Wednesday, March 31, 2010

Is Microsoft "Over-Selling" its Hohm System? What are the Real Energy Efficiency Gains from the Smart Grid Enabling Smart Consumers?

Information is power but will households use less power with more information? Microsoft's hohm system claims that the answer is yes but how do the smart guys up in Redmond, WA know this? Did they bother to partner with an electric utility to run a field experiment with real people and a kosher randomized treatment group and control group?

Today's breathless NY Times article (at first blush) made me think that a Ford electric vehicle that is armed with Hohm technology can recharge without cables (like a Blackberry downloading email). While I am not a physicist, it crossed my mind that this can't be right.

Now, I do agree that a world with lots of electric vehicles could overwhelm the electricity grid. Smart technologies can put at your fingertips the knowledge of when is the right time to recharge your vehicle.

"Electric vehicles will require consumers to change the way they think about personal transportation and energy use. With Hohm, Ford and Microsoft are aiming to help customers avoid unnecessary expenses by providing insight into their energy usage patterns and the ability to determine the optimal time to charge their vehicle - for example, between midnight and 6 a.m. when electricity rates are less expensive."

Do you really need a fancy Microsoft device to tell you this? My dumb blog just told you this! Such real time clues are only useful if the Obama Administration and regulators allow energy prices to fluctuate through deregulation.

Real time pricing of electricity would sharply increase demand and interest in these "smart energy software" that google and microsoft will want us to use. To invest our scarce time in optimizing home electricity use we must face serious scarcity signals. There is a fundamental complementarity here. For this "smart grid" stuff to really make an impact we need more electricity price volatility. In this case, consumers (regardless of their green politics) will demand more control over their electricity consumption.

Implicit in all of this discussion is that people do respond to information. As an economist I believe this but don't forget heterogeneous treatment effects. Some households (the more educated) are more nimble in responding than others. Information access does reduce the likelihood that you will miss out on a great deal.

Rob Jensen, my UCLA colleague, has done some of the best work on this topic. read his paper examining how households and markets are affected by information technology.

Tuesday, March 30, 2010

Nissan's Electric Vehicle; "The Leaf" will be Priced at $25,000

What is the price elasticity of demand for "green" products such as electric cars? We know that there are lots of different companies hard at work on producing electric vehicles. As they conducted their R&D, they must have formed a subjective guess concerning what price they would sell their first generation of vehicles for. No company enjoys losing money.

Now, Nissan has shook up this nascent green market by promising to offer their vehicle to consumers for $25,000 (net of a generous government subsidy). So Nissan will be paid $32,500 for each vehicle and each consumer who buys "a Nissan Leaf" will pay $25,000 and taxpayers such as my wife will finance the subsidy of $7,500. Given the fixed cost of designing the first generation of these vehicles ; companies must have an expectation of the scale of sales to lower their average fixed cost of production. For details on Nissan's Leaf see this and this .

This raises an interesting advertising issue. Up until its safety problems, the Toyota Prius was "the green car". Now with electric vehicles all the rage, how will these vehicles compete? Simply on price? A price war won't benefit the producers but consumers will be happy and so will environmentalists as people trade in Hummers for Leafs. Advertising firms could get rich here as they use their clever tricks to try to "help" consumers to distinguish between these various vehicles.

If there are 10 different makers fo electric vehicles, how will each search for its own market niche? From their perspective, each would like a small monopoly so that they can charge a price markup over their cost of production (i.e earn real profits). But, in a globalized economy --- will this happen?

A New Precedent: Economic Research Repackaged as a Documentary

In this morning's print edition of the New York Times Arts Section (don't ask why I read it), I stumbled upon a brief mention that Freakonomics will be turned into a documentary and this Dubner blog entry fleshes this out.

Now that the door is ajar, what other economics research will squeeze through? General equilibrium would be a hard sell.

1. I could imagine that a good documentary could be made about Andrew Lo's or Ariely's work showing "behavioral man" getting worked up and making "un-Spock" like decisions at the peak of some emotional high.

2. I could imagine an insider documentary showing a typical day at a University of Chicago Seminar where the speaker quickly realizes that he doesn't have property rights at his own seminar. The audience would have to decide whether they root for David or Goliath.

3. I could imagine Bill Easterly touring one of the Millenium Villages and walking with Jeff Sachs as they debate what are the true keys to economic development in front of the cameras.

4. I could imagine a new round of "Simon vs. Ehrlich" as the NBER's Energy and Environmental Economics group debates some Peak Oil folks. I would invite Stephen Holland to play a key role here.

5. Like the Odd Couple, we could pair unlikely buddies such as Eugene Fama and Paul Krugman and watch them drive across country together. On the way, they would discuss each other's work and ask tough questions.

I'm trying to think about which of my papers and books would make a good documentary. The answer is "Climatopolis" but we must wait until the September publication for me to convince you of this.

Monday, March 29, 2010

Do Borrowing Constraints Limit Green Investment?

Ignoring uncertainty, households and firms should do projects that have a positive net present value . Many empirical economics papers such as this one examine how a household's decisions are affected by its initial wealth. For example, suppose that you must choose whether to attend UCLA or work at Starbucks. Ignoring financial aid and assuming you cannot get a loan from parents or a bank, if you do not have $12,000 in the bank --- you cannot attend UCLA because you can't finance the tuition payment. If this young person would have simply kicked back and drank a lot of beer at UCLA then this is not a big social loss but if this young person would have discovered a cure for baldness by studying at UCLA then guys like me would be forever grateful. Economists would call her "liquidity constrained" if attending UCLA is a net present value > 0 investment but she cannot do this "project" because she can't pay the upfront tuition.

Now, here is my point. Environmental economists haven't paid much attention to liquidity constraints as an impediment to the "green economy". But, the company "Solar City" appears to be focusing on reducing upfront costs of going green through a "leasing" program for solar panels. Details are here . As I understand it, a solar system for a home can cost $20,000 to $30,000 upfront. This is a big investment. Part of Solar City's business plan is to give you a financing plan to pay an annual rate (like rent) for your solar panels. A Behavioral economist would say that this backloads pain and makes the price less salient as you spread it out. A Chicago economist would want to know what is the implicit interest rate solar households are paying for this.

Permit me to give you an example;

Suppose I want to sell you my book Climatopolis today and I offer you two ways to pay for it:

Option 1: give me $100 now

Option 2: give me $10 a year forever. In an economy in which the market rate of interest is 5%; we know that the Net PDV of option #2 = 10/.05 = $200 .

So what? The consumer sees the low price of "$10" as an annual flow and the smart company collects $200 in present value rather than the measly $100.

Now if this large a profit opportunity exists then free entry predicts that Solar City will face competition as entry takes place.

But, their business model raises an interesting empirical question --- as financing on annual flow basis becomes easier; will more middle class households adopt solar? In part this depends on how "sexy" they view it, how much they believe it adds to a home's resale value, and what they believe is the price path for electricity in their community.

