Saturday, July 31, 2010

Heroes and Cowards: The Social Face of War

Through the magic of Google Books, chunks of the Costa and Kahn 2009 social capital book can be seen here or here . Read the preface --- Dora let me write that.

The book has received a number of favorable reviews .

When published in early September 2010, my Climatopolis
will be roughed up by closed minded politically correct reviewers. But, I know that the "silent majority" are going to think that it is smart and very funny. My book is about the economics of climate change adaptation. It is a celebration of free markets and the pursuit of narrow self interest. It is an optimistic book that our best days are ahead of us.

The Coase Theorem and Payments of $5,000 to Those who Live Close to Noisy Oregon Wind Farms

To paraphrase Darth Vader, "Never underestimate the full power of the Coase Theorem ".

As usual, this is a property rights issue. The people who own land near a new wind farm are surprised by the amenity impact of their new neighbors. If a wind farm locates in a rural area, what happens to property values close to the wind farm? If there is a "green amenity" effect, then property values can go up but if it is noisy -- then property values could fall. A one time payment of $5,000 at a 5% interest rate implies an annual nuisance cost of $250 per year (250/.05 = 5000) or 66 cents per day. That doesn't sound like a large externality but if these sidepayments "buy the peace" then Coase should be happy.

Friday, July 30, 2010

Economic Growth and the Environment Redux

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

HERE is the transcript of the Radio Segment

Can there be clean air and economic growth?

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

Report: Pollution way up in Chinese cities

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


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

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


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

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

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

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

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

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

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

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

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

I'm Krissy Clark, for Marketplace.


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

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

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

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

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

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

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

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

The Chilling Effects of Recessions: Battling Climate Change During Bad Times

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

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

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

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


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

My Interview with The American Prospect on California's AB32 Anti-Greenhouse Gas Legislation

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

Thursday, July 29, 2010

Not Your Typical Youtube Video: Lars Hansen Discusses the Future of Macro

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

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

Is Urban Air Pollution in China Rising?

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

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

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

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

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

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

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

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

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

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

Wednesday, July 28, 2010

Mr. Spock Studied Photography at UCLA

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

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

Green Innovation and Complementarities: The Case of Wind Power and Batteries

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

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

A Comment on the $320,000 Kindergarten Teacher

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

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

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

Matthew E. Kahn


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

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

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

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

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

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

Tuesday, July 27, 2010

Innovative Financing for "Energy Efficient" New Products Such as Electric Cars Will Increase Demand

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

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

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

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

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

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

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

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

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

To an economist, here is the interesting part:

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

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

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

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

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

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

Monday, July 26, 2010

A Climate Economics Event at Stanford on 9/7/2010

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

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

Adaptation as Solution to Climate Change

Policy instruments: technological change and behavioral change

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

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

Sunday, July 25, 2010

Why Did Climate Change Mitigation Become a "Wedge" Issue Between Republicans and Democrats?

Will Al Gore's Nobel Prize end up causing climate change? Huh? As climate change mitigation efforts and "Ivy League Democrats" became synonyms, opposing such legislation has become a political litmus test for being a "true" Republican. Did this have to happen?

Some facts:

"Dunlap and McCright (2008) report that in 2008 there was 34 percentage point gap between Democrats and Republicans in their agreement with a statement that the effects of global warming have already begun, up from a 4 percentage point gap in 1997. The 2008 National Environmental Scorecard of the League of Conservation Voters gives the House Democratic leadership a score of 95 (out of a best score of 100) and the Republican leadership a score of 3. A 2009 Pew survey found a 23 percentage gap between Democrat and Republican agreement with the statement that people should be willing to pay higher prices to protect the environment. Prescriptions for energy policy differ between Democrats and Republicans: 88 percent of Republicans favor drilling in U.S. waters compared to 56 percent of Democrats. The two word phrase "fuel efficiency" was one of the top phrases used by Congressional Democrats but not by Republicans (Gentzkow and Shapiro 2010)." source .

I'd like to know whether any political scientists work on "ideological convergence" --- we know after the 9/11/2001 attacks that the Senate voted 99 to 1 to "do something" about the Bad Guys. Do only "salient shocks" bring about such unity?

Did the Democrats make a tactical mistake in claiming this issue as "their issue" and thus repelling potentially sympathetic Republicans? When can cross-party coalitions be formed?

A "self interest" story would say that liberal states are less likely to bear the effects of cap & trade the way that coal extraction states will. But, such endowment stories can't explain the dynamics in opinion over time and the "divergence". Endowments are a "fixed effect".

When I was spending a lot of time at USC this spring, I talked at length with Jim Haw. He is a Professor there responsible for their undergraduate environmental major. In our talks about climate change politics, he stressed that a politically neutral way of discussing the issue was as "climate hygiene". Just as you have to brush your teeth and take a bath, you have to take certain steps to make sure the climate system is healthy. This "spin" on this hot button issue shifts the focus from whether a given person is a "good person" or a given company is a "good company" to a less judgemental worldview of simply engaging in day to day steps (like brushing your teeth) that become part of our routine.

But think about it, if 300 million Americans each brush their teeth for 10 minutes a day, then we sepnd 3 billion minutes a day brushing our teeth and that equals 5 million hours. If we value our time at $15 an hour, then we are spending $75 million dollars a day to brush our teeth or 27 billion dollars a year on this activity. So even, "small investments" add up to look like they have large price tags but nobody debates the merits of brushing your teeth. Could climate change mitigation have been converted into a similar activity in terms of it being second nature that we engage in it without debating its merits or politicizing the entire topic?

Why Hasn't President Obama Gone Beyond "Merely" Nudging the Green Economy?

Apparently, Tom Friedman does not cause public policy. He is frustrated and many other green energy/environmentalists are also frustrated . Why has President Obama invested little political capital in tackling energy transition issues? The obvious claim is that the recession is just too salient and efforts to tackle a medium term/long term challenge (i.e oil dependence and climate change) would be viewed as "French" and laughed at on Fox News and Talk Radio.

Next week, Matthew Kotchen and I will release a new working paper that examines trends in public opinion. Here is one fact from the paper.

On the horizontal axis, we graph time starting in January 2006 and moving forward two months at a time until January 2010. On the vertical axis, we graph the count of news articles that major newspapers have published. Note that there are two graphs. The "dashed" graph displays the count of articles mentioning "global warming" while the "solid" graph displays the count of articles mentioning "unemployment". Do you see a pattern?

I'd like to hear Greg Mankiw's views on how you increase participation in the "Pigou Club" in the midst of recession and deep uncertainty about where this strange economy is going next? Everyone is waiting for Ben Bernanke to "do something" but he is waiting for the rest of the economy to "do something" --- that is a strange co-ordination game.

