Friday, December 31, 2010

My Governor Says "Hasta La Vista Baby"

Arnold's Exit Interview

Interesting Modern Macroeconomics

Everyone has opinions about macroeconomics but does anybody know what macro is these days? Knowing that I don't know, I went to Tom Sargent's webpage to find out some answers.  I read this paper that quickly brought me up to speed on the fundamental tension inherent in judging "Bank Bailout" policy.  The anticipation that banks will be bailed out preempts bank runs (Diamond and Dybvig) and this is "good" but the anticipation that banks will be bailed out creates moral hazard and excess risk taking as banks become options (throw for the endzone and if you are intercepted --- the government will pay, if you score, you win! (see Kareken and Wallace).

Sargent's paper cites Todd Keister's work.   Here is the abstract from Todd's recent paper;


Abstract

How does the belief that policymakers will bail out investors in the event of a crisis affect
the allocation of resources and the stability of the financial system? I study this question
in a model of financial intermediation with limited commitment. When a crisis occurs, the
efficient policy response is to use public resources to augment the private consumption
of those investors facing losses. The anticipation of such a “bailout” distorts ex ante
incentives, leading intermediaries to choose arrangements with excessive illiquidity
and thereby increasing financial fragility. Prohibiting bailouts is not necessarily desirable,
however: it induces intermediaries to become too liquid from a social point of view and
may, in addition, leave the economy more susceptible to a crisis. A policy of taxing
short-term liabilities, in contrast, can correct the incentive problem while improving
financial stability.

Key words: bank runs, financial regulation

This last sentence about "taxing short term liabilities" is interesting but what does it mean?  A "bank" that chooses to hold a lot of short term liabilities is at risk from a bank run.  If I collect deposits from each of my UCLA colleagues and promise them they can have the $ back at any time, I am at risk of default if there is a panic and they want their $ back on the spot.  Todd explains that with a tax on short term deposits that his model shows that "we can have the best of both worlds" of offering banks insurance without introducing moral hazard.

As  a retired macroeconomist, I think that both the Sargent paper (which represents a History of intellectual thought) and this paper by Keister highlight the relevance of macro. Perhaps, I should return to Chicago for a refresher course?

UPDATE:   Here is another interesting NYU Macro paper.  Similar to my thinking about climate change adaptation, note that the authors model the agent as "knowing that he does not know" the stochastic process of underlying shocks in the economy and having a desire to minimize risk exposure if the true state of the world turns ugly.  This is "robustness" at work.

Thursday, December 30, 2010

Water Pricing and Coping with Drought in the Southwest

The Director of my UCLA Institute has just edited a special issue for the Proceedings of the National Academy of Sciences. Here is Glen MacDonald's PNAS Volume link.

Given the growth of population and jobs in the Southwest and the basic need for water, if the supply of water is threatened by drought --- how can this region continue to flourish?  An economist would say that allowing water prices to reflect scarcity would take care of this problem.   Consider Peter Gleick's quote;


"Part of the challenge we face in the Southwest is old-style thinking," said Peter Gleick, president of the Pacific Institute and an author of another analysis. "We brought to the Southwest very European ideas about water, developed in water-rich areas. ... That worked OK for a while, although not really. But now it's clear that green lawns and unlimited swimming pools and inefficient irrigated agriculture can't be sustained."
Gleick says the solution lies in a combination of encouraging the development of untraditional water sources, such as reclaimed wastewater, policies to encourage more efficient water use, efforts to coordinate water policy at local, state and federal levels, and planning to help water utilities adapt to climate change."

I agree with Peter but I would say that allowing water prices to rise would simply and equitably solve this problem.  You would see less green grass in Los Angeles, fewer private swimming pools, and farmers (who use the majority of the water) would use water more efficiently and would make better choices over what to grow.  Water engineers (such as my colleague UCLA's Yoram Cohen) would have strong incentives to innovate to figure out how to reclaim water and use it for the variety of tasks we need water for.

Many new economics students worry that such "price gouging" will hurt the poor.  It doesn't have to.
Consider the following scheme.

Suppose a public health expert says that every person needs X gallons of water a day as minimum for bathing and washing and other essential services.

Suppose the free market price for water is  p cents per gallon.  In this case, we would have a public policy that gives each poor person 365*p*X/100  dollars per year so that they can afford their water needs under the new water pricing rules.

If there are  Z  poor people and  N total tax payers who are not poor, then the per-capita tax of protecting the poor would equal   365*p*X*Z/(100*N)

Politicians would need to "draw the line" in defining who qualifies as poor for this cash transfer but note that we can have the best of both worlds;  the Southwest's suffering from drought ends as we now face a proper pricing signal for not "wasting water" and the poor's basic rights are protected.

This example highlights why economists are useful people.  The climate scientists have shown that under the status quo, the Southwest (including my Los Angeles) has a problem -- and the economists know how to redesign incentives to mitigate the problem. This is the social science of climate change adaptation and this is the guts of my Climatopolis.

Durable Housing and Adapting to Climate Change

If homes weren't durable (and thus melted in one year like a piece of pizza), how many people would live in Detroit today?   Glaeser and Gyourko argue that Detroit's population would be much smaller.  Past investment decisions in real estate development sometimes turn out to be a irreversible mistake. We end up with infrastructure, housing and buildings where we currently do not need it.  If Detroit had remained the car capital of the world, then the housing built there in the 1930s-1950s would be quite valuable today but given the decline of Detroit's "golden goose" industry the durable housing stock lives on.  Demand for Detroit housing is low and the result is very low home prices (under $20,000) and the city thus becomes a poverty magnet and this effect feeds on itself.

This case study matters for thinking about climate change adaptation. If, due to climate change, a city such as Phoenix faces extreme heat conditions and water shortages in the year 2040, will it become the "next Detroit"?

I sketch this quick example because I received a very reasonable email this morning from Jim Gleeson of the London School of Economics.  Since I am a graduate of the LSE,  I believe I owe him a serious answer.  Here is his comment.

"If Moscow's quality of life declines relative to other Russian cities, do you believe that people won't move to a relatively nicer city?"


Gleeson:

"This is the bit I'm concerned about. Looking at the US example, the greatest population growth in the last ten years has been in hot, relatively sprawling Sunbelt cities, not in temperate, relatively dense places. Professor Kahn has elsewhere established that 'liberal' cities tend to restrict new housing supply. My concern is that these are often the same cities where we expect demand to rise as a result of climate change. Isn't there a real danger that housing supply won't be sufficiently elastic in these places for the required economic and demographic adjustments to take place?"

My response:

When I was a graduate student, we were taught that asset prices (such as homes and stocks) quickly reflect new news. If due to climate change, Phoenix becomes unlivable and this becomes common knowledge in the year 2030 then home prices there will fall sharply. Land owners will suffer an income effect. Renters who live there will merely face a transition cost of moving to a new city and trying to stay in touch with their social network (Facebook will help).   Phoenix employers are likely to seek out new locations and thus for many workers they would not switch jobs as they switch cities.  

In Climatopolis, I assert that different cities will be affected differently by climate change and that there will always be geographic areas where we can rebuild future urban infrastructure.  Consider San Francisco.  Here is a flood map created by the Pacific Institute. This is exactly what we need from the climate scientists. We need precise GIS maps concerning under different scenarios how much coastal real estate is at risk.  Given the possible damage caused by extreme low probability scenarios, it is important to map out worst case scenarios.  I predict that insurance companies and city governments will both have an incentive to do this in the future.

Suppose that even in "worst case" scenarios that there are parts of San Francisco's metropolitan area such as the Berkeley Hills that will not flood.   A benevolent planner might want to encourage more people to live and work there.  Will land regulation be flexible enough to allow more people to do so?  In Climatopolis , I discuss at length in chapter 4 that Los Angeles will have an easier time adapting to climate change if more people live closer to the ocean in the Santa Monica area. Drive along Wilshire Blvd there and you will see low density bad commercial auto shops.  In my world, this area should be rezoned for 25 story residential towers with Manhattan or Hong Kong density. In this way, millions of people could live there and a co-benefit would be that Los Angeles subway would become a viable transportation technology.  If you worry about earthquake risk, I am confident that earthquake engineers have made progress in designing buildings to withstand such shocks but people would be free to choose whether they want to live there.

