Tuesday, May 31, 2011

Optimism During Days of Pain

In today's WSJ, Donald Bodreaux seeks to make some money betting the next generation of Paul Ehrlichs.  He believes that deaths from natural disasters will decline over the next twenty years.   My loyal readers may remember (I doubt it!) that I offered a similar bet last September to Joe Romm and he politely turned it down.

I understand that the expectation of doom creates an "urgency of now" that may nudge some political moderates to change their positions.  So, if this is true then the converse is also true that optimism about progress and trends in quality of life lulls us into complacency.

Like King Solomon, I want to split the baby in two.   I am optimistic about our future (despite the challenge of budget deficits, terrorists, and climate change) because we anticipate these threats --- this anticipation nudges us individually to take actions to protect our families.  This is "small ball".  I do think that California's AB32 will turn out to be an effective field experiment that will demonstrate to the rest of the country that the economic costs of climate mitigation are relatively low. There will be learning by doing and and the lessons learned will spread across the world.  Ideas are public goods and we have plenty of nerds who are ambitious and "do gooders" and the combination will lead to several breakthroughs.  The net effect of this is that mitigation and adaptation will both occur in tandem and Joe Romm's grandkids will have a very good quality of life.

Can the CAPM Explain Art Price Dynamics?

As an intellectual (and a tenured professor with plenty of free time), I read the Arts Section of the NY Times.  Today's lead article is about finance and art.  The authors are puzzled about asset price dynamics and why there is dispersion across firms (i.e artists) with respect to their rate of return.

To quote the article:


"Prices for the work of a variety of artists, including some top names like Larry Rivers, Eric Fischl and Francesco Clemente, have declined or stayed flat at auction in recent years, according to data compiled by Artnet, a company that tracks such sales.  For example, a Dutch Masters painted cigar box, created by Rivers and valued as high as $40,000 last year, sold in September for less than $4,000."

Nonetheless, at a time when so much attention is paid to skyrocketing values, the dreary performance of some artists’ portfolios is a topic seldom broached.



“We in the auction business want to put our best foot forward, so when we get a good price, we make a big fuss about it,” said Elaine Stainton, the director of the painting department at the auction house Doyle New York. “When we have a disappointing sale, we keep our mouths shut.” Perhaps nothing in the art world is as mystifying to the layman as the often abrupt changes in works’ values." 



But how to explain the cruel backslide of artists whose work escalates, then slips in value? Just as it is difficult to pinpoint precisely why work by some artists rises in value, experts say it can be harder still to explain why some artists’ value declines.

“There is a constant ebb and flow in art historical reputations,” said Jeffrey Deitch, a longtime New York gallery owner who now directs the Museum of Contemporary Art in Los Angeles. “The reputation of even the greatest figures like Picasso are in flux.” "

THE NY Times believes in a "new news" theory of asset price dynamics;  to quote the article;


"Prices can be hurt by negative reviews or if an artist has gone a long time without a major exhibition. And it helps to have work held by a famous collector: high-profile collectors create high profiles for the art they purchase. "

So, there are non-small players in this market who can manipulate it?

The article also has a fair chunk of "behavioral finance" implicit in it.  "sucker buyers" who are not informed about the true supply of various artists such as Warhol.  

Now, the interesting thing about Art is that it represents both consumption and investment (like Solar panels) . You can boast about owning it and show it off. How much of the "dividend" flow value you receive depends on your utility function and where you live. If you live in Fargo, can you show off your Picasso to that many people?    In the case of Google shares, you can't show those off.  With Facebook still private now, those guys who own it from the "private market" can show that off. How much of the IPO premium is due to this?

