As you can see, Michael Greenstone is the focus of this picture and that is only fair since he leads the Hamilton Project.  Michael was kind enough to invite David Levinson and I to write a paper for the Hamilton Project.  Our paper is quite good and I think it is worth your time to read it!

This review does not encourage me to read Dan Gardner's book "Future Babble".  Gardner concludes that even the experts have trouble predicting the future.  Shocking!  What may be more surprising is that we have had great success in predicting the future.

A "small ball" example is the Zagat's restaurant guides.  The quality of a meal at a restaurant you have not been to is a random variable.  To help you make a "better choice", millions of people have studied the Zagat's guide before they invest and walk into a restaurant.  If people feel that the book gives bad advice, then they would never refer to it again and they would tell their friends and Zagat's would collapse as a business venture.  Due to competitive market forces, Zagat's has an incentive to accurately aggregate popular opinion (and it does this by averaging respondent's rankings).  The proof that Zagats can predict the future is that people keep buying their books.  Apparently, a restaurant's past success predicts its future success.

Another example:  predicting Presidential election results.  Ray Fair has demonstrated that a very simple statistical model can predict such election results.  Here are the data.  You can play around with that.

So, the author is correct that Nostradamus was a special dude but we continue to have examples of our ability to predict.

Why are some websites that help you profile who should go out on a date with successful? Match.com immediately explains how they engage in profiling using the information you provide to predict who might be a good match for you. They have the right incentives to have a good predictive model ---- otherwise nobody would sign up for their services.

If everything in life is "random" , why do firms seeking to hire employees interview people?  Why don't they randomly select a resume from a stack and just hire that person?  They don't do this because they learn things about you from the interview and these insights are predictive for whether you a good match for that firm.

So, "macro prediction" is hard --- but "small ball" micro prediction has a bright future.

I am a little bit defensive here because suppose that it is true that future events are uncorrelated with past events and suppose that it is true that climate change is raising the probability of horrible "fat tail" events, then we can be struck unexpectedly with shocks that we never anticipated and thus will be unprepared for them and will suffer greatly.

To begin to be optimistic at all about adapting to climate change, we need our entrepreneurs to be able to anticipate broad future trends (i.e to be able to predict likely scenarios under climate change). We need the population to anticipate increased risk of living in certain locations (i.e coastal areas at risk to flood). If flood locations and severity is completely unpredictable then even people who want to protect themselves will have no idea where to locate themselves to protect themselves.   Now, climate scientists wouldn't bother to study long run data patterns if it offered no clues about the future.

We know that there is always a "silver lining" of disasters.  At a minimum, new government jobs are created as the public demands "action"  and somebody must co-ordinate the rebuilding efforts.   Whether the shock is the Moscow Heat Wave of 2010, 2005 Katrina or 2011 Northern Japan, how much do we update our prior beliefs in response to a very salient shock?  Permit me to offer some quotes from this article.

"We can only work on precedent, and there was no precedent,” said Tsuneo Futami, a former Tokyo Electric nuclear engineer who was the director of Fukushima Daiichi in the late 1990s. “When I headed the plant, the thought of a tsunami never crossed my mind.”

This is a fascinating quote.  Mr. Daiichi is implicitly saying that based on his sampling of history that the probability of a Tsunami affecting his power plant was 0%.  This sounds a little like Wall Street in 2008.  In that case, what was the probability that all U.S local housing markets declined in value at the same time? It had never happened before so it couldn't happen.

For those who care about adapting to climate change, this is fascinating stuff.  Climate change is likely to raise the probability of very unlikely nasty events.   If these events used to be a 1 in ten million chance of taking place and now they are a 1 in 100,000 chance of taking place,  then there will be protective investments that will pass a "cost/benefit" test that could be invested in.


"For some experts, the underestimate of the tsunami threat at Fukushima is frustratingly reminiscent of the earthquake — this time with no tsunami — in July 2007 that struck Kashiwazaki, a Tokyo Electric nuclear plant on Japan’s western coast.. The ground at Kashiwazaki shook as much as two and a half times the maximum intensity envisioned in the plant’s design, prompting upgrades at the plant.

“They had years to prepare at that point, after Kashiwazaki, and I am seeing the same thing at Fukushima,” said Peter Yanev, an expert in seismic risk assessment based in California, who has studied Fukushima for the United States Nuclear Regulatory Commission and the Energy Department.
There is no doubt that when Fukushima was designed, seismology and its intersection with the structural engineering of nuclear power plants was in its infancy, said Hiroyuki Aoyama, 78, an expert on the quake resistance of nuclear plants who has served on Japanese government panels. Engineers employed a lot of guesswork, adopting a standard that structures inside nuclear plants should have three times the quake resistance of general buildings."

So, in the aftermath of a disaster --- how do risk regulators recalibrate their subjective risk assessments? Do they tend to "over-react"?