Saturday, July 24, 2010

A Self-Selected Canadian Census and Social Capital in the U.S Senate

Civic engagement --- what do you owe your nation? Are you able and willing to fill out a census form? This implicit volunteer work was studied in a paper by Jake Vigdor a couple of years ago (see this) . He found that people who lived in more diverse counties were less likely to fill out these forms. Now, Canada has made the brilliant move of making participation in the "long form" census voluntary. What does this mean? This creates a Nasty self selection problem. Nerd statisticians will only be able to crunch data for the non-representative subsample of people who actually bothered to fill out the forms. Suppose that highly motivated busy people don't bother, then the "average" person in Canada will look "lazy" because the sample who fills out the survey will omit the high achievers.

The only winner here is Jim Heckman as his cite count will go up as smart researchers in sociology, demography and economics will have to come up with a selection correction to model who bothers to fill out the form and then a researcher studying women's labor force participation would need to estimate a second selection correction. I'd like to see somebody work out the "three step" standard error formula in this case! Again, our goal is to create new demographic facts --- for example --- about the average woman's labor market experience in Canada --- but we only will observe labor market facts for women who bother to fill out the long form and then only observe women's wages for the select subset of this select subset (who fill out the forms) who choose to work!

Switching Subjects: The New York Times today claims that the reason that the Senate is so divided is that there is no "bridging" social capital --- with all of the deaths of the "Lions" (Thurmond, Byrd, Kennedy) -- the Senate is filled with new guys who have no working relationships and thus can't "bridge" across party lines. This is an interesting claim.

I would also want to know whether the Senate has any real "focal points" --- with all of these guys positioning themselves to run for President --- do any of them command real respect across parties and thus can reach across party lines?

Thursday, July 22, 2010

Cap and Fade: The Death of the Federal Carbon Bill

This isn't good news. I'd like to see a stock market event study that looks at the recent share price time trends for renewable energy companies. As the prospects for an electric utility carbon cap & trade increased and now have vanished, have there been wild stock price dynamics for such firms? How many billions of dollars of investment have been freezed up as investors have delayed investment until the political uncertainty about whether a carbon incentive deal would be realized? Now that we know that outside of California that there will be no deal, will this "green investment" flow into California? How will the California Prop 23 politics be affected by the Federal Senate's decision today? It appears to me that the Federal government's choice to abdicate a leadership role makes it even more important for AB32 to continue into its implementation phase. Economists can and should play a key role here in designing incentives to minimize the cost of achieving the GHG reductions.

Oakland Invests in the "Green" Economy: Cheech and Chong Would Approve!

"This city, which has been at the vanguard of medical marijuana legalization on everything from taxation to trade schools to the unionization of marijuana workers, voted Tuesday to permit industrial-size marijuana farms." Oakland is taking the pot plunge .

Now urban economists would say that land is allocated to its highest value so what should we infer here? Oakland is a stone's throw to downtown San Fran --- this might have appeared to be expensive farmland. But, if final consumers want really fresh product and are willing to pay a price premium for the fresh stuff then maybe basic economics can explain this.

Now, don't forget agglomeration theory. If marijuana farms are opened, what will open up next to it? So -- at a suburban mall you don't locate a fancy fur coat store next to a stinky fish restaurant (Al Taubman taught me that) --- but what "domino effect" will Oakland trigger once the pot farms are open? I could imagine fast food restaurants there for people with the munchies. I could imagine that there could be successful lounge areas for just hanging out and listening to the Grateful Dead --- so I hope that the area near the pot farms are zoned for bars and hip music.

Wednesday, July 21, 2010

Marmots Like Climate Change

Darwin would get a kick out of the "natural experiment" that climate change offers for testing theories of evolution. Consider the Marmot; "mountain rodents called marmots are growing larger, healthier and more plentiful in response to climate change." One of my UCLA IOE colleagues is an expert on this creature. I must admit that I don't speak to him about this creature but maybe I should. You can read about the happy marmot here . Perhaps a pack of them will debate Marty Weitzman at the NBER Summer Institute next week?

In September 2010, my Climatopolis book will argue that we have much in common with the adaptable Marmot.

Some News Links

Nepotism in the NYC Bloomberg Administration --- This article got me thinking about whether social connections help to increase inequality during a recession (and act as an implicit insurance policy for the connected). For recent graduates of universities, this is a tough time to find a job. This article hints that the kids of "insiders" are having an easier time finding a good job than the "nobodies". During boom times, there is growing opportunity and even those without connections have a shot at the big time.

Are Ex-Professional athletes good at Real Estate Development? This article says yes. How could this be? Their fame may attract people to return their calls. They may be from tough neighborhoods and have some insider knowledge about where there are real opportunities. Similar to Magic Johnson, they may act as a bridge between inner-city kids and bankers trying to connect without "street credibility" to these neighborhoods.

Get ready for a lot of books about oil spills . The publishing industry appears to believe in the "Cobweb" model of expectations. Given the lags in publishing after a big event (believe it or not it takes time to write a 300 page book), will the public be ready to read more about oil spills in Spring 2011? These publishers are handing out 6 digit signing bonuses to authors --- so they must believe there is demand. Note, the product differentiation. Some authors will focus on the "Science" while other books will focus on the Hollywood style race against the clock to plug the leak and others will tell the story of the 11 oil rig workers who died. Will the families of the victims be directly compensated by the book authors? Or will they take solace that they get to tell their story in a lasting book that could be turned into a movie?

Tuesday, July 20, 2010

Google Data Centers Co-Locate Near Wind Farms: The New Peanut Butter and Jelly Combo

Forget boring economists talking about left shoes and right shoes or peanut butter and jelly, the new examples of complements in future Mankiw digital texts will focus on Google data centers co-locating next to windfarms.

As you know, Erin Mansur and I are almost done with a new paper that examines the geography of where different types of manufacturing industries locate as a function of local electricity prices. Recognizing that the manufacturing sector is a declining share of our economy, I had hopes of exploring where electricity intensive data centers were opening in the United States. Simple economics would predict that they should be attracted to areas featuring cheap electricity prices and close to population centers.

But, My friends at Google have not provided me with data on where they locate their data centers. The new news about the NextEra/Google partnership highlights that Google is thinking through how to be a "green business". The carbon emissions factor associated with its data centers will plummet if wind power produces the electricity. My question for the Google guys is why did they take this action now? Do they predict that the Senate will pass a carbon cap & trade on the electric utilities and this will raise electricity prices? Or, is Google simply "doing no evil"?

So, if I'm the Mayor of a rural area -- can economic development goals be furthered by attracting a Google data center and wind farms? How many jobs and opportunities are created once the construction is done?

Sunday, July 18, 2010

Estimating Demand Curves Using Senior Citizen Discounts: A Regression Discontinuity Design

Demand curves slope down but we'd still like to know how steeply they do slope down. Reading this article about Senior Citizen quality of life in New York City got me thinking.

