Friday, April 30, 2010

Local Labor Markets and Career Transitions After Environmental Disasters

Life sounds tougher in Venice, Louisiana relative to Venice Beach, Los Angeles. This article highlights that the major oil spill has meant the end of fishing in this area and that there are a large number of such workers who will be unemployed.

"This spill isn’t going to be fixed in a day, probably even in a year,” said Chuc Nguyen, 35, who emigrated from Vietnam as a child and has fished his entire life. “What else can I do? I don’t know how to read and write. If you tell me to do something other than fishing, I don’t even know what it would be.” "

The article highlights an irony that people like Mr. Nguyen are now applying to the oil company (BP) to help it fight the oil spill. Supply creates demand. So the oil spill knocked out the fishing industry (because the local water is now polluted) but created a demand for cleanup workers.

I have never seen a study of the "job creation" that the cleanup of the Exxon Valdez Oil Spill Created but I have now been told that Casey Mulligan has written such a paper. Repair workers earned a high wage as Exxon had lots of work for them to do.

Shanghai's World Fair Investments = Superstar City

When I was a kid, we would drive out to Queens, NY to see my grandfather. Along the highway, we would drive past the rusting remains of the 1964 World's Fair and I would wonder; "what in the heck is that junk". I did not attend that festival of love. It hasn't aged well. Now, the major newspapers are reporting that Shanghai has invested a fortune to get ready for its World Fair. So, the 2008 Olympics offered the central government an incentive to invest in Beijing and now it is Shanghai's turn. What have the people of Shanghai gotten? A fresh coat of paint, some nice flowers and miles and miles of new clean subways. Not a bad deal, but a public finance guy might ask; "who paid for all of this stuff?" I guess that rural people and other cities have. There is a good paper to be written on the government's urban favortism. Are Beijing and Shanghai treated better than other cities in a system of transfers? Who are the losers? Is it the countryside? How are rural people taxed?

The whole enterprise of investing in a World's Fair raises the question of how do global cities signal that they are superstar cities? An economist would ask a few empirical questions;

1. Are international tourists visiting your city?

2. Holding hotel quality constant, what is the nightly price of a hotel room in your city relative to other cities?

3. What share of your nation's wealthy people live in your city? This signals through revealed preference that the city is desirable and recent research by Erik Hurst indicates that cities and communities that attract the rich enjoy a snowball process that this feeds on itself through "endogenous amenity" improvement (in english; better restaurants and shops close to the rich).

4. Do any international rich people live in your city?

5. What is the "golden goose" of your city? If it is an industry that attracts the skilled, then I am more optimistic about your claims to greatness.

6. Of course history and culture matter and offer a distinctive niche for cities such as Rome that a Las Vegas can't match or replicate.

I do think that the quality of life investments triggered by the 2008 Beijing Olympics and the 2010 Shanghai World Fair both will get local politicians "in the mood" of recognizing the economic benefits of promoting a "green cities" agenda. If such experience changes their subsequent policy choices, then these events could make a big difference in accelerating "green progress" in China's major cities.

UPDATE: Here is a sophisticated interview with California's Jerry Brown. He makes a lot of sense; especially where he discusses investment uncertainty created by the political business cycle.

Thursday, April 29, 2010

Jeffrey Miron's Dictionary Entry on Global Warming

Sandwiched between "gays in the military" and "gold standard and fiat money", I find the entry for "global warming" in Jeffrey Miron's new book Libertarianism from A to Z . (Full disclosure --- Basic Books published this book and they will publish my book this fall).

I will paraphrase his entry and then discuss;

1. Debate will continue about the underlying science of global warming.

2. There are benefits caused by global warming.

3. There are pre-existing government distortions that encourage the use of fossil fuels so we should consider getting rid of these "unlevel playing field policies" before we introduce new policies (i.e carbon tax). examples include; ethanol subsidies, not allowing peak time pricing and critical peak pricing on roads and electric utility pricing (both would reduce demand).

4. the cost of anti-carbon policies would be very high

5. public money would be better spent on LDC malaria fighting or improving education in LDCs.


There is a lot of truth to what he says here but I'm surprised by one big point. Where is the Coasian logic concerning property rights? At my University of Chicago, we were taught that if there are well defined property rights and everyone agrees on who owns what then through trading and bargaining that we can reach an efficient allocation of resources.

In the case of the atmosphere and carbon, who owns the right to pollute and what markets exist to trade in these rights?

I would have thought that a free market libertarian might say; "right now there are no world wide carbon markets for buying and selling the right to pollute. I favor opening up such a market and letting people buy and sell and pursue their own individual freedom". My question for a libertarian is; "in a free society, how do people who fear climate change and want to take action express their concern?" Yes, we will move to higher ground and yes we will purchase products to protect us from climate change's blows --- but could creating a new market be a bad thing? If your answer is yes, then you are implicitly endorsing that the polluters have the right to pollute but you are not allowing them the opportunity to sell this right in a free market. You are thus not allowing and encouraging endogenous innovation and squeezing out the waste in our status quo system.

I do not believe that being a libertarian = demanding "low prices".

To quote Gary Becker from 2007,

"Using a social-discount rate of 3 percent does not sweep away the greenhouse-gas problem. The latest report by the Intergovernmental Panel on Climate Change strongly suggests that the problem will be quite serious in perhaps 50 or fewer years from now. However, the 3 percent rate does imply that low weight be given to effects on the utility of generations 150 years from now, and even more so 400 years from now. Common sense also dictates that one recognize that technologies will be much improved in the future, including technologies that can improve health, income, and the environment. A positive and non-negligible discount rate is the formal way to recognize the importance of these and related considerations."

source is here

Wednesday, April 28, 2010

Watch Maria Bartiromo Sign an Autograph!

What do Andre Agassi, Maria Bartiromo, Austin Beutner, Willie Brown, Tony Pritzker and I all have in common? We represent just a handful of the panelists at the 2010 Milken Institute Global Conference in Beverly Hills.

As your loyal reporter, here is a picture of CNBC Anchor Maria Bartiromo signing autographs at her book signing.



If you'd like to hear what I have to say about climate change, click here to see my Milken Institute session.

There were some economists at the event. I attended a large lunch in which "Dr. Doom" Nouriel Roubini discussed the issues of the day with Big Mike Milken. Roubini didn't say anything interesting but Milken dominated the microphone. I thought that Milken was quite smart but he said some funny stuff.

He claimed we could save 1 trillion $ a year if we lost weight and became the same weight that our parents weighed when they were our age. Could this be true? This sounds like quite an extrapolation off of some linear relationship between health costs and average weight.

He said more interesting things about the conventional 30 year mortgage for homes. He pointed out what a strange contract this is for the lender.

Case A: if interest rates fall, the household refinances

Case B: if the bet turns bad, the household defaults

Case C: if home prices rise, the lender gets paid back but the borrower gets all of the upside.

I couldn't tell if he favors a relationship such as what Caplin and Tracy supported a long time ago in which the bank owns X% of your home and you own 100-X%.

Overall, I enjoyed the Milken Conference but it looked to me that the academics were under-represented at this conference. The share of panelists who have PHDs was probably 9%.

Tuesday, April 27, 2010

Nerds Gone Wild

I don't own a tv so I don't know what goes on --- on this new show called The Big Bang and I don't care. But, I am happy to see pro physicists receiving some public attention without getting a hair style like Einstein or making pronouncements about world peace. My colleague Dr. Saltzberg is clearly diversifying his portfolio of pursuits.

From looking at his resume, I see that we were at the University of Chicago at the same time for graduate school. Back then, I knew many physicists and used to lose to them at chess. Despite our shared Chicago past and our present UCLA stationary, our paths have diverged, he has experienced a Los Angeles glamour that I've been deprived of.

"Still, problems and questions arise, which is where David Saltzberg, a particle physicist at the University of California, Los Angeles, and the show’s scientific consultant, comes in. Besides supplying the equations that appear on whiteboards in Sheldon and Leonard’s living room, he sometimes advises on the plotting and characters’ scientific predilections.

