This piece about China's demand for natural resources got me thinking again about the broad topic of "limits to growth". As world population and per-capita incomes rise, and given our global desire to achieve the "American Dream", could we exhaust our finite stocks of non-renewable resources? In Collapse, Jared Diamond argues that there are many historical case studies that suggest that the answer is "yes".

In a 2007 Wall Street Journal Debate, I offered this "witty" reply.

"Matthew Kahn writes: Imagine a world where everyone in China and India achieves our living standards. In this world, with 7 billion people, if each drives a Hummer 10,000 miles per year, then the world would need 7 trillion gallons of gasoline to meet this aggregate demand. Now, that's an ecological footprint!

Now, the New York Times recently reported that the Sun will only shine for another 7.59 billion years. Even so, if the rest of the world achieves the "American Dream" and attempts to drive their Hummers until the sun finally flickers and dims, we are clearly going to need a lot of gas.

Still, it's important to note that expectations of such future scarcity create incentives to innovate. Implicit in the work of authors such as Jared Diamond is a type of mass-behavioral-economics myopia where he and a few other "wise men" are the only ones aware of the coming day of scarcity. I am more democratic and optimistic that, if there is a future arbitrage opportunity, a few ambitious young capitalists will seek out a profit and be ready with the next "Toyota Prius" to help mitigate future scarcity challenges."

Re-reading this quote, I'm now worried that this was my best writing and now its all downhill.

I was trying to emphasize a counter-intuitive point. Economists always question the "conventional wisdom" because this wisdom tends to downplay the power of incentives. Under "business as usual", of course it is the case that rising demand will exhaust a finite supply. But, the whole field of "rational expectations" in modern economics is based on the idea that self interested households and firms plan ahead and use all available current information to plan for future scenarios. The innovation sector is a crucial part of modern capitalism.

China and India's ongoing growth is a credible signal that resource demand will rise --- if this is predicted to lead to rising resources prices over time then this creates sharp innovation incentives to devise substitutes for the increasingly scarce natural resources. The net result of this innovation activity, caused by the need to find substitutes for increasingly scarce fossil fuels, will be a "green economy". Thus, we owe China. Its anticipated appetite for energy will green the world!

Detecting cheating is difficult. You can't ask a sumo wrestler whether the non-linear payoff system he faces induced him to throw a match. He might eat you. But, shrewd economists figured out how to detect cheating in that important sector. Teachers cheating on standardized tests in order to receive promotions is an ugly problem but skilled economists figured out how to identify the Chicago cheating teachers.

The members of the U.S Congress, perhaps having read Freakonomics, are now ready to unite across party lines to catch Doctors, who are cheating Medicare through fraud, in the act.

"They could potentially devise further changes to the bill, adding Republican ideas even without Republican cooperation. One area of common ground to emerge at the forum was an idea put forward by Senator Tom Coburn, Republican of Oklahoma, to use undercover regulators posing as patients to root out fraud by doctors and hospitals. “That’s something that I’d be very interested in exploring,” Mr. Obama said. Senator Charles E. Schumer, Democrat of New York, called it “a great idea.”" source NY Times article

So, how would this work? Would the new "Fraud Cops" randomly choose which hospitals and doctors to test for Fraud? Or would they engage in a type of "profiling" such that they would focus on hospitals and doctors who bill out unusually high Medicare and Medicaid rates? Would the "fake patients" pretend to have medical conditions that give the unsuspecting doctors plenty of leeway in prescribing a treatment?

In an economics field experiment, some incentive would be randomized. Would the "undercover regulators" randomly choose to offer different doctors different opportunities to cheat and see whether doctors are more likely to cheat when they can steal more money (i.e whiplash versus a toe nail infection).

From a Law and Economics perspective, what I find interesting here are the following questions;

1. How much fraud is there in our current health system as medical care is billed for in cases when the patient didn't really need it?

2. If this new set of "Doctor ABSCAM patrol" raises the probability that a cheating doctor gets caught by 1% and if the cheating doctor is imprisoned for 3 years, how much of a deterrence effect will this have? Will this credible threat lead to a 30% reduction in medical fraud? Now my old graduate school teachers would say, "just shoot one cheating doctor" and fraud will plummet. But, we know that such draconian punishment (of having one salient punishment case) is not credible.

