Michael Greenstone and I have a friendly disagreement discussed here about whether economic growth and recessions are "friend" or "foe" of "Green Cities".

HERE is the transcript of the Radio Segment

Can there be clean air and economic growth?

Economic growth is often coupled with an increase in pollution. But those two factors may not be mutually inclusive, at least not the way they once were.


Report: Pollution way up in Chinese cities

The downside to China's rapid growth of the past few years: a rise in air pollution. A Chinese government report shows over 100 Chinese cities had the worst pollution levels in five years.


TEXT OF STORY

Kai Ryssdal: It's still a point of macroeconomic debate as to when or, in some circles, whether China is going to pass the U.S. and become the biggest economy in the world. But it does look like they've nailed the number two spot. In Beijing today, a senior economic official said China has passed Japan for number two. But all that economic development brings growth of other things as well. In China's case, air pollution. A report over there this week said Chinese cities are seeing the worst air quality they've had in five years.

We asked Marketplace's Krissy Clark to explore the relationship between dirty air and the economy here.


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Krissy Clark: Let's begin with the obvious: Whether you're in China or the U.S., the more the economy is buzzing, the more it's spewing. More construction projects are happening...

Michael Greenstone: More people are driving and factories are producing more products. When that happens, there's more pollution. It's pretty simple.

That's MIT economist Michael Greenstone. Air quality data during the current recession isn't out yet, but Greenstone studied how the last recession, in the early 1980s, affected the air we breathe. The numbers were startling. The U.S. cities hit the hardest -- in places like the Rust Belt also saw their air pollution drop. Which raises the question: Can you have good air quality and economic growth? Greenstone says yes. He points to long term trends. Since the 1970s, the American economy has grown dramatically while overall emissions have shrunk.

Greenstone: And the reason is, we now have much stricter regulations than we did in the early 1970s.

And industry has figured out how to make money, in spite of them. And it helped that the country moved from an industrial and manufacturing base, to one with more office work and service jobs.

But, economist Matt Kahn from UCLA says tighter regulations can cut another way.

Matt Kahn: During recessions people are less likely to support environmental regulations as a public policy priority, and if environmental regulations are slowed or not enforced, then that can actually degrade the environment.

And whether you're in the U.S. or China, Kahn says there's one reason we should all breathe easy.

Kahn: Pollution makes urban, productive people sick, and a healthy work force is the key to economic growth.

I'm Krissy Clark, for Marketplace.


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I'm Matthew E. Kahn of UCLA. Permit me to be brief;

Jim Morrrison of the Doors would not recognize the 2010 Sunset Strip in Los Angeles.
His 1970 Sunset Strip was covered in ozone smog. Despite a huge growth in income
and miles driven, the smog is gone.

How is this possible? How could the scale of economic activity go up but the city is
Greener?

The answer is the "quality" of capitalism. A richer nation can afford to enforce stringent regulation that reduces emissions per mile of driving .

In a richer nation, people drive newer cars and new cars are cleaner than older cars (because they were built under a more stringent regulatory regime).

The idea that quality can offset quantity is an under-appreciated point.

I predict that Beijing's future circa 2010 will look a lot like Los Angeles' progress from 1975 until now as older dirty capital is phased out and replaced with low emissions new capital.

For you nerds out there, read my Los Angeles paper.

Matt Kotchen and I have written a new NBER Working Paper that we hope will interest you.

Environmental Concern and the Business Cycle: The Chilling Effect of Recession

Matthew E. Kahn, Matthew J. Kotchen
NBER Working Paper No. 16241
Issued in July 2010

This paper uses three different sources of data to investigate the association between the business cycle—measured with unemployment rates—and environmental concern. Building on recent research that finds internet search terms to be useful predictors of health epidemics and economic activity, we find that an increase in a state’s unemployment rate decreases Google searches for “global warming” and increases searches for “unemployment,” and that the effect differs according to a state’s political ideology. From national surveys, we find that an increase in a state’s unemployment rate is associated with a decrease in the probability that residents think global warming is happening and reduced support for the U.S to target policies intended to mitigate global warming. Finally, in California, we find that an increase in a county’s unemployment rate is associated with a significant decrease in county residents choosing the environment as the most important policy issue. Beyond providing the first empirical estimates of macroeconomic effects on environmental concern, we discuss the results in terms of the potential impact on environmental policy and understanding the full cost of recessions.