Dr. Saltzberg, who blogs about his activities on the show, said that many of the people who grouse to him about the show have not seen very much of it. His comments were echoed by Mr. Prady, one of the producers, who rejected the notion that the show stereotypes women. “Far from being a dumb blonde, Penny has demonstrated time and again that she possesses above average intelligence and practical knowledge that often far exceeds that of the guys,” he wrote in an e-mail message." "

This is all very nice.

I do think that a better TV show would be to take the underemployed posters at www.econjobrumors.com and allow them to harness their energy and anger in creating a show.

We could hold a competition in which;

A. sociologists would write their show

B. physicists have their show

C. economists have their show

and then similar to American Idol --- the American People would decide who has the best show and the Department that wins gets more $ from the Deans.

Monday, April 26, 2010

Urban Policy Effects on Carbon Mitigation

With the UC furloughs, I have been thinking about retiring but as the year continued, I find myself mildly interested in economics again and have now written a new paper titled; "Urban Policy Effects on Carbon Mitigation".

Here is the paper's first section. I will present this at this NBER Conference next month.

Introduction

Suppose that your household was choosing between living in suburban Houston or center city San Francisco. In each case, what would your household’s annual carbon footprint be? Glaeser and Kahn (2010) estimate that a standardized household would create 12.5 extra tons of carbon dioxide per year if it moved to Houston rather than moving to San Francisco. In Houston, the same household drives more, lives in a bigger home, uses more residential electricity – electricity that is generated by power plants with a higher emissions factor. Using data from 2006 for 74 major Chinese cities, Zheng, Wang, Glaeser and Kahn (2010) document that northern cities have the largest household carbon footprints due to coal burning for winter heat. This cross-sectional descriptive work creates a benchmark for comparing cities’ household carbon emissions from transportation, electricity consumption and home heating, at a point in time and tracking city trends over time. In both studies, there is clear evidence that cities differ sharply with respect to their “greenness” on this important dimension. Given that greenhouse gas emissions are a global externality, households are unlikely to internalize this cost of moving to a city like Houston when they make their locational decisions.

Why is San Francisco “greener” than Houston? San Francisco is blessed with a temperate climate. Northern California’s electric utilities emit less greenhouse gas emissions per unit of power generated than their Texas counterparts. In addition to these factors, San Francisco’s urban form and public transit system encourage more households to live a walking, compact, “new urbanist” life relative to households living in sprawling Houston.

This discussion highlights that there are a number of urban policies that can affect a metropolitan area’s per-capita carbon emissions. Rather than attempt to tease out the individual contributions of any one policy, I focus on estimating how much does a household’s carbon footprint shrink by when it lives closer to the city center. Throughout this paper, I assume that urban areas can enact a range of policies including urban transit investments, to business incentives (such as urging major employers to remain downtown) and center city quality of life improvements. Such policies increase the demand for living and working in the center city. I seek to measure the carbon mitigation externality benefits of having a more vibrant center city that attracts households to live closer to the center.

To quantify the greenhouse gas emissions reductions benefits from living at higher population density, and closer to the city center, this paper uses recent micro data from the 2009 National Household Transportation Survey and unique 2008 data from a California electric utility to measure how a household’s carbon footprint varies as a function of how close it lives to the city center, and proximity to rail transit. This paper’s main finding is that a standardized household drives less and consumes less electricity when it lives closer to the city center than if it lived in the same metropolitan area’s suburbs.

Is this a causal effect? A reasonable concern is residential self-selection; those with an unobserved taste for living a “low carbon” life cluster close to rail transit stops and close to city centers. My cross-sectional OLS estimates are likely to reflect a mixture of selection and treatment effects and thus to represent an upper bound on the policy induced benefits of moving a household chosen at random closer to the city center.

Learning How Corporations Really Operate

Economists are still learning about capitalist firms. The recent recession has convinced me that there are many incentive problems that I had not fully appreciated how they can add up to having "macro consequences". Microeconomists continue to look at specific cases. Recently, we have studied bagel delivery , and Starbucks' sales responses to caloric information on drink contents. We have been macho enough to put on "hard hats" and enter factories and take a look at how you actually produce a pin.

Now, some of the NBER's stars are asking good questions about external directors' incentives to participate in the day to day running of the firm. When the going gets tough, do the firm's outside directors dig in their heels and help the firm? Or to protect their reputation and search for more lucrative consulting per hour invested, do they quit and seek greener pastures? I had always thought that these gigs were a chance to get a $50,000 check for attending a few nice lunches a year. I have not been invited to be an external director of anything!


The dark side of outside directors: Do they quit when they are most needed?

RĂ¼diger Fahlenbrach, Angie Low, RenĂ© M. Stulz
NBER Working Paper No. 15917*
Issued in April 2010
NBER Program(s): CF


Outside directors have incentives to resign to protect their reputation or to avoid an increase in their workload when they anticipate that the firm on whose board they sit will perform poorly or disclose adverse news. We call these incentives the dark side of outside directors. We find strong support for the existence of this dark side. Following surprise director departures, affected firms have worse stock and operating performance, are more likely to suffer from an extreme negative return event, are more likely to restate earnings, and have a higher likelihood of being named in a federal class action securities fraud lawsuit.

This is really interesting stuff. I can imagine that it is hard to write out a contingent contract that the best talent will "stay on the bridge" during a financial storm.

Now, during the attacks of 9-11-2001, firemen rushed into the burning World Trade Center ---- what is the difference between those "heroes" and the men and women who are the outside directors of these firms? The latter appear to be running away from a burning building! Where is the loyalty and patriotism?

Sunday, April 25, 2010

No Social Capital in Queens, NYC

I just read this sad story and watched the video. If you watch, you will see a number of people walk by this victim. He is lying on the sidewalk. He must have been moaning in pain but nobody stops to help him. If you refuse to read the NY Post, then here is the same story in the NY Times.

We can lament anomie in the Big City. People may have thought that he was a drunk bum or worried about being dragged into a lawsuit but still this is quite gross.

Switching to happier subjects, as you know UCLA is on the quarter system so this means that this week is Spring Quarter's midterm week. My friends who teach at schools such as Tufts (who are on the semester system) will finish their teaching perhaps as early as this friday.

Now, I must love to teach --- because I have signed up to teach summer school. If you are a person who is ready to learn some environmental economics then I suggest that you enroll in this exciting July 2010 class. West Los Angeles is the right place to be during summer. Its the greatest place in the whole wide world. No NBER Summer Stuff for me this summer --- Boston is not the right place to be during summer.

Friday, April 23, 2010

Ray Fisman's Slate Column on the "Green Nudge"

Read it here .

Energy Conservation “Nudges” and Environmentalist Ideology: Evidence from a Randomized Residential Electricity Field Experiment

Dora L. Costa and Matthew E. Kahn

Abstract

“Nudges” are being widely promoted to encourage energy conservation. We show that while the electricity conservation “nudge” of providing feedback to households on own and peers’ home electricity usage works with liberals, it can backfire with conservatives. Our regression estimates predict that a Democratic household that pays for electricity from renewable sources, that donates to environmental groups, and that lives in a liberal neighborhood reduces its consumption by 3 percent in response to this nudge. A Republican household that does not pay for electricity from renewable sources and that does not donate to environmental groups increases its consumption by 1 percent.

The paper is posted here .

Thursday, April 22, 2010

The Joy of Tenure

One of my favorite reporters attended my class on wednesday. The Hawthorne Effect was out in force and here is what I said . Would I have lectured about more "conventional material" had she not been there? Who knows? Who cares? My wife (and my students) thinks that my wacky quotes are funny and that's all I care about.

I do suggest that you read the entire piece. Its a nice overview of what UCLA's Institute of the Environment has achieved in building up a first rate major. The IOE's Keith Stolzenbach and Cully Nordby deserve a lot of the credit for designing this very serious major. I teach one popular elective -- so I'm a cog in this bigger machine and I can honestly say that the machine functions quite well.

