Tuesday, November 30, 2010

Politically Incorrect Bosses and Women's Labor Market Opportunities in Urban China

If you are a young educated woman what are the opportunities in China's cities for advancing your career?   From basic labor economics, we know that you will go further if your employer invests more in your skills and development (firm specific human capital and general skills).   Potential employers compare the expected marginal product of hiring a new worker relative to the wage and training costs.

The Chinese bosses are not politically correct.   "The boss would ask several questions about my qualifications, then he’d say: ‘I see you just got married. When will you have a baby?’ It was always the last question. I’d say not for five years, at least, but they didn’t believe me,” Ms. Feng said."

Would U.S bosses like to ask this question?  Does such political incorrectness help to explain China's amazing growth as it leads to more efficient investment in workers?

"Many employers are choosing not to hire women in an economy where there is an oversupply of labor and women are perceived as bringing additional expense in the form of maternity leave and childbirth costs. The law stipulates that employers must help cover those costs, and feminists are seeking a system of state-supported childbirth insurance to lessen discrimination.  The result is that even highly qualified candidates like Ms. Feng can struggle to find a footing. Practical concerns about coping in a highly competitive world are feeding into a powerful identity crisis among China’s women."

Given the focus in China on maximizing economic growth, the economic theory of discrimination would predict that young women will have trouble finding jobs unless they are willing to work for a pay cut.

A solution to this problem would be for more women to become "bosses" and let them do the screening and arrange "flexible" work schedules to accommodate young women who want work/life balance.   The rise of women entrepreneurs in the United States helped to address this issue here.

Monday, November 29, 2010

New UCLA Research on Women Making Choices to Minimize the Probability of "Inbreeding"

Does this strike you to be distinctive research? It is pretty freaky!  UCLA is a special place with special minds working on PG-13 research questions.  I will stick to my research on climate change adaptation.  This work discussed below by Meg Sullivan is a little too much for me.

Contact with dads drops when women ovulate

Evidence of evolutionary protection against inbreeding in women?

Meg Sullivan, msullivan@support.ucla.edu
Through an innovative use of cell phone records, researchers at UCLA, the University of Miami and Cal State, Fullerton, have found that women appear to avoid contact with their fathers during ovulation. 

“Women call their dads less frequently on these high-fertility days and they hang up with them sooner if their dads initiate a call,” said Martie Haselton, a UCLA associate professor of communication in whose lab the research was conducted. 

Because they did not have access to the content of the calls, the researchers are not able to say for sure why ovulating women appear to avoid father-daughter talks. They say the behavior may be motivated by an unconscious motive to avoid male control at a time when the women are most fertile. But a more primal impulse may be at work: an evolutionary adaptation to avoid inbreeding.  

Whatever the case, the researchers know that the findings are consistent with past research on the behavior of other animals when they are at their most fertile.  

“Evolutionary biologists have found that females in other species avoid social interactions with male kin during periods of high fertility,” said the study’s lead author Debra Lieberman, a University of Miami assistant professor of psychology. “The behavior has long been explained as a means of avoiding inbreeding and the negative consequences associated with it. But until we conducted our study, nobody knew whether a similar pattern occurred in women.”  

The findings appear in the latest issue of “Psychological Science,” a prominent peer-reviewed scholarly journal.

The study builds on a mounting body of evidence of subtle and significant ways in which women’s behavior is unconsciously affected by the approach and achievement of ovulation — a physical change that in humans has no outward manifestation of its own. Research has found that women tend to dress more attractively, to alter the pitch of their voices ways that are perceived as more attractive by men, and to contemplate more frequently the possibility of straying from their mates during high as opposed to low fertility periods of their menstrual cycle. Research has also shown that women are more attracted during high-fertility periods to men whose physique and behavior are consistent with virility, especially if they’re not already mated to men with these characteristics.  

For the latest study, the researchers examined the cell phone records of 48 women between the ages of 18 and 22 — or near the height of a woman’s reproductive years. Over the course of one cell phone billing period, the researchers noted the date and duration of calls with two different people: the subjects’ fathers and their mothers. They then identified the span of days comprising each woman’s high and low fertility days within that billing period. 

Women were about half as likely to call their fathers during the high fertility days of their cycle as they were to call them during low fertility days. Women’s fertility had no impact, however, on the likelihood of their fathers calling them. Women also talked to their fathers for less time at high fertility, regardless of who initiated the call, talking only an average of 1.7 minutes per day at high fertility compared to 3.4 minutes per day at low fertility.     

The researchers concede that the high-fertile women might simply be avoiding their fathers because fathers might be keeping too close an eye on potential male suitors. But their data cast some doubt on this possibility. It is more likely, they conclude, that like females in other species, women have built-in psychological mechanisms that help protect against the risk of producing less healthy children, which tends to occur when close genetic relatives mate. 

“In humans, women are only fertile for a short window of time within their menstrual cycle,” Lieberman said. “Sexual decisions during this time are critical as they could lead to pregnancy and the long-term commitment of raising a child. For this reason, it makes sense that women would reduce their interactions with male genetic relatives, who are undesirable mates.” 

The reluctance to engage in conversations with fathers could not be attributed to an impulse to avoid all parental control during ovulation. In fact, the researchers found that women actually increased their phone calls to their mothers during this period of their cycle, and that this pattern was strongest for women who felt emotionally closer to their moms. At high fertility, women proved to be four times as likely to call their mothers as they were to phone their fathers, a difference that did not exist during the low fertility days. In addition, women spent an average of 4.7 minutes per day on the phone with their mothers during high fertility days, compared to 4.2 minutes per day during low-fertility.

One possible explanation is that women call their moms for relationship advice, said Elizabeth Pillsworth, who also contributed to the study. 

“They might be using mothers as sounding boards for possible mating decisions they’re contemplating at this time of their cycle,” said Pillsworth, an assistant professor of evolutionary anthropology at California State University, Fullerton. “Moms have a lot more experience than they do. Particularly for those women who are close to their mothers, we can imagine them saying, ‘Hey Mom, I just met this cute guy, what do you think?’” 

Either way, the findings show that women are unconsciously driven during their most fertile periods to behavior that increases the odds of reproducing as well as potentially doing so with a genetically appropriate mate, said Haselton. 

“We think of ourselves as being emancipated from the biological forces that drive animal behavior,” she said. “But this suggests that our every day decisions are often still tied to ancient factors that for millennia have affected survival and reproduction.”   

Sunday, November 28, 2010

Doom and Climate Change Gloom

In the new Chronicle of Higher Education,  Michael Ruse takes a look at a large number of new climate books including Climatopolis.

First he talks about everyone else's new books;

"Secular apocalyptic thinking continues; indeed, it thrives. The cold war may be over, but the world is not right. America is caught in a seemingly endless foreign conflict; we are in an economic downturn of a kind not seen since the 1930s; and above all hangs—or perhaps more accurately, chokes—the threat of global warming. This last topic has triggered a tsunami of books, almost all of which are linked by an apocalyptic theology of foreboding and warning. The Flooded Earth: Our Future in a World Without Ice Caps; The Climate Fix: What Scientists and Politicians Won't Tell You About Global Warming; The Rising Sea; The Coming Famine: The Global Food Crisis and What We Can Do to Avoid It; Coming Climate Crisis? Consider the Past, Beware the Big Fix; Storms of My Grandchildren: The Truth About the Coming Climate Catastrophe and Our Last Chance to Save Humanity."

"The proposed solutions aren't cause for eager anticipation either. Even if all does not collapse, get ready for some strenuously healthy living. There is a lot of bicycling in our future. And homegrown vegetables. Not much meat, I'm afraid. And you should forget about the restaurant experience; it's far too energy consuming. We will work less so as to have more time to fix food at home. How about raw spinach covered in cottage cheese and topped with applesauce? With that kind of diet, I'm not surprised about the thousands of gallons of untreated human waste. The pong inside our yurts will be overwhelming."

