Monday, January 31, 2011

China's Green Cities

I am an optimist.  In January 2011, I gave a talk at the World Bank focused on my ongoing work on the relationship between urban economic growth and pollution dynamics in China's cities. You can watch it here.

Sunday, January 30, 2011

The Family Name Brand: The Case of Robert and Raphael De Niro

Raphael De Niro has received a full page NY Times story about his recent success as a real estate broker.  This is a classic example of "product differentiation".  Small differences in perceived "quality" can snowball into large differences in ex-post economic returns (i.e incomes).   I have blogged before about social networks and the inside track they provide for "connected" people within a big city.  Since economists are empiricists and since it is difficult to track "who knows who and who is related to whom" --- economists have had trouble creating a "facebook" type network to establish cause and effect relationships in determining how powerful friends and family affect your future.


"Plenty of rival brokers attribute Mr. De Niro’s success to his last name, saying many of his sales began with referrals that his father or Elliman’s top management had handed him. But connections alone cannot explain multiple eight-figure deals when similar properties sit idle for months."


"Developers including Steve Witkoff, who converted the Cipriani building at 55 Wall Street, and Richard Born, who built the Richard Meier towers on Manhattan’s West Side, count on him for his habits of arriving five minutes early to appointments, returning their calls faster than anyone else and playing down his pedigree.
“Anybody can be out there selling a home when times are good,” said Gerard Longo, another major developer, for whom Mr. De Niro has sold at least $80 million in condominiums over the past two years. “He has clearly become a go-to guy in tough times.” "

So, arriving early to appointments and being polite on the phone are worth millions in NYC?

Without knowing the facts, it seems to me that Raphael De Niro has benefited from becoming a "focal point" -- rich buyers and sellers believe that he can connect them in beneficial trades and this creates a self-fulfilling prophesy.  

In this age, when we worry about superstar pay --- this youngster is earning a fortune.  But, this begs the question; what is his "quality"? What unique services is he providing to merit his 3% on 8 figure sales? He is classy, he knows his dad, he smokes, he has hair.  Is that quality?  The market says "yes" and I find that to be interesting.

Saturday, January 29, 2011

CPI Bias Revisited

I disagree with Tyler's thought provoking core thesis presented in this piece.   Innovation is sharply reducing the quality adjusted prices of all sorts of major goods we consume in markets.  This raises our real incomes.  Local pollution has sharply improved in the U.S.  This raises our real "hedonic" income.

In 1962, the Internet, the Smart Phone and Facebook would have been expensive to use.  These new products have generated a huge amount of consumer surplus.  Let's see a smart young IO economist quantify that!  Yes, new cereals and mini-vans generate consumer surplus but I want an estimate of Facebook's value added. Now Tyler would say that such improved leisure doesn't appear in the income statistics but you don't have to be Nordhaus or Tobin to argue that this means that the accountants haven't measured what matters.  Recall their classic;  "Is Growth Obsolete?"

Let's turn to life expectancy;  if I'm reading this ugly Google graph correctly for the United States;
 

Life expectancy has increased about 8 years since Tyler's birth.  That's valuable stuff!  to an optimistic like me, that sounds like progress.

Note that Tyler doesn't mention pollution in his article.  Urban water pollution and air pollution in the United States were much worse in 1960 than now.  Think of Los Angeles smog, Pittsburgh haze then versus now.  Think of the quality of our urban rivers then versus now.

CPI doesn't reflect non-market goods.  The "price" of clean air has plummeted over time ---In the past (in 1970), you'd have to live in expensive Malibu to purchase clean air. Now you can live in dozens of Los Angeles communities to purchase such clean air.  Innovation has played a key role in mitigating the nasty issues of air and water pollution.   These examples highlight how innovation can improve our quality of life without being explicitly seen in GNP accounts.  Tyler's grandma would be quite impressed with our Green Cities. You should all read my book on this topic. You can find chapter 1 on my UCLA webpage.

Recall that CPI (consumer price index) measures inflation.  I believe that continued improvements in the quality of new goods at such a rate that there is negative inflation over time. The real purchasing power of a dollar rises.  Take a look at this paper by Robert Gordon.

What is the right market test of progress?  We need a time machine and we need to know how much you would need to be paid to get in it to live your life in the past (while knowing that you won't know who will win the Super Bowl in 2010, I can't let you change the course of history).  In symmetric fashion, for people like Tyler's grandmother born in 1905 --- how much would she be willing to pay to have been born in 1962 versus 1905?

I believe that my son (born in 2001) will have a better life than my solid (1966) life.   Expected Innovation is a major piece of my optimism.

I've met others deeply concerned about terrorism, climate change and the general U.S malaise who believe that our next generations will not have a better life than ours.

My Return to New York City

I will be back in NYC at the end of next week for  this NYU Wagner School event and a friday talk at the Environmental Defense Fund.  While the temperature in New York is 45 degrees cooler than what I'm used to, I'm still looking forward to participating in these events and seeing my family.

I understand that the Northeast corridor (Boston,NYC, Washington DC) is an exciting place to be but I remain convinced that Los Angeles is heaven.   The right test of this claim is to contact the ex-UCLA faculty who have left for other schools such as Michigan, Yale, Texas, Washington Univ, Penn, and Duke and ask them how much they miss LA.  Have their new destinations offered them a higher quality of life than what they had in Los Angeles?  I strongly doubt it.
 

New Thoughts on the Co-Location Problem: Evidence from Political Science "Power Couples"

Over a decade ago, my wife and I published a paper about the locational decisions made by power couples.  We documented their increased concentration in thick local labor markets such as Los Angeles, and New York City.  Such local markets feature a large number of potential employers and by locating in such an area it reduces the likelihood that one of the spouses will have to sacrifice in the name of love.  So, big cities "solve" the co-location problem.   Less urban Universities such as Cornell are well aware that they face a challenge of making sure the spouse of an academic they are trying to recruit can find work or otherwise such "rural" schools will fail in achieving their objective.

I didn't really care if highly educated singles meet in big cities, and then remain in such cities or whether highly educated married couples choose as a pair to move to a big city.  Both of these dynamic paths yield the same empirical finding.

During the 2000s with the run up in income inequality, some highly educated married women (presumably married to men earning very high incomes) reduced their hours worked and focused on family but I believe that the co-location problem persists.  Today, this political science blog threat is  worth reading . It sketches some familiar tradeoffs that households face in choosing where to live their lives and how "power" works within the household and who ultimately sacrifices what.

Innovation Thrives Due to Globalization

Global capitalism yields lower quality adjusted prices for goods we want to buy.  Classic comparative advantage means that people in Boston do not have to grow their own fruit or brew up their own gasoline, they can import it cheap from elsewhere. 

In the case of new products, for which we need innovation and for which risky R&D expenditures must be incurred up front, globalization is a very good friend.  In this NY Times piece, I pushed this point in the case of green tech.  Some angry folks had some bitter responses to my optimistic piece.

Today's New York Times offers additional ammunition for my point.   Consider the Yale Professor Xu Tian.   He is returning to China each year.  Why? To see his mom?

"At Yale, he devised a process that allows mass production of genetically altered mice, an important step toward decoding the genome. At Fudan, he perfected it, and he is putting it to work at laboratories that hold one of the world’s largest collections of test animals. Soon, the new campus will sprout another building in the neo-Classical style: the Fudan Institute of Developmental Biology and Molecular Medicine, of which Dr. Xu is a co-director.


The Chinese government built them all, gratis.

In a sense, Yale and the Hughes Institute have outsourced the genome project to a place where labs are built quicker and more cheaply — “China speed,” Dr. Xu said, half-jokingly — and where talented young scientists work for a pittance.  “Realistically, with the flatlined budget in science, one can imagine he’d have to spend six times the money he’s spending in China” to duplicate the labs in the United States, said Jack E. Dixon, the Hughes Institute’s vice president and chief scientific officer. “It’s probably just not possible in the United States to do that on the scale that he wants to do it.”"

SO, does this mean that the United States loses?  Let's quote the article again;

"Science is not a zero-sum game — even when the competition is trying to poach your stars, said Dr. Dixon of the Hughes Institute. World-class research benefits all humanity, regardless of where it originates.


“Some Chinese labs are in fact very competitive with U.S. laboratories now,” Dr. Dixon said. “And in a way, that’s what you hope to see — that they would excel. I don’t view this as an arms race of any sort.”

Dr. Alpern agrees. “The key to success in the United States is strengthening the American enterprise, not trying to slow down another country,” he said."

These quotes nicely restate the point of my "green tech" article.  Whether the example at hand is green tech or biomedical progress the ideas are the exact same.

For those of you who worry about our trade deficit and ask; "what can the U.S export to China?"  The answer is tourism.  They will visit us --- we are cute, green and nice.   A better answer is that we will continue to export quality to them but to guarantee this , we need to raise our game.