The other interesting piece of information I see at Solar City
http://www.solarcity.com/residential/solar-lease.aspx is the company's attempt to reduce risk for the installing household. They offer a money back guarantee and promises of skilled installation and repair.

Similar issues arise for small firms. As they consider how energy efficient to be, how do they finance costly upfront investments? Are there financing arrangements to share the risks and the returns with deep pocket investors?

Is there a possibility of a nascent literature on corporate finance meets environmental and energy economics?

Sunday, March 28, 2010

Slaughterhouse Five Revisited

When I was a teenager, I liked Kurt Vonnegut books such as Slaughterhouse Five . So, when the NY Times writes an article about slaughterhouses I read it. The Times reports a funny story. Apparently, there are gains to trade. There are a number of free market hippies seeking to get rich selling "local food" (pigs, sheep that they raise on their rural farms) to sophisticated nearby big city fancy restaurants. The problem is one that Tony Soprano could appreciate. Who "whacks" the sheep?

Apparently there is something called a "Slaughterhouse" that transforms a living creature into something that Don Trump would want cooked medium rare. The "problem" is that a byproduct of the suburbs/rural interface and the rise of environmental concerns is a classic NIMBY issue. Nobody wants a slaughterhouse in their community. They must smell bad, polluter the water and appear to be "low class". So, the irony here is that the local pig growers must drive their pretty hog hundreds of miles to find the "local" slaughterhouse. This adds to costs and chips away at the argument that the local food is low carbon.

The NY Times article is weak on discussing why the slaughterhouse industry is contracting in the areas such as Vermont and Deleware County in Upper New York State.

To investigate this issue, I used google to find this article in Farming Magazine. This issue claims that food safety regulation and inspection is raising the cost of doing business by small slaughterhouses and they are responding by shutting down.

Given my interest in economic geography, it is an interesting question how we choose where to site necessary but nasty economic activity such as power plants and slaughterhouses.

Berkeley's Lucas Davis has taught me about the determinants of the siting of power plants but I can't find a similar paper on the determinants of the siting of slaughterhouses. So, I'm no dope. I appreciate that the slaughterhouse wants to be close to the rural demanders of its services (the pig growers) but as exurban development takes place does this sharply contribute to shutting down these "rural factories"? This strikes me as a nice example of a dynamic coase theorem at work. As exurban areas experience population density increases and rising per-capita incomes (as they become suburbs); it is probably efficient to shutdown nasty rural activity but then the anti-carbon justification for growing "local food" makes less sense.

This map of North Carolina Hog Farms makes my point. But, I want to see that map at multiple points in time to see how the probability that any given hog farm (and related slaughterhouses) are shutting down over time in relation to suburban growth.

Can Carbon "Cap and Trade" Make a Comeback?

Harvard's Rob Stavins asks "Who Killed Cap and Trade?". The NY Times is asking the same broad question .

The recession has not helped the push to internalize the carbon externality. Hummer drivers, meat eaters, electricity consumers, cement makers are all not eager to face higher input prices at a time when their earnings are down. Matt Kotchen and I have figured out a credible strategy for measuring this "recession chills the ardor for Carbon policy" effect and we should have a serious NBER paper ready in 2 months or so.

Last year, Mike Cragg and I served up our basic answer to Rob Stavins' question in this NBER paper . In that paper and in this better version of that paper, we document that there is clear evidence that Congressional representatives from high carbon, poor, conservative areas are not going to support such legislation. Our statistical model can be used to identify the "marginal fence sitting" representatives who Nancy Pelosi would need to form a coalition of the willing on carbon. For generations, environmental economists have spoken about the coase theorem (when property rights are well defined --- bargaining will take place and an efficient allocation of resources will emerge --- intuitively --- a vegetarian never ends up with a meat pizza) --- so in this case; liberal wealthy states such as California should make side payments to the West Virginia type states to encourage their leaders to vote pro-green. These aren't "bribes" to politicians. These would be transfers to the people of such states to help them cope under the new anti-carbon incentives that would be built into cap and trade.

So, you don't have to be a Nobel Prize winner to think through the narrow self interest of each of these Representatives and Senators from such states as Indiana and Missouri. Each will ask himself; "what are the benefits of adopting a carbon cap and trade and what are the costs?" Do the benefits to my district exceed the costs?

Of course, both are very difficult to quantify; on the benefits side -- it has become clear that the U.S enacting cap and trade is unlikely to set off a "chain reaction". Imagine if China and India said that they would match any regulation we sign, that would be a "chain reaction". The Congress may believe that the rest of the world can't credibly commit to "match" the U.S. If other nations do not respond to our unilateral actions, then given that we are 25% of world emissions --- a major 50% reduction by us does dent global emissions but not for long as China and India's share of emissions grows.

On the costs side, we need economists to generate credible estimates of how household well being for heterogeneous households will be affected by pricing carbon. This is a classic incidence question. In low carbon states such as California, households will face less of this carbon incentive then in a humid, sprawling, large home, coal fired power plant region. California could make side payments to these states' leaders to compensate them for the anticipated higher costs brought about by carbon legislation. I don't know if this was discussed.

Permit me to end with some optimism. Assume that California's AB32 is implemented and that over the next 10 years that California's innovation sector makes serious directed green technological progress --- these new "google" ideas can be adopted by the rest of the county and this lowers the cost of complying with a cap and trade mandate. Such substitution possibilities will make leaders in Missouri more willing to sign such legislation. Under this scenario, cap and trade will make a comeback when its anticipated price tag falls. Now will this be too late? Will Jim Hansen and 350 ppm and the general doom and gloom caused by climate change already have taken place? I do not know.

Shifting gears, the Stavins piece mentions that greens need booms and disasters to achieve political goals. Folks should read my 2007 paper in the Journal of Risk and Uncertainty that discusses the "silver lining of disasters" point using Congressional voting data before and after 5 major environmental disasters.

Saturday, March 27, 2010

The Limits of Economics in Predicting How the Economy Responds to a Major Policy Regime Change

Over the last month, reporters have been calling academic economists and asking important practical questions. Health economists have been asked how the Obama health care legislation will affect the budget deficit. Environmental economists have been asked how California's climate change mitigation legislation (AB32) will affect the state's economy? Will this legislation accelerate California's growth or prolong the current recession?

On health care reform, here is the CBO's attempt to crunch the data.

Here is the California Air Resources Board's updated economic analysis of the scoping plan.


"The Climate Change Scoping Plan provides California’s blueprint for reducing its greenhouse gas (GHG) emissions to 1990 levels by 2020 as directed by AB 32, California’s Global Warming Solutions Act of 2006. In approving the Scoping Plan, the California Air Resources Board (ARB) directed ARB staff to update the analysis of the economic effects of implementing the Plan. That updated economic analysis, documented in this report, profited from consultation with members of the Economic and Allocation Advisory Committee (EAAC), appointed by California Environmental
Protection Agency (Cal/EPA) Secretary Linda Adams and ARB Chairman Mary Nichols. EAAC consists of top economists, business and financial leaders."