Then he talks about me;

"Amillennialists don't get much representation in the climate-change debate, although one might put Climatopolis: How Our Cities Will Thrive in the Hotter Future, by Matthew E. Kahn, into this category. While everyone else is moaning about what's going wrong, Kahn is the St. Augustine of this business. Things have gone wrong; things will go wrong. Calm down. Or maybe he's the Alfred E. Neuman of climate change: "What? Me worry?" Never fear! We will adapt! Miami may go out with the tide, but Detroit will be a lot more pleasant in the winter. I leave to the judgment of others the prospect of a future America where half the population lives in North Dakota and the other half lives on houseboats."

If Mr. Ruse was fair --- he would have devoted 2 sentences to explain why I'm optimistic.  I do like his pithy quote but he could have discussed the power of innovation and self interest.   Like Mr. Ruse, I am well aware of the large number of books out there forecasting our end.  I do not believe this and my book presents a coherent and funny analysis of the microeconomics of how a large number of us will "escape".   We will rebuild our cities but our future cities may not be in Miami.

Saturday, November 27, 2010

Derek Jeter and Nominal Wage Rigidity

  • Derek Jeter is in the midst of some tough negotiations.  Will he accept a real pay cut?  The market says that he better but his sense of fairness and his past compensation are nudging him to be a pinch unrealistic here.     Now, $19 million a year averages out to $117,000 per game. Not a bad wage or $29,000 or so per at bat.   At $29,000 per lecture, how many lectures would my friends in academia be willing to give a year?  I'd supply 10 and call it a year.  

"If they did agree on those numbers, it would actually represent a small, but symbolic, annual increase over Jeter’s last contract, which, at the behest of George Steinbrenner, was designed to average a sliver below $19 million a year.

A deal that paid $19 million a year would also allow Jeter to rationalize that he was not taking a pay cut, a point that was emphasized on Friday by one National League executive who has been watching the Jeter situation with interest. That executive said that established stars like Jeter typically found it difficult to take any kind of reduction of pay, even when they have already made enormous amounts of money.

Still, it is not clear that the Yankees will ultimately agree to a compromise that pays Jeter $19 million a year, regardless of the negative fallout a protracted standoff might produce."

The Yankees should offer their Captain deferred compensation. Offer him $1 billion dollars in the year 2400 and let's get back to more important things. What is the net present discounted value of 1 billion dollars 390 years from now?

Robert B. Daugherty's Obituary Highlights How Human Capital Substitutes for Natural Capital: The Case of Water in the Plains

Robert B. Daugherty's life offers a classic example of an economist's optimism that ideas can substitute for natural capital.   "The breakthrough for Mr. Daugherty came in 1953, when he bought the rights to manufacture a new irrigation system, the brainchild of a Nebraska farmer, Frank Zybach. The new system came to be called center-pivot irrigation. It involved a long pipe on wheels that rotated around a point at the center of a field, spraying water as it went. "

"Robert B. Daugherty, a Nebraska businessman who helped transform the rural landscape into a patchwork of circular fields by popularizing a means of irrigation that used a pipe on wheels pivoting around a central point, died on Wednesday at his home in Omaha. He was 88."

"Today, about 42 percent of irrigated farmland in the United States uses center pivot machinery or similar mechanized systems, said Terry J. McClain, chief financial officer of Valmont. In some Great Plains states, the system is used to water three-quarters or more of the farmland that uses irrigation.

Its prevalence can perhaps be best recognized from the air, where travelers on cross-country flights can see the landscape converted into a polka dot pattern of irrigated circles inside square fields.
“On those areas where you need to irrigate to raise crops, it’s just dominant,” said Derrel L. Martin, a professor of irrigation and water resources engineering at the University of Nebraska, Lincoln.
Before the center pivot, farmers would typically irrigate their fields by allowing water to run downhill in furrows.

Dr. Martin said the center-pivot system allowed for a much more efficient use of water. It also requires less labor and can be used on uneven or hilly terrain where traditional methods of irrigation may not be an option. It is now used around the world and is credited with expanding the acreage of irrigated land and increasing farm productivity."

When I fly across country, I had wondered about all of these circles I see on the ground and now I get it.  I thought it was all about attracting UFOs to land there rather than another spot.

While Mr. Daugherty did not invent the key idea --- he did foresee how it could be widely adopted and he must have made money in its adoption.  

Water is a scarce resource and climate change is likely to make it more scarce in certain geographical areas --- this case study highlights how innovation and diffusion takes place to help us to make the best of the circumstance we face.  Human capital played a key role here and investment in education and basic R&D will only help us to be ready.  In this sense, capitalism helps us to adapt to climate change because it helps us to have the $ to finance basic research and great centers of research and discovery.  What poor nations have great universities?

Friday, November 26, 2010

My Trip to Claremont McKenna College

I will be speaking about Climatopolis at the Claremont McKenna College Marian Miner Cook Athenaeum on Thursday December 2nd.  As a warm up, I gave a lecture to my UCLA undergrads about the economics of climate change adaptation.  They pushed me on the broad issue of international migration.  Especially in the developing world, it will help us to adapt to climate change if people can move from a Bangladesh to Southern China.  Ted Miguel and co-authors have argued that in Africa that climate change will increase deaths from Civil War.  I presume that the causal story here will be that heat waves and natural disasters will displace people from where they currently live and in the name of adaptation they will encroach on other people's land and this will trigger violence and a cage match.

In my "win-win" vision of migration, there will be "environmental refugees" eager to move away from their flooded current home BUT there will be destinations such as southern China who welcome the immigrants.  Why? Not due to charity but due to gains to trade.  Educated, high income people need the time and help of low skilled people to supply basic services such as cooking and cleaning and home maintenance.  There are gains to trade and generations of immigrants have started their rise "up the ladder" based on these first steps. As India and China develop, there may be more opportunities for the people of Bangladesh than the pessimists think there will be.  This is obviously an empirical prediction and as time passes it will be proved to be true or false.

Superstar Cities vs. "Mellow" Cities: Which is Right for You?

The Wall Street Journal has provided Joel Kotkin with the space to sketch the tradeoffs of living in megacities (such as NYC or Tel-Aviv) vs. living in smaller cities such as Raleigh.  His thesis boils down to "Smaller, more nimble urban regions promise a better life than the congested megalopolis."  Is this correct? Will Don Trump and Derek Jeter read his column and move to Nashville?   These immediate counter-examples highlight that we need to be a pinch nuanced here.

To his credit, Kotkin later reveals that he is talking about the middle class and the urban poor.  If this is really his focus, then why did the Wall Street Journal publish it?  (that was a joke).  Consider this quote from his piece;

"Consider Mumbai, with a population just under 20 million. Over the past 40 years, the proportion of its citizens living in slums has grown from one in six to more than half. Mumbai's brutal traffic stems from a population density of more than 64,000 per square mile, fourth-highest of any city in the world, according to the website Demographia."

Now, to a non-economist the first sentence appears to suggest that quality of life is growing worse in Mumbai for the urban squatter poor.  The slums are growing more dense.  But, if we take revealed preference seriously then the people who are moving into such slums must  prefer it to the even poorer rural areas.  So, the incumbent urban poor are made worse of as the urban slums grow (rents rise, density increases, urban wages fall) but the new migrants must prefer their new destination or they would not have made the costly move to the city.  So, overall --- does Mumbai offer the urban poor a good "quality of life" or not?

Returning to the United States, Kotkin makes a very reasonable point about the fate of the middle class in the U.S Superstar cities;

"The largest American cities—notably New York, Los Angeles and Chicago—also show the most rapid decline in middle-class jobs and neighborhoods, with a growing bifurcation between the affluent and poor. In these megacities, high property prices tend to drive out employers and middle-income residents. By contrast, efficient cities are where most middle- and working-class Americans, and their counterparts around the world, will find the best places to achieve their aspirations."

