried that paradise was being turned into a parking lot but in cities such as Seoul the parking lots and roads are now being turned back into urban green paradise . These cities are rediscovering their water amenities that lie beneath paved areas. The NY Times today celebrates that the amenity gains that this "green city" approach offers. Boston's Big Dig is another famous example. The funny thing here is that in many of these cases, the major city was sited near a major water way because of its productivity advantages. As the water got dirty (middle 20th century) because of industrial production and too much sewage (the scale of the city) that was not properly treated, the water ways were viewed as gross. Think back to Cleveland's water catching on fire in the late 1960s. When the urban water was a disamenity, people did not want to "play there" and this contributed to suburbia and private pools and country club demand. Now with the rise of Green Consumer City, ambitious politicians have an economic incentive to invest to preserve their city's greeness. Local businesses recognize that the number of tourists and walking shoppers will increase if people want to hang out in the center city rather than being grossed out.

If cities near water can figure out how to adapt to coastal flood risk caused by climate change, they will be all set for attracting and retaining the skilled in the 21st centgury.

Thursday, July 16, 2009

The Ongoing Fight Over Estimating the Cost of Anti-Carbon Regulation

Varshney & Associates have issued a new consulting report available here that presents new cost numbers on what California's AB32 (carbon mitigation) regulation will cost the average household and the average small business. The authors report enormous cost numbers. According to this report, the average household will face an annual cost of $3,857 per year. That's pretty serious and represents a number more than 4 times larger than the CBO cost estimate evaluating the likely impact of the Waxman/Markey anti-carbon bill past in the House in June 2009.

Here is a brief comment I wrote about their report. In a nutshell, I don't believe their analysis. Read through my numerical examples to get a sense of my points.

The bigger issue here is what role do economists play in ex-ante policy circles as we attempt to inform decision making in Sacramento and in Washington DC? I believe that a key issue here is being honest about what we do know and what we don't know about key behavioral effects. For example, the optimism that learning my doing for green product producers such as makers of solar panels is implicit in the Air Resources Board documents. But, what is the evidence in favor of strong learning by doing effects? Ideally, economists should be consulted about this before regulation is written. I am eager to talk to my friends in Sacramento and offer my informed opinions on helping them to design effective policies for improving California's quality of life that are also cost-effective and improve the incentives of polluters to encourage them to "go green".

Secretary Chu's Trip to China to Convince the Chinese that Fighting Climate Change will Help Them

It takes some guts to walk into another nation and tell them that they should change their own environmental and energy policy for their own good. Is this "Mission Impossible" for Energy Secretary Chu? Why wasn't Larry Summers parachuted in? Secretary Chu is arguing the Tom Friedman point that "going green" will generate new jobs for China and he is also playing "bad cop" and saying that if climate change happens millions of coastal Chinese households will be flooded as sea levels rise. See this NY Times article on the Energy Secretary's mission .

Is this "new news" to the Chinese government? Do they care? In the first Superman movie, Lex Luthor owned plenty of inland land that he hoped would soon become coastal due to his misdeeds. Within China, which are the favored cities? Is Beijing at serious risk?

Does the Chinese government have a plan to help their coastal cities adapt to climate change? So, my usual question. Is climate change mitigation (i.e reducing GHG emissions) and adaptation substitutes or complements? I am writing a book on this subject and will have an answer for you pretty soon! I promise that this book won't be boring.


Now that I've been elected to this Wall Street Journal Top Econ Bloggers List, I have a duty to be interesting and to try to stay on topic but I must admit that I do enjoy talking about random stuff.

Wednesday, July 15, 2009

Ohanian on the Great Depression

Lee Ohanian has a nice piece in a recent issue of Forbes.

Can NYC Learn from London's Transit Policies?

Much has been said about globalization's consequences but the "guinea pig" effect has been downplayed. London has made some smart transit moves in recent years and people give Jay Walder some of the credit. NY City has now made him the boss of its transit system see Jay Walder's MTA Appointment . I'm hoping he will take some of the lessons he has learned in London and think through what can be "transplanted" in New York City. This example of learning from best practices should take place all of the time but I guess that interest groups and defenders of the status quo claim that heterogeneity and diverse circumstances means that what works in location X may not work in location Z. While this is an important point to keep in mind, it is the case that "apples" (i.e London) and "oranges" (i.e NY City) are sometimes similar enough that the lesson generalizes.