But, the Congress has spoken; "waste is bad" --- but the devil is in the details -- how do you detect it? How do you punish the "wasters"?

We know that the Olympics has a "causal" impact. It helped to beautify Seoul in 1988 and cleaned up Atlanta's air in 1992 and Beijing's in 2008. One fascinating economics study (available here ) documents the "coincidence" that when international natural disasters occur at the same time that the Olympics are taking that the U.S AID is more stingy in terms of offering disaster relief. The only plausible explanation for this fact is that the Olympics displaces interest in the rest of the world and what is going on elsewhere because we are glued to our TV or Internet feed watching Michael Phelps belly flop or watching that red haired dude (Shawn White?) do his wild hip flips on that ski thing.

But, what happens to the cities that host the Olympics. This NY Times article is worried that Vancouver is going to suffer quite a hangover. The article foreshadows doom and gloom from raised expectations that the Olympics would offer a spotlight on this great city but that ex-post that it would only leave a $1 billion dollar debt.

I like this quote;

"Kennedy Stewart, a professor of public policy at Simon Fraser University in suburban Vancouver who has written extensively about the city’s politics, remains unconvinced that showing potential investors a good time during the Olympics will resolve Vancouver’s long-term economic issues. The forestry industry, once the mainstay of its economy, has been devastated by a beetle infestation, the collapse of the housing market in the United States and competition from South America. While motion picture production companies and software developers have set up shop here in recent years, they lack the same economic impact.

“What’s the substantive thing Vancouver has to offer other than its nice mountains and vastly overpriced real estate?” Professor Stewart asked. “The forestry industries have collapsed, so where is the money going to come from other than marijuana grow-ops?”"


Now, some of you may have forgotten that I offered my opinions on the bright
future for Vancover 3 years ago. Here I repeat my "green cities vision";


Get ready for a new-look downtown
Sauder Business School arranges 'Condos versus offices' debate

Frances Bula
Vancouver Sun


Tuesday, June 19, 2007


Vancouver's 19th-century downtown is on the way out.

Instead, the city's 21st-century downtown is very likely to be a mix of residences for highly skilled local professionals and second homes for rich people from elsewhere, along with a tight core of office space for high-end dealmakers and a scattering of services for all those groups of people.

That's the provocative future UCLA economist Matthew Kahn is going to discuss this week in a debate the University of B.C.'s Sauder School of Business has put together on the controversial question of "condos versus offices" in downtown Vancouver.

"There's certainly a possibility that there's been a resortification in Vancouver," said Kahn, in an interview from San Francisco. "But why is that bad?"

The city currently has a moratorium on residential development in part of the downtown next to the central business district that was put in place after rising concern from business groups and commercial brokers that office space was under threat.

But Kahn said Vancouver could be evolving into what San Francisco already is -- an attractive downtown that is largely a home to the upper middle class.

"In San Francisco, no one is worried about its health."

He also pointed out that Vancouver is experiencing the same trends that have been documented in other North American cities. As the price of land goes up, firms leave their deal-makers downtown but move the bulk of their back-office work out to the suburbs.

Some cities, like San Francisco or New York or Vancouver, are then able to attract people to live in their "consumer downtowns."

And there's nothing wrong with that, says Kahn.

From an urban economist's point of view, it's an advantage to be able to attract skilled professional people to your downtown. Those people will then either accept slightly lower wages in order to work close to where they live, and firms that can save money on wages will be willing to spend it on the cost of space downtown. Or they will reverse commute to the suburbs.

From a public-finance economist's point of view, having about 15 per cent of residential space downtown taken up by second homes for wealthy people from elsewhere is also a benefit.

"It's a free lunch, with these people moving in, paying taxes, and demanding no services at all."

The businesses that remain downtown will be those that can survive with a minimum of space or the ones that keep their high-ranking people downtown while the rest of the work moves out to the suburbs.

"There's still a demand to be downtown for the power lunch," says Kahn. As well, there will be many jobs in the arts, culture and retail sectors that serve that downtown community.