Harvey Mansfield Dishes Out Some Punishment

Who knew that Harvard's Harvey Mansfield has an unfavorable view of sociology?  After reading his OP-ED in the WSJ today, I see that he will be a popular graduation speaker.   What does he think about economics?  To quote the Charmer; "


"Others try to imitate the sciences and call themselves "social scientists." The best imitators of scientists are the economists. Among social scientists they rank highest in rigor, which means in mathematics. They also rank highest in boastful pretension, and you can lose more money listening to them than by trying to read books in sociology. Just as Gender Studies taints the whole university with its sexless fantasies, so economists infect their neighbors with the imitation science they peddle. (Game theorists, I'm talking about you.)"

Now, that's diversity in the academy!

Monday, May 30, 2011

New NBER Research on Environmental Economics

These are exciting days to be an environmental economist.  Here I would like to offer three recent examples of new research that I find interesting and I didn't even write any of these papers!

Paper #1:   Studies the economic costs of states adopting a Renewable Portfolio Standard for electricity power generation.  As states such as California embrace aggressive (33% RPS!) standards, how much more costly will it be for power generators to supply power? How risky will such wind and solar reliance be?  These guys present a rigorous framework for studying this issue and show there better be significant learning by doing effects for renewable power generators in order for this policy to not have serious unintended consequences.

Paper #2:    Many "consequences of climate change" studies implicitly assume that the average forecast of the future impacts of climate change will actually be the true impacts but climate change's future impact is a random variable with a mean and a variance.  Martin Weitzman has made great progress on this point.   The new NBER paper predicts likely climate change impacts for agriculture in Africa when it incorporates that there are a range of possible climate forecasts in the future.  Intuitively, if there is a "nasty, a moderate, and a nice" possible climate impacts --- we need to know what will be the agriculture outcomes in the future for farmers in each of these three scenarios.  Simply calculate the average (nasty + moderate + nice)/3  and asking how farmers will cope with this "average" future climate is not that interesting if farmer profits are highly non-linear functions of future climate conditions.  The authors predict a very large prediction interval.

A major point of my Climatopolis book is to ask whether those who will be affected by climate change such as  farmers in Africa anticipate the worst case scenarios?  If they do, then they have strong incentives to take actions now (switching crops, investing in different strategies) to reduce their risk exposure. The net effect of this "small ball" is the worst case predictions made by these authors will overstate the impacts because their paper has helped to change rational actors' choices!     You have to admit that it will be ironic but useful when research (by inducing a Hawthorne effect) leads to over-stated predictions because it helped to stimulate precautionary investment!

Paper #3:  Investigates who will actually bear the costs of carbon pricing.  Basic economics tells us that those who can't substitute away from goods that are now taxed will end up facing higher prices due to the carbon pricing.  

As you can see, there is a whole interesting set of research being done that is far removed from the macro economy and yelling about budget deficits.

Sunday, May 29, 2011

Field Experiments and Free Riding

In today's NY Times, Rob Stavins and I are both quoted in this piece about California's continued effort to launch a serious carbon cap and trade program as part of its ambitious AB32 legislation.   I would love to see this effort succeed but I would like to focus on a slightly different point here.

We all agree that ideas are public goods and that learning offers positive spillover externalites to society.  So, a question arises -- who is the "sucker" who runs the "policy experiment" to generate this new knowledge?

When we know that we don't know the truth and there exists a costly (but we don't know how costly) experiment that can be run (such as cap & trade), the free rider problem will arise.   Everyone will delay running their own experiment hoping that somebody else will run the experiment. If the experiment fails, then others won't imitate California while if the AB32 experiment succeeds then others will join the "coalition of the willing" and cap & trade could diffuse and build up into a national effort.

I have argued that California should be rewarded for running this experiment.  The rest of the country appears to view us as Berkeley hippies who will push ahead with this effort even without an explicit incentive. You may be right about this but the recession and lingering unemployment have pushed many moderate greens to ask tougher questions about whether the California "green push" is good public policy.