Subtle thinkers should note that the Lucas Critique is highly relevant in both cases. "The Lucas critique, named for Robert Lucas′ work on macroeconomic policymaking, supports that it is naive to try to predict the effects of a change in economic policy entirely on the basis of relationships observed in historical data, especially highly aggregated historical data."

In both the health reform case and the California carbon mitigation case, I don't believe that economists have been completely honest about the fundamental uncertainty lurking here. The policy makers are getting ready to run two major policy experiments but economists can't be confident that we know what will happen next. The main reason for this is that we are not strong at predicting how technological change's "direction" is affected by major government policy shifts. We also do not know the key "elasticities" of how behavior will change as the policies shift incentives. For example, in the case of health care reform --- will the uninsured, who will now be covered by insurance, take better care of themselves and how healthier will they be?

In economic policy discussions, economists are used to being asked smaller questions such as; "if we raise the minimum wage from $7 to $8 will this have unintended consequences?" Compare this "small" policy change with the major incentives changes bundled into the health care bill and the carbon mitigation legislation. When modest economists shrug and say, "I don't know" what will happen next? The vacuum is filled by "policy entrepreneurs" (recall Krugman's term) who fill the void by providing the politicians with convenient numbers that they would not be able to defend in an academic setting.

Despite my deep reluctance to support the use of macro CGE models to judge the effects of California's carbon regulation, I am confident about its likely medium term beneficial effects. My optimism is based on the regulation's core focus of "green incentives". If credible (and not repealed by future Republican Govenors), this regulation will nudge households and firms within California to adapt and make choices to decarbonize. This will stimulate induced innovation and the next generation of "green products" through the home market effect. The rest of the U.S and the rest of the world will gain from California being a first mover. I do think that the Obama Administration should think about rewarding California for being such a voluntary guinea pig.

As I get older, I now am starting to believe that the "Nelson/Winters" ugly line about the evolutionary nature of capitalism is the first order issue here.

Static efficiency doesn't interest our students. They care about distribution. Dynamic efficiency --- how we improve our standard of living by innovating our way out of the major challenges we face (cancer, climate change) remains the key question for determining capitalism's benefits.

Wednesday, March 24, 2010

The Economic Impact of California's AB 32 Law for Fighting Climate Change

Today is a big day in California environmental politics. The Air Resources Board has released its new economic report providing details of its best predictions concerning the likely impact of this important regulation. Details are posted here:
http://www.arb.ca.gov/cc/scopingplan/economics-sp/economics-sp.htm

Jim Sweeney and I published an editorial today in the Los Angeles Times. You can find a draft of that piece at
http://www.today.ucla.edu/portal/ut/analysis-of-cost-of-greener-california-155823.aspx. We argue that AB32 offers some benefits and that we need careful economic analysis of its true micro economic effects.

I was also happy to see this US News and World Report article discussing my work on the impact of natural disasters. http://news.yahoo.com/s/usnews/20100324/ts_usnews/whynaturaldisastersaremoreexpensivebutlessdeadly

Returning to AB32, I spoke to many different reporters today and I always said the same thing;

1. I don't love "macro models"
2. I do believe that this regulation is beneficial because of how it will change firms and households incentives and this MICROECONOMIC incentive change will spur green innovation and help the California economy in the medium term.

A smart writer from the San Diego Union Tribune pushed me asking about free riding. He asked why California must be the Guinea Pig? Why can't we free ride like everyone else (given that the rest of the world failed at Copenhagen to sign a global deal). I pushed back that California, Oregon and Washington are large enough together to form a home market effect to push the green economy regardless of what the rest of the nation is doing. But, upon reflection -- I do think he is right that President Obama should think about offering a "green carrot" to California for taking this costly first move for the social good of the "big green economy". I will return to this point in a future post.

Monday, March 22, 2010

The Hidden Link Between Health Care Reform and Support for Immigration

Will the Obama Health legislation increase political opposition to immigration? I see an expansion of coverage for 30 million people in the United States. This must be an income transfer to this group and this means that taxpayers will cover this. Now, I do hope that preventative medicine will reduce this group's demand for costly emergency care but I do not know of a NBER quality health economics paper carefully documenting this optimistic claim.

Let's assume that the expansion of health care insurance coverage for the uninsured is an income transfer. If immigrants are over-represented in this group (or if this is even perceived to be true), will political opposition to immigration rise? The economics literature on the determinants of redistribution would say yes. Read the Alesina and Glaeser book. If you don't have time to read that, then read this . The ugly fact that emerges is that we are not generous when the recipients "look different" than us. Now, how big of a tax price will we collectively face because of this legislation? The CBO doesn't know the answer to this and I don't believe a word of the "scoring" that they do. Health economists will have plenty to do over the next couple of years.

Now, I am a full fan of immigration. In previous blog posts, I have argued that the U.S should auction off 3 million passports a year.

what is the core logic here? Immigrants tend to be poorer than average and younger than average. These groups are over-represented among those who don't have health insurance. Friends of Fox News have already noted this fact .

Tuesday, March 16, 2010

Green Irreversible Investment Under Uncertainty and the Big Chill

On March 29th, I make my comeback as an environmental economics teacher. To prepare for this big day (and the 200 registered students), I'm vanishing and heading up to Berkeley for 10 days of solar panels and Prius watching and no blogging. I will be thinking about this WSJ piece that debates the consequences of the Congress' refusal to pass credible anti-carbon legislation. The article argues that there is a huge amount of "green investment" sitting on the sidelines and not happening because of the fundamental uncertainty about what are the "rules of the game".

This is a key application of the deep ideas of investment under uncertainty. Robert Pindyck outlines these ideas in this very nice survey piece. In a nutshell, when uncertainty about the direction of public policy increases --- a business will delay making an irreversible investment and wait until the uncertainty is resolved. While this is individually rational, it can be socially costly if there is a core challenge (i.e climate change) that grows more dangerous with further delays in battling it.

Imagine if a block of adjacent liberal/green states such as California, Oregon and Washington formed a "Regional Green Trading Block" where they collectively enacted the equivalent of California's AB32 .

This collective effort would feature a large number of people (perhaps 45 million) and cover a large land area. If this "Green Region" committed to only purchasing new high average MPG vehicles and demand a large share of electricity to be produced from renewables, then this consumer push would attract the green investment that the WSJ claims is sitting on the sidelines. The old "home market" effect from International Trade would kick in as this 45 million person region would be large enough to sell to even if the rest of the nation continued to side with Dick Cheney.

The Green Home Market Effect would even offer a convenient story to convince my liberal/green region that our next great export base (forget movies) will be shipping green products to the rest of the nation and China.

In this sense, a green trading bloc could be a building block to achieving a national carbon policy. In this case, the green region would pre-commit to be the guinea pig and if the learning by doing effects actually exist for "green" products then the rest of the country will be happy to adopt them after the learning takes place in my West Coast Lab (i.e California, Oregon, and Washington). My friends in Canada, if you want to join this coalition of the willing, you are welcome. The greater the size of the home market --- the greater the economic opportunities for suppliers.