Suppose an ambitious graduate student surveyed a representative sample of 64 year olds about their consumption and transportation choices. To make the problem simple, suppose that everyone in the sample works and doesn't plan to retire in the next couple of years. At age 65, you can start to qualify for the "Senior Discount" on public transit (here are some facts about the subsidy). So, the graduate student who can trace the same people over time as they age will have "exogenous price variation" in goods ranging from McDonalds' coffee to public transit and can study whether people purchase more public transit rides as the price falls (by conducting a before/after comparison).

Now, the discontinuity here is that age is increasing continuously but there is a negative "jump" in prices because of the start of the Senior Discount. I do realize that different senior discounts start at different ages but this can be accounted for.

The only confounding factor is if people retire at the same time that they qualify for the Senior Discount. In this case, we do not have an "all else equal" condition. A 65 year old who is retired now faces lower prices for coffee and public transit AND has more free time because she is not working. To keep this experiment simple, we would want to focus on people who do not retire at 65 and argue that we can abstract away from issues of "self-selection". So we could focus on people who don't work in their 60s and people who always work in their 60s and estimate the demand curves for these two subsets using the exogenous price variation brought about by the "Senior Discount".

Has this brilliant paper already been written? My quick google search suggests "no". Serious economists have asked what is the CPI inflation trends that seniors face (see this ). But, this economist is aggregating many different prices. I'm interested in using person level panel data to estimate how quantity consumed changes as price per unit exogenously falls. My regression would have person fixed effects and calendar year/month fixed effects and identify the price effect from the introduction of the Senior Discount.

How Do Los Angeles Residents Cope With Heat Waves?

For 4 straight days, it has been pretty hot here in LA. This article highlights the diversity of climate experiences within this big metro area. Near the beach in Santa Monica and Malibu the temperature hasn't been above the 70s but far inland it has been over 110 degrees. Guess what this temperature variation leads people to do? The people who live in East LA go to the beach! I thought that this article did a nice job talking about "high frequency" adaptation --- the little things that people do to "beat the heat". Now, it is no accident that home prices are so much higher closer to the water but just because you live in a hot area --- you can take some steps to protect yourself and have a pleasant day (especially on a weekend).

This quick case study is relevant for thinking about climate change adaptation --- I will return to this theme again and again starting in September 2010.

Note the last paragraph of the article,

"One exception was Gail Janeway, who braved the elements and decided to hold a yard sale.

For hours, the 56-year-old sat underneath a tent, her skin covered in a sweaty glow, hawking suit jackets, ties, scarves and handmade jewelry. While waiting for customers, she took sips from a tall cup of hot coffee.

"I've made $110 so far," she reported proudly.

Asked about the heat, she said, "What heat? I'm from Thailand. This is nothing."

That's a telling quote. In Baghdad today, the temperature will reach 113 degrees. I agree that this isn't pleasant but we can take it.

The Climate Policy Wars: Round 15

Will the U.S Senate agree to place electric utilities in a carbon cap & trade system? I hope so but the Obama Administration may have to recycle a lot of revenue back to the utilities to nudge certain Senators to sign on. Take a look at Table One of the 2nd paper from the top posted here . The following 30 states produce at least 40% of their power using coal fired power plants (and I'm not even looking at natural gas). These states include; AL, AR, AZ, CO, DE, GA, IA, IL, IN, KS , KY, MI, MN, MO, MT, NC , NE, NM, NV, OH, OK, PA, SC, SD, TN, UT, VA, WI, WV, and WY.

Note that the most liberal states; CA, NY, MA , OR are not on this list. The Senators from the conservative, coal states will need a side payment to make this deal work and giving "free permits" to these polluters would achieve this. So, in terms of geography --- this amended deal featuring cap & trade and revenue recycling to the polluters is a tax on liberal states (i.e Matt in California) to transfer to the coal states (the economists at Wash Univ in St. Louis). Are the Green coastal states happy with this? Or should the polluter pay?

Under electric utility cap & trade, how much will energy prices rise in the coal states? This NBER paper offers some prospective answers.

Why does any of this matter? The electric utility sector is a major producer of GHG emissions and success with regulating this sector using the free market approach (i.e pollution permits) would build up national confidence that this "wacky" approach can be used for the entire economy. Step by step baby ---- how will the new 36 year old Senator from West Virginia vote on this? What Obama pork will he bring back home to his coal miners to placate them? The demand for coal is unlikely to rise in the face of vigorous cap & trade.

The reason I write this blog post today is because the popular media is celebrating Eric Pooley's new book that offers an "insider's take" on the negotiations over Climate Policy. I've written two papers on this subject. The first is listed above and Matt Kotchen and I will soon release a new working paper on this subject.

The starting point in my forthcoming Climatopolis book is that these well meaning efforts will not cap U.S GHG emissions nor will they help to cap ever rising global GHG emissions. I 100% support the effort to engage in cap & trade and carbon mitigation incentives but basic free rider logic convinces me that serious global mitigation efforts will not be forthcoming. This is why I have focused my attention on the medium term and long term issue of adaptation to climate change.

Saturday, July 17, 2010

Knights Apparel Offers a Test of Both the Efficiency Wage Hypothesis and the CSR Price Premium Hypothesis: Can "Nice" Capitalist Firms Prosper?

Do you remember the good old days in the 1980s when leading labor economists were debating whether wage premiums represented efficiency wages or compensating differentials for unobserved skills? Here is a good example. I had more hair back then and now it appears that we have returned to the past.

An innovative entrepreneur named Joseph Bozich, C.E.O. of Knights Apparel will be offering us a "natural experiment" that may shed some light on those boring fights that nudged me to quit labor economics. As discussed here , he will soon be hugely "over paying" workers in the Dominican Republic to make clothes for him that he will try to sell in the USA to college kids.

What is his business model? How does he really expect to make $ here?

1. Is there large exogenous differences in Dominican worker productivity and he wants to self-select the best workers by offering a huge wage premium? How will workers apply for this job? Given that supply of applicants will exceed his demand (since he is offering a very high wage), how will he choose who to hire?

2. Does he expect that U.S college kids will pay a huge price markup for t-shirts and stuff when he spreads his Corporate Social Responsibility (CSR) philosophy and asks the U.S kids to "do the right thing" and pay extra for a t-shirt that they could buy at a cheaper price from another firm.

3. Does he expect a handout from the Obama Administration as Larry Summers reads the piece in the Newspaper and directs some Federal Stimulus $ to be used to subsidize the imports of Joseph Bozich's shirts? It appears that many "double-bottom line" firms expect government incentives, is Mr. Bozich an exception?

4. Is this really a loss leader and he intends to run for U.S Senate as the "Nice Guy"?

5. Does he believe in efficiency wage theory such that his high wages will earn him worker loyalty and hard effort that will raise his firm's productivity sky high?