 

Durable Housing and Overall Trends in the Economy's Energy Efficiency

Now that Universities such as Texas A&M are ranking professors with respect to their "profitability", I expect that UCLA will embrace similar performance standards.  Since I believe that "incentives matter",  I turned off my television and I wrote a new paper with Dora L. Costa.  Here is the paper link.  I'm now considering launching an IPO of myself the day before Facebook goes public.  A free copy of this paper is available here.

In our new paper, we document a cool fact.  A fact that I didn't know and I doubt that even you knew it.

In the United States, homes consume about 30% of overall electricity generated.   At any point in time on your street, there will be some new homes, some homes built 5 years ago, 15 years ago, 35 years ago and even some built 90 years ago or longer. Housing is a long lived durable good. It lives longer than computers or cars.

So what? From a green perspective, if we build a "bad cohort" of homes say 1956 motel architecture, this cohort will be with us for a long time.

As a believer in "progress", I had assumed that homes built more recently always consume less energy than older homes. It is true that newer homes are larger and have more "modern" features but you can control for many of these factors using simple statistical techniques.

Dora Costa and I first document based on a large sample of California single family homes in calendar year 2000 that homes built in the 1970s have higher electricity consumption than homes built in the same geographic communities built more recently and homes built in the 1960s.

In the more interesting second step of the project,  we have invested the effort to track down the electricity price in the home's vicinity at the time it was built.  So, a home built in Westwood in 1968 would have faced a different "birth price" than a home built in Westwood in 1982 because LADWP changed the price of power. Similarly, a home built in Westwood in 1968 would face a different "birth price" for power than a home in Berkeley also built in 1968 because LADWP  and PGE were charging different prices for power at the same point in time.

Dora and I exploit these two types of pricing variation to document that homes built when power is cheap  are less energy efficient today!   Note that "today" can be 30 years after the home was built.  Dora was interested in this topic because of her work on cohort studies.  Housing at any point in time represents a set of birth cohorts (1 year old homes, 55 year old homes) all on the street. The average home can become more energy efficient if new homes are more energy efficient and  a growing share of the total (think of China today) or if we scrap the older inefficient vintages.

Our work has a similar flavor as the induced innovation literature.  During times of high prices, it is rational to substitute away from the scarce input (this lowers your costs).  When prices are low, why conserve?

Given that homes live longer than cars, it is more important to document this effect for homes because past mistakes will live on the longest.

The Law of Demand: The Case of Egypt's Nascent Revolution

"Everyone seemed nervous. Nasser al-Sherif, 24, looked for his friends, who were late. It was his first protest in Egypt. “I’m just here to say no,” he said. “Once things get rough and violent, I might leave.”" source   I would call this guy an eloquent free rider.  When the going gets tough, he gets going!  Let somebody else do the fighting for him.

Multiple equilibria exist in this case.  If the Egyptian rioters "enjoy" their experience and grow more confident and gain in numbers, then there could be a peaceful regime change as the Mubarak government chooses to quit without a fight.  Dora Costa and I studied a similar issue in this U.S Civil War desertion paper.  We used a large sample of Union Army soldiers and their choice of deserting or not to document that both "Macro Factors" (i.e was the Union Winning recent battles) and "co-ordination factors" (i.e were men  in your unit deserting) both influenced the probability that any individual deserted in a given month.  So, the math is tricky here;  your probability of deserting is a function of whether all the men around you are deserting.  This is like a bank run.  Returning to Egypt, it is cheaper to protest if you know that everyone else will protest with you. There is strength in numbers.

But, the Mubarak government may have learned the wrong lessons from China's 1989 hard line at Tiananmen
Square.  If Mubarak plays "fight", then people will die and rational free riders such as Nasser al-Sherif will quit the fight and "the people" are likely to lose.   The good news for Nasser is that in this age of Twitter and the Internet, the world will know that this unfair fight is playing out and Egypt would risk suffering greatly on the world stage.

The Military represents a 3rd player in this complicated game. Who do they work for?  Who is the leader of the military in the middle of a riot?  
If there is a revolution in Egypt, what nation is next in the domino chain?  The United States?

Friday, January 28, 2011

Local Revenue for Chinese Cities Will Increase

Perhaps California should become a suburb of Shanghai?  It has been announced that for first time that there will be a  property tax in Shanghai  .   .5% of the current market value of Shanghai real estate could generate a fair bit of revenue and allow the Tiger Moms to send their Shanghai kids to good public schools!

All cities face balance budget conditions.  Only the United States can permanently spend more money than it collects in revenue (I'm half kidding).  Over time, the present value of expenditures must equal the present value of revenue (that's a balanced budget).

So, if there are 19 million people in Shanghai, then let there be 5 million properties.  If on average each of these properties is worth $100,000 then the government now receives $500 for each one or a budget flow of $2.5 billion dollars per year.   That's pretty good revenue.

Note a few points:

1. Compare this to the old regime in which the city relied on land auctions to raise revenue.  The land auction price depends on what new developers bid. If they can collude or if they face high interest rates or if the economy is in recession, then the land auction will not yield much revenue.

2.  In contrast, this property tax is applied to both new housing and existing housing. It is making existing home owners contribute to local public goods and services (i.e cops, schools , parks).  

Now it is true that this unexpected introduction of the property tax is a "takings" from the existing home owners. When they bought their homes, they must have expected that land auctions (not property taxes) would continue to be the revenue source. The incumbent home owners will only gain if their tax payments yield public goods which they value.

3.  The property tax does introduce good incentives for the Mayor of Shanghai. He has an incentive to provide quality public goods per tax dollar because if he doesn't then Shanghai property values will decline relative to other cities as skilled Chinese households vote with their feet and migrate away.If the Mayor can improve services per tax dollar, then Shanghai's home prices will further rise in value and his government will collect more revenue.

4.  Based on the logic of #3, there is a type of "Laffer Curve" here. If the Shanghai Mayor tries to raise the property tax to 2% or higher, there will be a Prop 13 type tax revolt and home prices will fall in Shanghai relative to Beijing as people will move to the lower "tax haven".  If people can migrate across cities, then higher taxes may lower a city's tax revenue as your golden goose flies away.

Given that this is a "Green" blog, will Shanghai spend its new revenue on green public goods?  I expect that it will but this will be worth watching.  Will corruption rise in Shanghai's local government now that more revenue will be washing around?

Thursday, January 27, 2011

Small Stuff

I tried today to provide a wise thought here in this NPR Quote but clearly I failed. I am alway amazed by how many people listen to this radio show.  I would have thought that my friends would be cooler and would be rocking out listening to Duran Duran or the Doors.

The only other funny thing that merits mentioning today is this "Davos" encounter between
larry-summers-vs-tiger-mom  .   They deserve each other!   If I'm reading this WSJ piece correctly, Dr. Summers went "new age" on the tiger mom as he declared that he wants our children to be happy, have fun and be creative. He also stressed that the key to being successful at harvard is to drop out and attempt to be like Bill Gates and the Zuck.

Is the Tiger Mom a top legal scholar?   Here is what Google Scholar says about her and here is my google scholar page. She needs to study more.

Understanding The Declining Fertility Rate in Muslim-Majority Countries

Gary Becker's insights about the determinants of fertility have crucial implications for world environmental challenges.  If world population growth slows, then this will reduce the "scale effect" leading to more greenhouse gas emissions.   Why has there been a sharp recent reduction in Muslim-majority country fertility rates?  "With more Muslim women getting educations and jobs, people migrating to cities, and living standards improving, the report says, the birthrate in majority-Muslim countries will come to more closely resemble the pattern in other nations."   source     Urbanization incentives and investment in human capital appearing to be more important than "culture" . Interesting!  Maybe, we economists are better at predicting trends than you give us a credit for!   But, don't ask me who will win the Super Bowl or What Bernanke will do next.

Do you see the convergence in this graph?




Wednesday, January 26, 2011

The Great Misallocators?

The WSJ has published an editorial chiding President Obama's new economics guru (Jeffrey Immelt) for looking for a government handout at the same time that he celebrates "market capitalism".


"Less laudable is Mr. Immelt's habit of inviting government to be his business partner and promoter. In his 2008 letter to shareholders, the CEO declared that the financial crisis and election of Mr. Obama meant that the U.S. economy had been fundamentally "reset."

His key line: "The interaction between government and business will change forever. In a reset economy, the government will be a regulator; and also an industry policy champion, a financier, and a key partner."
This is an invitation to the same kind of capital misallocation that led to the housing bubble. Mr. Immelt's particular goal is to promote policies and subsidies that aid green energy, in which GE is deeply invested. But if wind turbines are a good business, they will find a market on their own. If wind power turns out to be an uncompetitive bust, then the government will have misallocated hundreds of billions more dollars that could have found more productive uses."

I have mixed feelings about this WSJ paragraph and I believe that it is crucial for economists to debate its merits.

On the one hand (as a University of Chicago economist), I agree with every word that the WSJ has written here.

