Monday, May 31, 2010

Diversified African Agriculture

This article tells the story of a mysterious pest that is degrading Africa's supply of Cassava. I did not know that this root is a major caloric source for hundreds of millions of people there. For some more facts read this .

The interesting economics here is farmer choice. At the end of the article, the Times quotes a "smart farmer" who recognizing this shock has now diversified his plantings to now also grow some beans. The article makes the interesting point that Cassava has been a safe crop to grow because it requires so little work that a farmer sick with malaria can still grow this stuff.

The article got me thinking about how farmers can be nudged to be more "nimble" in the face of unexpected shocks. Climate change will require that farmers become nimble in the face of climate shocks and this pest shock is an interesting case study. If this pest eats up a fair bit of Cassava, what are the general equilibrium implications? What will consumers substitute to if Cassava becomes scarce? Can these nations import agricultural products from nations not suffering from these pest shocks or do domestic tariffs and quotas (that protect domestic farmers) bind and poor households will really suffer?

For subsistence farmers, it would interest me how diversified a portfolio of agricultural crops do they grow? Do they have all of "their eggs in 1 basket"?

The NY Times article celebrates the Bill Gates Foundation and its investments in this region. But, what can Big Bill's $ achieve here? What is the targeted intervention in this case? What is limiting African farmer diversification? Is it a lumpy piece of machinery such as a tractor? Or is it information and knowledge about how to grow other crops? Or is it access to water for growing other stuff?

If the Gates Foundation provides such basic infrastructure, will the incumbent farmers gain from such investments or will they be outbid for the land by others and displaced to more marginal land as the new infrastructure's value is capitalized into land prices?

Sunday, May 30, 2010

Celebrity Sighting at the Beverly Hills Farmers Market

The A-List was out in force today at the market. Dora and I were there and people continue to think that I may be Quentin Tarantino (unfortunately I do see the resemblance). As an avid reader of People Magazine, I was quick to spot three young people who often grace its pages. Ashlee Simpson , her husband --- the tattooed Pete Wentz --- and baby seemed to be having a nice morning. Even "important people" can have a peaceful start to their day.

I am now listening to my son play his violin --- he is playing the Star Wars music that I bought for him. Yoda might not recognize the sound but the neighbors love it. We encourage him to play outside so that all of our nearby "friends" can hear it. This is payback for their barking dogs. If the Coase Theorem really holds, I'm expecting a payment from them (in return for shutting down the noise) of $10,000 very soon.

UCLA's final week of class starts tuesday. Despite the large paycuts and the absence of new hiring this year, I'm mildly optimistic about the short term future. I continue to lobby that we need to start acting like a cost minimizer and allow the economists and business types to play more of a leadership role in rational planning and prioritization. There are 10 campuses at the UC but I don't believe that any PHD economist plays a leadership role at any of them. At UC Davis, I believe that Steven Sheffrin was in a leadership role (Dean of something). UCLA would be in even better financial shape if strong incentives could be introduced into the system to encourage excellence and optimization. All Deans should be required to read Laffont and Tirole's book on the principal/agent problem.

University management appears to be a classic case of how to incentivize a tenured group of agents to work hard for the greater good. --- Same issue with the implicitly tenured "staff".

Saturday, May 29, 2010

My 12th Wedding Anniversary

According to this website , Dora and I had a 82% chance to make it to our 12th anniversary. My son's violin playing (Star Wars symphony) is not helping. As I flashback to May 29th 1998, I remember that it was a very hot day in Cambridge, MA. My grandfather married us and he did a great job. With all of the details we had to attend to, we had forgotten to memorize our vows and stood up there with our printed copies of "the script". If you watch the video, I have a lot more hair and it looks like a graduate student skit show.

In my new book Climatopolis (for which the page proofs now exist), I quote the New Yorker's Elizabeth Kolbert. In this piece praising behavioral economics, she writes:

"If there is any consolation to take from behavioral economics—and this impulse itself probably counts as irrational—it is that irrationality is not always altogether a bad thing. What we most value in other people, after all, has little to do with the values of economics. (Who wants a friend or a lover who is too precise a calculator?)"

I have married another economist and that's revealed preference! Is rationality and cold cost/benefit analysis that unsexy? Is sticking to the plan and being consistent such a bad thing? Diversity is the spice of life but you can plan and foresee how you inject this into your day to day life.

I gave my 8.5 year old son a copy of Climatopolis and he read the first chapter and says that he likes it. In September 2010, I will return to my college (Hamilton College) and the World Bank to speak about this book. I'm also making plans to speak about it at Pomona College here in LA.

Here is the book's Amazon page.

Friday, May 28, 2010

What New Legislation will Be Caused by the BP Spill?