So to return to Jim's email, the key issue here in the future is to identify those geographical areas that face the least climate change risk. I predict that these areas will experience land price appreciation. How many people will be able to live there? This depends on how these areas are zoned. Are they zoned for one household per 1/2 acre or are high rise towers allowed?   I agree with him that binding zoning law (if enacted in the most desirable places in the future) could inhibit adaptation. I want to write an academic paper with real estate lawyers on this very point and I think it merits serious research. The research question is; "Is real estate law nimble enough to evolve as the threat of climate change becomes apparent?"  Could local zoning and land use controls inhibit adaptation by raising real estate prices in areas where people want to move to and thus making it hard for them to move to the safe areas?

In my recent Journal of Urban Economics Paper, I document using data from California that its liberal cities do slow growth.   This matters for climate change adaptation only if liberal people are the majority of voters in areas that will have the easiest time adapting.   Now the ability for a city to be able to adapt is not merely a function of its geography.  Liberal cities may have enacted policies (such as wetlands and water pricing policies) that make it easier for them to handle climate shocks.  This point merits future research by political scientists.   A rational forward looking mayor will know that there are synergies between his city's geography and the policies he enacts. An inland city does not need "sea walls" but needs to have several sources of water and a "backup" plan in case there is drought.

In Climatopolis, I talk about competition in political markets. A mayor who allows a city's quality of life to suffer will lose his mobile skilled people and end up with a poor city. Anticipating this provides strong incentives for this Mayor to be pro-active in the face of climate change.

To close this long post, let's return to durable housing.  To minimize the Glaeser/Gyourko durable housing problem in the face of climate change --- maybe we need more people to live in mobile homes or to live in structures that are not as durable but live on for 30 years.  I realize that there would be a life cycle environmental cost to this reduction in durability but it would allow us to have more option value. In transport economics, researchers like John Kain argued in favor of buses over irreversible investment in subways in part because of the option value.  Buses can be re-routed (as new information about the city's urban form is learned) while subway cannot.  In the face of climate change, we need to build in more investments with "option value".












Tuesday, December 28, 2010

A Response to Fellow Climate Change Nerds

Grist has republished an angry review of Climatopolis.  Permit me to make two points about myself and my work on the economics of climate change.

1.  I would love to see the world reduce its greenhouse gas emissions but I don't believe that we will in medium term.  Why?  You can read my academic papers on this subject here and here and especially here.

2.  Given that global GHG concentrations will rise and given the uncertainty over what will happen next in terms of weather fluctuation and how this risk differs across continents and cities within contents, it is relevant to ask how diverse households, firms and governments will respond to the new realities they will face in our hotter world.  Climatopolis is my attempt (as a microeconomist) to anticipate how we individually and collectively respond to an anticipated known "unknown".

For a brief sketch of the book's core logic read this.

To listen to me talk about the micro economics of climate change adaptation watch this.

I'm trying to start an intellectual debate --- I won't be shouted down by interest groups who are afraid of intellectual discovery and debate.

Yes, I am an economist. Yes I know I can learn from climate scientists but right now their predictions about our future have large confidence intervals. I am optimistic that they will make progress in making more accurate predictions for the new risks that cities will face and that rational households and firms will respond to this new information in new ways that will shield them from climate change's blows. This doesn't mean that adaptation will be costless.  But, in a world where we refuse to mitigate (the free rider problem) --- we have a great capacity to adapt to the new realities we face.  At the heart of my optimism is that we are forward looking, and make investments to protect ourselves from anticipated known unknowns.  I also have great faith in capitalism to produce new products to shield us from new risks we will face. Capitalism is a friend of climate change adaptation.  Before Climatopolis, this point has not been thought through in sufficient detail.

My critics need to return to microeconomics and explain why the incentives and investments won't help to protect us from climate change's future punches.

Monday, December 27, 2010

Paul Krugman on "Peak Oil" and Smooth Adjustment to Anticipated Rising Commodity Prices

In this column, Paul Krugman says some wise stuff.  As an applied micro economist, he starts with some facts: "Oil is back above $90 a barrel. Copper and cotton have hit record highs. Wheat and corn prices are way up. Over all, world commodity prices have risen by a quarter in the past six months."

He offers some speculations about the causes of these price dynamics.  But, the interesting part of the article is his predictions about the consequences of these events:

He writes:

"So what are the implications of the recent rise in commodity prices? It is, as I said, a sign that we’re living in a finite world, one in which resource constraints are becoming increasingly binding. This won’t bring an end to economic growth, let alone a descent into Mad Max-style collapse. It will require that we gradually change the way we live, adapting our economy and our lifestyles to the reality of more expensive resources."

This smells like the logic presented in my Climatopolis.

In Climatopolis, I argue that the anticipated rise in fossil fuel demand in China and India will help us to adapt to climate change.  If forward looking entrepreneurs anticipate that real fossil fuel prices will rise over time, then they have an incentive to find substitutes. If these substitutes are cleaner than fossil fuels (i.e renewables) then we can achieve the win-win of economic growth without exacerbating GHG concentrations in the atmosphere. In this sense; the belief in "Peak Oil" helps us to simultaneously mitigate and adapt to climate change.

Note that Krugman predicts a gradual adjustment of society to our new realities. He is taking a gentle slap at those who believe that we can fall off a cliff over night.

Sunday, December 26, 2010

The Power of the Cell Phone: Decentralized Information and Nimble People

I wonder if Hayek owned a cell phone?   This article about the cell phone reports that soon you will be able to determine whether you are exposed to high levels of air pollution just by waving your phone around.

"Rather than using cell phones to just snap photos of friends or the occasional celebrity sighting, phone users in California may get the chance to track levels of harmful black soot near their workplaces and homes.

Tech entrepreneurs created a simple circular filter that darkens over time as it absorbs black soot. Anyone with a basic cell phone camera can take a picture of the filter next to a calibration chart that reflects different black soot pollution levels - no smartphone required. "We don't need a fancy app for this, because we just need to be able to e-mail it or SMS it to our system," said Martin Lukac, a cofounder of the nonprofit Nexleaf Analytics. Sending the photo via e-mail or text to an online database allows the cell-phone user to get back info about black soot concentration. The power of that information is that it reflects the individual person's exposure to air pollution."


This is just one example of how information technology helps us to adapt to changing circumstances (of course I'm thinking ahead to climate change).

Another example of the future power of the cell phone is Nathan Wolfe's efforts.  As I read in the New Yorker, this guy was my colleague at UCLA and he had the nerve to quit our esteemed faculty so that he could have more time for field research. He is interested in how viruses pass from animals to people in poor rural parts of the world. Here is an interview with this nerd where he celebrates that rural people with cell phones can know when an epidemic is breaking out and will change their behavior to protect themselves and this will have social benefits in slowing contagion risk.


"What's next? What are you excited about?

If the Internet is the global nervous system, and you have companies like Google pushing forward its evolution, part of what we're trying to do is create the equivalent of the global immune system.
One thing I'm excited about is mobile phones. How are we going to work with populations that are in geographically distant spots and link them together, to know when they're sick?
I'm fascinated by revolutions that come from adapting technologies like text messaging. For example, people can text message surveillance information, and we can respond and put credit on their phone, which means even populations that are very poor, if they have proximity to cell phones, can have access to healthcare."


Here  is the New Yorker profile when I first heard of this guy.  The New Yorker rejects my cartoon captions and thus I respect them.


Now, if you really want to learn something about the power of cell phones -- read the work of my man Robert Jensen.  Most academics just sit around and recall how witty and charming they are but not this young man.  He functions!


The Digital Provide: Information (Technology), Market Performance, and Welfare in the South Indian Fisheries Sector



"When information is limited or costly, agents are unable to engage in optimal arbitrage. Excess price dispersion across markets can arise, and goods may not be allocated efficiently. In this setting, information technologies may improve market performance and increase welfare. Between 1997 and 2001, mobile phone service was introduced throughout Kerala, a state in India with a large fishing industry. Using microlevel survey data, we show that the adoption of mobile phones by fishermen and wholesalers was associated with a dramatic reduction in price dispersion, the complete elimination of waste, and near-perfect adherence to the Law of One Price. Both consumer and producer welfare increased."



