Starbucks has taken its business model (expensive good coffee) and exported this concept to every major city around the world.  I was just in London and didn't have to walk far to find a Starbucks (namely 300 feet).   There are other Seattle businesses such as Glassybaby that  have not enjoyed equal success in "exporting" to other cities.  This article  offers some insights about the challenges of trying to play in the "big leagues". 
This article interested me because of its relevance to the broad topic of urban real estate. It is important to ask who might demand such real estate and what profits can they earn from leasing it. 

Below, I supply a photo of Moshe (not Buchinsky) Cavalin. He is a 13 year old UCLA student who has just published a best selling autobiography.   At age 13, my autobiography would have been a pinch thin.






While his book may raise the hopes of billions, I find this a pinch silly and I urge Moshe to get back to work.

Economists should have something smart to say about the consequences of making our tax code more progressive. Yes, this will make Warren Buffet happy but will it make Jacob Mincer happy?  Will our future society have less human capital and skill because of such a policy change?

A useful debate is now playing out concerning the consequences of changing the tax code. This smart Harvard undergraduate argues in today's Crimson that increases in the marginal tax rate will not discourage work effort.  Did he receive an "A" in Dr. Mankiw's course?   He may be right about short run effects of his policy shift but he is ignoring the long run effects on human capital acquisition.

To quote the author;

"I’ll be taking on one such assumption right now: the claim that higher marginal income tax rates discourage work. Though an article of faith in economic policy, this misguided belief actually stems from inaccurate assumptions made to simplify economic arguments. When compared to the real world, it simply does not hold water."

He argues that; 1. people don't really understand the non-linear tax rates they face, 2. That high earning people do not control how many hours they work and thus can't optimize at the margin even if they wanted to.

He ignores the human capital accumulation issue.  Facing a higher marginal tax rate, will people continue to invest less in  specialized time intensive skills and learning?  Does high tax Europe have a high degree of specialization and investment in human capital?

The Nobel Laureate James Heckman and Pete Klenow have an under-appreciated paper available here.   Read page 44 of their paper, "The progressivity in the tax schedule will tend to discourage human capital investment."  This unintended consequence of raising marginal rates should be incorporated into cost/benefit analysis of tax changes.

At the bottom of page 48, they write; "For the most skilled, both schooling and post-schooling investment is likely to be reduced when taxes are progressive."

They argue that such taxes reduce inequality but also lower the possible growth of the entire economy by reducing the effort of the skilled to invest.

If human capital is the key to long run growth, then is this a wise choice?  We need more empirical work to know the size of this distorting effect on long run incentives.

Are the people of Los Angeles tough on their San Francisco nude associates?

"I brought my out-of-town guests here to show them an ‘only in San Francisco’ experience,” said Maggie Cahill, 53, a technology manager at a bank who stood scrunching her nose at the scene with friends from Los Angeles. “Where are the supermodel types?” she asked. “We want to know why it’s always the people who should not be naked who get naked.”

I respect self confidence.  

Switching subjects, I gave my first lecture of the 2011-2012 Academic Year this morning.  The students are looking rather young. They didn't care when I told them that I've been a professor for 20 years and that I'm starting to understand what I'm doing.   I asked them why I chose to become an economist. I asked them what economists do all day long? I asked them why economics is an exciting field?  I'm waiting for your answers!

Everybody now knows that the DOE blew it when it guaranteed roughly $530 million dollars of loans to the "green" solar firm Solyndra.  But, we do not know what criteria the DOE used to judge whether this was (ex-ante) a good use of public funds.   Read this letter sent to Secretary Chu in 2010.  Many people have wondered how the DOE evaluates potentially promising proposals.  A for profit bank will use statistical models to try to predict the probability of default.

In the case of this loan, the DOE had more a complex objective.  It wanted to spur new U.S green economy research and it wanted to stimulate the economy and it wanted to be paid back.    What information did DOE officials receive that allowed them to make a decision?  Did the company provide projections concerning job growth over the short run? How could DOE evaluate the merits of such claims? It is well known in the transportation literature that project boosters always overstate ex-ante the likely ridership of new subway lines to encourage politicians to invest in them (see the work of Don Pickrell and John Kain).

Now Secretary Chu is an expert on energy issues. Has he assembled a team of experts who sat down and thought about how promising was the core strategy of each loan that was being considered?   Other bloggers say that the answer was "no".  Here is a subtle post.  To quote the author; "The difference isn't the nature of the risks, but rather the nature of the investor -- the federal government, straying far from its domain of demonstrated competance.  This is the core issue I see in the Solyndra situation, but one that seems to be getting overlooked.  The Title 17 loan guarantee program, in all of its various forms including a swath of more recent even larger plans to have a federal "Clean Energy Bank", is poorly structured to achieve success.  It puts a handful of largely invisible bureaucrats and advisors in the position of making unprecedented wealth transfers to fund high risk private ventures."