Contrast environmental policy with medical clinical trials. If I am suffering from a health problem, I will seek any cure and will be happy to sign up for a randomized trial because I may be randomly assigned to the treatment group and the new pill may help me.  In contrast, in the case of environmental policy --- the people of California know that they cannot single handedly stop climate change.  We are volunteering to be the "green guinea pig" and the lessons we learn here will spread widely.  We need a mechanism where we can "sell" this new knowledge or at least be rewarded for generating this knowledge.  Each Republican should have to take their family for a one month vacation in California each year.  Such a cultural exchange program would generate tolerance and cash for the people of California.

When Economists Don't Debate

My wife was kind enough to point out this great letter in today's NY Times Magazine.   Permit me to quote it in full:


"In Andrew Goldman’s interview of Larry Summers, my colleague Joseph Stiglitz is cited for saying Summers ignores arguments that he doesn’t like. I have disagreed with Summers on several issues, but I have always found him ready to debate my views, even at Columbia, when, on the celebration of my 75th birthday, he took on me, Paul Krugman and others. He shies away from shoddy arguments that are simply populist, not from debating serious differences with critics his own size. By contrast, I have never succeeded in getting a debate, on or off campus, between Stiglitz and myself."

JAGDISH BHAGWATI,
Professor of Economics and Law, Columbia University, e-mail

Now, Ed Glaeser has argued that cities facilitate interaction and thus cause new ideas to be born and accelerate economic progress.  Columbia University (my home from 1993 to 2000) like any other leading University is an "intellectual city".  What aren't such production interactions between leading economists there taking place?

The Miami Heat has proved that a Dream Team can enjoy synergies and work together for common goals.  Can the Columbia "Dream Team" of Sachs, Stiglitz, and Bhagwati enjoy similar group success as Wade, James and Bosh?

Beverly Hills vs. Brentwood: Why Are the Celebrities Moving Away from 90210 Towards OJ's Ex-House??

This article discusses one of the major questions in social science;  is Brentwood or Beverly Hills the right place for a Los Angeles celebrity to live?  I live in neither area so I can objectively write about this hot button issue.   The NY Times author wants to tell a "tipping point" story focused on the tragedy of the commons.  Apparently, public streets are public property and enterprising business people are sponsoring tours of celebrity streets such as this one.     Here is a preview;


"Heading into Beverly Hills, you will begin to see more gated estates and more elaborate mansions. See the Hilton household where Paris and Nicki grew up. Directly across the street, view the estate of musician Rod Stewart and his daughter, Kimberly Stewart. Drive by Harvard-Westlake High School where Tori Spelling and other famous child actors and actresses attend high school to the tune of $30,000 per semester. See the estate of the first Tarzan, Johnny Weissmuller. This incredible estate looks like a tropical jungle with a pool extending 360 degrees around the entire property. The house is rumored to be haunted and has been sitting vacant for over 14 years. Drive by the Beverly Hills mansion that was transformed into a Bel Air home in the television series Fresh Prince of Bel Air. See the homes of Robert Redford, Nicholas Cage, Sir Elton John, Mick Jagger, George Harrison, and a number of other celebrities. "

As you can imagine, for roughly $40 a ticket there is plenty of demand for these bus tours. I have joked that this is Los Angeles' last growth industry.

The celebrities are not happy. The NY Times article quotes Dr. Phil (remember Oprah?) complaining about being harassed.   These VIPs have convinced themselves that Brentwood is the answer.  I would argue that Brentwood's adjacent neighbor to its East (Westwood) is the correct answer.   Celebrities --- join me in Little Holmby and I will protect your privacy.

More on the Race Between Electric Cars and Gasoline Cars

The NY Times provides some great data on the head to head operating costs and environmental impact of driving a Nissan Leaf versus a conventional car.



The one detail that I would like to see the NY Times address is the price volatility of gas prices versus electricity and the role that such volatility plays in determining the actual operating cost of each modal choice.    With the rise of the smart grid, electricity prices will vary during the course of the day and smart electric car owners can recharge at night.  This means that the 11 cent per kWh charge discussed above is too high.  The electric car's operating cost will be even lower than is discussed here.