Tuesday, July 14, 2009

Europe's Carbon Footprint will Shrink

Paul Ehrlich has emphasized the environmental impacts of population growth. Jared Diamond has emphasized the environmental impacts of per-capita income growth. New NBER research sketched below argues that Europe's low rate of fertility will lower its per-capita income growth and by definition its population growth. Perhaps Europe is pursuing this "low carbon strategy" because they anticipate that carbon permits will sell in 2050 for $100,000 a ton and relative to their baseline allotments they will be able to sell their excess permits and live off the interest? (I'm kidding).


While the authors discuss immigration, there is obvious political economy here. If a nation really really needs young people and if nobody is "producing" such kids in the domestic market then simple "make versus buy" logic says that you will import them from the Middle East or other nations with lots of kids. Now, this raises a host of globalization issues but this "insurance policy" must put a check on the extent of the problem that Europe faces. Europe is small relative to the rest of the world.

It is an interesting incidence question to think through, as the number of 100 year old people rises into the tens or 100s of millions, who is in charge of feeding this crew and nursing this crew? In english, who should pay the cost for these Abe Simpsons? Do you have the right to live to 100? What would Milton Friedman do here? He would have had these folks buy an annuity when they were working age to pay for their expenditure if they lived into their 90s. Now for the subset of people who had the audacity to live to 100 but didn't buy the annuity would the libertarians be firm and let them starve or rely solely on their own families for income?



http://www.nber.org/digest/jul09/w14820.html

The Cost of Low Fertility in Europe

In the long run, low rates of fertility are associated with diminished economic growth.

As in many parts of the world, Europe has seen a rapid decline in fertility. In 1960, Estonia was the only European nation whose total fertility rate was less than two. Today, only two European countries -- Albania and Iceland – have fertility rates above two. Several factors are thought to be driving that decline in Western Europe: socioeconomic incentives to delay childbearing; a decline in the desired number of children; and institutional factors, such as labor market rigidities, lack of child care, and changing gender roles. Also, the nations in Eastern Europe have gone through major economic, political, and social change.

In the long run, low rates of fertility are associated with diminished economic growth, according to a new study by NBER Research Associate David Bloom and his co-authors David Canning, G√ľnther Fink, and Jocelyn Finlay. In The Cost of Low Fertility in Europe (NBER Working Paper No. 14820), they observe that in the short term, low fertility rates raise per capita income by lowering families’ costs of child-rearing and boosting the share of working-age people. But as that working-age population moves into retirement, the number of workers who replace them will shrink. So, whatever short-term boon European nations may have gained from low youth dependency will be overwhelmed eventually by the economic burdens of old-age dependency.

If fertility rates stay at current levels and life expectancy averages 80 years, this study implies that Europe’s share of working-age people will fall from about 70 percent today to somewhere between 50 and 55 percent in the long run. That would suggest a 25 percent drop in the number of workers per capita, assuming that labor participation rates stay the same.

There are several ways to analyze the effects of fertility on economic growth -- these authors choose to concentrate on age structure. The idea is that fertility, mortality, and net migration together determine the size of a nation’s working-age population. The bigger is that group relative to the total population, the more workers there are, and thus the more income the nation is likely to generate. The smaller is that working-age group relative to total population, the smaller is output per capita in equilibrium.

Of course, small changes in any one of several variables can alter the picture dramatically. In France, for example, where life expectancy is 80, the fertility rate that would maximize the working-age share of France’s population would be 2.1 if young people started working at age 20 and retired at age 60. With retirement at age 55, the working-age share-maximizing fertility rate would have to rise to 3.1. With retirement delayed until 70, that rate would drop to two.

The same dynamic works at the other end of the working-age spectrum. If young people entered the workforce at age 15, the fertility rate necessary to keep everything in balance would rise to 2.6. If they entered at 25, then fertility only would need to be at 1.8 (below replacement level) to maximize the working-age share of the population.

Another factor is immigration, which typically helps to boost the size of a nation’s working-age population. But its impact is usually quite small. Austria, for example, has Europe’s third-highest net migration relative to its overall population, but over the past 45 years the absence of migration barely would have changed its share of working-age people, this study finds. Even if it did, political resistance to immigration is high.

