Friday, October 30, 2009

A Case Study for Elinor Ostrom's 2009 Nobel Speech?

Here is a French tragedy of the commons. In a happy utopia, people could share the bicycles through renting them, using them and returning them and this "green transit mode" would reduce vehicle use. But, this has not played out. 80% of the bikes have been stolen or injured.

"Residents here can rent a sturdy bicycle from hundreds of public stations and pedal to their destinations, an inexpensive, healthy and low-carbon alternative to hopping in a car or bus.

But this latest French utopia has met a prosaic reality: Many of the specially designed bikes, which cost $3,500 each, are showing up on black markets in Eastern Europe and northern Africa. Many others are being spirited away for urban joy rides, then ditched by roadsides, their wheels bent and tires stripped."

One solution would be for renters to post a larger deposit which would be returned to them when they return the bike back in mint condition. But, this would price out the poor and lower middle class.

Can social sanction and repeated interaction substitute for rule of law in this case?

Stanford University's Carbon Footprint: Is Golf Causing Climate Change?

Tiger Woods needs to use some of his billions offsetting his carbon emissions. Trained for a little while at Stanford, he must have enjoyed playing on this miniature golf course. I know that Stanford has invested a fair bit of money to be a green campus but suppose all of the golf course were transformed into faculty housing? The carbon footprint from driving to Stanford would vanish and the water now being thrown away on all of that green grass would not be needed. Given that the land would be expensive --- so close to campus --- senior faculty would live in smaller homes than in they lived in sprawl housing nearby , this would reduce their residential electricity consumption. With access to the University pool, they wouldn't need their own pool (which raises electricity consumption by 30% --- see Costa and Kahn (2010)). I'm a fan of density. Are you?

The Future of Research Economics

Tyler Cowen notes some relevant trends here . I talk to people and they say that applied micro has suffered over the last 15 years as top Americans have gone to Wall Street rather than the professor route. When I was a graduate student 20 years ago, my entering class was 50% American. Now I believe that at Chicago it is 15%. So what? I'm go back and forth on the causes and consequences of the globalization of research economics. I look at the MIT faculty. It is a highly international group and they are certainly churning out great research except when the World Cup is played and then the place turns into the United Nations.

A deeper question might ask; "Why are Americans not entering academic economics?" Is it simply the "pull" of Wall Street big money? Unfortunately, I am slightly worried that economics has hit diminishing returns. There is a huge intellectual payoff from starting to know basic economics and statistics but are there increasing returns here?

I think of Watson and Crick and the Double Helix with many research teams all simultaneously trying to crack the same research question. They were working in a "stationary" environment. I don't believe that DNA changes over time.

Economics is harder. The agents we are studying form expectations of the future, are highly heterogeneous, their choices are often strategic and some claim that they even make mistakes. These agents have private information concerning their past history and this past set of choices and outcomes affects their decisions today (non-separable) On top of this, the economies we study are not stationary as they are bombarded with shocks (climate change, financial news, new products) that change the equilibrium we observe. If we could study a stationary process where people play the same games and situations over and over, I'm highly optimistic that we could use revealed preference methods to tease out interesting facts about people, firms and governments and then use our "structural findings" to inform policy debates.

I do have the sense that modern applied micro is too spread out. Our collective research covers a vast number of topics. I would find it satisfying to be in a field where there is one core question and everyone is trying to make progress on that question. In contrast, we have sprawled. Perhaps I know too little about other fields and they are equally sprawled.

Well, I just received a revise and resubmit email so please let me end this blog
to get back to the research frontier. Lucas please call me!

UPDATE: I see that people are reading this blog entry so I want to offer a quick
follow up.

I am proud to be a Ph.D. applied economist. If I was 22 again, I think I would make the same career choice. This is certainly a very good life. But in 2009, are the next 30 years brighter for academic economics or academic biology meets computer science or neuroscience? If in the year 2039, economics is in the midst of a "golden age" --- this would be a very happy surprise to me when I am a 73 year old man.

I want to be wrong here because it would be quite exciting to be part of a field whose cumulative insights are accelerating. What can economics do to maximize the likelihood that this remains an exciting time for our field?

A couple of "micro" ideas

1. Google could create a centralized data clearinghouse so that all data sets would be archived there after publication. No more ISSR. Journals such as the AER that require such archiving could forward on the data sets to Google.

2. The National Academy of Sciences could strongly lobby the government of the U.S and others around the world to reconsider what types of data are collected and to reconfigure panel data sets.

3. The U.S tax authorities should offer special tax deals for data companies to share proprietary data with academic nerds. I pay a lot of money for micro data sets from companies that sell real estate data or vehicle registration data. There is no reason for why I need to face such monopoly pricing when the true marginal cost of data delivery equals zero. This is slowing down science.

#1- #3 would improve data quality and guarantee replicability. It would lower the barrier to entry -- we know that the number of papers written would rise but would average quality rise? Given that we only care about the max of the set --- so what? but someone would have to review all of these papers.

I just stumbled across this recent speech by Alan Krueger. He appears to agree with me.

I am not smart enough to answer the riddle of the future of macro. We started with the 1 sector growth model with representative agents and common production technology. We now agree with the 2000 Nobel Laureate concerning the fundamental role that heterogeneity plays along many many dimensions in our modern economy. Once we allow the "heterogeneity genie" out of the bottle, how do we generalize from the field experiments we run? How do we do empirical work when we are accumulating high numbers of unobserved state variables that the agents are aware of and responding to but that the econometrician does not observe?

Thursday, October 29, 2009

What are Economists Good For?

Well, we know we can't screw in a lightbulb but that can be outsourced. Auction theorists know that they have made a difference in the real world. Want proof? Click here . Preston McAfee serves up a very interesting recent intellectual history.

What else are we good for?

On improving the design of health care policy, here is an example from MIT's jon gruber.

On designing well functioning carbon mitigation legislation, I can point you to Dr. Stavins' input .

