Thursday, September 30, 2010

Career Synergies: Do Celebrities Who Become Real Estate Agents Earn More?

This LA Times Article tells an interesting story providing three examples of "B-List" Hollywood stars who are now successful real estate agents. The article says that these individuals (including a Seinfeld Girl and a surgeon from the soap opera "General Hospital)  have used their fame to attract more people to hire them as agents. 

A few years ago, Enrico Moretti and  Chang-Tai Hsieh published an important paper on the entry of real estate agents into selling homes in markets experiencing rising prices.  In their setup, it is easy to become a real estate agent and during a boom time, people enter this market to sell homes.  Perhaps the Los Angeles celebrity status for real estate agents creates an efficient barrier to entry? After all, not all of us are famous.  If a "nobody" knows that he is not famous and won't be able to get clients if he enters the LA market --- because the home buyers seek a star agent -- then he is less likely to enter.  So, my point is that Celebrities are good for our economy! 

Here is their paper's abstract

"Real estate agents in the US typically charge a 6 percent commission, regardless of the price


of the house sold. As a consequence, the commission fee from selling a house will differ

dramatically across cities depending on the average price of housing, although the effort necessary

to match buyers and sellers may not be that different. We use a simple economic model and crosscity

data to measure the effect of the fixed commission rate on market entry by real-estate agents.

We show that if the commission rate does not vary and if there are low barriers to entry to the realestate

brokerage business, the entry of real-estate agents into cities with high housing prices is

socially inefficient. Consistent with our model, we find that when the average price of land in a city

increases, (1) the fraction of real-estate brokers in a city increases; (2) the productivity of an average

real-estate agent (houses sold per hour worked) falls; and (3) the real wage of a typical real-estate

agent remains unchanged. We can not completely rule out the alternative explanation that these

results reflect unmeasured differences in the quality of broker services. However, we present

evidence that as the average price of housing in a city increases, there is only a small increase in the

amount of time a buyer spends searching for a house, and the average time a house for sale stays on

the market falls."

Wednesday, September 29, 2010

UC's Giannnini Foundation to Throw a Serious Climate Change Policy Conference on October 4th

I want to congratulate my father for his being recognized tonight by NYU for his 50 years of contributions to their great Medical School. My father has spent his whole career there.  He is a loyal guy. I'm more of a free agent but I see the benefits of building lasting bonds with one institution rather than continually switching universities.  With that drum roll, permit me to change topics. 

Climate change policy to be focus of Oct. 4 conference


September 29, 2010

Leading economists, analysts, and executives from academia, the state government and industry will discuss the impacts of climate change and Assembly Bill 32 on California’s economy and the environment during an Oct. 4 conference, sponsored by the University of California Giannini Foundation and UC Davis-based UC Agricultural Issues Center.


"California's Climate Change Policy: The Economic and Environmental Impacts of AB 32" will be held from 8:30 a.m. to 4:30 p.m. at the California Museum, 1020 O St., in Sacramento.


Assembly Bill 32, or the Global Warming Solutions Act of 2006, set the 2020 greenhouse gas emissions reduction goal into law. It directed the California Air Resources Board to begin developing discrete early actions to reduce greenhouse gases, while also preparing a scoping plan to identify how best to reach the 2020 limit. The reduction measures to meet the 2020 target are to be adopted by the start of 2011.



"It is important in the current economic and political climate that Californians have the best possible information about the impacts of AB 32 on the California environment, climate change and job creation in California," said Colin Carter, director of the Giannini Foundation and a UC Davis professor of agricultural and resource economics. "We are pleased to have assembled some of the best and brightest minds in the state and nation to inform the debate on AB 32.”



Slated to speak during the conference are researchers who have contributed to the California Air Resources Board's economic analysis of AB 32 impacts, as well as those who have offered independent reviews of that analysis or their own economic assessments.



Speakers include Lawrence Goulder, Stanford professor of environmental and resource economics; Matthew Kahn, UCLA professor and author of “Climatopolis: How Our Cities Will Thrive in the Hotter Future”; Mark Newton and James Nachbaur of the California Legislative Analyst’s Office; and Robert Stavins, director of the Harvard Environmental Economics program.



UC speakers will include Meredith Fowlie, UC Berkeley assistant professor of agricultural and resource economics; Dan Sumner, UC Davis professor of agricultural and resource economics and director of the UC Agricultural Issues Center; David Victor, director of the UC San Diego Laboratory on International Law and Regulation and author of “Climate Change: Debating America’s Policy Options”; and David Zilberman, UC Berkeley agricultural and resource economics professor.



A.G. Kawamura, secretary of the California Department of Food and Agriculture will be the luncheon speaker.



The conference registration fee is $35 and includes lunch. More information and registration are available at the Giannini Foundation website: http://giannini.ucop.edu/AB32/AB32conference.

Amazon Rankings of Recent Climate Change Books

REPEC offers monthly rankings of which economists are on the rise versus which are slipping down the vertical quality ladder.  While it doesn't count my 3 books, I'm mildly comfortable with my REPEC ranking
here .  But, Amazon offers an hourly update of who is "hot" and who is "not".  The market is saying that there are thousands of more popular books than Climatopolis.  Market's don't lie. You can see my competition posted here at  Climate Change Books

The Rise and Decline (and Future Rise) of the Midwest

Below, I report a graph of the share of Congressional Seats that the Midwest has held over the last 200 years.  In the year 1800, the Midwest had a 0% share.  It's share peaked at 36% in 1890 and now stands at 21.6%.  With the 2010 Census coming out, the Midwest is concerned about losing political clout.  The wild non-linear dynamics in this graph highlight how population mobility across regions shapes politics.  But, it also highlights that linear extrapolation is silly when predicting the future.  Climatopolis predicts that this region's share of the nation will grow as climate change impacts coastal cities and South West cities.  Fargo is in this set of states!  There is plenty of land there to build anew.  Join me in purchasing a few acres of land now before the coastal city slickers show up!  Migration and Innovation will help us cope with our hotter future.   I discuss these themes at length in Chapter 7 of Climatopolis.


NY Times Source

Tuesday, September 28, 2010

How Do We Cope During a Heat Wave?

It is hovering over 100 degrees here in Los Angeles.  I have not been invited to Malibu to any beach parties to stay cool.   How are people coping with the heat?   My son's school doesn't have air conditioning but the school is being pro-active to beat the heat.


Dear Parents,


It's going to be a hot week! We want to reassure you that the XX School is taking several steps to accommodate the high temperatures  and to ensure the health and comfort of our students:


1. We are closing the blacktop during lunch time.

2. The PE coaches are changing their activities to accommodate for the

heat.

3. We have distributed spray water bottles, of the sort used at the  Jogathon, to help keep children cool.

4. We are distributing extra fans in as many classrooms as possible.

5. Where feasible, classroom lights will be turned off to lower the room temperature

6. In classroom morning meetings, teachers and teaching assistants  stressed the importance of staying hydrated, and they will continue to  encourage children to drink water throughout the day.

We encourage you to send water bottles this week to help keep students hydrated.

Best,

XX

 
This all sounds reasonable and not so expensive to comply with. 
 
This summer the temperature reached 120 degrees in Baghdad  .  Demand for electricity was high.  Is the state willing and able to provide necessary infrastructure for coping with the heat?  Improvements in solar could decentralize the grid and allow for competition in order
to provide greater reliability and to avoid state monopoly issues. 
 
If our friends to predict the weather on a week to week basis can foresee a heat wave coming, then this "heads up" will make it even easier for to adapt.  Different people will have access to different coping strategies and merely to due to self interest -- such individuals will seek out the right strategy for themselves.
 
 
 
 
 
 

Could Climatopolis Interest the Young and the Old?

Wired Magazine   and AARP's Magazine  report on Climatopolis.

The future of cities in the face of climate change is a midly interesting topic.  Climate scientists should share the microphone with micro-economists on this subject.  We (the economists) have some interesting things to say on this subject and we certainly like to talk.

Monday, September 27, 2010

Hot Times in the City! UCLA Students Learn in 105+ Degree Heat

Today was my first day of classes for the fall 2010 term.  I was actually happy to be teaching again but it was hot outside.   110 Degrees in Los Angeles!  People were suffering in the heat.  Now, a reasonable question is; "how much would everyone in the city be willing to pay for it to have been "merely" 90 degrees today?"

What will be the amenity costs of climate change?

This paper argues that cities South of Chicago will suffer and that the national loss will be on the order of a 3% drop in income.  That strikes me to be a small number. 

Will there be "heat wave" deaths in Los Angeles?  I certainly hope not.  My "advanced Google searches" over the last week reports no stories on this topic.  Los Angeles has opened up air conditioning centers and people have taken precautions.  This is what a richer city can do when faced with an unexpected shock.