In the past, the Congress voted on new risk reduction regulation shortly after environmental disasters took place. What will this recent BP Spill trigger?

Thomas Friedman would vote for a "Patriot Tax" and I agree with him but I don't see the President suggesting a two dollar a gallon tax on gasoline right now.

If we ban drilling on our coastline and if we don't pass carbon legislation, then we will need to import more oil and will remain reliant on some non-democracies to continue to feed us dirty resources.

Will we pursue an electric car agenda to replace our gasoline fleet with electric vehicles? (A Tesla in every garage?). In this case, we need to start thinking about streamlining the permitting and the construction of new power plants and transmission cable. NIMBY lawyers better be ready to be on the defensive.

Perhaps the Congress will enact a law banning oil spills. Now, on this point I do not know how much of an investment BP made in minimizing the probability of a spill and what "fail-safe" checks they built into their system. No process can be risk free but at the margin, how much $ do we want oil companies to pay to lower the risk of disaster? Do they have the right incentives under current torts and public relations challenges to invest in minimizing the probability of disaster? Companies such as BP and Exxon know that they will be sued and pillored in the press and blogs when a spill occurs; how much ex-ante precaution does this trigger?

The unspoken issue here is "out of sight, out of mind". When we import natural resources , we do not think about the safety issues (coal mines) and the environmental issues associated with harvesting those resources, we just buy the final product. When domestic production generates the coal and gas, we see the "dirty work". I thought that we never wanted to know how the sausage is produced.

Switching subjects; calories have become too cheap and now the world has fat cops .

Thursday, May 27, 2010

A Typical Day for a Humanities Professor?

While I'm suffering and thinking, my humanities colleagues at UCLA and Stanford are rocking out . Equal pay for equal work!

I can't imagine Milton Friedman or even Paul Krugman or Randy Wright attempting the following;

"A rakish band of Stanford professors and their cronies is rocking out through tune after tune in a university rehearsal space on a hot spring afternoon. No, this is not your typical rock band — its founding guitarist-songwriters are professors of literature, scholars of Dante and the French Enlightenment. But Glass Wave, as the group calls itself, settles into a snarling, chicken-scratch groove for a song it has recorded titled "Lolita," as lead singer Christy Wampole crouches and moans:

Now that Mother's gone away,

you think that you can have your way.

So you stroke my fevered lips

with your filthy fingertips.

Yes, Wampole — a doctoral student in French and Italian literature — is singing the scared thoughts of that Lolita, the 12-year-old who grows sexually involved with middle-aged Humbert Humbert in Vladimir Nabokov's 1955 novel."

I'm not sure what any of this means and I don't want to know but clearly freedom of speech has gone too far. Where is Senator Joe McCarthy when we need him?

Wednesday, May 26, 2010

Perfume Loathing in Las Vegas

Recently, I've been thinking about the health impacts caused by exposure to various chemicals. While not revisiting Woodstock or other hippie arenas, I would like to know the answers to some deep "perception versus reality" questions. For common products such as perfumes or toliet cleaners, what chemicals do they actually have in them? What is their "secret sauce"? Such facts would be the cold reality --- now perceptions are key here. For the typical person who uses these products --- do we perceive these products to be safe and having zero risk from exposure? If your answer is yes, what laws and regulations or market forces "guarantee" this happy outcome?

Las Vegas has just run an interesting social experiment that is described in today's New York Times here .

"One thing that Las Vegas never lacks is scent. Perfumed hallways, the aroma of waffles wafting off the buffet, the certain je ne sais smell of a casino at 2 a.m. — Vegas has it.

And so perhaps the city is an odd choice for a fragrance-free day, as it has proclaimed for Wednesday, in the hopes that perfume, hairspray, body oil and their ilk shall be banished from the land, in honor of Indoor Air Quality Awareness Day.

Councilwoman Lois Tarkanian said she was influenced in calling for the proclamation by information from the National Toxic Encephalopathy Foundation, a group based in Las Vegas that lobbies on behalf of people with brain injuries caused by chemicals. “We are asking people not to wear perfume,” Ms. Tarkanian said. She would like people and businesses to use vinegar instead of some cleaning supplies.

“I thought this might be interesting,” she said, “so we will try to go scent-free for that day and see if differences occur.” "

NOW, one day is not a revolution --- but it should alert people to how in aggregate their small choices over perfumes and body lotions add up. Indoor air pollution is a major problem in the developing world. Kirk Smith of UC Berkeley has been a leader on documenting the health costs caused by cooking with coal inside and the millions of rural poor who have died.