A Second Look at "Nudges" and Benevolent Paternalism

One size does not fit all. Costa and Kahn (2010) are fans of the "nudge" in certain nuanced cases but those who nudge to achieve social goals (such as increased energy conservation) must keep in mind that the population is diverse. If you want to read a new NBER paper that I think is both interesting and funny (I did write it!) then click here .

On an unrelated note, this is a ridiculous NY Times story. People have to keep straight that there is positive economics (what is) and normative economics (what ought to be). A leading economist can hold a normative view (i.e support California's AB32 policy) and still take a sober cold hearted look at whether this legislation passes a cost/benefit test. Academic economics value their reputations too much to "sell out" to politics. If we intentionally back a bad economic idea in return for short term political gain then our long run reputation will suffer. Anticipating this, academic economists play the game straight without catering to special interests.


If you don't believe that we can disentangle our "Spock" from our "McCoy" take a look at my writing here . In the first paragraph of my report, I state that I support AB32 and then you will note that I kick the crap out of the first economic model used to evaluate its impacts.

We are tough guys and gals who play the game straight up. This is due to selection (who enters academic economics) and treatment (sell out and you lose your reputation forever).

Wednesday, April 21, 2010

Severin Borenstein's Views on Solar Energy Investment in California

Here is an interesting debate about the merits of ramping up residential solar power generation in California. So far, Dora and I have resisted joining the "million solar roof" army. We received a piece of mail that showed our roof (it is white) with a nice solar panel in one corner of it. Dora saw that I was staring intently at "my future" and she took this piece of mail away from me. Now, I know that such a system costs about $30,000 and that we couldn't sell any excess electricity back to the grid right now. But, if there is a solar leasing company who is willing to accept $1 from me per year for the next 30,000 years then we will purchase this system right now!

If you want to "go solar" then go here . Would Milton Friedman feel good about this specific government intervention?

In Severin Borenstein's discussion, he makes a nice point that he is more optimistic about the economics of commercial real estate installing solar rather than residential. So, I have a real estate inventory question. If every viable commercial building in California installed solar --- how much generation capacity would this create? Why is residential solar the thrust of the solar push? Why not have a lower profile campaign called a "10,000 Solar McDonalds"?

Career Trajectories for Female Faculty at Harvard Business School

Relative to its other graduate schools, female faculty are under-represented at Harvard Business School. Women hold 29% of the untenured faculty slots at HBS. Is this due to supply or demand? The Harvard Crimson investigates but fails to answer the question. It is difficult to run a field experiment here to tease out whether discrimination is present. The article quotes professors saying that the "discrimination" is tacit rather than overt but that the "old boys network" lives on.

As a "middle aged boy" who is skeptical of everything I read and I hear, I started to think and my mind converged on Gary Becker's work on firm specific human capital and the following "Catch-22". I could be wrong but please hear me out.

Consider the following game within an organization; this organization could be a Finance Faculty or a law firm;

there are two types of people; older partners in the firm and younger untenured "young".

Question #1: Will the old invest in any specific young person? According to Becker's theory of firm specific human capital; they will be less likely to invest time and resources in a young person who they believe will leave the firm or will grow up and not be a star. Why? Ex-post such investments will be wasted investments (from the point of view of the firm).

Question #2: Will the young person stay at the firm? If the young person does not think that she is succeeding at the firm then she is more likely to leave.

So combining #1 and #2, there are two Nash Equilibria to this game; If the old do not invest in the young, then the young are unhappy, do not become stars and they leave and the old have no regrets about not investing. Note that this is an ugly
self-fulfilling prophesy. Female junior faculty here suffer (relative to their male counterparts) because the older guys at the firm believe that the expected benefits of investing in them are lower than investing in the "new boys" and this becomes self-confirming ex-post.

The "nicer nash equilibrium" is for the young women to signal that they will stay at the firm and stay "in the game" and then the old dudes invest in them and this results in a causal effect that the probability that any one young HBS women becomes a star rises and the "win-win" is achieved.

So the empirical question here is whether the HBS senior faculty invest more time and effort in mentoring the male junior faculty than the female junior faculty. This would be hard to measure but I bet this is the case. If learning begets learning and skill begets skills, then this compounds over time and divergence in publications and career trajectory takes place between ex-ante "equal" male and female junior faculty.

As Dora and I have learned, kids take time and time with your kids crowds out time with colleagues. The time budget constraint is clearly binding in this case.

Tuesday, April 20, 2010

Who Are UCLA's Great Teachers?

As usual, I lost out to some decent teachers . The winners receive a cash prize. It was almost enough to induce me to devote some effort but not quite enough.

I was planning to blog about the fact that Goldman Sachs' boss Lloyd Blankfein looks a lot like Blofeld (the James Bond Villain) but when I typed in their names into google -- I immediately saw that someone else made the same point a year ago. Perhaps my value added is really low. I am humbled but tomorrow I will try again.

I had hoped to write an intelligent post about Goldman Sachs. Wall Street appears to need to engage in some random assignment. Ratings agencies such as Moodys and Standard and Poor should be randomly assigned to rate companies to avoid shopping around for a good bond rating. This John Paulson should have had to have randomly chosen which assets were bundled into the securities rather than him having a say over what to stack into the deck.

A return to "random selection" would minimize adverse selection issues and would re-establish faith that the Wall Street game is not crooked. Once trust is broken, how do you build it back? We are keeping our money under our bed.

While housing is an undiversified asset (it co-moves with the California economy and my UCLA salary), at least we know what we own --- with a share in a modern company -- what do you own? What is this asset? The complexity of the modern firm and the complexity of the accounting rules makes it pretty tricky to keep straight what this claim on the "Lucas Tree" really represents.

Monday, April 19, 2010

Can You Sell a Stolen Nobel Prize on EBay?

All robbers face the challenge of how to turn stolen goods into cash. While I have never owned a pawn shop, there is an interesting issue about one to one mappings and stolen property. In the case of Roy J. Glauber's Nobel Prize, I assume that his name is on his medal. Some dude stole it and while he has been caught, the actual Nobel Medal is still out and about. The "lucky person" who currently has it must be eager to ditch this "hot potato" but will a pawn shop take it? The Harvard Crimson reports all. If my Nobel is ever stolen, I promise I will blog about this event and my emotional reaction to it in real time.

Sunday, April 18, 2010

What Do Academia and Hollywood Have in Common?

Attractive people are over-represented in Hollywood (there is the occasional Paul Giamatti or Woody Allen but they exude inner beauty). Now, young academics in political science are debating how "hot" and thin they need to be to compete in the tough new professor job market.

To my fellow nerds, this is an interesting case of a principal/agent issue. The Deans hope that the hiring faculty play the game straight and hire on "the merits" but when two candidates are close substitutes what tips the balance? Does a candidate's good looks make the hiring faculty more perky and improve the department's morale? Or do good looks signal that the job candidate has non-cognitive skills (i.e the person bathes)? In this second case, a statistical discrimination model would say that it is wise to hire the attractive candidate because , all else equal, this is the tip of the iceberg and signals high unobserved quality on margins that are hard to measure during a 1 day job talk visit.

There is an interesting "inverse problem". When I go to the UCLA faculty club, I see some truly strange looking faculty in other departments and they are eating lunch with their colleagues, I look at these guys and I say to myself; "that guy must be a genius because he looks like a train wreck and yet he is part of the active gang".

When I was a kid, my brother and I were really impressed with the long haired lawyer William Kunstler . Our wise mom pointed out that his weird look didn't cause his success but instead that he could get away with looking weird because he was so talented. Today, I'm trying to match Kunstler as I depreciate.

Saturday, April 17, 2010

The Economics of Volcanoes

Iceland seems pretty determined to make its mark in international relations. I may teach a course on Iceland and international relations next year at USC. Recently, it had a major financial crisis and now it has unleashed an angry volcano barfing smoke all over Europe. When in doubt, I turn to the New York Post's Readers for wisdom and here is what one intellectual had to say.

"roykirk

04/17/2010 3:05 PM

This is a tragic event! I demand that President Obama and former Vice president Gore call for an emergency meeting with the United Nations and pass a global treaty to immediately ban all future volcanoes and that any nation involved with the use of volcanoes be held accountable for any damage to the environment. We must not allow any country involved in the use of volcanoes to not pay the price of the damage caused to the environment and the death and destruction to property."