Now, he is ignoring the fact that NYC, LA and Chicago all have suburbs where the price of land heads to zero. You can live in a very large, very cheap home in LA as you go east towards Riverside.  As employment has suburbanized, commute times do not go to infinity as people suburbanize. More and more people have suburban home to suburban jobs commutes.

If few middle class people can afford to live in Manhattan, or near Santa Monica in LA or in Lincoln Park in Chicago; what problem arises? I wish I had a fancy Mercedes but I can't afford one.  I'm not going to lead a revolution because I know that Don Trump has 22 of them.

He is correct that for some middle class people that there may be better cities for them to live in that NYC, LA or Chicago but so what?  It is up to them to make this choice.  The key is that they have choice.  In nations around the world, we need different cities to pursue their own competitive edge in terms of amenities, job opportunities and culture.   Today, Detroit has a growing Arab-American population.  As this group grows in terms of education, numbers and income, Detroit will become a stronger city because of this. Young Arab immigrants to the United States know that if they move to Detroit that they will have access to religious events and sympathetic social networks to start their life in our nation.

This type of specialization across cities is fantastic. Individuals differ with respect to their conception of what is "the good life" and the menu of cities that the U.S offers (coastal and big and superstar, inland and medium sized) offers different choices for different people.  Just like when you go to a restaurant with a diverse menu, in the U.S you face a menu with 300 different choices. Neither Kotkin or I know what's right for you, but you do!

Cities differ on at least the following 6 dimensions.

A. labor market opportunities (industries that the city specializes in)
B. geographical amenities (close to a coast, climate amenities such as LA)
C. marriage market opportunities (ethnic types in cities and their counts)
D. learning and culture opportunities (presence of leading universities such as a Harvard)
E. consumer cities  (large counts of people similar to you so that restaurants and shops you like are open there)
F.  Endogenous attributes such as local pollution and crime ----  (read my Green Cities book!)

Different households will place different weights on these 6 factors.  Real estate prices will differ across cities as a function of these 6 atributes

He never defines what is an "efficient city". I presume that he means low commute times.  But, does this mean that day traders who work in their underwear in their basement are the most efficient people?  He also glosses over the fate of the urban poor.  Big cities such as NYC have been generous to their urban poor and to balance the budget taxes do need to rise.  In the "efficient cities" that Kotkin celebrates such as

"The winners included business-friendly Texas cities and other Southern locales like Raleigh-Durham, now the nation's fastest-growing metro area with over one million people. You can add rising heartland cities like Columbus, Indianapolis, Des Moines, Omaha, Sioux Falls, Oklahoma City and Fargo."

How do they treat their poor?  There is a welfare magnets effect here. Cities such as San Francisco end up with more poor people and more taxes because they are "nice" to the poor.  Non-liberal cities are rewarded for being not nice in terms of redistribution.  While Kotkin would call that "efficient", there are other words for that such as "cheap" and "nasty".  Economists know that redistribution should take place at the Federal level (to minimize the local magnet effect) but the Republican Congress is unlikely to enact this.

So, my question for the WSJ is; "why did you accept Mr. Kotkin's piece?"  Can LA, Chicago and NYC really learn from the Omaha experience?    Should your company move to Omaha?  Yes, if you land intensive and don't need to learn from other nearby firms.  But, there are many companies seeking to network and to learn and to have access to superstar talent for whom NYC continues to be the right place to be.

In this age of firm fragmentation, firms can have it both ways but splitting their firm such that the deal makers are in the center city of the Superstar cities and the "back office" is somewhere else where it is cheaper.  The firm has the right incentives to consider the tradeoffs that will maximize its profits.

Why have I written this long blog piece?  Because, Dr. Kotkin has taken the slot of an urban economist here. The WSJ should believe in competition for scarce resources and allocate it to those who can make the best of it.

Thursday, November 25, 2010

Coastal Climate Change Adaptation: The Case of Norfolk Virginia

Norfolk, Virginia  is facing more flooding risk these days.  Whether climate change is the cause of this problem remains an open question. But, FEMA is spending over $20,000 per home to raise them to protect them from the next flood.

"We are the front lines of climate change,” said Jim Schultz, a science and technology writer who lives on Richmond Crescent near Ms. Peck. “No one who has a house here is a skeptic.”

Politics aside, the city of Norfolk is tackling the sea-rise problem head on. In August, the Public Works Department briefed the City Council on the seriousness of the situation, and Mayor Paul D. Fraim has acknowledged that if the sea continues rising, the city might actually have to create “retreat” zones.
Kristen Lentz, the acting director of public works, prefers to think of these contingency plans as new zoning opportunities.

“If we plan land use in a way that understands certain areas are prone to flooding,” Ms. Lentz said, “we can put parks in those areas. It would make the areas adjacent to the coast available to more people. It could be a win-win for the environment and community at large and makes smart use of our coastline.”
Ms. Lentz believes that if Norfolk can manage the flooding well, it will have a first-mover advantage and be able to market its expertise to other communities as they face similar problems."

This is a smart article and it highlights the adaptive responses that I claimed in my new book Climatopolis that coastal areas would engage in when faced with a real threat.

Now, for the land owners who own the land that people "retreat from" they would lose out.  What does society owe them?  If they have flood insurance , then these contracts should be honored but I'm not convinced that general tax payer $ should be used by FEMA to defend private homes. If people want to make these investments for themselves then they are welcome to do so.  If Federal tax payer $ will be used to defend the coasts, then this actually will have a moral hazard effect (and a cross-subsidy effect) of encouraging more people to live in dangerous zones and when the inevitable shocks do occur -- there will be more loss of life. Note that government intervention , not capitalism, causes this problem.

More on the Microeconomics of Climate Change Adaptation

I wrote Climatopolis because I wanted to nudge forward the discussion of how diverse urban households and firms will adapt to climate change.   Unfortunately for me, there are so many other pressing issues right now (war, Bernanke's QE2, airport nude body scans, Michael Vick, the Royal Wedding, the Miami Heat's losing streak, the fake Taliban leader, Bristol Palin's dance moves, etc) that the world has refused to engage with my book's core ideas about the microeconomics of adaptation.  On top of this, I face the political challenge that my book has received weird reviews from non-economists who didn't think through the book's core logic and it has also been attacked by angry liberal activists such as Joe Romm who have taken out their frustration over our collective inability to reduce our greenhouse gas emissions on those who dare to discuss what our future path will be in the face of climate change.  In the case of Dr. Romm, he admits that he hasn't read the book but that did not slow down his onslaught.  As I have said many times, mitigation and adaptation go "hand in hand" but we are not going to mitigate. I wish we will but we won't.  Taking this reality as given, what happens next?  Doom or adaptation?

While my Amazon ranking has made me sorry for myself, a number of prominent economists have sent me nice notes about my book. Today, I see The Economist Magazine's report on climate change adaptation.  You will see that this article says some smart stuff about my book.  I like that!

The lead story in This week's Economist sounds a lot like the main themes of my book.  I like that!

To quote the first article:

"The fight to limit global warming to easily tolerated levels is thus over. Analysts who have long worked on adaptation to climate change—finding ways to live with scarcer water, higher peak temperatures, higher sea levels and weather patterns at odds with those under which today’s settled patterns of farming developed—are starting to see their day in the uncomfortably hot sun. That such measures cannot protect everyone from all harm that climate change may bring does not mean that they should be ignored. On the contrary, they are sorely needed.

Public harms

Many of these adaptations are the sorts of thing—moving house, improving water supply, sowing different seeds—that people will do for themselves, given a chance. This is one reason why adaptation has not been the subject of public debate in the same way as reductions in greenhouse-gas emissions from industry and deforestation have. But even if a lot of adaptation will end up being done privately, it is also a suitable issue for public policy.