“In short, migration is highly unlikely to have a major effect on falling working-age shares in Western European countries over the next decades,” the authors write. “The size of the economic repercussions of declining working-age shares on economic development, however, will critically depend on individual behavior.”

Previous research has shown that for every extra child that a woman has, her labor participation falls on average 1.9 years over her lifetime. So as fertility falls, women tend to spend more time working, which allows them to accumulate more savings, more experience, and possibly a better-paying job. This accumulation of physical and human capital may offset some of the overall long-term income decline that low fertility suggests.

-- Laurent Belsie


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Saturday, July 11, 2009

Free Tennis Balls if You Buy this Los Angeles Tennis Court Estate!

This is a good test of behavioral economics. You can buy this tennis estate for $8.8 million. Now $8.8 may strike some as expensive but the seller is offering a "lifetime supply of tennis balls" to the person who buys this home. I understand complementary goods and this is a nice case. Will the "free" balls tempt you to buy this house?

Now I must warn you that in the fine print it says that "lifetime supply" merely means 1000 cans of balls but still this is a nice test of our love of "free stuff".

This home is located about 4 miles from me --- so we would be neighbors but there are other "lovely" new homes closer by such as this one.

C-SPAN Book TV Debut

If you really have no plans next weekend, then you can watch my Eco Barons Interview with Edward Humes . I received a free mug for participating in this interview at the UCLA Book Fair this summer. With taxes rising, I expect that we will return to a barter economy where we will paid in services that cannot be taxed. I need some new sneakers and perhaps a new comb. Keep that in mind if you require my services.

Friday, July 10, 2009

Glen MacDonald is the New Director of the UCLA Institute of the Environment

I am very happy to share this news. While UC President Yudof did announce our pay cuts today, I am still optimistic about the future of my part of UCLA.

"Yudof will present the plan to Regents at a meeting in San Francisco on Wednesday, and the board will vote Thursday. The incoming chair, a former finance director for the State of California, announced Friday that he and Yudof would launch a new panel to study growth and funding models that will put UC on a more stable track.

"President Yudof and I agree we can't keep limping along like this, from budget cycle to budget cycle," Russ Gould said. "If there is any good news in this present financial crisis, it's that, in the long haul, it will force us to forge a new path for the university - one that addresses stubborn fiscal realities, but that also allows us to preserve and nurture our world-class public research university system."
http://www.mercurynews.com/centralcoast/ci_12811031

I hope that Mr. Yudof and Mr. Gould have a serious plan because there are a lot of talented professors at the UC campuses and it would be a shame if 40% of them left over the next 3 to 5 years.

Fortunately, my Institute now has a permanent Director.


IOE Welcomes New Director

The UCLA IOE is pleased to welcome Professor Glen MacDonald as its new Director. Dr. MacDonald was appointed Director on July 1, 2009 following a national search. He replaces former Director Mary Nichols who took leave in 2007 when Governor Arnold Schwarzenegger appointed her to chair of the California Air Resources Board, and Acting Director Tom Smith, who remains Director of the IOE Center for Tropical Research.

"Environmental, social and economic sustainability are all interlinked and as we move forward in the 21st century the need for people and approaches that recognize this in environmental science and management, public policy and business is critical."Dr. MacDonald is a professor of both Geography and Ecology and Evolutionary Biology at UCLA and was the former Chair of Geography. He has been active in the IOE since his arrival on campus in 1995. Prior to coming to UCLA, Dr. MacDonald was Professor and Vice Chair of Geography at McMaster University in Canada. His research centers on climate change, its causes and its impacts on the environment and society. He uses a number of different approaches to reconstruct and analyze historic and pre-historic changes in climate and environment including meteorological records, historical documents, tree-rings and the analysis of cores from lake sediments and soils. A recent focus of his work is on the threat of perfect droughts in California and throughout the arid subtropics due to climate warming. Dr. MacDonald has published over 120 peer-reviewed articles in a wide variety of journals including Science and Nature and an award-winning book on biogeography. His research has been supported by the National Science Foundation, The Environmental Protection Agency, The Natural Sciences and Engineering Research Council of Canada and the Royal Society of Canada.