We are trying to be as socially useful as dentists. But the patient takes the advice that the dentist offers. There is no strategic game played between the patient and the dentist. The dentist leads (she looks in your mouth) and you do what she tells you to do. I am going to dental school.

My First History Publication

Here is proof that I can publish in a history journal. The Costa/Kahn book was reviewed in a history journal and we were invited to reply. I wish that the Journal of Economic Literature would allow me to respond to Ed Mills' review of my Green Cities book.


Books: Awaiting the Heavenly Country: The Civil War and America's Culture of Death
Mark S. Schantz
Ithaca NY: Cornell University Press, 2008
ISBN-13: 978-0801437618 ; 245 pp.; £20.95.00


Heroes and Cowards: The Social Face of War
Dora L. Costa and Matthew E. Kahn
Princeton, NJ: Princeton University Press, 2008
ISBN-13: 978-0691137049 ; 336 pp.; £19.95

Reviewer: Brian Holden Reid
King's College London

Citation: Brian Holden Reid review of Awaiting the Heavenly Country: The Civil War and America's Culture of Death, by Mark S. Schantz and Heroes and Cowards: The Social Face of War by Dora L. Costa and Matthew E. Kahn (review no. 811)
URL: http://www.history.ac.uk/reviews/paper/reidb.html
Date accessed: Thursday, 29-Oct-2009 15:56:16 GMT


Author's response (Dora L. Costa and Matthew E. Kahn)

We appreciate the opportunity to respond to Brian H. Reid’s thoughtful review of Heroes and Cowards: The Social Face of War. Given book review publication lags, we have eagerly awaited the first set of reviews written by historians to appear. We have wondered how a book that is set in the Civil War but is not about the Civil War would strike historians.

Our book differs from the hundreds of Civil War books published every year in two ways. One is methodological. The second is that our book has implications beyond those four years of bloody combat and its immediate aftermath. We examine four main questions that are basic to social science research. First, when are men willing to sacrifice for the common good? We answer this by looking at why men deserted during the Civil War and find that men in more homogeneous companies, companies that were more similar in occupation, ethnicity, and age, were more loyal. Our second question is what are the benefits to men of friendship and of community? Loyalty to comrades raised men’s chances of dying during the Civil War. We find that the stronger the ties between men (and ties were stronger when men had more in common – whether because they were related or because they were of the same ethnicity), the more likely men were to survive the hell holes that were Civil War POW camps. Our third question is how do communities deal with betrayal? We found that during the Civil War men who had betrayed their communities by deserting moved away, driven out by shame and ostracism. We conclude that community codes of conduct are reinforced not just by loyalty but also by punishments. Our work shows that more diverse communities are less cohesive. Their members are less willing to sacrifice and derive fewer benefits from being part of the community. Our fourth and final question is whether there are any benefits to living and working in a diverse community. When we look at the lives of black soldiers after the Civil War, the tensions between the short-run costs of diversity and its long-run benefits become apparent. Men did not like to serve with those who were different from them, so much so that they were more likely to desert, but in the long run the ex-slaves who joined the Union Army learned the most from being in units with men who were different from themselves.

Our book is about the costs and benefits of diversity in any organization, not just in Civil War companies. The same factors play out in terrorist organizations, in United States cities, on college campuses, and in towns in developing countries. Men may measure similarity in different ways across time and space. The distance between us may now be more likely to be education rather than ethnicity, but the basic lesson remains the same. A community of similar people is likely to be cohesive and its members are likely to sacrifice time, effort, and even their lives for each other. But in a diverse community members can learn from one another.

Much of history is written as if each case were unique. While each case does have unique features, we approach history as allowing us to uncover basic facts about human behaviour.

Our work is a quantitative history. Unlike many historians, we avoid using diaries and letters as our primary sources of evidence. Not only is ‘talk is cheap,’ but it is also the talk of the literate. Many black soldiers’ stories cannot be told if one does not ‘crunch the data’. Second, sophisticated men may ‘spin’ their diaries with an eye to history as they re-write events to play up bravery and downplay cowardice. We therefore focus solely on outcomes we can observe in our data. Who deserts? Who survives? Who migrates where after the war? Who deserts? Who survives? Who migrates where after the war? These are well defined, costly choices that are easily amenable to statistical analysis.

We are not arguing that statistical analyses do not come without their drawbacks. (These are not, however, the drawbacks pointed out by Brian Reid. For example, when we say that ‘A good soldier was older’ we are not drawing any inferences beyond unit loyalty. The physical demands of the job are a completely different matter.) We acknowledge that one of the limitations of our study is that we have very little to say about the importance of leadership. We do find that having one of your own officers (and most of these officers were non-commissioned officers) with you in a POW camp, improved your survival probability. We can say that for black soldiers having an abolitionist officer decreased desertion rates but that the effect was relatively small. We agree that we could have done more with the non-commissioned officers for the white troops. The empirical challenge that a researcher faces in measuring the effects of ‘good leadership’ is to identify before combat begins who are the ‘good leaders’ and who are the ‘bad leaders’.

Finally, we want to emphasize that we do not just ‘exploit the 41,000 computerized soldiers’ records in the National Archives.’ Dora Costa has spent almost 20 years working on the digitalization and analysis of these records. The Nobel Laureate, Robert Fogel, has spent more years on this project. The final product is a unique data base that provides the life histories of men before the war, during the war, and after the war. A unique feature of our study is our ability to recreate each soldier’s peer network. We can do this because of the way the sample was drawn. The Union Army was built from companies of roughly 100 men. Our sample is based on randomly sampling companies and then conducting a 100 per cent census of all men in a randomly selected company. Without jargon, this means that for any soldier in our sample we also know information about all the other soldiers in his war company. These men lived together 24 hours a day and were forced to interact with each other continuously.

Our book does not reveal the full power of the Union Army data base. The data base has been used in studies of health and of retirement. Work is underway to continue to expand the data base to examine specific subpopulations. The data base is currently available at http://www.cpe.uchicago.edu . We encourage other researchers to use this unique resource.