The adaptive process involves both government self-protection investments and private sector investments.  Will people choose to live close to such plants and in such coastal locations?  What materials will they build their homes out of as they rebuild?  The media is reporting that concrete homes in the Tsunami zone survived the disaster with much less damage than wood homes.  How will this lesson affect the rebuilding effort?

Returning to climate change adaptation, the key issue here is subjective risk assessment.  For voters and day to day citizens, do salient disasters shock people into changing their lifestyles so that they are protected from the next disaster? In the case of the Moscow Heat Wave of 2010, I am sure that this will stimulate air conditioner sales so that next summer's Moscow Heat will cause much less suffering.  Does this optimism hold more broadly? Or are we doomed to make the same mistakes over and over again because we do not learn?

Economists are sure that people do learn from their mistakes and increased fat tail risk offers a fascinating test of this optimism.  In my 2010 book Climatopolis,  I present a "Chicago" free markets and rational expectations case that our entrepreneurs and our insurance industry have incentives to think ahead and anticipate fat tail risk.  This risk creates opportunities and challenges for them. I talk in the book about the behavioral economics world view and its implications for anticipating our ability to adapt to climate change.  Now, this doesn't mean that we have "perfect information".  Instead, rational households and firms recognize that they face a moving target and "know that they don't know" the likelihood of future states of the world. Anticipating this ambiguity, there are actions they can take today to protect themselves that are likely to be cost-effective.   Companies that can figure out new products that reduce risk exposure are likely to become rich in our hotter future.  

I fly back from Rome to LA tomorrow. I have been in "old Europe" for 2.5 weeks now and it is now time to return.   My mind is clear and I'm eager to get back to work again.  I owe work for several co-authors and I apologize for being a bum.    To reduce academic leisure, I propose that everyone's tenure should be revoked and we should all have to earn our privileges again.

My dad always asks me; "what have you learned recently son?"  So,  What have I learned in Europe?

1. In Maastricht, Holland -- the people are tall and the food is good.  You will not find a Starbucks there. If you look for coffee at a "Koffee House" you will meet drugged out dudes eager to sell you "weed".  I didn't buy any.

2.  There are many places to buy beer in Maastricht and the beer is good.

3.  Maastricht University has many serious economists and I greatly enjoyed talking to them.   You should read the work of Piet Eichholtz and Nils Kok.

At the Green Real Estate Conference, I talked and talked some more.  Several of my U.S friends were there (Max Auffhammer, Erin Mansur, Howard Chong,  Dwight Jaffee, John Quigley,  Grant Jacobson) and old friends such as Henry Overman and Yongheng Deng were also participating in the conference.    My favorite wife was also in attendance and without our son around we had the chance to talk to each other.  We had dinner together in a cave in an old Castle and we drank a lot of high quality wine.

4.  The International Herald Tribune is a pretty good newspaper.

5. There is an airline called "Ryanair" and I don't fit into their seats.  When the plane lands, they play a celebration bugle that matches the sound of the start of a horse race and everyone on the plane cheers that they are safe and alive.  Pretty strange!

6.  At European airports, there is no gate for loading you into the plane; you disembark from a steep staircase that I was worried I would slip on.

We miss Los Angeles.  I miss the modern showers and the smells of Spring but I am a big fan of Europe and hope to return soon.

For my friends at UCLA who actually expect that I will do what I promised I would do (and I can't remember what I promised to do),  I will be very busy the next couple of months.  I am refreshed and ready to work very hard again.  

REPEC provides an objective measure of who is "Royalty" in the economics profession.  The current list of the top 5% is here.   I am ranked #681 out of 27,365 economists so that's not bad (and my 3 books aren't counted here).  But, here is the interesting part.  There are 52 women who rank in the top 1000 and 0 of them blog.  Contrast that with the men.  Consider the top 100 men. In this elite subset; at least 8 of them blog.  Consider the men ranked between 101 and 200. At least, six of them blog.  So, this isn't very scientific but we see a 7% participation rate for excellent male economists and a 0% participation rate for excellent women.    This differential looks statistically significant to me.   I have searched for Nancy Folbre among the top 1369 economists (the 5% cutoff) and she is not counted in the elite subset.

How do you resolve this puzzle?  A Household Production Theory of leisure would posit that men have more leisure time than working women and that nerdy guys spend more time reading and writing blog posts (such as this one).    If women who work are also providing more time in "home production" in cooking and rearing children then the time budget constraint will bind.  UPDATE: One blogger responded to this post by arguing that economics bloggers are posting combative nasty stuff and that most women don't want to participate in such professional wrestling.  While, there is some truth to this --- I use this blog to promote my own work rather than to drag others down.  Leading economists such as Gary Becker use their blogs to talk about the real world rather than to score some cheap debating points.

Is the dearth of top women bloggers a problem?  It actually is in the following sense.  The shrewd academic uses his blog to market his ideas and to "amplify" his new academic results. This is a type of branding. I am a like a mediocre washing powder that advertises on TV using jingles and this is good!  You don't have to be as big a star as Tyler Cowen to leverage your blog into new opportunities. If women are not participating in this sector, then excellent women are losing certain opportunities that the blogger class takes for granted.  In a linear algebra sense, we may also be losing out on important ideas that women would offer if they did blog. Perhaps, men do not know everything?