For environmental economists, this is a pretty funny quote.

But back to the Volcano. This "natural experiment" will yield several nerd papers;

1. Does particulate matter cause health damage? Public health nerds will exploit the short run unexpected increase in pollution to study health impacts. Self protection offsetting is minimal in this setting. Time diaries could be collected here to see if households in affected European cities did change their behavior to minimize pollution exposure.

2. Do airplanes contribute to our economy? This is a new twist on Robert Fogel's famous work on the role of the railroads in the U.S economic development in the 19th century. I realize that the airplane disruption is temporary but it is interesting how robust our transportation system is (rail for planes) in the face of a disruptive shock.

3. I wonder if we really do get a test of the geo-engineering claims about particulates blocking sun light and hence lowering temperatures. This isn't economics but it speaks directly to whether geo-engineering could achieve its stated objectives.

4. Regional Cross-boundary externalities --- This is a new version of "Acid Rain" (from the U.S to Canada) or the Mekong River --- China's dams affecting water access down river in Vietnam. In this case, there is nothing that Iceland can do to mitigate or exacerbate the problem. The externality "inelastically" supplies itself. Suppose the Volcano smoke is a permanent new effect (caused by climate change?) --- how will the geography of European economic activity be affected?

Now, Los Angeles is not suffering from volcano smoke. It is 70 degrees and blue skies. The future is here.

Social Interactions and Multiple Equilibria: The Case of Professional Sports' Locker Rooms

Leading economists such as Steve Durlauf have been in deep thought about empirical models of social interactions. Pro Sports (due to trades and free agency) provides some variation in social networks to test for whether the same player acts differently as his peer group changes. The conventional wisdom is that multiple equilibria exist: “If you’re in the locker room where there are a lot of bad guys in the locker room, then if you bring a player into that atmosphere, he’s going to act accordingly,” he said. “If you bring a guy into the locker room that has a lot of players that tow the line, then if that guy has anything to him, he tows the line as well. So character depends on the situation.” Sports Section NY Times

Switching subjects, I spent yesterday at USC at this event . As many of you know, I have a personal fondness for USC and it appears to be mutual.

USC's Don Paul said something quite interesting at the event. On the topic of carbon mitigation he said; "Suppose the United States takes a leadership role and unilaterally cuts back its carbon emissions while other nations do nothing in terms of carbon mitigation. So, the U.S would stop its coal burning power plants and give up driving gasoline vehicles. In this scenario, what happens to U.S coal reserves? Don argued that we would become the "Saudi Arabia of coal" as we export our coal to every other nation and they create GHG emissions with our resources. So, he was making a big leakage point. If the rest of the world does not sign the deal; we can reduce our emissions sharply but world emissions continue to rise and our fossil fuels get used. Now our trade balance would improve! but his point is valid.

I made the following feeble claim; If the USA is the green guinea pig then our nerds will come up with the next "green google" and since low carbon innovations (think of electric vehicles or solar power generation) are ideas --- developing countries through globalization of intellectual property and trade may prefer to leapfrog over coal and adopt our cutting edge strategies as their means of providing power. So, the key to my optimism in this case is; rich countries do the green innovation and then share the winning ideas with the developing nations to keep them from using past proven (but dirty) technologies such as coal and gasoline.

Friday, April 16, 2010

Business Cycles and Volatile Prices for Fun Second Homes

Real estate prices are suffering in Baja, Mexico. This article from the LA Times tells a story of half finished ocean side condo buildings sitting next to each other and it looks like a ghost town. While I have never been there, I doubt that people want to buy in this area because of proximity to jobs. This beach community is all about fun. As the 2008 crisis hits, people cut back on such fun and the whole community scales back.

The interesting thing here is the consumption externality. Suppose that I want to live close to the beach and eat dinner each night at a fancy restaurant. There is fixed cost to setting up a fancy restaurant; the chef's salary, the rent. Suppose that I have a good job and even though we are in recession I can go to this restaurant and pay my bill but suppose that everyone else in the town is broke. I am just one guy and I don't order enough at the restaurant to single handedly keep them in business so the restaurant goes bust. I no longer like vacationing in this town. Yes, my condo is still next to the beach but I have nothing to do at night because the other wealthy people are no longer wealthy and thus not demanding the products --- without their aggregate demand -- the nightlife and local economy collapses and this diminishes my consumption opportunities.

So the funny thing here, is in a world with fixed costs of running businesses --- there is a co-ordination problem; the wealthy need other wealthy people to remain wealthy and living close to them because in aggregate they have enough purchasing power to allow nice shops and stores to flourish and this creates a great "consumer city". The beach (while God Given) is not sufficient to have a paradise. This is an interesting example of a chain reaction. How does this Baja recover? The end of the recession would help but second homes are a leading indicator of "cutting back".

Thursday, April 15, 2010

My Talented Extended Family

In today's NY Times, there is a nice piece by Lynn Saville . She talks about her photography work and the Internet version shows several of her photos. I like her picture taken from behind of the "Pepsi Cola" neon light. You can see Manhattan in the background. From staring at that sign from Manhattan it always gave me a "retro feel" of New York Circa 1950.

As you all know, Lynn is my cousin by marriage. Her husband, Phil, is my father's first cousin. Here is an interview conducted by Philip with a poet who I have never heard of but what do I know (I am an economist) and here is an original Philip Fried poem. I used to write limericks but my teachers discouraged me from further pursuing that path. Lynn and Philip have rare talents in our extended family. There are too few artists in my extended family.

As I think about it, I don't have any talents at all. I was never a good athlete. I have no artistic ability and my clarinet playing stunk. So, I would like to thank the economics profession for giving me something I do. To show how grateful I truly am, I recently sent the University of Chicago a check for a whopping $150. I figure that such funds can feed the next generation of Ph.D. students in economics there for a year. My donation represents 10% of my post-furlough, post-taxes net income here in California.

Wednesday, April 14, 2010

Does the Demand Curve for Attending UCLA Slope Down?

UCLA has increased its tuition by 30% but there is no evidence (see below) that the quality of the admitted undergraduate pool has declined or that applications have declined. This "natural experiment" has generated some interesting results. As a biased bystander, I want to see UCLA take the necessary steps to guarantee a consistent stream of revenue. Excellence is not cheap. I am excited that the UCLA class of 2014 looks quite strong. I believe in matching excellence with excellence so maybe I should start to give better lectures.


For Immediate Use
April 14, 2010

More than 13,000 highly accomplished students admitted as UCLA freshmen

Claudia Luther, cluther@support.ucla.edu

Chess, debate and athletic champions; budding environmentalists and filmmakers; musicians, mathematicians and skaters, both roller and ice; and enough entrepreneurs and inventors to staff a substantial startup company — all are among the 13,020 freshman applicants admitted to UCLA for the fall 2010 term.

They were selected from a record 57,651 applicants to UCLA, which remains the most popular campus in the nation. The university admitted 22.6 percent of all those who applied, compared with 21.9 percent last year. The fall freshman class is expected to number about 4,700.

"As these numbers prove, UCLA continues to be a strong draw for highly qualified students because of the first-rate education they can get here and the abundance of activities and research opportunities," said UCLA Chancellor Gene Block. "They also have access to more arts, cultural and athletic events on campus than most cities offer."

Block added that, as a public university, UCLA opens its doors to the best and brightest students, regardless of their backgrounds, ethnicities or socioeconomic levels.

"We have students of almost every race and ethnicity, from all parts of the country and the world," he said.

Campus administrators, along with students, alumni, faculty and staff, are now working to encourage the talented students who were admitted to enroll for the fall quarter. Admitted students have until May 1 to indicate their intention to enroll.


Applications to UCLA are read and considered holistically, a process that emphasizes students' achievements in the context of the opportunities available to them and how they have taken advantage of those opportunities.

Janina Montero, UCLA vice chancellor for student affairs, said the admitted students are outstanding in every way.