Now, gasoline prices are volatile over time and the electric car acts as a hedge against rising gasoline prices. It will interest me to see how many 2 car households hold a diversified portfolio with one gasoline car and one electric car and how responsive the utilization of these two cars are as gas prices go up and down.  You can't hold gasoline inventories in large quantities in your garage but owning an electric car that you could charge with solar panels or using your neighbor's solar panels would be one way to sharply reduce the gasoline consumption per mile driven.  As the chart above highlights, to really get this right -- -we need the electricity to be generated by low carbon renewable sources. In a high carbon area such as Ohio (where coal may generate 100% of power), electric car use may have a greater carbon factor than conventional cars.

Friday, May 27, 2011

Over Investment in Beauty and Slowing Aging's Effects?

UCLA is still in session and I've been teaching 2 courses this quarter. My undergraduates yawn in class and some of my MBA students wonder what in the heck I am talking about.  I am feeling the effects of aging.   I used to be one of the great teachers but now I hear Bruce Springsteen's song Glory Days (have passed me by) as I look into my students eyes.    Fortunately, I can still write a few serious papers and yell at a few of my loyal Ph.D. students or I would really feel worthless.

So, this article got me thinking about how much I should be investing in slowing down the aging process.  This author claims that her rich friends who have invested in the wonders of modern botox etc. have not anticipated the consequences that they cannot smile anymore.

To quote the author;    "We are now in the position of watching politicians and newscasters talk about disturbing issues — like, say, the state of our education system, or environmental degradation — yet they cannot muster signals of concern, much less dismay."

I have not had any of these procedures and I can certainly signal dismay.   Economists are vain and well paid. How many of us invested in these procedures?   The Hammer has taught us that beauty pays off in the labor market.  Given that Columbia Business School is demanding "full disclosure" of consulting arrangements, I think we should take the next step and also disclose our past investments in self improvement.

Thursday, May 26, 2011

Buy a Copy of My Final Exam for Only $99.99

Is a penny only a penny?  We see firms pricing products for $9.99 to avoid "double digits" or $99.99 to avoid a "triple digit" price tag.    These firms must believe that consumers see a "jump" between the price of $9.99 and $10 and that consumers will be less likely to buy the "expensive" product even if it costs just 1 penny more.   In this new NBER paper, Lacetera, Pope and Sydnor have managed to access a 22 million observation used car data set and they document a very funny new fact.

When they graph the used vehicle's sales price with respect to its odometer reading, they see a sharp reduction (a discontinuity in nerdspeak) at salient cut points such as 10,000 mile intervals (so 10,000, 20,000, 30,000 etc).   This suggests that folks are engaging in "rounding" off significant digits.  So consider two identical used 2004 Volvos.  One has an odometer reading of 59,967 and other is at 60,012.  These researchers are claiming that a typical buyer does not view these vehicles as identical because the buyer thinks; "the first car has 50,000 miles while the 2nd car has 60,000" miles.  This is what I mean by "rounding" -- not rounding up but just working with 1 significant digit.  If buyers view the 59,967 mile vehicle as a 50,000 mile vehicle then they will be willing to pay more for it and these researchers will observe a higher used vehicle price for the 59,967 mile vehicle relative to its 60,012 mile twin.  Their regression statistical techniques are simply averaging over these pair comparisons.

My question for the authors is whether the used vehicle sellers are aware of this dynamic? If so, then the authors  should see "too many" used vehicles being sold that have a "9" in their 2nd digit if the vehicle has <100,000 miles or a 9 in the 3 digit for vehicles that have > 100,000 miles.   In these cases, the sellers could extract extra $ from "dumb" buyers.

