Sunday, February 28, 2010

Deaths from Natural Disasters: Lessons from Chile and Haiti

The horrible destruction that has taken place in Chile and Haiti offers a fascinating contrast. Haiti was hit with a 7.0 richter scale earthquake and roughly 230,000 people died in January 2010. Chile was hit with a 8.8 richter scale earthquake and as of now roughly 1000 people are reported dead. The richter scale is a base 10 log scale --- so the shaking amplitude of the Chile quake was almost 100 times larger than the Haiti quake.

How could a much worse quake cause much less death? One answer is simply luck that the Hatian quake struck a major population center. But, we know that Chile's city of Concepcion was close to the epi-center.

My favorite explanation is discussed in My 2005 paper on deaths from disasters . Using data for nations all over the world, I documented the benefits of economic development. Richer nations suffer fewer deaths from the "same quality" shock.

Now, the open question is "why"?

Explanation #1: The Quality of Government

Richer governments can enforce building codes and quality building codes protect the public.

Explanation #2: Richer people

Richer people live in newer, higher quality structures and this protects them. The structures are built of higher quality (no collapsing cement).

Richer people often live at lower density (outside of a Manhattan or a Tokyo) and this reduces risk.

There is a synergy between #1 and #2. Richer nations tend to have a more educated populace. The educated are better able to monitor their politicians and this provides an incentive for self interested politicians to actually act in the public's interest. The role of the media in "policing" politicians remains an active question in modern economics. Researchers at the London School of Economics have done some of the best research on this topic.

Saturday, February 27, 2010

Could China's Voracious Demand for Natural Resources "Green" the World's Economy?

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!

Thursday, February 25, 2010

The Republicans and Democrats Agree on One Thing: "Medical Fraud is Bad, So Let's Run a Field Experiment" To Catch the Cheats

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"?

Wednesday, February 24, 2010

Will the 2010 Winter Olympics Payoff for Vancouver's Long Run Growth?

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."

Hybrid Solar Cells: An Example of How University Research Causes "Green" Innovation

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

Tuesday, February 23, 2010

Does Behavioral Economics Help Phil Jackson to Excel as an NBA Coach?

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.

Monday, February 22, 2010

Paul Krugman's Profile in the New Yorker

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.

A Proposal for Increasing UCLA's Revenue Stream

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.

Sunday, February 21, 2010

Killing the Golden Goose? Taxation Chills Investment in Low Carbon Renewables

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.

Saturday, February 20, 2010

Why is Urban Quality of Life Improving? The Case of the Battle Against Dog Poop on Our Streets

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.

Friday, February 19, 2010

Excitement at UCLA

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.

Army Unit Cohesion and Later Life Health Outcomes for Veterans

Meg Sullivan has done a nice job writing up a press release on a new paper that I wrote with Dora L. Costa. Is there a clear link here to "green economics"? Here is a free copy of this paper and you can judge for yourself.

We face many tough collective action problems ranging from local air pollution to greenhouse gas emissions. To overcome classic free rider problems, we can either have explicit incentives (cap & Trade for pollution) or social incentives. Given that we have not been willing to "cap and trade" carbon, we need to continue to explore other ways of harnessing "social incentives" to encourage households, firms and governments to "do the right thing".

I have been quite interested in the causes and consequences of being actively invovled in one's community. Now a "community" differs across different people. For some, it is their place of residence, while for others it may be their facebook page, while others it could be a church or place of work, or just your extended family. In our book, Heroes and Cowards --- Dora Costa and I focused on just one community --- union army companies during the U.S Civil War.

Here is what we find;

Battlefield camaraderie yields long-term dividends for veterans, study finds

Meg Sullivan,

The benefits of wartime camaraderie extend far beyond the battlefield, a new UCLA study of U.S. Civil War veterans suggests.

Veterans who served in military units characterized by a strong esprit de corps were much less likely decades later to die of a stroke or heart condition than veterans from less cohesive companies, two UCLA economists have found.

"On the battlefield, you'd expect your buddy to have your back," said Dora Costa, the study's lead author and a UCLA professor of economics. "But the fact that camaraderie provides a protective effect that endures long after the war has ended is a new and surprising finding."

"We're not sure how it works, but somehow, being armed with close social bonds in the extremely stressful situation of battlefield combat has a protective effect that continues long after the fighting has ended," said Matthew Kahn, the study's co-author and a fellow UCLA economics professor. "Men who went into battle with this emotional armor were much less likely in their late 50s and early 60s to fall victim to stress-related illnesses."

The study, which tracked the veterans for up to 68 years, constitutes the first long-term look at the effect of unit cohesion on soldiers' mortality and health at older ages. It is also one of the longest-running studies of the effect of human social bonds on extreme stress. The findings appear in the latest issue of the peer-reviewed scholarly journal Demography, which is expected to ship Feb. 19 to subscribers.

Drawing on data amassed by the University of Chicago's Center for Population Economics, Costa and Kahn looked at records for more than 35,000 Union veterans who served between 1861 and 1865 in 303 infantry companies. The economists first determined how many men each company lost, reasoning that the companies with the most losses also experienced the most stress.

They also figured out whether the veterans served with men of shared ethnicity, occupation and other commonalities. Previous research has shown that soldiers who fought in companies with men who shared similar characteristics — a common race, religion, ethnicity, socioeconomic status or hometown — displayed a higher degree of loyalty to one another than their counterparts in more diverse companies.

The researchers then examined meticulously detailed medical records kept by the Pension Bureau — the precursor to today's Department of Veterans Affairs — for the purposes of ascertaining whether the veterans were eligible for age- and disability-related benefits as they aged. In particular, Costa and Kahn looked at whether the men experienced medical conditions with well-documented links to stress, such as arteriosclerosis, heart attacks and strokes.

Finally, they scoured U.S. Census records from 1850 to 1930 for details of the veterans' lives as they unfolded. The researchers were especially interested in the veterans' economic situation and martial status, two variables that have been shown to have a significant effect on an individual's health.

Even after adjusting for these factors, Costa and Kahn found that veterans from companies lacking in cohesion were six times more likely than peers from cohesive companies to suffer from arteriolosclerosis or to have heart attacks or strokes by their late 50s or early 60s.

When translated into total lifespan, the toll was considerable. Of the veterans who died from heart disease or stroke, men who served in an uncohesive company lived one year and four months less than men from a cohesive company.

Costa and Kahn admit they're not sure of the mechanism behind camaraderie's long-term protective influence, but they suspect social bonds somehow moderate stress hormones released either during or after intense battles.

"It may be that you don't have the same release of stress hormones when you go into battle with comrades on whom you feel like you can depend," Costa said.

The study quotes from the journal of a Civil War captain whose personal experiences seem to reinforce this view: "I have always found comforting in battle the companionship of a friend, one in whom you had confidence, one you felt assured would stand by you until the last," Frank Hollinger wrote.