October 2009

Wednesday, October 28, 2009

New York State Confronts The Energy Suppy/Natural Capital Protection Tradeoff

People in New York City want clean water to drink and access to cheap natural gas. This article highlights the tradeoff. To protect the water supply from pollution at the drill site, the energy company has been pushed not to drill in upper New York State. Given that the company believes that a huge amount of natural gas is located there, they are frustrated. Would a Torts lawyer have come up with a contract to encourage the energy company to devote careful effort to minimize the liability concerns? Is zero drilling "optimal"?

The "big issue" here is how much risk (to the water supply in this case) are we willing to take on in return for some benefits? If the water supply can really be poisoned by the energy company's pollution, then I certainly support this decision but is that true? There is really no way to craft a moderate position here?

Of course, I want my mom (in New York City) to have clean water and there are 20 million people like her in the region. But, what is the cost of banning this drilling?

Tuesday, October 27, 2009

Ed Glaeser's Tribute to John Meyer

In this Economix Piece , Ed remembers a great economist. It is striking that a great man's life can be boiled down to roughly 2000 words. You live for 25,000 days (if you are lucky). At 10 days a word, this piece is a powerful reminder of John Meyer's key contributions to economics.

Today, transportation economics is a vibrant field. With the rise of GIS techniques and some efforts to model the political economy of where infrastructure is built; the causes and consequences of transportation investment is an ongoing research effort. Meyer gets a lot of the credit for this.

Monday, October 26, 2009

A "Natural Experiment" on Local Human Capital Spillovers at Columbia University?

According to this article , Columbia University plans to move some Nobel Laureate faculty from their current Medical School location to a new location. Will this raise or lower productivity of the Medical School as a whole? Presuming that the Nobel Laureates offer positive local spillover effects (is this always true?), the losers will be their current neighbors. The article quotes a colleague of theirs who implies that it would be a bad thing to move them. Now, I don't know if their destination is randomly assigned but this design bears some similarity to Josh Zivin and Pierre's work on Superstar Scientists. Now they use death as a measure of breaking the network. I guess I am assuming that migration away from the "Mother Ship" is equivalent to death.

If the productivity spillover effect is so high, why are the Deans moving the laureates? Do the Deans not know the true parameters of the model? If they are risk averse why are they rocking the ship? While I'm cracking jokes, a Dean is supposed to be a benevolent planner who internalizes externalities. If these guys can't achieve an efficient allocation of resources within the firm, then maybe Oliver Williamson needs to be called in for some Nobel to Nobel consulting.

What Do Other Academics Do All Day?

We roughly know what economists do all day (teach?, blog?) but what about everybody else? In this interview, UCLA's Richard Ambrose sketches his background and explains why he studies water systems.

Now that I know the modern research university, I still think I would have entered academic economics. A good friend once told me that I would have been a homeless person had I not become an economist. Now, that's comparative advantage!

Merely out of self interest, the other fields require that you do 1 or 2 Post-Docs. Some very talented scientists are not guaranteed academic jobs. While the Scientists are given expensive lab equipment, their salaries tend to be low. In terms of intellectual substance, it certainly would be exciting to come up with a cure for cancer or baldness but I do not have that type of mind. I know that I couldn't have cracked such problems. I do see the links between random ideas. So, I'm a permutation guy. I read a lot of stuff and then I see how stuff that looks independent and unrelated actually fits together and out comes a new paper based on this "Resses Peanut Butter Cup".

Sunday, October 25, 2009

The Future of Macro?

James Hamilton has written a great pithy piece on the possible causes of the recent deep recession. As a retired macroeconomist (I dropped out in 1988), I wonder how modern macro guys will figure out how to disentangle the possible explanations that he poses. What calibration exercise will count as a "test"? How will model builders nest the various possible explanations? We seem to have more theories than data points so as "scientists" what happens next?

I do find the "fundamentals" versus "sunspots and panic" explanations to be pretty stark but how do we disentangle these? I must admit that when Hank Paulson and Ben Bernanke were talking "doom and gloom" to justify the TARP (circa November 2008?) they spooked me out. I can't say that I panicked (I didn't change my portfolio at all) but I did assume that they had better information than me about the real state of the relevant state variables. So, my point is that the game theorists must enter macro. What was Bernanke "maximizing"? What game did he think he was playing with Congress and the taxpapers? How did his announcements shift expectations?

My Carbon Debate on Japanese National NHK TV

I woke up at 430am this morning to participate in this debate on Japan's efforts to reduce its CO2 emissions. I'm glad I did it. The other NHK panelists were smart. The challenge is that I do not speak Japanese so the translator was constantly taking my words and translating them so there was a delay. I had to look at myself on the TV monitor and that was a scary sight. There was also a slight delay in transmission so when I moved in real life, I moved slightly on the tv screen 1 second later. This took some getting used to. I also learned that my mother is right. When I'm normally listening to a person , I have a slight scowl on my face and this looks like I'm in a bad news. To counter this, I forced myself to half smile while the other panelists were speaking. This (costly) action made me look like a "normal" person.

In terms of substance, the conservatives in Japan's government have estimated that this carbon mitigation legislation will be very costly in the short run. While I agree that carbon legislation is not a free lunch, I argued that the CGE models that estimate precise numbers for how households will fare in the face of carbon legislation should not be taken very seriously.

I pushed the panel on whether Japan could meet its co2 reduction mandate by ramping up nuclear production of electricity and lower reliance on oil and coal in generating power. The panel agreed but said that the Japanese public fears "too much" nuclear power. So this sounds like a nimby issue.

We talked about a number of relevant issues. I argued that the success of the Toyota Prius as an export product highlights that in the face of globalization, japan could help its economy in the medium to long term with this green push if this pushes green innovation that yields future export products.

Saturday, October 24, 2009

Job Opening at UCLA's Institute of the Environment: Asst. Prof Focused on "Energy and the Environment"

Who said that California no longer creates jobs? Here is a new "green job". Your office will be pretty close to mine and you may actually see me once in a while. In sunny Los Angeles, I mainly work outside but I certainly do appear at the UCLA Institute of the Environment. In my humble opinion, this is an excellent job. I will be serving as one humble member of the search committee. I seek someone who can help me raise my productivity.