Most people agree that income insulates urbanites against Mother Nature's blows but then some Climatopolis critics say that rising income will merely exacerbate the greenhouse gas emissions level making climate change even worse.    There is some truth to this but there are reasons to push back against this pessimism;

1.  Greater income ===>  improved universities ==> research ideas ==> uncouple GHG emissions from economic growth (i.e the rise of the electric car, and renewable power generation)

2.   educational attainment rises in richer nations and education is likely to make us more patient and more patient voters may be more willing to tackle the collective action problem of reducing greenhouse gas emissions.  So, if India and China continue to develop then in the near future --- their middle class will be more likely to support a carbon deal out of national self interest.

3.  Richer urbanites have fewer children than rural people;  the urbanization of the world population will slow world population growth.

4.  There are scenarios under which fossil fuel prices rise as developing nations consume the existing stock, anticipating this creates incentives to innovate to substitute away from them.  I recognize that the anticipation of rising fossil fuel prices creates incentives to also search for more (in the tar sands in Canada).  So, this is the amazing race --- given anticipated scarcity --- this race for fossil fuel substitutes (that are green and low GHG) versus finding more fossil fuels (with the resulting GHG emissions).

Sunday, September 26, 2010

Moscow's 2010 Heat Wave Revisited

Some quotes from the BBC News concerning the August 2010 Moscow Heat Wave.

"Those who remain in the city of 10.5m people were being urged to wear face masks if they ventured outdoors, and to hang wet towels indoors to attract dust and cool the airflow. Most apartments in the city lack air conditioning and there are media reports of wealthier citizens moving out of their homes into hotels, shopping malls, offices and private cars."

So, if Moscow will face more heat waves --- then its residents will install air conditioning to protect the population.  This Article  tells an interesting "cobweb" story about the firms selling air conditioning units. Because 2009's summer was cool, these firms held low amounts of air conditioning inventory and were surprised by the demand during the July 2010 heat.  The lessons learned from the Summer of 2010 will convince them to hold larger inventories to sell to people seeking to beat the heat and this competition will mean that equilibrium prices of air conditioners will be lower and more people will be able to afford them.

Moving forward, Climate scientists will be better able to predict heat waves a few days before they unfold and spreading this information to people will allow them to choose their best coping strategy.  Businesses in Moscow could offer air conditioning to allow people to escape the heat.  For example, movie theaters offer AC.

Now, these coping strategies will require electricity.  So -- in this case adaptation efforts exacerbate mitigation efforts.

Will the City of Moscow protect the urban poor against the heat waves? In New York City, there are community cooling centers where people can go on hot days (read this).  Does NYC invest in this because it is wealthy or because it "is nice"?   This is an example of how a wealthy city
can use its resources to help its residents to cope with climate change.  Moscow will pursue similar strategies and future heat waves will cause less death and pain.

How Will the Urban Poor Cope With Climate Change?

Global greenhouse gas emissions keep rising.  Yes, the world's poor would enjoy an improvement in their standard of living if climate change does not unfold.  Climate change's blows will be less severe if we can restrain our GHG emissions.  But, the free rider problem lurks and I predict that GHG emissions will continue to rise.  Taking this as given, what happens next to the urban poor?  Will there be mass death all over the developing world caused by climate change?  If we anticipate that the answer is "maybe", what do we do now? Does this moral imperative nudge any swing voters to now support carbon regulation?  I wish this was the case but I don't believe this.  Self interest governs much of our behavior.

Some Climatopolis reviewers (see this example) have hinted that I lack a moral code for promoting an anti-poverty agenda for helping the poor to cope with climate change.  Am I a "bad person"?  I don't think so.
I view people as self interested and taking actions that help them to achieve their goals. If we could engage in social engineering to change Rush Limbaugh's preferences then it would be easier to fight climate change but I don't believe that Rush will be operated upon by "green" doctors.

Climate change will not abruptly destroy our society in the next several decades.  We have time to simultaneously seek out mitigation and adaptation strategies.  Our science nerds will develop ways to uncouple energy production from greenhouse gas production. Our transportation fleet will swap out electric cars for gasoline cars.  These mitigation efforts will help to attenuate the link between world GNP growth and world GHG growth.    On the adaptation side, it is a fact that richer people will have an easier time adapting to climate change.  They will have greater access to a variety of coping strategies ranging from migration, to the types of homes they live , to the types of products (air conditioners and electricity) that they can afford.

There are plenty of urban poor people in the world.  If you want to protect them from climate change and if we are unable to solve the free rider problem (i.e signing a credible global Carbon Cap agreement), then the only way to protect the urban poor is to help them to grow richer.  The logic is obvious.   Go to China or India and you can meet 100s of millions of people who have been lifted out of poverty by embracing free markets ,  isn't this a success story?  Climate change actually creates a moral imperative to embrace free markets and globalization.   Consider the alternatives.  Bill Gates is worth $50 billion dollars. If he gives it all way to every person on the planet, they would each receive $7.  This is a silly example but my point is that private charity is not going to solve this problem.  Skill development, education and integration into the world economy offers the urban poor their best start.

So again, here are my basic points;

1.  climate change is a real threat that grows more scary the more CO2 we release
2. we are showing no signs of capping our CO2 emissions
3. given 1 and 2, we must prepare for climate change adaptation and out of self interest we have the right incentives to do so.
4. the poor have the least ability to cope with climate change
5. there is no law of physics that the poor must remain poor.  The American Dream is playing out around the world and this should be celebrated and encouraged.  We are not passive victims in the face of changing circumstances.

Saturday, September 25, 2010

Could the World Death Count from Natural Disasters Start to Decline Despite Climate Change?

Here is a list of history's deadliest natural disasters.  The world's population is growing and climate change is likely to increase the quantity and severity of these events.   Given these realities, how could the death count actually decline?  In my 2005 paper, the  Death Toll from Natural Disasters, I document the negative correlation between deaths from disasters and national per-capita income.  If over the next 40 years, poor nations open up their economies to world trade and grow --- then my estimates suggest that natural disaster deaths could fall sharply.    This very nice  paper by Kellenberg and Mobarak argues that for quickly urbanizing poor nations that some of my optimism is over-stated.  This merits more research.

My new book Climatopolis argues that on top of the direct income effect that new information (generated by climate scientists) about the exacerbated risks that coastal areas face and areas facing heat waves face will provide strong incentives encouraging self interested people to protect themselves.  The combination of rising income and increased information about natural disasters will help to protect people all over the world and raises my confidence that the death count from natural disasters could fall over time.  This would be direct (observable) evidence that we are adapting to climate change.

Do you smell a new "Simon vs. Ehrlich Bet"?  details

The Microeconomics of Climate Change Adaptation

Climate change will be a world public bad.  Paul Samuelson has taught us that our aggregate willingness to pay for a public good is the sum of individual willingness to pay.  So, how much are each of us willing to pay to avoid climate change?  This depends on your circumstances (endowments, information, preferences) and the severity of climate change (is atmospheric CO2 levels at 400 ppm or 750 ppm or 1000 ppm). 

Most environmental economists have adopted a "macro" perspective in analyzing climate change. Prominent examples include  Nordhaus and Weitzman.   Such macro approaches implicitly assume that there is no relevant within variation.  For example, the Nordhaus RICE model examines how the United States will be affected by climate change.  But within the United States, there is likely to be huge variation in how different parcels of land are affected by climate change.  There will be locations badly hurt and other locations much less affected.  Climate scientists (not economists) will identify these.   If we move economic activity gradually over time to the less affected areas, what does this mean about the long run costs of climate change? I think that we will over-state them.

I wrote Climatopolis because I saw a "hole" in the literature.  There is so much attention focused on carbon mitigation that microeconomists haven't written much on adaptation.  Given that we have made very little progress on capping global emissions (they continue to rise), it is the job of the microeconomist to explain and predict how different individuals will cope with climate change.  Climatopolis fills this gap.

It optimistically argues that for any given level of warming that urbanites around the world have access to a set of coping strategies (i.e migration and innovation) that will help to lessen the impact of climate change on our urban life.  This doesn't mean that climate change is good.  This doesn't mean that we "easily handle" climate change.   We are not fatalist passive "victims" in the face of anticipated challenges. We are self interested and forward looking.  This helps us to protect ourselves against an anticipated but uncertain foe and lowers the aggregate costs that it will impose on us. 

Macro researchers posit a structural production function mapping temperature into per-capita income.  This is one strategy for creating a "closed loop" such that rising average temperature lowers an economy's overall well being. My point is that individual choice and self protective actions means that this mapping is not a "structural equation".  Over time, the impact of temperature on per-capita income will decline because of private actions.