Having a friendly shoulder to cry on at the end of the day also may help dissipate stress hormones, Costa said.

"If you actually see people being killed, your comrade can say, 'No, no. It's all right. It's not your fault.' "

Also unclear is whether veterans from less cohesive units sustained damage that led to stress-related conditions during the war itself or in the years that followed the conflict.

"One theory is that release of hormones in battle may cause systemic inflammation that later in life leads to heart disease and other potentially fatal diseases," Kahn said.

Alternatively, the absence of camaraderie may have made veterans more likely later on to relive battle trauma in the form of post-traumatic stress syndrome.

"Every time a veteran experiences a PTSD reaction, stress hormones are released again," Costa said. "So PTSD leads to repeated exposure to hormones that may over time lead to damaging inflammation."

The latter theory, the researchers admit, is just conjecture. The Pension Bureau did not track PTSD symptoms because the illness was not accepted into diagnostic literature until more than a century later. Neither did the bureau track symptoms that could be ascribed, with the benefit of hindsight, to PTSD. Nonetheless, the researchers view the data as a goldmine.

"Many studies have investigated how social networks combat the effects of stress in people," Costa said. "But they've tended to focus on stress generated in a laboratory setting, where researchers naturally would be prevented from inflicting the high levels experienced on a battlefield. The beauty of the Civil War data is it lets us get as close to a randomized, experimental study of extreme stress and social networks as you can ethically get."

The study also takes advantage of record-keeping quirks unique to the era. To ensure delivery of the country's earliest comprehensive benefits for veterans, the Pension Bureau tracked the veterans to their death. Because neither the Pension Bureau's records nor corresponding U.S. Census data is protected by the kinds of privacy safeguards that U.S. citizens now enjoy, the researchers were able to reconstruct a vivid picture of the types of conditions under which the men served and how they fared as they aged.

Moreover, Civil War soldiers who joined one company stayed with that company for their entire tour of duty. Only in very rare cases did companies add new soldiers as old ones were injured or killed. This distinction facilitated tracking the effects of cohesion. By contrast, soldiers repeatedly cycled in and out of companies during World War II and the Korean and Vietnam wars, infinitely complicating such research.

Even though the findings may date from a 145-year-old conflict, the researchers hope they will shed light on contemporary problems.

"Now that we're in the middle of two long-term wars, it's really important to understand what effect combat has on men's long-term health," Costa said. "If we can find strategies for minimizing the long-term toll of the experience on these brave people, we really need to do so."

The project received funding from the National Institutes of Health.

For more news, visit the UCLA Newsroom or follow us on Twitter.

Thursday, February 18, 2010

An Economic History Lesson on Adapting to Climate Change

Gary Libecap and Rick Steckel have put together a new edited volume that uses the historical experience to examine how farmers, urbanites, and the economy as a whole has adapted to past climate shocks. Note that economists are the authors of these chapters. Almost all of these essays use new data sets to examine the historical experience in the face of changing climate conditions.

The future won’t look like it does now, but then it never has. As Frank Knight wrote in 1921, “The existence of a problem of knowledge depends on the future being different from the past, while the possibility of a solution of the problem depends on the future being like the past.” Relative to what most bloggers have to say, that's pretty profound. I wonder if he had a blog?

While Knight is unlikely to have pondered the issue of climate change almost 90 years ago, he did anticipate the fundamental challenge of predicting how we will individually and collectively cope in our hotter world.

Do Climate Shocks Make Poor Nations Poorer?

Over the last two days, I have finished edits to my new book Climatopolis. Basic Books will publish it this fall. This is the third book that I have written and I can tell you that there is "learning by doing". While I'm no Richard Posner, I am starting to improve as a writer and perhaps blogging has helped? In my humble opinion, this book is smart and funny. At the tender age of 44, I know that I don't have that much productive time left so I'm getting ready to jump in and write out the notes that I have collected on my 4th book. Tsinghua University's Siqi Zheng and I will roll out a book about China's urban economic growth in late 2011.

My new book, Climatopolis, will be about how nations all over the world will cope with climate change. The technical economics literature on adaptation is just now starting. A fundamental challenge is that climate change will play out in the future --- so studying its future consequences poses a challenge for empiricists who like to crunch data.

Economists have used historical climate variation to study how economies are affected by these climate shocks. Ben Olken and Ben Jones have a new NBER Working Paper that merits mentioning.

"This paper uses international trade data to examine the effects of climate shocks on economic activity. We examine panel models relating the annual growth rate of a country’s exports in a particular product
category to the country’s weather in that year. We find that a poor country being 1 degree Celsius warmer in a given year reduces the growth rate of that country’s exports by between 2.0 and 5.7 percentage points, with no detectable effects in rich countries. We find negative effects of temperature on exports of both agricultural products and light manufacturing products, with little apparent effects on heavy
industry or raw materials. The results confirm large negative effects of temperature on poor countries’ economies and suggest that temperature affects a much wider range of economic activity than conventionally thought."

"Examining the negative and statistically significant categories, we find that the negative impacts of temperature seem to fall into two broad categories: agricultural products (e.g., cereals, dairy products and eggs, leather, feed stuff for animals) and light manufacturing (e.g., photo equipment, footwear, misc manufactured goods, electrical machinery, rubber manufactures, office machines, firearms, travel goods, plumbing, wood manufactures, metal manufactures). Heavy industry (e.g., chemicals, paper, cement, iron and steel, cars and trucks) and raw materialmining, petroleum, wood and pulp) seem generally unaffected. The explanation for agriculture
seems clear (plants and animals may not thrive as well when it is too hot), and is consistent with negative effects on agriculture in poor countries reported elsewhere (e.g., DJO 2008, Raymond Guiteras 2009). The negative impacts on manufacturing are perhaps more surprising, and suggest that factory workers may be less productive when conditions inside the factory become too hot."

How did these talented young nerds detect this? Blog readers shouldn't have slept through their statistics classes. They collected national-yearly data on exports by industrial type and national data on climate conditions by year. By classifying nations into "rich and poor" they document that climate shocks (defined as deviations from typical national climate conditions) cause interesting exports dynamics for poorer nations.

This is interesting evidence that helps to paint a complete picture in thinking through the likely economic consequences of coming climate change.

Wednesday, February 17, 2010

Thomas Friedman Believes that China is "Smarter" than the United States: Is He Right?

Do China's best and the brightest work for their powerful state or in the private sector? The NY Times' Tom Friedman hints that the Chinese government is filled with 200 IQ people. He argues that China is pursuing a wiser long term energy policy than the United States. Why? Unlike our government, China's government anticipates the coming scarcity of resources and thus are making investments now so that they will be ready to corner even more export markets when "natural resource collapse" is just about to take place.