Solutions to this problem?  That's your problem --- my job was to pose the riddle and answer the question.

Fewer pregnant women now smoke than in the past.  What role has this fact played in recent crime declines?  Here is a cross post I wrote for the "Same Facts" blog.   In the clash of the titans, we now have "lead", "abortion" and "smoking" all dueling it out.  Note that 2 of these 3 are "environmental factors".   If environmental economists can now claim both climate change and urban crime as our domain then our future is quite bright!

Tomorrow we travel to Holland's Maastricht for a Green Buildings conference. I have not been in Holland for 25 years so we will see whether it has changed or whether I have changed.   We have been in Europe for about 2 weeks now.  The contrast between Europe's dense walking streets, weird smells in the air, and its small bathrooms and apartments stands in contrast with the sprawled U.S.    I must admit that I like both.

Here is a copy of the slides for my thursday Climatopolis Keynote.   Dora and I will also be presenting our solar paper that is jointly authored with Sam Dastrup and Josh Graff-Zivin.    Yongheng Deng will also be presenting a new paper I have written with him, Siqi Zheng and Jing Wu.

Here is the abstract for that paper;

Investing in maintenance and repair of existing urban and transport infrastructure isn't sexy.  No politician attends a ribbon cutting for a bridge improvement. Yet the irony is that our cities have developed around existing infrastructure.  But, political challenges arise.  If the Republicans live in the suburbs and the democrats live in the cities, will Republicans support "fix it first" policies that they will anticipate will be paid for by them but will mainly benefit the "Big City Liberals" who live and work in the old center cities (think of San Francisco,  Chicago, Boston).

Critics have the right to be concerned that "fix it first" is merely a politically correct slogan to justify more Keynesian expansion of government.  What would calm down the critics?

In this Brookings Institution Paper,  David Levinson and I lay out a microeconomic strategy that simultaneously will lead to infrastructure improvements and lead to the "right" projects to be done at low cost.

If a state wants to improve an old bridge, we want it to use its own share of the Federal gas tax revenue for this.   We would redirect gas tax revenue away from new road construction towards investments in improving the existing system.  If cities and states must use their own funds as part of the financing, then they will have strong incentives to only propose valuable projects.

In one corner of the ring, we introduce Ed Glaeser boxing in a 3 piece suit and lit cigar.  He writes about the vibrancy of our center cities.  In the other corner, we have the ex-boxer Mike Tyson celebrating the peace and quiet that the Las Vegas suburbs offer.  Who will win this battle of wits and brawn?

Imagine if you were the proud parent of 35,000 different teenagers.  By a law of large numbers at least 1% or 350 of them will do something "wild and crazy" each year and the rest of your neighborhood will hear about this and say to themselves; "those crazy Kahn kids".   A University President faces this challenge.  He/she is the public face of the University and is supposed to keep "his house in order".  In this age of Facebook and Youtube, any "wild kid" has a microphone.  She/he is aware if they do something wild that they can go viral and have their 15 minutes of fame. This creates bad incentives unless severe punishment is anticipated.

UCLA Chancellor Gene Block has created his own Youtube video in order to respond to Ms. Wallace's original  video.

As a faculty member and as someone who has spent almost 5 years now at UCLA, permit me to make a few points.   UCLA is a happy, serious place.  As I walk the campus, I see all sorts of happy students walking around living their lives to the fullest.   I hear students speaking many different languages to each other.  This is an immigrant friendly campus and this is a good thing.

Each year, I sponsor visiting faculty and graduate students (mainly from China) and they have a great year living and learning at UCLA.   Students from Asia should be confident that if they enroll at UCLA that they will have an excellent learning experience and high quality of life.

U.S universities tend not to be the great melting pot that they claim to be. Similar to all U.S Universities,  and I have previously taught at Columbia, Harvard, Tufts, Stanford,  there is an unfortunate amount of ethnic segregation on campus.  Speaking in broad generalities, students of similar ethnic groups tend to cluster together in social settings.  I do not know Ms. Wallace (and I have not watched her video) but I would want to know whether she has any UCLA friends who are Asian immigrants? Has she expressed her "pet peeves" to them?  Did they agree? Did they answer any of her questions?

Universities make a big deal about "diversity" on campus but continue to struggle with how you integrate a diverse campus beyond admissions counts. You can't force "bridging social capital".   Since I have not blogged about social capital in a long time, I should remind you of the past work that Dora Costa and I have done on this subject.

UCLA does not deserve a bad rep for the ugly choices made by one of our students.   We have many great students and some bad ones.  As I have blogged before, UCLA's student body would be more diverse if we change our admissions rules to become 40% out of state.  There are too few people from Chicago, New York City, its suburbs and the greater Boston area at UCLA.  These individuals would offer UCLA both diversity and $.