Amongst his honors, Dr. MacDonald has been elected a Visiting Fellow and Life Member of Clare Hall, Cambridge, awarded the University of Helsinki Medal, twice awarded the Cowles Award for Excellence in Publication by the American Association of Geographers, awarded a Guggenheim Fellowship and has just returned from a term as a Christensen Visiting Fellow at Saint Catherines College, Oxford. In 2006 Glen MacDonald was elected a Fellow of the American Association for the Advancement of Science.

In addition to environmental research, Dr. MacDonald is committed to environmental education and public engagement. He has won university-wide distinguished teaching awards at both McMaster University and UCLA. He has published magazine and newspaper opinion pieces on climate change and testified before the US Senate Appropriations Committee. He has spoken widely in the media and to water resource and management groups in the US and Canada. Dr. MacDonald has a particular interest in integrated approaches to environmental issues and sustainability that reflect not only good science, but good social, cultural and economic sensibilities. He states that "Environmental, social and economic sustainability are all interlinked and as we move forward in the 21st century the need for people and approaches that recognize this in environmental science and management, public policy and business is critical."

Dr. MacDonald is greatly looking forward to his Directorship of the IOE "I see the UCLA Institute of the Environment as a terrific organization that will not only help generate solutions for the environmental challenges of the 21st century, but will be a leader in reshaping how we approach environment, sustainability and the environment-social-economic nexus. The world looks to California, Los Angeles and UCLA for innovation and the UCLA Institute of the Environment will bring that same spirit of energy and innovation to the environment and sustainability."

Having been raised in California and receiving his bachelors from UC Berkeley, Dr. MacDonald says of his personal goals I hope to pass on to my kids and their children a California and a University of California that are as good, and hopefully even better, than I have enjoyed so that they can have the same wonderful opportunities that this state has afforded me.


Institute of the Environment

Date Posted: 7/8/2009

http://www.ioe.ucla.edu/news/article.asp?parentid=4197

Wednesday, July 08, 2009

Crime and Punishment: The Case of LA Water Rules

This is funny. Make sure that you read the comments. They are better than the entry itself. In a city of 8 million people, LADWP has found 4000 law breakers who are violating the water use rules during the current drought. If there are 1 million homes with lawns and let's assume that 25% of them are breaking the law and watering (and when we walk around Little Holmby we see many of them), then there are 250,000 "criminal waterers" out there to catch. If 4,000 have been caught then the average "water criminal" faces a 4000/250000 = 1.6% chance of being caught and the fine if caught equals $430 so the expected fine from cheating = .016*430 = $6.88. Not a very impressive deterrent!

Given the state's budget deficit, I say we confiscate the home of anyone caught cheating. So if the average home sells for $750,000 and there are 4,000 "criminals", my policy would generate around $3 billion in tax money to help balance the state's deficit!

Knittel on Vehicle Technological Progress

Chris Knittel is my kind of guy. I even like his new paper.

The Senate's Deliberations on Carbon Legislation and Strategic Interactions

I am worried about the following strategic logic. The NY Times is reporting that the G-8 nations have failed to agree on an international carbon target.

"China, India and the other developing nations are upset that commitments to provide financial and technological help made during a United Nations conference in Bali, Indonesia, in 2007 have not translated into anything more tangible."

A U.S Senator such as Sen. Rockefeller of West Virgnia or Baucus of Montana may say to himself; "If we adopt stringent standards, and the rest of the world does not follow our step, could Martin Feldstein be right that we will end up imposing costs on our economy and global carbon emissions will not fall?"

see
http://network.nationalpost.com/np/blogs/fpcomment/archive/tags/Martin+Feldstein/default.aspx

This is turning into an interesting co-ordination game. Is it a leader/follower game or a simultaneous move game? Rock/Papers/Scissors is a lot more fun to play when you are a sequential follower!

Of interest is this new piece:
http://belfercenter.ksg.harvard.edu/analysis/stavins/?p=219

Sunday, July 05, 2009

Implicit Subsidies for High Carbon Development

The Los Angeles DWP has a big ad in the LA Times today announcing its electricity pricing tiers for Summer 2009. It says that the DWP Service Area covers several different climate zones. Households who live in hotter climate zones will face the low price Tier I for longer than households who live in cooler parts of the service area. Intuitively, there is some cut point such as 600 KWH such that a household in a cool area will be bumped up to the higher Tier II price while a household in the hot area will only be bumped up to the same higher Tier II price if its consumption exceeds perhaps 1000 KWH.