If Mr. Friedman would return my phone calls, I would like to ask him why the China's one party system has created a better long run policy than ours? Does Tom believe that interest group politics in the U.S blocks smart policy? So, is he a fan of one party rule? Or only in this case? Is he envious of a non-democracy's ability to get things done? Has he soured on democracy? Should the U.S adopt China's 1 party system? Or should we offer free passports to the Chinese government so that they can teach us how to have a well functioning government? Would Tom Friedman restrict voting rights and only allow people to vote who have been to college or have passed an "issues literacy" test?

Here is a quote from his NY Times column today, I agree with his first paragraph but find the 2nd paragraph to be strange.

"4) Even if climate change proves less catastrophic than some fear, in a world that is forecast to grow from 6.7 billion to 9.2 billion people between now and 2050, more and more of whom will live like Americans, demand for renewable energy and clean water is going to soar. It is obviously going to be the next great global industry.

China, of course, understands that, which is why it is investing heavily in clean-tech, efficiency and high-speed rail. It sees the future trends and is betting on them. Indeed, I suspect China is quietly laughing at us right now. And Iran, Russia, Venezuela and the whole OPEC gang are high-fiving each other. Nothing better serves their interests than to see Americans becoming confused about climate change, and, therefore, less inclined to move toward clean-tech and, therefore, more certain to remain addicted to oil. Yes, sir, it is morning in Saudi Arabia."

So Dr. Friedman, what is broken in the United States? Why did it break? Are you willing to adopt China's methods to solve our problem?

UPDATE: I read this earnest comment on my post and want to make one last point I was not engaging in China bashing. Instead, I was asking whether the United States or China has better "rules of the game" for creating "good public policies" for a nation. Tom Friedman appears to be voting for China's one party way of forming public policy and that is interesting.

U.S interest group politics have slowed down the green agenda that I wish that the USA would adopt. China's government has not faced this problem and they are making progress on their energy agenda. Taking these facts as given, what is an environmentalist to conclude? Does the autocrat beat the democrat? What is Tom Friedman trying to achieve by continuing pointing out "China is ahead, China is ahead" --- In what causal model of voting behavior will this nudge a Republican or coal interest in the U.S to switch coalitions? Friedman is an eternal optimist --- that he bothers to repeatedly write columns such as the one I cite above suggests that he believes that our democracy can change course. Under what circumstances do we deviate from status quo business as usual policies? Only after the Titanic hits the iceberg? Is he simply trying to harness "China envy" to give Nancy Pelosi a leg up in the carbon tax debates?

One can admire China without going too far in terms of arguing that we need to fundamentally change our institutions. What does he really thinks about our current political structure? Is he calling for a "revolution"? If yes, let's hear him say it. That would be interesting reading in the NY Times.

Democracy offers costs and benefits. Have the costs of democracy increased over time?

Liability Issues Related to New Anti-Climate Change Initiatives

Yesterday, I listened to an interesting lecture on the economics of carbon capture and sequestration at my UCLA Institute of the Environment. As world electricity demand continues to rise, developing nations will use coal fired power plants to supply a big share of this demand. Under "business as usual", this will increase greenhouse gas emissions to levels that Jim Hansen would say are quite scary.

If Carbon Capture and sequestration (CCS) could safely work, then this would be a way for the developing countries to achieve a "win-win" of access to electricity without the resulting greenhouse gases.

Listening to the talk, CCS raises a host of legal liability issues and spatial economics issues. A whole infrastructure of collecting the coal gas and injecting it into pipes will be needed and these pipes will then have to go somewhere for injection under the ground.

Will for profit insurance companies be willing to write insurance contracts for these unknown hard to quantify risks? If not, then government will need to step in and thus the taxpayers will bear the risk of this as yet unproven technology.

Similar issues arise with geo-engineering. If China unilaterally engages in some geo-engineering experiment and this affects the United States through affecting our air quality or climate conditions, is there an international court where we could sue them?

It would interest me whether lawyers are optimistic concerning whether legal institutions evolve fast enough to stay a step ahead in a world where technological progress (i.e human cloning etc) is moving fast and opening up potentially tricky new contentious issues.

I know that young lawyers are worried today about their job prospects at the leading firms but this discussion has me thinking that there will be plenty of demand for their services in the future.

Tuesday, February 16, 2010

Can Google Cause Urban Economic Growth?

Google will soon run a very interesting experiment. As discussed in this newspaper article, Google is getting ready to "wire" certain liberal cities with fast cable that will allow users to download data 100 times faster than they can now.

Real Estate economists have argued that "location matters". We know that New York City property closer to Central Park sells for a price premium relative to property in Queens. Once Google lays down this fast cable in specific geographical areas, will real estate prices rise in those areas to reflect the value of this new localized amenity? So, Los Angeles home prices are high in part because of the unique climate.

Will the cities that Google selects to offer the "fast download" capability experience a similar real estate price appreciation impact?

What businesses will self select to locate in the "Google Zone"? In english, how will access to this unique amenity affect the migration patterns of households and firms? What types of households will seek out the "Fast Google Zone" areas even though home prices will be higher?

Google is likely to choose wealthy, educated cities such as San Francisco and Portland as the "guinea pig" cities for this fast cable. From a social justice standpoint, shouldn't they set up Cleveland and Detroit as the first cities to receive this treatment? Should Detroit's mayor or the Obama Administration pay Google to designate Detroit as a "Google Zone"?

If a declining city did receive this designation, would this access to fast cable stimulate economic development? Urban economists have documented that new highways do "cause growth" but a chunk of this local growth is grabbed from nearby areas who are not close to the new highway.

Monday, February 15, 2010

Diversity in Modern Economics

Paul Krugman might like Roger Myerson's New Paper . Chicago's Most Recent Nobel Laureate writes down a model in which it can be pareto optimal for the taxpayers to bail out the bankers! Will everyone at Chicago celebrate this new paper?

I skimmed this paper and it is certainly interesting but as a retired theorist I have a basic question. How are we to judge this model? As other researchers write down their models of the crisis, how do we go about ranking them? In the original Real Business Cycle literature, the macro guys generated data based on their models and compared it to actual time series. The "distance" between the predicted and actual data was used to rank the models. Will a similar metric be used here?

The Electric Car in the Liberal Cities

Using data on Hybrid Vehicle counts by census tract and by zip code, I have documented the spatial green "hot spots" for these vehicles in a series of papers including; paper #1 , paper #2 , and paper #3 . These vehicles cluster in educated, wealthy, white parts of cities where the residents are registered in pro-environment political parties. Across cities, the same patterns are apparent. These vehicles cluster in the San Franciscos and Portlands rather than in Detroit and Houston.