More seriously, Junior faculty and new PHDs should apply if they have a real desire to work in an interdisciplinary research environment. If you are a structural IO guy who is only interested in formal identification results, then this is not the right job for you. You won't "backdoor" your way into UCLA economics. You can have as much contact with UCLA's excellent economics dept as you wish but at the end of the day our new hire's focus will be the IOE.

To read more about the IOE and who we are go to www.ioe.ucla.edu .

Friday, October 23, 2009

My Debut in a Chinese Newspaper

If you can read Chinese, my recent interview with China's Energy News may entertain you. If you can't read Chinese, you have to admit that it is still funny. On sunday, I will appear on Japanese television. I will appear in a debate format on NHK tv to discuss; "The debate is on how the 25% reduction of carbon dioxide will influence the economy in Japan." I am supposed to be the "bad boy" and argue that the pursuit of the "green economy" is a noble goal but that it won't cause an economic boom.

To see a sketch of my views on the "green economy", please read this.

Trust and Kidney Exchange at UCLA

This would be a difficult field experiment to get IRB approval for! It looks like higher stakes stuff relative to dropping envelopes with cash in the middle of the University quad and asking people to transfer some fraction of this cash to another student who may promise to give a multiple of the original cash back to the sender.

Thursday, October 22, 2009

Is Public Support for Tackling Global Warming Cooling?

What causal factors move public opinion? Are you a fundamentals guy or do you believe in path dependence models so that small shocks set off a contagion/multiplier effect as everybody is talking about the "Octomom" or the "balloon boy". In the Case of Global Warming, has Al Gore's movie worn off? Or has the recession cut too deep? Or has it been too cool o.utside? Today in Westwood it is 85 degrees and sunny.



http://pewresearch.org/pubs/1386/cap-and-trade-global-warming-opinion

While this is an interesting graph, the Pew Research people don't answer the "so what". If "belief" in global warming is down, what political economy outcome will be affected? Should Al Gore have pushed for Waxman/Markey in 2006? Should he have waited to release his Nobel Prize movie until a Democrat was President?

The question posed is a slightly strange one. I don't know what "solid evidence" is. But, I do think that the trend line is related to underlying interest in the topic.

Wednesday, October 21, 2009

Could Public Transit Soon Become Even Slower Relative to Car Trips?

The full time cost of commuting by any transit mode (car, walk, bus, subway) has a fixed time cost and marginal time cost per mile. For some facts about these differentials by mode circa 2001 See Table 3 of this paper . Cars have a low fixed time cost (walk up to your car and turn the key) and a low marginal time cost per mile (you speed along without stoping except for some traffic lights). Cars are expensive to buy and to operate in terms of out of pocket expense. Buses have a high time fixed cost (you must wait for the bus) and a higher marginal time cost per mile (the bus stops annoyingly often to pick up people). But, the bus is cheap in terms of out of pocket expense (25 cents in santa monica!).

Now in the near future, the Baby Boomers will age. There will be more and more older, slightly infirm people moving very slowly to get on and off the bus. This will slow down the bus even more than cars. I fully support the mobility of the elderly using public transit but I don't think that there has been an open discussion about the time costs of loading and unloading this slow moving crew on and off of buses. In terms of the language of economics, the elderly public transit users impose a time externality on the young. If everyone could quickly board, pay and sit down and eventually get off the bus; how much would the time cost of taking the bus change by? In cities with plenty of elderly, I actually think that the answer is a big number.

But for bus to win against car, it must be time effective? To quote Lenin; what is to be done?

John Meyer

Harvard's John Meyer died yesterday. He was a great urban economist. His combined contributions to urban economics, transport economics and economic history merited a share of a nobel prize. He also served for a decade as the President of NBER (before it moved to Cambridge).

Ed Glaeser introduced me to John in the early 1990s. At that time, Harvard had a great urban economic seminar led by Meyer, John Kain and Glaeser. I presented my work in that seminar a few times and it was a great experience. I joined a Glaeser/Meyer Harvard Institute of International Development project that took us to Santiago, Chile. That introduction to "applied urban economics" was a great experience and I still have fond memories of it.

I continue to read his classic 1965 book "The Urban Transportation Problem". It is amazing how that book has stood the "test of time". The John Meyer I knew was a very serious avuncular guy who was supportive of young scholars (i.e me) but tough on them. His face was often in a half-smile as he would nudge me to think through some issue that I had naively glossed over.

My last meeting with him was in 2004 when I presented some urban transportation work that Nate Baum-Snow and I were doing at the Kennedy School. I was thrilled when I sensed that Meyer actually thought it was pretty good.

Tenured academics always face the question of; "what do I want to do next?" John Meyer represents a great model for how to continue to do great scholarship while mentoring younger scholars and simultaneously being involved in the real world. I will miss him. I was shocked when John Kain died young and I have the same feeling again.

Monday, October 19, 2009

Should the National Science Foundation Fund Social Science Research?

Of course, but what % should go to economics or political science or sociology?
The New York Times Arts Section tackles a piece of this issue today. It focuses on political science. Has this field lost its bearings by imitating economics? I don't believe this.

When I was a graduate student, I asked a prominent economist what knowledge had the economics profession generated that justified why a set of economists should continue to receive NSF funding. He looked at me with disgust, thought for 2 seconds, and then said that Milton Friedman's work on hyperinflation and Black and Scholes work on option pricing were sufficient to justify an infinite flow of future NSF funds for economics.

So, I want to ask the political scientists the same question. If the Republicans go "cold turkey" and cut off your funds, what basic research will stop? I know that political scientists are running a series of interesting field experiments. I know that field experiments cost serious money to pay for the treatments (i.e the free newspapers).

www.econ.yale.edu/karlan/papers/newspapers.pdf

While I don't love the way this Congressman is phrasing his question, it is not a crazy question to pose. Social Scientists should be ready to answer such questions. What is our "value added"? It ain't our charm.