Predicting Global Epidemics: Should You Believe the Economists or the Public Health Experts? Evidence from the Swine Flu Case

Economists seek to explain and predict human behavior. We believe that people can change their behavior as they receive "new news". Other research fields implicitly assume that people do not change our behavior and thus they predict the future using naive statistical extrapolation methods. The recent swine flu epidemic offers an interesting case study. A new NBER Working paper titled "Public Avoidance and the Epidemiology of novel H1N1 Influenza A" by Byung-Kwang Yoo, Megumi Kasajima, and Jay Bhattacharya (NBER Working Paper No. 15752
February 2010
http://www.nber.org/papers/w15752.pdf) investigates this important issue.

"In June 2009, the World Health Organization declared that novel influenza A (nH1N1) had reached pandemic status worldwide. The response to the spread of this virus by the public and by the public health community was immediate and widespread. Among the responses included voluntary avoidance of public spaces, closure of schools, the ubiquitous placement of hand sanitizer, and the use of face masks in public places. Existing forecasting models of the epidemic spread of nH1N1, used by public
health officials to aid in making many decisions including vaccination policy, ignore avoidance responses in the formal modeling. In this paper, we build a forecasting model of the nH1N1 epidemic that explicitly accounts for avoidance behavior. We use data from the U.S. summer and the Australian winter nH1N1
epidemic of 2009 to estimate the parameters of our model and forecast the course of the epidemic in the U.S. in 2010. We find that accounting for avoidance responses results in a better fitting forecasting model. We also find that in models with avoidance, the marginal return in terms of saved lives and reduced infection rates of an early vaccination campaign are higher."

As individuals take costly actions (how costly?) to protect themselves (hand washing) their small mutinees against the public health threat help to protect us all from infection. A serious public health research question should investigate how different households (white, black, Hispanic, Asian of different ages and education levels) each respond to the common threat of epidemic. Who is most responsive? Do their local residential communities suffer less disease risk because of these individual responses? Which individuals and communities engage in the least epidemic "self defense"? How can we encourage such communities and individuals to be more pro-active?

In this age of air travel and globalization, there must be the variation in the data to explore the geography of contagion and the interesting aggregation patterns of which geographical areas suffered little from the epidemic versus which areas and demographic groups suffered greatly.

Monday, March 15, 2010

UCLA's Luskin Center Research on the "Feed-in Tariff" Will Promote a Greening of Los Angeles

Mayor Villaraigosa announces L.A. solar energy incentive plan based on UCLA Luskin research

By Minne Ho March 15, 2010

J.R. DeShazo, the director UCLA's Luskin Center for Innovation, has long studied how governments can promote and help implement environmentally friendly energy policies. Now, his recent research on solar energy incentive programs, conducted with Luskin Center research project manager Ryan Matulka and other colleagues at UCLA, has become the basis for a new energy policy introduced by the city of Los Angeles.

On Monday, March 15, Los Angeles Mayor Antonio Villaraigosa announced an ambitious program to move the city's energy grid toward renewable energy sources over the next decade. Included in the plan is a provision — based in large part on the Luskin Center research — for a "feed-in tariff," which would encourage residents to install solar energy systems that are connected to the city's power grid.

The overall plan would require ratepayers to pay 2.7 cents more per kilowatt hour of electricity consumed, with 0.7 cents of that — a so-called carbon surcharge — going to the city's Renewable Energy and Efficiency Trust, a lockbox that will specifically fund two types of programs: energy efficiency and the solar power feed-in tariff.

Under the feed-in tariff system, homeowners, farmers, cooperatives and businesses in Los Angeles that install solar panels on homes or other properties could sell solar energy to public utility suppliers. The price paid for this renewable energy would be set at an above-market level that covers the cost of the electricity produced, plus a reasonable profit.

"A feed-in tariff initiated in this city has the potential to change the landscape of Los Angeles," said DeShazo, who is also an associate professor of public policy at the UCLA School of Public Affairs. "If incentivized appropriately, the program could prompt individual property owners and businesses to install solar panels on unused spaces including commercial and industrial rooftops, parking lots, and residential buildings. Our projections show that the end result would be more jobs and a significant move to renewable energy with no net cost burden to the city."

Feed-in tariffs for solar energy have been implemented in Germany and several other European countries, as well as domestically in cities in Florida and Vermont. The programs have moved these regions to the forefront of clean energy.

And while these programs have necessitated slight increases in ratepayers' monthly electricity bills, they have also generated thousands of new jobs.

The mayor estimated that under the program announced Monday, 18,000 new jobs would be generated over the next 10 years.

"For Los Angeles to be the cleanest, greenest city, we need participation from every Angeleno," Villaraigosa said. "We know that dirty fossil fuels will only become more scarce and more expensive in the years to come. This helps move us toward renewable energy while at the same time creating new jobs."

The new program had its genesis last year, when Villaraigosa announced a long-term, comprehensive solar plan intended to help meet the city's future clean energy needs. The plan included a proposal for a solar feed-in tariff program administered by the Los Angeles Department of Water and Power.

In September 2009, the Los Angeles Business Council created a Solar Working Group consisting of leaders in the private, environmental and educational sectors in Los Angeles County to investigate the promise of the feed-in tariff for Los Angeles and commissioned the UCLA Luskin Center for Innovation to lead the investigation. In addition to DeShazo and Matulka, the working group also included Sean Hecht and Cara Horowitz from the UCLA School of Law's Emmett Center on Climate Change and the Environment.

The first phase of their research examined current models operating in Germany, Spain, Canada, Vermont and Florida to propose guidelines for a feed-in tariff design. The second phase looks at the potential participation rates in a large-scale solar feed-in tariff program in Los Angeles and its impact on clean energy in the Los Angeles basin.

The Los Angeles Business Council is expected to release the UCLA Luskin Center for Innovation's complete report on solar energy feed-in tariffs next month.

The Luskin Center for Innovation at the UCLA School of Public Affairs unites the intellectual capital of UCLA with forward-looking civic leaders in Los Angeles to address urgent public issues and actively work toward solutions. The center's current focus in on issues of environmental sustainability.

Two Trillion Dollars in Unfunded Local Pension Obligations

Bloggers are talking about the $2 trillion bucks that states such as California owe in pension benefits to firemen, teachers, UCLA professors, and other public sector employees. As someone with a stake in this discussion, permit me to speak.

1. If labor markets were competitive, then these job perks allowed states and cities to pay lower wages and this benefited the tax payers (simple compensating differentials logic). Given that many of these perks are not taxed (Cadillac health plans), the employee wants such "hidden" compensation that the IRS cannot see.

But, there have been a series of shocks that were not anticipated when the original contracts were signed.

1. Public sector employees are living longer than ever so the present discounted value of the benefit stream is large for each worker.