UPDATE:

Bloggers are funny people. Look at how this new paper is attacked here . This intellectual has not bothered to read our paper but he has an opinion. I would like to respond. His main point appears to be that he already knew our main point so there is no contribution made by our empirical work. But, the "conventional wisdom" is often wrong. Ask Galileo and this has been repeated for centuries. Ask Darwin. Now, I am neither Galileo or Darwin but it is the scientist's job to use proper methods to double check the conventional wisdom and that is a contribution. We need to know why President Obama devoted little political capital to enacting climate change legislation and our work suggests that the recession as a "smoking gun" is correct. Does that make our paper worthless? The NBER did not pay us a dime for this research but we have released it as a NBER working paper. So, the intellectual payoff of the Kahn and Kotchen (2010) paper is to offer a convincing test of the claim that "recessions reduce interest in battling climate change". Our evidence says this statement is true and this is valuable knowledge for those who seek to enact new legislation and for environmentalists who often claim that economic growth is an enemy of the environment.

An abbreviated version of our discussion is posted here . You will see that I'm not an eloquent speaker. In the future, I will practice my english speaking.

This would appear to be a very exciting time to be a macro economist. Watch this Lars Hansen video and you will see what I mean.

This talk by Princeton's Markus B. is also worth watching .

The New York Times claims that China's air pollution is growing worse due to increased motorization, construction, coal burning and general economic growth. But, their article didn't report any data trends. One way to measure air pollution is to use the API = air pollution index.

Using Google, I went to the Chinese Environmental Ministry and found this daily data for Chinese major cities measuring ambient pollution. At least in Beijing this hot summer, there have been 0 API days above 150 and 150 is the threshold for "Lightly Polluted". I encourage you to look at the data for other cities.

I must admit that I have an intellectual stake in this discussion. If you remember reading my 2010 Regional Science and Urban Economics paper on China , Zheng, Liu and I present evidence based on 35 major Chinese cities that several of them (including Beijing) have passed the EKC "turning point" and that we predict that further economic growth will DECREASE their air pollution.

When the media makes a bold claim, I encourage them to present some facts or at least a webpage offering the reader the chance to look up some facts. It appears that the NY Times and the Chinese government have two different sets of facts. Who is telling the truth?

As I have discussed before, my belief is that the following chain of events will occur;

1. China will keep growing and this raises the "value of life" and the "value of not being sick"

2. Coal burning is recognized to elevate local air pollution levels such PM10

3. Elevated PM10 causes extra morbidity and mortality risk for the urban population

4. As #1 rises, the externality damage caused by #3 increases and recognizing this fact will nudge the central government to take steps to clean up the coal fired power plants.

Human capital is the wealth of nations and China can't afford to kill its golden goose with dust from coal fired power plants.

Who knew? Now, I'm hoping that William Shatner might take one of my classes and then maybe we could record a Beatles song together. Perhaps, Norwegian Wood?

Yesterday was my last day of teaching summer school. I'm not sure if this experiment was a success or not. But, it mildly distracted me from research that I can't get myself to do. I'm now sitting on six revise and resubmits that I should probably think about doing but I'm not sure where to start with any of them. Maybe I should read the reviewer reports? Maybe, I will teach in Summer Session B. I go to Berkeley in two weeks and I will seek wisdom there. I will reveal a secret. I'm starting to work on economic history again.