UPDATE: Here is a photo I took at SeaWorld. The Killer Whale "believes" and so do I.

The Fiscal Impact of California's AB 32

The Sacramento Bee is full of useful stuff. When they aren't publishing my salary, they are highlighting important policy debates taking place in California's Capital (Sacramento). This article on AB32 is a case in point. When a new "big" policy (whether it is health care reform, a war or climate mitigation) is launched, there is considerable uncertainty about the costs and benefits of the policy. This creates an opening for academics and consultants to jump in and provide their expert opinions.

In the specific case of California AB32 (which seeks to sharply reduce the state's greenhouse gas emissions), I have always supported this regulation. Over time, my support has increased because of the Air Resources Board's serious commitment to rigorous economic analysis.

Stanford's Larry Goulder now chairs the ARB's AB 32 Economic and Allocation Advisory Committee.

Here are the members. This is a Dream Team. Note that I am not a member of this Committee.


Name Organization
Larry Goulder Stanford University
Justin Adams Forward Observer
Vicki Arroyo Georgetown State and Federal Resource Center
Matthew Barger Hellman and Friedman LLC
James K. Boyce University of Massachusetts, Amherst
Dallas Burtraw Resources for the Future
James Bushnell University of California Energy Institute
Robert Fisher Gap, Inc.
Richard Frank California Center for Environmental Law & Policy
Dan Kammen University of California, Berkeley
Christopher R. Knittel University of California, Davis
Stephen Levy Center for the Continuing Study of the California Economy
Joe Nation Stanford University
Nancy E. Ryan California Public Utilities Commission
Nancy Sidhu Los Angeles County Economic Development Corporation
James L. Sweeney Stanford University

With these men and women on board advising the ARB, I am highly confident that the Air Resources Board will make prudent regulatory decisions to achieve the AB32 goals at minimum cost. The regulation also offers serious benefits that are difficult to quantify.

In ongoing work, Erin Mansur and I are measuring how responsive is energy intensive manufacturing to higher electricity prices. Given our current results, we do not believe that manufacturing is very responsive at all to higher electricity prices. If California's electricity prices rise by 15% because of AB32, we do not believe that many manufacturing jobs will go to Nevada or cheaper electricity locations. We currently do not know how electricity prices will be afffected by AB32 and I hope that the Goulder Committee is forming informed predictions about the expected future price distribution.

Saturday, October 17, 2009

Geoengineering and the Economics of Climate Change

Do we address threats ex-ante or ex-post? The anticipated access to ex-post remedies creates a moral hazard effect through lulling. A recent University of Chicago PHD thesis argued that we are getting fatter over time because we anticipate that if we get too fat we can (ex-post) have stomach surgery or other procedures to lose weight. Such technological optimism leads to less effort in the present for tackling hard social problems.

In the case of climate change, do we take ex-ante measures (i.e reduce greenhouse gas emissions to achieve 350 ppm to minimize Weitzman's nightmare scenarios) or do keep living the American Dream and when Carbon hits 800 ppm and bad Al Gore scenarios start to play out, we call in the geoengineers to scrub the planet with their science fiction approaches? If we believe ex-ante that such ex-post efforts will work, why be lean and mean today? This is what I mean by the moral hazard effect. Columbia's Scott Barrett has thought hard about the economics of geoengineering. Have the authors of Superfreakonomics spoken to him? Did they read this paper of his ?

I am a believer in holding a portfolio. We should simultaneously be enacting a carbon incentive and doing the basic research to prepare for geoengineering solutions. It would help policy makers to be more gutsy in making costly decisions if we do not view mitigation and geoengineering as perfect substitutes.

I am certainly a fan of questioning the "conventional wisdom". I will want to read the Superfreakonomics' Global Warming chapter when it is published later this month.

Beijing Air Pollution Dynamics and the Environmental Kuznets Curve

Beijing's ambient pollution level depends on the scale of nearby economic activity (i.e cars, people, power plants, factories) and their respective emissions factors (pollution per unit of activity such as emissions per mile). This NY Times article celebrates that the quality of capitalism (i.e greener techniques) is offsetting the quantity of capitalist growth so on net the city is becoming less polluted. Perhaps, the Environmental Kuznets Curve hypothesis has some merit?

Turning to other news; suppose we do have a $1.5 trillion dollar deficit. There are 300 million people in the USA. If we replace the entire income tax system with an annual head tax of $25,000 each --- this would generate total revenue of 7.5 trillion per year. How would poor households who have many kids pay this tax? I am not smart enough to answer that but facing a 0% marginal income tax and capital gains tax would provide strong incentives.

I recognize that there is a taste for redistribution. Here is my proposal. The government could run a lottery. All college graduates could be placed in a lottery and 10% of them would be chosen at random to be national heroes who would be expected to pay an extra $25,000 that year. The collected income could be transferred to "deserving" households. Private charity would also be encouraged because of the wealth accumulation through lower marginal taxation.

Turning to other news, I just spent a day at Sea World in San Diego. I have a new respect for Killer Whales. Shamu and friends put on quite a show. I had the opportunity to see a lot of people with tattoos and they had the opportunity to look at my strange family.

Thursday, October 15, 2009

Santa Monica Embraces Smart Public Policy!

Santa Monica drivers will soon be paying much more for scarce parking spots . Will city revenue rise? Will bus ridership rise? Will travel speeds increase? Will air quality improve? Will fewer shoppers appear to go shopping on 3rd street?

I hope that this experiment serves an educational purpose of demonstrating what life could be like under a more rational pricing scheme. To loosely quote Don Shoup, free parking ain't free. Will other cities learn from the Santa Monica experience? Will there be a sharp push back and rebellion? Economists have not been smart about modeling how we move from an inefficient political equilibrium (low parking pricing) to an efficient equilibrium. How long does this transition take? Are there any "evolutionary" means to accelerate this process? I would say yes, through experimentation and learning we can be more optimistic that good ideas won't remain untried forever.