Along with Kahn, others debating the future of Vancouver's downtown will be UBC professor Robert Helsley and Vancouver's planning director, Brent Toderian. It will be held Wednesday at UBC's Robson Square campus from 5 p.m to 7:30 p.m.

Tsur Somerville, the UBC professor who organized the panel, said he decided to tackle the topic because "people are concerned about what the downtown is going to look like." However, at the moment, the debate has been limited mostly to business groups arguing for more office space and residential developers arguing for more room to build condos.

"Urban economics tend to have a long view and a different perspective."

fbula@png.canwest.com

All major universities have student newspapers. After serving for 17 years as a faculty member at a number of excellent schools, I'm always amazed at the insipid content of these newspapers. Usually, you wouldn't know that the University has a research faculty. The typical articles focus on romance, frats, sports, and tuition hikes. But, today's Columbia Spectator offers a great counter-example. This article makes me proud to be an emeritus Associate Professor of that esteemed university.

Columbia’s Engineering School has one solution for making buildings greener—hybrid solar cells that produce heat and electricity simultaneously.

Huiming Yin, assistant professor of civil engineering and engineering mechanics and creator of the panels, said that the purpose of the project was to create more efficient solar cells.

“We want to increase the efficiency of solar cells in our experimentation so that the solar cells don’t waste so much energy when they absorb sunlight,” Yin said.

This sounds like a great opportunity for graduate students to work on a cutting edge project. Columbia University must smell some intellectual property royalties based on the patents that this research will generate.

The nerds who write for Wikipedia have a strong understanding of the innovation issues revolving around solar cells.

"High-efficiency solar cells are a class of solar cell that can generate more electricity per incident solar power unit (watt/watt). Much of the industry is focused on the most cost efficient technologies in terms of cost per generated power. The two main strategies to bring down the cost of photovoltaic electricity are increasing the efficiency of the cells and decreasing their cost per unit area. However, increasing the efficiency of a solar cell without decreasing the total cost per kilowatt-hour is not more economical, since sunlight is free. (An analogy is that a pound of lead weighs the same as a pound of feathers.) Thus, whether or not "efficiency" matters depends on whether "cost" is defined as cost per unit of sunlight falling on the cell, per unit area, per unit weight of the cell, or per unit energy produced by the cell. In situations where much of the cost of a solar system scales with its area (so that one is effectively "paying" for sunlight), the challenge of increasing the photovoltaic efficiency is thus of great interest, both from the academic and economic points of view. Many groups have published papers claiming possibility of high efficiencies after conducting optical measurements under many hypothetical conditions. The efficiency should be measured under real conditions and the basic parameters that need to be evaluated are the short circuit current, open circuit voltage."

So, in English ---- Al Gore would be happier if more of our electricity supply was generated by renewables. Even Dick Cheney would consider installing solar panels if the price of installation is low, if the panels generate a lot of electricity and if he can sell back his surplus electricity (production - consumption) back to the grid at a good price. Any innovation that makes panels per square foot more "absorbing" or cheaper to install makes the "green Al Gore" scenario more likely.

In academic economics, there continues to be an active research agenda of examining the current economics of solar panels. Here is Severin Borenstein's study.

California is a hotbed of solar innovation. One prominent example is SPG Solar

Phil Jackson has won 10 NBA coaching titles. Now, my mom could coach MJ, Kobe and Shack to a title or 8 but let's abstract from the quality of his inputs in production of victory. In today's print version of the NY Times, Jackson admits his secret for success borrowed from the late great Red Holzman. "Jackson also adopted Holzman's system of fines for minor infractions. "what you basically call a silly fine," Jackson said. For instance a player might be assessed a $10 or $20 fine for arriving more than five minutes late to a game. To players making millions, that might seem trivial. But, Jackson has found that players are more grudging about having to pull cash out of their own pocket on the spot, than having a larger fine deducted from a paycheck, as is the usual practice. The fines also serve a team building purpose. Players can win back the money in shooting games." NY Times article

So, Richard Thaler should quit Booth's GSB and go down to the United Center and earn some real $ nudging the players to greatness. Now that Dora Costa and I are working on "the nudge", I have a great appreciation for Thaler and Sunstein's work on this topic.