But, in a rich country such as ours --- is there a serious environmental externality associated with indoor exposure to toxics? There certainly could be. If we care about this problem, then experimentation such as what is going on in Las Vegas is the right way to begin to explore cause and effect or at least to alert people to how much better their day to day quality of life could be if ditch the status quo.

Tuesday, May 25, 2010

Physically Fit Cities

Los Angeles did not make the top 10! I guess I raised the average weight around here. Sacramento ranks #7 in terms of the fittest cities in the U.S (read here ). Perhaps because of President Obama and Larry Summers, Washington DC ranks #1.

Here's the top ten:

1. Washington, D.C.

2. Boston

3. Minneapolis-St. Paul

4. Seattle

5. Portland, Ore.

6. Denver

7. Sacramento

8. San Francisco

9. Hartford

10. Austin

And here's some of the reasons that Sacramento did so well:

- Higher percentage eating five or more servings of vegetables or fruit each day.

- Lower percentage of diabetes.

- More farmer's markets per capita.

- More baseball/softball diamonds per capita.

- Lower percent currently smoking.

- Lower percent obese.

- Higher percent bicycling or walking to work.

And under the category of "challenges" for Sacramento:

- Higher percent with asthma.

- Higher percent unemployed.

- Lower percent using public transportation to work.

- Higher percent with disability.

- Fewer acres of parkland per capita.

- Fewer swimming pools per capita.

- Fewer tennis courts per capita.

If you want to see the source of this wisdom, click here .

Glaeser on Transparency in Public Pensions

Ed Glaeser makes some excellent points in this piece about public sector compensation. Permit me to add my 2 cents.

1. As Paul Samuelson taught us in the context of his overlapping generations model (OLG), in a growing economy --- we can run a ponzi scheme. The current old are fed by the current middle aged and in the next generation when the current middle aged are old, they will be fed by the current young who will then be middle aged and so on.

BUT, if Krugman is right and our economy is now the "New Japan" of the 1990s with low growth --- then this model unravels.

2. Non-Stationary Life Expectancy --- in english --- suppose you are 70 years old today ; how long can you expect to live? Suppose that you were born in 1900 , in calendar year 1970 --- (when you were 70) --- how long could you expect to live? The conditional probability of survival (i.e given that you are age X , what is your probability of surviving to age X+Z) keeps rising over time. This is a good thing! Here is some data . But, who pays for you? You undersaved as a young person because you didn't anticipate this windfall.

3. Glaeser argues that the Public Union bosses are quite savvy and understand salience and behavioral economics. Out of sight --- out of mind --- the public respects police officers and didn't fully appreciate the true cost of the deal. The New York Times is running front page stories about bus drivers getting 2 months off for "disability" when they are spit upon. Of course spitting is gross but how much damage did this event cause?

Glaeser makes an excellent case for transparency in compensation --- workers should be indifferent between working in the private and public sector. Think of yourself and jury duty --- are you paid your hourly wage when you are summoned? For each public sector worker, what job would they have had they worked in the private sector?

Monday, May 24, 2010

Los Angeles vs. New York City

Could an article such as this (an LA Times interview with William Shattner) appear in the New York Times? I don't think so. The LA Times invests less effort in discussing the Wall Street/Washington corridor and devotes more time to the big personalities hanging around Hollywood. I guess this is comparative advantage and I prefer the LA Times to the NY Times. The NY Times may cover more important people but my hometown newspaper reports about more interesting people.

Summer is quickly approaching. My friends who teach at schools on the semester schedule have been on summer break starting about 2 weeks ago --- while us "quarter people" keep marching on for another two weeks. The 10 week quarters fly by. For reasons, I can't fully explain --- I will be teaching summer school this summer.

If you want to study Environmental Economics taught by a Dream Team in Summer 2010 at UCLA, then click here .

Sunday, May 23, 2010

UCLA Executive Education Focused on Corporate Environmental Sustainability

Here is a press release providing details about a new executive education program that UCLA's Institute of the Environment will offer in July 2010. We've been working hard to prepare a relevant and challenging curriculum. We have assembled a "Dream Team" to teach this one week mini-course. I've been thinking of enrolling my parents in this class so that they can learn how I view the "green economy".

Who should enroll? I expect that there is a new generation of business leaders who are thinking about the opportunities and challenges that the next wave of environmental regulation will pose for their line of work. Climate change by itself both poses opportunities and challenges for firms. Those who participate in our course will have a great time living in Los Angeles for a week and will immerse themselves in a serious intellectual endeavor that will payoff both in the short term and the long run. We hope that our "students" will come from a variety of nations.

If you have questions about this program, please email me.

Contrasting Economics with Other Social Sciences

UCLA's Elinor Ochs has her research profiled on the front page of the New York Times today. In this article , we learn about how she spent $9 million dollars to videotape 32 Los Angeles families over the years 2002 to 2005.