Is this an important result?  Yes.  22 million observations is pretty serious.  Now, I don't know how steep is the price/mileage capitalization effect.  In English, for every extra 1,000 miles on the odometer how much a price discount does a used car sell for?   The larger this is then the larger is the "mistake" the buyers are making when they "miss out" that they just purchased a 59,950 mile vehicle that they incorrectly viewed as a 50,000 mile vehicle.  In this case, they are handing out free $ to the seller.   Maybe they are altruistic?

Now all authors want to believe that their findings generalize.  Do these results generalize?  What other settings could be studied?

Wednesday, May 25, 2011

My New Climatopolis Interview

There are plenty of exciting popular economics books being released each month.  An author faces the challenge of how you "stay relevant" when you face such high quality competition.    Here is my most recent effort.    Permit me to preview a few of my quotes about Climatopolis;

"My starting point is that we have to be honest that we have collectively chosen to run a dangerous experiment. The book’s first chapter is titled “Too Much Gas.” As India and China and other developing countries achieve their version of the “American Dream,” global greenhouse gas emissions will continue to rise. Climate change poses many potentially nasty threats for different parts of the world.


In 2006, the Brookings Institution Press published my Green Cities: Urban Growth and the Environment. That book focused on how local pollution challenges such air pollution, water pollution, and access to green space evolves in a growing economy.

Today, such local indicators of environmental quality are all improving in the United States. Rising income and technological advance and shifts in the location of manufacturing of goods have allowed us to enjoy both ongoing growth and improved environmental quality at the same time.


Climatopolis is meant to be a sequel to Green Cities. While predicting the future is challenging, the book sketches a logical set of claims for how our free market system will facilitate migration and innovation and behavioral change at the individual and firm level that collectively will help us to adapt to the evolving threat of climate change."

Monday, May 23, 2011

Endogenous Technological Change and Aging Baby Boomers

As Baby Boomers age, their aggregate demand for products will create new markets for innovators.  Acemoglu and Linn (2004)  have anticipated future news stories such as this one.  I believe that the same dynamic will unfold in the case of climate change adaptation.  Billions of people will be seeking strategies to help them cope with climate change and the best ideas in the market will rise to the surface and deliver.  Which ones will they be? I'm not that smart but I understand the law of large numbers and the power of ideas as public goods.   To quote myself;


Urban Adaption to Climate Change


My book titled Climatopolis: How Our Cities Will Thrive in the Hotter Future was published in fall 2010. In it, I examine how urban quality of life will be affected by climate change. Assuming free market capitalist growth and the fundamental worldwide free rider problem, global greenhouse gas emissions will continue to rise. Facing this reality, what will climate change do to our urban economy?

Although I cannot predict what will happen to a city such as Moscow in the year 2050, I am confident that the insights generated by NBER research have direct implications for the complex challenge of climate change adaptation. Microeconomics provides a powerful tool for thinking about how we will cope with this emerging ambiguous threat. The book's core thesis is that urban capitalism will play a crucial role in helping us to adapt to the challenge posed by climate change.

For example, climate change is likely to raise the average temperature in certain cities. Because of that, cities such as Detroit and Buffalo will have an easier time competing against Sun Belt cities whose warm winter temperatures have acted as a magnet, attracting population migration.15

In Climatopolis, I argue that households will learn from climate scientists about the new challenges that different cities will face. If specific cities do experience a decline in their quality of life, then their real estate prices will decline, and they will suffer a net outflow of people. Households will "vote with their feet" and this nimbleness will help them to cope with the evolving challenge of climate change. Cities compete to attract and retain the skilled. If a city's quality of life declines because of climate change, then the skilled will leave and economic growth will slow.

My book emphasizes the potential for endogenous technological advance to play a key role in helping us to adapt. The billions of people who will be affected by climate change create a large market opportunity for entrepreneurs who can serve this market. In the presence of fixed costs to develop new products, the scale of the market is a key determinant. If billions of people seek an energy efficient air conditioner to offset hot summers, then there will be sharp incentives to invest in developing such products. Some of these producers will succeed. In a globalized world market, the pay-off to the successful entrepreneur will be huge. In new research, I will continue to explore microeconomic issues related to climate change mitigation and adaptation.