On the other hand, we delve into the nasty "theory of the second best". In a world where we are unable to enact carbon pricing, how does "green energy" compete against the dirty status quo fossil fuel sources?  We appear to be in a multiple equilibrium model. IF we priced the  carbon externality, then GE could invest with confidence in green tech and Adam Smith would be happy. Since we haven't (and won't) price the carbon externality, companies such as GE face political uncertainty concerning whether "green tech" is a wise investment.  

So, I believe that wind turbines would be a better business if we introduce carbon pricing --- what are the right incentives to implement to promote "green tech" given that the public has rejected the first best strategy?  I have mixed feelings about the Renewable Portfolio Standards.

This paper by Larry Goulder and Rob Stavins offers some insights about this issue.

Returning to Dr. Immelt, there is a game theory issue that hasn't been discussed. When big business anticipates that government will be its partner, this raises nasty strategic issues ranging from "too big to fail" to "adverse selection".   Milton Friedman's tough love (that there would be no bailouts or special treatment of the private sector) sent clear "rules of the game" signals to big business.  In the Obama Age, big business will spend more time  lobbying for favorable rules  and less time thinking about how to compete on the international market.  We need our best companies to be focused on market competition not on seeking an inside track by hiring K Street lobbyists.

UCLA Will Continue to Thrive in Our Colder Fiscal Climate

We learn and we adapt.  UCLA has learned that it is being cut loose by the state of California. We have a tradition of excellence that extends way beyond Coach Wooden's basketball court.  Such high quality is demanded by those who seek to raise their skills and to be associated with our brand name.  As I have said before, I have taught at 4 leading private schools and I believe that UCLA compares quite favorably with these richer schools (Harvard, Columbia, Tufts and Stanford).  We can charge 20% below their tuition and excellent students will enroll.  That's a win-win.

There are large untapped markets in Asia and even in the Northeast that UCLA will tap into.  I grew up in New York City (my father is a Professor at NYU), it never occurred to me to apply to UCLA or Berkeley. I just assumed that they were California schools for California people.

The taxpayers of California have spoken. They want a free lunch.  Given that this doesn't exist, UCLA will adapt to the new fiscal reality that Sacramento is no longer our "sugar daddy".  As an excellent institution, there are plenty of other sources of revenue streams ranging from higher tuition for more out of state students, to more executive education, to raising more money from past successful graduates.   The UC campuses are not clones of each other. We aren't all equal.  Allow them to compete against each other. If Sacramento wants to prop up the new guys, that's okay with me but give UCLA the freedom to pursue excellence.  Our Chancellor is committed to diversity.   His vision guarantees that UCLA will continue to seek out strong applicants of diverse backgrounds and to use our newly collected revenue to lower the tuition price they would pay.  It is not the case that a cash hungry UCLA would become 100% "Scarsdale" and downtown Beijing.

Consider the case of Meyer Luskin and Renee Luskin.  Their gift to UCLA will transformational.

The discussions already taking place at UCLA's School of Public Policy with regard to how to improve the quality of every aspect of this school are exciting and convince me that this gift will be transformational.  I agree with my Chancellor!



"To the Campus Community:


It is with tremendous pride, gratitude and optimism for UCLA’s future that I share news of a landmark commitment to our campus.


UCLA alumni Meyer and Renee Luskin have made a transformative gift to UCLA, contributing $100 million to support academic programs and capital improvements. This remarkably generous donation will be divided among the School of Public Affairs, which will be renamed the Meyer and Renee Luskin School of Public Affairs, the new Meyer and Renee Luskin Residential Conference Center, and the College of Letters and Science.


The Luskins’ commitment is among the five largest individual gifts to any university during the past year, and it is the second largest ever to UCLA. Even as we face serious fiscal challenges posed by state budget cuts, this is a profound statement about the current and future strength of UCLA as an engine for innovation and cutting-edge scholarship.
The gift also is an overwhelming demonstration of the Luskins’ confidence in UCLA as a force for addressing society’s most important challenges and in our unique ability to foster the meaningful and effective exchange of ideas among scholars, civic leaders and the community. The Luskins have said they view this commitment as a strategic investment in our campus and, by extension, in greater Los Angeles.


Meyer and Renee Luskin were inspired to give to UCLA in part because of their long relationship with the campus. Meyer earned a bachelor’s degree in economics from UCLA in 1949—he has credited the multidisciplinary education he received here for providing the platform for his successful business career—and Renee earned a bachelor’s degree in sociology here in 1953. Their generosity has already made an enormous impact on our campus, endowing a faculty chair in migraine and headache studies, a fund to support undergraduates participating in civic engagement research, a graduate fellowship in history, and a children’s clinic at Santa Monica-UCLA Medical Center, and establishing the Luskin Center for Innovation, which is housed in the School of Public Affairs.
Half of the Luskins’ donation will be directed to the School of Public Affairs, where it will establish endowments, support emerging research areas—including new programs in urban studies and social justice—and attract the outstanding faculty and students who will ensure the school’s continued competitiveness among the nation’s leading government and public affairs schools.


Forty percent of the $100 million gift will support the Meyer and Renee Luskin Conference Center, which will begin construction next spring on the site of the UCLA Faculty Center, pending approval by the UC Board of Regents. No state funding would be used for construction. Another 10 percent will fund the College’s Luskin Endowment for Thought Leadership, which will support academic conferences and an annual lecture.
The months ahead will offer several opportunities to express our deep appreciation to Meyer and Renee Luskin, including a naming ceremony for the School of Public Affairs in March. In the meantime, I invite you to learn more about the Luskins’ gift on UCLA Newsroom.


Sincerely,


Gene D. Block
Chancellor"

Monday, January 24, 2011

Understanding Climatopolis' Bimodal Amazon Book Ratings

Most distributions are not bimodal but people's opinions about my Climatopolis are not normal.  One recent  reviewer who gave it a "1 star" claimed that I over utilize Wikipedia.  I didn't believe this so I just looked at the 210 endnotes to my book and I see that 14 are from Wikipedia.  So, exceeding the 6% rule leads to a death sentence?    Most of these cites were to quirky topics for which I needed access to a fun fact.

Why do some people dig my book while other people just freak out?

Economists are optimistic people.  We are not the dismal science. We celebrate the wonder of free markets to co-ordinate the choices of billions of diverse individuals each pursuing their own conception of the good life.   We are not fatalistic.  We recognize that our choices can have unintended consequences and that we can (ex-post) regret past choices but tomorrow is another day.  We move forward with the new information we have learned and make our best choices going forward giving our conceptions of what we want and what constraints we face in achieving our goals.

We have access to a large number of strategies to protect ourselves against the various risks we face in day to day life.  In the case of climate change, of course it would be wise to reduce our GHG emissions now.  Chapter One of Climatopolis is called "Too Much Gas".  My critics didn't bother to read the title.

Climate Hawks and "Nick Stern" economists (including myself) have failed to convince the public that we should prioritize cutting our GHG emissions.  The starting point of Climatopolis is to be honest about this reality. I expect global GHG concentrations to rise into the mid 21st century. I do believe that improved renewables and carbon mitigation strategies will become cheaper as the century goes on and this will decouple economic growth from GHG production.  But, taking it as given that GHG concentrations will rise and that more and more of the world's people will live in cities, I want to know what happens next?

Where do we build our cities?
How do we build them?
How do we use technology and innovation to protect us against risk?
How will capitalism help us to adapt to the new risks we will face?

These are the core questions I tackle in Climatopolis.

Doom and gloom must offer its proponents a smug chance to "tsk tsk" the rest of us.  They know the pain we will feel.  But, if they know then other entrepreneurs also anticipate the risks that we may face.  The expectation of future pain creates opportunities now.  That's capitalism at work. I believe that our best innovators are good enough and have enough lead time to come up with some strong solutions for our future challenges. If they fail, we can move. Move where?  Over time, we will learn about the likely risks that climate change will pose.  Whether Northern Canada or Detroit or Phoenix is the right place to buy real estate?  Climatopolis offers some conjectures but I know that we will know and we can reoptimize in the future.

Don't bet against capitalism. It will help us to continue to thrive in our hotter future.

Sunday, January 23, 2011

Glaeser on High Real Estate Prices and Low Population Growth in Liberal Places

In a short OP-ED,  Professor Ed Glaeser sketches the puzzle of his home state. Massachusetts is experiencing lower population growth than the nation but has relatively high home prices.  Glaeser argues that limits to housing supply in such liberal places explains this fact.  At the other extreme is Texas, with no limits to growth, few liberals, little home price appreciation and lots of population growth.  Glaeser points to the loss of a Congressional Seat as evidence that MA has shot itself in the foot by slowing growth.  Is this last statement correct?

Why are home prices high in Boston? It ain't the weather or the accents.  Boston is a quaint University town that resembles NYC's little brother.  Having lived there for 9 years, I do believe that its liberal culture has blocked housing growth but this same "liberal ideology" has led to funky restaurants to open, historic architecture to be preserved (cobblestone), walk and ride public transit stations to be valued, and to a celebration of its elite research universities.  Every fall the city comes to life as a new cohort of 18 year olds arrive to start their intellectual (and drinking) journey.