2. There are a large number of these retiring babyboomers (this was predictable)

3. health expenditures per senior per year are going to infinity.

To see the public finance challenge here, let's assume that the average public sector employee lives 25 years after retiring. Let's assume that her promised annual retirement income (defined benefit) is $75,000. Let's assume that she spends an extra $25,000 per year on health and other promised benefits. So, the tax payers owe her (measured in thousands) = 100. Assume there are 1 million retired public sector total employees in California. Let there be 15 million workers in California who are paying taxes.

Assuming a 0% interest rate to keep the PDV calculations simple, to support these workers over their remaining life will mean that the State will need to collect (measured in $1,000s)

1,000,000*25*100000 = 2.5 trillion dollars.

The average Cumulative tax burden for Californian workers = 2.5 trillion/ 15 million
= $166,000. That's the cumulative amount of money each worker would need to pay to the State so that they can redistribute promised $ back to that teacher.

Now I know that my numbers are a little bit off but you can see the problem!
For some actual facts on the key parameters here click here and Calpers information.

So what happens next?

Ideally, we could grow our way out of this problem. If the economy and the stock market grew deterministically by 15% per year then it would be easier to achieve a dynamic balanced budget such that we tax the young, invest in a mutual fund and use the payout to payoff the public pensioners. But, today the stock market's mean return growth appears to be down and the variance is up. The economy is stuck in a rut.

A one time default on 30% of the public obligations to the "fat" public pensioners? I predict that this will happen. Anticipating this, new employees at places like UCLA should demand a raise to compensate them for this risk. The State appears to no longer be willing to make contributions to Calpers. This effectively means that UCLA faculty will suffer a permanent pay cut as the working faculty will make increasingly large payments into the system to guarantee the defined benefits to those who are now retired. The old guys on the faculty have no choice but to suffer in silence. This raises a Legal Question. What "bankruptcy court" would handle the case? Could some judge determine the future of the public sector's balance sheet?

There is an element of behavioral economics here. The public is not aware of the cumulative benefits they had promised through being nice to unions and the unions knew this.

During a time of increased risk and fundamental uncertainty, the pensioners have been offered a "risk free" retirement package. The irony here is that this great deal is now threatened because so many California workers had this deal that this has brewed up a political backlash and increased risk for public sector employees. If only 1 UCLA Prof had had this deal, nobody would have notices.

This raises the key question of how large should the public sector be? How many government employees should there be? To be honest at UCLA, we have too few faculty and too many non-teaching workers doing all sorts of redundant tasks that could be "out-sourced" or replace by information technology. Union rules certainly affect how UCLA uses its resources in terms of hiring. Put simply, we are over-staffed with too many gardeners and garbage management and facilities management guys. I'm guessing that this is the tip of the iceberg.

It appears that the field of "demography and macro economics" has a ripe future as researchers investigage whether cumulative obligations to retiring generations slow down economic growth just when we need it!

Sunday, March 14, 2010

Will the Toyota Prius Continue To Be the "King of the Green Hill"?

As the proud owner of a 2008 Toyota Avalon and as a researcher who likes to make maps of where are the communities with lots of Prius vehicles (i.e Berkeley), I have been in deep thought about the "green" competition for auto market share. The NY Times wrote a thought provoking piece on this topic.

Will Toyota Prius buyers maintain brand loyalty? Or, will safety concerns lead them to take a new look at alternative hybrids and electric vehicles? Interesting product competition issues will break out, if Prius competitors anticipate that the Prius is vulnerable then they should price aggressively to lure them away. Anticipating this, will Toyota deeply discount the price of their next Prius fleet in order to not lose market share?

There is also the issue of "objective reality". How do we rank these different vehicles to determine how green they really are? Does the truth matter? Here is the EPA's Green Vehicle guide. Do you trust them?

How does Al Gore choose what vehicle to drive? My wife and I only drive 1,000 miles a year so our logic is that it doesn't really matter what our vehicle's MPG is. The Avalon is not a Prius but for our mileage --- it is good enough for us to go to heaven.

So, given that I will be spending 10 days soon in Berkeley --- I'm thinking of doing some field research and asking the natives there whether they have soured on the Prius. If "yes", what will they substitute to? The designers for the competitor vehicles should be thinking about what designs are distinctive (not the hybrid Civic) so that Prius buyers who like "green cache" can gain the same buzz from their vehicle. There is also the issue of network externalities. If Matt Kahn motors makes a green vehicle but nobody knows this, does my mom gain any "green status" in Berkeley if she drives one of these out on the streets? If the answer is no, then the little car makers (regardless of how green their vehicles objectively are) will not gain market share at Prius' expense.

Saturday, March 13, 2010

Two Thoughts about China's Cities

Does urban infrastructure such as new airports cause urban growth? China is running an interesting "natural experiment" in cities such as Libo (a city of about 166,000 in a mountainous region in Guizhou, one of the poorest provinces in China) Source . In Libo, China has unveiled a $57-million airport opened in late 2007. "Local officials were so confident that tourists would flock to this beautiful, mountainous county in southwestern China that they made the terminal big enough to accommodate 220,000 passengers annually, and built a runway capable of handling a 140-seat Boeing 737." The LA Times says that as of right now that nobody is using this airline but will this infrastructure attract employers to cluster nearby and then if people follow jobs then you have the start of a dynamic "chain reaction" and a new vibrant city.

Switching to the New York Times, there is a long article today probing the deep thoughts of Han Han. Mr. Han is a handsome race car driver and a blogger. So we share 1/3 attributes. While I usually do not turn to such drivers for wisdom, he did say one smart thing;

"Once viewed by critics as petulant and self-consciously rebellious, Mr. Han has moved beyond ad hominem attacks on poets, pop stars and fellow bloggers. These days his attention is largely drawn to society’s deeper problems: a surge in nationalism; the lackluster quality of contemporary culture; and the albatross of sky-high real-estate prices that keep China’s nascent middle-class in a constant state of anxiety.

He blames the high prices on local officials, who sell off land to the highest bidder in an effort to finance public works and pump up the double-digit economic growth figures that keep Beijing happy. High property values, he adds, also pay for all those dinners and fancy gifts that seem to be the birthright of officialdom.

The grim result is a country of young professionals so overworked and distracted by mortgage payments that they have no time to care about what ails China. “The government is happy to see prices go up, people are forced to buy property they can’t afford and they end up living in fear.” Then he smiles and adds, “It’s a perfect situation, right?”"

This quote nicely summs up the Real Wage issue in China's major cities. Yes, nominal wages in big cities are high but when you deflate by real estate prices in such cities --- is the standard of living that high? Your answer hinges on whether high real estate prices are driven by quality of life fundamentals (i.e Beijing is a great place to live) or due to artificial government land use regulation barriers (building height restrictions).

The market test of this claim is whether the skilled continue to move to the high rent cities or whether the next Chinese Google does seek to locate in a cheap city such as "Libo" that offers an underutilized airport and cheap land. In a system of cities, the "cheap" cities can compete against the superstar cities and this will impose discipline on the big city politicians to take actions to continue to attract and retain the skilled.