Today, the NY Times has an article on how electric car growth will shape certain cities. A few points.

1. What will be the future price of gasoline versus the price of a kWh of electricity? This determines whether Sarah Palin will buy an electric car.

2. Will gas stations in the future offer both electric recharging and gasoline? Do these activities together pose any liability challenges?

3. Will any land zoning issues have to be addressed to allow car recharging activity?

4. For people who live in multi-family housing, how will recharging be set up? In certain dedicated parking spots in the common garage?

5. Why did Michael Peevey have so much trouble setting up his electric car? Simply a new industry and little human capital has been built up?

6. In aggregate in cities such as San Fran, how much will electricity demand rise by because of the growth of the electric vehicle?

7. In my work for SMUD, we documented that the electric car clusters appear near public transit lines. This is not surprising because liberal/greens commute using public transit see Kahn and Morris 2009. So, based on GIS maps there will be clear "green corridors" --- will this act to attract new businesses who want to be close to the public transit/green recharge corridors within cities?

Sunday, February 14, 2010

An Open Letter to My University of California Colleagues

Dear UC Friends,

Despite the furloughs, the hiring freezes, the rising health insurance costs and the coming pension crisis, the sun still shines and our students are still motivated and eager to learn. Would you truly be happier if you were offered a position at Stanford? This January 2010 Stanford University Report , which reports facts based on a survey of its faculty, may raise your spirits. I was sad that the report didn't provide a breakout of the survey responses of their Economics Department. I encourage Stanford to more finely cut the data next time to allow for a Department by Department comparison (especially for departments with more than 10 people).

Now, Stanford has shown the ability to fundraise and to provide generous financial support for graduate students. I would like to encourage my fellow UC colleagues to push their respective campuses to try to build a serious development effort for raising a significant amount of private donations. UCLA has over 340,000 graduates. If each of these successful people would donate $1,000 a year to their favorite University --- we would be able to achieve truly great things. What do Princeton and Stanford do to build intense loyalty that the UCs have failed to do?

With an influx of new $ of $340 million per year, perhaps my UCLA Econ department would be allowed to hire some new blood to teach our excellent students.

2010 UC Berkeley Energy Institute Power Conference

Just as hippies continue to celebrate the August 1969 Woodstock Music Festival, in the future, energy nerds will fondly recall the March 2010 UC Berkeley Energy Institute Power Conference . Forget Hendrix and the Who, the Power Conference will feature Wolak and Costa and a host of other awesome acts. I will be there and will have the opportunity to crack some jokes and make a few energy related points in the brief time I have to speak there. While I don't love wearing a jacket and tie, this dignified conference does force me to sober up and try to look and act like a grownup.

If you've always wanted to talk to me about your ideas related to energy economics, this will be your chance. I encourage you to register!

Switching Subjects: If any young Economics Scholars bother to read this webpage, you would be wise to read this new NBER paper . While it has the least sexy title of any paper I have ever seen, I bet that this paper will become influential. It is clear that Dr. Bajari needs to return to Cambridge to learn the art of "Sexy Economics". But, I'm sure that this paper is excellent.

A Theory-Based Approach to Hedonic Price Regressions with Time-Varying Unobserved Product Attributes: The Price of Pollution
Patrick Bajari, Jane Cooley, Kyoo il Kim, Christopher Timmins

NBER Working Paper No. 15724*
Issued in February 2010
NBER Program(s): EEE IO PE

We propose a new strategy for a pervasive problem in the hedonics literature—recovering hedonic prices in the presence of time-varying correlated unobservables. Our approach relies on an assumption about homebuyer rationality, under which prior sales prices can be used to control for time-varying unobservable attributes of the house or neighborhood. Using housing transactions data from California’s Bay Area between 1990 and 2006, we apply our estimator to recover marginal willingness to pay for reductions in three of the EPA’s “criteria” air pollutants. Our findings suggest that ignoring bias from time-varying correlated unobservables considerably understates the benefits of a pollution reduction policy.

As a producer and a consumer of "low-brow" hedonics papers, this literature certainly needs to continue to try to improve.

Can Michael Ni Raise Civic Participation Rates?

Why do people not vote? If the "time price" of voting could be sharply reduced, would more people vote? Michael Ni thinks the answer is yes and so does the OP-Ed writer from the LA Times. If electronic signatures become legal for endorsing California ballot initiatives, could we also decentralize the voting box and let people vote at home? If yes, what will be the long run consequences of this "price reduction"?

While I am not a political scientist, I do know their literature and the voting propensity research continues. Give people free newspapers and they raise their probability of voting. Convince them that they are pivotal and they are more likely to vote. But, what about the "schlep" cost?

Suppose that such an "Amazon One Click" could take place. Right now only the self-select intense partisans bother to vote in non-Presidential years. If instead we had a 85% participation rate in each election --- would the "Silent Majority" be happier with our politicians? Would a different group of men and women run in the primaries now that they know that they have a shot?

I hope that political scientists have written papers about how the expected low turnout rate for races affects who chooses to run for office and how they position themselves in policy space as they run against others knowing that merely 50% or less of voters will vote.

We need to integrate modern technology into the civic marketplace. Michael Ni gets my vote.

Will China's Fast New Cross-City Trains Accelerate Urban Economic Growth?

Has investment in transport infrastructure really helped China's economy to achieve 9% annual growth? Yesterday, the NY Times celebrated the fruits of China's investments in fast trains . I appreciate that its editors find the Delta Shuttle ride from NYC to Washington to be annoying and the Acela moves at the speed of a tricycle. But, abstracting from consumer confort in commuting across cities at 200 MPG --- do such trains have real effects on economic growth?

The NY Times article didn't talk to any economists concerning the marginal benefits of fast trains between cities. So, permit me to discuss the real issues here.

Now, airplanes already exist and these trains are a pretty good substitute for airplanes. So, the loser here are the airlines. I can certainly imagine that trains have greater capacity than planes.

Now, who are the winners? Power Couples can now convexify the local labor market problem. In an economy with slow city to city transport technology; one must choose to live and work in the same city. My Governor (Big Arnold) lives in LA but works in Sacramento as he commutes by fast private airplane. Most of us cannot unbundle place of work from place of residence. The question is; the bullet train also relaxes this constraint but how much of a constraint is it?

Imagine if all dentists work in City A and all economists work in City B, then a married couple consisting of a dentist and an economist would greatly benefit from a bullet train. They could live in the cheaper or higher quality of life city (either A or B) and one of the two would commute by fast train. How many couples are in this situation? This is crucial for determining the real benefits of these trains.

The fast train effectively increases the size of the suburbs in the mega-cities. If I could live 150 miles from UCLA but still work at UCLA, then LA's absorptive capacity could rise without the nasty congestion externalities. So, a key economic parameter here in determining the benefits of these trains is the agglomeration benefits of mega-cities. Scholars such as Vern Henderson and Ed Glaeser continue to estimate these. Land owners in rural areas 100 miles from the major cities are big winners from this transport innovation.