How much will our actions help to shield us from climate change's risks?  You should win a Nobel Prize if you can answer that. Climatopolis isn't that ambitious. It merely seeks to start a discussion and to help nuanced people think about how our future will play out even if the international free rider problem proves impossible to overcome.

Some critics of Climatopolis haven't actually read the book.  I'd suggest reading page 237. "I do not intend for this book to lull moderates ino thinking that "since we can adapt, we don't need to mitigate." ... "Reducing carbon emissions now will make the future challenge to adapt easier to face."

An individual's willingness to pay to avoid climate change depends on how her life (and her children's life) will be affected by climate change.  Each household will have to envision the extra risks and discomforts that climate change will introduce.  If you can easily move to a city facing little risk and rent a nice apartment there, then you suffer little.  Conversely, if you are stuck in a flood zone and unable to move --- you will suffer greatly. 

Climatopolis argues that climate science will improve and provide more accurate leading indicators of what risks we face and that self interested households will respond to this information and firms will respond by innovating to develop products to  help households cope with climate change. In this sense, the evolutionary nature of capitalism protects people in both the developed and developing world.  In the developing world, further economic development over the next 50 years will protect billions of people.  Again, I would ask my critics to read my paper The Death Toll from Natural Disasters  . The best way to help protect the poor from climate change risk is to help their nation's grow their per-capita GNP.  

Given today's technologies, such development will exacerbate the mitigation challenge. It is my hope that as nations such as India and China develop that their middle class will support carbon regulation and this help create a political basis for an international treaty.    I discuss this on pages 146-151 of the book.

A Poem Written for Rush Limbaugh From a Tough Smart Green

Kathleen Martin is a good poet.  Below I report her poem.  Economists rarely discuss "moral imperatives".  We discuss the free rider problem and we recognize that social sanction can substitute for formal sanction but what if "social sanction" is ineffective with a subgroup of the population? Tell Rush Limbaugh to extinguish his cigar when it is making a young kid cough and what will he do? The cliche is that he will laugh.  Ms. Martin wants him to put down that cigar for all of our sake. But Rush understands the free rider problem and knows that there is no "cigar tax" so economics predicts that he will keep smoking.  Ms. Martin knows that Limbaugh knows this and she is trying to make him more aware that the child is suffering.  If Rush is made aware of others' suffering caused by his actions, what will Rush now do?
HERE is her poem

"This "prose poem" below was written in a rush of despair the morning of the autumnal equinox upon hearing a radio report the temperature could reach 100-degrees in the Louisville, KY, metro area that day. Various titles I've considered for it include "If the Shoe Fits..." and "Which Shoe Fits You?" and "Get Your Gloat On" -- whatever it's called, it's long past high time to start calling some of us so-called '70s "pessimists" by our true identities: REALISTS.



Okay, all right. Gotta admit, you got us good. I'm talking to YOU, the

loud, materialistic majority who smirk at us bent on our bicycles or

cramped in our compact cars as you cruise around in your roomy,

gas-guzzling SUVs and minivans. Who scoff at all the extra time and

effort we take to recycle and compost over the decades while you fill

the ground with your mounds of trash. Who luxuriate in your long hot

baths and chuckle at us shivering in our stream-off-when-soaping

showers. Who fill up your swimming pools and hot tubs with utility rate

breaks while we use collected rainwater on our locavore gardens. Who

sneer at the "eyesore" of clothes hanging to dry on lines while you run

your w/d's for that one pair of jeans you just gotta wear tonight. I

could continue ad nauseum with this laundry list of compare and

contrast, but you get my drift.



So now when it's 100 degrees on the first day of autumn and natural

disaster after natural disaster follow upon the heels of man-made

disaster after man-made disaster, you get to gloat about us all winding

up together in the same oil-filled boat after all. You can smile smugly

to yourselves and think, "Tree-hugging suckers! At least WE really lived

it up and enjoyed the spoils of the planet before we spoiled it for

everyone! Ha-ha! You took all that extra effort and sacrificed creature

comforts for decades, yet in the end you won't suffer any less from our

selfishness just because of your responsible behavior. And besides,

we'll just crank up the A/C even higher and go take a dip!"



But here's a truly sobering thought for consumerists who have done

little-to-nothing as stewards of this great Earth: If not your children,

then your children's children, and whatever generations may survive

beyond that, all still alive will curse you and your lethal legacy left to

them with every labored breath they try to take. And the band plays on

with Nero on first violin....



Kathleen Martin

New Albany, IN

September 23, 2010"

 
The logic of my climatopolis book   is that Rush Limbaugh and friends will slowly see the link between their actions and collective outcomes.  How will Rush change his behavior as climate change unfolds? He has the income to protect himself in a variety of ways. Ms. Martin is pointing out that the rich transfer quality of life away from the poor when they live a high carbon lifestyle because climate change's impact will be mostly borne by the poor.  In Climatopolis, I argue that all of us will have access to some coping strategies for adapting to climate change and that economic development will help the poor to adapt. In 100 degree areas (as they grow more common), we will need more electricity to cope.  Capitalist innovation today in anticipation of such trends will help all to reduce the quality of life impacts caused by Mother Nature.
 
 
 

Friday, September 24, 2010

A Return to Los Angeles

After a week on the east coast, I am returning to my home.  My students will see me monday morning and I will be eager to see them.  I have two links to share with you.  Here     is a link that I urge my new friend Joe Romm to read.  Andrew Sullivan is an open minded thinker.  This weekend the Financial Times will publish a review of Climatopolis.  For folks who are willing to debate, I'm eager to discuss my ideas with you.

For those of you who believe in love and romance,  here is a wonderful story .   Mary and J.R look so happy. 

Thursday, September 23, 2010

Diversification and Trade with China in Rare Natural Resources

The world relies on China to produce cheap exports.  While economists celebrate comparative advantage because it makes us richer and able to afford to purchase a broader set of items we want, can we be overly reliant on a trade partner?   Japan is learning that the answer is "yes". In a diplomacy spat with Japan, China appears to have suspended its export  trade in rare metals to Japan.

So what?  "China mines 93 percent of the world’s rare earth minerals, and more than 99 percent of the world’s supply of some of the most prized rare earths ..

Japan has been the main buyer of Chinese rare earths for many years, using them for a wide range of industrial purposes, like making glass for solar panels. They are also used in small steering control motors in conventional gasoline-powered cars as well as in motors that help propel hybrid cars like the Toyota Prius.


American companies now rely mostly on Japan for magnets and other components using rare earth elements, as the United States’ manufacturing capacity in the industry became uncompetitive and mostly closed over the last two decades. " (source Bradsher's NY Times Piece cited here

This is an interesting case.  Japan has learned that it made a strategic mistake by not diversifying its supply chains.  Today,  China seems to be almost a monopolist here.  Knowing that China plays tough and uses is trade leverage to achieve its political goals (such as claiming disputed Asian islands near China) --- China knows that it can use the threat of cutting off exports to get what it wants.

An economist would ask; "why didn't Japan anticipate this?"   There are some good game theorists in Japan.  A threat isn't credible or effective if Japan has alternative trading partners or if it can "grow its own stash".

Now, I realize that this is easier said than done but I can't believe that the geology is such that these minerals are only found in China.  If this is the case, then the nerds need to get back to work to figure out what other substances could substitute for them in the products in question.

The NY Times piece suggests that rich nations such as USA and Japan need to do more mining to have their own stash.  Would environmentalists support this?  We want it both ways.  Low pollution here (no mining and mountain top removal) and no political hassles there (no threats by major export partners to cut off the flow of goods).  

Wednesday, September 22, 2010

Blogging

Each day this week I am blogging at  Volokh Conspiracy about Climatopolis.  This is a great chance for me to present my book's main themes.  Carbon mitigation and climate change adaptation go hand in hand.  They are not substitutes. Liberal bloggers are yelling that adapation and mitigation are not  perfect substitutes (like Coke and Pepsi).  I agree with this and I never say that they are.  Adaptation will occur , it will be less costly to adapt to climate change if we take costly mitigation steps now. Given that we have chosen not to mitigate, we need to have a serious discussion about adaptation and climatopolis seeks to start a rational debate.

 If my book catches on, the fear is that the expectation that we can and will adapt to protect ourselves from climate change will further chill our urge to enact a carbon tax.  I support the carbon tax but national and international efforts to overcome the carbon free rider problem will fail.  You can win a Nobel Prize if you can come up with a mechanism that achieves a credible global deal.

Switching subjects:

I have been waiting for Thomas Friedman's announcement that he will defect to China. Today, he explains what he admires about China in a nuanced piece.   Thomas Friedman Quote

"How can you compete with a country that is run like a company?” an Indian entrepreneur at the forum asked me of China. He then answered his own question: For democracy to be effective and deliver the policies and infrastructure our societies need requires the political center to be focused, united and energized. That means electing candidates who will do what is right for the country not just for their ideological wing or whoever comes with the biggest bag of money. For democracies to address big problems — and that’s all we have these days — requires a lot of people pulling in the same direction, and that is precisely what we’re lacking."