"These students demonstrate excellence in all aspects of their lives, whether inside the classroom or outside," she said. "Not only are they extremely competitive in their academic work, but they also demonstrate individual talents in a wide range of fields, including the performance stage, athletics, music, civic involvement and the arts. And of great importance to UCLA, they are strongly committed to being of service to their schools and communities."

Montero noted that among the admitted students are nearly 170 student body presidents; almost 200 National AP Scholars; more than 400 most valuable players in their sports; roughly 950 outstanding musicians; more than 300 Eagle Scouts and Girl Scout leaders; more than 250 black belts in various martial arts; some 600 Science Olympians; about 475 recipients of book awards from Harvard, Yale, Cornell, Princeton and other universities; 160 Model United Nations delegates; approximately 160 recipients of Rotary Youth Leadership Awards; more than 460 Academic Decathlon participants; and 3,200 captains of sports or academic teams.

The academic quality of UCLA applicants continues to increase, with nearly half having a grade-point average of 4.0 or above.

The overall GPA of freshmen who were admitted to UCLA is 4.37, compared with 4.35 last year. The average composite score for the SAT reasoning test rose almost 29 points to 2,029.8 out of a possible 2,400. Average scores in math (691), reading (662) and writing (677) were all higher than last year. Admitted freshmen took an average of 21 honors courses and completed 51 college preparatory semester courses — far above the minimum of 30 that is required.

Of the students admitted, 2,226, or 18.9 percent, are underrepresented minorities, including 435 African Americans (3.7 percent), 1,711 Latinos/Chicanos (14.5 percent) and 80 Native Americans (0.7 percent). The 2009 figures were 417 African Americans (3.6 percent), 1,677 Latinos/Chicanos (14.5 percent) and 57 Native Americans (0.5 percent).

In other ethnic categories, admitted freshmen included 5,039 Asian Americans (42.9 percent), 3,702 whites/Caucasians (31.5 percent) and 791 (6.7 percent) whose ethnicity is unknown.

Information about admitted California freshmen at University of California campuses is available at www.ucop.edu/news/studstaff.html. More than 68,000 students were offered freshman admission at UC campuses.


UCLA is California's largest university, with an enrollment of nearly 38,000 undergraduate and graduate students. The UCLA College of Letters and Science and the university's 11 professional schools feature renowned faculty and offer more than 323 degree programs and majors. UCLA is a national and international leader in the breadth and quality of its academic, research, health care, cultural, continuing education and athletic programs. Five alumni and five faculty have been awarded the Nobel Prize.

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

NOTE: Fall 2010 figures are extracted from March 31 files and do not reflect final figures. The data used reflect information about domestic students, except for the total numbers of applicants and admits, which include international students. This year's figures are compared with official data from 2009. Admissions numbers will change slightly, with final official data available in October 2010. Data provided by the University of California Office of the President are for California residents only.

Tuesday, April 13, 2010

What is the Marginal Cost of Producing a "Green" Egg McMuffin?

McDonalds has decided not to have 5% of its eggs it buys be from chickens with lots of elbow room (do chickens have elbows?). As a younger man, I loved their Egg McMuffin . But, now that I'm an older man I have new questions.

If McDonalds went ahead and purchased the eggs from the farms that are nice to their chickens, this would raise the marginal cost of production for McDonalds. How much would this marginal rise by? We know that McDonalds has decided not to take this action so by revealed preference we must learn that this firm does not believe that the Egg McMuffin munchers are willing to pay a price premium for a breakfast made in an environmentally friendly way.

Is McDonalds right about this? Is there diversity among McDonalds' customers such that a subset is willing to vote with their pocketbook to be nice to chickens? Now in truth, I would guess that the average person eating at a McDonalds is not a big "organic foods" , Prius driving person but am I wrong?

Could the Sierra Club launch a "hearts and minds" campaign to make the case for why Joe Six Pack should change his dietary habits or at least why he should "go green" in day to day choices. Is an egg better for Joe's health if it is produced by a free range chicken? Will Joe feel any "warm glow" knowing that a happy chicken produced that incredible edible egg?

Energy Efficiency in the South and the Need for Micro Data

The U.S population is moving from the North East and Mid West to the South and West. If we want our aggregate carbon footprint to be smaller, then we need to shrink greenhouse gas production in regions (such as the south) where growth will take place. Today, the NY Times points to this 180 page study of predicting trends in energy efficiency in the south. Now, Glaeser and I document in this NBER paper that southern cities do have larger household carbon footprints.

So, I skimmed this 180 page study with great interest. My surprise is that the scholars chose to be "macro analysts". They did not partner with a real world southern electric utility to acquire monthly billing data for residential, industrial and commercial electricity consumers. This would appear to be a case where some hard statistical analysis of real households and firms and buildings would be useful. The authors do not apologize for their "lazyness" nor do they explain this omission. Yet, I view this as a crucial piece of the puzzle. Without a serious statistical analysis (and I wonder if the DOE's residential electricity consumption surveys are too small especially when you cut the data by region), how do the authors know which building codes and energy standards are effective and how effective they really are in the "real world"? Economists have clashed with engineers on the true effects of past regulatory impacts. For one important example of this, see Gib Metcalf's 1990s paper .

It is time for energy engineers to embrace Freakonomics!

Monday, April 12, 2010

To Be or Not to Be: A Medical Doctor or an Economist?

I flunked out of pre-med a long time ago. My parents still hope that I will drop out of economics and go to medical school but I know that I make mistakes and when I do make my inevitable errors --- I don't want others to suffer. But, this article in the Columbia Spectator got me thinking about making a career transition. With its furloughs, UCLA is lowering the price of my seeking out new on the job training.

Does this quote entice you to want to go to Medical School?

"Despite the horrible hours, demanding patients, and incredibly stressful situations, being a doctor is amazing. No, it’s beyond amazing. The societal respect and salaries are great, however secondary still to the reward of daily practice. To think that after a short “Hello, I am Dr. X” a patient will proceed to tell you their most deep secrets, trust your every word, and call on you in their life’s darkest moments for advice. To witness the way a family looks at you when you tell them “we can beat this cancer” or “your dad is going to be fine.” To hold a screaming baby in your arms and say, “It’s a girl” as the father weeps holding his wife’s hand. It’s unbelievable, truly unbelievable. Even as an intern, staying up for 30 hours straight, admitting half dead patients at 3:30am, running codes on the floors, helping with traumas in the ED at 4:15am, the whole time I still was in awe at the privilege of being a doctor. The way nurses, who have been practicing for 30+ years (compared to my 4 weeks when I was a fresh intern) have to bow to your word because you are an MD, its was shocking, and rewarding. You have done your time, you know your stuff, and you run the show.

So here is my advice to you, return to the organic you were just studying, and continue on your quest to become a physician. Study an extra hour tonight, and do those MCAT flash cards you have at your bedside. It will be the best decision of your life. You will look back over the 300k of debt, with a salary to more than match it, and a life that is more rewarding than you could ever imagine."

I would not want this person treating me but he/she sounds sincere. My advice to doctors is keep your white coat on and don't reveal the truth to your nervous "customers". The sick want to believe that you are a benevolent daddy and not to hear that you are "all too human".

As a Doctor (of Economics), I can't say that I feel the need for a power trip like this person. My joy comes from several places; 1. in a research seminar when I see in the face of someone I respect (like a Nobel Laureate) that they are impressed with an idea of mine. I like that. 2. When I see at a lunch with my younger colleagues or at a conference that a new idea of mine provokes a spirited discussion among the next cohort --- I like that. 3. When a smart undergraduate gets the confidence to speak to me and says something smart that isn't in the class notes but actually originated in his/her own head. I like that. 4. When I read a new research paper that has an idea that I never thought of, I like that.

Sunday, April 11, 2010

Paul Krugman is a Very Good Environmental Economist!

April 11th 2010

Dean Vernon Wormer
Princeton University,

Dear Dean Wormer,

Paul Krugman merits a tenured position at Princeton University for his recent work on environmental economics. In this letter, I will review his contributions. I will not comment on his past work on trade theory, economic geography, or his George W. Bush fixation. While his REPEC ranking in this field is not high, I'm optimistic that his research profile is on an upward trajectory.