The popularity of Zagat's ratings highlights that we have a thirst for making "good decisions" and we know when we do not know the full consequences of our choices.  Technologists are figuring out ways to provide us with the high frequency information we need to better handle an increasingly risky future.  Are these technologies substitutes or complements of an individual's own cognitive skills?  

Saturday, December 25, 2010

Wednesday, December 22, 2010

Climate Scientists and Predicting Future Migration in a World Where Average Temperature has Increased by 7 Degrees

An example  worth reading.  You won't learn much about our future under climate change but you will see a laundry list of uncertainties related to how climate change will affect us in the future.  You will see that this researcher admits that "he knows that he does not know" what climate change will mean for specific migration patterns.  Since the author is not an economist, you will not see any discussion of incentives or free market capitalism providing signals helping people to cope with future scenarios.  This logic is what distinguishes Climatopolis from other "pontifications" about our future in the face of climate change.

UPDATE: I also suggest that you read the preface from the same January 2011 Special Issue. I can't say that I'm that impressed with their current knowledge.  Climate change looks like a vague threat and we need these nerds to make some progress refining their predictions and offering better geographic resolution to help us to adapt.

Here are a few quotes from the article.


"As adaptation strategies will be a key element of the fight against climate
change in a 4◦C+ world, policy responses would need, in particular, to promote
the right to mobility. Migration can indeed be an efficient adaptation strategy
and traditional patterns of mobility in relation to environmental changes will
most probably be deeply disrupted. Migration, in many cases, would need
to be encouraged rather than avoided. Migration would have to become a
core element of the affected populations’ adaptive capacity, rather than a
symptom of adaptation failure."  (this sounds like a quote from Climatopolis!)


"Climate change will affect societies through an extensive range of impacts. The
prediction of such impacts, however, remains marred by uncertainties, especially
at the regional and local levels."  (this is why I wrote Climatopolis to help people think these issues through!)


"The effects of water stress on migration patterns remain heavily contested:
some authors argue that droughts and desertification are a major push factor
for migration [28,29]"


"We are thus faced with a double level of uncertainty: the first level deals with
uncertainties related to climate impacts on local and regional scales; whereas
the second level concerns the way humans will react to environmental changes.
Such uncertainties are even greater in the event where the average global
temperature would rise by 4◦C and beyond."  (again my friends, this is why I wrote Climatopolis!)


"Given the uncertainties associated with a 2◦C temperature rise, an assessment
of climate-induced displacements in a 4◦C+ world is a very tricky task. Though
empirical evidence cannot predict future population displacements, it suggests
that, in a 4◦C+ world, people might move in a very different way than in a 2◦C
world: the very nature of the displacements might be affected more than just
their magnitude."  (capitalist price signals will guide the migration, migration is a rational investment
choice and price signals will tell workers where their skills are valued and where food and necessities are
more plentiful).


"However, not everyone moves when confronted with environmental changes.
Another consequence of a temperature rise of 4◦C+ might be, paradoxically
and in some cases, a decrease in the number of people on the move. Numerous
studies show that migration flows tend to decrease when environmental crises
peak. This is especially true in the case of droughts, as people tend to allocate
their income primarily to meet their household’s basic needs rather than to
moving [6,36]."   (note that he does not discuss increasing the efficiency of using our resources more wisely in a climate changed world. No more green grass, reducing production of water intensive crops --- such actions could allow us to live on where we currently live even if we have fewer resources because of climate change -- price signals of rising scarcity would bring about this transition more smoothly).


"In a nutshell, the effects of a 4◦C+ temperature rise on migration flows remain
difficult to assess. The linkages between environmental changes and mobility
cannot be explained through a linear, deterministic relationship, though many
discourses on this issue remain rooted in an essentialist perspective. Empirical
research has shown that responses to environmental changes vary according to
a wide set of factors and are context-specific: this makes it difficult—if not
impossible—to design a general predictive model of climate-induced displacement."  (and this is a peer reviewed paper given that he concludes "mush"? I do respect his honesty about the uncertainty here but notice that nowhere does he discuss capitalism as a useful force in guiding adaptation efforts. But, that is the whole point of Climatopolis.)


"As Danish physicist Niels Bohr famously put it, ‘prediction is very difficult,
especially about the future’. A 4◦C+ world would bring unprecedented changes
to the environment, likely to affect human mobility in different ways."  (Well, maybe the wise Bohr should have taken a course in micro economics?)


I looked up the author's resume and he is not a scientist but it is revealing that this is the author that must have been selected for this conference to discuss "climate change and humanity".   While prediction is difficult an economic analysis of adaptation offers more precise pathways for how we will respond to climate change than this article suggests.

Increasing the Deadweight Loss from Christmas

The Yale Students who Joel Waldfogel surveyed at the start of his Scroogenomics research project could never have anticipated that someone could order this "Gift" as a public speaker for their event.  Call now.  At the stated price, there is "excess supply"!

Kahn on the Rebound Effect: Underwear "Maybe", Prius "No"

My Christmas gifts to you include My blog entry  and Lucas Davis's academic paper.  The key issue here is the Becker --- full price of operating the energy using product. If you use your time as an input (recall that driving a car requires gas and your time) then the Jevons point doesn't hold (see my blog entry).  If increased energy efficiency lowers the full price of owning and operating the good (such as an air conditioner) then the extensive margin matters.  In English, if poor people in India and China can now afford an air conditioner because it becomes more energy efficient then this ownership margin (rather than the utilization dimension given that you already own one) could lead to an increase in aggregate use.

Predicting Future Rare Events: Implications for Climate Change Adaptation

A rare major snowstorm in Europe has crippled airports as major airports such as Heathrow were caught unprepared for a major storm. Stranded customers are angry and wondering why the airport didn’t have a contingency plan (or snow trucks) to handle serious snow.


In the Summer of 2010, a major heat wave hit Moscow.  The city was caught unprepared for a major heat wave.  Moscow residents were  angry and wondered why the city and themselves didn’t have a contingency plan for how to handle the heat in the same way that people in Phoenix do.

Do you see the similarities between these two paragraphs? 

The core logic of my book Climatopolis is:  “fool me once shame on you, fool me twice shame on me”.   In the 1960s and 1970s, academic nerd economists debated whether people have myopic expectations (tomorrow will be like today),  or rational expectations (our best guess of tomorrow’s weather equals the true average but we do make forecast errors).   Climate change adaptation pushes this issue to forefront again.
Climate change will increase the volatility of weather events.  There will be more snowy days and more hot days. How does this increased risk affect investment today? Consider the basic microeconomics logic of the Heathrow airport.  In 2010, assume that the firm who operates the airport believes that there is a 1 in 10000 chance of a major snowstorm.  Suppose that plowing equipment costs $1 million dollars to buy and operate.  Assume that the damage to the reputation of the airport due to customer anger from delays equals $1 billion dollars when a snow event occurs and the airport isn’t ready to handle it. Will the rational cost minimizing airport prepare?

CASE #1:  The airport doesn’t invest in the snow equipment
With probability 99.99% there is no disaster and nothing to worry about.
With probability 1/10000 the airport loses 1 billion dollars. The expected loss =  100,000

CASE #2:  The airport invests in the snow equipment
So with probability 1 , it pays $1 million dollars but it has 0 probability of a public relations disaster.
Since $100,000 < $1 million,  the firm will chose CASE #1 and disasters will occur.

NOW INTRODUCE Climate Change --- watch this Joe Romm!  If the airport anticipates that the probability of a major snowstorm rises from 1/10000 to 1/500 --- let’s recalculate the expected values from each investment choice.

CASE #1:  The airport doesn’t invest in the snow equipment
With probability 99.5% there is no disaster and nothing to worry about.
With probability 1/500 the airport loses 1 billion dollars. The expected loss =  $2 million

CASE #2:  The airport invests in the snow equipment
So with probability 1 , it pays $1 million dollars but it has 0 probability of a public relations disaster.
Since $1 million < $2 million,  the firm will chose CASE #2 and climate shocks will cause less damage to our economy.

So, if airports hire climate scientists as consultants in planning investment strategies -- then expected future disasters will not nail the airports!  As Mother Nature changes the rules of the game, we change our investment patterns.  Because our climate scientists are good, they give us a leading indicator of where Mother Nature is trending and we invest and our ready for her. Now, if the climate scientists say that they know nothing about the future we will face --- then we face a challenge but in this case of complete anticipated ignorance we have an incentive to build in the "precautionary principle" into our investments to be ready for the possible unknowns.