In a diverse society, who is "the country" and what does the phrase "right for the country" actually mean?  If we were all identical this would be easy.  
 
He appears to support the reasonable goal of maximizing our long run  income (GNP per-capita).
Growth economists have identified policies that help to increase economic growth.  Some of this list he will support but I doubt that he would support others.  This list is not in any order.
 
1.  Invest in young children to increase the future human capital stock.
2. remove labor market distortions such as the minimum wage, and weaken labor protection rules to
encourage firms to hire workers knowing that they can fire workers.
3.  no more agricultural subsidies?
4. lowering the capital gains tax to zero?
5. lower the labor tax close to zero?
6. investment in basic science research?
7.  investment in public goods infrastructure?
 
I know he supports  1, 6 and 7 but what about the entire package?
 
Ken Arrow's Impossibility Theorem may be important here. 
 
 
 

Tuesday, September 21, 2010

Back to School: My Return to Hamilton College

To misquote Cher, "I can turn back time".  While Hamilton College has received a serious makeover since I was last here in 1995, some things do not change.  Do you recognize this iconic building?  I speak there tonight.



While on campus today, I have had the opportunity to meet with my favorite professors including Jeff Pliskin, Jim Bradfield and Alfred Kelly.  To my amazement, Professor Kelly has kept his records for all students in his classes from 1981 until the present. He read to me my grades on my paper, final exam, oral discussion for each of the two classes I took with him.  I was not an "A" student.  I had forgotten this point. 

Returning to Climatopolis: I acknowledge always that I'm an economist not a climate modeler.  I believe in comparative advantage.  The climate scientists will do their work and present their predictions and then self interested households and firms will have the opportunity to respond to this information.  As an economist, I'm mainly interested in this last step and I'm optimistic that we do respond to "new" trusted news and take actions that protect ourselves. I never said that moving to "Fargo" is sufficient for adaptation.  That is a caricature.  Migration to the "right" city -- once the climate scientists have made more progress identifying such areas --- is just piece of the adaptation effort.  You  will also have to choose where to live within that city, what type of materials to build your home out of, how to protect your family if heat waves, or illness epidemics break out.  

No city will ever be completely risk free. There are murders in NYC every week but people want to live there. We learn to manage risk and take pro-active actions to protect ourselves.  Some carry a gun, some do not go out at night.   I would ask the climate scientists to explain why climate change poses different risks for cities than the vague threat of crime.  Do people like Joe Romm really believe that not a single square mile of Los Angeles will be habitable in the year 2100?  He should be selling short the Case-Schiller house price indices for those cities. 

The climate scientists will identify the inhabitable parts of our land mass and over time  -- we will rebuild our cities at higher densities in those areas.    This is not a free lunch  -- it will be costly but there will be benefits from such pro-active adaptation efforts in our hotter future.

I'd suggest taking a look at:  IPCC's 4th Wave Regional Assessments's report.  These regional assessments look quite crude and highly aggregated. In reality, different parts of a specific city such
as Seattle or San Diego will face different threats but this report treats these land parcels as perfect substitutes.  As we learn, we will make better decisions.  Clearly, the climate scientists have much more work to do and there is certainly a market for the information they will generate. Self interested people will want to know which cities will have an absolute and relatively high quality of life in our hotter future.

These reports also engage in a type of geographical determinism. If a city does experience more 100 degree days, is there nothing its mayor and residents can do to protect the population?  There is no "siesta" or other institutions or architecture for protecting the "victims"?

Will Joe Romm Bet Me on Round #2 of the Ehrlich/Simon Bet But This Time on Deaths from Natural Disasters?

In Joe Romm's blog post he has some tough things to say about my book climatopolis.   He doesn't bother linking to it in his post so permit me to make a couple of points and to propose a wager.

1.  Dr. Romm is clearly quite angry about the failure to overcome the free rider problem to reduce our greenhouse gas emissions.  I am angry about this as well and say throughout the book that I am a 100% supporter of carbon incentives.

2. Perhaps to increase demand for carbon mitigation efforts today,  Dr. Romm pushes hard that we are doomed and dead meat if we allow atmospheric GHG concentrations to march up to 1000 ppm.  At a linear  increase of 1.9 ppm per year right now -- I believe that we would not reach a target until more than 200 years have past.

But, let's assume he is right that we will soon hit 1000 ppm under business as usual.

3.  He presents a series of color graphs showing how many days over 100 degrees different parts of the USA will be per year when we hit carbon concentration of 1000 ppm.  Commenters on his webpage discuss that cities such as Salt Lake City have suffered from climate events recently.  I deny none of these points.  An economist would ask;  "how much are people in such areas willing to pay to avoid such days?"  When Phoenix had 14 days over 100 degrees in May 2009, how much did people suffer? How much did air conditioning protect them from being exposed to the heat? 

4. I agree with Romm that adaptation will be easier if we curb our CO2 emissions now.  I just don't believe that we will enact such mitigation legislation.   As I discuss in Climatoplis, the mitigation free rider problem is too hard for politicians to solve. Nobody wants to be the "first mover".   He is clearly worried about the lulling hypothesis which I discuss in my conclusion. If we think we can adapt then this diminishes the desire to mitigate.  He is using his blog as a political sledgehammer to achieve climate consensus now.  This may be a wise political strategy but to swing political moderates -- I believe that we need to have an honest discussion of what plays out if we don't make costly decisions now.

I would like to bet Joe Romm in an optimist vs. pessimist bet.  While climate change will cause more natural disasters in the future, I don't believe that the death count will go up.  We will be richer and we will take pre-cautions. Please read my paper  The Death Toll from Natural Disasters  .  Please email me if you can suggest a suitable bet. Given world population growth, I would want to standardize by this ; so the bet could take the form of "the over/under on the count of world deaths from natural disasters in the year 2040".


5. Joe Romm's piece is a pinch condescending to economists.  We understand incentives and human behavior. I understand his incentives but does he understand mine?  I want to explain and predict human behavior and microeconomics is a powerful tool.  As climate change plays out, we need to understand how a self interested forward looking population will respond. I argue that migration and innovation and carbon mitigation will all simultaneously playout and that the combined trio will help us to adapt.  In his "model", we are simply victims , passive vicitims, of bad collective choices (not mitigating carbon) made in the past.  That's pessimistic.  Does my prospective vision of the trio of migration, innovation and carbon mitigation border on wishful thinking?  No, we have a historical track record indicating how we have responded in the past to shocks and we have the right incentives (survival) and big brains to help us solve the new problems that climate change will pose for us.

Again the bet: yes climate change is coming and it will throw more heat waves and natural disasters at us but I claim that there will be less death from such shocks as we are richer, smarter, and on the move to the new cities we will build to protect ourselves against anticipated change.

Sunday, September 19, 2010

A Response to One Climatopolis Critic

In a comment posted at the bottom of this review of Climatopolis, I found this remark by "d.h. strongheart

of santa fe, nm posted on September 1st, 2010.  Here I reprint the remark and reply below.

"9:22 am The optimistic perspective of Professor Kahn seems to overlook a critical fact:

The ability of humankind to thrive is directly connected to the virility of our global ecosystems and the balance of natural cycles....global warming poses a serious threat to Earth's ecosystems, species diversification and the balance of climatic cycles. Kahn's optimism reflects a common tendency of economists to abstract the economy from the natural systems that support it.

Also, Kahn speaks of migration as if it were a family road trip: just pack up your bags and move along. Unfortunately, migration is a treacherous and often deadly endeavor, which also can easily lead to social strife and war. If such factors as war and overcrowded urban areas become the norm of the decades ahead, we cannot expect to make much progress towards the urban utopias that Kahn envisions. "

REPLY:   The author of this comment ignores the possibility that free markets (markets for water, electricity, food, energy) provide correct signals about the scarcity of the natural capital that Mother Nature provides for us.  If the climatic cycles have been altered and this affects food production, food prices will rise and this will send a signal of scarcity and of change.  Price dynamics link the "natural system" to the economy.  Of course there are common property issues (who owns the oceans?) but if the quantity of fish decline because of over-fishing, then consumers will substitute to a substitute such as meat and its price will rise signaling scarcity again.

The author ignores that migration is purposeful. If a Jewish family is not welcome in a town, it won't migrate there.  There are multiple possible migration destinations and the rational migrant will tradeoff the costs and benefits of moving to each possible destination. If there is likely to be ethnic conflict at a particular destination, you will be less likely to move there.   Nations such as China are about to have too few young people because of their 1 child policy -- that nation will soon encourage international migration and people in India and Bangladesh who are suffering will have the choice to move there. Yes, migration takes time and resources but climate change will not occur over night --- we have time for this migration to play out over decades.   