My concern is that the DOE was spending other people's money and thus didn't have sharp incentives to think through the merits of each loan.  I wonder if it was under pressure to get the $ out there to get the Keynesian demand push going.

The DOE should tell us how much time they spent evaluating the Solyndra proposal and who testified in front of them concerning the issue?   Did any congressional members lobby hard?   There is an asymmetry here. The supporters of Solyndra have every incentive to lobby hard but there is nobody representing "the budget". The opportunity cost of investing in a company such as Solyndra is to hold onto that $ and wait to see if a better project comes around.   But, the "winners" from this option are too diffused to be willing to lobby hard for this "patience" strategy.

The NY Times disagrees with my analysis. It's Editorial Page ascribes the Solyndra case to "bad luck".

To quote the article;

"Solyndra made a bad bet, investing heavily in a new type of solar array just as the price of silicon, the main ingredient in competitors’ solar cells, was dropping. Its demise should not spell the end of federal investment in the alternative fuels and energy sources that are critical to reducing greenhouse gas emissions, easing this country’s dependence on fossil fuels and keeping it competitive in the race for clean-energy jobs."

I agree with the second sentence but I believe that the DOE needs to be clear about its criteria it uses to evaluate projects and how it collects "kosher information" to prospectively evaluate these loans rather than engaging in wishful thinking.  

If venture capitalists aren't financing a "green investment" then does that send a bad signal that it may be a very risky  project?  

A final point.  Could the availability of public sector capital actually hurt the company's long run prospects. If a  Green CEO knows that he can rely on the government as his sugar daddy then this may create a moral hazard effect such that he invests less effort in building his prototype which he would have needed to convince Venture Capitalists that his firm is a profitable endeavor.

Some things do not change. Back in October 1988, I wasn't the best macro student in Prof. Lucas' class.  This morning I tried to raise my game and read through his interview in today's WSJ.    I didn't think it was a very informative interview.  Here are the questions I would like to ask him.

1.  Your work has highlighted the dynamic game that is played between optimizing consumers, firms and the government.  What "rules of the game" should the government commit to in order to raise long term growth?  Should the marginal tax rate on capital be zero?  Should we have a head tax per worker?

2.  If the policy rules you support exacerbate short run recessions, should government spend considerable amounts of money in the short run to bailout people who are suffering?  Are you a "tough love" guy?  Is that a time consistent policy position for politicians who must face the angry electorate? What stand do you take on unemployment insurance provided by the public sector?   How do you balance compassion for the suffering versus minimizing moral hazard effects?

3.  You and Paul Krugman seem to have very different visions of how our economy works.  Given that you are both Nobel Laureates, how can there be such a divergence in your respective views of the economy?   Are your differences with Prof. Krugman based on "science" or on personal tastes over the equity/efficiency tradeoff?   For example, Krugman appears to believe that there is significant duration dependence with respect to unemployment.  Intuitively, this means that the experience of being unemployed now makes you less likely to be employed in the future because your skills atrophy.  Do you believe this?  In your past work, you have famously argued that the welfare costs of recessions are quite low because the representative agent's consumption falls by about 2%.  Do you still believe your claims?

4.  In your work on rational expectations, you implicitly assumed that everyone agrees on the true probability distributions of future random variables such as the inflation rate or shocks to the economy.  In the real world, people disagree over their subjective assessments of the likelihood of future random variables (i.e what is the probability that unemployment will be 15% in the year 2013).   While it is difficult to incorporate such heterogeneous expectations into formal models, do you believe that this is an important research subject to explore.   Where does "confidence" come from?   How has Hansen and Sargent's work on robust control influenced your thinking about models of business cycles?

5. Building on #4, do you believe in the importance of social interactions across individuals? If my friends are pessimistic about our future, can this have a contagion effect on me such that I become pessimistic and change my investment plans accordingly?  In this case, what role does the media play here?  If we acknowledge this possibility, then do issues of multiple equilibria arise?  Can the government play a role in nudging us to a better equilibria in this case --- if it could "instill confidence"? I see from your piece in the Minneapolis Fed publication that you are thinking about "Bank Runs" and Diamond and Dybvig's JPE paper.  Doesn't this work harken back to multiple equilibria models that we weren't taught back in 1988 with the focus on the one sector growth model?  In graduate school, I recall that you didn't want to engage on the broad topic of self fulfilling prophesies.  What has changed your mind about the importance of this topic?

6.   If the Fed and Ben Bernanke acknowledge that they "know that they do not know" whether their policies such as QE and QE2 will be effective but they say; "we are running an experiment and will see what happens" , how does this influence models of private sector investment.  When the decision makers in the economy acknowledge that they are learning about a moving target,  what is the best response by optimizing consumers and firms to such fundamental uncertainty?   If the answer is delay (due to option value), what is the government's best response to the private sector's best response?   How do macroeconomists avoid being dragged into very messy game theory?