Wednesday, October 14, 2009

$ 10,000 Per Square Foot in a Nice Tower in Hong Kong

So, you can buy a Detroit home or 1.3 square feet in this expensive Hong Kong tower. Tough choice!

It is raining in Los Angeles. Who knew that this could happen? We have built up a wall of bricks at the base of our backyard hill to stop the mudslides. Our neighbhors' garbage cans washed down to in front of our house spilling their crap onto my driveway. I picked up their garbage and then saw my charming neighbor backing up her mercedes to go out. She did not get out to help me. I waived to her and plotted my revenge. Where is the Nobel Laureate Ostrom when I need her? This tragedy of the commons became my problem.

Monday, October 12, 2009

The Traffic Congestion/Air Pollution Nexus: Reduce Infant Mortality By Introducing the EZ Pass

You don't want to live near a highway toll plaza, especially if cars get stuck there waiting to pay the toll. This paper presents a "natural experiment" under which EZ-Pass is introduced and a before/after comparison of infant mortality rates in neighborhoods nearby is calculated. Death rates fall by 10% when drivers can speed through (creating a uniform distribution of pollution) versus the concentrated plume (nice word) when they are stuck waiting to pay the toll.

So, this paper is arguing that congestion pricing could also have local environmental benefits. But, if air pollution got better near highways --- would even more people live nearby? Will rents really not change? These types of public health papers are not always explicit about the general equilibrium long run effects of local amenity improvements. Coase would have something to say here on whether we move the Mountain or Mohammad. In the short run, the urban poor who live nearby will certainly gain from the "treatment" but if I can quote Keynes, how short is the short run?


Turning to the 2009 Nobel, note that this is a UC prize. Oliver W. does great work at Berkeley and Elinor received all of her degrees from UCLA (but not in economics!).

Sunday, October 11, 2009

Do You Want to Buy Nicholas Cage's Home?

Here are the details on this movie star's home. $17 million is a pretty serious price. I was not aware that he lives .9 miles away. I will look for him at the local Starbucks.



Driving directions to Warner Ave, Los Angeles, CA 90024

0.9 mi – about 3 mins


363 Copa De Oro Rd, Los Angeles, CA 90077

1. Head southwest on Copa De Oro Rd toward Bellagio Rd 0.3 mi
2. Continue on Hilgard Ave 0.4 mi
3. Turn left at Warner Ave

Destination will be on the right 0.2 mi

Smarter Cities: New Datasets Generated by City Governments and the Nerds Who Love Them

In case I win the Nobel Prize tomorrow, I wanted to make a couple of points because I could be real busy the next couple of weeks. In today's NY Times, Steve Lohr has a nice piece that will excite Supercrunchers. Cities are sitting on data goldmines. If we can overcome privacy concerns then academics and other nerds could do some really interesting research. The GIS mapping crew can map until the end of time but we could be more ambitious and make some progress on some causal questions.

Mayor Bloomberg, who knows something about the value of information, is leading the charge here. Will Mayors of smaller cities follow the leader? Suppose that the Mayor makes available the electricity bill of every commercial building in the city. Energy efficiency businesses could contact the buildings whose square foot consumption is high to see if these buildings are being "wasteful" or whether the activities taking place there (plasma TV?) just use a lot of power. The "green jobs" weatherizers should not be throwing darts at a map in choosing who to target. They should focus on high electricity consumers but do these consumers know that they are "high"? Equal easy access to information would make my answer "yes".

Lists of restaurants that have poisoned people recently will lead to improved sanitation and public health (see Phil Leslie's work). This is just the tip of the iceberg. Information is a public good and government does have a role here in providing it. I have been told that Milton Friedman opposed this role but I have never understood his view here.

Let the sunshine in and the nerds will run with it. Mayors will be accountable, the nerds will get tenure and the blogs will have a lot of funny things to talk about as the statisticians uncover some funny and policy relevant facts.

Now in terms of causal research designs, smart guys will have to solve initial conditions issues. Ideally treatments will be randomly assigned or we will need a model of the initial conditions to see how various treatments (such as introducing a Charter school) affect the spatial distribution of kid's test scores around the charter school and in nearby public schools.

But the dependent variable and easy access to it is a nice first step.

Saturday, October 10, 2009

Brian Wilson of the Beach Boys Doesn't Recognize Me at Little Holmby Park

Today at the Little Holmby Park, I spotted a guy who I am sure is Brian Wilson of the Beach Boys. I was throwing a nerf football with my son and numerous "Star Tour" buses were coming by to gawk at Aaron Spelling's nearby mansion. My intuition told me that there were celebrities around me besides for my son. I looked up and there was that young Beach Boy. I nudged my son to start singing "Surfing USA" but he didn't recognize the old guy. I thought that Dr. Wilson would recognize me. He has a kind of Nick Nolte feel to him and I like these kind of guys. I respect their honesty for not hiding the mileage on their odometer.

It does make you wonder, who is everyone else at the park? I would pay a few dollars to know whether there were other people who I didn't recognize. For a People Magazine reader, such as myself, this is an important piece of being in Los Angeles. Cambridge and St. Louis and even Chicago, Berkeley nor New York City offer this perk.

It is nice to know that celebrities have the same nasty life that I do. They walk around a beautiful public park on a sunny, blue sky day. They limp while I can throw the nerf quite well.

One final point. Google is truly amazing. I did wonder if the guy who I thought was Brian Wilson was Brian Wilson. Using Google for 30 seconds, I found out that he does have a limp and that he does walk around Little Holmby Park. This raised my suspicion that I had found my man.

I'm still looking for The Door's Jim Morrison around UCLA. I think that we would get on really well.