So, what is my point?  The presence of liberals in a city does block new housing supply but I believe that they have a causal role in increasing the city's quality of life.  Joel Waldfogel's Consumption Externality stories can be used here.   For example, if creative hippies live in larger numbers in a certain part of Boston then funky stores will locate nearby to sell to them. You won't see Starbucks and Barnes and Noble there.

Implicit in Glaeser's argument is the claim that blocking new housing supply only creates monopoly rents for the home owner incumbents. While this is true, the same people who block new housing have bundled into them this secondary valuable attribute of increasing demand for walkable "Richard Florida" neighborhoods (and I value that).   In fact, these folks are probably Richard Florida's readers and are literally "walking the walk".

How many books does Richard Florida sell in Texas (outside of Austin)?  So, could Houston become "funky" if liberals moved there?  The Waldfogel hypothesis would say "yes" but this begs the question of how they choose where to go.  Major universities such as Harvard, University of Chicago, Columbia, Berkeley act as beacons and liberal towns form around them.   These towns then pass laws making it hard to grow and this ensures that there "club" remains pure as the barbarians are kept at the gate.

There is a formal identification problem here.  Are Boston home prices high solely because liberals constrain new housing supply or do their actions set off a domino effect such that the high home prices (brought about in part by housing regulation) mean that the community self selects only the funky subset of people who really value the "Boston Culture" and an emergent property of this group living together is a higher quality of life city --- and this further increases demand to live in such a city?  So, this second story is about how limits to growth keep Boston "cobblestoned and quaint" and this further increases the demand for the unique lifestyle that Texas can't offer.

Read this exciting March 2011 paper that will appear in the Journal of Urban Economics.

Did I mention that it has been 75 degrees and blue skies in LA for the last 10 days?

Saturday, January 22, 2011

Will Chinese Import Competition Nudge Our Firms to "Raise their Game"?

Here is an important new NBER paper.  I didn't write it!   Take a look at how people responded to my NY Times "Room for Debate" piece last week. You can read it here.   Many of the folks who wrote "nice" comments about my post appear to believe that we are in a zero sum game with China.  But, in a world where ideas are public goods and in which low input prices increase the competitiveness of many of our firms, international trade continues to offer benefits both to us as consumers (think of Walmart without Chinese imports) and as producers!   Direct competition forces a nation's firms to innovate and stay cutting edge.  This paper presents new empirical evidence on this point.  



TRADE INDUCED TECHNICAL CHANGE? THE IMPACT OF CHINESE IMPORTS
ON INNOVATION, IT AND PRODUCTIVITY

Nicholas Bloom
Mirko Draca
John Van Reenen
http://www.nber.org/papers/w16717


ABSTRACT

We examine the impact of Chinese import competition on patenting, IT, R&D and TFP using a panel
of up to half a million firms over 1996-2007 across twelve European countries. We correct for endogeneity
using the removal of product-specific quotas following China’s entry into the World Trade Organization.
Chinese import competition had two effects: first, it led to increases in R&D, patenting, IT and TFP
within firms; and second it reallocated employment between firms towards more innovative and technologically advanced firms. These within and between effects were about equal in magnitude, and appear to account for around 15% of European technology upgrading between 2000-2007. Rising Chinese import competition also led to falls in employment, profits, prices and the skill share. By contrast, import competition
from developed countries had no effect on innovation. We develop a simple “trapped factor” model
of innovation that is consistent with these empirical findings.

So, this Bloom et. al. paper supports my view that Chinese Import Competition leads domestic firms in rich countries to invest more in ideas and breakthroughs  BUT it also lends empirical support (See Table 5 column 2) to the claim that Chinese imports "cost us jobs".  We should all read and debate this paper's implications.

My read of this paper is that it highlights how diverse firms within the same industry respond to an external shock. In this case, the shock is increased Chinese import competition.  Some "dinosaur" incumbent firms can't compete with the new entrants and they go bust.  Other firms are more nimble and have more adaptation strategies that they can engage in to try to cope with the new reality of intense competition. Such firms may have better management or a more innovative friendly corporate culture that leads them to "raise their game" in response to the Chinese competition.

This Industrial Organization issue of how diverse firms respond to the same challenge has been on my mind as I've been thinking about how environmental regulations such as California's AB32 or the Green Chemistry Initiative can create "winners" and "losers" within the same narrowly defined industry.  Exogenous shifts in regulation or in competition cause a shake up of the status quo.  Is all change bad?

Lessons on Climate Change Adaptation from George Clooney's 2nd Bout with Malaria

I read the National Enquirer because it often gives me research ideas.  This article about George Clooney's recovery from malaria speaks to adaptation to climate change.    Researchers    worry that climate change will exacerbate malaria risk.  This could significantly lower our quality of life unless we have ways to treat those who suffer from malaria.


"Clooney's rep confirmed the story especially since Clooney has frequently traveled to Sudan as a global ambassador trying to end the bloody civil war between the decisive factions. "This illustrates how with proper medication, the most lethal condition in Africa, can be reduced to bad ten days instead of a death sentence," Clooney said in a statement.""

Income growth around the world will increase access to medication which will help us to adapt to the extra malaria risk we will face due to climate change.  This is a salient example of how capitalism helps to protect us from climate change.

Public Finance Debts Lead to Reduced Public Transit Service: The Case of Caltrain

Caltrain is a slow moving train that makes too many stops as it takes me from San Francisco to the Stanford area. I don't drive and BART doesn't connect to Stanford so I ride Caltrain.   Caltrain has a huge operating budget deficit.   I'd like to know why.  There aren't too many conductors on the trains so where does the money go?  Is there a huge amount of public works to upgrade and improve the train tracks?

Caltrain is cute but quite slow. It makes Amtrak look like a racehorse.  You can quickly get a sense of how many stops Caltrain makes and the time between stops from clicking here. To provide a sense of its speed, the local weekday train takes 51 minutes to go from San Francisco's 22nd Street to Palo Alto.   According to google maps these two locations are 25.5 miles apart; so this train moves at an average speed of 30 MPH.

Is that a high or low speed?  The 280 Highway runs parallel to Caltrain and its speed limit must be 70 mph. I realize that it becomes congested at peak times.    So, depending on your value of time and your distaste for a variable commute time;   Caltrain might be a better deal at rush hour on weekdays but the highway is the way to travel on weekends and off peak.   If this simple algebra is true, then is it a tragedy that Caltrain is considering;


  • Weekday trains would be reduced from 86 to 48, with service limited to commute hours.


  • No weekend service, eliminating up to 68 trains   



  • My solution to this deficit problem would work as follows;

    1. Institute road pricing on the 280 Highway and earmark 15% of the revenue collected to Caltrain.
    2. The peak time road pricing on the 280 would allocate resources efficiently and would nudge some drivers to substitute to Caltrain.
    3. With the peak time road pricing in place, demand for Caltrain would become more inelastic and it could raise its peak time fares.

    Economists can improve your quality of life!  Please consider our humble suggestions.

    Friday, January 21, 2011

    An Economist's Reply to Lester Brown's New "Doom Forecast"

    A free copy of Lester Brown's new book is available here.  It is titled "World on the Edge: How to Prevent Environmental and Economic Collapse".    Here is a direct quote:


    "My sense is that the “perfect storm” or the “ultimate

    recession” could come at any time. It will likely be triggered
    by an unprecedented harvest shortfall, one caused
    by a combination of crop-withering heat waves and
    emerging water shortages as aquifers are depleted. Such a
    grain shortfall could drive food prices off the top of the
    chart, leading exporting countries to restrict or ban
    exports—as several countries did when prices rose in
    2007–08 and as Russia did again in response to the heat
    wave of 2010. This in turn would undermine confidence
    in the market economy as a reliable source of grain. And
    in a world where each country would be narrowly
    focused on meeting its own needs, the confidence that is
    the foundation of the international economic and financial
    systems would begin to erode."


    So, he believes that climate shocks will cause an unraveling of international trade and cause
    painful autarky and mass suffering.  

    Knowing that my readers are open minded intellectuals, let me turn to one of them to reply.
    Professor Aaron Smith of UC Davis was kind enough to send me this email and to allow me to post it.  There is a lot of wisdom in what he has to say.  Lester Brown can learn from the economists.  We are not blindly optimistic.  We think about incentives and pro-active actions pursued out of raw self interest.

    "I came across your blog post on Lester Brown's predictions about the breakdown of world food markets. I had a couple of comments inspired by the questions you raised.

    Mostly, I think Brown's concerns are overblown. It is true that governments in exporting countries often restrict exports when prices rise. Such action exacerbates jumps in the world price (see Russian wheat in 2010 and Indian rice in 2008), but only temporarily. Russia won't hoard wheat forever. Of course,  temporary food commodity price spikes can have devastating effects in poor countries, but it requires a big leap to go from starvation an civil unrest in a few countries to global chaos. Rice and wheat are produced all over the world, so I can't see long term breakdowns in export markets for those commodities.
    The US dominates corn production, but I think an export embargo from the US is unlikely. Soybean production is concentrated in the US and Brazil, but China imports about 55% world exports. Given that Brazil exports well over half of the soybeans it produces and given China's
     market power, I can't see Brazil stopping soybean exports any time soon.