In his long NY Times piece today, Paul Krugman has offered me an excellent teaching tool. He first introduces the reader to the idea of an "externality" and discusses the joys of the Pigou Club. He discusses real world cases of successful introductions of pollution permit markets that helped to achieve a "win-win" of a cleaner environment with minimal economic costs. He then tackles the issue of distribution. When we create a new commodity (pollution permits) who gets the revenue? While I would like to see UCLA receive this revenue, I can see how there could be a quite a fight over this new sugar pot. He then turns to the economics of climate change with a credible discussion of how uncertainty matters and how the introduction of carbon pricing would affect the typical soccer mom's day to day life. This is useful for imagining a world that does not exist right now. Given our implicit "status quo" bias, we need micro economists to sketch a plausible future that is likely to play out when we adopt innovative public policies. He then offers a sophisticated political economy view of the fights (that have an ideological feel to them) over how our economy will really be affected by climate pricing. This is a BIG ISSUE. Will carbon pricing damage our macro economy? or allow us to achieve a Tom Friedman wish of reinventing our economy? Krugman's analysis is honest and reflective of what the "smart folks" in the profession think. He ends the piece with a reasonable look at what happens "if we do nothing" and a look at fundamental uncertainty. He approves of Marty Weitzman's views on positive probabilities of truly horrible scenarious and this means a very large possible expected loss in the future (if we do nothing).

The only weakness I see in his article is not enough discussion of why Republicans vote no on this legislation and whether the Coase theorem really fails. Is there a sidepayment that can be made to Republican Senators so that they vote in favor of the anti-carbon legislation? The article's political economy is weak here. I expect more from a Nobel Laureate. He should read my paper on this subject!

But, with this caveat aside, Paul Kruman would be an excellent appointment for Princeton's environmental studies program.

Saturday, April 10, 2010

Academic Politics

This post will be boring so skip it. I already knew that Duke University plays good basketball and now I learn that some of their Department Chairs know what they are doing. The Chair of Duke's Political Science Dept. makes a lot of sense in issuing his 10 commandments. Could UCLA learn from his wisdom?

Now Duke is a growing private university with an increasing endowment. UCLA is a better university but we are public and we keep getting emails that we need to shrink. I am losing hair. Is this sufficient shrinkage? This Chair at Duke does not discuss whether his job is harder during bad times.

At my university, the economists face a challenge. Times are bad and the leaders want to reduce costs. Relative to our friends in other departments, we are paid more and we teach less. We bring in less grant money than our friends in the physical sciences and the medical school. We tend to be much more conservative (i.e pro free-market libertarians) than our colleagues in other fields. All of these "truths" rankle various members of our community. What is to be done?

The road forks --- along one path is an exodus. Unfortunately, UCLA Econ will lose several senior faculty this year. I will miss all of them but it is a sign of a great school to lose faculty to excellent universities. This means that we have a valuable inventory of assets. But, my big thing is that UCLA Econ must be allowed to hire and renew itself. I go to the faculty club some days and think to myself; "this place needs to get younger --- there are too many happy people here who were at Woodstock."

The Deans should remember the 45 degree line. A university's overall ranking and its economics department ranking lie on the same 45 degree line and I don't think this is merely correlation. A strong economics group keeps the University in the newspaper and gives the alumni something to be proud of. Applied statistical analysis will only become more useful in the modern economy.

I do think that academic economists need to make a better case for why we are useful people. A prominent economist once told me that Milton Friedman's work on hyperinflation and the Black-Scholes work on option pricing were sufficient for showing our value added. I agree that this was a good start but we owe the world more than that and I think we can deliver. Yes we can.

Friday, April 09, 2010

The NY Times Business Section Today is Very Funny

Like other old guys, I start my day by skimming the print version of the NY Times. I'm looking for funny stuff and today's newspaper delivered.

Example #1 comes from Duke University where the Provost cancelled afternoon classes to have a big party for the b-ball team. A Math Nerd was upset that kids didn't go to class for 4 hours. While I agree with him, this article is funny. At least the Provost of Duke is honest about the purpose of higher education.

Example #2 is on the same print page. The Manager of the Sex Pistols is dead . Malcolm M. lived quite a life and the NY Times gave him 1/2 of a page. Sid Vicious would be impressed.

Example #3 is Ben Bernanke's evaluation of his own "treatment effect" in nipping the incipient depression in the bud. He credits his knowledge of economic history in this article . Maybe MIT should make economic history a required course for its PHD economics students again? What do young economists need to know to practice our dark art?

Example #4 is Robert Rubin's self pity in this article . My advice to all of you is ; "there is no free lunch". If you take $100 million in compensation, you will be expected to do something for that pay. Rubin must have thought that his rolodex was sufficient but Citigroup used his gold plated name to signal to outsiders that their firm was well managed and the outsiders thus had confidence in Citigroup. Rubin is no dummy. He must have known this.

Thursday, April 08, 2010

Robert Rubin's Testimony on the Financial Crisis

In his autobiography, Robert Rubin's spends a lot of time saying that the key to his getting very rich was his understanding of how to estimate probability distributions. In english, If somebody offers you $10,000 next year if UCLA wins the NCAA basketball tournament in 2011; how much $ is this guy really offering you today? The answer = p*10000/(1+r) where p= probability that UCLA will win the tournament and r is the market rate of interest. Suppose that r=0% and p = .01, then this guy is offering you $100. But, where does "p=.01" come from? How do experts on Wall Street form their best guesses of the future? Rubin (through natural selection and learning) proved to be one of the top guys at correctly (on average) "seeing" the future.

So, with this drumroll --- it is funny to turn to his Congressional Rubin testimony today. As I read the bottom of the first page, I see that he claims that Wall Street's Kings attached "the wrong" probabilities to different scenarios. He is saying that the Kings thought the probability of a triple "witching hour" was 0 when it was actually much larger than 0. This is the challenge that statistical researchers face. Even with very long histories, we may never see an event that has a 1 in billion chance of taking place. The empiricist assumes this probabily = 0 because he has never seen it but he is under-estimating the "true risk".

Rubin tells a complex story of the crisis of a nasty synergy of multiple shocks including; low interest rates due to the Fed and China's exports of capital, easy AAA bond ratings from the captured rating houses, banks not doing their due diligence in double checking households' income levels before offering huge loans to value. Marginal home buyers getting the "urge" to buy due to "irrational exurberance" and home owners with equity having the same feeling that the good times would roll on and taking equity out to finance their plasma TV. Finally, the lurking non-libertarian government --- implicitly promising to bailout anyone who does get in financial trouble.

So, how will modern macro economists make sense of this --- there are a lot of moving parts here --- we only have 1 crisis and Rubin claims that there are synergies between these pieces. How do you write down a coherent "macro model" that can generate all of these facts and helps you to figure out "what causes what"? How do we know how to test such a model? What varies across countries that would allow cross-country evidence to help here? In Canada, I believe that borrowers needed to put more $ down to buy a house. Will this type of variation be exploited to study the role of "housing equity" in pre-empting foreclosure and the resulting cascade?

Tuesday, April 06, 2010

Pick Your Poison: CO2 from Coal or No Lights in Africa

"The Obama administration, caught in an awkward bind between its own ambitions on climate change and Africa’s pressing energy needs, is facing the first test of its new guidelines discouraging coal-fired power projects in developing nations." quoted here .

To quote Lenin, "what is to be done?"

To semi-quote John Lennon, "give the residual claimant a chance"

Suppose that the World Bank said to African nations; "You can have a $X dollar coal fired power plant that will produce 100 units of power but consider this alternative. The coal fired power plant will produce 200 units of carbon each year. For every ton of carbon you choose not to produce, we will give you $50. So, if you build a wind turbine system rather than the coal fired power plant, we will give you 200*$50" each year."