So, I do see that these trains will allow middle class people to live in the mega-cities without having to pay "mega-prices" for real estate. The classic monocentric model of urban economics shows that land prices fall with respect to distance from the city center. In my paper with Siqi Zheng (see table 3, we show that land prices decline by 4% per kilometer from Beijing's Center. If this gradient continued, think of how low land prices will be 100 miles from the City Center. So, households can live in cheaper nearby cities and take the bullet train to work in Beijing.

Now will these fast trains help China's elite to have power-lunches? In the past, they could meet after a quick plane trip or by teleconference. Do these trains really facilitate more face to face communication?

My bottomline is that the NY Times has forgotten marginal analysis. These bullet trains will make Acela envious and will help the middle class through a commuting and consumer city benefit but I'm not convinced about the productivity impact of this multi-billion dollar investment by itself.

In fairness to the Times, there is one scenario where they are right about the benefits of fast trains. Real wages in big cities get bid up because workers facing high commuting costs must pay very high rents to live nearby. If a fast train connects rural areas (150 miles) from the City center to the big city, then rising apartment prices will slow and this will allow more of China's urbanizing population to achieve a high standard of living. But in this case, the transport system isn't connecting major cities --- instead it is creating new suburbs a further distance away from the Mega-Cities.

In the U.S , if Acela could move fast --- Providence Rhode Island would turn into a funky suburb of Boston and New York City. In that case, the artists of that city would find that their loft rental rates would rise.

Saturday, February 13, 2010

Achieving Sustainable Growth on a Growing University Campus

Urban Universities such as UCLA, Columbia and Washington Univ. in St. Louis want to grow. The nerds on their faculty actually want lab space and offices. The students want nice dorms, libraries and classrooms. Given that these Universities have finite land, when they build wide new buildings, --- they lose parking. But, as this case study clearly states --- the demand for parking on campus just keeps rising. So, if supply of parking spots is contracting and demand is rising --- what's going to happen next? At UCLA --- the unions have not been happy about allowing parking prices to rise. As a humble guy who walks to work, I say that we should get rid of all of the parking lots and make everyone park in Westwood Village. This would force everyone to get some exercise walking to campus, would help to jump start the decaying Westwood Village as people would shop there and by giving up the UCLA Parking Lots --- there would be plenty of land on campus to actually do some serious stuff rather than stack cars.

Now returning to Washington Univ's parking shortage; what should they do? The smart economists there should suggest time of day pricing. Given the large number of unemployed in St. Louis, the university could introduce a valet car parking where a member of the Olin School would give the keys to his BMW to a valet driver who would promise to drive it the rest of the day (and thus not need a spot in the lot) and then bring it back to the professor when he wants his car ready to take him home. In the winter, the car would stay warm and it would not stall and a new job would be created. Now, I realize that this would create co2 emissions but this could be offset.

While I'm cracking jokes, it is important to have land be used for its highest value and this use may change over time. Joni Mitchell may have to write a new hip song if too many parking lots are transformed back into paradise.

Friday, February 12, 2010

A Chicago Economist's Plea to Keep the Berkeley Planet in Print Format

The New York Times is filled with news today. David Brooks demands that our President should focus on one key theme that would unify our diverse nation. I'll propose one. Let's erase our border with Canada and Mexico and have a new unified nation called North America. This would reduce the region's poverty, address immigration concerns, solve energy insecurity issues and help us collectively to adapt to climate change.

The Times upset me today on two fronts. First, in a small blurb I read that the
Berkeley Planet will no longer be available in print format. What will I read at Starbucks? My demand for their coffee will plummet. The San Fran Chronicle has shrunk to the size of a Kindle and now the Planet vanishes? I live in Berkeley a chunk of the time and I love the crazy letters that are published in the Planet and it does a great job on Berkeley local politics. Ed Glaeser should be offered a column there.

Most importantly, today's NY Times has a piece discussing Arizona's decision to exit the Western Carbon Cap & Trade initiative. This has several implications. Building on the Kahn and Kotchen theme, they claim that the recession is the trigger of their decision.

You do not have to be John Nash, to ponder the following;

1. Will Arizona's decision trigger a domino effect such that the regional pact unravels? Why? Fear of leakage of jobs. Will Nevada now say to itself; "If we remain in the pact; our electricity rates will be higher (reflecting carbon pricing) but Arizona's won't be; footloose electricity intensive consumers such as a Google may move to Arizona rather than here." If Nevada believes that this story is true, then their probability of staying in the pact declines. Erin Mansur and I have been studying this job migration issue as a function of local electricity prices and will report some results soon.

2. If other West Coast states drop out, how does this affect California's AB32 initiative? In particular, do issues of thin markets arise as there are not enough buyers and sellers in the carbon market to have a competitive market?

3. If all of the West Coast States remain in the cap & trade initiative, will there be more R&D innovation because there are a larger number of potential buyers of "green energy" low carbon? Hopefully California is a large enough market to create a "home market" effect so that innovative nerds keep tinkering away even if Nevada and Arizona drop out.

I am worried about the guinea pig effect. With new ideas, we need a guinea pig to step up and try the medicine. The rest of the country was counting on Arizona and the other members of the pact to taste the medicine. There should have been an Obama transfer to the region for rewarding us for being a first mover because of the externality benefit. What is the externality? It is identical to Caplan and Leahy's old paper about the information gleaned from 1st movers; read this for details

Thursday, February 11, 2010

Google Access as a Capitalized Real Estate Amenity

This has been a strange week. I spent monday and tuesday in deep thought about the UCLA Statistics' Department's Past, Present and Future. There is nothing more fun than to serve on a Departmental Review. While we were locked in a room for 12 hours a day talking about Statistics (which is distinct from doing statistics), I made five new friends. UCLA's Vijay Gupta, Dorthy Wiley and Carol Bakhos are all very sharp, very fair colleagues and I hope to stay in touch with them. Our two external statisticians, Adrian Raftery, and Terry Speed, carried us to greatness. As you might guess, they are very smart but they were also very funny. I spent the last two days at USC in deep thought.

But now, I have actually read this newspaper article from the LA Times. Google is getting ready to "wire" certain liberal cities with fast cable that will allow users to download data 100 times faster than they can now. I have several questions for the Google Guys who regularly read this blog;

1. Have they bought land in the cities where they will lay down the cable? This unique amenity will be capitalized into land prices in the cities where they build. You could use a spatial regression discontinuity design to test this claim. There will be zip codes just inside the "Google Zone" and they will gain fast access while there will be a nearby control group of zip codes without access. So, the cliche of real estate is "location, location, location" but usually what has differentiated parcels of land are locally tied "god-given" attributes such as climate or proximity to the coast. Google is introducing a "man made" difference across parcels (namely access to extremely fast download tech).