Nations that mistreat potential entrants will not attract such migrants. This author appears to believe that immigrants are worthless to the nation that welcomes them.  I don't believe this at all.  The United States could solve several of its problems today if it increased immigration! Recall that the United States is a nation of immigrants.  The destination nations may actually compete to attract the immigrants who are   eager to move from their current nations that are suffering from  climate change.   A growing younger population offers a new workforce and helps with retirement "pay as you go" fiscal systems. Wise destination nations will recognize this and actually bid (through offering good jobs and relatively high quality of life) to attract them.

People need to think about the wonders of competition and the price system.  We owe a lot to it.

Bad Eggs and Free Market Capitalism

The Recent Egg Recall List got me thinking about the quality of our food supply.  We take it for granted that the food we buy will be high quality but how do we cost effectively maximize this probability?  Do we need government and the Food and Drug Agency to be studying every egg before it is sold?

An economist who believes in the power of competition and accountability would say that "bad eggs" will quickly be discovered and that consumers will substitute away from farms that sell the bad eggs but how long will it take for the "bad guys" to be discovered?  How quickly is such information aggregated on the web at a website that might be called  http://www.badegg.com/?   Standard and Poors and Moodys rank Wall Street companies, what private sector labels could continuously update their rankings of which farms are producing bad products?

If such a ratings agency existed, what would be its threshold line? If my farm sells 1 million eggs a year and I sell one bad egg, am I a "bad egg" firm?  Now if 50% of my eggs are bad, then certainly but where is "the line" drawn?

A libertarian would say that there is a market for eggs that can be differentiated on quality and price.  Diverse households have different valuations over egg quality and the egg's price. Firms have different costs of producing an egg of a given quality. Some firms are able to produce such a high quality egg relatively cheaply while others can produce a large quantity of eggs at low price but some of these eggs will be infected.  If a person purchases a cheap egg and gets sick, are they a victim or is this a lost gamble like the person who bets on the losing team in the Super Bowl? 

A benevolent paternalist would say that competition and information updating are unlikely to be sufficient to protect consumers.  Consumers may think they have identified a "free lunch" of a cheap egg that they assume is 0 risk. 

If there is ex-post liability lawsuits against the egg farms, is this sufficient to incentivize them to better screen their eggs for risk and to take good care of their chickens to minimize such risk?  Does ex-post litigation threats substitute for ex-ante regulation?  If not, why not? Do the farms go bankrupt before the lawsuit comes to court?

Existing egg farms may also worry about spillover externalities. If my evil rival sells bad eggs, will consumers substitute away from his eggs AND my eggs and now drink beer for breakfast?  If this logic is right, does this suggest that egg farms should be allowed to merge into mega-farms? The government would be better able to monitor these farms and the firm would internalize the product externality of selling a bad egg since its profits would fall.  It appears that there is a tradeoff between monopoly power (and higher prices for consumers) and the quality and safety of products.  How does the FDA trade of price versus quality?  As we grow richer and our demand for high quality (i.e safe) eggs increase, does the FDA change its criteria for allowing mergers to take place?  How does the FDA and FTC co-ordinate their efforts?  The FDA wants a safe food supply while the FTC wants competition and little monopoly.  In the egg case, are these goals in competition?  Do the majority of the salmonella cases take place at the little guys or the "big egg" high volume producers?

How is confidence in a product (such as an egg) restored?  A Bayesian would say that after a salmonella outbreak that we need to see a long streak with no more reports of public health problems. 

Saturday, September 18, 2010

Can the Video Game "Climate Challenge" Help Us Adapt to Climate Change?

The power of video games as a climate change adaptation tool is a brand new idea for me. But, if this game makes future scary scenarios more salient and helps teenagers to focus on it --- then I like it. While I haven't thought about this before, this falls under the broad example of "human ingenuity" helping us to adapt to climate change. Here is an email I just received;

"World's leading environmental game maker Red Redemption has created "Fate of the World" - new climate challenge game for PC's and Apple from in association with Oxford University climate experts with really scary climate scenarios - game is being pitched to top distribution houses on the West Coast this week following its presentation at New York Climate Week- Chairman Gobion Rowlands will talk to Gaming Magazines and Blogs in one-on-one phone interviews - Phone Stuart Rowlands 310 850-1088 to set time

Red Redemption created award winning "Climate Challenge" for the BBC in 2008 played by more than 970,000.

http://albion.red-redemption.com/~gobion/FOTW_Trailer.wmv :

Now, I'm not going to play this game -- and I don't know who it is targeted for but recall what Malcolm X said; "by any means necessary". If this is what it takes to wake up complacent youth about scenarios we could face if we aren't pro-active, then I am supportive.

The irony here (which I discuss in Climatopolis) is the anticipation of "gloom and doom" helps us to continue to "live long and prosper".

UPDATE:  This NY Times article explores this general point from a different standpoint.  As discussed in this article, some nerds at the Northwestern Kellogg School have created a software program that shows a survey participant what he/she will look like in the future when this person turns age 68.  This randomly assigned prompt giving you a glimpse of "who you will be" nudges people to save more than the control group. Now a skeptic might ask whether this cheap talk reflects the reality;

Can seeing a representation of what you’ll look like later in life persuade you to save more for retirement? Some recent studies say yes.



"Hal Ersner-Hershfield of the Kellogg School of Management at Northwestern University and fellow researchers created images of college-age participants that showed how they looked as they aged.



They then put the participants in a virtual reality environment, showed them either an image of what they looked like now or of what they might look like as they aged, then asked them questions about retirement allocation. Participants who saw the aged image of themselves allocated twice as much to retirement as people who saw their current appearance, the researchers found.

“Our hunch is that exposure to one’s future self is creating somewhat of an empathic response,” similar to the feelings of protectiveness one might feel when seeing an aged parent, said Professor Ersner-Hershfield. "

Now, I can't believe that the survey participants were making binding commitments but this is still mildly interesting.

What is the link to video games?  In both the video game experience and in this Kellogg aging experiment, people get a glimpse of the future and become more aware of their life in the future in different circumstances than they face today. Facing this "cold water" changes their behavior today and this eases their adaptation to their future reality (i.e climate change and needing $ to enjoy stable consumption while retired).

World Bank Talk on Climatopolis

I'm looking forward to my talk next Wednesday at the World Bank (see below). I will focus on what my Climatopolis book has to say about cities in the developing world and modestly offer some suggestions for how the World Bank can productively use its research dollars to make progress on urban adaptation to climate change. Here is a copy of my talk's slides.

Friday, September 17, 2010

A Distinctive Interview in the Los Angeles Times

Decorum may not be my middle name. Maybe when I turn age 50, I will become a more dignified Professor but for now I am what I am .

Do You Hear a Sound When Environmentalists Rough Up Economists?

Read through the comments of this Grist Interview and you will meet some people who do not respect the dark art called neoclassical economics.

My esteemed colleague Jared Diamond's book sales will not Collapse. Here is an interview with him. I agree with 49% of what he has to say.

I DISAGREE WITH DIAMOND'S ANSWER HERE:

QUESTION: You say there’s a real possibility that the most advanced countries — what you call the First World — are going to collapse within the next several decades, depending on the decisions we make. Do we really have so little time?

DIAMOND "We only have somewhere between 20 and 50 years because we’re consuming things so quickly. We’ll run out of the last of our major tropical rainforests in the Amazon and the Congo in less than 20 years. In a few decades, we’ll run out of relatively inexpensive, environmentally benign hydrocarbons — not that we’ll completely run out of oil, but it will be more expensive and environmentally dirtier to dig out. In a few decades we’ll be using all of the world’s water — the First World is using 70 to 80 percent of the world’s freshwater today. There are a dozen factors occurring all at once, all of them time bombs with fuses set to go off not far in the future — during the lifetimes of my 23-year-old twins."



I AGREE WITH DIAMOND'S ANSWER HERE

QUESTION: Sure. It’s not that everything is terrible, that California and the United States have made no good decisions. In the 1950s, Los Angeles was notorious for having the worst smog in the country. I was in college in Boston when a student I met from Los Angeles told me that the city was in the process of solving its air problem. That seemed ridiculous to me.

Diamond "But the reality is that over the last several decades, the federal government has taken air problems seriously, mandating air quality, getting lead out of gasoline, requiring smog checks on your car. Today, even though Los Angeles has lots more people with far more cars than in the 1950s, the air quality is much better. The message I draw from this is that if we can solve a complicated, messy problem like air quality, we can solve other complicated, messy problems."