This investment example is a key piece of the core logic of Climatopolis. Note that none of the critics of Climatopolis have discussed this point at all in which they link climate science to actual choices and choices to consequences for the real economy.  But, this broad example is a  crucial nexus between climate and the economy. The key assumption that critics have ignored in discussing my book is that we are forward looking adults who will adjust our subjective assessments of the future as new news (such as Moscow Heat Wave) or the London Snow of December 2010 take place.

Investment under uncertainty will become a hot topic again and Lucas and Prescott will generate more citations!

Note the key role for the climate scientists. Those nerds will do the basic research to help us foresee the consequences of climate change.  If they can produce forecasts with spatial resolution, then this will greatly help investment planning in where to build infrastructure and how much slack capacity must be embodied in the infrastructure (such as San Francisco future airport flood concern) to minimize the probability of ugly events.  We need options built into our investments because we know that we don’t know what climate change will actually do. 






Saturday, December 18, 2010

A Reply to a Smart Email About Rational Expectations and Climate Change Adaptation

This is my last blog post for a week or so.   I'm going to Berkeley.  In the post below, you will see my long winded response to this question concerning whether I really am a Rational Expectations (RE) economist?   To paraphrase Ellen DeGeneres; "Yes I am" --- But,  you don't need to have "rational expectations" in order to survive climate change.  It would certainly help your adaptation prospects if you did but I will argue below that we only need roughly 2% of the population to have rational expectations for reasons that I will sketch below.

"now on to a different subject. it seems to me, in the ongoing wake of such a broad-deep real estate screwup, it takes great -- courage -- to advance RE market resilience as a basic assumption for catastrophe planning. have any econ-savvy reviewers of your book explored that thesis?

dp."

What is "rational expectations"?   You incorporate all available information today to form your best guess about the likelihood of future scenarios.  It doesn't mean that you have perfect foresight.  An aware person will know that when predicting some future event such as the likelihood of a major flood in New York City in 2050 that you "know that you do not know".   Knowing that you do not know leads a risk averse person to plan prudently to avoid the vague threat or to learn more before making an irreversible decision (such as buying coastal property in Manhattan).

You can read my earlier blog post on this broad issue but permit me to add some more points.


I believe that we do hold heterogeneous expectations of the future. The rational expectations model imposed too much discipline by assuming that everyone has the same beliefs about future events and that on average these forecasts are accurate.  Tom Sargent has earned the right to speak for all economists on this subject. Read his interview on this subject posted here.

Let me start with a cliche example and then say some smarter things.


EXAMPLE: If Don Trump underpredicts the probability of flooding in Manhattan then he will mistakenly build billion dollar housing in flood zones. If rich people who are looking for a nice condo also underpredict this event then they will move into his objectively dangerous building and will die in the resulting nightmare.  


BUT,   I believe that climate change will not be so abrupt that one morning the Trump tower will be submerged under 20 feet of water.  As climate change becomes a real threat, the land owners in that building will learn that they are under siege and they will need to call in engineers to take steps to protect the investment or they will abandon ship.  There will be an income loss as this new news becomes common 
knowledge but I don't foresee everyone in this building dying.


If widespread urban coastal flooding becomes a reality, then engineers will try out their solutions and architects will try out their solutions, if neither of these solutions work then we will need to move inland.  I talk in Climatopolis about the future of the NYC region if parts of Manhattan are under siege.  Urban places will certainly suffer but mobile urbanites do not need to.

SMARTER POINTS


You can dismiss the strong assumption that all of us have rational expectations but it would be a mistake to dismiss bayesian updating when "we know that we do not know". The real climate scientists will make progress in their forecasts.  This new information will benefit all of us who will make our choices based on this new information. Armed with this information and knowing one's own risk aversion, you will see people and firms migrate away from the riskiest areas. You will see some innovators (from a law of large numbers some people will anticipate the scary future scenarios that Joe Romm sketches) making bets on future technologies that will help us to adapt and they will become very rich. We don't need everyone to have perfect foresight. Instead we need heterogeneity, experimentation nad investment and options so that when the true future unfolds that we have access to several strategies to cope with the new news.

In Climatopolis , I discuss these themes at length.   The recent housing crisis and the inability of economists to foresee it tells us nothing about how capitalism will help us to cope with climate change adaptation.  The world has not ended because of this painful recession.   In the case of the housing crisis, there all sorts of bad incentives including banks being "too big to fail" that encouraged excess risk taking.   The banking industry knew that they would be bailed out by government and this anticipation of ex-post insurance encouraged ample ex-ante risk taking --- this is moral hazard! 


In the case of climate change, you die if you live in a dangerous setting --- that is an incentive to be smart about your choices. Out of raw self interest, future urbanites will have strong incentives to make their location decisions wisely. Developers will have strong incentives to build in "safe" places.


UPDATE:   In a subsequent, e-mail I received this response


"after he  (Joe Romm) explained in detail exactly what people are concerned about 
in the near term -- unpredictable water cycle & natural resource 
shocks -- and why it would be good not to tempt fate into worsening 
that volatility,."



My friends, the first chapter of the book is titled "Too Much Gas".  I 100% agree with you that it "would be good not to tempt fate into worsening that volatility." But, I can't influence the political process.   For those of you who are interested in the political economy of carbon mitigation, read this or this.  World GHG emissions will continue to rise probably until the mid-21st century. The question is how we will adapt to this challenge.


Returning to the quote above,  this is again a case of our "knowing that we don't know" what we face with water cycles. A rational person plans by holding an inventory or having a backup technology (water desalinization) to be ready for the known unknowns. This is all in my book.  In the Los Angeles chapter, I discuss the importance of allowing water prices to rise to reflect increased scarcity and my optimism about the law of demand.  As water prices go in Los Angeles, people will demand less and the scarcity challenge will be mitigated!


Let's return to holding inventories and permit me to introduce a wacky example. I discussed dried fruit in one chapter and reviewers made fun of me for claiming that such a mundane product helps to protect us from climate change.  But, I'm serious.  Holding reserves of dried fruit is a type of inventory or insurance strategy.  Dried fruit lasts for a year and you get the vitamins you need from it even if you can't grow fresh fruit because of water cycles.  Just as a pirate ship has crates of food because they anticipate that they won't find a Starbucks in the middle of the ocean, we will act in the same way.

Now, you will say that I'm assuming rational expectations.  Yes and no. Adaptation will be easier if we all have rational expectations but even if only 1% of us are real smart, then there will be huge arbitrage opportunities for these entrepreneurs to seize the market when Homer Simpson says "duh" and realizes that Joe Romm was right. At that point there will be gains to trade and the entrepreneurs will grow rich and Homer will live on.  Every day, entrepreneurs make bets. If any of them anticipate future water scarcity then they will make investments now.   



For capitalism to help to protect us from climate change, I need 2% of the world to be informed investors who believe the climate change science and to have the financing resources through venture capital to operationalize their vision to design and bring to market products that can protect us ranging from better air conditioning to cleaner cars to safer housing structures to water supply augmentation.    Given that policy activism has not achieved a federal breakthrough,  liberal intellectuals should be working with Al Gore in encouraging green venture capital firms to invest in breakthrough technology that will help us to adapt and to mitigate our future carbon emissions.   




In the opportunities chapter of Climatopolis, this is exactly my  point.  Did the guys who created Google smell an opportunity? yes, was it a risky bet of their time and effort , yes.  Did everyone foresee how big their company would become? No.


If I'm wrong that there aren't even 2% of people with this forward looking vision, then I need households to be mobile and ready to mover to safer, higher quality of life locations when they see a deterioration in their current city's water supply, heat waves, and natural disaster risk.  It is true that I assume in Climatopolis that there will always be some "safe" places to move to either in another city or within the same metropolitan area. Remember that we can build up in tall buildings--- so we do not have to fight to the death over a plot of land.


Critics of Climatopolis' core logic  need to carefully write out your implicit assumptions about the choices of human beings that could generate your doom and gloom scenarios. You will see that the necessary ingredients to generate your pessimism is that all 7 billion people on the planet either have no anticipation of the real threats that we face or are liquidity constrained and can't act now to build the "Noah's Ark".  You also will find that you are implicitly assuming that human knowledge and innovation can't substitute for Mother Nature.  I believe that it can.  My father has treated thousands of patients with heart disease and helped them to recover.