6. My wife believes that this is an industrial organization story. She believes that at the University Book Stores that there is a procurement agent who choses one seller to provide all of UCLA's t-shirts. Similar to a monopolist, this "monopsonist" will be more likely to pick Bozich's firm to provide the t-shirts because the Book Store Boss is eager to pursue "social justice" goals. So, this raises the issue of how non-profit universities choose who to run the University wide store and what goals are they trying to achieve. Is there a principal/agent issue there?

Friday, July 16, 2010

The Journal of American History is My New Favorite Journal

A Review of Heroes and Cowards: The Social Face of War . By Dora L. Costa and Matthew E. Kahn. (Princeton: Princeton University Press, 2008. xxviii, 315 pp. $27.95, ISBN 978-0-691-13704-9.)

"Each year, hundreds of new books on the Civil War appear, many of them badly conceived, shabbily researched, and poorly written. They vary from studies of prostitutes who followed the Army of the Potomac to examinations of minor naval engagements in some remote area of the Gulf of Mexico to biographies of inconsequential military generals or insignificant political figures, both Northern and Southern. Almost weekly, bits and pieces of Civil War history, some of it plagiarized, show up on the Internet. In this endless dribble, rarely does a real jewel appear, but one does here: Dora L. Costa and Matthew E. Kahn's fine study of the social face of the war. With a striking amount of data, Heroes and Cowards is one of the most impressive books this reviewer has seen in years. Aimed at the broad social science research community, the book analyzes an array of military documents, soldiers' journals, and the life histories of 41,000 black and white soldiers in the Union army, compiled from service records housed in the National Archives. The book has much appeal as a model for the possibilities of qualitative social history of the Civil War and as a manual for approaching the often-tragic lives of soldiers who were caught in the epic and bloody conflict. 1

Some of the authors' conclusions appear logical. For example, after the war, soldiers from rural areas were more likely to move to a large city if they had traveled to a city during the war. In addition, observable characteristics, such as place of birth, prewar occupation, company occupation, and birthplace diversity, helped determine the probability of desertion, as did a soldier's county of origin and support for Abraham Lincoln in the 1860 presidential election. In studying the birthplace diversity of four black regiments and the predicted probability of their soldiers' desertion, the authors found that the "greater the birthplace fragmentation, the larger is birthplace diversity" (p. 105). Birthplace fragmentation "is measured as one minus the share of men in each company in each birthplace category, squared" (ibid.). Readers will also learn that "the coefficient of variation of age is [the] ratio of the standard deviation of age to its arithmetic mean" (p. 106). Preexisting data, such as the age, height, occupation, rank, social networks by ethnicity, and the number of friends Union soldiers had at Andersonville prison, allowed the authors to predict survival probabilities. Carefully written, with sharp analysis and new avenues for research, Heroes and Cowards is a fresh and inspiring example of social history at its best."

Jerry Thompson
Texas A&M International University
Del Rio, Texas

The "Stone Cold" Economics of Professional Wrestling

Linda E. McMahon is running for a Seat in the U.S Senate. Her main claim to fame is the Professional Wrestling empire she helped to build up. This article hints at the old Marxian "exploitation" of workers (i.e wrestlers). Using legal loopholes, the WWF wrestlers were not paid health insurance and do not have a retirement pension. Many of them did suffer long term injuries and the article hints that the wrestlers didn't know they would face this risk ex-ante.

But, the article does make clear that there is a "Superstar Tournament" taking place. If Matthew Kahn is a young wrestler and if he can become the next "Andre the Giant or the Hulk" then I can become very very rich but what is the probability of that? In this sense, Professional wrestling with its risks for the new guys but superstar pay for the top dogs resembles Steve Levitt's Chicago Drug Gangs .

So, is Ms. McMahon a "villain" or is she an American success story as she produces a type of entertainment that we have exported around the world? The NY Times could have asked whether Republicans are more likely to make their money off the backs of "the little guy" while rich Democrats make their money from software and human capital innovation. Is this righteous conjecture right?

From the wrestlers vantage point, an economist would say that this is the old story of occupational choice (to be a wrestler or get a PHD in economics) and ex-ante uncertainty (will I become the next "Hulk" ) versus ex-post inequality --- most wrestling guys will have a low Q rating and won't become network stars. So, what did Hulk do right? Was it the blond hair? What charisma skills allowed him to succeed while the Mickey Rourkes of the world fail?

Thursday, July 15, 2010

UCLA "Mind Reading" Research: Neuroscientists at Work on the Future Demand for Sunscreen

"In a study with implications for the advertising industry and public health organizations, UCLA neuroscientists have shown they can use brain scanning to predict whether people will use sunscreen during a one-week period even better than the people themselves can.

"There is a very long history within psychology of people not being very good judges of what they will actually do in a future situation," said the study's senior author, Matthew Lieberman, a UCLA professor of psychology and of psychiatry and biobehavioral sciences. "Many people 'decide' to do things but then don't do them."

The new study by Lieberman and lead author Emily Falk, who earned her doctorate in psychology from UCLA this month, shows that increased activity in a brain region called the medial prefrontal cortex among individuals viewing and listening to public service announcement slides on the importance of using sunscreen strongly indicated that these people were more likely to increase their use of sunscreen the following week, even beyond the people's own expectations.

"From this region of the brain, we can predict for about three-quarters of the people whether they will increase their use of sunscreen beyond what they say they will do," Lieberman said. "If you just go by what people say they will do, you get fewer than half of the people accurately predicted, and using this brain region, we could do significantly better."

"While most people's self-reports are not very accurate, they do not realize their self-reports are wrong so often in predicting future behavior," Falk said. "It is surprising to find out that some technique might be able to predict my own behavior better than I can. Yet the brain seems to reveal something important that we may not even realize."

read it here

NOW, the authors had a sample size of 20. They used 1/2 of the sample to estimate their model and predicted the outcomes for the other 10.

What would the marketing researchers at Anderson have to say about this research?

So, in a future James Bond movie --- will the villain have access to all of our fMRI scans and know which of us he can "turn on" or "turn off" with specific messages?

Will we become pawns of the "Master Manipulator" so that John Kenneth Galbraith will get the last laugh about Madison Avenue truly controlling us?

Purchasing sunscreen in response to a sunscreen public service announcement is a nice nudge that I support but will the future evil Bond Villain say that all bald jewish guys must be punched and this nudge will turn loose a specific subset of the population without them even knowing it?

Could stock price manipulators use this tool to get "noise traders" activated and trade on what the unsuspecting suckers are about to invest in?

A human capital theorist might ask whether there are individual investments a person can make to build up the "brain's medial prefrontal cortex, which is located in the front of the brain, between the eyebrows. This brain region is associated with self-reflection — thinking about what we like and do not like and our motivations and desires." Do we make "better" choices when we build up this lobe in the brain or are we simply more susceptible to advertising messages?