Wind turbines generate electricity when the wind is blowing but we often demand electricity for air conditioning on hot days when the wind isn't blowing! If we could store electricity using batteries, then we could effectively separate production activity (i.e generating power) from when we consume the power. Similar to peanut butter and jelly, investments in wind turbines and battery technology are complements. If we make progress in improving battery storage technology then electric utilities are more likely to purchase power from wind turbines. Similarly, if wind turbines become more productive and cost-effective, then this will increase investment in battery technology because green venture capitalists will smell an economic return to such investment. A real world example is discussed here . If the Department of Energy is choosing which technology to subsidize, it would be wise to think about these "spillover" effects.

My favorite argument for California's AB32 regulation is that it will lead to green "endogenous technological change" that will help California to achieve the "win win" of continued growth and lower greenhouse gas emissions. The hard part is the next sentence of pointing to where the technological change will go. Predicting future innovation is tricky. In 1990, did you foresee Google? Did Bill Gates?

Today, David Leonhardt reports on some exciting new research done by some photogenic leading economists (check out their photo at the Royal Sonesta staircase here ). Imagine if Matthew Kahn had been randomly assigned to a good Kindergarten class, the Chetty et. al. research documents that by age 27 that my earnings would be significantly higher. Apparently, the legacy of kindergarten lives on. Early life investments increase later life achievement. Jim Heckman would agree. But why? What causes this effect that Chetty documents?

The authors attribute the success to the Kindergarten teacher's "treatment effect". I wrote the following comment 6 months ago after reading a new paper by Caroline Minter Hoxby but it appears to apply to this research.


Interpreting the Causal Effects of a Randomized Experiment When Subjects Optimize Conditional on Treatment Status

Matthew E. Kahn

Introduction

You are a parent who has one 9 year old child. You must allocate your scarce time between working in the market and investing in your child’s human capital. Your child is currently on the waitlist for admission to an elite school. There is a 50% chance that your child will be accepted and a 50% chance that your child will be denied this slot. This outcome will be determined by a coin flip.

Unbeknownst to you, a Ph.D. researcher is salivating at the opportunity to use a large sample of children such as your kid to study whether attending an elite school raises test score outcomes. This researcher foresees an ideal experimental design. For the subset of kids whose parents wanted them to attend this school, there is a randomization to see who actually gets to go. This randomization means that the unobservables at the baseline are the same for the control and treatment group. The PHD is confident that a simple before/after comparison for the treatment group and the control group will yield a clean estimate of the causal ATE of attending an elite school.

Unbeknownst to the PHD, essential heterogeneity lurks. The researcher implicitly assumes that unobserved home production of child skill formation is not taking place. But, consider the case in which you, the parent, believe that investments you make at home in your child are complementary to attending the elite school. If your child is admitted to the school, you plan to increase your investments in your child because the private returns of doing so have increased. The PHD , who cannot observe the black box, of what goes on within each household in the treatment and control group, implicitly assumes that the unobservables (home production) do not change over time.

But, in this case the kid who was assigned to the elite school who has the parent who believes that parental input are a complemnt invests more in the kid. The econometrician ascribes the ex-post increase in the test score (the noisy measure of the kid’s human capital) to attending the elite school.

In this sequential case of complementarity, the econometrician over-states the true treatment effect. In a nutshell, the program evaluator has assumed away the possibility of household production augmenting the extra resources that have been invested in the child by the randomization. Of course, if school inputs are substitutes for parental inputs then random assignment to the elite school will crowd out parental investments. It will especially crowd out such investments for parents with the highest opportunity cost of time.

So, Leonhardt and Raj Chetty credit the teacher -- but I believe that this overstates the teacher's contribution. The good teacher is a commitment device and the parents match her efforts with investments of their own.

Starting with Hausman's 1979 paper , empirical economists have been interested in the fact that most consumers prefer to purchase durable products whose costs are "backloaded". In English, we tend to prefer the air conditioner whose upfront price is cheap but that uses a lot of electricity in each subsequent year while we run away from products that are expensive today but are very inexpensive to operate (because they require little electricity) on an annual basis. Environmentalists shouldn't be happy about this fact but the good news is that capitalism may have figured out a way out of this financing jam (the lease).