The New Yorker Magazine routinely rejects my cartoon caption suggestions (for their weekly contest) and now it has selected to profile Paul Krugman rather than me. These slights help me to keep working on academic stuff as I seek to rise in the REPEC rankings of economists. Over the next ten years, will Kahn or Krugman write better academic stuff? As you can see, Paul knows that his opportunity cost of another QJE is high.

"But it’s been a long time—years now—since he did any serious research. Could he, still? “I’d like to get back to it,” he says. “I’m craving the chance to do some deep thinking, and I haven’t been doing a lot of that. I guess doing the really creative academic work does require a state of mind that’s hard to maintain throughout your whole life. Even Paul Samuelson—the bulk of the stuff you read from him is before he was fifty. There was an intensity of focus that I had when I was twenty-six that I won’t be able to recapture at fifty-six. You develop your habits of mind, and to a point that’s a good thing, because you learn ways to work, but it does mean that you’re less likely to come up with something really innovative. Even if I weren’t doing all this other stuff, I don’t think I’d be producing a lot of breakthrough papers. There’s crude stuff: if I do have some brilliant academic insight, what are they going to do, give me a Nobel Prize? . . . When I was younger, when I figured something out there was this sense of the heavens parting and the choirs singing that I don’t get now. And that’s life.”"

Now, in general I agree with his life-cycle view of economic research but I can name 4 Nobel Prize winning counter-examples to Krugman's point here. Think of Becker, Heckman, Stigler, and Schultz. Each of these impressive guys did big big work after the age of 60. Krugman is still a kid and has no excuses about easing off the gas pedal.

During the academic 2010-2011 year, UCLA will charge undergraduates $10,000 tuition per year. Our Ivy League Peers charge roughly $40,000 per year. Consider this modest new funding model for UCLA:

1. 60% of UCLA's class will be in state students (I would want to see a residency requirement such that all 4 years of high school were spent in California). Each of these students will face a price of $9,000 a year (before financial aid).

2. 40% of the entering class will be from out of state. They will pay The Average Ivy League Tuition - 20%. (before financial aid).

According to my math; the annual revenue stream per student/year in thousands of $ = .4*32 + .6*9 = roughly 20. Note that 20 is much greater than $10 (the status quo revenue pre-financial aid ) and this is the key to fiscal solvency.

This infusion of cash would allow for better financial aid deals for deserving students and a preservation of excellence on campus. Quality is costly.

Now, I recognize that the University would be trading off more suburban out of state kids (think of New York State's Scarsdale High School --- they are under-represented on this campus) and having fewer good California students in the classroom.

From a teaching perspective, average class quality would be likely to improve as these "ivy league" imports would make the classroom a more competitive setting.

I recognize that this proposal reduces the probability of access to UCLA for some students but note that 60% of students would still be in state.

The State of California's economy would be helped because New York kids who get a taste of Los Angeles are likely to remain here rather than going back home after graduation.

There are no free lunches here. The extra financial aid will guarantee diversity and excellence on this campus.

Economists love to talk about time consistency and the dynamics of tax rates. The public does not share this love. Consider the case of Wyoming . Like all states, it is seeking out new sources of revenue. Returning to basic ideas from the economics of taxes, a State can tax (and raise revenue) from activities that cannot respond and "walk away". You can tax land because it can't migrate to Nevada. If Wyoming tries to tax high income earners, it will quickly lose these high flyers as they migrate elsewhere. If you tax the "golden goose" you risk losing your goose!