2. What businesses will self select to locate in the "Google Zone"? In english, how will access to this unique amenity affect the migration patterns of households and firms? What types of households will seek out the "Fast Google Zone" areas even though home prices will be higher?

3. Should Detroit's mayor pay Google to designate Detroit as a "Google Zone"? Should Obama use Stimulus $ to pay Google to lay fast cable there?

4. General equilibrium effects -- as Google lays down more cable will diminishing returns kick such that if we repeat step #1 above we will see declining capitalization into real estate effects? Or is this an increasing returns technology such that the demand for "Google Zones" actually increases as Google lays down more cable?

What's mildly interesting here is that up till now, the Internet has been viewed as a substitute for Cities --- but returning to the old theme; in this case the Fast Google Zone Internet will increase the demand for the specific subset of cities that have access to the fast cable.

Look for San Fran to be one of the guinea pigs rather than detroit?

Tuesday, February 09, 2010

The Environmental Consequences of Urban Growth

Ed Glaeser is a good man. I am a weak man and I sometimes need a morale boost. This helped. It reminded me that the Zheng, Wang, Glaeser, Kahn Paper that focuses on ranking China's "Green Cities" using unique micro data is a pretty good study that merits more research.

I've spent a fair bit of time working on the environmental consequences of urban growth. My 2006 Green Cities book brought together my key ideas concerning how local pollutants evolve as urban growth takes place.

In recent years, I've studied the same question but focused on climate change.
A Sketch of those ideas is presented here . The real version will be published by Basic Books this fall.

Monday, February 08, 2010

What Do Billionaires Owe Joe the Plummer?

Eli Broad must live within 5 miles of my Westwood house. He has done more good for Los Angeles than I have. Despite his generous donations of plenty of civic culture, the New York Times has written an tough piece about him hinting that his business tactics are too "hardball" in the Streisand world of philanthropy.

The article states that Dr. Roland Fryer has grabbed some Mr. Broad's cash for field experiments. I hope that the "treatment group" appreciates Mr. Broad's payments. After all, Mr. Broad paid his taxes on this money. He could simply buy himself 1,000 yachts. But, he has not pursued this temptation. Instead, he has used his "iron checkbook" to give LA the Museum of Contemporary Art, and a dozen other big ticket items. Such civic engagement should be celebrated. What has Don Trump given NYC besides for some silly headlines and some gold plated buildings?

Sunday, February 07, 2010

Some Economics of Terrorism

Now that I'm older than the players and the owners, I refuse to watch the Super Bowl. It just isn't that "Super" anymore. So, I'd prefer to talk about terrorism. My old friend Eli Berman has a new book on terrorism and the NY Times favorably reviews it today.

The interesting issue that I don't hear people talking about is the strategic game of "cat and mouse" played between terror groups and nations such as the USA. The terrorists have a large set of possible strategies. How do they judge the probability of success of each strategy and the payoff (our loss) from a terrorist attack on each of these possible targets. Are they expected utility maximizers? What do their substitution patterns look like? If we make it hard to blow up an airline, what do they substitute to?

If we use drones to knock off a few of their "leaders", does this really have any effect or can they quickly promote somebody else and recruit new recruits because of our drone attack?

Terrorist attacks are a form of fighting dirty. If such organized groups thought that they could win a formal military confrontations would they launch fewer of these "dirty attacks"? Have we raised our own fears from low probability salient attacks because our military is perceived to be so strong?

Around the world, are the terrorists winning the risk perception battle? How much do people over-estimate the risk of another 9/11 attack? How much anxiety does this cause? or are we "rational expectations" agents forming accurate actuarial probabilities of objective risk?

How Do We "Jump Start" the Los Angeles Economy?

At your university, are your colleagues "good colleagues"? I ask for 2 things from my colleagues; 1. to say interesting things, 2. to listen (respectfully) to my crazy ideas. I will now name names. UCLA's Jason Snyder is an excellent colleague. On Saturday, we sat in a quiet place called the Pauley Pavilion to talk about research. Apparently, there was a basketball game going on.

To my surprise, I spotted at the game; 1. the Chancellor of UCLA, 2. the ex-chancellor of UCLA , 3. The Dean of Life Sciences. I didn't know that sports is part of our strategic plan but I congratulate them on their "work/leisure" balance.

Now UCLA was playing Berkeley and I know this is supposed to be a serious rivalry. Our $2 million dollar coach earned his furlough; UCLA looked slow and unathletic. Berkeley was sleek and drove the ball to the hoop and appeared to play a pro-NBA game while UCLA settled for ugly jump shots from the perimeter and shot too few free throws.

Jason and I discussed many subjects during this "game". I forgot to talk to him about his ideas for jump starting LA economic growth. Here are the views of one dream team of friends of the Mayor.

LAEJC's Report to the Mayor

"Executive Summary

Los Angeles, the nation’s second largest city, has a vibrant culture, a diverse population and a strong economy. The city is a leader in a number of important areas. It is the largest manufacturing center in the United States, a major financial and professional services center, the nation’s largest retail market, home to one of the world's most important seaports and busiest airports and the entertainment and cultural capital of the United States. The city also houses extraordinary centers of higher education, medical research and care, apparel, tourism, manufacturing and design, technology and bio-technology, goods movement and more.

Yet, for all of this economic activity, since its peak employment in 1995 the City of Los Angeles has suffered a decline in employment by almost 30,000 jobs. In the past 17 years, Los Angeles has lost a net of 106,446 manufacturing jobs, a large majority of which were in the aerospace and high tech industries. Manufacturing jobs continue to be on a steady decline.

Los Angeles Economy & Jobs Committee

Under Mayor Antonio Villaraigosa’s leadership, the city has addressed a number of issues that directly influence economic development. Among them are public safety, affordable housing, education and transportation.

To further the city’s efforts to nurture the economy and attract and retain new, quality jobs, the Mayor created the Los Angeles Economy and Jobs Committee (LAEJC). The privately funded, 26-member committee is comprised of independent business, labor, academic and non-profit leaders from the greater metropolitan area. It is chaired by Russell Goldsmith, chairman and chief executive officer of City National Bank. The committee is solely responsible for the content of this report."

I have downloaded this report but I wonder if this committee had the guts to talk about the unintended consequences of being a pro-union state. My intuition tells me that if you make it easier for business people to create jobs with less redtape and fewer lawsuits if the relationship is a bad match that more jobs will be created.

Take a look at this map . If you make a graph of where jobs are being created, you will see the "coincidence" that many form at the borders on the "blue" part of the map just adjacent to the borders.