"“This is the richest, most detailed, most complete database of middle-class family living in the world,” said Thomas S. Weisner, a professor of anthropology at U.C.L.A. who was not involved in the research. “What it does is hold up a mirror to people. They laugh. They cringe. It shows us life as it is actually lived.” "

We learn some new facts from this research.

"Mothers still do most of the housework, spending 27 percent of their time on it, on average, compared with 18 percent for fathers and 3 percent for children (giving an allowance made no difference).

Husbands and wives were together alone in the house only about 10 percent of their waking time, on average, and the entire family was gathered in one room about 14 percent of the time. Stress levels soared — yet families spent very little time in the most soothing, uncluttered area of the home, the yard."

Stress levels were measured with a saliva sample (4 a day).

WHAT is my point? Professor Ochs created an excellent laboratory but it appears that she didn't run any field experiments here. She observes 32 familes for months in continuous time. Suppose that she used a random number generator to decide which households at which dates for them to receive a "treatment". This treatment could have been something related to my own research such as a Home Energy Report informing them how their electricity consumption compares to their neighbors or it could have been something silly like a free pizza. In each of these cases, she could have explored "cause and effect" ; what happens next when a randomized treatment arrives? Now, if Professor Ochs was feeling daring --- she could have examined what happens to family dynamics if an old boyfriend of the wife appears or if there is an IRS tax audit. These would be high stakes treatments! My big point is to contrast how economists go about their business versus what the anthropologists do. Professor Ochs created a fantastic setting for watching a field experiment play out but at least as far as I can tell --- no randomized treatments were attempted.

NEW Point

If you believe that urban dogs pose challenges to green cities, read this . I like this quote;

Copon, for his part, says the campaign isn't working. So he has become a vigilante, accosting strangers who are too busy talking on their cellphones to pay attention to what their dogs are doing to his building.

First he demands to know where they live, then snaps: "Now I'm going to go pee on your front door!"

Copon, who speaks with a rough French accent, said he thinks many downtown dogs are simply accessories.

"It's very fashionable," he said. "You go downtown, you gay, you have tattoo, you have dog."

Mr. Copon --- you are very funny.

Saturday, May 22, 2010

Past Greatness

Harrison Ford does not appear to be fully at peace with the role that Star Wars played in creating his movie career. My evidence? This LA Times piece . Given the money and the fame that Han Solo offered for him, I was a pinch surprised that he isn't more grateful.

But, on another level --- I respect that he clearly doesn't believe that this was his best work and maybe he views himself as an artist. But, he shouldn't be embarrassed by the fame and fortune that George Lucas's vision created for him.

I had the opportunity to think about this question the other night. I attended a UCLA student event. Not many students showed up, but one student asked me what my greatest research accomplishment has been. To be honest, I have never had a Watson and Crick "Double Helix" moment that stands out as the apex of my career. I have had plenty of ideas that I researched and wrote up. These ideas are embodied in my 3 books and my 75 published papers. As this flashed through my mind, I simply said "I need to believe that my best work will take place in the future".

Harrison Ford is 67 years old --- I hope that his best work is in front of him but the probability that this is true falls with age. For any worker, there is the mildly interesting question of whether our work "stands the test of time". Good academic papers get bundled into the research frontier and become part of the conventional wisdom.

Friday, May 21, 2010

Can Kevin Costner Stop the BP Oil Spill?

The free market rewards innovation and experimentation. Just ask Kevin Costner; " The " Kevin Costner solution" to the worsening oil spill in the Gulf of Mexico may actually work, and none too soon for the president of Plaquemines Parish. Costner has invested 15 years and about $24 million in a novel way of sifting oil spills that he began working on while making his own maritime film, "Waterworld," released in 1995."

I have trouble believing this story but I do like this LA Times Story.

Now what has Dr. Costner done right?

Let's ask one of the Baldwin Brothers.

"It certainly is an odd thing to see a 'Kevin Costner' and a 'centrifugal oil separator' together in a place like the Gulf of Mexico," said actor Stephen Baldwin, who is producing a documentary about the oil spill and Costner's device. "But, hey, some of the best ideas sometimes come from the strangest places.""

So what is really going on here? Did Costner invent a piece of engineering equipment? No, he financed some nerd's invention. Financing matters!

"Houghtaling said Costner bought the technology, which was originally developed with help from the Department of Energy, after the 1989 Exxon Valdez disaster and turned it over to a team of scientists and engineers for fine-tuning.

"The machines are essentially like big vacuum cleaners, which sit on barges and suck up oily water and spin it around at high speed," Houghtaling said. "On one side, it spits out pure oil, which can be recovered. The other side spits out 99% pure water.""