The Sierra Club should oppose this. To the atmosphere and climate change, a kilowatt hour of power is a KWH. It generates the same carbon regardless of where it is consumed. This is an implicit spatial subsidy encouraging development in East LA rather than near the coast.

When economists see inefficient policy, we ask why? In this case, the political economy is easy. On average, people are poorer the further east you go. Conversely, people are richer the closer you get to the Pacific Ocean. Think of Santa Monica, Malibu and the Palisades. So LADWP has introduced a progressive tax that implicitly redistributes from coastal people to inland people.

Now why don't the coastal people yell? As a % of total Los Angeles, they are a small share and these rich folks may not want poorer people demanding to live closer to them.

But, the atmosphere should care! If we are serious about fighting climate change then these types of implicit hidden subsidies must be fought . There needs to be a leveled development playing field to encourage higher density development in the low carbon areas of the state. This is how California can meet the AB32 goals.

Here are the facts on the cutoff points for the tiers and the rates at each tier:

http://www.ladwp.com/ladwp/cms/ladwp001710.jsp

I forgot to add one other point. If people who live in hot areas face a higher marginal electricity price, they will have a greater incentive to buy more energy efficient appliances. Household total electricity demand is a function of locational choice, housing structure style and form,durables choice and utilization. Ideally, price signals will affect all four of these margins.

Saturday, July 04, 2009

Unintended Consequences Built into the American Clean Energy and Security Act of 2009

Like the rest of you, I am spending July 4th reading the 1428 page ACES climate change mitigation Act that was passed by Congress in late 2009. Here are the key files.

Economists love to talk about unintended consequences and I'm starting to spot some in the Act. We know that the exisiting building stock of homes, commercial and industrial real estate consume a lot of electricity. "Building retrofits" is a big part of Section 202 starting on page 348.

In my ideal world, electricty prices for power produced from fossil fuels (i.e coal and natural gas) would rise and this would provide a strong incentive for people living and working in inefficient buildings to call Van Jones to create green jobs to retrofit their buildings.

I could be wrong but it appears to me that the Act hands out pollution permits to the coal fired power producers with the expectation that the power plants will not raise electricity prices for their consumers. But, in this case there is no incentive to "retrofit".

Now, the electric utilities may then announce an incentive plan for the existing housing, industrial, and commercial stock that says; "if you reduce your electricity consumption 20% below your baseline consumption, we will give you a yy% reduction in your bill or a payment of $xx dollars."

Could this "retrofit" incentive actually increase greenhouse gas production in the short run?

As usual, the question is how the baseline is set. Strategic agents may intentionally raise their electricity consumption in the short run (their baseline consumption) to raise the probability that they qualify for the retrofit rebate even if they don't take any real costly actions. To get around this, the utilities should set the baseline as consumption in spring 2009 before decision makers were aware of the program's details.

Whether this is an important example remains an open question, but my point is that it is key to keep an eye on the unintended consequences as we move forward.

Friday, July 03, 2009

Does Blog Reading Crowd Out Book Reading?

Some people don't like to read while some nerds do. Let's acknowledge that there are at least two types of nerd readers. Set #1 have a taste for variety and suffer from slight attention deficient disorder and want to be exposed to a tidbit of information on a very large number of subjects. We can call this group the Wikipedia Nerds (WN). With the advent of the Internet blog, how many WN have substituted from reading books to just reading free blogs? This same group may prefer their information to be "fresh" and not stale. Given the delay in book publishing, blog entries are much "newer news". Set #2 are "deep readers" who want to really dig into a subset of subjects. It strikes me that the percentages of each type here may be 80% Set #1 and 20% Set #2.

While researchers continue to investigate whether free Internet music downloads increase or decrease music sales, a similar question can be asked concerning cross-elasticities. Has the introduction of free access to blogs lowered the demand for costly books? Books have a price to purchase, you have to wait for it to show up, it takes up space in your home or office and it delves too deeply into a single topic.

An empiricist would want to collect some time diaries before and after the introduction of blogs and would want to see how heterogeneous people respond to this "treatment".