Wednesday, September 15, 2010

The College Class of 2014

Stanford Univ. welcomes its 2014 class. The 2nd paragraph is amusing.

"The campus welcomed 1,675 freshmen from 49 states and 54 countries. More than one-third of the class of 2014 is from California, but it also includes students from Kazakhstan, Thailand and Swaziland. About 15 percent are the first members of their families to attend college.

Housing officials issued their own list of essential items (photo ID, rain jacket, two weeks' worth of underwear) and well as those things discouraged (a first edition of Dickens, your grandfather's gold ring) and banned (mercury thermometers, aquariums, George Foreman grills, firearms)."

Is this a binding constraint?

source

Some Thoughts on the Modern Council of Economic Advisers

Ed Glaeser has written a terrific piece about CEA Chair Austan Goolsbee's significant contributions to economic research . After being reminded about all that Austan has achieved up to this point, there is clearly an opportunity cost for him to not be at Chicago GSB right now. Is serving on the Council a productive use of his time? Clearly, he and the President believe so -- but I wonder.

In this age of blogs, the President's "Kitchen Cabinet" is very large. Rahm and David Axe can use google to quickly find out what Paul Krugman thinks without calling the busy Princeton economist. With economic advice, there has always been a "make versus buy" decision and in this age of blogs the price of "buying" advice is zero. You don't need to make it in house because there are dozens of star economists telling you what they think posted on their blogs (I'm not talking about this blog!).

During WW II, the leading physicists joined the secret Manhattan Project to work in house on a long run project for the U. S Government. I don't see a CEA analogue to this. It appears to me that the CEA has a short run perspective (helping to put out day to day political fires) as it has very little time to sit back and think about long run growth incentives that a David Brooks would celebrate.

These are highly partisan days where politics appears to trump economic logic. If a smart economist knows this and wants to have a senior White House job (and be a player there), does this make him/her a politician? Is there a dangerous line that one can cross between objective analysis and anticipating Republican snarky counter-responses? There is a "time to build" component to doing policy relevant research. Does the CEA have the time to engage in this socially productive activity or is it a middleman who connects politicians to the best recent work (NBER Working Papers) on the subject? Once the politicians are connected with the nerd economists, does the nerd's work have a causal effect on what regulations and policies that emerge or is the nerd's work used to justify a decision that has already been made? I would be much more excited about the CEA's work if the former story is accurate and I really hope that it is.

Being a naive guy, I had hoped that the Obama Administration would be a time of "Mr. Spock goes to Washington". I had imagined that Austan Goolsbee and the CEA would plant the seeds to run long run field experiments to see which government agencies are actually achieving good results. So, the Secretary of Education Duncan is trying to do this with his accountability and test scores at schools and the Department of Energy is trying to figure out how to design incentives and energy efficiency regulations to achieve measurable impacts on energy consumption. But, I had expected to see this in every agency . Accountability comes from measurement and the anticipation that if $ is wasted on a specific government program, that the academic nerds will figure this out and the newspapers will report this.

The CEA continues to have excellent economists serving on it and I think this is great. But, what do they do all day long? Are they doing useful economic analysis or are they doing mandated boring tasks (in this Internet Age the "Economic Report of the President" is an out of date anachronism) or helping the political wing of the White House to play defense?

The job of the economist is to explain and predict human behavior. If government policies that Axelrod and Emanuel want implemented have serious unintended consequences or are silly (see Cash for Clunkers), does the CEA kill these off or is the CEA told to come up with some justification for supporting the legislation? I don't know the answer here.

Some Climatopols Self Promotion

This saturday, I'm hoping that the Los Angeles Times will be running a piece in its Science Section about Climatopolis. On tuesday night 9/21, I will speaking at Hamilton College about the book, and on wednesday 9/22, I will be speaking at the World Bank in Washington DC about the book. On October 7th, I'll be speaking about the book at BYU. For more info, take a look at the Climatopolis website .

For folks who like Seattle Radio podcasts, here is your chance.

Hi Matt,

The interview we taped on CLIMATOPOLIS for the 'Conversations' Show will air on 4 Seattle stations this Sunday, 9/19/10. They are:

-KMTT, 103.7 FM, 'The Mountain', between 6:00 - 7:00 a.m. PT
-KKWF, 100.7 FM, 'The Wolf', between 7:00 - 8:00 a.m. PT
-KISW, 99.9 FM, between 6:00 - 7:00 a.m. PT
-KNDD, 107.7 FM, 'The End', between 7:00 - 8:00 a.m. PT

It will also be available via podcast on the KMTT-FM website, www.kmtt.com, the 'Conversations' Show page (under program schedule) for 1 month.

Thanks for giving such great information on the upcoming challenges cities face with climate change!

Best,
Lizz Sommars
Host
'Conversations' Show
KISW,KKWF,KMTT,KNDD

Tuesday, September 14, 2010

Very High Speed Internet as a Placed Based Economic Development Strategy

Chattanooga, Tennessee is running an interesting experiment . By the end of this year, its residents and firms will be able to opt into accessing an extremely high speed (1 gig per second) Internet access. This is a specific place based treatment. Will this stimulate economic growth or simply stimulate increased downloads of movies, videos, and images of Lady Gaga and other leisure activities that raise well being but won't "create jobs".

Cities have tried out many placed based strategies for encouraging growth. Favorites include; new sports stadiums, new arts museums and Ed Glaeser's favorite --- building billion dollar federally subsidized rail transit systems). Could fast Internet cable achieve what these other strategies have not? I have blogged about this subject before .

But, now a new point. Google is undertaking a similar effort.

"Eric E. Schmidt, Google’s chief executive, and other leaders in technology and government point to the trailing broadband performance as a danger to American competitiveness that threatens to saddle the nation with an “innovation deficit” compared with other countries.

To help close the gap, Google pledged this year to supply service at one gigabit a second to up to 500,000 people in the United States. The company says that 1,100 communities have applied, and Google will make its selection — one community, or a few — this year."

PERMIT me to make an interesting point. Suppose that Google chooses to place this "gigabit Internet" in 50 small cities. For each of these cities, Google will have identified a second place "runner up" who just missed being treated with this fast Internet cable.

A comparison of subsequent economic growth and quality of life in the 50 "treated" cities versus the 50 runner-up "control" cities --- would yield an estimate of the average treatment effect due to fast Internet Access. Note the sharp regression discontinuity here. This is no ugly "propensity score" design. This empirical strategy exactly matches the approach adopted by Michael Greenstone and Enrico Moretti in their important paper on the causal effects for rural towns when they lure a Manufacturing plant to locate there.

In the name of Reseach, I ask my friends at Google -- do not choose one site for your fast Internet. Yes, you save money paying only one fixed cost of delivering it there. But if only 1 city is treated, then there is no way to study the causal impact of your treatment.

For small and medium sized cities, does fast Internet access offer spillover benefits as an endogenous cluster emerges and co-agglomerates? For example, will movie makers and software designers and good restaurants emerge? To answer this, we need some serious thought about co-aggomeration. Examples of recent relevant urban research using manufacturing include;

Ellison et. al

Greenstone, Moretti and Hornbeck

but we need some similar work on service clusters. See Jed Kolko's work on this subject .

Monday, September 13, 2010

New Empirical Work on Who Washes Their Hands After Going to the Toliet

Now, this is serious research. My son always thinks that I'm related to Howard Hughes with my fear of germs as I give him the business to stop touching everything. But, this article vindicates my low trust worldview. Everything is gross. With bedbugs, H1N1 Virus and all the other plagues wandering around --- it is amazing that cities continue to exist. Talk about asymmetric information. I'm not ordering any more hot dogs or going to any more pro sports events. The next time I see you, I will spray you with hand sanitizer and then I will speak to you.

Can an Economist Get Back in Shape? Investment Over the Life-Cycle

Do you remember this Star Trek episode (titled "Return to Tomorrow"). Captain Kirk and "The landing party find themselves in a vault, and encounter a glowing sphere that identifies itself as Sargon. He explains that his people were destroyed in a cataclysmic war half a million years ago, and that he once had a body, but now is only pure thought. Sargon insists that he and two others of his kind need to "borrow" the bodies of the Enterprise officers long enough to construct new artificial ones."

For years, I have not been exercising enough. I didn't have enough time and I convinced myself that my brain could be placed in one of these "glowing spheres". But, over the last week --- I have started to make my comeback. I can almost hear the theme from "Rocky".

My wife has taught me how to jump rope. As a younger man, I didn't view jump rope as that macho. I'm doing my jumping jacks, jump rope and I'm running and the comeback is taking place.

Why am I doing this? Everyone in Los Angeles looks good but me and if I'm going to stay in this town I should try to fit in.

Maybe I'm in training to look good at my Hamilton College comeback. I will speak there on September 21st at the Chapel.