The only case where you would be right about Doom is the following;

1. We all think we know the "true model" of the future with certainty when we are in fact dead wrong.

2. Our dead wrong expectations model leads us to underinvest in defenses and strategies to adapt.

3.  When Mother Nature strikes in 2100, she knocks us all out because we weren't ready.

We are a diverse world of 7 billion people. By a law of large numbers if 1% of 1% of people anticipate the tough days that will soon arrive,  then we will have at least 700,000 new good ideas to help us to adapt to climate change.  Given that ideas are public goods, these ideas will flow around the world and help people in Bangladesh and New York City to adapt.

I celebrate capitalism because of its inherent system for fostering learning, and experimentation and trying out new ideas.  The Soviet 5 Year Plan did not encourage such efforts.  By introducing price signals to co-ordinate dispersed economic activity,capitalism will send the signals to our nerds to incentivize them for which technological challenges they will work on. If changes in water cycles are making water more scarce, then we need to see rising water prices and our nerds will get to work.  Government can distort this price signal with price caps but this only means we need more free markets to help us to adapt.











The Future of the Midwest

Bill Testa of the Federal Reserve Bank of Chicago has provided a very nice facts based assessment of where the Midwest now stands.   Below, I show you the type of evidence he presents as he makes the case that the Midwest is overly invested in manufacturing.  As this industry declines, the Midwest suffers.  Here is a plot of different Midwest cities documenting the negative correlation between initial city manufacturing jobs share versus subsequent employment growth.  The manufacturing intensive cities enjoy less subsequent employment growth.



Is this a causal relationship? In part.  In my Green Cities book, I argue that manufacturing cities tend to be high pollution cities. If these cities are nasty, then the skilled won't want to live there.If attracting and retaining the skilled is the key to subsequent economic growth, then manufacturing cities will have a problem. The good news is that counter-examples exist. Pittsburgh was a nasty steel city and the silver lining of steel's demise is that Pittsburgh has reinvented itself.  Chicago has had a similar transformation while Detroit has not.

In my new book Climatopolis, I sketch how cities compete against each other for firms and workers.  As Testa's piece highlights, over the last 40 years the Midwest and parts of the East have been losing workers and jobs to the warmer south and Sunbelt.    In Climatopolis, I argue that climate change will reverse this trend.  Put simply, people will be more likely to move to a Detroit than a Phoenix.  Water scarcity, extra heat wave risk in Phoenix relative to Detroit will nudge self interested households to seek out safer, relatively higher quality of life areas.  Today, some homes in Detroit sell for less than $20,000. This may be a good long term investment!

Public health research has documented the deaths that occur due to winter cold. Climate change will reduce the freezing days that hit the Midwest and warmer January temperature will raise the "amenity" level of this region.  When Ed Glaeser releases his new book Triumph in 6 weeks, you will hear a lot of talk about the importance of Warm January temperature as a key urban growth determinant. As of today, Detroit doesn't have this.  Note that in this public health piece that they argue that heat waves do not kill, they harvest. People who were at risk of dying die in the heat wave earlier than they would have died in the absence of the heat wave. They argue that the heat wave "harvest" people who would soon subsequently die otherwise.  In the case of cold waves, this "harvesting" effect is not there.  This finding has implications for the costs of the Moscow Heat Wave of Summer 2010 and the French Heat Wave.  You have to be a pinch subtle here. Of course people died in France and Moscow during their respective heat waves but the Deschenes and Moretti  research argues that these individuals would have died just a few weeks later if the heat waves hadn't taken place.

I also argue in Climatopolis that climate change mitigation efforts will aid Midwest cities.  Carbon pricing will mean that the "death of distance" will die.  Proximity to final consumers will be valued and some manufacturing activity could actually return to the Midwest with the goal being to ship final products to the East Coast cities.

Climate change creates new challenges and new opportunities. Forward looking people choosing how to live their lives have the right incentives to understand the past trends that Bill Testa highlights but to also think ahead about anticipated future trends.

Finally, if you'd like to see what I've had to say about the Midwest --- you might want to read my Federal Reserve Bank of Cleveland Interview

Thursday, December 16, 2010

Joe Romm Punches Climatopolis Again

Joe Romm is a smart angry man.  He throws some new punches at my Climatopolis.   Under the scenario that greenhouse gas concentrations reach 1000 ppm (which sounds high and if we reach that number this would take place in the year 2200?), some of the scenarios he sketches may play out.  He makes some reasonable points about tightening some of the raw calculations but he ignores two key facts about my book.  In the next edition of the book, I will address his points but in no way do his points detract from the book's core thesis.  Capitalism will help us to adapt to climate change. Out of self interest, we will rebuild our future cities in places that are less at risk from climate change and we will be pro-active in embracing strategies to protect ourselves from different dimensions of climate change.  If it turns out that Salt Lake City can flood, then we will learn this and build with materials that can withstand this. If Moscow turns out to be much hotter in the future, then they will purchase more energy efficient air conditioners and build their buildings in ways that allow for ventilation. We learn and our engineers make progress to protect us.  The "endogenous innovation" engine of capitalism will generate new products that neither Joe Romm nor I can anticipate but an economist can sketch why the law of large numbers makes us so confident that this dynamic will play out.

1. He overstates the "geographical determinism" of my book--- I don't have a crystal ball -- I don't know what will happen to Salt Lake City in the year 2100 and neither does he.  I never meant for Climatopolis to be a bet on any one specific city.   In Climatopolis, I sought to highlight some of the differences that different cities face depending on their geographical location. Does he really mean to say that all geographical areas face the same and equal threats from climate change?

UPDATE:  I would add here that the IPCC reports provide little geographical resolution.  Do the best climate scientists know for certain what will happen to Salt Lake City in 2100? I don't think so.  The point of Climatopolis is that we are always learning. Our climate scientists in the year 2050 will know more about the specific challenges that Salt Lake City and San Francisco face at that time.  Rational people will use that information to plan for their future and will make choices that help them to cope with the changing climate.


2. Climatopolis is meant to be a celebration of capitalism as an evolutionary force for helping us to adapt to changing constraints.  It is meant to show the reader how individuals and firms respond to capitalist market signals as climate change makes certain commodities such as water and food more scarce and affects the day to day quality of life (and the probability of disasters) in different cities.   I do think that Detroit will fare better than New York City in the face of climate change.  In Climatopolis, I sketch how the process of migration and investment in cities will be shifted by the anticipated threat of climate change.

No where, in Joe Romm's second attack does he mention "choice" or "incentives" --- his attacks are devoid of basic microeconomic logic.  This logic is exactly what I'm trying to inject into the rational discussion of planning for climate change adaptation.  Joe Romm is better climate scientist than I am and his blogging actually helps us to adapt to climate change. This is the evolutionary learning process I talk about in Climatopolis.

Unlike David Satterthwaite, he refuses to even sketch the core logic of Climatopolis or to link to its Amazon webpage.  Recently, Joe Romm censored a comment I posted on his blog.  That impressed me!  The Internet isn't supposed to be the Soviet Union.   Instead of tackling my book's core economic logic he focuses on beating up my footnotes (in fairness to him, he raises a couple of points that need to be fixed).  That is a debater's tactic but it suggests that his mind is not open to new ideas and he is locked in.  As I have said before, I have hoped that he would succeed with his Federal carbon mitigation effort but despite his tough blog posts (or perhaps because of them?) he has failed.   In Chapter One titled "too much gas", I am afraid of climate change but as a thinker I want to understand how a diverse urban population who knows that they "do not know" but have been provided incomplete information by climate scientists cope with this ambiguous scary challenge.

He is right that in the next version I will speak about Bangladesh more.  In the Freakonomics blog posted here, I wrote;


"Today, the World Bank celebrates the sharp reduction in Bangladesh’s poverty. Richer people will have more strategies to cope with climate change. In Climatopolis, I argue that climate change is likely to accelerate urbanization in developing nations such as Bangladesh. Urban households have fewer children than rural households. So, urbanization can have a causal role in reducing the number of victims caused by climate change.