Friday, March 12, 2010

Protecting Tuna and Elephants in a Growing World Economy

In a growing world economy, how do we protect natural resources to guard against "collapse"? International negotiations are unlikely to mitigate this clasic tragedy of the commons. Ecologists continue to try to educate the public about the consequences of the status quo in articles such as this and this in Science.

Here are our options;

1. Privatize the commons.

2. Draconian, credible punishments for poachers

3. Invent a perfect substitute for the depletable natural resource (keep in mind that PETA is investing in developing a substitute for meat ).

4. Educate consumers about the social consequences of their actions so that they engage in "voluntary restraint"

As a free market environmentalist, I do worry about the "in between" case in which we have ample "common property" and a growing world economy where there are more people with a taste to spend more of their income on tusks and tuna. This is a recipe for big natural resource depletion problems.

The optimist in me hopes that improvements in information technology such as satellite pictures and real time information creates credible means of protecting the commons.

Thursday, March 11, 2010

Some Comments on Today's News

In today's NY Times, there is an article about the Obama Administration's urge to root out medical fraud and there is an article about my electric utility's (LADWP) desire to raise my electricity prices in the name of fighting global warming. In today's LA Times, there is a lead article on the decline in investment in oil refining .

A few thoughts;

1. Detecting Medical Fraud -- The article mentions the deployment of "bounty hunters" who will root out this fraud. I would assume that econometrics nerds would follow Brian Jacob and Steve Levitt's approach on detecting teacher cheating and look for suspicious data patterns. A simple approach would be to estimate a count model of the number of times each doctor applies for reimbursement as a function of his attributes and his patient mix. Controlling for such observables, identify the outliers (the positive residuals). For this subset who have submitted "too many claims", one could then turn to the dollar amount claimed. Do these "suspect doctors" always put in claims for the same amount of money? Does the timing of the date when they put in their paperwork look suspicious? For this subset of doctors, the Government should invite them in for a work out where the doctor has to prove that his work is kosher. Credible punishment of a few identified guilty fraudsters could save us billions.

2. "Now, the Los Angeles Department of Water and Power, the largest municipal utility in the United States, is poised to pass a roughly 5 percent rate increase on electricity use. The proceeds would be earmarked for renewable energy purchases and programs, including one that would repay people or businesses that use solar panels to contribute to the power grid."

As a green, I support this but as a cynic I wonder whether this is a politically correct means for this over-staffed agency to keep its budget balanced so that fat labor union contracts continue on.

I did like Severin Borenstein's quotes in the article. To see what a tough job this is, take a look at this job description for managing LADWP. To get a sense of the union who plays a big role at LADWP take a look at this . Unions offer their members benefits but social costs rise and Los Angeles does not have a nimble power provider. As the real world changes, a supplier of key services must be ready to evolve.

3. The decline of oil refining in the U.S raises interesting issues that merit real academic research. What is the medium term future for cars? We see the growth of electric car production but we know that in the short term that most cars will run on gasoline. If oil refiners start to scale back their investment in new refining capacity and if the electric car is not a mature technology yet, what happens next when inevitable shocks such as OPEC or other wacky nations have shocks. If refining capacity is low, then the supply of gasoline could tighten up and slight shifts in demand could have wild price implications. Will this anticipated volatility of gas prices accelerate our economy's transition to electric cars?

Wednesday, March 10, 2010

A Preview of the Fall 2010 Climatopolis Book Rollout

In fall 2010, Basic Books will publish my new book titled "Climatopolis". If you'd like to see a preview of some of this book's themes, then you might want to watch my presentation at the February 2010 USC Conference on Cities and Urban Growth. Believe it or not, I was sober and I was trying to be serious. I had a great time and I hope that you find it thought provoking.

Designing a High Quality Environmental Economics Course

When I was an undergraduate, the middle aged Professors seemed to be lecturing from "yellowing" sheets of paper that looked older than my grandfather. At the time, I thought this was curious but I didn't investigate this matter. Now that I am a "supplier" of middle aged lecturers, I have the opportunity (and the time) to reflect on this point. This issue takes on a certain urgency because UCLA actually expects me to teach starting in 2 weeks. To my surprise, 200 talented undergraduates want to hear what I have to say about environmental economics. I believe that 500 of them would have registered if UCLA would have been willing to give me more than 1 TA to help me teach this class! These are tough times.

I am not a modest man so I will talk about the history of my thinking on this topic.

1. We will discuss my past green cities work


2. "Urban Growth and Climate Change Paper" Posted Here

3. My Carbon Geography paper (joint with Cragg) Posted Here

4. My China work (joint with Zheng)

But, we will then turn to other scholar's work. In particular, we will focus on
articles published in the Review of Environmental Economics and Policy . Charlie Kolstad and Rob Stavins have put together an excellent journal that I am now helping them on.

Here are just a few of the articles that I will be teaching in Spring 2010.

1. Carson on the Environmental Kuznets Curve

2. Levinson on Trade and the Environment

3. Metcalf on Designing a Carbon Tax

4. Corporate Social Responsibility

Each of these pieces is written by a star researcher who is boiling down the key ideas of the subject to their essence. Please tell my Deans that I am trying to devote some effort to be a decent teacher. For Professors thinking about updating their materials and trying something new, REEP will not disappoint you.

Tuesday, March 09, 2010

Old School vs. New School: The Case of the Smart Grid and Real Time Electricity Metering

All change is bad. The Smart Electricity Meter roll out offers a test of this claim. These meters provide us with real time information about our minute by minute electricity consumption. In a world where we are glued to our Iphones and Blackberries, shouldn't such information be useful and improve our quality of life? After all, these $100 meters will replace the antiquated monthly electricity bill. Like Star Trek's Captain Kirk, you will now be an informed captain of your own ship!

To paraphrase Sy Sims, an educated consumer should be a better customer. But, the NY Times is reporting that a revolt is breaking out. The first guinea pigs of the smart meter roll out are complaining that they are being price gouged. The utilities are countering that the bills are high because of weather shocks not a malfunctioning machine or a corrupt machine.

Economists are hoping that these devices will spread quickly across all households. If households had real time access to information about their consumption of electricity, then electric utilities could offer special incentive programs to such customers to shift their daily consumption. Leading economists continue to explore how households change their behavior when they face critical peak pricing . So imagine if your utility sent you a letter saying that it would send you a check for $100 each summer month but in return you must agree to face much higher prices per kWh when electricity is at peak demand. Armed with your smart meter, you would know when these "peak periods" were taking place. Such a contract would help the utility because if it signed up enough people, this would reduce the likelihood of a blackout and it might need to build less electric utility capacity to meet anticipated demand.