Wednesday, May 19, 2010

A Very Successful UCLA Professor

Paul Terasaki is a better man than I am. If you don't believe me, read this . He has lived a full life and has accomplished great things. He must believe that UCLA has played a key role in helping him to create new knowledge. After reading this story, I am willing to make a sincere promise. If I ever earn $50 million dollars, I will give it to UCLA. What is the expected value of this promise? I would say that it's about $10.

Now that I know Prof. Terasaki's story, I'm thinking about how I can up my game and be a more productive member of UCLA. Maybe I should teach more? Attend more Graduate Council meetings? Talk to my PHD students? Attend more graduations? Hold Office Hours? Write columns in the student newspaper? Eat my meals at the Student Cafeteria? Write Letters of Recommendation? These suggestions all have merit and I will consider each of them at a later date. Right now I need to write.

The Cost of Recessions

I am a retired labor economist. Back in the day, there was an interesting debate about the "scarring effects" of unemployment. Intuitively, does being unemployed make you less employable in the future? Papers such as this one said yes. The mechanism might be that an unemployed person's skills atrophy as he drinks more booze, stops shaving and bathing. If such "scarring effects" are large then this provides a microeconomic reason to take Keynesian counter-cyclical policy seriously.
Government investments today in "aggregate demand" help to preempt this depreciation of the human capital stock.

Now a new line has emerged in this paper.

Joblessness and Perceptions about the Effectiveness of Democracy
Duha Tore Altindag, Naci H. Mocan
NBER Working Paper No. 15994*
Issued in May 2010

Using micro data on more than 130,000 individuals from 69 countries, we analyze the extent to which joblessness of the individuals and the prevailing unemployment rate in the country impact perceptions of the effectiveness of democracy. We find that personal joblessness experience translates into negative opinions about the effectiveness of democracy and it increases the desire for a rogue leader. Evidence from people who live in European countries suggests that being jobless for more than a year is the source of discontent. We also find that well-educated and wealthier individuals are less likely to indicate that democracies are ineffective, regardless of joblessness. People’s beliefs about the effectiveness of democracy as system of governance are also shaped by the unemployment rate in countries with low levels of democracy. The results suggest that periods of high unemployment and joblessness could hinder the development of democracy or threaten its existence.


I am reading a biography of IKE and there is a short section about Hitler's rise to power. The Post WW I German data point does provide a supportive case study for this paper's core thesis.

Do desperate people blame themselves or "institutions" for their bad fortune? Now that economists are studying social interactions --- it is certainly interesting to ask how participation in a revolution/rioting starts up -- how much is push versus pull of giving up on the incumbent institutions?

Monday, May 10, 2010

Pinpoint Solar Maps of Cities Aid the Green Push

Location, Location, Location --- this mantra of real estate applies to green cities as well. Within a city, where should costly renewables infrastructure (i.e solar panels) be sited? The GIS nerds can provide the answer based on their new funky maps . A good decision theory paper should be written comparing the cost effectiveness of renewables investments made using these maps versus what the outcome would have been without these maps. That would be allow us to estimate the "value of information".

In California, the hope is that solar panel makers will take a close look at the archive of possible siting locations and will customize products that can be placed on top of existing structures. So, as I understand it, the state wants to play the role of a middleman helping solar power entrepreneurs to identify good places to plunk down their panels to generate lots of power.

Sunday, May 09, 2010

Green Jobs Revisited: The Case of A123 Systems

In several research papers, such as my Pittsburgh decline of steel study , I have stressed the "green city" benefits of U.S deindustrialization. New York City is a "greener" city today in part because it has lost 1 million manufacturing jobs since the early 1950s. But, in the middle of a deep recession --- we need to find meaningful work for people to do. Given that new factories are cleaner than old regulation exempt factories, any new factories that are built in the U.S today would offer a "win-win" of jobs without severely impacting the local environment.

This LA Times article provides a case study of A123 Systems. This battery maker can more than double the fuel efficiency of a hybrid by replacing the hybrid's battery with the A123 "better battery". Now, I have always wondered why Toyota doesn't buy this product and upgrade its battery but that is a question for another day. It may be an issue of product differentiation that Toyota doesn't want to lose Prius sales by offering the "green current Prius" and the "super green Prius armed with the A123 battery".

In the article, Don Lee sketches the tradeoffs that MIT Professor Yet-Ming Chiang faces. Dr. Chiang hints that he wants to build his product in the United States but that China offers certain attractions for mass producing his battery there;

"The obstacles here are rooted in the sad history of manufacturing's decline in the United States: Despite the promise of Chiang's batteries, many on Wall Street and in Silicon Valley were incredulous when he and other leaders at A123 asked for capital to build factories in America — Asia, yes, but Michigan, why would you want to?