     Governments have a terrible history in trying to stabilize prices by playing in storage markets (see the US in the 1980s). However, private firms face an increased incentive to store when prices are more volatile. And the increased possibility of export embargoes implies more volatile prices.  I would expect increased storage in countries like the US and Canada, i.e., large exporters that would be unlikely to ever impose export embargoes but could profit from embargoes imposed by others. Importing countries may also increase storage and their own production of staples by substituting away from, say, fruit and vegetable production.

     Given sufficient water, there seems to be considerable scope for grain yield to tolerate temperature increases. A prominent agronomist named Ken Cassman (University of Nebraska) has written extensively on this. For example, varieties of corn differ in the amount of time it takes them to mature. All else equal, high temperatures speed up the maturation process, which doesn't give the plant enough time to maximize its yield. So, if the average  temperature increases, producers can respond by planting varieties with longer maturity. At least, that's how I understand it. I do think the "given sufficient water" caveat could be significant.

     The effect of corn ethanol on food markets is much greater than any likely  weather-induced trade disruptions. The US converts about 115 million metric tons of corn into ethanol each year. For comparison, total world grain exports are about 280mmt per year, about half of which is wheat. Former Soviet countries export about 35mmt of wheat per year. I am working on a paper that shows that the growth of the US ethanol industry has caused corn  prices to double with significant spillovers to soybeans and wheat.

     Overall, I expect storage markets to mitigate the boom-bust food price  cycles associated with extreme weather and trade disruptions. The real  questions are how far (if at all) the average price of food has to rise to equilibrate long run aggregate supply and demand, how those price rises will affect poor countries, and what will be the environmental consequences.

    Anyway, I enjoy looking at your blog every now and then. Thanks for indulging my thoughts."


     Regards,

     Aaron.


    The Demand for Attending UCLA is Inelastic!

    UCLA raised out of state tuition last year and applications continue to increase.  So much for the "law of demand"?  No, all else wasn't equal.  As UCLA rises in quality, we can charge more without losing market share.  Read the facts. I have taught at 4 private universities (Columbia, Harvard, Tufts and Stanford) and I can tell you that UCLA offers a quite comparable education at the fraction of the price.   UCLA led the fall 2011 application count with a total of 81,300 freshmen and transfer applicants – a 6.4 percent increase from last year.  This was achieved while tuition increased by about 30%.

    "Kayla Parker, a senior at Temescal Canyon High School in Lake Elsinore, said she applied to UCLA because she views UCs as more affordable than private schools despite the rising tuition."


    Now, consider this deep quote from our key Admissions Dean.


    “We have a good academic reputation, a beautiful environment, a safe campus in a beautiful neighborhood and, not to mention, beautiful weather,” Tran said."  --- So, she makes UCLA sound like a summer camp.  We are not a summer camp. We are a major research university where students are challenged to learn and to live up to their potential.

    As I have said many times, there is a simple formula for UCLA to thrive and to collect some serious revenue from tuition. Commit 60% of the undergraduate slots to California students and charge each of them $10,000 a year.  Commit 40% of the slots to out of state applicants and charge them 20% less than the average Ivy League Tuition.  If that average is $30,000, then the price is $24,000.  That's a bargain my friends and you can take my class.    The average student quality in the classroom would improve as a more diverse student body would be sitting there. Average SAT scores would rise and we would have a more intellectually competitive environment.  

    UCLA's new revenue per student (abstracting from financial aid) would be .6*10,000 + .4*24,000 =  15,600.  We have 35,000 students so total annual revenue from tuition would be 546 million dollars per year.   We could maintain academic excellence and provide some financial aid to needy students.

    This year's admissions statistics highlight that UCLA can raise tuition without suffering a loss of quantity or quality of applicants.  In fact, I would argue that by raising tuition; we raise UCLA's quality (because excellent faculty will remain) and this further increases the demand for the core product.

    I hope that my close friends in Murphy Hall read this post and follow my advice.  You don't need to call McKinsey Consulting for a fancy report.  As a UCLA Bruin supporter, I provide my university consulting services for free.

    Counting Adaptation Strategy Options: Birds vs. Urbanites

    How will different creatures such as Birds cope with climate change?  This is a major research topic in ecology.

    "Polar bears have become the icons of this climate threat. But scientists say that tens of thousands of smaller species that live in the tropics or on or near mountaintops are equally, if not more, vulnerable. These species, in habitats from the high plateaus of Africa to the jungles of Australia to the Sierra Nevada in the United States, are already experiencing climate pressures, and will be the bulk of the animals that disappear.

    In response to warming, animals classically move to cooler ground, relocating either higher up in altitude or farther toward the poles. But in the tropics, animals have to move hundreds of miles north or south to find a different niche. Mountain species face even starker limitations: As they climb upward they find themselves competing for less and less space on the conical peaks, where they run into uninhabitable rocks or a lack of their usual foods — or have nowhere farther to go."

    So, migration is an adaptation strategy for such creatures but with limited possibilities (for the reasons sketched above).  

    Migration is just one adaptation strategy we will have access to.   Capitalist free markets open up a host of other adaptation strategies.  Unlike other creatures, we are forward looking and base current decisions on our best guess of what the future is likely to look like.  The ambiguous, uncertain science of climate change prediction informs us about "known unknowns".  Anticipating that scary future scenarios could play out creates incentives to innovate now to economize on scarce resources and to have a larger set of adaptation options available.  

    Consider flood risk.

    I expect that using GIS software future geographers will make progress in mapping out for every detailed land parcel in the world the likelihood of flooding that the area will face.   Here is an example from Indiana

    Governments will make informed decisions about land zoning in such areas and for profit insurance companies will make better decisions concerning what rates they charge for flood insurance on specific parcels. Such premiums will reflect the best guess of the expected risk at that time and these premiums will evolve in price as new information arrives about how serious a threat flood risk poses.  Home owners who fear flood risk at a specific location will demand that their housing structures be built in ways that reduces the ex-post damage caused by the flood and reduces the likelihood of death and danger during the flood.

    An Example from the New Jersey Coast

    Housing, buildings and other urban infrastructure is long lived but it doesn't live forever. In a world in which we know that we will have to rebuild our cities, we have the right incentives to build in more adaptation options and flexibility because we know that we do not know what challenges we will face.

    Thursday, January 20, 2011

    Lester Brown Poses an Interesting Puzzle for Optimistic Economists

    Climate Progress presents a very interesting post today sketching Lester Brown's concern that a consequence of extreme weather events (such as Russia's 2010 Heat Wave) will be a breakdown in international food trade.  In his causal story, due to national security concerns an exporting nation such as Russia will declare that its farmers can't export any of its agricultural production abroad to make sure that the home country can be fed.  If a government of a "big output produce" took such an action, what happens next?

    We all know that trade breaks the link between consumption and production.  If you live alone on an island and can't trade  with anyone, you can only eat what you produce.

    If Russia no longer sends you wheat, what do you eat?

    Some Answers:

    1.  If you (as a net importer) anticipate that big agricultural exporters might cut off exports, can you hold inventories?  If yes, you buy extra in years when prices are low and store it.

    2.  Are there futures markets where you can lock in and guarantee that your nation can buy at a specific price in the future?  What institutions are in place to honor that contract?

    3. If a Russia stops exporting and world wheat prices soar, does this create new export opportunities for other nations who can raise their yields?   How quickly can such arbitrage occur?

    4. If harvests are sensitive to extreme climate, can our nerds come up with human capital fixes to reduce this "damage"?  So heat lamps for orange groves protect them from frost.   Is there anything similar for heat?

    5. If we anticipate that Russia may "cut us off in the future", what other spatial diversification strategies individual nations engage in to "be prepared" for the next major heat wave?

    A Kindler Gentler Alternative to Foreclosure?

    David E. Papell suggests a new public policy for handling foreclosure.


    "Here’s how it would work. The borrower would lose ownership of his home, but be allowed to remain as a tenant paying fair rent for a reasonable period after foreclosure, with the requirement that he cooperate in the foreclosure. He’d pay fair market rents as published by the federal government, ensuring a clear, national standard. If the borrower couldn’t afford to pay market rent, existing federal rent-subsidy programs could be extended to help tide him over.

    At the same time, with borrowers now working with lenders, it would be much easier to gather all the documents necessary to process the foreclosure, unclogging the sort of paperwork roadblocks that have recently encumbered the mortgage industry. Lenders would wind up owning a portfolio of income-producing property that would be readily marketable to investors."

    So, this policy proposal would give owners the option to become renters again.  What are the unintended consequences of such an option?