Are the authors of this study assuming that the heterogeneity across people is fixed or that this "lobe" develops over time?

Wednesday, July 14, 2010

Do You Live in a "Green" Zipcode?

The Environmental Protection Agency isn't in the news much. To find out what is going on there, I went to their webpage and found one interesting item. There is a website that allows you to type in your zip code and you can see your community's air quality and the spatial patterns for noxious facilities and Superfund sites. This is mildly interesting stuff and I'm glad to see that my 90024 zip code looks pretty good (especially north of Wilshire). See if you can find me on the map. I'll give you a hint. I'm east of UCLA.

Tuesday, July 13, 2010

David Brooks on the Multi-Dimensions of Skill and Pinpointing What is our "Engine of Growth"

Labor economists study the microeconomics of skill acquisition. Do you attend UCLA or not? What do you major in? Macro growth theorists examine how a nation's cumulative human capital maps into "good economic" outcomes such as GNP growth and a high per-capita income level. But what is "skill"? Charles Murray claimed that it boils down to IQ but Jim Heckman has disagreed. It turns out that each of us is "multi-dimensional". Michael Jordan can beat me at basketball and in making underwear commercials but I can dunk on him in the court of "environmental economics".

Today, David Brooks offers his own take on the "Wealth of Nations". Permit me to paraphrase. Suppose that each adult person is a bundle of 3 attributes;

1. Raw ability to solve logic problems
2. Charm in social settings
3. perseverance and ambition and focus

Parental upbringing, choices over time allocation during the early years, peers in school and university and random luck determine an adult's "endowment" of these 3 .

Your wages in capitalism are an increasing function of each of these 3. David Brooks appears to argue that Capitalism over-rewards #2 relative to the interaction of #1 and #3. If David Brooks had to choose between the Ivy League Schmoozing well networked lawyer or a strange innovator to help America get its groove back he is betting on the "Bobby Fischer".

Now, in the article he appears to go further arguing that the large number of #2 types may actually be slowing growth as they use their nepotistic ties to get legislation that helps them but may strangle the economy in the long run. This is an interesting claim. Could Harvard University actually be slowing the growth of our economy as it churns out unlimited numbers of smooth articulate people who want to be part of the Washington/Wall Street Nexus?

"The princes (type #2) can thrive while the government intervenes in the private sector. They’ve got the lobbyists and the connections. The grinds (type #1 and #3), needless to say, don’t.

Over the past decade, professionals — lawyers, regulators and legislators — have inserted themselves into more and more economic realms. The princes are perfectly at home amid these tax breaks, low-interest loans and public-private partnerships. They went to the same schools as the professionals and speak the same language. The grinds try to stay far away and regard the interlocking network of corporate-government schmoozing with undisguised contempt."

Implicit in Brooks' article is a libertarian streak that government (and the anticipation of government intervention in everything) has grown too big and that connections to Washington can make magic happen but that unintended consequences lurk.

He would be wise to explore the 2nd clause. I'm sure that he is right that the connected can make a fortune (I'm thinking of Rahm Emmanuel's consulting firm after he left the Clinton Administration) but the link to how this retards economic growth isn't completely clear to me. For "Silicon Valley" types, how does "connected capitalism" slow them down? Does it tilt the playing field against innovation? If yes, then maybe Brooks is right but this needs to be examined. I would guess that connections (through Government picking winners -- think of corn based ethanol) tilts the innovation to specific causes that may not play out in the long run. This would be one causal pathway such that networks and connections influencing government policy help to slow macro growth.

In this case, skills such as (#2) above that payoff individually are actually socially unproductive from society's standpoint. We want fewer charmers!

A final point on "endogenous skill acquisition". Suppose you are 18 and a Harvard freshman. You can either devote your time and effort to being a "charmer" (i.e go to law school) or become an applied math major (#1 and #3). If you believe that the Age of Big Government and social connections is here to stay, you will be more likely to be nudged to invest your scarce time towards the "Charmer" sector. If many of your classmates make the same choice, then we will be poorer in the long run. How could the price sector send the wrong signals? There must be a disconnect between the marginal valuation of rent seeking (so you can earn a high private wage while not being socially useful --- there is a negative externality associated with your efforts) while if you went into applied math you could come up with a socially useful breakthrough (such that your private wage understates your social value to society because of the positive externality here).

Monday, July 12, 2010

Declining U.S Real Estate Prices Attract International Buyers

In a globalized economy, we can import cheap products from China. We can also sell our assets to foreigners. U.S real estate is bought on the international market . Driving and Walking around West LA, I have wondered how much of high local home prices are caused by "international money"? Urban economists who have discussed U.S "Superstar Cities" have focused on where the U.S rich want to live and the consequences of the skewing of the U.S income distribution (i.e that the domestic rich are bidding against each other for scarce nice real estate on the coasts and this drives up prices). But, this argument ignores international demand. The international elite may further drive up prices if they have the same ranking of "nice places" as the domestic Don Trumps. Given that we all agree that West LA is paradise, this is good news for us land owners here.

I have wanted to write a paper on how exchange rate dynamics affect Big City real estate demand. If the Yen appreciates relative to the dollar, do Japanese investors visit LA looking for bargains? In an open system of cities as the dollar depreciates, would we see International buyers over-represented among new buyers?

Sunday, July 11, 2010

An Inside Look at Teenagers' Parties in Hancock Park, Los Angeles

Earlier this year, I thought that I would be moving to Hancock Park in Los Angeles. There are some very nice homes for sale in this area. I have wondered what really goes on inside these homes. Now, I know. This article describes the hip parties that I'm not being invited to. The author strikes me to be a "man's man" as he plays Dirty Harry in keeping order among an infinite number of teenagers seeking booze.

Nudging Tenured Faculty to Retire Early

In Econ 101, we teach that labor supply curves slope up and thus we must be paid a higher wage in order to induce us to work more. But, this article discusses the case of Stanford Univ. where older tenured faculty are being offered pretty serious $ to work less! The answer to this riddle is "income effects". Tenure is a property right and Stanford is trying to buy back that right from the age 70+ faculty.

Now there is a hidden information issue here. Each tenured faculty member has private information about what is the lowest payment he/she would need in order to induce him to retire early. Somebody who is sick or sick of his colleagues would need a smaller incentive then a guy who thinks that he is on the verge of coming up with his "General Theory of Economics" or doesn't like to hang out with his spouse.

The University faces an interesting challenge that it wants to minimize the endowment cost of getting rid of older faculty. If it makes a low bid, nobody takes it. If it makes a high bid, it is costly in aggregate. Expectations matter here. If faculty do not accept the first offer, will a more generous offer be made in the near future? Stanford should mimic MIT Econ and introduce a "culture" in which it is expected that you will retire at age 70 (regardless of your legal rights). How "shame and ostracism" are used to enforce this culture and whether such social boycotts are credible remain an open question.