Now, I'm making up the "200" number but not the $50 number. In cap and trade discussions, serious people say that the price per ton of carbon should start at $35 a ton but suppose that we paid African nations $50 per ton of carbon avoided. This would provide them with a strong incentive to choose the "green option". This is like the "nega-watt" that Amory Lovins would champion.

Note that under my offer, the African nations could still build the coal fired power plant but they would lose out on the payment for not polluting. So this isn't a carbon tax, it is a "carbon subsidy". I'm giving the African nation the property rights to pollute but they have the opportunity to sell this right (at a price of $50 per ton) back to the World Bank.

Now, the World Bank would need to finance this but the developed nations would transfer resources to the developing countries while giving them the choice of whether they want "to go green" or not.

PERVERSE INCENTIVES? Of course, the smart African nation will try to manipulate the baseline and say that they would build a "really dirty" power plant and thus by building the green windturbines that they deserve an enormous payoff --- there would need to be some thinking about how to set the baseline (i.e imputing what the African nation's carbon release would have been had it built the coal fired power plant) because the nation has an incentive to over-state this to increase their payoff.

The Milken Institute 2010 Global Conference

Beverly Hills is a nerd friendly, intellectual town. On April 28th, I've been invited there for at least 1 hour. Do you remember The Who's song Substitute? Well, I know my place in the galaxy so I'm happy to serve as a substitute at the 2010 Milken Institute 2010 Global Conference. Our topic is climate change . The Beverly Hills Hilton sits in between UCLA and Beverly Hills so one can walk over. I'm hoping that Mike Milken will offer me some stock tips.

What are some of the other conference highlights?

If you register, you can watch Mike Milken, Ted Turner and T. Boone Pickens debate energy issues.

You can listen to the wise man Kenneth Feinberg explain how he priced life after 9/11 in determining how much the victims' families deserved in compensation .

If you are an "A-Lister", you might be invited to this party . I was not invited

You could get a Nouriel Roubini autograph and you New Yorker fans can score a John Cassidy autograph at this event;

Panel Detail:

Tuesday, April 27, 2010
4:00 PM - 4:30 PM


Book Signing
John Cassidy, How Markets Fall: The Logic of Economic Calamities

Now, this is just a small taste of what is going on at this Conference.

For all of the details go here .

Why am I participating? That is hard question to answer but sometimes you have to show up.

Monday, April 05, 2010

The Great Green Conspiracy?

A major research field in industrial organization is detecting collusion. Whether its OPEC working to limit competition or Ohio milk markets economists have used our tools to figure out whether suppliers are working together to price gouge the consumer. In the case of climate change, the suppliers are suppliers of ideas (us nerds). The demanders of accurate climate information is everyone who must live on this earth and is forming expectations of the future in planning investments today (carry an umbrella) and in the future (buy beach front property).

Building the excitement of "climategate", there is the claim of a big green climate cartel of liberal nerds seeking to impose their vision of the good life (low carbon) on everyone else and using chicken little scare tatics to nudge this pessimistic future vision onto Obama's policy horizon. Cynics go further and say that the liberal nerds have financial grant incentives to push their "low carbon" vision. There is certainly some truth to this. This broad issue is discussed in the New Yorker this week by Elizabeth Kolbert

All of this raises an interesting question. What motivates scientists and how do scientists compete? Suppose that 1/2 of scientists are ideological and 1/2 just want to know the truth. If each type is equally able, will the truth seekers win the competition? My intuition is that they will if there is an event (such as Einstein with his eclipse) that can settle which theory must be right.

Now, I realize that such a powerful test doesn't always exist. But, I return to the challenge of mass collusion --- could thousands of scientists really collude together to launch a false green conventional wisdom? The transaction costs of keeping this group cohesive and "on message" would be huge.

There is always a new generation of PHDs seeking to make their reputation. They way a Prince becomes a King is by killing the King! Take down a giant and you become huge in economics. The Dead King is angry but the profession is impressed with the "New Boss". Competition among nerds leads bad ideas to die!

Also, don't forget your type 1 and type 2 errors. Let the Null hypothesis be that climate change is a hoax. In the first case (unless I have them backwards), you believe a false hypothesis. In the second case, you reject a true hypothesis.

Decision theorists ask that you consider what you will lose in each of these cases. I hope you agree that the first case is more socially costly than the 2nd case. If we believe that climate change is real when it isn't then we will "waste" $ on stuff like electric cars and renewable portfolio standards but our economy won't go broke. In the first case, if we accept a false "big hoax claim" then we will be like the Titantic in 1912.

Final point; in our modern society; who is an expert? We respect doctors and dentists but somehow economists and climate scientists don't seem to carry such esteem. The man on the street believes that he "knows" the economy and the weather. He refuses to delegate expertise to the nerds. Why?

Is this a byproduct of the 1960s hippies talk that we "all equal"? Is it psychology that we don't like being dependent on others and knowing where we stand in the monkey hierarchy?

Sunday, April 04, 2010

Inclusive Green Politics

This Christian Science Monitor article profiles an evangelical Christian couple who have embraced the importance of reducing our greenhouse gas emissions. This article interests me because climate change mitigation today is a "left/right" issue. Liberals vote in favor of mitigation while conservatives vote against. The people profiled in this article represent relevant counter-examples. A sociologist might ask; "why have these people "flipped"? What convinced them to buck their group's common belief?".

Who cares? Obama needs such voters. There aren't enough liberals in the Congress to give him the votes on cap & trade to mitigate carbon. He needs to identify swing voters. What messages and thoughts are persuasive to evangelicals?

"Merritt hopes that even those Evangelicals who can't bring themselves to accept human-induced climate change will accept other parts of the environmental message to care for God's creation.

Harming God's creation is as destructive as "tearing a page out of the Bible," Merritt says. "We are asked by God to act to preserve the planet and to protect the people who depend on the planet's resources." The command in the book of Genesis for humans to care for the world "has never been revoked, ever, in Scripture," he says. From the very beginning of the Bible "we get a very clear picture that God has gone green, and He's never looked back."

The reason Evangelicals should care about climate change is "not because we worship the earth," Hayhoe says. It's recognizing that the impact is likely to be most severe in some of the most impoverished areas of the world.

"Doing something about climate change is loving our global neighbor," she says. "It's about caring about people who are already hurting around the world. And it's about caring for our children and future generations, who are going to inherit this earth that God has given us.""

I'm getting interested in persuasion. For different types of people; "liberals versus conservatives, young vs. old etc", what is a convincing argument?

Here is a brief paper by two Clark Medalists on this broad topic.

Saturday, April 03, 2010

The Future of California

1. The key to long run economic growth is attracting and retaining the skilled. Detroit is poor because it is unable to do so. California's climate, lifestyle and universities (both private and public) provide a bedrock to build upon. In a series of papers such as this one about New York City, and this one about Chicago , Ed Glaeser has demonstrated the robust correlation that skilled cities grow.

2. What do the skilled want? Economic opportunity and quality of life. Since California's quality of life is unique and no other state in the U.S is close to it, I am convinced that California has a great future. In my "model", quality of life acts as a magnet that attracts the skilled and where the skilled cluster (San Fran, LA) --- economic opportunities emerge.

3. A key challenge here is consistent Government policy. Will California's taxes and fees simply keep marching upwards? Businesses and households need certainty over the policy regime when making investment choices. If California could pre-commit to not engage in highly progressive taxation then more Superstars will continue to live and work here. If taxes on such stars rise, then California will be running a dangerous experiment in sketching out "the demand curve" for living in California. Intuitively, high taxes lower after tax wages and only those who really love it here will remain. Others will run away to Nevada, Texas and other low tax areas.

4. What business opportunities will climate change mitigation policies and climate change adaptation play for the state? Could the "green economy" really be our next Google? Will AB32 be enacted without disruption? Green businesses need clear policy signals --- what will the RPS be in 2020? What will be the policy "rules of game" for solar subsidies, electric vehicles and other green products?

California has an edge here due to our universities, and the home market effect (i.e that we buy 1st generation solar panels and green cars and the fact that a lot of progressive venture capitalists want to live here.