Chicago's Plan to Adapt to Anticipated Climate Change

Is Chicago the last bastion of rational planning?   I don't think so.  Self interest will nudge even those who don't work in Hyde Park to anticipate how climate change will affect their lives.  Chicago has paid some consultants to provide a crystal ball study of how their city is likely to be affected.   As new infrastructure decisions are made, the consulting report will provide useful hints for how to make irreversible investments that the city won't regret in the year 2070.  The report claims that 1000s may die each year in future heat waves.  While possible, merely by alerting people of this possible horrible scenario can be sufficient to sharply reduce the probability that the event ever takes place.

If people foresee such nasty heat waves, they will buy the air conditioners and demand access to ventilated places so that they can ride out such a future storm. Yes, such adaptation will increase electricity demand and yes that could exacerbate climate change if the electricity is generated using fossil fuels -- but if by the year 2050 we have made free market progress in renewable power generation then we can enjoy the win-win of adapting without exacerbating the real threat of climate change.   Increased air conditioning is likely not to be sufficient for fending off Chicago's expected heat.  Urban planners will play a role in thinking through how to increase green space and reducing the Urban Heat Island effect by smashing up concrete.   We will fumble our way around in this learning process by experimenting to learn what works and the best ideas will spread to all cities.

I argue in my Climatopolis  book that free market capitalism will greatly ease the pain that cities such as Chicago suffer because of climate change.  If a city such as Chicago does not make adaptation plans while competitor cities such as Boston do, then Chicago will lose the skilled and jobs to other cities that become more livable and land owners in a suffering city such as Chicago will suffer a sharp drop in property values. Capitalism punishes those that don't step up in a changing environment.

The New York Times story linked to above tells a nice prospective story about Chicago but the proof is in the pudding as time passes and climate change unfolds -- will Chicago sink in the quality of life rankings or will it rise?   I predict that proactive urbanites and proactive city governments will experiment and learn how to handle this emerging threat. Adaptation won't be a "free lunch" but our collective capacity to adjust to new situations and to harness capitalism's innovation will allow cities such as Chicago to continue to thrive in our hotter future.

Saturday, May 21, 2011

How Do Anonymous Political Scientists View Economists?

This discussion  at Political Science Job Rumors (don't ask why I read it) is informative.   Kristof of the NY Times wrote a piece celebrating randomized trials as a source of credible information about effective interventions for helping the poor.  Michael Kremer and Ted Miguel's piece on "deworming" is discussed in detail.   Here is one comment by a political science scholar called "Anon"

"

True that "deworming = GOOD".

Where poli-sci comes in though, is that many economists would assume that once this information is out there, that deworming is highly cost effective, then the work is done.

Years later, said economists will be surprised that Govt X hasn't actually done any deworming despite the clear cost-benefit argument, because the economists won't have thought through the political incentives facing Govt X that led them to do something else. Or, when Govt Y channels their deworming money first to Favored Ethnic Group Z, it turns out to be the last straw that provokes a brutal civil war, leading to more dead children than if you'd let the worms alone. Confused, sad economist.

(yes, smart economists get those issues, just as smart political scientists understand marginal utility. But neither discipline is made up of 100% smart people) "

This funny sketch is why serious economists have carved out the nascent field of "political economy" --- when a "free lunch" is discovered --- will it be grabbed or are there powerful interest groups who will slow down the pursuit of the pareto optimum?

Some of the world's top economists are hard at work on this general topic.  Don't believe me?  Then go to this NBER Webpage and start reading!

Economists are aware of the weaknesses of our field.  There are strong incentives to address these shortcomings and to make intellectual progress.  We do watch developments in psychology, sociology and political science and like the Borg from Star Trek we bring these ideas back to the our "mother ship".