But, suppose that I am wrong and Bangladesh’s quality of life declines dramatically. Many environmentalists have written pessimistic reports about millions of “environmental refugees.” A microeconomist would point out that migration is an investment choice. The rational household will tradeoff the benefits and costs of migration. For example, as India and China develop, their growing middle class may desire low skill services that Bangladeshi migrants could supply. As China ages due to its one child policy, it may be actively looking for millions of young migrants to move to Southern China. In this sense, immigration represents a “gains to trade” in the international labor market. People from Bangladesh will have choices over where to move to. Mobility across nations helps to protect the people of Bangladesh from challenges their nation may not be able to escape. My grandfather immigrated to New York City from Poland in 1923. Immigrants have played a key role in the growth of the United States. Why won’t a similar dynamic play out in Bangladesh? I realize that I am glossing over ethnic and religion assimilation issues, but if there are significant economic gains to such trade then I am optimistic that these costs can be borne."

Expectations and Preparing for Disastrous Low Probability Events Such as Nuclear Bomb Detonation

If a nuclear bomb goes off in your city, go inside or stay in your car. This article offers some survival tips.
"Suppose the unthinkable happened, and terrorists struck New York or another big city with an atom bomb. What should people there do? The government has a surprising new message: Do not flee. Get inside any stable building and don’t come out till officials say it’s safe.



The advice is based on recent scientific analyses showing that a nuclear attack is much more survivable if you immediately shield yourself from the lethal radiation that follows a blast, a simple tactic seen as saving hundreds of thousands of lives. Even staying in a car, the studies show, would reduce casualties by more than 50 percent; hunkering down in a basement would be better by far.

But a problem for the Obama administration is how to spread the word without seeming alarmist about a subject that few politicians care to consider, let alone discuss. So officials are proceeding gingerly in a campaign to educate the public.

Over the years, Washington has sought to prevent nuclear terrorism and limit its harm, mainly by governmental means. It has spent tens of billions of dollars on everything from intelligence and securing nuclear materials to equipping local authorities with radiation detectors. The new wave is citizen preparedness. For people who survive the initial blast, the main advice is to fight the impulse to run and instead seek shelter from lethal radioactivity."

Note the theme here,  self interested people taking pro-active actions to protect themselves from a terrible shock.  And, the confidence that through such choices we can reduce our exposure to risk.

Now, the article places government front and center for protecting us.  In  Climatopolis, I tackle a similar risk issue (gradual climate change)  but I place markets and individual choice as the key for protecting us against the risks of climate change.

It remains an open question of "how nimble are we in responding to change?" Are we passive victims (like a bunch of babies) or do we anticipate challenges and take steps to have options ready if and when nasty scenarios play out.  I am optimistic about our ability to plan, think ahead and be ready.  In fact, all of us don't need to be Spock -- we just need a few forward looking entrepreneurs to anticipate these challenges and be ready to help us cope when the "days of pain" arrive.

Wednesday, December 15, 2010

A Face for Radio

Here  is my "webinar" for Harvard Business Review.  Angelia Herrin and I discuss the future of cities, the smart grid and the broad issue of how different cities will adapt to climate change.

Climate Change Adaptation Offers the Ultimate Test of Behavioral Economics' Predictions

Climatopolis is meant to challenge the conventional wisdom of how climate change will affect urbanites. Neo-classical economists have a very different view of how humans cope with shocks relative to most environmentalists and behavioral economists. In my book, I wanted to highlight this intellectual debate but most of my reviewers have missied this point.  Not, Dave Levitan!

Dave Levitan has published his review of Climatopolis.  This is the first review of my book that picked up a key theme that I had hoped would captivate people and trigger a sophisticated debate.  Neo-classical economists trained in the rational expectations tradition view people as sophisticated planners who form expectations of the future, know what they know and don't know and update their beliefs as new information arrives. If we know that we "don't know" what climate change holds in store for our city, then we buy "options" such as having the ability to migrate across cities so that if a specific city's quality of life deteriorates --- we can re-optimize later and move to a relatively nicer city.  Dave Levitan reveals himself to be a "behavioral economist".

To quote him:

"The likely rise in temperature and sea level in Southern California in 2050 should affect our actions now—leading to rational (and inevitably higher) electricity and water prices, and housing prices that reflect them, better city planning, and the like—but to assume that it will ignores the often irrational ways that humans move through the world."

"Kahn writes. Because severe cold is generally more dangerous than heat waves, this increase "will have a serious impact on reducing the mortality rate in Pittsburgh." This is far too small a view: What if the city’s inland location and relatively cool climate start to draw climate refugees from coastal cities? A much larger population might strain the electrical grid, leading to brownouts and the elderly dying in homes without air-conditioning—to say nothing of overcrowding, increased crime, food shortages, water rationing, and other potential life-threatening consequences of the new, higher-temperature world order. There is no good way to predict which way Pittsburgh’s ball will roll."

Dave, I disagree --- you seem to believe that 100 million people from the Atlantic Ocean coastal cities will converge on Pittsburgh over night. Yes, this happened in 1969 at Woodstock but that is because a monopolist named Jimi Hendrix was playing there.  If the Bostons and NYC and Miami all become unlivable, Pittsburgh is just one of many destinations people could move to.  If they all tried to move to Pittsburgh, home prices would go sky high and your "refugees" would move elsewhere such as to Cleveland.  There are many safety valves here. Think about the microeconomics of this challenge for a moment and your mind will achieve clarity.

Behavioral economists read my thinking here and write out an intelligent critique!

Tuesday, December 14, 2010

Good Enough for the Web but Not Good Enough for Print

The World Policy Institute has published My blog entry about cities and climate change on its webpage but they politely told me that they would not publish it in their print version.  I can take a punch.  We economists live at the margin and I guess so does my written output.

New Research on the Home Price Effects of Installing Solar Panels: Evidence from San Diego

Who said that I've stopped doing research?   Samuel Dastrup, Joshua Graff-Zivin, Dora L. Costa and Matthew E. Kahn have just released this  residential real estate and solar panels working paper.


Abstract

This study uses a large sample of homes in the San Diego area to provide some of the first
capitalization estimates of the resale value of homes with solar panels as compared to
comparable homes without solar panels. While the residential solar home market continues to
grow, there is surprisingly little direct evidence on the market capitalization effect. We find
evidence using both hedonics and a repeat sales index approach that solar panels are capitalized
at roughly a 3% premium. This premium is larger in communities with more registered Prius
hybrid vehicles and in communities featuring a larger share of college graduates.

Jeremy Siegel's WSJ Piece Highlights the Fundamental Challenge of Studying Macro-Finance Issues

Jeremy Siegel has already convinced me to hold stocks for the long run.   Now, he is getting more ambitious as he seeks to study current events. Today, you can read here    his points concerning QE2 and why the recent rise in long term interests rates is a good thing!  Now, I could believe this would be good for him if he is holding a large gold position but he makes a different point.


"Long-term Treasury rates are influenced positively by economic growth—which encourages consumers to borrow in anticipation of higher incomes and causes firms to seek funds to expand capacity—and by inflationary expectations. Long-term Treasury rates are affected negatively by risk aversion: Seeking a safe haven, investors pile into Treasury bonds, running up their prices and lowering their yields."

So, there are 3 factors that could raise long term interest rates;

1. anticipated economic growth
2. anticipated inflation
3. reduced panic and reduced flight to the "risk free asset"

Like Meatloaf,  Jeremy Siegel believes that "2 out of 3 ain't bad".   He appears to celebrate #1 and #3 as the data generating process here.  Now, he is right to point out that #2 may not be the sole cause of this recent interest spike but his point that 3 different unobservables may account for the facts should trouble Macro-Finance scholars. There is a fundamental identification problem here.   In english, detectives try to find the man who committed the crime.  There is one crime and one bad guy. The model is identified. In the Siegel case, there are 3 competing theories for the limited number of facts but one's view of Bernanke's actions hinge on which theory you believe in. Since we can't use facts to disentangle what is the true data generating process, we can simply quote Mick Jagger in Street Fighting Man; "What is a poor boy to do, except to play in a rock and roll band?"

Monday, December 13, 2010

A Return to New York City

I lived in Manhattan from 1968 until 1973 and from 1993 until 2000.  So, I've seen Manhattan at two different points in time.   Now, I'm just another tourist.   But, in early February 2011 --- I will make my return with My NYU Talk  on February 3rd 2011.    As usual, I will be talking about Green Cities and Climatopolis.