5. At some point, the state's public employee unions will need to be challenged. This is not a politically correct topic but we need government to provide more services and more nimble services per tax dollar paid. Republicans would be more likely to support government and taxes if they felt that this did not represent redistribution to other groups. Articles such as this one about over-compensation at Los Angeles DWP do not auger well for our future if this unsustainable status quo continues.

A daring economist should write a paper calculating what it costs California to provide a service such as garbage collection for 200 homes versus what it would cost for the private sector to provide the same services. My guess is that the public sector provides this specific service at 3 times the cost of the private sector. Now, I recognize that this "cost" is a wage premium for the lucky guys who have the public sector job. But, this public expenditure must be covered with taxes (to balance our budget) and this imposes the usual public finance costs.


6. In the face of Prop 13, I continue to support a windfall profits tax. Longtime homeowners have been paying "too low" a share of annual property taxes and they will make a very high return on their homes when they sell. It isn't crazy to impose a 5% windfall profits tax when they sell and for those who hand their home to their kids, somebody should come up with a mechanism to share the long run capital gain.


7. The future of California's public universities? --- This is a discussion for another day. A radical strategy would be privatization. I favor this but UCLA appears to be quite weary about pursuing this strategy. I wish that Milton Friedman was alive to spend an hour with the leaders of our University to discuss the benefits and costs of freedom. I'd pay his consulting rate to facilitate the meeting.

Friday, April 02, 2010

UCLA's Roger Farmer Provides Some Answers About the Health of Our Economy

Here is an interview with Roger.

"What are the chances of a double-dip recession?

The chances are 50-50. If inflation starts to pick up in our major trading partners such as China, there is a danger that it will be passed onto U.S. consumers. If inflation picks up in the U.S. when unemployment is at still at 8% or 9%, the Fed is going to face a difficult dilemma. There will be pressure to raise short-term rates to help prevent inflation. That will choke off the nascent recovery. But if the Fed does nothing, we could easily get back into a situation five years from now with high unemployment and high inflation together. The same thing happened in the 1970s. It can happen again."

This is very interesting stuff. As you know, I planned to become a macroeconomist when I entered the University of Chicago in 1988 but Robert Lucas quickly provided me with information (my midterm grade) that nudged me towards applied micro. Now, at the tender age of 44 --- I'm thinking of reinventing myself as a dynamic stochastic GE guy. Learn to learn!

Banking Reform and the Catch-22

Krugman's piece today on banking reform offers several interesting ideas. I want to talk about this quote; "Here’s how I see it. Breaking up big banks wouldn’t really solve our problems, because it’s perfectly possible to have a financial crisis that mainly takes the form of a run on smaller institutions. In fact, that’s precisely what happened in the 1930s, when most of the banks that collapsed were relatively small — small enough that the Federal Reserve believed that it was O.K. to let them fail. As it turned out, the Fed was dead wrong: the wave of small-bank failures was a catastrophe for the wider economy."

Here is the irony. We know that banks would make "better" decisions if they knew that the government would not bail then out when things go bad. But, the 2008 precedent, their lobbying and ongoing research in macro economics (that argues that the financial sector influences the macro economy) all suggests that government is not willing to sit on its hands during a crisis.

In a strategic game between a bank and a government, if the government promises that there will be no bailout, then the bank will do a better job researching real risk exposure and will hedge risk through futures markets and will demand a big risk premium (a price discount) for taking on risk.

Now suppose that Paul Volcker gets his wish and the big banks are broken up; here is the funny party. In the future when small banks experience a bank run (for whatever reason), this creates an arbitrage opportunity for a big bank to buy it and restore "confidence". Note that NO TAXPAYER $ is used here. The big bank steps in and like a sheriff in a Western restores order. The problem is that in this case we need "big banks" or there will be "big banks" as medium sized banks buy distressed banks and get bigger and eventually they will cross the Volcker line. So, the irony here is that competition and big fish buying up distressed small banks offers a way to minimize taxpayer involvement with this strange sector but if the government has a rule on bank size then this free market adjustment mechanism may vanish.

Now, I disagree with the relevance of Krugman's history lesson from 1930 for today. If a small bank in Los Angeles goes bust today, this doesn't mean depression for my home town. We now have a globalized capital market and low prices means there is an opportunity for a buyer (vulture?). Now, to avoid adverse selection problems (the bank is a lemon) , we need regulatory laws so that banks must disclose their full balance sheet of assets so that potential buyers can value the risk and calculate how their correlation structure of assets will be affected by buying the distressed bank. In this age of strong computers, banks should hold more detailed information on the income and job categories of their borrowers so they can assess in real time how much risk their portfolio of loans really reflects. Banks should hire a few more applied microeconometricians and we could crunch the data in a few days to figure this out.

Thursday, April 01, 2010

The "Dark Side" of Banking Pollution Permits: Time Inconsistent Pollution Policy

Suppose that your factory produces greenhouse gases (GHG) as a byproduct of production. To keep this simple, suppose that you emit one ton of GHG per year. If carbon regulation now requires that you must own a "pollution permit" to cover your emissions, you face a choice. You could purchase 1 permit each year. Or, in an early year you could purchase 100 permits (if the price of a permit in that year was low) and "bank" them to use them later. If you can borrow and lend at a constant interest rate r, then a PDV maximizing firm will purchase the permit at time t if (permit price at time t) < (permit price at time t+1)/(1+r).

Now with this setup, we can turn to this NY Times article. Set in Europe, this piece says that dirty firms are banking large numbers of permits that they bought in the past at a very low price.

This article got me thinking that environmentalists may encourage the EU to engage in a type of inflation. Recall that inflation is printing money so that the amount of real goods that you can buy with $100 falls sharply (i.e prices rise).

In the case of pollution permits, the original contract was; "1 permit = 1 ton of GHG" but imagine if there is a devaluation of the value of permits such that under the new regime "1 permit = .01 tons of GHG". In this case, the factory discussed above would now need to buy 100 permits each year to cover its GHG emissions.

What would be the real effects of changing this "exchange rate"? Firms who have purchased lots of permits in the past and banked them would now own a much less valuable asset. This "devaluation" would be a transfer from the shareholders of the polluting firms to the government who would now receive more revenue when these firms would have to buy more permits.

Now is this a costless transfer? "Fool me once shame on you, fool me twice shame on me". Moving forwards, firms with rational expectations will no longer bank permits and will face more price volatility. Just like in a nation with hyperinflation where nobody wants to hold cash (because it is losing value every second), polluting firms will need to hedge carbon pricing risk and could use futures markets rather than using banking.

I need to think about this but it could be the case that fear of pollution permit "hyperinflation" could accelerate energy efficiency and decarbonization because firms would know that they are likely to face higher price in the future for mitigating carbon. So, is "green inflation" good?

Now, this "inflation" only incentivizes firms who purchased permits before the news of the devaluation become public. In rational expectations finance, the equilibrium price of permits will decline immediately when that news becomes public knowledge and will decline even further if firms believe that the devaluation today implies future devaluations.

So only firms that were the original holders of the asset will suffer an income loss.
This is the "dark side" for firms that held large numbers of permits (because they become less valuable after the devaluation) --- but anticipating this effect may accelerate their transition to becoming "greener" to reduce their total carbon bill.

For a serious study on the economics of banking pollution permits read this .

It appears that the crucial issue here from an environmental point of view is what share of the dirty major producers in the economy were planning on meeting their carbon obligations using banked permits? The larger is this set, then the greater are the benefits of a big one time unexpected pollution permit devaluation.

A final point. The original permit buyers who banked the permits have revealed that at the time they bought the permits they believed it would be costly for them to reduce their GHG emissions. For example, suppose that in 2009 --- your firm buys 1000 tons of GHG permits and banks 990 and you paid $30 per ton for each. You are revealing that a lower bound in 2009 on your marginal abatement cost is $30 per ton. When this firm learns that banked permits are worthless in the near future, if it still costs the firm more than $30 per ton to abate; then this reneging on banking is socially costly. Relatively high abatement cost firms (the original "bankees" will now need to do more private abatement). The environmentalists will be happy but the shareholders will be upset.