For a start, some forms of adaptation—flood barriers, for instance—are clearly public goods, best supplied through collective action. Adaptation will require redistribution, too. Some people and communities are too poor to adapt on their own; and if emissions caused by the consumption of the rich imposes adaptation costs on the poor, justice demands recompense.
Furthermore, policymakers’ neat division of the topic of climate change into mitigation, impact and adaptation is too simplistic. Some means of adaptation can also act as mitigation; a farming technique which helps soil store moisture better may well help it store carbon too."

My book argues that capitalism will help us to adapt to climate change.  The "Climate Hawks" need to engage on the adaptation issue.  I'm waiting and willing to work with you.

Wednesday, November 24, 2010

Do Liberal Cities Block New Housing Development?

In my new Journal of Urban Economics paper , I use data for California's cities and argue that the answer is "yes".   Within the San Francisco metro area, have you noticed the boom in development in Emeryville?  An unintended consequence of next door Berkeley's and Oakland's restrictive land use policies is to nudge growth to more builder friendly Emeryville.

For those who follow my work, I hope you see the common theme of the role of political ideology in affecting economic outcomes.

This theme appears;

paper #1   ,  paper #2   and paper #3

Is blocking new development good or bad for the environment?  The answer hinges on the "deflection effect". If an urban city such as Oakland blocks growth, where does the growth go? If it leapfrogs to the exurban fringe then overall sustainability can fall due to the carbon footprint growth at the fringe.  If the growth deflects to a Las Vegas if a City of San Francisco blocks growth then the extent of the sustainability impact depends on what is the relative footprint of Las Vegas relative to San Francisco. For the answer to that question, read this.

Household Consumption Patterns in China and the Life-Cycle Profile Revisited

David Leonhardt has increased his carbon footprint to study Consumption in China.  If David had asked me to co-write this long article with him, I would have suggested that we focus on a couple of families and look at their actual consumption patterns. I know some very successful academic economists in Beijing.  By U.S standards, they live a middle class life as they live in a small apartment that is modestly furnished in a high rise tower that shares a little bit of green space with several other towers.  They own a small car that they drive infrequently.

These successful academics save their salaries for several reasons.  They are unsure of what retirement pension they will receive.  They are unsure of what health benefits they will have access to.  Anticipating a long life, and that they may have to care for their parents, they are saving for their future. If the Chinese state used its capital account surplus to offer a FDR New Deal of Social Security and LBJ Medicare and Medicaid then I bet you would see Chinese households save less and consume more goodies and plasma TVs today.  

In David L's piece, he talks about high home prices in the superstar cities and this certainly encourages savings today but this raises the question of why "2nd tier" cities are not booming? In the United States, cities such as Phoenix and Las Vegas exploded in growth because of their cheap housing! People cashed out their small San Francisco home and bought something real nice in these growing, cheap land cities.  Why isn't the same thing happening in China? Is government policy acting to "force" urbanites to live in the eastern coastal cities? Why aren't free market forces encouraging decentralization and the push of jobs and people to cheaper land cities?

If the equivalent of a Las Vegas could grow in China, then households would have more $ after housing to spend on consumption stuff and the U.S might have a new export market?

Can Philosophers Earn Big Money Consulting?

Major court cases such the Exxon Valdez Oil Spill liability case and the Microsoft Antitrust case have increased the earnings of some prominent economists.   Such high stakes cases push the lawyers to hire the very best talent to help them win.  I have hoped that some macro economist would test whether academic economics research (especially in industrial organization) is counter cyclical.  During busts, if there are fewer block buster cases taking place (and this may be false) --- do the superstars re-focus on research rather than putting on a suit and heading to the courthouse?

While economists have always been consulting, other academics are getting into the game.  This article highlights the rise of philosophers entering the market and offering their wisdom as "field philosophers".  I believe that a synonym for this term is "consultant".

"Rather than seeking to identify general philosophic principles, they (the Philosophers) begin with the problems of non-philosophers, drawing out specific, underappreciated, philosophic dimensions of societal problems. Growing numbers of philosophers are interested in this kind of philosophic practice. Some of this field work in philosophy has been going on for years, for instance within the ethics boards of hospitals. But today this approach is increasingly visible across a number of fields like environmental science and nanotechnology. Paul Thompson of Michigan State has worked with and challenged the food industry on the application of recombinant DNA techniques to agricultural crops and food animals."

So, my question for Prof. Thompson is why have these food industries hired you?  Are they seeking legal cover for actions they already decided upon?  Or does hiring you, stretch them out intellectually and act as a commitment device to listen to perspectives and ideas that they would be uncomfortable thinking about? Do you help the firm to "think outside the box"?  

Is this political correctness or is this "value added" in terms of substantive strategy analysis and understanding the full consequences of a choice a company might make? 


Tuesday, November 23, 2010

NBA Basketball Players Anticipate the Coming Strike and Increase their Savings Today

NBA Basketball players are giving up their bling consumption in the name of increasing their savings in anticipation of the coming basketball strike.  Many of the league's players have taken the new financial education they have been offered seriously and are changing their behavior in accord with the life cycle model of consumption.   Past cohorts of NBA players have earned millions and ended up in bankruptcy (see Antonne Walker and Charles Barkeley and Kareem).  It appears that this new cohort is managing its $ more wisely.  Some young economist should write a paper explaining why.  Is the new cohort more "savvy? Or has financial education worked?   Such a study would be building on Bernheim's past work on the effects of financial education on savings.  The interesting wrinkle here is the anticipated common shock (the upcoming strike).

In other economics news,  I have released another NBER paper --- here it is  --- Kahn and Mansur (2010)

"Manufacturing industries differ with respect to their energy intensity, labor-to-capital ratio and their pollution intensity. Across the United States, there is significant variation in electricity prices and labor and environmental regulation. This paper uses a regression discontinuity approach to examine whether the basic logic of comparative advantage can explain the geographical clustering of U.S. manufacturing. Using a unified empirical framework, we document that energy-intensive industries concentrate in low electricity price counties, labor-intensive industries avoid pro-union counties, and pollution-intensive industries locate in counties featuring relatively lax Clean Air Act regulation. We use our estimates to predict the likely jobs impacts of regional carbon mitigation efforts."

In my humble opinion, this paper is quite good.  Erin gets credit for 60% of it but I had some value added.

New UCLA Research Investigates How Climate Change Will Affect Polar Bear Quality of Life

In competitive capitalism, prices mediate our interactions through markets.  If due to climate change, I want to drink more ice tea on hot days --- then I will have to buy that from some vendor.  If sellers can easily scale up their production of this drink, then prices may not rise as demand increases.  In the case of hungry polar bears, as climate change melts their current ice they sit on --- they will have to wander south and search for food already inhabited by other creatures such as grizzly bears. Will the grizzlies welcome their polar bear cousins? This article below says no and predicts that blood will spill as the bears wrestle.    While bears can migrate in response to climate change , they cannot innovate or trade through markets.  Part of my goal in Climatopolis book is to contrast the extra adaptation strategies that we can access relative to other creatures. It would interest me if evolutionary theorists predict that the polar bear will become extinct as it loses its fight with the tough grizzlies or whether the polar bear will evolve and learn to co-exist with its 2nd cousins?

UCLA biologists report more bad news for polar bears
Climate change will force them south, where they are unsuited for the diet

Stuart Wolpert, swolpert@support.ucla.edu
Will polar bears survive in a warmer world? UCLA life scientists present new evidence that their numbers are likely to dwindle. 

As polar bears lose habitat due to global warming, these biologists say, they will be forced southward in search of alternative sources of food, where they will increasingly come into competition with grizzly bears. 

To test how this competition might unfold, the UCLA biologists constructed three-dimensional computer models of the skulls of polar bears and grizzly bears — a subspecies of brown bears — and simulated the process of biting. The models enabled them to compare the two species in terms of how hard they can bite and how strong their skulls are. 