Now, given this background, let's turn to wind turbines and solar panels. Right now a heck of lot of investment is taking place in this sector --- investors are choosing where to site their irreversible sunk investment. After all, once you've built a billion dollar wind turbine farm --- you can't pick it up and carry it across state borders to another location. A good business person will ask herself; "I know the upfront costs of installing this system but what is the flow of revenue from setting this up? The answer depends on how much power the wind turbines will generate on average each year and at what price (net of taxes) that the wind turbine output can be sold at. Today's NY Times says that Wyoming is considering a $1 per MwH tax on wind output. This lowers the marginal revenue that wind turbine companies will earn. In truth, this is not a large tax but if it hints that the tax will go up even higher in the future --- then forward looking entrepreneurs in the green renewables game should think twice about going to Wyoming. Note that this is a dynamic Laffer Curve; by keeping taxes low and credibly committing to keep them low --- Wyoming will attract more "green investment". The golden goose will thrive.
With a new technology where there is little installed capacity but a lot of capacity will soon be installed, locations that can credibly say "our taxes will remain low" -- will be rewarded. This same issue arises over and over again in the capital gains tax literature.


From an Al Gore's point of view does any of this boring discussion matter? Suppose that a physical scientist who knows no economics declares that North Dakota and Wyoming are the objective best places to have wind turbines and are much better than Idaho or California. In this case, Wyoming's myopic strategy of taxing now will be socially costly because it will displace green investment to areas (the lower tax ones) where the same wind turbine will generate less output.

So , assuming equal cost of installation of the turbine;

profit in Wyoming = Price_mWh*(Generation_wyoming)*(1- Tax_wyoming)

profit in Idaho = Price_mWh*(Generation_idaho)*(1-Tax_Idaho)

A benevolent planner would send the turbine to Wyoming if

Generation_wyoming > Generation_idaho --- while the for profit firm will choose
the location with the higher after tax profit. The presence of the tax in wyoming
could lead the self interested firms to go to the "wrong" location.

In this algebra --- Generation_wyoming represents the power generation by the same wind turbine if it locates in wyoming.

Fran Lee played an important role in "greening" New York City. To quote the NY Times, "Lee, a preternaturally outspoken consumer advocate whose ardent campaign against dog waste helped bring about New York City’s pooper-scooper law in 1978, died on Feb. 13 at her home in Jerusalem. She was 99."

Big City quality of life has improved as we have figured out big and small ways to minimize the nasty externalities from living and working in close proximity. Traffic congestion is the last urban challenge rich cities face. Crime and pollution are both down sharply.

In this photo, you quickly see that she was engaged in greening the community and active in fighting the "brown" status quo. In a city filled with free riders, she stood up and took a leadership role.



The "greening" of post-industrial cities is a major theme in our improved standard of living over the last 100 years. If you were to visit NYC in the year 1910, you wouldn't like it too much. The absence of a Starbucks would only be one of your problems. Our major cities have made enormous quality of life strides over the last 100 years. Since our national income accounts (GNP), ignore such non-market factors; we tend to under-state "progress". Fran Lee helped to bring this progress about and I thank her. Walking the streets of Rome recently, I can tell you that Italy's major cities could benefit from importing a few tough ladies like her.

In the middle of 70 degree winter in West L.A, the UCLA men's basketball team is no good. Due to budget cuts and abundant opportunities at less sunny private universities, some excellent faculty are preparing to leave and we have not been able to hire replacements in the short run. Despite all of these challenges, morale at UCLA is surprisingly high. Why? Sunshine? In part.

While I don't know the full answer, my optimism is based on the quality of the scholars who (at least for now) continue to be at UCLA. While I could single out hundreds of people on campus, I am a lazy man and will name only two.

1. Ed Leamer has worked with a team to build a fascinating new data set that I am sure will become the leading indicator of where the macro economy and local economies (such as at the state or regional level) are going. His "early warning" indicators project will provide a heads up to policy makers and financial markets concerning the state of the economy.

2. Eric Morris --- If you had told me back 3 years ago when I joined UCLA that I would be advising Ph.D. students who had written for Star Trek (Eric) or loved to surf (I'm thinking of Ryan and Neil), I would have told you that you were nuts. Back in my day, Ph.D. students didn't leave the A-level of Regenstein Library. But, things have changed. UCLA has a new cohort of Ph.D. students who are all quite smart. I suggest that you read that interview with Morris and then read the Kahn/Morris classic paper.

Perhaps to raise my morale, I will name more names of who is serious at this great University. With a finite and shrinking set of faculty and graduate students, if I never mention you then you will learn the truth about what I really think of you.