    1.  Lenders will anticipate that under this policy that they are likely to be handed the keys to a large number of homes in distressed neighborhoods that they will need to hold in inventory (waiting for home prices to rise) rather than holding a more diversified market portfolio. The rational lender will charge an interest rate premium to all borrowers to cover this expected cost of default.  Lenders will also have to invest in having the human capital on payroll to engage in upkeep and maintenance for the homes they would now own. If these homes are scattered across the country in weird places then there will be higher monitoring costs for doing the basics of being a landlord of a rental property (mowing lawns etc).

    2.  If potential home buyers know that they have an easy exit option, then more of them will try to become home owners earlier.  This is a type of "adverse selection" because of the anticipation that a new exit option exists thanks to Papell's proposal.

    3. His proposal is vague about what the word "reasonable" means in terms of the length of the rental contract. If the local housing market heats up again, the bank will be eager to evict the renter to sell to someone who wants to buy it. Will the renter sue in court?

    4. I do like that in a static efficiency sense that his proposal lowers transaction costs and thus is "Coasian" for achieving the efficient allocation of risk at a point in time.

    But, as usual with any policy proposal -- it isn't clear to me whether the dynamic effects of his proposal have been thought out. If they could be quantified, is his idea still an obvious winner?

    So,  dynamic economics is useful for thinking about the NY Times editorial page!

    Wednesday, January 19, 2011

    Counting "Green Jobs": The Case of California

    My students at UCLA want to work in "green jobs".  I want to know what a "green job" is, how to count them and whether this sector is growing over time.  I am not alone.

    The previous Governor's Team designed a survey to ask California businesses about how many "Green" jobs existed at their establishment.  Take a look at this survey instrument to get a sense of the questions.  Now, if I'm reading this correctly  --- firms self selected to supply this information. Participation wasn't mandatory.

    This raises a fundamental self-selection issue.  What types of firms will fill out this green jobs survey after receiving this letter?


    Dear California Employer,

    California employers lead the globe as entrepreneurs, innovators and investors. You have
    the insights to take advantage of emerging technologies and industries as our state
    evolves and makes more efficient and sustainable use of our limited natural resources.
    Our developing green economy offers opportunities for new investments, products,
    services, markets and jobs.

    It is vital that our state works to align your business activities with our public policy
    investments. The attached survey asks questions related to green activities and how they
    are influencing your workforce.

    By taking a few minutes to complete this survey, you will provide California’s public
    workforce system with information necessary to tailor current worker training programs
    to better support our green economy. Your response will also provide important
    feedback as we implement President Obama’s American Recovery and Reinvestment Act
    of 2009.

    There are many convenient ways to complete this survey. I encourage you to save time
    and energy by responding online at www.labormarketinfo.edd.ca.gov and clicking on
    “Green Survey.” You can also return your completed survey in the enclosed envelope or
    fax it to (916) 262-2607 or (916) 262-2351. Please respond within fifteen days.
    Thank you for your time and participation, and I extend my best wishes for every future
    success.

    Sincerely,

    Arnold Schwarzenegger

    If the "green firms" are more likely to participate and fill out these surveys,  how did the researchers use these data to make general statements about the growth in California's total "green jobs"?

    I ask because this new "greens jobs" report has just been issued.   In the Appendix on page 39, the report states that the Survey data is one of two data sets used for counting "green jobs".   There isn't enough technical detail provided for me to judge whether one can extrapolate from the self select set of firms
    who participate in the survey to the state's total "green activity".

    I would be more confident about the validity of the results if the researchers identified "green" NAICS industry codes and used the NETS data (see the left column of page 39).

    Let's not be cynical here. I like very much the idea of a trends study of "green jobs" in California. In fact, I've assigned this for my California Sustainability Challenges Class as the reading for next week.  But, an empirical analysis is only as good as the raw data used in the analysis.  The authors of this report owe the readers a few more technical details on their sampling procedure and whether concerns about sample selection bias are valid or not.

    Who is the "Marginal" CFL Lightbulb Buyer? A Case Study of Why Structural Estimation Matters in Public Policy Design

    California's PUC has introduced an incentive program to nudge the state's electric utilities to promote the diffusion of energy efficient CFL lightbulbs.  For details click here  and here.


    CPUC MAKES LARGEST COMMITMENT EVER MADE
    BY A STATE TO ENERGY EFFICIENCY

    SAN FRANCISCO, September 24, 2009 - The California Public Utilities Commission (CPUC), in its ongoing commitment to making energy efficiency a way of life in California, today established energy efficiency programs for 2010 - 2012, approving a three-year budget of $3.1 billion for Southern California Edison, Pacific Gas and Electric Company, San Diego Gas and Electric Company, and Southern California Gas Company. This is the largest commitment ever made by a state to energy efficiency and further confirms California's leadership.
    These programs will create energy savings of almost 7,000 gigawatt hours, 1,500 megawatts, and 150 million metric therms of natural gas; this is the equivalent of three 500-megawatt power plants and will avoid 3 million tons of greenhouse gas emissions. The funding from this decision can create between 15,000 and 18,000 skilled green jobs. 


    BACK TO THE WALL STREET JOURNAL ARTICLE



    "One complexity of California's incentive program is it seeks to reward utilities only for energy savings they directly cause. For example, utilities aren't supposed to get rewarded for bulbs purchased by people who say they would have bought them even without utility promotions.


    "We're not only trying to measure the technical side, but determine how much of a difference utilities have made in transforming the market," said Peter Miller, senior scientist at the Natural Resources Defense Council, an environmental group that supports the utility-lighting programs.


    For the 2006-2008 program, utilities said they achieved energy savings from all their energy efficiency programs that were 151% of the goal set by regulators. But the commission's staff, armed with exhaustive studies, said utilities saved only 62% of the goal amount, hurt by the bulbs.


    Nevertheless, anxious to move on to the current 2010-2012 program, the commission last month gave the utilities $68 million of rewards, on top of $143.7 million of incentive pay previously awarded. PG&E pocketed $104 million total. Dian Grueneich, one of two commission members who voted against the final incentive payment, said it rewarded utilities "for subpar performance."""

    So,  how do we know that the incentive program has caused CFL lightbulb adoption. We all agree that it is silly to give a performance bonus to the electric utility if its efforts have no effects on a household's behavior. If Matt Kahn's household never buys CFLs or always buys CFLs then the electric utility is wasting its time approaching me. I am not at the margin.  In english, I'm not close to being indifferent between buying the green bulbs or not.   Whether with coupons or any other incentive, you want to focus your efforts on the subset of consumers who will change their behavior because of your incentive offer.

    So, the key unknown here is:  "how many CFL lightbulbs would have been purchased in the absence of utility promotions?"

    Let's do a simple case:  Suppose that the San Francisco electric utility PGE knows the aggregate demand for CFL lightbulbs is this linear function =   400 - 50*Price_CFL  +   10*Price_conventional

    and suppose it knows that the

    demand for conventional lightbulbs  =   1000 -   20*Price_conventional   + 40*Price_CFL

    Price_CFL = price per CFL lightbulb
    Price_conventional = price per conventional lightbulb.

    In the absence of utility subsidies, let's assume that Price_CFL = 5  and Price_conventional =  2

    so aggregate demand for conventional lightbulbs =  1160 and demand for CFL lightbulbs = 170

    Now suppose that a 60% subsidy for CFLs lowers their price to $2 each and the price of conventional lightbulbs remains unchanged.

    New aggregate demand for conventional lightbulbs =   1080 and CFL lighbulbs = 320

    So the 60% subsidy has caused a change in energy consumption  =  f_conventional*-80 +   f_CFL*150

    where f is the energy consumption per hour of light for the two types of lightbulbs.

    The utility should only be rewarded on this object  =   f_conventional*-80 +   f_CFL*150

    The KEY POINT here is that you need an estimate of the aggregate demand curve in order to figure out the causal effect  of the subsidy.

    A good calculus student would ask;  "What is the optimal subsidy" here?

    To actually solve this calculus problem, we need to know;

    1.  This depends on the deadweight loss of raising funds to give out for the subsidy 
    2. how much we value reducing energy consumption 
    3.  The own price and cross-price effects for the two aggregate demand curves listed above

    Now where did this "aggregate demand curve" come from?  A good microeconomist would use micro data to estimate a discrete choice model at the household level of how a household choose CFL lightbulb or not and how many lightbulbs to buy as a function of prices and household demographics. This discrete choice model yields an expected count of lightbulbs purchased and this can be added up across all households within the electric utility's service area.

    This isn't an easy problem but this is what has to be done to calculate what is the energy consumption reduction caused by the utility's subsidy.












    A Free Climatopolis Book Excerpt

    The Milken Institute was kind enough to publish an excerpt from  my book Climatopolis.  It is available  here.

    Also, I suggest reading the comments at the bottom of my NY Times piece.  There are some passionate readers who are quite worried about our country. They appear to blame China for our problems.   I would be more inclined to focus on our individual and aggregate investments in early childhood development and how those investments in human capital are reinforced over the life-cycle.  

    Tuesday, January 18, 2011

    Room for Debate on Green U.S Jobs

    My pro China post for the New York Times.