"What we found was striking," said Graham Slater, a National Science Foundation–funded UCLA postdoctoral scholar in ecology and evolutionary biology and lead author of the research. "The polar bear and brown bear can bite equally hard, but the polar bear's skull is a much weaker structure." 

The implication is that polar bears are likely to lose out in competition for food to grizzlies as warmer temperatures bring them into the same environments, because grizzlies' stronger skulls are better suited to a plant-rich diet, said Slater and Blaire Van Valkenburgh, UCLA professor of ecology and evolutionary biology and senior author of the research. 

"The result for polar bears may be lower weight, smaller and fewer litters, less reproductive success, fewer that would survive to adulthood, and dwindling populations," Van Valkenburgh said. "Then you can get into an extinction vortex, where a small population becomes even smaller in a downward spiral to extinction. 

"To people who say polar bears can just change their diet, we are saying they will change their diet — they will have to — but it probably will not be sufficient for them, especially if they are co-existing with grizzly bears. Their skull is relatively weak and not suited to adapting its diet. We did not expect to find what we found." 

"This is one additional piece of evidence that things look pretty bleak for the polar bear if current trends continue," Slater said. 

The research, federally funded by the National Science Foundation, was published this month in the online journal PLoS ONE, a publication of the Public Library of Science. 

Polar bears are a "marvelous example of rapid adaptation to an extreme environment," Slater said. "The fact that we can lose them equally as rapidly as a result of human-mediated climate change is rather striking. Polar bears are very well suited to do what they do, but they are highly specialized and not well suited to doing much else." 

It could take quite some time for polar bears to go extinct, Van Valkenburgh said, but they are likely to become much more rare than today. 

Polar bears are losing habitat as a result of global warming and the associated loss of arctic sea ice, which they use to hunt for seals, Van Valkenburgh and Slater said. But could they survive on an alternative food source? 

"Our results suggest that this is not too likely," Slater said. "The polar bear's skull is a relatively weak structure that is not suited to diets consisting of a lot of plant material like that of the brown bear. As climate change continues, polar bears will be forced to move south in search of resources, while brown bears move north as their climate becomes more mild. When these two species meet, as they have already begun to, it seems that brown bears will easily out-compete polar bears. Our findings should serve as a warning that polar bears may not be flexible enough to survive if current trends continue. 

"Chewing a lot of vegetables takes quite a lot of force to grind up," Slater said. "Grizzly bears are well suited to eating these kinds of food, but the polar bear is not well suited for it. The grizzly has a much more efficient skull for eating these kinds of foods." 

In Canada, grizzly bears are moving north and are already in polar bear territory, Van Valkenburgh and Slater said. 

The life scientists — whose co-authors include UCLA undergraduates Leeann Louis and Paul Yang and graduate student Borja Figueirido from Spain's Universidad de Malaga, Campus Universitario de Teatinos — studied two adult male skulls from museums, one of a polar bear from Canada, the other of a grizzly from Alaska. They built 3-D computer models of the skulls and then analyzed their biomechanics. 

"We can apply muscle forces to the skull to simulate biting, and we can measure how hard the animal could bite. We can measure stress and strain in the skull as well," Slater said. "We found that while the stresses in the grizzly bear skull are relatively low, the same bites in the polar bear produce much more stress. Combined with other evidence from Blaire's laboratory, this tells us that the smaller teeth of polar bears are less suited to diets that consist of plants, grass, vegetation and berries." 

"Polar bears would not be able to break up the food as well in their mouths and would not digest it as well," Van Valkenburgh said. 

In the timeline of evolution, polar bears evolved from the brown bear very recently, and the two are very closely related, Van Valkenburgh and Slater said. Genetic studies indicate that the split between polar bears and brown bears occurred only 500,000 to 800,000 years ago — the most recent split between any of the eight bear species. 

Despite the recentness of the split between these two species, their skulls and teeth are extremely different, probably as a result of where they live (arctic versus temperate regions) and the differences in their diets. Grizzly bears have very large molar teeth, while polar bears have teeth that are much smaller. Polar bears eat seal blubber, which is soft and does not require much chewing, while brown bears consume many plants. 

The biologists investigated the rate at which skull shape has evolved in the bear family. They found that the rate of evolution in the branch of the bear family tree leading to the polar bear was twice as fast as the rates in other branches of the tree; it appears that skull shape evolved extremely rapidly in polar bears. 

Polar bears probably evolved very rapidly in response to glacial climates during the ice ages, Slater said. 

"You don't see many bears that look like polar bears, and the difference in skull shape evolved very rapidly," Slater said.  

Monday, November 22, 2010

Revenge of the Nerds?

With the Republican takeover of the House of Representatives, Nancy Pelosi and my beloved state is going to lose out on some federal cash.  Remember the "shovel ready" California High Speed Rail that would have allowed me to see my wonderful friends in Berkeley without being groped by Homeland Security at the airport?  According to the source, the $ is about to vanish.  Now, I realized that this train would be completed by the year 2040 when I will be a Clark Medal eligible 74 year old but I still held out hope that I could go for a fast ride on a French train paid for by folks I don't know in the midwest.

Do you remember the movie Revenge of the Nerds?   While few would mistake Republicans for "nerds", my state is going to suffer over the next couple of years. Somehow, I don't believe that a coalition of Jerry Brown and Nancy Pelosi, B. Boxer and D. Feinstein will succeed in having serious pork $ sent to California.  Anticipating this point, how will this affect Jerry Brown's budgets?

My guess is that the Republican Congress will enjoy making California handle its "share" of the burden for reducing the deficit.  San Francisco did not win the last election.

Sunday, November 21, 2010

Cost Effective Terrorists

The Terrorists appear to have a strong grasp of the basic economics concept of maximizing marginal product per dollar spent on inputs.  Our problem is that their "product" lowers our overall quality of life.

"In a detailed account of its failed parcel bomb plot last month, Al Qaeda’s branch in Yemen said late Saturday that the operation cost only $4,200 to mount, was intended to disrupt global air cargo systems and reflected a new strategy of low-cost attacks designed to inflict broad economic damage."

“Two Nokia mobiles, $150 each, two HP printers, $300 each, plus shipping, transportation and other miscellaneous expenses add up to a total bill of $4,200. That is all what Operation Hemorrhage cost us,” the magazine said.

It mocked the notion that the plot was a failure, saying it was the work of “less than six brothers” over three months. “This supposedly ‘foiled plot,’ ” the group wrote, “will without a doubt cost America and other Western countries billions of dollars in new security measures. That is what we call leverage.”

So, if the terrorists can pay $4,200 and 18 months of work and cause billions of dollars of pain and trouble, that's a pretty high rate of return.

The Terrorists are pretty honest about their strategy;

"The magazine said that it had adopted a “strategy of a thousand cuts.”

“To bring down America we do not need to strike big,” it said. “In such an environment of security phobia that is sweeping America, it is more feasible to stage smaller attacks that involve less players and less time to launch and thus we may circumvent the security barriers America worked so hard to erect.”

SO HOW DO WE PLAY DEFENSE?   We need to end Facebook and the Internet so that we aren't so interconnected -- fear cannot spread so easily if we are not exposed to the same images and chattering away about the same threats. We need to decentralize back to the old days of "island economies" where we knew what was going on on our block but we didn't know anything about Paris Hilton or other Internet Crazes.

Decentralize power and information and stop herding and the terrorists won't be able to hurt us.  We have centralized power and focal points and this gives them easy access to our imagination.

Saturday, November 20, 2010

The Economics of "Green" Turkey

In the midst of an ongoing recession, will the people of California cut back on their Thanksgiving expenditure and solely eat beans and rice?  No! Many are eating expensive Organic Turkey.