Even more daunting, nearly all of the world's battery manufacturing industry is in Asia, where plants can be built faster and supplies and equipment are much easier to get than in the United States. These days, it's hard to find Americans who even know how to build a battery factory.

That's why A123 had to give in and build its first plants in China, where the company could move into production quickly to show auto industry customers that it could deliver on future contracts."

It is interesting that the article does not discuss differential wages and health benefits in the U.S and China and how much this nudges a factory to locate there. The article claims that the attraction to building a new factory in China is the absence of redtape and the existing human capital and infrastructure for getting the project up and going without delays.

But, there is a cost of having a factory in China. Dr. Chiang, is aware that his private secrets for what makes his product great will become common knowledge there. So, the attraction of locating his factory in Michigan is a combination of Obama Stimulus money and the implicit guarantee that his intellectual property will be safe here. If intellectual property protection helps to rebuild U.S manufacturing, will be an interesting trend to revisit.

His firm expects to create 400 Michigan jobs at its new factory by the end of the year. Is that a big number? How will the Obama team know if they have "over-paid" in terms of the incentives package they offered? Don't forget Tim Bartik's work on the economics of local development. He asked; "who gets the new jobs?" A Mayor may hope that the unemployed and discouraged not in the labor force workers will get these jobs but Bartik showed that migrants from other areas will move in and grab roughly 90% of the new jobs. So, this Michigan effort will move 40 currently unemployed people to gainful employment.

Returning back to China, suppose you a high up official in the central government --- do you have the right incentives to protect Western intellectual property as a commitment device so that your nation will continue to attract firms like A123 to locate within your borders. If you view your home market size as too tempting for foreign companies to pass up on, then you may choose to take the gamble of not offering foreign firms such guarantees.

Saturday, May 08, 2010

Famed Physicist Stephen Hawking Embraces the "Push/Pull" Model of Migration to Explain Alien Invasion Patterns

In the midst of the ongoing economic crisis, renewed faith in Keynesianism, and wild stock market dynamics, I have worried about economics' ability to explain and predict human behavior but today the Los Angeles Times offers good news. As reported in this story , basic economics may be able to explain which space aliens will visit Earth.

Recall from Sjaastad's well known 1962 JPE paper with almost 2000 cites that migration represents an investment decision. The rational migrant recognizes that there is fixed cost of moving (selling your home where you live, packing your stuff, leaving your social network at your origin) and there is a variable cost of moving a far distance (transportation cost). In addition, you lose out on your origin location's stream of wages and opportunities that you would have earned had you remained there. The rational migrant compares this to the expected present discounted value of opportunities at each potential destination and moves if the maximum across the possible destinations in terms of expected benefits exceed the costs.

With this setup, we can now discuss space aliens. You can think of inter-planetary travel as a type of migration and basic economics should also explain such intergalactic patterns. According to Stephen Hawking, space aliens are not altruists. They will only arrive on Earth if their quality of life on their original planet stinks. He voices a Jared Diamond style claim of "collapse" that these green aliens have exhausted all of their home planet's natural resources and now that they are starving , they are angry and ready to kick some earth ass. Hawking believes that they are here to colonize us and grab out stuff. My son would not hand off his legos without a fight. Will you work with my young Napoleon to save Earth?

If Hawking is right, then this is a funky Roy model, Earth will only be visited by angry ETs because the happy aliens will be happy enough at their origin to not pay the costs to travel all the way here and thus they won't bother to come visit. This is a fundamental negative self selection case.

Switching subjects, I have just returned from a 36 hour trip to San Francisco. I had fun meeting some successful graduates of UCLA. They seemed mildly interested in my research. The next day, I gave a seminar at UC Berkeley and this was a chance for me to see many of my friends. Fridays are usually a pretty quiet day at universities but I had the chance to speak to a number of friends. My presentation was well received but I slightly shocked the audience by presenting 6 different papers and my new book's key themes all in 1 hour. I refuse to be boring and I believe that we should focus on the big ideas in our work -- too many seminars get dragged into 3rd order issues. Its not a wise strategy for a new assistant professor but I'm not that young anymore. I've decided that from now on I will only give "big think" seminars. If you don't want to hear such stuff, then don't invite me baby!

Friday, May 07, 2010

Two Humble Microeconomists Dabble in "Macro"

Nobody believes it (and nobody cares) but I intended to become a macroeconomist. Some dreams do not die and now I've seized the day. While I'm not studying average national per-capita income or when Ben B. will bring down the hammer, I am studying a time series average fact. On the topic of electricity consumption, California's per-capita annual consumption has barely increased over the last 30 years while the nation's as a whole has doubled. Now, California a lot richer than it was 30 years ago and electricity is a good with a positive elasticity ---- so what is going on?