Now there are two research questions here; 1. selection --- who would sign up for this program? If I plan to be in Paris all summer, then I will sign up for this program and receive the $100 check but true aggregate electricity demand doesn't decline because of this program because I would have been out of the country if they had or had not given me the check. 2. Treatment --- facing the high price for electricity at peak times --- how do people change their daily routine? Do they go for a swim at an outdoor pool rather than cranking the AC while watching their plasma TV? Price signals can play a useful role in our society when we allow them to reflect scarcity!

This backlash against the smart meters is ugly. The utilities should have rolled out these devices in areas where people support conservation goals and trust the electric utilities. This group of "guinea pigs" would have offered valuable lessons on perfecting this new technology. Instead, we now have a paranoia brewing.

Monday, March 08, 2010

New Research on Economic Geography

The Berkeley Electronic Press knows how to put together a nice special issue of a journal. The editor (Duke's Chris Timmins) did a great job nudging the authors of this economic geography special issue to work hard.

The Overeducated Chinese Young Person?

In 1976, Richard Freeman's book The Overeducated American was published. In a nutshell he argued that the returns to U.S college education were declining. Here is an old review by two prominent economists. With the benefit of hindsight, it appears that he was wrong. The returns to skill have increased over time in the U.S.

History repeats itself. Now the New York Times is arguing that the same dynamic is playing out in China in the year 2010. What is going on?

I was once a labor economist so permit me to offer some conjectures on how to reduce unemployment among the skilled;

1. More Chinese young skilled should enter self employment. We know that to
start your own firm requires capital. If skilled young people are liquidity constrained and can't post collateral then they will have trouble starting their own firms. The government could start a program to take an equity share in companies (irony of a Communist Party as Venture capitalist!)

2. Real wage inequality -- given how high home prices are in the big cities (such as Shanghai and Beijing), workers require very high nominal wages to work in those cities. Such high wages discourage employers from hiring. The government should encourage some job clusters to move to low land rent cities and this would set off an agglomeration in those cities.

3. I do not know what are the firing rules in China. Can firms fire at will or is there effective "tenure"? In a new economy where worker skills and job match quality must be discovered it makes sense to a have a labor market where firms can dismiss at will. If firms know they can fire workers, they will be more likely to hire workers to see if they are a good fit within the organization.

4. Are all college degrees valuable in China in terms of human development and problem solving? Have their graduates received a serious education that resembles a UCLA or Harvard? Or have they been memorizing a lot of stuff? Has China suffered from the brain drain and needs more of their best graduates who have gone abroad to return home? The NY Times has written about superstars returning home.

5. Don't forget the "system of cities". In the United States, if Los Angeles offers a UCLA graduate few opportunities then she can move to Dallas or Cleveland. For years, China had restricted migration. To arbitrage regional differences in job opportunities requires information. Does China have "middle men" playing an active role broadcasting where there is local job demand for the skilled? Demand tends to attract supply! Zheng, Liu and I explore these themes in this 2010 RSUE paper .

Sunday, March 07, 2010

A Vision of New York City's "Green Defense" Against Climate Change Induced Sea Level Rise

Climate change is predicted to pose some low probability but highly risky scenarios for New York City when the water rises. Rather than passively accepting this risk, New York City can choose to shed some of its "victim status" by being pro-active. A group of architects have sensed this and are seizing this niche. The New York Magazine has recently profiled their ideas .

1. Aro and Dlandstudio argue that lower manhattan could erect a defense line of giant grassy sponges that would be "fingers of wetlands". How absorptive would this pretty defense be?

2. LTL Arichitects want a Venice feel to this part of the city.

3. SCAPE pushes a vision of oyster farms. They would "Purify the harbor and soften waves." I have no idea if this is true but it would help to diversify the Manhattan economy.

4. Matthew Baird eyes the oil tanks on the New Jersey side of the river as a possible source of renewable power

5. nArchitects; wants to cut channels deep into sunset park and build watery neighborhoods (that look like Amsterdam or Venice). New apartment buildings will be needed these builds would float rather than sink.

While I am not in the business of "picking winners", do you agree that anticipated challenges generate beneficial competition?

Boston is Cold but NBER Rocks

I haven’t seen snow for three years and had forgotten what 35 degree weather is like. Over the last 4 days, I ate at three different Legal Seafoods in Boston and lost 10 pounds. While the last statement is false, I did have a great time in Boston. The Cambridge area is a serious cluster of economic talent and it was great to see my old friends and co-authors (5 of them) who all attended the National Bureau of Economic Research's environmental economics meetings. These meetings were bundled with a 1.5 day session on agricultural economics. UC Berkeley's Agricultural and Resource Economics was well represented at this conference. I had never talked research with David Zilberman before and had a great time learning agricultural economics from him. Everyone knows that I love to talk and over these four days, I sat down and talked and talked to over 30 star economists who ranged in age from 25to 75. I’m willing to talk to anybody who will teach me about economics and answer my strange questions!

What research did I see? The future of agricultural economics and environmental economics is bright but let me just talk about one paper by two young Columbia stars. Now, I had thought that when I left Columbia in 2000 that no more research would emerge from that liberal arts school but I was wrong. Here is a salient counter-example offered by Reed Walker and Wolfram Schlenker .

What are the health impacts from exposure to air pollution? This is a deceptively hard causal question. In a world without human subject’s protection, I would take my current Ph.D. students and randomly choose a subset (Neil?) to be exposed to some air pollution and then track his later health outcomes. Assuming that my graduate students are randomly sampled from the greater population (and this may be true), this experimental design (while nasty) would help to answer the question of how the average person’s health is affected by short term exposure to air pollution. Given that I can’t run such an experiment, how do we go about measuring the causal impact of pollution on health? We can wait for volcanoes to explode or the 4 year Olympic cycle which stops traffic and shuts down dirty factories near the athletic Olympic Village, but Reed and Wolfram have a better design.

Here is their logic; Step #1: Airports are major urban polluters, 2. Airports produce more emissions when plans “taxi” for long periods of time; just running their engines getting from the gate and stop and go before getting to the runway. 3. The taxi period is longer when there is bad weather and delays on the east coast. 4. So, random delays on the East Coast raise taxi times at California Air ports which yields exogenous air pollution variation within a 5 mile radius around the airports, 5. This increase at random times in nox and carbon monoxide yields variation for testing the health impacts. To measure health impacts, they examine hospital admissions for people over age 65 on Medicare. They observe Emergency Room admissions per 100,000 by zipcode/year. While this work is still in a preliminary stage, the current results indicate that unexpected carbon monoxide blasts do cause health impacts. Since the exposed population cannot anticipate these elevated levels, they cannot take defensive actions to self protect. So, this study is a very nice contribution to the public health literature.

Another economist at Columbia named Matt Neidell has devoted effort to documenting that when people are given information about elevated pollution levels (Smog Alerts) that they do preempt and take costly self protection actions (such as not going to the Zoo) that reduces their ambient pollution exposure.

Tuesday, March 02, 2010

In the Navy: Who Sails the Seven Seas?