    RFK jr. agrees with me.

    Three Cheers for Cross-Agency Regulatory Consistency?

    You don't have to be a Jedi Master from Star Wars in order to sense Austan Goolsbee's influence on this President Obama Editorial in today's WSJ.   This sounds like a Pareto improvement and such rare free lunches are tasty.  But, is it a free lunch? Which nerd is going to go through the thousands of pages of regulations to comply with the President's new order?


    "This order requires that federal agencies ensure that regulations protect our safety, health and environment while promoting economic growth. And it orders a government-wide review of the rules already on the books to remove outdated regulations that stifle job creation and make our economy less competitive. It's a review that will help bring order to regulations that have become a patchwork of overlapping rules, the result of tinkering by administrations and legislators of both parties and the influence of special interests in Washington over decades."

    I have questions;

    1.  How will cross-agency disputes here be arbitrated? If one agency finds the rule helpful while another does not, how will the verdict be decided?
    2. Will lobbyists be allowed to offer their views here?
    3. In the short editorial, no examples were given concerning how the inefficient rules on the books "stifle job creation". Can someone provide a concrete example?
    4.  How Will the President's Men know a "bad regulation" when they see one?  Has a serious NBER scholar estimated the benefits and costs of each of these regulations with a valid control group and treatment group research design?

    A Few Thoughts About Evergreen Solar's Eclipse in Massachusetts

    Both Ed Glaeser and the WSJ in an unsigned editorial argue that Massachusetts should not have been investing public money in Evergreen Solar.  I agree with them but permit me to point out a couple of things.   First, Governor Deval Patrick was "putting his (our) $ where his mouth is".  MA has been an early signer of RGGI and he must have believed that Federal Carbon Cap & Trade legislation was on the horizon.   If Waxman/Markey had been signed, would the prospects for Evergreen have been looking better as electric utilities would be preparing to be under a cap?    Patrick may also have talked to the ex-Harvard Professor named Michael Spence who wrote a good Ph.D. thesis on "signalling". Perhaps Patrick believed that by establishing Massachusetts as a "leader" on solar that this would set off a domino effect and attract other firms to agglomerate nearby.  Clearly, this expectation turned out to be false but at the time, he might have convinced himself that this was a good bet.  

    Missing in both the Glaeser piece and the WSJ piece is a retrospective look at what was MA's logic here?  At the time of the deep investment, how did they justify it to themselves?   Did the Boston Globe ask any tough questions about "picking winners" (a point in Glaeser's piece)?  Or did Wishful Thinking rule the day?
    All economists know that you have to tell a powerful externality (positive spillover) story to justify strategic subsidies of industries.  Did the Governor commission such a study?  For the "researchers" who did the study, what evidence did they provide? MA has unique research universities.  Could Evergreen's productivity have really been significantly higher because of physical proximity to Harvard and MIT?  Can't their nerds get on a phone or Skype?  In this case, why could face to face interactions really make a difference?

    Glaeser's piece highlights that he doesn't believe that MA has a manufacturing future.


    "Manufacturing solar panels in Devens never played to Massachusetts’s core strength: the creativity that emerges naturally when smart people are clustered together. Forty years ago, greater Boston was suffering from the same deindustrialization that afflicted all older American cities. The region came back, buoyed not by renewed manufacturing plants, but by technological innovation, much of which was connected to the region’s rich research community."

    But, MA has a lot of people living there who do not have elite degrees.  What should they do all day long?

    Monday, January 17, 2011

    Interdisciplinary Discussion

    Tomorrow, the UCLA Institute of Geophysics & Planetary Physics is in for a big treat.  This Institute's esteemed scholars have invited me in to give a seminar and I will lower the average IQ in the room. Here are my "economics of climate change" slides.   In this 30 minute talk, I do not provide an overview of the field. That's not my style. Instead, I talk about my own recent research.  I know what I know and I know what I don't know!  I am a modest man.  Are you?

    Supply creates demand. When I give these talks, they just lead more people to ask me to talk again.   The people at UCLA know that I like to talk. I'm sent out to meet with potential donors,  parents of current students, alumni, and potential faculty recruits.  I'm sent to the video conference center to be taped for TV even thought I don't look too good anymore.   I'm asked to give guest lectures in about a dozen different courses scattered around campus.  I even gave a week of graduate Ph.D. economic history lectures in the fall when my wife chose to attend her jury duty assignment.    What do I ask for in return from UCLA?  Excellence.  I want my UCLA to remain great.

    Can physics and economists gain from talking to each other?   I hope so.  I know some very brilliant UCLA physicists and they certainly amuse me.  Several have mixed feelings about capitalism.  I've thought about buying each of them a copy of Free to Choose but I chose not to do so.  

    Adapting to Natural Disaster Risk: The Case of Brazil's Flood

    More than 600 people have died in mudslides that ripped through hillside communities near Brazil's Rio de Janeiro.  Why did this happen?  Can "political economy" teach us anything about how to reduce such loss when future disasters occur?

    "The hardest hit towns — Petrópolis, Teresópolis and Nova Friburgo — have been scenes of widespread devastation since last week.  ... Communications, electricity and potable water were still lacking in several areas, leaving disaster experts to lament Brazil’s lack of preparedness for deadly rains, which they say are becoming more common."   NY Times Source

    So, the experts know that the events are taking place more often but the towns were not ready to respond.  Why?


    "For much of its history, Brazil has been blessed like almost no other country of its size to be almost free of such calamities. Earthquakes, tornadoes, hurricanes, blizzards, erupting volcanoes — none have proved threats to Brazil. Until recently, the most costly and best-known disasters were severe droughts, said Margareta Wahlstrom, the assistant secretary general for the United NationsInternational Strategy for Disaster Reduction.
    “But in the last few years the increasing frequency of floods, high winds and storms has become part of the new normal of Brazil,” she said. “The political choice we have today is to not treat disasters as events that come and go, but decide that you plan for them and realize that they are very costly.”"

    So, a Bayesian would say that people will need to update their probability assessments and realize that they do face new increased risks from natural disaster.

    The New York Times contrasts the recent Australian floods with the Brazilian floods.  Many fewer people died in the Australian Floods.  Why?

    "The hillside areas around Rio lacked early warning systems or effective community organizations that might have helped residents to wake one another as the rains intensified last Tuesday night, disaster experts and residents said. Most people are believed to have died early Wednesday morning as they slept, when water-loosened earth swept their houses away."


    The article continues:

    "Australia had not experienced severe floods since the early 1970s, Ms. Wahlstrom said, but annual cyclones and minor floods led officials to develop early-warning systems and evacuation guides that residents were regularly drilled on. Better drainage infrastructure and better quality housing also helped, she said."

    So, what this article isn't completely honest about is; "who lived in the hillside housing in Brazil?" I'm guessing that it was the poor.  Will a sociologist do a study of who died in this natural disaster?   My conjecture is that the poor lived in this housing, didn't have access to the Internet and "text messages" to be tipped off about the flooding and didn't have an "escape plan".  Who is the political representative for the affected community?  Did he have any incentives (such as re-election incentives) to improve the land zoning in the hillside communities or is this an "informal community" where there isn't formal rule of law?

    Brazil is not a poor country but everyone knows that it has a high degree of income inequality. If the poor grew richer, would fewer people die in a flood?  I believe the answer is yes.  Cross-country evidence (see my 2005 paper) and within country evidence (see this Katrina Study of who died in New Orleans) support this claim.

    To adapt to climate change risk, we need to grow richer.

    The Rio officials hint at illegality of people living on marginal lands as a cause here;


    "Rio de Janeiro State officials have cited irregular occupation of areas at risk of floods and landslides as the main reason that so many have been dying. Carlos Minc, Rio’s environment secretary, said Thursday that the state’s civil defense authority urgently needed to relocate residents in high-risk areas. “The next rain will destroy everything that still remains,” he said. “We do not have time for contemplation.”

    The city of Rio, in geological mappings, has identified 177 regions with areas at risk to rain-related events."

    This last sentence is crucial.  In Climatopolis, I talk at length about how GIS information systems will be used to provide pinpoint maps about where actual risks are concentrated.   In such risky areas (once this becomes public knowledge), land prices will fall and insurance prices will be high. Government must use its zoning powers to prohibit people from living there. I realize that poor people like cheap rents but if our goal is to protect life from such disasters then government must step in and reduce access or such environmental justice disasters will occur again.

    So, Brazil can protect its poor from natural disasters in two ways;

    1. it can invest in institutions and free markets to reduce poverty. Richer people will not choose to live in risky locations and will have access to more self protection strategies.
    2. it can pinpoint where are the areas at risk from natural disasters and "police" them so that people do not live in these low quality, risky areas.

    Sunday, January 16, 2011

    Nimble Australian Farmers?

    This article discusses the challenges that Australian farmers face as Mother Nature randomly rotates shocks of droughts and floods.  Should these farmers quit and enter UCLA's Econ's Ph.D. program?   Or, can they adapt and change their game?