Why do I care about this? As a blog writer and a book author, I hope that people are reading both. I worry that the publishing industry may be upended by this trend. Are academic books and popular books written by academics selling fewer copies now than they did before blogging began? Or do blogs increase demand for these books by accelerating buzz and info about them?

Books and blogs: complements or substitutes? It strikes me that for the Set #1 they are substitutes and for set #2 they are complements but given that there are many more Wikipedia Nerds on net they are substitutes.

Thursday, July 02, 2009

Michael Jackson's House on Zillow?

Who knew that the King of Economics (me) and the King of Pop where neighbors? With a little bit of detective work, I believe that this was his house. Mail me 8% of my UC salary and I will explain how I figured this out. Google maps says that he lived 2.1 miles away from my more modest house.

update, I had the wrong house. Here is the right one.

http://www.zillow.com/homedetails/birds-eye-view-map/20523968_zpid/#birds-eye-view

Wednesday, July 01, 2009

King of the Hill?

This isn't American Idol but it is mildly interesting to compare the "impact factor" of various journals put out by Elsevier. Will Ted Bergstrom (http://www.econ.ucsb.edu/~tedb/Journals/jpricing.html) now subscribe? I've published in 6 of the journals listed below. Can you pick them out? The only surprise to me in the set below is the Journal of Health Economics relative to Explorations in Economic History. A 4 to 1 ratio is serious!


Listed alphabetically
Journal Title 2008 Impact Factor

China Economic Review 1.154
Economic Modelling 0.342
Economics And Human Biology 1.725
Economics Letters 0.483
European Economic Review 1.039
Explorations In Economic History 0.467
Games And Economic Behavior 1.333
Information Economics And Policy 0.917
Insurance Mathematics & Economics 1.477
International Journal Of Industrial Organization 1.075
International Journal of Production Economics 2.026
International Review Of Law And Economics 0.377
Japan And The World Economy 0.288
Journal Of Banking & Finance 0.997
Journal Of Comparative Economics 0.897
Journal Of Corporate Finance 1.700
Journal Of Development Economics 1.323
Journal Of Econometrics 1.790
Journal Of Economic Behavior & Organization 1.125
Journal Of Economic Dynamics & Control 0.885
Journal Of Economic Psychology 0.943
Journal Of Economic Theory 1.224
Journal Of Environmental Economics And Management 1.730
Journal Of Financial Intermediation 0.773
Journal Of Financial Markets 0.576
Journal Of Health Economics 2.118
Journal Of Housing Economics 0.472
Journal Of International Economics 1.724
Journal Of International Money And Finance 0.860
Journal Of Macroeconomics 0.556
Journal Of Mathematical Economics 0.377
Journal Of Monetary Economics 1.429
Journal Of Policy Modeling 0.482
Journal Of Public Economics 1.278
Journal Of The Japanese And International Economies 0.526
Journal Of Urban Economics 1.460
Labour Economics 0.895
Mathematical Social Sciences 0.330
Regional Science And Urban Economics 1.216
Resource And Energy Economics 1.081
Review Of Economic Dynamics 0.954

Strawberry Fields Forever

Living is easy with eyes closed. Misunderstanding all of the economics lectures... Hmm, on second thought maybe we should stick to the original words in the song? John Lennon was ahead of his time. He anticipated that Strawberry fields were a wise economic development path.

Real Estate economists, when not humming beatles' songs, are always thinking about capitalization effects. This article offers some distinctive insights for rural areas. We all know that standard localized amenities such as low crime, nice climate (think of LA versus Houston), clean air are reflected in home prices. You do not have to be Adam Smith to anticipate that those homes in nicer cities and located within nice neighborhoods within those cities will sell for a price premium.

This article claims that in the country side that there are high economic returns to siting a housing development next to "nice organic" farming. So this farming offers the green space and because it is organic, you know that there will be less chemicals (that might affect you) being dumped on it. The farm may even grow some of your food and this would let you sleep well at night as your carbon footprint shrinks.

This is a nice example of "consumer city" turning into "consumer countryside". I do like the photo of the tired hippie in the picture who appears to be worn out as he works at the organic farm. While in theory this must have been a dream job, what is the reality? Will he unionize? Will he go back to working at an urban starbucks?