Now, the key issue that the article does not discuss is that University faculty sizes are shrinking. During a time of aggregate growth --- the repeal of mandatory retirement was not such a big deal. It was a transfer from the young to the old. But, TODAY --- during a time of faculty shrinkage --- the USA's anti-age discrimination policy will have real effects for scientific breakthroughs because this is a zero sum game.

When I was in Beijing in September 2009, I did notice how young the faculty at Tsinghua and Peking Univ were. If young people make most of the discoveries and if our leading universities are old in terms of human capital, will we stay on top?

So, this is another case in which redistribution (in this case across generations) is likely to have aggregate growth effects.

Friday, July 09, 2010

My Own Blurb About My Forthcoming Climatopolis

If anonymous reviewers can offer their deep thoughts, then so can I! The University of Chicago Alumni Magazine offers this opportunity and I have seized it.

In Their Own Words
Matthew E. Kahn, AM'93, PhD'93
Climatopolis: How Our Cities Will Thrive in the Hotter Future
ISBN 9780465019267
Basic Books
Business & Economics
To be Published September 7th 2010

This book examines how free-market capitalism will help us to escape the potentially deadly impacts caused by coming climate change. The book's core theme is ironic. Capitalist growth has caused climate change, but the innovation spurred by free markets will allow us to adapt to our changing climate conditions. Why? In the Chicago rational-expectations spirit, forward-looking households and firms have every incentive to anticipate the challenges ahead and take proactive actions. Unlike the free-rider problems inherent in reducing greenhouse-gas emissions, mere self interest (to save our ass!) helps us to adapt to climate change. While some of us are Homer Simpson, just a few Spocks will help to protect the entire world from the tough days ahead.

This book is funny. Most economists aren't funny and no climate-change books are funny at all. This book will anger the entire political spectrum. The right will not like this book because I believe that climate change is a real threat. The left won't like it because I aspire to be a minor league Milton Friedman, AM'33, or Gary Becker, AM'53, PhD'55. David Brooks, AB'83, might like it?

Posted July 9, 2010


Thursday, July 08, 2010

What Salary Would Entice You to Play with the Miami Heat Now? A Test of Compensating Differentials Theory

LeBron James' decision offers labor economists a very nice test of compensating differentials theory. Sherwin Rosen would predict that the Heat will not have much trouble finding 9 players to sign on for the league minimum. While the pundits worry about this, let's review some basic economics about the Miami Heat as a "bundle of attributes".

1. Miami will be the star team on TV every time they play. If a couple of these "nobody" players have a personality then when they play in the second quarter they can do their "wild" Big Baby thing (like the plump Celtic) and earn valuable National Exposure that will raise their Q rating (see #3 below).

2. Miami is a very desirable city to live in as a young wealthy dude.

3. Young players will learn from the big 3 and this will improve their career development. I remember when a dude named "Judd Buchler" played with the Bulls during the MJ years. He was a minor league Steve Kerr and he would dive on the ground for loose balls. He received a big contract after serving his time with MJ because he was a "winner".

4. The potential to win 5 titles in a row should be worth some salary sacrifice to some hungry players.

Now, Pat Riley will have to pick and choose; he clearly needs a plump center like the Celtics' Perkins to bang with Andrew Bynum. He also needs a sharp shooter or two such as the Duke guy who plays for Orlando or a younger Ray Allen.

But, these guys can be found and economics says that they will be found for very cheap. In fact, LeBron could pick the MVP from his Sports Camp and bring him (or her) along.

Why is the U.S Department of Energy so Energy Inefficient?

We are supposed to find this article ironic. The Department of Energy doesn't practice what it preaches. While this is amusing, we should ask an old question; "why"?

As I have told you before, I have used the 2003 CBECS micro data, and estimated simple statistical models of a commericial building's electricity consumption per square foot of interior space. Controlling for year built, hours operated, climate zone, how many workers work there, and its intended use --- my focus was to test whether governmental and private sector buildings consume the same amount of electricity. I reject this hypothesis. Government buildings consume roughly 20% more.

My statistical study could not answer "why" but the answer must have something to do with incentives. For profit firms have to pay their bills and this provides some incentive to become "lean and mean" with regards to energy efficiency. In the case of the government, can they simply budget for more money to cover operating expenses? Intuitively, do they have incentive to make their buildings energy efficient? Would the DOE be allowed to keep any "extra saved" $ for a better holidays party? Or would they simply give the money back to the Treasury? If the second case is the truth, then this isn't a good set of incentives for achieving energy efficiency.

One way to test my claim is look across government buildings; so compare the CIA's energy consumption to EPA to DOE to treasury. Is there any "within" variation in the incentives that could be used to study the role that soft budget constraints play in being energy inefficient?

Today's "Day of Shame" for DOE is funny but what do we learn from this one data point?

Wednesday, July 07, 2010

Are Economists Good at Business?

Some tenured economists write fewer papers and spend more time in public consulting (i.e Washington DC) or in private consulting (i.e anti-trust litigation). Some start their own businesses. Paul Romer's success with Aplia is well documented but there are other cases. This Story about Barry Nalebuff's success with Honest Tea and the saga of what happens when his small startup was bought up by Coca-Cola was pretty interesting.

I wonder what other businesses have economists tried to launch? We know that some real estate economists have developed information companies providing forecasts and newsletters focused on industry trends in specific local real estate markets.

Are economists more successful than other people in starting firms that succeed? How many Fortune 500 firms have a CEO who has a Ph.D in econ? I see that my old friend Bryan Tyler from our graduate school days is having a very successful career in business. Does our University of Chicago economics training deserve any of the credit for his success?

The analytic approach emphasized at the Chicago's Business School, Wharton, and Stanford's GSB maked me think that our training must have some payoff in the business world. Now, I must admit that my interest here is not on Wall Street --- I mean at the Fortune 500 or companies such as Google --- are economists valuable people? I need to believe so.

UPDATE: I just found this website for a new company called "Mile Meter". Note that they sell car insurance but their market niche is that you pay per mile of driving. So what? More than 10 years ago' UC Berkeley's Aaron Edlin wrote a paper on the benefits of auto insurance per mile (rather than a fixed cost independent of miles driven). His paper was eventually published in the JPE. I'm guessing that these guys read his paper (or at least heard about it) and created a new firm based on the idea. Now, that shows you something. Greens like myself love Edlin's idea because it acts as an incentive to drive less and this helps mitigate traffic congestion, local air pollution and GHG production.

Maybe we could be good at business as the "vision guys". If any of you want to hear my ideas for mass marketing glow in the dark underwear, please call me.