Now, I know that California has high taxes and high regulation along almost every dimension such as environmental, safety, labor. But, labor costs are the major business cost for getting things done. Paying wages and health benefits costs employers. Recognizing this, and now uncertain about the demand for their product and the state of the macro-economy; they are going to be quite hesistant about creating new jobs. What can California and Los Angeles do to be more "business friendly"?

If the Mayor doesn't like what I'm saying, he should read this article from yesterday's NY Times. Movies are no longer being filmed here. They are footloose.
With better "business conditions", the state wouldn't have to offer generous subsidies to lure movie filming to remain here.

Friday, February 05, 2010

Supply and Demand for Dates on the Modern College Campus

We know that there are too many young men in China looking for a date relative to the number of young women there. This NY Times article says that the reverse is true on the modern U.S campus. There are young ladies here who cannot find a date because the female/male ratio on the U.S campus is heading towards infinity. Perhaps there are gains to trade if Chinese students purchase U.S passports to come over to the U.S and study here. So, my solution of selling U.S passports will simultaneously balance our nation's budget and solve the romantic woes of two nations. Not bad? As Keynes said, we economists should be as useful as dentists.

Balance the U.S Budget by Auctioning off 10 Million U.S Passports

Where is the Pigou Club when we need it? We all want budget discipline and some of us want to avoid climate change. Suppose the Congress did enact carbon cap & trade and that the market price of a ton of carbon dioxide is $35; if there are 300 million Americans and each of us contributes 20 tons of carbon a year on average, then if none of the revenue was handed back to the public; this policy would yield $210 billion a year in revenue.

If you reject this revenue generating program, what is your counter-proposal? Should we auction off the Grand Canyon? We could auction off 10 million U.S passports. Suppose we could sell each for $200,000 --- that would yield a one time payment of 2 trillion dollars. Now that I think of it, that's a pretty good idea!

As these "international superstars" sort across our cities, many of them will buy homes. This will help to slow down home price declines and thus slow down mortgage defaults. This will prop up the balance sheets of banks and make them more likely to make loans and this will help the economy to rev up again.

Switching gears, This editorial below is sad but not shocking. Matt Kotchen and I are writing a serious paper on this topic. You will see it in the medium term.,0,4351967.story

LA Times Editorial
Backing down on climate change
Washington appears to have lost its appetite for attacking the problem of global warming. February 5, 2010

"If changes in the public mood and the party alignment of the U.S. Senate have stalled healthcare legislation, they may have thrown the highly anticipated climate bill under a bus.

Even before Republican Scott Brown's stunning election to the Senate in traditionally Democratic Massachusetts last month, it was proving hard to corral moderate Democrats to support a bill capping greenhouse gas emissions. Now they're afraid to back anything that could be perceived as harmful to the economy. "Realistically, the cap-and-trade bills in the House and the Senate are going nowhere," Sen. Lindsey Graham (R-S.C.) told the New York Times. That's a distressing comment coming from one of the three senators supposedly crafting a compromise climate bill that's capable of achieving a filibuster-proof majority in the Senate.

President Obama has backed down too. On Tuesday, he signaled that cap-and-trade could go the way of healthcare reform's "public option," saying it could be removed from the climate bill. That would eliminate the market mechanism for pricing greenhouse gas pollution -- and without setting such a carbon price, other measures under consideration, such as a national renewable energy standard, won't go far enough to significantly slow global warming.

Global emissions of carbon dioxide and other greenhouse gases rise every year, and within decades are expected to hit a worrisome atmospheric concentration threshold of 450 parts per million. At that point, there's a high probability that average global temperatures will be at least 2 degrees Celsius higher than they were in 1850 (they're already 1 C higher). Our children would live in a world of mass migrations, wars and conflicts fueled by scarce water supplies, infrastructure destruction as rising sea levels swallow coastlines, extreme weather events, wildfires and increased poverty and disease. These are not the predictions of wild-eyed liberal pundits but of thousands of climate researchers around the world, along with organizations such as the Intergovernmental Panel on Climate Change, the U.S. Global Change Research Program and the National Academies of Sciences.

It gets worse. No one really knows what would happen if average temperatures hit 5 C higher than 1850 -- a level we could easily reach within a century under a business-as-usual scenario -- but changes to the physical geography of the planet become probable: land masses would vanish; ecosystems would collapse. Human civilization would change, and not for the better.

This process can still be slowed at a moderate economic cost, but time is short -- delays make both fighting climate change and adapting to it dramatically more expensive, and eventually could make it impossible. It's foolish to say we can't afford to pass a climate bill during a recession. We can't afford not to."

For a Copy of my "Political Economy of Carbon Geography" click
here .

Thursday, February 04, 2010

An Analysis of the Rate of Return on Washington University's Recent Investment in its Economics Department

The young men at economics jobrumors have some candid and accurate comments about Washington University's Economics Department posted here . The profession has benefited from this era of free agency and their department has certainly improved for now but per dollar spent what is the opportunity cost? Provost Macias can learn from the collected wisdom of this crowd. He could have skimmed this paper by Hammermesh and Oster (1998 RESTAT),

"Economists' productivity over their careers and as measured by publication in leading journals declines very sharply with age. There is no difference by age in the probability that an article submitted to a leading journal will be accepted. Rates of declining productivity are no greater among the very top publishers than among others, and the probability of acceptance is increasingly related to the author's quality rather than the author's age."

February 1998, Vol. 80, No. 1, Pages 154-156

Posted Online March 13, 2006.
© 1998 President and Fellows of Harvard College and the Massachusetts Institute of Technology
Aging and Productivity Among Economists

Sharon M. Oster
Yale University

Daniel S. Hamermesh
University of Texas

Willingness to Pay for a "Sustainable" Matzah Ball at Berkeley's Saul's Deli

Saul's Deli sits on Shattuck Avenue in between my in-laws' Berkeley home and the UC Berkeley campus. Given that I walk back and forth, I often go to Sauls. Their food is salty and expensive but it does remind me of my roots in New York City. The Time Blog Article is a funny piece about how to introduce new ways of doing "old things" such as the standard jewish deli meal.

In our first 3 years in LA, we had not found a good deli until we finally found Juniors just 1.5 miles from our house. We were the youngest people in the restaurant by 40 years but we still loved it .

The Social Benefits of Economics Bloggers

Skimming through the headlines at William Parke's Economic Roundtable , you will quickly see that the economics bloggers span a big space of ideas and ideology. But, did you know that we routinely help strangers do their homework?

Somebody in the Philippines found my blog useful for their homework assignment.

Search Engine:
Search Words: "of the four couses of environmental degredation,which do you think gives the most severe effects.justify your answer"

I hope I was cited in the actual homework submitted to the teacher.

I wonder if the smart consultants at McKinsey offer such immediate low cost expertise?