Finally, if there are any Streisand fanatics reading this; she is selling her junk and you can go look at it at a hotel 2 miles from my home. Look me up if you go check it out.

http://www.latimes.com/features/home/la-hm-streisand10-2009oct10,0,4781944.story

Thursday, October 08, 2009

The Year 2036 Offers a Test of the Efficient Markets Hypothesis

Richard Posner has taught me to worry about big asteroids hitting our planet. I was focused on other concerns (like journal revise and resubmits) until I read his book. As NASA continues to update its probability assessment of the likelihood that this big rock called Apophis will hit our planet how will asset prices move? Now we know that the big date is 4-13-2036, I will be a spry 70 year old at that time. My young wife will be 72. We all know that prices of assets today reflect our time t best assessment of future events. If this asteroid cuts off the future and creates a "Cap T at 2036", some stocks should fall in value in 2035. If we believe that this will be end of the world but we believe that this event has a 1/250,000 chance of taking place, how does the price of assets decline as 2036 approaches? Where is Bruce Willis when you need him? Recall that he knows how to deflect an asteroid. Perhaps heading it like a soccer ball?



NASA downgrades threat of large asteroid

LOS ANGELES – Earth can breathe a sigh of relief.

NASA on Wednesday downgraded the odds of an 885-foot asteroid striking the planet in 2036.

Scientists initially believed there was a 1-in-45,000 chance that Apophis could hit the planet on April 13, 2036. But the threat was lowered to a 1-in-250,000 chance after researchers recalculated the asteroid's path.

"It wasn't anything to worry about before. Now it's even less so," said Steve Chesley, an astronomer with the Near Earth Object Program at NASA's Jet Propulsion Laboratory.

Chesley and his colleagues refined the asteroid's orbit after an astronomer in Hawaii analyzed previously unreleased images that gave scientists a better idea of Apophis' position.

Earth got a scare in 2004 when initial measurements suggested the newly discovered Apophis seemed to have a chance of hitting the planet in 2029. Further observations ruled out any possibility of an impact.

Scientists are tracking Apophis, which is slated to come within 18,300 miles above Earth's surface in 2029.


http://news.yahoo.com/s/ap/20091007/ap_on_sc/us_sci_asteroid_encounter

The Carbon Footprint of Pets

Below, I provide you with a photo of a 7 foot dog. He will play for the LA Clippers this year. This picture got me thinking. I live in Westwood, Los Angeles. Here we have a suburban housing stock but most of the homes have no children living there. Instead, there are some adults and a large number of pets. Economists talk about equivalence scales. What is the carbon footprint of a 7 foot dog? As we introduce carbon pricing, will pet owners face higher food prices? Will this lead them to substitute to smaller pets and I hope these small creatures will create smaller poops left on my private property!

Here is the big dog.



It is true that the pet shares the space of the house, so excluding its food --- its marginal carbon impact is low. But, how much would U.S demand for food go down by if nobody had any pets? How much carbon is produced as a byproduct of making this pet food?

UCI/UCLA/USC First Real Estate Research Day

All economists know that there are too many conferences. Can't we shrink our carbon footprint and cancel 95% of them? That said, tomorrow there will be an real estate/urban economics conference at UCLA. Here are some details. It takes some work to organize one of these things so I hope the participants like what I put together.

For those of you who are fluent in Chinese, I have been told that my interview with the China Energy News will run in next week's issue. The very smart reporter who interviewed me emailed me today that they need a nice photo of me. Since I don't have much hair, I sent a photo of my son.

My son. My 8 year old son has taken up the violin and our house sounds like a horror movie. Perhaps he understands the Coase Theorem and knows that I will soon write him a check for $10,000 to stop his lessons.

Yesterday, I spoke to a LA Times reporter about the UCLA Lab School. Look for some funny quotes by me in an article next week. Everyone at the school is sad that the principal (Jim Kennedy) has quit after just 2 years on the job. The story will make clear that his decision is linked to recent budget troubles at UCLA and the University needing to prioritize what it really wants to be. It appears to me and Dora that this University is trying to be everything to everyone. We would prefer a more focused pursuit of excellence rather than doing 10,000 things pretty good.

Do you feel for President Obama? On this Afghanistan issue, he is clearly searching for a JFK style "Cuban Missle Crisis" solution. He is too aware of past history of Vietnam and Iraq and must view JFK as the ideal. I wonder if history is always a good guide for how to proceed. In terms of incentives, it certainly is interesting whether his military generals have the right incentives to give him their "true" opinion on what is going on --- on the ground. Perhaps Larry Summers should be embedded with the army in Afghanistan to provide his own independent view to the White House?

Wednesday, October 07, 2009

Smart Buildings will Shrink Our Carbon Footprint

Do you need some good news in your life? Try this . In New York City, Vornado Reality Trust (a major commercial property landlord) is installing small electricity meters into its tenants offices. These sensors will provide data on energy use by 15 minute intervals to some big data base. This information will help tenants efficiently use electricity (i.e identify the energy hogs) and this will help to reduce their building's carbon footprint. Even Sherlock Holmes needs clues to figure out who commits the crime. This cheap information will increase accountability. Those who leave their lights or their computer on will be known about. This will change behavior and shrink electricity consumption.

Vornado must be betting that by installing the energy meters that this will make their buildings more attractive for potential tenants who are cost minimizers. Potential tenants will know that they will waste less $ on electricity if they locate in a Vornado building. Will this create a "race to the top" as other commercial building landlords mimic Vornado? In a world where electricity prices are rising due to carbon pricing, the answer is yes.

Technological optimists would be wise to continue to ponder the various pathways that evolutionary capitalism will help us to tackle the carbon mitigation challenge. But, this is a nice example.

Tuesday, October 06, 2009

Do Charter Cities Cause Increased Investment in Skill Formation?

Paul Romer is investigating how the introduction of Charter Cities could improve the economic performance of LDCs. My UCLA colleagues know that I keep talking about Paul's ideas at lunch. On his new blog, he is actively seeking to promote a debate about his ideas. Here is my first post . I argue that Charter Cities will have a short run "brain drain" effect but a long run positive treatment effect on the rest of the nation's stock of human capital.