"Despite economic hardships and shrinking overall turkey production in the U.S., the allure of a fresh, organic turkey has grown in recent years. Farmers and industry experts attribute the increasing demand, particularly in California, to the health-conscious culture, the popularity of the anti-agribusiness sentiment found in the documentary "Food Inc." and the movement for locally grown food. Or maybe it's just simple nostalgia for a classic holiday feast." (LA Times)

How much of a price premium must one pay for the organic turkey?

"The price of a frozen turkey at an Albertson's or Ralphs market usually tops out around $1.99 a pound (and some chains offer holiday turkey discounts to get customers in the store and spending on other things.) The price per pound of a fresh turkey can hit $5 or more but generally ranges from $1.99 to $2.69 — a noticeable price difference over frozen birds, especially when multiplied by 15 or 20 pounds."

What merits this price premium?

"Pitman said that organic turkeys must be raised on certified organic ranches and given organic feed, free of genetically modified organisms and pesticides. That also means no hormone injections, something her farm prides itself on. "You get just turkey, just chicken, just duck. We have nothing added, no injections, nothing," Pitman said."

This is an interesting case of product differentiation --- I don't think I can tell what are the consequences for my family if we eat the "steroid turkey" vs. this expensive hippie turkey.  The interesting economics question is;  "during a recession, are people more price sensitive and thus less willing to pay the price premium for the organic turkey?"  During a recession, what consumer products do we cut back on?  Vacations?  New cars? new furniture? Or within food categories, do we eat out less and eat cheaper foods?

There are many quality margins to move on that will allow your household to reduce its total expenditures --- it would interest me whether our consumption data is good enough to detect these substitution patterns over the business cycle for different types of households.

Now, all of this blog  post has focused on the demand side --- on the supply side -- - I have no idea how much it costs a farmer to grow a 20 pound turkey if they don't use the steroids and and other "hormone injections".

UPDATE:   Today, the NY Times has an article providing a chronology of the reporter choosing her own live turkey for thanksgiving and choosing to chop its head off. She goes into gory details about her feelings, the Turkey's feelings and the whole process as we learn that a supermarket's meat was once a living creature.  She pays a large price premium of $3.99 per pound for this experience.

I would say that this highlights the magic of capitalism. For people who want this experience, they can pay to have it. I don't want that experience. I know what a turkey is and was and I outsource its execution to another guy (or machine) who does the dirty work for me.  Would I eat less turkey if I had to do the "dirty deed" myself? Of course.  But, what is in our utility function?  Is my goal in life to minimize turkey consumption? If we don't eat turkey, how many turkeys would be born?  Is it better to live and love or to never have lived at all?  I don't know the answer to this but I still like eating turkey and  not killing turkeys.  The NY Times plays a role here as an amateur sociologist running a field experiment on one subject (the article's author) but I'm not moved by her bigger point.

In my model of human behavior, we know ourselves and we make choices to put ourselves in good situations and to avoid "bad" situations.  If you believe that people should be placed in "uncomfortable" settings (such as assigning Dick Cheney a house in Berkeley, California and forcing him to live there) --- that is an interesting social experiment but it is unlikely to play out in the real world.  We have choice and different people make different choices.  The interesting economics question is; as our choice set expands due to new options and opportunities how much does this improve the quality of life of different people?

Thursday, November 18, 2010

The Los Angeles Times Publishes Some Letters on Reforming the University of California

The people  have spoken and they want a free lunch.  

Colleges for Californians
Re "Schools recruit out of state," Nov. 15

If the University of California system is looking to boost revenue by recruiting out of state, then it ought to forgo California tax revenues. Instead of looking to increase revenues, UC should be looking to cut costs. Get rid of tenure, hire new doctorate recipients who are willing to accept lower salaries to get a first break in academia, and concentrate on excellent instruction instead of research.

Undergraduates should be going to college to learn a skill that will get them a job or prepare them for professional school. New, untenured professors are more than capable of providing this education.
The UC system should not be a country club for high-priced academics who delegate most of their teaching duties to graduate students.

Steve Stillman
Redondo Beach

Mr. Stillman should visit UCLA.  He would see an intellectually vibrant center of discovery, research and excitement.  All institutions can improve but he would transform my institution into the equivalent of a Minor League baseball team.   Under his vision for UCLA, any new professor who proves that he/she has the right stuff would be snapped up by another private university (such as USC) leaving UCLA weaker.  Without a senior faculty, who hires the untenured professors?  Is he going to delegate this decision to the Deans?  The incumbent junior faculty would have an incentive to hire morons so that they can compete against the new entrants.  When a faculty has a tenured faculty, this group of stakeholders has an incentive to build a great institution because are "owners" and long run members of the community.

I agree with him that there should be performance review and punishment for tenured faculty who do not publish or teach well.  Such "dead wood" are not respected by their colleagues but Deans could bring additional pressure down.  Such members could be placed on numerous university committees or denied a parking spot on campus or made to pay extra for that spot.

Human capital and skill development are California's best chance to reinvent itself.  Mr. Stillman would transform the UC into an extension of community college.  Excellence is not cheap but there is no substitute.   In his 2nd paragraph, he states that undergraduates should learn a "skill" that will help them get a job. On one level I agree with him and that is why my courses focus on statistical analysis and problem solving but he makes it sound like we should be teaching students "glass blowing" like a German apprentice system. In this uncertain world, what skills does he know that we should be teaching?  We need to train the next generation to be smart, nimble problem solvers.  That doesn't boil down to an easy cook book.

In Mr. Stillman's vision of the UC, Ph.D. education would end.  No serious graduate student would enter a Ph.D. program to be mentored by junior faculty who have been hired solely to teach.  Without Ph.D students and without  a research faculty, the UC's reputation and flow of new ideas would dry up over night.   California would still have Stanford, Cal Tech and USC but I do not believe that this is enough excellence to throw out what the UC system has achieved over the years.

He is certainly correct that there are high paid members of the UC faculty but when you take the ratio of salary to home prices in Westwood --- we are not "fat cats".   If he can wave his magic wand and make Westwood home prices return to 1980s levels and fix the silly LAUSD public schools then he can lower my UC salary by 70%.

A major idea in economics is the law of unintended consequences. I would ask Mr. Stillman and others who share his opinion to think these through before they lobby and vote for radical change.  Why has California been great?  The answer isn't Kobe Bryant or Paris Hilton; its the nerds and the UC supplies these folks at relatively low cost and high quality.  Moving forward, we will do a better job and I hope that we can do our job with fewer of Mr. Stillman's tax dollars.  The UC needs to raise its prices, do a better job selecting its students (we should take 35% of students from outside of California), and do a better job connecting with our alumni.  With these 3 tasks, we can do our job and do it quite well.

Could China's Green Investments Protect Us All from Climate Change?

In My National Geographic Blog Post on China,  I take on the smart guys from the NY Times including Keith Bradsher and Tom Friedman who argue that we are losing a "zero sum" game with China over who will "win" the green tech competition. When China invests, we all win. Ideas are public goods.  Who pays for the basic R&D?  If China is willing to fund such a risky public good, then we should say "thank you"!

Switching subjects slightly:  Is it surprising that sports stadiums are investing in renewable technology by placing solar panels and wind turbines on them?  There are economies of scale of utilizing such large homogeneous spaces and it is good public relations.  Public funds are used to build these stadiums so it would interest me if the public/private contracts require such green investments or if the MBAs who crunch the numbers think this investment is a wise one purely on the merits.

Wednesday, November 17, 2010

A Thoughtful Review of Climatopolis

Stanford's James Sweeney  has written a quite reasonable review of my Climatopolis book.  I have been amazed by the diverse set of reviews that have been written.   Here is a subtle quote from his review:

"Kahn characterizes his book as optimistic. It may be. But one is left with a profound sense of not knowing how severe the consequences of climate change will be for any particular city or region of the world. Adaptation ultimately may be insufficient to solve most problems caused by global climate change. And adaptation is definitely not free; typically it requires many costly investments. Even the best adaptation to global climate change will be very costly to the world’s cities.