When I was a student there in the mid-1980s, I heard Suzanne Vega play there and I heard Presidential Candidate (in 1972) George McGovern speak there. Now it is my time. I would say that I'm a linear combination of Vega and McGovern except he is a little bit more liberal than I am. I place the weights at 25% Vega and 25% McGovern with leaving 50% for "Other".

Sunday, September 12, 2010

A Defense of the Modern Research University

Andrew Hacker and Claudia Dreifus are on a roll as they offer a populist critique of the "fat" modern research university. Part of writing a good book is timing. Their timing is good. During a lasting recession, Americans want to know who continues to enjoy the "good life" and he points a finger at the tenured professors and Deans of leading private universities.

I would argue that research universities are one of the last great institutions that the United States has. If China will build great universities, they will resemble our great universities in terms of incentives and responsibilities.

While I have spent my adult life in "the Ivory Tower" --- I am self aware enough to know that they can be improved. I will return to my policy tweaks below.

In yesterday's Los Angeles Times, Andrew Hacker and Claudia Dreifus make several points;

1. tuition is rising over time faster than the rate of inflation

2. Universities have too many sports teams

3. Universities have too many deans and deputy deans.

4. University Presidents are being paid too much.

5. Senior tenured faculty have really cushy, high paying jobs with light teaching loads.

6. Universities focus on campus amenities such as gyms and good meals that are unrelated to their core function (education)

Point #1 is a fact and I agree with points #2, #3, and #6. Faculty members at the University of California know very little about why we have layers of administration at our home campuses and Oakland but it adds up to 100s of millions of dollars of compensation for people who do not teach or do research or have day to day contact with students.

Point #4: University presidents are well paid because they are effectively CEOs of a strange hybrid public and private firm. There are dozens of interest groups lobbying the University President and he/she must play nice with dozens of constituents. To attract talented people to such a tough job requires "combat pay". Now, there is a barrier to entry that raises University President pay. Almost all Presidents have a PHD. They are former academics who opted out of research to enter administration. If Universities considered hiring MBAs to lead their school, then the compensation package would fall due to competition but there would be ugly fights about the "values" of the university and not running it as a business.

Now, let's turn to point #5. Senior faculty. At any university, there
is deadwood on the faculty who the Provost wishes would retire. Mandatory retirement used to remove this crew at age 70. Research universities would be reinvigorated if all of the faculty had to retire at age 65 and then the school could selectively choose who to hire back.

Do senior faculty teach too little? There are only 24 hours in the day. Our research does matter and it does take time to do. At UCLA, I teach very large survey classes (over 200 people in some of my environmental economics classes) so that a large number of students can be exposed to my ideas. The internet (through blogging) allows me to reach even more readers. I give lectures on campus and meet with parents groups. I hire undergraduates to be my research assistants and work with PHD students on their thesis research.

A serious faculty acts as a co-ordination device. Serious students choose to go to a university with serious faculty and the students learn from each other. The students sense the dedication and the sacrifice that faculty make and this becomes "infectious" as students see what it takes to make original discoveries. As Edison said, it's 99% perspiration.

How can the modern university be reformed?

There are too many PHD classes offered. Back in the 1990s at Columbia, there were many courses with 2 registered graduate students. Those courses should not be offered. Faculty should team teach a course and each be given credit for a fraction of the course. There are diminishing returns to taking a class with any professor. A senior faculty member should teach one PHD class per year and all of his/her other teaching should be undergraduate classes. (I have edited this part of the post.)

I know that people will disagree with this point but ever since I was junior faculty at Columbia University --- I have consistently argued that more faculty teaching resources be geared towards undergraduate teaching. Schools such as Columbia and UCLA should have PHD classes of 10 entering students per year (MIT admits 18 per year). There is a quantity/quality tradeoff in terms of advising and the faculty could invest more per-student. Faculty time would be freed up and could be devoted to teaching and advising advanced undergraduates to make their undergraduate research experience more meaningful.

People will counter that PHD students are needed to be teaching assistants in classes. But I disagree, the star undergraduates can serve this role and Paul Romer's Aplia has shown that information technology can play this role. Faculty can form their own reading groups to stay sharp in terms of discussing cutting edge research.

My vision for Research universities that are not "ivy league" rich is for them to reduce the quantity of PHD students at their schools. This will allow them to invest more per-graduate student and will free up faculty time to focus on the undergraduates.

Permit me to offer an example. Here is Washington University in St. Louis' Economics Department's Teaching Matrix for Fall 2010. Courses with a number < 500 are undergraduate courses while courses with a number > 500 are PHD classes. While the department offers many sections of undergraduate classes, the total count of different courses is roughly equal between the undergraduate courses (16) versus the PHD courses (13) and I'm not counting the graduate research seminars. Also note that non-tenure track faculty teach most of their intro and intermediate micro and macro classes but the bulk of the students take these classes. In my view, the tenured faculty (such as a Greg Mankiw or a Sali-i-Martin) should be teaching these classes. This is exactly my point. Resources have been misallocated and the undergraduates suffer. They don't have the same meaningful experience and they are not as loyal alumni as they might have been. The same issues arise at UCLA.

The modern university needs to give more undergraduates a research experience so that they can participate in active learning. We are asking undergraduates to pay a lot per year of education. We need to deliver "value added". I'm still trying to figure out how to employ more UCLA students on productive tasks that are a "win-win" for me and the student.

There is a major difference between modern research universities and publicly traded for profit companies. If the latter perform badly, their stock price will fall and they will be risk of a leveraged buyout by a T. Boone Pickens or a Carl Icahn. The anticipation of this credible threat creates good management incentives. We need a good contract theorist to study whether university managers have sufficient incentives when such a "stick" is not available and output is hard to measure and contract on.

Tenured faculty do have strong incentives to write good papers and to be good teachers. Your own reputation will suffer if you shirk on either of these tasks.

Saturday, September 11, 2010

How Dangerous is Natural Gas Reliance in Earthquake Zones?

Environmentalists have mixed feelings about natural gas. It is a fossil fuel but its greenhouse gas emissions are 50% lower than coal and this is why California's electric utilities are relatively "green". But, this horrible explosion in PGE's territory in the outskirts of San Francisco has everyone here wondering whether this is a fluke or a sign of something bigger?

My concern relates to earthquake caused depreciation of the natural gas lines. My family uses natural gas to heat our home and to cook. Do small earthquakes (that occur a lot) weaken the natural gas infrastructure network?

As discussed here , to avoid terrorism risk -- the utilities are not eager to share information with the public concerning whether our homes are close to major natural gas lines. This asymmetric information is not useful. In a well functioning housing market, people are alerted if they live in an earthquake zone or near toxic waste sites and the price of real estate adjusts to reflect compensation for this "bad news".

Now, here is my question. As small earthquakes rock California --- does this accelerate the depreciation of the natural gas infrastructure? For each piece of the natural gas pipe network, I would like to know;

1. When was it built?
2. When was it last inspected?
3. How do the gas providers choose what pieces to inspect?
4. When earthquakes take place, do the utilities invest more effort to determine whether the network is still secure?
5. From an engineering perspective, what "fail-safe" investments can the utility make to minimize the probability of a disaster? Do they have the right incentives to do so? Can they pass such costs on to customers? Does fear of ex-post liability in lawsuits provide sufficient incentive or is there a moral hazard effect because firms such as PGE have insurance?

If I'm right with my hunch that earthquake zones make reliance on natural gas more risky, then maybe this will nudge solar further and stimulate new interest in a second generation of "electric homes"?

Woodstock Revisited? AB 32 Economists Converge in Sacramento on October 4th

Now that I've retired from active research, it makes perfect sense for me to be in a museum. I'm looking forward to this AB 32 event . UC Berkeley's David Zilberman has arranged a great conference.

California's Climate Change Policy: The Economic and Environmental Impacts of AB 32

California Museum
1020 O Street
Sacramento, CA

When I was a younger man, I used to attend these "Monsters of Rock" concerts where a half dozen heavy metal bans would all play. Take a look at this conference agenda. This event should be called the "Monsters of Environmental Economics". Ignoring myself, I see (in random order); Goulder, Stavins, Victor, Wright, Montgomery, Knittel, Fowlie, Zimmerman, and Rauser. And these are just the researchers -- I know.

In other news, here is a cogent essay I wrote about climatopolis . Vox EU is the greatest. While some may argue that blogging crowds out research, I would argue the opposite. Anticipating that Richard Baldwin's Vox EU is well read, this creates good dynamic incentives for a research nerd to write a new good paper so that Vox EU will consider publishing your short version about your new paper.

Friday, September 10, 2010

Futurama Revisited

I am a graduate of Virgina Tech's Summer Sports Camp. I'm proud to see that their nerds are planning for our future. The sustainable home they have designed looks original.