The Solution to Pollution is Still Dilution: The Case for Sprawl Rests on Second Hand Smoke in Multi-Family Apartment Housing

Kids who live in apartments are exposed to more second hand smoke even if their parents don't smoke.  No, this isn't an income effect.  Rich people live in apartments in New York City and this offers a decent control group.

The nerds who publish in Pediatrics have a new study. "The study tested for cotinine, a tobacco metabolite used to assess exposure to secondhand smoke, and found that children living in apartments had higher levels of the chemical in their systems than those who lived in detached houses, even though their own units were smoke-free zones. Children living in town houses with shared walls had the same problem, the study found, though to a lesser degree. Average blood levels of cotinine for these children were lower than for children living in apartments but higher than for those living in detached houses."


Now the $64,000 question here is what is the impact on a child's long run development if she is exposed to extra tobacco metabolite?   The nerds do not appear to know the answer to this.

But, let's turn to the urban economics here.  Land is expensive close to the city center and in desirable parts of a city (such as Santa Monica's beach areas).  Where land is expensive, people consume little land by living in multi-family apartments.  Far from the city center (sprawl country), people live in single detached homes.

So, here is the irony.   Compact cities are good for the environment because your carbon footprint is smaller there. Use consume less land and you use public transit and you consume less electricity.  Ed Glaeser and I document this in this  Journal of Urban Economics paper.

But, in terms of minimizing your own family's exposure to urban environmental ills --- the suburbs are the place to be!   I document this point in this NBER paper.  Air pollution and crime (and apparently 2nd hand smoke) all decline in "intensity" with distance from the same center city.  So,  Greenacres is the place to be.  Farm living is the life for me.  Don't forget what Eva Gabor has to say.  See it here.  Keep Manhattan , just give me the country side.

Relive the 1970s? You Can See Your Old Car in Caracas

Caracas, Venezuela has an older vehicle stock. "We like our cars to be like tanks in this country, meaning they should be huge, comfortable and preferably manufactured in the United States,” said Miguel Delgado, 52, a mechanic in Los Frailes, a slum on this city’s western fringe, where he was working on a 1976 Dodge Coronet and a 1979 Chevrolet Impala."  

With gas prices at 10 cents per gallon, the people of Caracas can splurge on fuel inefficient vehicles and the early 1970s live on.  Now, we know that Venezuela is not a rich nation and that vehicles over age 30 are not demanded by rich people.  This combination of cheap gas and demand for relatively "low quality" roomy cars creates an economic environment in which durable cars can live on for a long time.

This point is exactly what Lucas Davis and I were thinking about when we wrote our NAFTA paper.  You remember that one?  Here is the abstract:

Since trade restrictions were eliminated in 2005, Mexico has imported over 2.5 million used vehicles from the United States. Using a unique, vehicle-level dataset, we find that traded vehicles are dirtier than the stock of vehicles in the United States and cleaner than the stock in Mexico, so when a vehicle is traded from the United States to Mexico average vehicle emissions per mile tend to decrease in both countries. Overall, however, the evidence suggests that trade has increased total lifetime emissions, primarily because of low vehicle retirement rates in Mexico. (JEL F13, F14, L62, O13, O19, Q53, Q56)

The same logic will hold for trade between the USA and Venezuela.

Why does this matter? We want the world vehicle stock to be energy efficient. If gas prices are really low in some large countries then the average fleet fuel economy there will be real bad.  Investment in vehicle energy efficiency will be higher if vehicle makers believe that all potential customers will face a high gas price per mile (and hence will demand energy efficient vehicles).

Sunday, December 12, 2010

Different Views of the Cancun Climate Summit

Margot Roosevelt has written a piece for the LA Times about the Cancun Climate Summit. At the end of her piece, several anonymous authors have offered comments.  Their comments are revealing but I do not endorse any of them.  Comment #2 below is funny.

I DID NOT WRITE THESE 3 COMMENTS BUT THEY ARE WORTH READING!


Comment #1 ReidCampbell at 5:14 AM December 12, 2010
A convention backed by the Western elitest banking system sponsered by their puppet the UN using the global warming threat as a means to broker control over third world countries, they´ll be in Africa next. There is alot of information on the internet available to open up minds to this sham and the basic destruction of western culture to promote these elitests " New World Order" agenda.

I´ve lived in a third world country for almost 15 years and what I see as the biggest factor in the contentful longivity of our species and the planet is the out of control population increase. How are you going to stop an illiterate peasant from cutting down the rainforest, or killing the last rare rhino when he has a shack full of children to feed? Throw a convention in a resort?!!¡¡¿

Comment #2   GregMaragos at 1:21 AM December 12, 2010
Me like to drive. Me like cheap gasoline.  Me like air conditioning on a hot, summer day.  Me like electricity. You get out of way or me drive big SUV right over you and squash your green butt into ground.

(thumps his chest)

Ugh!

Comment #3    tribalsouls at 12:27 AM December 12, 2010
This "Global Warming" hoax is the biggest fraud of all times! It has been proven that C02 is not the cause of temperature rising, its the exact opposite. Temperatures rising cause the C02 levels to go up! Temperatures throughout history go up and down which is normal, and if we got rid of every vehicle and C02 emitting source in the world, it would not effect the outcome of temperature changing up or down that is worth killing our economies and giving up our rights to any government. This is nothing more than the corporations that have corrupted our governments to get more of our tax dollars and control of pretty much everything.


Saving the planet is a great idea, but we need to have some logic and look at some real scientific data that is not funded by any corrupt government entity.


This quite possibly could be the worst thing to happen the free world as we know it if this goes through!

Saturday, December 11, 2010

Living Legends and Lazy Sons

Permit me to quote from this NYU Medical School Blurb about my favorite dad.  Take a look at the photo below. He inherited my hair.  For folks who wonder why I'm a pretty good teacher, you can figure this out from the hints below.  All hail the legend!   My father and I are both academics and together we offer a good example of mean reversion.  I'm very proud of him and now I'm seriously thinking about applying to medical school.


Martin L. Kahn, MD Honored with Department of Medicine's First "Living Legend" Award

Joel Smilow gives Dr. Martin Kahn the "Living Legend" award.
Joel Smilow presents Martin Kahn, MD, with NYU Langone Department of Medicine "Living Legend" award.
On the evening of September 29, 2010, the NYU Langone Department of Medicine bestowed its inaugural Living Legend Award on Martin L. Kahn, MD. Scores of distinguished guests attended the event, held in the lobby of the Joan and Joel Smilow Research Center.
What makes a “living legend”? In the case of Martin L. Kahn, MD, it is an untiring dedication to furthering excellence in patient care, education, and research at the institution that welcomed him as a medical student more than 50 years ago. It is serving as an inspiration and role model for generations of physicians-in-training and providing the utmost in skilled and empathetic care to thousands of patients and their families. NYU Langone Dean and CEO Robert I. Grossman, MD, perhaps put it best when he presented Dr. Kahn with the 2009 Master Clinician Award and hailed his ability “to listen to each patient with the concentration and attention of someone just entering medical school, and to bring empathy as deep as his knowledge to each encounter.”

The Living Legends Award is just the latest in Dr. Kahn’s impressive collection of honors and accolades. A 1963 graduate of NYU School of Medicine, Dr. Kahn was named Senior Chief Resident in Medicine at Bellevue Hospital in 1969, and went on to be appointed Director of the Coronary Care Unit at Tisch Hospital in 1974, the Saul J. Farber Firm Chief of the Department of Medicine in 1982, and the Joel E. and Joan L. Smilow Professor of Cardiology, his current position, in 2002. In addition to the Master Clinician and Living Legend awards, Dr. Kahn received the university-wide Great Teacher Award in 1998 and the Humanism in Medicine Award from NYU School of Medicine in 2001. Other honors include the creation of the Dr. Martin L. Kahn Teaching and Learning Center in the Geraldine H. Coles Medical Science Laboratory Building in 1998, and induction into the Alpha Omega Alpha Honor Medical Society in 2004.