A careful read of Climatopolis is an invitation not to rely solely on urban adaptation. As the author argues, adaptation should not be the sole strategy to deal with global climate change. Mitigation is still crucial. Yet the U.S. government continues to shun economic incentives, such as carbon taxes or carbon markets, needed for aggressive mitigation.

My advice: Read the book with an open but critical mind. Reading and reflection should stimulate your own speculations about urban adaptation in the face of climate change. And your mind will be nicely stretched, whatever you ultimately conclude about Kahn’s speculations."

My book seeks to highlight the microeconomics of how diverse individuals, firms and governments cope in an uncertain and evolving climate.  Most of the leading economists studying climate change (Nordhaus, Weitzman,  Goulder, Stern) have focused on macro models that implicitly throw away much of the rich substitution possibilities available to a diverse society spread out across space.  By injecting some basic urban economics and space back into our thinking, I'm trying to refocus the discussion on the "strategy space" for how we cope and adapt.

We will have to rebuild our cities (the durable capital rusts and depreciates). The key issue is where we build them and how we build them. Migration and innovation will go a long way in helping us to adapt. Now, will it allow us to reduce our exposure to the costs of climate change by 45% or 82%?  I can't answer that but the broad sweep of Climatopolis is to propose a research agenda for how we can quantify this on a city by city basis.

Tuesday, November 16, 2010

Ed Glaeser Revisits the Question of What Us "Worldly Philosophers" Can Do for Society

Glaeser explains why he refused to take David Leonhardt's quiz for reducing the deficit.  More precisely, as a citizen he filled it out but as a Harvard economist --- he was not willing to "top down" share his scientific opinions for how to achieve the goal because he doesn't believe that our science provides deep insights into how to achieve this goal.  Modesty is an important new idea for all economists!  Ed highlights some of the structural parameters (what is the marginal productivity of an extra $ invested in the military?) that he would need to know to begin to be willing to use the rigor of economics to provide a serious answer to David L's question.  If you sit down and think for 2 minutes, you would realize that there are 100s of structural (i.e marginal benefit, marginal cost) parameters related to the budget that we currently do not know.  This is why the NSF needs a bigger budget (but don't ask me what is the marginal product from giving the NSF an extra $!).

Monday, November 15, 2010

An Exciting Economics of Climate Change Conference

Here is the Conference Summary from the September 2010 Giannini Foundation conference on Climate Change Economics held in Sacramento. It was a very interesting conference.  If you click on that link, you can read my exciting 3 page paper.

Switching subjects --- I have had friends at leading East Coast schools email me that they have finished their teaching for the 2010-2011 academic year and asking me what I am up to.  Well, at mighty UCLA we are merely in the middle of the 8th week of the fall quarter.  Apparently there is a winter quarter and a spring quarter and I'm expected to teach in each of these quarters.  Clearly, I must have committed some sin as a younger man (such as writing bad papers).

The 2010 Nobel Laureates won their prize for their work on job search.  I'm waiting for a job offer that pays well and asks that I just sit and think, blog and crack jokes and sometimes write a paper or a book.  Does that job exist?   When will such a job arrive?

Are University Presidents Overpaid?

Every year the newspapers love to run stories such as this one clucking about the superstar 7 digit pay for University Presidents.  The articles always hint that cozy boards of directors are granting their friends unmerited pay.  A different model of superstar labor markets is that running a major university is a complex, unglamorous tasks and to attract talent today you need to pay serious "combat pay".  Don't forget supply and demand --- who wants the job?  There are a lot of ambitious universities bidding for the scarce supply of "talent".  Now, how do you establish yourself as having "talent"? If you were a good Provost, will you be a good University President? I actually believe that the two jobs have very different requirements and there could be a negative correlation or very low correlation between outcomes in these occupations such that excellent Provosts can be bad university Presidents.

 What do University Presidents do all day long?  Do they have the time to pontificate about the big issues of the day and meet with world leaders to discuss nuclear arms proliferation and climate change?  Do they eat in the dining halls with Freshman to discuss their hopes and fears and Dreams?   No!  They attend countless chicken dinners giving short boring speeches and begging rich people for donations and they beg state representatives for public transfers.  Not so glamorous.   They earn their pay the hard way!

If I could sit down with a variety of University Presidents, I would like to ask them how they prioritize investing in human capital vs. physical capital such as the buildings on campus.  People are mobile while buildings sit there forever with a donor's name on it.  Yet, the irony is the university is only as good as its people. I'm concerned that many universities are over-investing in the physical capital stock at the expense of the people.

Sunday, November 14, 2010

The New World Bank Report on the Economics of Natural Disasters

Apurva Sanghi has led a Dream Team to issue an important new World Bank Report.

"Earthquakes, droughts, floods, and storms are natural hazards, but unnatural disasters are the deaths and damages that result from human acts of omission and commission. Every disaster is unique, but each exposes actions—by individuals and governments at different levels—that, had they been different, would have resulted in fewer deaths and less damage. Prevention is possible, and this book examines what it takes to do this cost-effectively.

Natural Hazards, UnNatural Disasters looks at disasters primarily through an economic lens. Economists emphasize self-interest to explain how people choose the amount of prevention, insurance, and coping. But lenses can distort as well as sharpen images, so the book also draws from other disciplines: psychology to examine how people may misperceive risks, political science to understand voting patterns, and nutrition science to see how stunting in children after a disaster impairs cognitive abilities and productivity as adults much later. It asks not only the tough questions, but some unexpected ones as well: Should all disasters be prevented? Do disasters increase or decrease conflict? Does foreign aid help or hinder prevention? The answers are not obvious. Peering into the future, it finds that growing cities and a changing climate will shape the disaster prevention landscape. While it is cautious about the future, it is not alarmist."

A free copy is available here.

There is an obvious link to climate change adaptation here.   While I have only skimmed the book, I can see that there are some fantastic case studies of developing countries.

An issue that I discuss in Climatopolis is relevant here.  Don't forget your law of 72.  If a developing nation's per-capita income grows by 6% a year, its per-capita income will double in 12 years (12*6=72).  So what?  As people grow richer, they have a greater capacity to take a range of actions that help to protect them against risk from natural disaster. They eat a better diet, live in better housing, have better governments that provide local public services that protect them, they have access to formal insurance markets to offer transfers in those scenarios where a disaster causes significant damage.   I believe that a combination of migration (in response to climate change science models) and growing income (due to capitalist success) will help millions of people in the developing world cope with climate change induced natural disaster risk.  There are many pessimists who disagree.  As you can tell, this is an important debate to have.  Are the poor in the developing world, passive victims of coming climate change or are they pro-active forward looking households seeking coping strategies? My bet is on the 2nd one.

Returning to Apurva's study, this is a really nice book about a topic that has interested me for years.  My 2005 Review of Economics and Statistics paper, titled the Death Toll from Natural Disasters has generated lots of interest over the years. I would love to see empirical nerds having access to better micro data to study how individuals (rather than nations) are affected by such shocks.

Saturday, November 13, 2010

Will UCLA Outsource Our New Hotel's Construction to China?

China builds a 15 story hotel in 6 days!  Watch the video. It is pretty cool and their workers are working hard. Now a cynic might ask whether the quality of this hotel resembles the Lemon Liberty Battleships during World War II that were built in haste. This is a valid concern but there must be ways to double check this.  

China's talents impress me even more because I am quite concerned about  UCLA's plan for The Faculty Center .  We have a very pleasant but decrepit faculty club where we go to eat lunch and have coffee.  If I'm reading this correctly, UCLA would like to shut this amenity for 2 to 3 years to build a hotel that we as a campus do not need.  This does not sound like an efficient allocation of scarce resources but nobody has asked me for my opinion (I'm only an economist).   I recently was negotiating with the university to remain on the faculty. If I had known that I would lose this valued amenity, I would have demanded an extra 10% more salary per year.