I just had the opportunity to do a radio interview with Patt Morrison. I like her saturday LA Times interviews. In a couple of days, the podcast will be posted here .

Thursday, September 09, 2010

What Do Ozzy Osbourne and I Have in Common?

Different hair, different rates of depreciation, different permanent incomes. He has written books that have sold more copies than mine but I would guess that I read more than he has.

We have one thing in common. We both like the Andaz Hotel . I was there today to give a speech. When, I walked in -- I was quite impressed to see this set of Ozzy photos. I met the manager of the hotel and he told me that Slash was there the night before. I sensed that I was lowering the average "cool" of the place.



and there were more Ozzy photos.



Would New York City's fancy hotels near Central Park invest in this much Ozzy? This is why LA is LA.

Wednesday, September 08, 2010

Should the U.S Fear the Rise of China's Renewable Energy Sector?

Today, the New York Times has published a long piece on the microeconomics of activist industrial policy in China. According to the NY Times, using subsidized loans and free land provided by government, chinese firms are "taking over" this exciting new growing industry.

"Western clean energy companies complain of much higher financing costs — when they can raise money at all. Banks have been cautious about the sector, which leans heavily on venture capitalists and private equity firms that demand implicit interest rates of up to 9 percent right now in the United States, said Thomas Maslin, a senior solar analyst at IHS Emerging Energy Research.

Evergreen Solar, the Massachusetts company, struggled for three years to raise money in the States, but had no trouble doing so in China. Chinese state banks were happy to lend most of the money for the factory on very attractive terms, like a five-year loan with no payments of interest or principal until the end of the loan, said Michael El-Hillow, the company’s chief financial officer."

The NY Times hints that China's activist government's actions are "unfair" WTO violating that hurts the well being of the United States. Is this true? Are we a nation of producers or consumers?

China's actions will benefit U.S consumers who will import low priced , higher quality products due to China's activist policies.

These Chinese investments will help households all over the world to adapt to climate change (i.e access to air conditioning) without exacerbating global GHG levels. Why? Their "big push" will make renewable power generation more reliable, and cheaper and better able to compete with power generated by fossil fuel. The Sierra Club should thank China for this.


Could U.S producers gain? Energy intensive businesses would have access to improved "green" energy source. That's not a bad thing.

The NY Times hints that we are in direct competition with the Chinese over this future golden goose (the green economy). I don't know if this is correct. There are firms in the United States competing against Chinese firms but I don't believe that the geography of where green jobs production takes place is a national interest issue.

This newspaper wants domestic job creation. What creates a job? A firm hires a worker when its expected marginal revenue generated by the worker exceeds her wage.

China's activist industrial policies are portrayed as a "free lunch" but the land given away to these firms for free has alternative uses as does the capital lent to these firms at extremely low interest rates. Their government must be taxing something to balance its books.

Paul Krugman would be wise to revisit his 1980s work on whether industrial policy is "wise policy" in this new green case see this .

Signal Extraction and Climate Change

When we see "weird weather" such as heat waves in Moscow and NYC are these events freak outliers or the "new normal" under climate change. This sounds like a "signal extraction" problem. Andrew Revkin has a nice piece here . It fits neatly into my book Climatopolis ' main themes.

"With the global population cresting in the coming decades, our exposure to extreme events will only worsen. So whatever nations decide to do about greenhouse gas emissions, there is an urgent need to “climate proof” human endeavors. That means building roads in Pakistan and reservoirs in Malawi that can withstand flooding. And it means no longer encouraging construction in flood plains, as we have been doing in areas around St. Louis that were submerged in the great 1993 Mississippi deluge."

A major point in Climatopolis is to note that we know this, Revkin knows this, I know this, and entrepreneurs know this and thus the pursuit of narrow self interest will help us to adapt to this uncertain, ambiguous but anticipated threat.

Monday, September 06, 2010

California's AB32 Revisited

Before I talk about California's AB32, permit me to advertise my "Wayne's World" style TV appearance in Seattle. Watch it here . Climatopolis is "officially" published tomorrow. I'm excited about that.

Returning to California's unilateral effort to reduce its greenhouse gas emissions, I'm quoted here saying that this legislation will cost California manufacturing jobs. Was that 2008 statement correct? At that time, I worried that AB32 would raise California electricity prices (through discouraging power generation using natural gas) and mandating an aggressive renewables use (more costly wind and solar) and that rising electricity prices would lead footloose energy intensive manufacturing to migrate to areas with lower electricity prices (i.e coal fired states such as Missouri).

For local carbon regulation to cause manufacturing job "leakage", two conditions must hold. First, the regulation must raise local electricity prices and second --- industry must be responsive to such price changes and to respond by migrating somewhere else.

1. It appears that this regulation will not raise local electricity prices because of changes in its implementation. Mary Nichols recently announced that the Air Resources Board won't implement a California electricity cap and trade market if California is the only state participating. Without the cap and trade component, it will be harder for California to reach the sharp GHG goals embedded in AB32 but this recent decision will lower the short run impact of this regulation on the economy.

2. Even if electricity prices did rise due to AB32, I no longer believe that there would be a significant impact on California manufacturing? Why? New research findings that I now sketch! Don't forget how academic economics works. When there is a plausible conjecture floating around, academics collect data and study whether there is merit to the claim.

New Paper #1: Olivier Deschenes has recently released a nation wide study using state level data for over 35 years on employment by industry as a function of state electricity prices. He can't reject the hypothesis that there is a zero correlation between electricity prices and lost manufacturing jobs. This is good news for California.

New Paper #2: Erin Mansur and I will soon release a new working paper in which we disaggregate manufacturing into several subsectors. Only a subset of manufacturing industries are quite responsive to migrating away from areas with high electricity prices. These industries include; textile mills, wood products, petroleum, primary metals, and transportation equipment. There are over 15 other manufacturing industries for which we find a small effect of electricity prices on determining where manufacturing jobs go.

These two studies are brand new and my new "bottom line" is that incumbent California manufacturing is unlikely to be hurt by AB32. The key unknown is how many new firms will be born because of AB32 and will they locate in California or locate in low wage, low union places in other nations and export to California?

Sunday, September 05, 2010

Synergies Between Purchasing Solar Homes and Purchasing an Electric Vehicle

I will be in Berkeley for only one more day so I'm sitting in a Starbucks thinking about the synergies between buying a solar home and buying an electric vehicle. Let's do some arithmetic together --- concerning the simple economics of green product bundling and the joint purchase of solar panels and an electric vehicle.


In case #1, a solar home owner doesn't own an electric vehicle and she can't sell back "excess power" generation (production - household electricity consumption) back to the grid.

In Case #2, a solar home owner doesn't own an electric vehicle and she can sell back "excess power" generation (production - household electricity consumption) back to the grid at a constant price per kWh.

In Case #3, a solar home owner owns an electric vehicle and she can sell back "excess power" generation (production - household electricity consumption - electricity used by the electric vehicle) back to the grid at a constant price per kWh.


If our goal is to increase residential solar installation then; Case #3 > Case #2 > Case #1. Why?

Consider Case #1: households will only install solar panels if they are big Berkeley greens (the warm glow) or if they are major electricity consumers and located in an area (San Diego) that is sunny and where electricity prices are high.

Case #2: The payoff of selling back power back to the grid is low if the price per kWh is low.

Now consider Case #3: Suppose that an electric car travels 3 miles per kWh. A household who drives 45 miles per day will either need to generate 15 kWh using its solar panels or purchase this extra power per day. If this household owned a vehicle that achieved a MPG of 22.5 and if the price of gasoline is $3 per gallon, then this household would have spent $6 per day (roughly $2,000 a year on gas).

I recognize that a price of $.1 per kWh, it appers to be cheap to purchase this power from the utility for your PHEV rather than producing the power yourself.

So, those who install solar panels have an incentive to buy a PHEV vehicle. The incentives for PHEV owners to install solar panels appear to be lower unless the price of electricity is expected to sharply increase.


The ability to recharge your vehicle using your own self generation (the solar panels) allows you to insure yourself against gas price volatility. You know have the option of selling your power to the utility or reducing your gasoline bill. (So I am implicitly assuming that a household owns 2 vehicles and one is gasoline and one is a PHEV vehicle).

An interesting economics question is whether households who own PHEV vehicles AND if they could sell power to their adjacent neighbors for their PHEV vehicles would choose to supersize their solar systems to generate more power than their residential home needs. Would the California PUC support this?

Now, I have not discussed PHEV demand in multi-family buildings. I predict a type of Tiebout sorting will take place as "green", electric vehicle lovers will self select to live in buildings that advertise that they have installed recharger stations. For some details click
here .