Monday, October 05, 2009

The "Green" Consequences of Introducing the Plug-In Prius by 2012

This article says that Toyota will soon introduce plug-in hybrids. It claims that these vehicles will be able to travel up to 10 miles on just their electric battery and then each night they would be recharged. So, this means that urban drivers could sharply increase their vehicle's fuel economy and presumably also reduce their smog emissions. Per mile of driving how much will CO2 emissions decline by? This hinges on the average power plant's emissions factor. If California goes ahead with its aggressive RPS standard then the electricity will be getting greener at the same time that more of the vehicle fleet will be running on electricity.

Suppose that 100% of the California vehicle fleet runs on electric power. If each of the 20 million vehicles runs on electricity and travels 12,000 miles each; how much extra power will be needed to travel this 240 billion miles? California is going to need to site a lot of new generation capacity. Which suburban communities will forget about NIMBY issues? Where will transmission lines be sited? Will ecologists battle the energy generation community over where to site these needed facilities?

It is clear to me that the introduction of the Plug-In hybrids will certainly help to meet the Pavley fuel economy standards. A small share of the fleet (if it achieves 250 MPG) can help to meet this average standard.

In the Near Future There Will Be Lots of 100 Year Old People

Social Security may have an even bigger problem in the year 2109 or so says this news item: Born in 2009 and Living to the year 2109 . How will we discourage seniors from morphing into Grandpa Simpson and instead encourage them to continue to be productive members of society? We could pass a rule that only people over the age of 100 can run for Government Office.

Saturday, October 03, 2009

The Blame Game: Has California's Green Push Caused A Deeper Recession Here?

In the 1970s, macro productivity indicators were declining at the same time that EPA regulation was increasing. Some claimed that there was a causal link between these facts. It was claimed that increased regulation lowered business productivity through increasing the labor and capital inputs required to comply with the new regulations.

In hindsight, nobody believes this claim is a big deal. In fact, the Porter Hypothesis has posited that regulation has negative costs as it pushes firms to rethink their business strategies (an inertia claim). I don't believe this story either.

Today, we find some of the leading candidates seeking Arnold S's job making this claim again. See this. Is Ms. Whitman right?

Local land use regulation in California (which is more stringent in liberal communities like Berkeley) helps to drive up real estate prices. This may push some jobs out of the state; especially commercial and industrial activity that is land intensive.

I have also wondered about union power in California. Listening to today's headlines about the LADWP, I see the power of the local unions. Dozens of economic studies have documented the job growth patterns across states and the "coincidence" that there is much greater job growth in Right to Work States (see Thomas Holmes 1998).
Holmes, Thomas, 1998. "The Effect of State Policies on the Location of Manufacturing: Evidence from State Borders," Journal of Political Economy, vol. 106(4), pages 667-705, August.

So, I agree with Ms. Whitman that an unintended consequence of liberal politics leading to land use regulation and labor regulation is to make California's economy less competitive. Why? They drive up the cost of land and labor and this raises firm's cost of doing business in the state and the cost minimizing firm seeks out cheaper (i.e Nevada) places for doing business.

But, is she right about environmental regulation's detrimental effects on the state economy? I don't think so. As I have argued before, California will continue to attract the next Googles if it is perceived to be cutting edge. Environmental regulation does not have to be extremely costly if the economists are brought in to design it. If we are invited in (and the Air Resources Board now has excellent economists working with them), then I am highly confident that environmental regulation can both achieve its direct goal of improving environmental outcomes in the state and helping to lead a push to job creation in new vibrant sectors.

So, California is liberal and liberal states have more land use regulation, labor regulation and environmental regulation. To quote Professor Meatloaf, "two of out three ain't bad". But on the last count, she is wrong. AB32 is not causing this recession.

Technology Forcing and Energy Sucking Flat Screen Televisions

We know that technological change is the key for us achieving the "win-win" of continued economic growth and a clean, climate change free future. How do we accelerate such technological change? The California CEC is trying to force television makers into building more energy efficient televisions by mandating very strict energy efficiency standards. The LA Times has a thoughtful piece here .

The LA Times appears to advocate that similar to nutritional labels that the television marketers must create a label informing consumers about how much electricity the television uses. Will this change consumer behavior? Yes, if electricity prices are high. No if electricity prices are low. Information is necessary but not sufficient for consumers to make "good green" choices.

The Editorial makes a very good point when it says that the California Energy Commission views all televisions as perfect substitutes. I have seen the same basic logic at the Air Resources Board with respect to vehicles. Under the Pavley bill, a Hummer and a Prius are both "cars" but a Prius uses less energy to go a mile so the Prius is good and the Hummer is bad. While I agree with this statement, there are many people who derive more pleasure from driving the Hummer a mile rather than the Prius. The environmental regulatory bodies refuse to acknowledge that the lost "consumer surplus" from making Dick Cheney substitute from the Hummer to a Prius should be included as part of the cost of the regulation. How large is this cost? A good economist needs to be hired to calculate this cost of substituting across imperfect substitutes. The same issue arises with the TVs.

Now the real issue here is how to harness innovation so that consumers have higher quality durables (bigger TVs) that use less electricity. This is the win-win. We know that we need higher electricity prices to achieve this. Enact the carbon cap and trade regulation and we have taken a first step on the endogenous technological innovation path.

Friday, October 02, 2009

A 36 Hour Trip to Lexington, Kentucky

I am back in LA after 4 flights in 36 hours. I'm glad I went because I had the chance to see my old friends at the University of Kentucky. UK has built up quite a crew of applied micro researchers and there was a lot to talk about. Steve Durlauf also attended this conference and it was great to talk to him.

I had the opportunity to head out with my old friend Bruce Weinberg. We were all there for this http://www.ukcpr.org/SeminarSeries/appalachianresearchconference.pdf.

I also had the opportunity to sit down with folks from the Federal Reserve Bank of Cleveland for an interview on Green Cities. I'm hoping that this may be published in a few months.

Switching subjects and turning to AB32, the debate continues on the economic effects of this important regulation. Here are my thoughts. This new paper is posted on the ARB's webpage.

I am optimistic that this carbon regulation is a net win for California. Skeptics have the right to air their concerns but they have to be serious about how they make their claims and what evidence they cite supporting this claims.