If we must have this new building (and I don't understand why we do), let's outsource the construction and allow our friends in China to build it for us.  What would be the price of the new construction? Time to completion? Quality of the construction?  Let's have some competition and pursue excellence!  My motto for the University of California is simple:  invest in human capital not physical capital.  We can hold our classes and our office hours in tents --- continue to hire the best faculty and lure the best students.  Not everyone is listening to me.

Friday, November 12, 2010

Interdisciplinary Research at the UCLA Institute of the Environment

People ask me why I work at an Institute of the Environment.  They say; "you are a free markets guy. You look like Milton Friedman but you are not as smart --- why are you hanging out with people (i.e non-economists) who believe that Friedman was wrong about 99.99% of  the issues?  You should sit at an Economics Department and use your bad jokes to mock people who don't understand or appreciate the joys of free markets."

There are three answers to this question.    First, at UCLA --- I have 4 faculty appointments.  You can find me at the Institute, the Economics Department, the Public Policy Department, and starting next July at the Anderson School of Business.

A better answer is that I believe in intellectual diversity.  While I'm married to my favorite economist and I try to have lunch every day with the economists, I'm perfectly happy to talk with people who are not economists.  It is true that other fields have a different vocabulary than us and many of them are suspicious of free market capitalism but I ran into this issue repeatedly at the Fletcher School at Tufts.  I'm used to being a minority member of the group.

But, by best answer is research such as this.  At the end of the day , I care about new ideas and this is the first interdisciplinary paper I have published since moving to UCLA.   This intersection between economic distress and ecology is kind of cool as it has implications for pigouvian externalities exacerbated by bad times.  Look for more of this kind of green "freakonomics" by me and my IOE brothers and sisters.

Harrigan RJ, Thomassen HA, Buermann W, Cummings RF, Kahn ME, et al. 2010 Economic Conditions Predict Prevalence of West Nile Virus. PLoS ONE 5(11): e15437. doi:10.1371/journal.pone.0015437


Understanding the conditions underlying the proliferation of infectious diseases is crucial for mitigating future outbreaks. Since its arrival in North America in 1999, West Nile virus (WNV) has led to population-wide declines of bird species, morbidity and mortality of humans, and expenditures of millions of dollars on treatment and control. To understand the environmental conditions that best explain and predict WNV prevalence, we employed recently developed spatial modeling techniques in a recognized WNV hotspot, Orange County, California. Our models explained 85–95% of the variation of WNV prevalence in mosquito vectors, and WNV presence in secondary human hosts. Prevalence in both vectors and humans was best explained by economic variables, specifically per capita income, and by anthropogenic characteristics of the environment, particularly human population and neglected swimming pool density. While previous studies have shown associations between anthropogenic change and pathogen presence, results show that poorer economic conditions may act as a direct surrogate for environmental characteristics related to WNV prevalence. Low-income areas may be associated with higher prevalence for a number of reasons, including variations in property upkeep, microhabitat conditions conducive to viral amplification in both vectors and hosts, host community composition, and human behavioral responses related to differences in education or political participation. Results emphasize the importance and utility of including economic variables in mapping spatial risk assessments of disease.

Thursday, November 11, 2010

Freakonomics: How to Spark a Domino Effect

Why did Freakonomics conquer the world?   Great raw ingredients, great timing (pre-recession), great writing, we all know this already but the "new news" to me are these details about the secret sauce.   This article is worth reading because it provides the nitty gritty details for how ex-post inequality occurs.  The Freaknomics book has probably sold more copies than all other popular economics books combined since Milton Friedman's Free to Choose (so the last 30 years?).

This success sounds like Sherwin Rosen's model of superstars where there is a complementarity between the quality of the Levitt's raw ideas with Dubner's writing style and the expert marketing of the book.   What was missing in Rosen's original model was word of mouth learning such that one's willingness to pay for the Superstar product is an increasing function of whether your peer group is "into" the product.  You can imagine a bubble of exuberance breaking out and the owners of the profit stream can ride this.  Now in popular music some Miley Cyrus (not a great talent) can ride this wave and after the fact it looks funny when she becomes quite rich relative to other young ladies who are her age with the same talent.  But, in the case of economics --- the authors of The Freak have a lot more talent than Ms. Cyrus.

While economics and sociology models can ex-post explain why some product such as a Pet Rock or the Toyota Prius becomes a major fad, we have trouble predicting before hand which books and products and albums and movies will enjoy such a wave.

How does a book or a movie become "cool"?  This Jon Stewart is a necessary or sufficient "treatment" or arbitrating this?  If he signs on, how much do sales rise by?  If he endorses too many products, does his glow fade?   If Steve Levitt had gone on Oprah rather than Jon Stewart would it have triggered the same effect?

Why does this matter?  Beyond being good gossip, as social scientists we economists need to understand the causes of superstardom.  What are necessary and sufficient conditions?  How much randomness in the process is there?  Tiger Woods was truly the world's best golfer and he was paid as the best.  Mike Tyson was the best boxer and he was paid as the best.   For those who obtain great wealth, are they lucky or great? or both?  Is capitalism fair?

Some Innovative Ideas for Balancing California's Budget

Does Jerry Brown really want the job?  Here are the facts about the budget he will inherit.  Apparently his predecessor did him no favors.  I expected that a macho man would have stood up and said "hasta la vista public pensions".   Anticipating that Jerry Brown listens to economists and cares about what we have to say, permit me to offer some budget balancing ideas.  All of these are meant as 1/2 jokes --- I've learned that many readers don't know when I am joking and when I'm not.  Strange.

1.  Fire all gardeners within the UC System --- each day at UCLA and other UC campuses there are countless facility management guys (I've never seen a woman doing this) using noisy, polluting leaf blowers to blow leaves in random patterns and then create more work for themselves to do it again. It fills the air with dust, bad smells and noise and serves no purpose.  Let the leaves fall.  Let the grass grow.  In fact, get rid of the grass and plant some native plants to save $ on water and upkeep.  Just let it go the way Mother Nature wanted it to look.

2.  Tax tourists --- California is filled with tourists who come to our great state to have fun. I welcome them but they should pay for the unique experience California offers. The sales tax on their meals and purchases and hotel stays are not sufficient. There should be a "passport" tax for their short trip to see us. I believe that demand is inelastic and they wouldn't substitute to going to Kansas instead.  We could charge international tourists a higher short term passport tax than domestic visitors.

3.  Bring back the car registration tax and make it an increasing function of the price of vehicle you drive. So, if you drive a $65,000 Mercedes ---- the tax is 1% of its value and you owe $650. If you drive a $2000 1995 Taurus, you owe $20.    In a state with 20 million vehicles --- if this tax yields $100 a vehicle this yields $2 billion bucks.  Not bad!

4.   Tax Lakers tickets ---  now that the team is great, people will pay a markup until Kobe retires.  At $10 surcharge per home game * 50 games (including playoffs) and 20,000 seats would yield $100 million per year. Not bad!

5.  Raise parking prices everywhere --- especially at peak times (make Don Shoup proud).

6.  Raise the retirement age for public pensions to 62.  We are not Greece.

7.  Tie public sector union cost of living increases to the change in the stock market say July 1st to the next July 1st.  If the stock market falls, no raise.

8.  Following the success that Paul Romer has had with Aplia, introduce information technology in public school classrooms to replace teachers. This will standardize the quality of education and students appear to like computers and computers do not need incentives to work hard and do not need pensions.

Paul Romer's Aplia Software

I have more ideas and I await Jerry Brown's call. If he is looking for a head economist I will serve and I am even willing to visit Sacramento to talk with him.