    "Buffeted by a cycle of dispiriting dry followed by overwhelming wet, the farmers are experiencing a fate highlighting the vagaries of Australia’s extreme weather. At the same time, it is also adding fuel to a continuing debate over the future of intensive agriculture on a continent drier than all the others save Antarctica.
    “Oh, mate, it’s going to hurt us financially,” said Derek Schulz, who owns land downstream near the town of Grantham, which was largely destroyed in the flood. Where more than a week ago fields were ready for a fresh vegetable crop, there is now a plane of cracked mud and the scattered debris of crushed cars, tractors and torn homes.
    “We’re carrying a huge amount of debt, we’re talking my wife and I carrying millions of dollars in debt. And to have a complete wipeout, that’s gonna hurt us,” he said.
    Australian farming is a business of high expenditures and thin margins, and Mr. Schulz said he expected many from the town would give up."

    The article goes on;


    "But he said it was indisputable that, as a result of climate change, “these extremes are becoming more intensified” — meaning more severe, and longer, droughts.

    As a result, Australia must consider a less water-intensive agricultural future, Mr. Cocklin said. “People have to accept that the game’s changed,” he said, particularly in the case of water-hogging crops like rice and cotton."

    SO, the economic issue here is how Australian farmer profitability is affected by substituting production from water intensive crops such as rice and cotton to less water intensive crops.  I can't name what those crops are but in a world of international trade. Australia's farmers will figure out what their new comparative advantage is (taking into account the new drought conditions they will face due to climate change).  The difference between their profits when they grew rice and cotton versus what their profits will be after they re-optimize taking into account drought conditions determines how much they lose in agricultural profits because of climate change.     This article highlights that Australia was growing rice and cotton because of generous government subsidies (not due to some natural comparative advantage). In this sense, climate change may INCREASE the true productivity  of Australian farming as it creates an imperative to push the Australian farmers away from production activities (growing rice and cotton) that were actually quite wasteful of a valuable natural resource (water).   I could be wrong here but the deep economic issue is whether increased scarcity caused by climate change actually encourages economic efficiency as inefficient past silly policies (such as water subsidies for farmers) becomes too costly a policy to continue in the face of climate change.

    Optimal Parenting: An Economist's Perspective on "Tiger Moms"

    Amy Chua is having a strong "15 minutes" of fame.  I have not read her book, nor will I, but as an intellectual I will offer my biased opinions!  In this "clash of civilizations", Professor Chua offers the rest of us a peek into what's going right within her high striving household.  Will Sarah Palin buy her book?  Will such "real Americans" respond to this Eastern Treatment by turning off the family television and bringing in some "old school" discipline into the leisure filled, Snooki, and Paris Hilton world that many Americans love so much?

    If you haven't read Amy Chua's words let me supply a couple before I turn to the calculus of producing a high quality child in the face of uncertainty and alternative uses of parental time and in an economy where a child's leisure and fear of burnout also arises.   Here is the source


    Do you think that strict, “Eastern” parenting eventually helps children lead happy lives as adults?

    Erin Patrice O’Brien for The Wall Street Journal
    Amy Chua with her daughters, Sophia and Louisa.
    When it works well, absolutely! And by working well, I mean when high expectations are coupled with love, understanding and parental involvement. This is the gift my parents gave me, and what I hope I’m giving my daughters. I’ve also taught law students of all backgrounds for 17 years, and I’ve met countless students raised the “tough immigrant” way (by parents from Pakistan, India, Nigeria, Korea, Jamaica, Haiti, Iran, Ireland, etc.) who are thriving, independent, bold, creative, hilarious and, at least to my eyes, as happy as anyone. But I also know of people raised with “tough love” who are not happy and who resent their parents. There is no easy formula for parenting, no right approach (I don’t believe, by the way, that Chinese parenting is superior—a splashy headline, but I didn’t choose it). The best rule of thumb I can think of is that love, compassion and knowing your child have to come first, whatever culture you’re from. It doesn’t come through in the excerpt, but my actual book is not a how-to guide; it’s a memoir, the story of our family’s journey in two cultures, and my own eventual transformation as a mother. Much of the book is about my decision to retreat from the strict “Chinese” approach, after my younger daughter rebelled at 13."



    Your method may work with children with a native high IQ—but demanding that kind of excellence from less intelligent children seems unfair and a fool’s errand. Demanding hard work and a great effort from children is the best middle ground we can reach philosophically, isn’t it? Your thoughts?
    Jokes about A+s and gold medals aside (much of my book is tongue-in-cheek, making fun of myself), I don’t believe that grades or achievement is ultimately what Chinese parenting (at least as I practice it) is really about. I think it’s about helping your children be the best they can be—which is usually better than they think! It’s about believing in your child more than anyone else—even more than they believe in themselves. And this principle can be applied to any child, of any level of ability. My youngest sister, Cindy, has Down syndrome, and I remember my mother spending hours and hours with her, teaching her to tie her shoelaces on her own, drilling multiplication tables with Cindy, practicing piano every day with her. No one expected Cindy to get a PhD! But my mom wanted her to be the best she could be, within her limits. Today, my sister works at Wal-Mart, has a boyfriend and still plays piano—one of her favorite things is performing for her friends. She and my mom have a wonderful relationship, and we all love her for who she is.


    Ms. Chua, are you a happy adult? Do you look back on your childhood and feel that it was happy? Do you remember laughing with your parents? Do you wish that you could have taken ballet or been in the high school musical?

    I was raised by extremely strict—but also extremely loving—Chinese immigrant parents, and I had the most wonderful childhood! I remember laughing constantly with my parents—my dad is a real character and very funny. I certainly did wish they allowed to me do more things! I remember often thinking, “Why is it such a big deal for me to go to a school dance,” or “Why can’t I go on the school ski trip?” But on the other hand, I had great times with my family (and even today, it’s one of my favorite things to vacation with my parents and sisters). As I write in my book, “When my friends hear stories about when I was little, they often imagine that I had a horrible childhood. But that’s not true at all; I found strength and confidence in my peculiar family. We started off as outsiders together, and we discovered America together, becoming Americans in the process. I remember my father working until three in the morning every night, so driven he wouldn’t even notice us entering the room. But I also remember how excited he was introducing us to tacos, sloppy joes, Dairy Queen and eat-all-you-can buffets, not to mention sledding, skiing, crabbing and camping. I remember a boy in grade school making slanty-eyed gestures at me, guffawing as he mimicked the way I pronounced “restaurant” (rest-OW-rant)—I vowed at that moment to rid myself of my Chinese accent. But I also remember Girl Scouts and hula hoops; poetry contests and public libraries; winning a Daughters of the American Revolution essay contest; and the proud, momentous day my parents were naturalized.”
    And yes, I am a happy adult. I am definitely a Type A personality, always rushing around, trying to do too much, not good at just lying on the beach. But I’m so thankful for everything I have: wonderfully supportive parents and sisters, the best husband in the world, terrific students I love teaching and hanging out with, and above all, my two amazing daughters."




    Let's turn to a calculus maximization question and approach this the way Gary Becker or Jim Heckman might;


    1.  Parents value having happy, and productive children but they do not fully know how to produce a happy, productive child

    2.  Children are happy in the present and they will be productive in the future (when they are adults)

    3.  Parents can invest their time in their children and can spend this time making them happy (taking them to the movies ) or increasing their future productivity (doing math and reading with the kids)

    4. Parents can invest money in their children to raise their future productivity in terms of  better neighborhoods (Scarsdale), better schools (Horace Mann) and better inputs (clarinet lessons, Stanley Kaplan Test Prep).

    The simple economics of the "old school, Tiger Mom" approach is that this makes sense if;

    1.  parental discipline and school quality are complements in the production of child quality  (complements is like peanut butter and jelly -- there are synergies)
    2.  the child is unlikely to burn out and rebel as a teenager against the "Type A" stress amplified at home.
    3.  The parents do not care about the child having fun as a kid and are very patient and care deeply about future success over being happy and "child like" in the present.

    Gary Becker's work has taught us to pay careful attention to the value of parental time.  In the case of Amy Chua,  she is a Professor of Law and thus has a great deal of flexibility of choosing when and how to invest in her children using her own time.  I be that she has been at home more with her children than other U.S workers who are on fixed work time schedules and live further from where they work than Professor Chua does.

    From Jim Heckman's work, we know that there are strong dynamic complementarities in producing a quality child. Learning begets learning. Skill begets skill.  I would like to see time diaries for Professor Chua's children. For each month of their childhood, how much time were they reading, playing musical instruments, doing math, versus more "fun" leisure of hanging out with friends and watching tv and playing video games?   As an empiricist, I would like to see some data!  As they got older, were their peers similar nerds? Or was there peer pressure at school to go "Palin" and act like the other soft U.S kids?

    The reason this book has hit a nerve is the sense that China is "investing" while we are taking "leisure".  The Chua family's story is a microcosm about "consumption versus investment".   There is a concern in the U.S that we have made a choice with long run consequences but that we want to believe that we haven't.