Wednesday, February 03, 2010

Environmental Issues in the Informal Sector in LDCs

I had forgotten that Alex Pfaff and I wrote a good paper a long time ago (when we were both on the esteemed Columbia faculty) on key environmental issues in LDCs with large informal sectors. Here is a copy of the paper . Below I reproduce the introduction.

Many less developed countries (LDCs) contain sizeable shadow economies. For example,
informal economic activity constitutes perhaps 70 percent of the GDP of Nigeria and Egypt, and
perhaps as much as 30 percent of the GDP of Chile, Costa Rica, Venezuela, Brazil, Paraguay,
and Colombia.1 The magnitude of the shadow economy in these and other countries may have
serious environmental consequences. Environmental regulators seeking to provide incentives for
environmental protection and conservation, for example, may face enormous difficulties in
monitoring and enforcing laws in the shadow sector. Groups and individuals operating in this
sector will recognize that they are not likely to be held accountable for actions that degrade
environmental quality. The lack of accountability and incentives to comply with strong
environmental standards raises the possibility that parties operating in the shadow sector will
engage in activities that threaten the quality of the environment. This may include activities that
cause an increase in the number of hazardous waste sites, the degradation of local air and water
quality, species loss and total greenhouse gas emissions.
While informal sectors exist in all economies, the impact of unobserved economic activity on the
environment might be more intense in developing countries for at least four reasons:
(1) as suggested above, the shadow sectors of LDCs are likely to represent a higher proportion of
gross GDP than in developed countries;
(2) LDCs characteristically have more relatively rural and unpopulated areas, in which the
inhabitants lack sufficient incentives (economic or otherwise) to motivate well-defined
property rights;2
(3) developing countries are poorer, and thus their governments have fewer resources with which
to monitor polluters; and
(4) If environmental health is understood as a “luxury good”3 then developing countries may
lack the motivation to develop institutions that expose shadow sectors to regulation.
Given the challenge shadow economies pose to environmental regulators, are there strategies that
a well-intentioned government can pursue to mitigate environmental damage? This paper will
investigate three major related questions:
1. How does the existence of shadow sectors affect the design of environmental regulation?
2. How might regulators set environmental policies if they had more information concerning
economic activity within shadow sectors?3. Could economic development (including income growth) and increased international trade
help “lift the shadow” and thus aid environmental regulators in pursuing accountability?
In general, environmental economic policies should provide appropriate incentives for firms and
households to reduce environmental degradation. Designed appropriately, such government
intervention can guide markets toward outcomes that are socially preferable if, as expected, these
actors ignore to some extent the environmental consequences of their actions. Appropriate
intervention, however, may require expensive studies to gather useful information regarding
actors in the shadow economy that regulators need.
Consider the underlying policy problems: Firms and households make millions of choices every
day that go unobserved by regulators but that have an impact the environment. These are choices
such as: the quantity and type of fuel to use, or a choice between simply dumping hazardous
wastes or disposing of them wastes properly. If a regulator observed each activity and thereby
knew how much damage they caused, they could provide the appropriate incentives required to
induce polluters to bear the full costs of their activities. Otherwise, these costs will be borne by
society. For example, this could be accomplished by instituting a tax equal to the environmental
damage of each activity. Even in well-developed regulatory systems, however, it is costly (in
time and money) to obtain information regarding all of the activities that occur, or the damages
they cause, or the costs of reducing pollution. Thus, in shadow economies, where much of the
economic activity is not officially observed, policy options are limited.

A Novel Way to Increase Spain's Population

We know that Soap Opera watching in Brazil reduces fertility rates but did you know that soccer victories in the Catalonia region of Spain have the opposite effect?

Today, I learned from Sports Illustrated about how soccer victories put everyone in "the mood".


"The number of births in the Catalonia region of Spain in late January, nine months after F.C. Barcelona won La Liga and Champions League hardware within a 25-day span. According to a survey conducted by a local radio station, COMRadio, hospitals saw an almost 50% increase in children born last week. Locals have dubbed the babies "the Iniesta generation" after winger Andrés Iniesta, who scored a 93rd-minute goal to lift Barca to the Champions League final on May 27. "When we notice some sort of surge, we look for the reason," a staffer at the city's Quiron Clinic told the newspaper El Mundo, "and it's evident that the cause of the increase is the euphoria of Barca fans."

In the early 1990s, I noted that in the aftermath of the Rodney King Verdict that no city whose NBA team was still in the playoffs suffered from a race riot at that time.

This suggests that sports outcomes should be strategically allocated (i.e Saints win Super Bowl) by the Obama Administration as part of our bigger Keynesian counter-cyclical policy efforts.

Encouraging Faculty Diversity at Yale

This article from the Yale Daily News is interesting to read on several levels. Ideally, we could follow Goldin and Rouse's "Orchestrating Impartiality research design for testing for gender discrimination. But, this would be tough in the case of tenured appointments.

Judge Burton R. Lifland's Key Decision in the Madoff Zero Sum Game

Today's NY Times reports an interesting "King Solomon" case study. Suppose that Matt Kahn naively invested $200 in Madoff in 2007. Suppose that the month before Madoff's Ponzi Scheme exploded that he sent me a financial statement saying that my $200 is now worth $2,000. Once, Madoff is exposed --- I am a victim. But have I suffered a $200 loss or a $2,000 loss? This is the decision that Judge Lifland faces.

The case for the $200 loss makes the Madoff portfolio analogous to owning a home. Your equity = current value - debt - downpayment. The truth is that your "Madoff Investment" is worthless. A behavioral economist would counter that what matters here is your "perception" of its value. You believed your statement and it anchors you on "the fact" that your Madoff $ is now worth $2,000 and you view this as a property right.

From basic incentive theory, financial markets would work better if the Judge rules in favor of the $200 rather than $2,000. If "paper statements" are meaningless (and if everyone knows this ex-ante) then, investors will invest in costly due diligence before they hand the next Madoff their life's savings.

Why does all of this matter? There is a zero sum game going on between Madoff's victims. They are each staking out claims to the remaining $.

Now, I must admit that I'm puzzled about the following case. Suppose that I give Madoff the $200 to invest and he bought Google stocks with them and told me that he would and suppose that between 2007 and just before he crashed that my Google investment (that Madoff made for me) is now worth $2000. If he then vanishes with my money, then in this case I do agree that he has stolen $2000 from me.

In this case, I bore the risk of the asset price fluctuation of Google's shares and in this case I am a beneficiary that Google's stock has increased so objectively my investment is now more valuable.

There appears to be a difference between this case and the Madoff case than in the latter --- he didn't actually make the trades so the investor didn't really own the core assets. Trust matters here and in the future firms will have to prove that they hold the assets that are listed on the financial statements. 3rd party certifiers can play this role.