Maintaining “the concentration and attention of someone just entering medical school” is no mean feat after nearly 50 years of medical practice, but it is that passion for what he does that makes Dr. Kahn such an invigorating and inspiring figure to all who encounter him. His own inspiration has come from the towering clinicians and brilliant minds he has worked with throughout his NYU career—men and women like Dr. Bertha Rader, the “guardian angel” of the Bellevue cardiac clinic in the 1960s; Dr. Arthur Fox, a master clinician with, in Dr. Kahn’s words, “an encyclopedic knowledge of medicine”; and the late former dean of NYU School of Medicine, the legendary Dr. Saul Farber. “If I’m now a legend,” says Dr. Kahn, “I’m just one in a web of legends at NYU. What keeps me going is the open and collegial environment here. This is a place where the opportunities for continued intellectual growth are legion, and where I’m still learning every single day from my extraordinary colleagues, students and patients.”

THE KAHN ENDOWMENT: Honoring a Department of Medicine Living Legend

To celebrate Dr. Kahn and his more than 50 years of achievement and service at NYU, the Department of Medicine is establishing the Kahn Endowment. Income generated by the fund will be used to support the recruitment and career development of the next generation of physician-scientists. The Kahn Endowment will provide benefactors with an opportunity not only to honor a beloved physician, but to invest in the careers of potential future “living legends”—young physician-scientists who share Dr. Kahn’s abiding intellectual curiosity and gifts for observation, communication, and empathy, and whose work will expand medical knowledge and transform medical practice. 

As clinician, revered teacher and role model, and the recipient this year of the first NYU Langone Living Legend Award, Martin L. Kahn, MD embodies the qualities that most closely define the practice and teaching of medicine at NYU: a profound empathy for patients and a passion for advancing medical science. “Ultimately, what distinguishes and grounds NYU Langone, and the Department of Medicine in particular, is our deeply ingrained tradition of service,” observes Department of Medicine Chair Martin J. Blaser, MD, “and Martin Kahn epitomizes that. The fundamental desire to help others in a direct, hands-on way is what continues to draw medical students to the practice of internal medicine and there is no better example for them than the career of Dr. Martin Kahn.”

You can make a gift to the Kahn Endowment online or by contacting Department of Medicine Director of Development, Donna Marino, telephone: 212.404.3590. 

Friday, December 10, 2010

Climatopolis Critics and Critics of the Climatopolis Critics

Example #1 and Example #2 and Example #3 but don't forget to study Joe Romm's calm Example #4.

Judge for yourself and click here.  If you bother, you will see a defense of capitalism as our best hope of adapting to climate change.  Yes, capitalism has caused climate change but given the situation we face moving forward, capitalism will help us to adapt to the serious climate change challenges we will face in the medium term and long term.  I'd ask that you watch my video.  Without a powerpoint presentation, I think I gave a very good speech at the Zocalo event.

If your time is valuable and you want to read the short version of my thesis then click here.

Climatopolis is both a funny book (I'm a funny guy especially relative to other economists) and it is a serious book based on microeconomic logic for studying the future of cities in the face of climate change.  I wish that I had titled the book: Climatopolis:  The Future of Cities in Our Hotter World.  I am very optimistic about the future of our cities despite climate change.  I do not believe that climate change will cause our cities to thrive but I believe that many of our cities will continue to thrive and that mobile urbanites will continue to thrive despite the very real challenge of climate change.

David Satterthwaite's Review of Climatopolis

David Satterthwaite has written a tough  review of my Climatopolis book.  Below I take an objective look at his 4 points.  "Kahn paints a beguiling picture of a world capable of adapting to climate change, a world in which people are growing wealthier and are making decisions about where and how to live, using better information than we have now about the challenges that climate change poses. Market forces and human ingenuity (driven mainly by the desire to make money) will support climate- change adaptation, he asserts. As cities experience changing climatic conditions and increased risk of disasters, households will take steps to protect their health, property and quality of life. Adaptation will take place through billions of small choices made by self-interested individuals."

"It has four major flaws. The first is that Kahn does not recognize that reduction of greenhouse gas emissions needs to be among our highest priorities right now."

chapter 1 of the book is titled "too much gas" --- I am well aware that GHG concentrations are high and rising but I'm not optimistic that the global free rider problem can be overcome. Look at Cancun today. Is a great GHG reduction breakthrough agreement about to happen? No.  The starting point of Climatopolis is that we have to be realistic about "what happens next" now that we've let the genie out of the bottle.  I would love to see mitigation but I'm a realist.    I own the IPCC volumes. They are watered down bathroom reading style literature reviews of a bunch of technical studies.  The geographical specificity in the reports is really limited. Some things are said about different continents but I found very little interesting stuff about any specific geographical areas in those volumes.

"The second problem is that Kahn does not understand the scale and nature of the risk facing most cities (and national economies) in low- and middle-income countries."

David Satterthwaite has published some very good stuff on urban development in the developing world and I cite him in my book.   He appears to view poor people in the developing world as helpless victims.  In nations such as India, as poor people move to cities and work -- what do they buy with their increased income?  If they can buy better housing and food, doesn't this help to protect them against disease and natural disasters?  Sattherwaite is not an economist.  I have never met him but he appears to believe that people are passive victims in the face of events they cannot control.  Parts of climate change are predictable.  Millions of people in India are experiencing rising incomes due to free trade.  Is he convinced that such individuals will have no coping strategies?  He ignores a key point in my book that innovation and the diffusion of "good new products" will help people all over the world to adapt to climate change. For example, innovation in renewable power generation can spread over the world once the U.S or China improves the technology. Of course, the poor suffer more than richer people but why will the poor still be poor in 20 years?  What new coping strategies will the poor have because of innovation and migration?


"The third problem is Kahn’s assumption that economic success and market forces will ensure risk reduction. Many nations and cities that will face serious risks from climate change have little economic success, and many of them have carbon emissions per person that are one-tenth or even one-fiftieth of those in cities in the United States. How will their citizens and governments react when they are devastated by climate change that they played little or no role in causing?"

income growth increases our consumption opportunities and safety is something risk averse people value and will purchase as they grow richer.  Just because nations are poor now doesn't mean they have to be poor in the future.  The Post-WW 2 case of South Korea, and China and India today highlight the dramatic progress in incomes that can take place when nations embrace free markets.  Richer people eat better diets, live in better housing, have access to better medical care and live in better communities . These facts have played out both over hundreds of years of history and at any point in time when you compare rich and poor areas.

My question for David S is the following; "David , how would you help the urban poor in the face of climate change?"  If Bill Gates gives away his fortune, this does little to increase their well being. I am deeply concerned about the urban poor in the face of climate change but the best way to help them is to embrace free market capitalism.

"The last problem, alluded to earlier, is that Kahn gives little credence to the role of government. He mentions what he refers to as a “fantasy democracy”—one in which government officials anticipate the needs and desires of their constituents, collect taxes, and provide clean water, street safety and roads."

This is a little over-stated by David S.  I am cynical about government but I discuss cases in which government's incentives can be aligned to help protect cities against climate change.  On page 122, I discuss NYC's mayor Mike Bloomberg and his efforts on climate change adaptation.  On page 68, I discuss a whole set of strategies that mayors of liberal cities such as San Francisco are likely to adopt that will help their cities to adapt.

In the Climatopolis chapter on LDCs, I discuss Tim Besley's work that in India that politicians do a better job providing public services in areas with higher literacy and newspaper readership rates. This finding suggests that in the short run that India's states with higher literacy will have better politicians in terms of having politicians who provide services that people want.  But, in the medium term --- if poor states grow richer and more literate then they will gain the same benefits (due to the political accountability effect) that literate states today enjoy.   David S should re-read page 175.   Rising educational attainment in India will help the poor to protect themselves from climate change and make them more informed monitors of their politicians and due to self interest on the part of the politicians -- this will help such states to adapt to climate change.

Note that in his review that David doesn't give any specific examples of real efforts being made by governments to adapt to climate change. I hope he is right but he is a pinch naive in his optimistic blanket statement that a paternalistic "big daddy" government will protect its citizens from the threats of Mother Nature.  Yes, New Orleans has new Sea Levees and this could protect citizens against future floods but it could also increase the count of future victims as the construction of the Levees displaces self protection by individuals who choose to live in flood zones because they feel safe due to government investment.

I'm proud that David Satterthwaite reviewed my book but he needs to take a class in microeconomics.