To see this point, suppose that there are two air conditioners called "A" and "B". A costs $75 to buy and uses 20 units of electricity to operate while B costs $200 to buy today but uses only 1 unit of electricity to operate. To keep this simple, assume that "A" and "B" are equally good at providing cooling and that each lives for 4 years and then dies.

Define r = your personal discount factor --- so you are equally happy if I give you $1 this year or $1+r next year. Assume that the price of electricity per unit equals P and this never changes.

A person will buy "A" rather than "B", if the present discounted value (PDV) of the cost of buying and operating "A" is less than the PDV of the cost of buying and operating "B".

So , if you buy A: the following algebra must hold for you:

$75 + 20*(P + P/(1+r) + (P/((1+r)*(1+r)) + P/((1+r)*(1+r)*(1+r)))

< 200 + 1*(P + P/(1+r) + (P/(1+r)*(1+r)) + P/((1+r)*(1+r)*(1+r)))

With a little bit of algebra, you should be able to convince yourself that "r" must be very high for this person --- she must be very impatient and not eager to give up $200 today in order to have the energy efficient appliance. Now if P = 0, this logic would fall apart.

Why am I boring you about this? In 2010, car companies such as Nissan are rolling out their electric vehicles such as the Leaf and the Chevy Volt. The news is full of stories about them such as this one .

To an economist, here is the interesting part:


"The Chevrolet Volt, the first mass-market electric vehicle from General Motors Co., will have a sticker price starting at $41,000 when it hits showrooms this year, but it was the attractive lease offer that the automaker announced Tuesday that grabbed the attention of industry analysts.

Chevrolet plans to offer a lease program on the Volt with a monthly payment as low as $350 for 36 months plus $2,500 due at lease signing, a deal that could speed up adoption of the new generation of automobiles by making them competitive with traditional gasoline-powered vehicles.

In December, the all-electric Nissan Leaf hatchback is slated to go on sale starting at $32,780. But it too will have a lease deal: $349 a month for three years with an initial $1,999 customer payment."


Note that Nissan and Chevrolet have "solved" the Hausman problem; they have converted the large upfront payment into a series of "small" monthly rent of roughly $350 a month. This financing scheme will attract new buyers to try out the vehicle.

Now, I'm not sure if the math actually works out here. $350*36 = 12,600 + 2,500 = 15,100 which is < 41,000. So it can't be the case that a "leaser" owns the vehicle after 36 months. What surprises me here is if the leasee can return the vehicle to Chevy, what is the resale value of a 3 year old electric vehicle?

So, while these numbers look fishy to me --- the big point remains --- until now --- academic economists have worried that people are too impatient to be willing to pay the upfront costs to buy green products --- leasing arrangements solve this problem and should help to stimulate demand.

I don't like to leave West Los Angeles but for this event at Stanford on 9/7/2010 -- I am willing to participate. The last speaker of the day always faces the challenge of keeping everyone awake as they are either thinking about going home or dreaming of having a beer or 6 at the Happy Hour that takes place after the last talk. Unlike in track & field where the final runner is the star, at conferences it seems to be the opposite. Unlike Tom Cruise, I can handle the truth. But, Professors Stavins, Borenstein, Knittel, and Wolak better be on their "A" games because I will put on a good show.


Based on my Climatopolis book, I will be discussing this key issue:

Adaptation as Solution to Climate Change

Policy instruments: technological change and behavioral change

What are potential adaptations to climate change that individuals and local governments can make?
What adaptations have individuals and local governments made to climate change?
How will urban quality of life be affected by climate change?
Who will lose and who will gain because of climate change?
How can governments help and hinder the adaptation to climate change?

On September 8th, I expect to be talking about my book at an event in downtown San Francisco. I'm still waiting for the kind folks at Google to invite me in.