Tuesday, July 06, 2010

75 Degrees Today and Blue Skies in Westwood, Los Angeles

I read today in the newspaper that it is roughly 100 degrees in large parts of the Northeast and Midwest. I am sorry to report that it has been 75 degrees and mostly blue skies here in Los Angeles. Easy access to Northeast elites has pretty serious amenity costs. I will fly to the east coast in late September but I didn't want to do this. If I could, I would never leave Westwood. Right now, I'm sitting outside on my porch in a shaded spot typing this out.

I did thumb through all of the NBER Summer Sessions to see what I will miss . There certainly are some interesting papers being presented but even they aren't good enough to tempt me to get on a long flight to a hot place to eat some one armed lobster. I have mixed feelings about the importance of "face to face" communication in modern economics. I can read someone's paper faster than he/she can present it. Now, you might say that if you don't show up that "people will forget about you". I hope that's not true. But, there is always a silver lining --- the egoist inside me will respond by writing better papers and funnier blog posts. We need some economist to act
like Eminem in "Without Me".

Sunday, July 04, 2010

China's Growth is Making the Carbon Fat Tail Fatter

China's Carbon Footprint keeps growing. This news will not surprise Auffhammer and Carson (see their JEEM paper ). But, maybe it will surprise Tom Friedman? Rising CO2 levels means that some very low probability disastrous events become more likely.

China represents a very nice test case of the "amazing race" between scale, composition and technique effects. Environmental economists argue that these three factors determine whether economic growth leads to more or less pollution. In the case of China and greenhouse gas emissions, there are 1.3 billion people getting richer in China and manufacturing (composition) is a big part of the story and this sector is quite energy intensive. The Beijing Central Government is pushing a major technique effect (CO2 per RMB declining) but according to the latest news ; scale is winning the race against technique. To mitigate GHG emissions, we need GHG intensity to decline faster than GNP grows in China. Without a carbon incentive, this sounds tough.

Anticipating this ongoing trend, it is time to really think about climate change adaptation. This is why I wrote Climatopolis . This September 2010 Basic Book will tell you all you want to know about how cities will compete in the face of climate change.

If you want to see me attempt to blend humor and economics while discussing climate change, watch my January 2010 Speech at the UCSB Bren School here .

Seize the Day: Your Mother's Role in the Modern Urban Marriage Market

Economists continue to be interested in the role that cities play as "marriage markets" . After all, Robinson Crusoe had trouble finding a date. But, economists have under estimated the role that mothers (of adult children) play in helping these new love matches to actually take place. Want proof? Read this . As this article highlights, if Doris Bachmann hadn't been a talented sprinter, her lovely daughter wouldn't be married right now. The confident dude made his move and the mom had to react quickly and "seize the day". Saul Bellow would approve.

Friday, July 02, 2010

Creating Value Added in a Capitalist Economy: A Case Study of the Rock Band "Kiss"

Bill Aucoin , the brains behind the pretty rock band Kiss, has died at the age of 66. Aucoin's life dovetails with ongoing work conducted by leading economists who are studying the causal role of managers in raising the output of the organization they manage. Stanford's Nick Bloom has done a lot of work on this topic.

I would encourage him to engage in a pinch of Freakonomics and take a close look at the Kiss Case Study.

" Much credit goes to Bill Aucoin, who, as Kiss’s manager, helped four scruffy New York City kids with big, weird dreams formulate their flamboyant act; got them their first record contract; and ferociously marketed their merchandise, including a Kiss comic book, a Kiss pinball machine and, of course, Kiss makeup. He even got their outlandishly painted faces copyrighted."

This sounds like serious value added! He transformed a garage band of freaks into a billion dollar worldwide commodity. If you don't believe me, then watch this YOUTUBE video of Kiss rocking out in Tokyo .

Returning to the theme of environmental economics, I just found this Nick Bloom paper. Using data for 300 UK Manufacturing firms, he and his co-authors document that firms with better manangers have lower energy intensity. Suppose this is a causal relationship --- then sending more people to UCLA's Anderson School of Business will help to slow climate change! Why? If manufacturing uses less electricity and if electricity is generated using fossil fuels then GHG emissions falls as manufacturing is more energy efficient.

How could "good managers" matter? They could be more attentive and more likely to optimize and minimize X-inefficiency as they solve the intermediate micro calculus problem of minimizing cost subject to producing the output target. Now with dynamics and uncertainty and durability of capital, this is a harder problem but a smart MBA can solve it!

Thursday, July 01, 2010

Marty Weitzman's NBER Environmental Economics Paper on Climate Change's Possible Blows to our Quality of Life

This Weitzman paper will give you a good scare about the dangers of "fat tails" and possible future states of the world in the face of climate change. An average temperature increase of 12 degree celcius sounds quite nasty. To quote Marty;

"Climate change potentially affects the whole worldwide portfolio of utility by threatening to drive all of planetary welfare to disastrously low levels in the most extreme scenarios."

This is a fascinating quote but I don't believe it.

Hong Kong's average population density is 16,500 per square mile.

There are 7 billion people on this planet. So, if all of us lived at Hong Kong's density , we would need to find a safe land area that is 424,000 square miles.

The state of Texas is 268,601 square miles and the state of Alaska is 570,374 square miles. I realize that Hong Kong imports food but productivity in farming and "vertical agriculture" could shrink such land requirements sharply.

So what is my point? We have already built dense cities. I question Marty's claim that in the face of nasty climate change that there won't be a single spatial inhabitable part of the globe where flooding does not take place and temperatures are not atrocious.

the total area of the six habitable continents (Antarctica excluded) is around 52 million square miles.

So we need 424,000 of 52 million or .8% of the earth's land area to be inhabitable after climate change really kicks in. As of right now, from a spatial portfolio point of view, I certainly think it is possible. If the world's population shrinks or we reduce our caloric intake, the necessary quantity of viable land would shrink further.

Implicit in my forthcoming book Climatopolis is my optimism that there will continue to be "safe" geographical places to settle and build new cities. I would like to know whether any climate change models predict that there are scenarios under which we cannot find 424,000 safe square miles of inhabitable Earth to build anew?

New UCLA Research Takes a Long Run View on the Tragedy of the Commons

Extinction of woolly mammoths may have been due to addition of a predator: humans

Stuart Wolpert is the author of this press release

The extinction of woolly mammoths and other large mammals more than 10,000 years ago may be explained by the same type of cascade of ecosystem disruption that is being caused today by the global decline of predators such as wolves, cougars and sharks, life scientists report July 1 in the cover article of the journal Bioscience.

Then, as now, the cascading events were originally begun by human disruption of ecosystems, a new study concludes, but around 15,000 years ago the problem was not the loss of a key predator, but the addition of one — human hunters with spears.