The NY Times has published a politically incorrect piece  about immigrant purchase and use of poisons in big cities.  Typically living at high density and facing a rodent problem, some immigrants turn to purchasing powerful poisons to solve their problem.  These products (made in China) promise to leave the "cat unemployed".   (This quote made me wonder whether cats are counted in the BLS unemployment statistics?).

In the quote, I reproduce below, the NY Times claims that social networks among immigrants is the reason for the "poison externality".    This is an interesting twist on the usual beneficial social networks story that immigrants arrive and learn and succeed and then tell their friends at the origin about the benefits of moving to a location and this creates path-dependent migration.


"The product at the center of that investigation, which government officials disclosed this week, was sold in a box printed with Chinese characters and an awkward English translation: “The Cat Be Unemployed.” Officials said the substance contained a toxic chemical in a concentration almost 61 times higher than federal regulations allowed.

Though several professional exterminators said they had never encountered the product, they said it was just the latest in a stream of goods that for years had flowed from overseas factories into the supply closets of households and businesses in New York.

City health officials said that since 2005 they had received about 100 reports of poisoning from Tres Pasitos and two other anti-pest products favored by immigrants, Tempo and Chinese Chalk. While there were no deaths, about 40 percent of the victims had to be treated in medical centers, officials said.

Lower prices and language barriers can steer immigrants toward the underground market, immigrant advocates say. So can cultural biases: immigrants become familiar with products in their homeland and import their preferences, and sometimes the substance itself, when they move to the United States. They pass along their knowledge and techniques to neighbors and friends. "

So, how should this problem be solved?  Could educating the community about the consequences of using this product do the trick? I doubt it because each user will view himself as small.  Could rising incomes solve the problem?  Perhaps but enforcement will be needed to curb this density externality.

UPDATE:  Given that the theme of this blog post is politically incorrect, permit me to continue.  There is a long tradition of discussing environmental justice issues in immigrant and minority communities. I have written on this topic.   But, in this case --- the concentration of immigrants is causing the pollution challenge.

This news was not good news.   California is phasing out a surcharge on electric utility customers that was earmarked to subsidizing purchases of energy efficient appliances and for paying for basic research.

There may be a serious lesson here.  Proponents of this charge never convincingly demonstrated that this money was being spent on "good things".  Rigorous cost/benefit analysis of taxes and government intervention plays a crucial role in educating skeptical consumers that they are getting their "money's worth" when they sacrifice private consumption in return for providing a big pot of $ that can be spent on new technology and funding research.

Liberals mock Tea Party members and are shocked by their refusal to "do their share" for the greater good.  I can imagine that Tea Party members would be more likely to support higher taxes and a larger government sector if they believed that this money was well spent on public goods that benefit society. If there is a belief that the increase in public goods financed with new tax dollars is tiny, then most taxpayers will not support such legislation.

So, my point is that society needs to empower the economists to step in and evaluate which government investments are cost effective and which are not.  It is not clear to me that a serious evaluation was ever conducted concerning whether this electricity surcharge yielded net benefits to the people of California.   If I had been asked to conduct such research, I would have examined the following;

1. For the people who purchased energy efficient appliances and received a rebate, would they have purchased similar appliances had they not received rebates?  Were they at the margin?  How much greenhouse gas emissions was abated because of this incentive program?  Valued at $25 per ton, what was the total benefits on this margin?

2.  For the research projects funded by PIER, what did we learn?  What are the major ideas?  Would we have been likely to have learned these ideas if this grants program hadn't existed?

2011 has been a terrible year for natural disasters but for those of you who need some optimism, read this report about long run trends in deaths from  natural disasters.  I was happy to see that the author has read my 2005 RESTAT paper the "Death Toll from Natural Disasters".

PERC's Terry Anderson has a smart OP-ED in today's WSJ.  Here is a line from his last paragraph; "
It is not enough to strut your stuff in clothes made of recycled materials while driving your hybrid to an environmental protest. And environmental quality cannot be bought simply by throwing more tax dollars and regulations at problems."

He advocates for a "Green Tea Party (GTP)" .  To quote the article;

"The GTP's platform would be that only prosperity and incentives can drive environmental improvements. The first plank: Wealthier is healthier. From the U.S. to the former Soviet Union, data show that economic growth is necessary for environmental improvement, not its enemy. Such growth requires a strong private sector, not more federal spending and red tape. The second plank: Incentives matter. The GTP would use a carrot instead of the regulatory stick to improve environmental quality, and let energy markets and prices dictate energy sources. A replacement for fossil fuels will be found only when entrepreneurs can make a profit from cheaper, cleaner and more efficient energy."