In this new NBER paper , Dora L. Costa and I conduct an aggregation exercise. We use a large, high quality micro dataset to estimate a "residential electricity consumption" equation and this yields several interesting findings concerning the role that household demographics, housing structure attributes, household ideology, building codes and climate and electricity prices play in determining consumption.

We then use our estimated regression estimates to create an average residential electricity consumption index. It resembles a Paasche Index. More interestingly, we decompose this index into its subcomponents and demonstrate the "gross flows". Over time, the average home is becoming larger and the average household is becoming richer --- these trends should lead to a greater electricity consumption and we measure this effect but partially offsetting this effect is the phase in of California's strict residential building codes.

The key idea here is that homes are long lived durables. If in Calendar year 2000, California enforces strict new building codes then the macroeconomist will see no change in average home electricity consumption in that year because 99.5% of the stock was built before 2000 (before the code was enacted) --- but by the year 2050 --- you will see the impact of this legislation in the "macro" average --- because a majority of the housing stock will have been built after the standard was enacted.

So, Dora views our new paper as part of her "Cohort Studies" program because at any point in time --- the average home is a weighted average of birth cohorts and using our micro data we document the shares of the housing stock by birth cohort/calendar year and document how the electricity consumption varies by birth cohort.

We have a funky result that homes born in years with low electricity prices have high electricity consumption even 30 years after the birth! Initial conditions matter! Maybe I should hire more tutors for my son.

Switching subjects --- the violence in Greece sends a bad signal. That their public is so angry about the upcoming IMF enforced cuts in pensions and retirement deals signals to world markets that they will not swallow these conditions and instead will default --- so this is a signalling game. World financial markets would be much less volatile right now if the average Greek said; "We've had too good of deal and now we will work until age 65 like everyone else, we can no longer afford our cushy past deal." But on the streets, it looks like this logic is not being accepted and thus "confidence" suffers in the face of political uncertainty.

Tuesday, May 04, 2010

A UCLA Physicist Tackles Financial Bubbles and Fat Tails

Who has a comparative advantage in studying finance markets? Is it physicists or economists or neither? I respect that my UCLA colleague Didier is entering the mix. I'd like to know what portfolio he holds.

"Financial Bubble Experiment, a project launched by UCLA professor of geophysics and complex systems theorist Didier Sornette that attempted to identify four financial bubbles developing in Europe and forecast when they would peak."

To get a sense of what he thinks about "fat tails" click here .

So, from an ex-ante perspective --- what is his annual rate of return on investment if he takes his model as "true" in predicting the non-linear dynamics of stock prices? Will a hedge fund adopt his model at the heart of its trading strategy?

Or with fat tails, do we need an infinite amount of time to pass to being able to truly judge his rate of return relative to other trading strategies --- why? With fat tails and finite time, it is quite likely that we haven't seen the "black swan".

Given that most empirical researchers have finite data samples, I am confused about how a bayesian updates his priors if he believes in fat tailed distributions. I know that UCLA has many brilliant physicists and I would be happy to talk to them about what their discipline can teach mine and vice-versa.

Sunday, May 02, 2010

California's Green Coordination Game

How many new startup firms are attracted to locating in California because of the state's cutting edge carbon mitigation AB32 law? This article argues that there are lots and that these firms will reconsider their decision to locate in California if AB32 is not enacted. This synergy between private investment and public regulation is an under-researched topic.

Conversely, there are other firms who say that they will leave California if AB32 is enacted. Who is telling the truth? Both sets of firms may be.

Could a good applied micro economist with data on the locational choice of firms and industries across geographical areas test whether both claims are true? Since AB32's rules have not come into play yet, it would be hard to use historical data to estimate how responsive firms are to regulatory rules that have never been in place. If AB32's impacts will mainly be on prices of electricity and other traded goods (such as labor and capital), then we could use past variation in prices to study firm entry and exit from the California local market.

Saturday, May 01, 2010

Environmental Disasters as Regulation Catalysts: The Case of the April 2010 Oil Spill

Back in 2007, I published this classic titled "Environmental disasters as risk regulation catalysts? The role of Bhopal, Chernobyl, Exxon Valdez, Love Canal, and Three Mile Island in shaping U.S. environmental law"

Here is the abstract;

"Unexpected events such as environmental catastrophes capture wide public attention. Soon after five major shocks—Three Mile Island, Love Canal, Bhopal, Chernobyl, and the Exxon Valdez oil spill—Congress voted on new risk regulation. This paper conducts an event study to test whether individual congressional representatives were “shocked” by these environmental disasters into increasing their probability of voting in favor of risk legislation. On average, representatives were less likely to vote in favor of bills tied to these five events. Significant heterogeneity in representatives’ responses to these shocks is documented. Liberal Northeast representatives were most likely to increase their pro-environment voting in the aftermath of these shocks."