The Village People made good music and distinctive music videos. I'm having trouble getting their sound out of my head as I read this new paper by Golan, Greene and Perloff . I'm reading that paper because I'll be at the NBER for the next 3 days attending this conference and I wanted to see what recent research the conference organizer (Jeffrey Perloff) has been up to. I apologize (this is what nerds do with their finite time).

Now, please recall that in 2009 that I published a prominent book on the U.S military . So, my opinions count!

Here is the abstract for this new Perloff paper:

"The Navy’s promotion-retention process involves two successive decisions: The Navy decides whether an individual is selected for promotion, and then, conditional on the Navy’s decision, the sailor decides whether to reenlist or leave the Navy. Rates of promotion and retention depend on individuals’ demographic and other characteristics, wars and economic conditions and factors that the Navy policy makers can control. Using estimates of these decision-making processes, we examine two important public policy questions: Do Navy promotion and retention rates differ across race and sex? Can the Navy alter its promotion and other policies to better retain sailors, or do war and civilian labor market conditions determine retention?"

Here is the cool part:
"To estimate the model, we use data on virtually all Navy enlisted personnel from January 1997 through May 2008."

The interesting piece to the econometrics here is that a Navy person's probability of remaining in the Navy is a function of whether the Navy promotes him (not kicked out) and whether he chooses to stay. A labor economist would say that this probability will be higher if the officer is happy and productive in the Navy and if his next best "outside opportunities" (i.e teaching at UCLA) are not so hot.

Controlling for a large number of observable characteristics such as aptitude scores on standardized tests, age, education, sex, Macro trends such as whether the attacks of 9/11/2001 had recently taken place, Perloff and co-authors show that blacks are less likely to be promoted and less likely to be retained than whites.

How large are these effects? To judge this they conduct the following thought experiment, "If the Average black male soldier had the average white male's observable characteristics, his probability of being promoted would be 35% while the average white male soldier with the average white male's observable characteristics is predicted to have a 37.6% chance of being promoted. Now, the average Hispanic given the average white's characteristics only has a 26.6% chance of being promoted. That's a huge difference in this "apples to apples" comparison.

Why are the authors "standardizing" by observable attributes. The ideal experiment here is to compare an identical soldier who happens to be black, Hispanic, white , male, female and test for differential outcomes. Statistical techniques allow you to do this based on "observables" such as education, age, AFQT test scores.

Is this evidence of discrimination?

"The annual probabilities of promotion and retention could differ across racial and sex for three reasons. First, demographic groups could be treated differently by the Navy in the sense that people with the same characteristics but who differ in terms of race or sex have different probabilities (that is, the coefficients on individuals’ characteristics are the same across demographic groups). Second, these groups could have different mixes of observed characteristics such as education and experience. Third, there could be differences in unobserved characteristics across the demographic groups.

Differences in coefficients (the first hypothesis) play roughly twice as large a role as the difference in observed characteristics (the second hypothesis) in explaining the overall difference in promotion probabilities between Whites and other races. The difference in coefficients is most pronounced for Hispanics. We cannot explicitly examine the third hypothesis. However, because our bivariate probit analysis includes an objective ability measure, the AFQT score, as well as a large number of other observed characteristics, it is relatively unlikely that racial and sex differences in promotion rates reflect unmeasured ability differences across demographic groups."

Monday, March 01, 2010

My Dad's Smart Quote About President Obama's Medical Exam Results in Today's New York Times

My father offers some sound advice to President Obama today in this NY Times article . He still hopes that I will quit economics and go to medical school. It is true that UCLA's faculty salary cuts are lowering the price of making such a career transition.

"Doctors see a rise in cholesterol like Mr. Obama’s occasionally, said Dr. Martin L. Kahn, a professor of cardiology at New York University who is not connected with Mr. Obama’s case. “Usually that is a lever for the doctor to recommend more aggressive dietary changes and cigarette cessation to warn a patient, ‘Look what you are doing to yourself’,’ “ Dr. Kahn said in an interview.

“Nutritionists tell us that a very little extra food each day adds up to a measurable amount at the end of a year,” Dr. Kahn said.

Dr. Kahn said he might recommend an exercise stress test “as a baseline” for the future but would not do further procedures “unless he had a calamitous stress test.”

Mr. Obama showed no evidence of heart disease from an electrocardiogram and a test known as an electron beam CT scan that looks for calcified areas in coronary arteries that may be evidence of coronary artery disease.

“The CT heart scan findings are somewhat reassuring” because if it were positive, “it would be a worry,” Dr. Kahn said."

NOW --- permit me to boast. How many parents and their kids have been quoted in the New York Times in the same year in independent articles unrelated to crime or spatial shocks such as a Katrina event? Here is one of my quotes in that fancy newspaper. I'm still waiting for the NY Post to call me.

The Clean Water Act's Ambiguity Offers a "Natural Experiment" on the Impact of Regulation on Polluter Activity

The New York Times wants the United States to have clean water . But, does Justice Scalia want you to have such an amenity? The original Clean Water Act has a sloppy definition of its geographical scope. To remind you young environmental lawyers out there ; the core issue is a clear, consistent definition of "navigable waters". I have no idea what these words mean but English is not my first language.

"the Clean Water Act that limited it to “the discharge of pollutants into the navigable waters” of the United States. For decades, “navigable waters” was broadly interpreted by regulators to include many large wetlands and streams that connected to major rivers."

The economics of this ambiguity issue are fascinating;

1. There are geographical areas where it is not uncertain whether the Clean Water Act is enforceable.

2. How do polluting firms respond to the possibility of these new "domestic pollution havens"?

3. Will dirty firms move to such areas because they believe that they can pollute with delight and not face costly regulation? As President Obama seeks to create new jobs, will he support this? Will the pursuit of local dirty job growth be an economic development strategy during these tough days?

4. Will incumbent firms who are already located in the "ambiguous regulation" zone start to pollute more? The New York Times says yes but an excellent economist named Tom Lyon would push back and say that firms are strategic and will think through whether there are benefits of "flying under the radar screen" and not polluting to avoid the wraith of the regulator.

5. There is an element of investment under uncertainty here. Right now, there is uncertainty about whether the regulatory rules apply in these cases;

"But the two decisions suggested that waterways that are entirely within one state, creeks that sometimes go dry, and lakes unconnected to larger water systems may not be “navigable waters” and are therefore not covered by the act — even though pollution from such waterways can make its way into sources of drinking water."

Firms may start to purchase land near such areas and take a bet that the Republican dominated Supreme Court will rule that the Clean Water Act does not apply there. This would give such firms an "option" to build a factory later if the area is indeed not forced to comply with Clean Water Act regulation standards.

For those of you who are academic economists, there has been a long literature -- that Vern Henderson and I started (see my 1997 RSUE paper) on the consequences of differential Clean Air Act regulation (i.e that footloose dirty manufacturing moves to areas where the Clean Air Act is not enforced (attainment counties). This case represents the same logic but the Clean Water Act would now be "spatially delineated".