This mass extinction was caused by newly arrived humans tipping the balance of power and competing with major predators such as sabertooth cats, the authors of the new analysis argue. An equilibrium that had survived for thousands of years was disrupted, perhaps explaining the loss of two-thirds of North America's large mammals during this period.

"We suggest that the arrival of humans to North America triggered a trophic cascade in which competition for the largest prey was intensified, ultimately causing the large non-human carnivores to decimate the large herbivores," said Blaire Van Valkenburgh, UCLA professor of ecology and evolutionary biology and a co-author on the paper. "When human hunters arrived on the scene, they provided new competition with these carnivores for the same prey.

"The addition of humans was different from prior arrivals of new predators, such as lions, because humans were also omnivores and could live on plant foods if necessary," Van Valkenburgh said. "We think this may have triggered a sequential collapse not only in the large herbivores, but ultimately their predators as well. Importantly, humans had some other defenses against predation, such as fire, weapons and living in groups, so they were able to survive."

"For decades, scientists have been debating the causes of this mass extinction, and the two theories with the most support are hunting pressures from the arrival of humans and climate change," said William Ripple, a professor of forest ecosystems and society at Oregon State University and lead author on the paper.

In the late Pleistocene, researchers say, major predators dominated North America in an uneasy stability with a wide range of mammals: mammoths, mastodons, ground sloths, camels, horses and several species of bison. The new study cites previous evidence from carnivore tooth wear and fracture, growth rates of prey, and other factors that suggest that there were no serious shortages of food caused by environmental change 10,000 to 15,000 years ago.

The large herbivores seemed to be growing quickly, and just as quickly had their numbers reduced by a range of significant carnivorous predators, including lions, dire wolves and two species of sabertooth cats. Food was plentiful for herbivores, and the system was balanced, but it was dominated by predators.

Humans were the triggering mechanism for the extinction. After that, predators increasingly desperate for food may have driven their prey to extinction over long periods of time and then eventually died out themselves.

"We think the evidence shows that major ecosystem disruptions, resulting in these domino effects, can be caused either by subtracting or adding a major predator," Ripple said. "In the case of the woolly mammoths and sabertooth tiger, the problems may have begun by adding a predator, in this case humans."

The loss of species in North America during the late Pleistocene was remarkable; about 80 percent of 51 large herbivore species went extinct, along with more than 60 percent of large carnivores. Previous research has documented the growth rates of North American mammoths by studying their tusks, revealing no evidence of reduced growth caused by inadequate food, thus offering no support for climate-induced habitat decline.

Rather, the large population of predators such as dire wolves and sabertooth cats caused carnivores to compete intensely for food, as evidenced by heavy tooth wear.

"Heavily worn and fractured teeth are a result of bone consumption, something most carnivores avoid unless prey is difficult to acquire," Van Valkenburgh said.

Trophic cascades initiated by humans are broadly demonstrated, the researchers report. In North America, it may have started with the arrival of the first humans, but continues today with the extirpation of wolves, cougars and other predators around the world. The hunting of whales in the last century may have led to predatory killer whales turning their attention to other prey, such as seals and sea otters — and the declines in sea otter populations has led to an explosion of sea urchins and the collapse of kelp forest ecosystems.

"In the terrestrial realm, it is important that we have a better understanding of how Pleistocene ecosystems were structured as we proceed in maintaining and restoring today's ecosystems," the scientists wrote. "In the aquatic realm, the Earth's oceans are the last frontier for megafaunal species declines and extinctions.

"The tragic cascade of species declines due to human harvesting of marine megafauna happening now may be a repeat of the cascade that occurred with the onset of human harvesting of terrestrial megafauna more than 10,000 years ago. This is a sobering thought, but it is not too late to alter our course this time around in the interest of sustaining Earth's ecosystems."

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.

The Simple Economics of PACE Financing for Green Homes: The Challenge of Recessions

The New York Times has a long article on the PACE (property assessed clean energy) program that helps households finance "green" investments such as solar panels. While the article quotes lots of affected people it doesn't bother to actually explain the economics so permit me to try.

Suppose that in 2007 you bought a $400,000 home in California. You financed this with a $80,000 in cash and a $320,000 loan. Your property tax is 2% so $8,000 per year to pick up the trash and have a couple of public schools and a few cops. You are an environmentalist and you like to look good to your friends so you inquire about installing solar panels on your sunny roof. You are quoted an upfront price of $30,000 to install. You turn down this option to "go green" because you don't have that much cash in the bank but the NREL calculator tells you that the present discounted value of saved electricity bills from having solar panels would have made this a good investment. Given that you are a green, the psychic value that the solar panels offers you also has real value to you.

Facing this binding liquidity constraint, the PACE program helps you to achieve your dreams because the City will pay the upfront costs. But, this is not a free lunch! your flow of future property taxes will go up. Let's assume that your property taxes will now be $2000 higher per year into the infinite future and the interest rate is 5%.

You go ahead and install the solar panels and the future now unfolds.

Case #1: The economy keeps booming. In this case, your $400,000 home increases in value perhaps by 3% per year and you have no trouble paying off your loan and paying your $10,000 property tax per year and everyone is happy.

Case #2: The economy suffers from a deep recession. In this case , in the midst of the recession your home (ignoring the solar property tax) is now worth $290,000. If you go into foreclosure and you hadn't installed solar panels, the lender would lose $30,000 ($290,000-$320,000). But you installed those solar panels.

If by law you are required to payoff the full balance on the $30,000 solar panels debt to the City before the lender gets his money back then then lender loses $60,000 ($290,000-$30,000 - $320,000).

Don't forget economic incidence. Suppose that you are the only person in the local housing market who likes solar panels. In this case, the buyer of your foreclosed home will not be willing to pay $290,000 for your home because he recognizes that the home has a higher property tax (to pay for the solar panels that he doesn't want). In this case, the market price for your home will be roughly $260,000 to compensate the buyer for the higher property taxes for the services (the solar panels) that he doesn't want. In this case, the lender loses $60,000.

But, suppose the City is filled with greens who want solar panels. In this case you will be able to sell your home for $290,000 and the lender loses $30,000.

So from the lender's perspective there are 2 crucial issues here;

1. What is the probability that a home with solar panels goes into foreclosure? This is an empirical question. If homes with solar panels do not go into foreclosure, then there is no risk for the lender --- he continues to receive his flow of mortgage payments. If environmentalists install solar and environmentalists have financial assets other than their home then I would predict they are less likely to foreclose.

2. In communities with lots of foreclosed solar homes, will the next buyer value the solar panels?

In my opinion, Fannie Mae and Freddie Mac are over-reacting here because I believe that the probability of default by solar homes is low and that the home's price when resold will not fall by the full capitalization of the property tax owed.

The article hints that fear of the Fannie Mae and Freddie ruling is sharply affecting this nascent market and this is a shame.