So what? Given our new environmental disaster now unfolding near Louisiana's coast, what will Congress be tempted to vote on?

In my 2007 Journal of Risk and Uncertainty paper, I documented an interesting result. Do you remember the Seinfeld episode that focused on the "Upper Hand" in relationships? George was eager to have the "upper hand" on his latest girlfriend to help him have more power in the relationship. In a similar spirit, I document that after environmental disasters such as Chernobyl, more liberal Congressmen propose new legislation related to the recent disaster. This says to me that the Greens in Congress believe that the shock affects the pressure group politics and that the polluters (in the aftermath of the disaster) are on the defensive so this is the right time to try to enact "macho" tough green regulation. This is the reason that voting percentages in favor of legislation do not rise after regulation. The regulation itself is more aggressive in the aftermath of the disaster. So the treatment (the disaster) causes a selection effect concerning what types of bills emerge from Congressional Committees and then are voted on by the entire House.

Turning back to the recent disaster; what effects will it trigger?

1. The "Spill Baby Spill" crowd will use the law of small numbers to highlight the safety consequences of domestic oil production and hint that California's coast will be more likely to suffer if domestic efforts increase there.

2. The nascent electric car industry will lobby for subsidies to accelerate the transition to their use in replacing gasoline vehicles.

3. Will a pro-gas tax contingent in the Congress emerge as they argue that this policy will collect revenue, battle climate change, accelerate the transition to electric vehicles and reduce our desire for off shore oil? Will any Republicans join this coalition?

4. What will the "Drill Baby Drill" crowd push for? Will they point to a "Smart Pump" that can minimize the environmental damage of offshore drilling?

Now after the other disasters, we saw dramatic new regulation --- I'm not showing much imagination here but could someone in the Congress propose something extreme such as No gas use on thursdays?

Diane Keaton Tries to Sell a $8.5 Million Dollar LA Home and China's Government Tries to Get the Keys To New U.S Technology

Here are two unrelated stories. Diane Keaton makes movies and upgrades great homes in West LA. If you have the cash, here is a $8.5 Million dollar home for you. It appears that market prices for this elite subset of homes have fallen more than for homes that merely sit in the 98th percentile of the LA pricing distribution. I believe that Candy Spelling has not sold her $150 million dollar home yet but I could be wrong.

If you don't believe me, consider the recent case study of Dr. Britney Spears. Oops she dropped her LA home's sales price again. Details here . Now, I still can't afford that house. Is there cache to owning such a star's home. As I reported in a blog post from 2 years ago, I found no evidence of a star premium for home sales price in LA.

Turning to more important matters. This article offended me. If I'm reading it correctly, the Chinese Government is requiring that foreign companies that bring new technology to China must disclose key pieces of information to the government before they can sell to China or work with Chinese companies. Now, I'm not a technology wizard --- so I must ask; "why does the Chinese government need this information?" If the answer is merely, "to protect against cyber-attacks" then I understand this requirement. But, a cynic might ask whether the Chinese government seeks to use this barrier to entry both to create some monopoly power and to extract rents from foreign firms (as they negotiate with Western firms over a mutually beneficial contract) --- in addition having access to these computer codes may help Chinese companies to reverse engineer aspects of U.S technology that allow them to learn. If information is a public good, then this acceleration of learning and the diffusion of best practices is a good thing as far as overall global welfare is concerned --- but if this new practice by the Chinese government allows their firms to grab our technology and then defeat our firms in free market competition then in the long run this will retard technological advance --- because our firms will anticipate that they cannot recoup the upfront fixed costs of learning and R&D.

Finally, I should note to all of my friends in San Francisco --- I will be in your area this thursday night. If you are a UCLA graduate, I look forward to seeing you at;

Thursday, May 6
6:30 pm
YACC Exclusive

Bay Area Chancellor’s Associates Event

Please join UCLA alumni, parents, and friends for a Chancellor’s Associates
wine and hors d’oeuvres reception and presentation featuring Matthew Kahn,
Professor in the UCLA Institute of the Environment, Department of Economics,
and Department of Public Policy. His topic will be "The Future of San
Francisco: An Environmental Economist's Perspective."
At Boudin Bakery (160 Jefferson Street, San Francisco CA 94133)
For more information contact Melissa Bersofsky at