Friday, May 20, 2011

Boldrin and Levine Respond to Critics of their "Against Intellectual Monopoly"

Michele Boldrin and David Levine have written a powerful critique of critics of their book.   I respect their paper on a number of levels.  As the author of a controversial book, I can appreciate the opportunity to be given a fresh chance to revisit criticism.    This isn't about revenge but rather to take control of the narrative.  When you write a book, others control how it is viewed.  There is a complex web of bloggers and opinion makers who nudge and spin the work in ways that can take surprising turns.  The author of such a book wants to start a debate but bloggers and critics may have their own agenda and will use the author's material to return to their core themes.  

Boldrin and Levine are smart, tough guys and they must have anticipated that their work would generate criticism. It appears that they underestimated how much criticism they would face.  In their new paper, they present both theory and empirics supporting their core claim that the costs of intellectual property protection (i.e patents and copyright law) exceeds the benefits they offer.

At the end of the day, their core claim is an empirical claim.  They know this but they are not empiricists.  If they have written a paper with a regression in it, then this would be news to me.  They cite historical examples and review some econometric evidence.  The funny thing here is their Economics Department is not known to be a friend of "applied micro"  but their core question boils down to an empirical proposition that will need to be settled using "Cambridge" natural experiments and perhaps field experiments rather than dynamic General equilibrium theory or game theory.

The U.S has had a very good 20th century and is likely to have a good 20th century.  What role has our current legal institutions played in achieving our innovative, creative culture?   For firms making costly irreversible investments in drugs, green tech and other products;  would they be much less willing to make such innovations if they couldn't patent what they discover?  

It will be interesting to see how China handles intellectual property.  The cliche is that China was happy to grab Bill Gates' Windows at a low price in the past but if they start to be a green tech innovator will they engage in "open source"?  

The claim is that China is now tightening its own patent protection.  How would Boldrin and Levine, explain China's recent push on IP?
  
"It is the Chinese government's view that the intellectual property protection system plays a significant role in promoting progress in science and technology, enriching culture and developing the economy. It functions both as an important institution ensuring the normal running of the socialist market economy and as one of the basic environments and conditions for conducting international exchange and cooperation in science, technology, economy and culture. China considers the protection of intellectual property an important part of its policy of reform and opening to the outside world and of the building of its socialist legal system. Beginning in the late 1970s, China has been formulating laws and regulations for intellectual property rights protection, and has been participating in activities organized by the relevant international organizations aimed at strengthening international exchange and cooperation in the field of intellectual property rights. From its inception China's intellectual property rights protection system was directed towards the world and geared to high international standards. Spurred on by its reform and opening up, China has carried on its intellectual property protection legislation at a speed never before known."

Given China's focus on economic development, wouldn't their institutional choices reflect what is optimal for them rather than merely rent seeking by their equivalent of James Watt today?
 

Leakage in Poverty Aid that Reaches India's Poor

This article summarizes a new World Bank study highlighting the challenges posed by corrupt officials and middle men in targeting poverty reduction aid to the poor in India.  To quote the NY Times,

"The World Bank on Wednesday recommended a radical overhaul of India’s social programs. “Marginal changes alone may not deliver the kind of safety net which a changing India needs for its poor and for its economy,” Mr. Blomquist wrote.

One of the primary problems, the World Bank said, was “leakages” — an often-used term in development circles that refers to government administrators and middle men stealing money, food and benefits. The bank said that 59 percent of the grain allotted for public distribution to the poor does not reach those households."

The good news is 59% is lower than what many U.S charities grab in administrative fees!

So, how can the donor and the Indian poor "cut out the middlemen" and transact their transfer transaction?  If the poor had direct deposits, then the donor could directly wire in the resources.  I realize that the poor do not have bank accounts.   An alternative would be if the Donor could "helicopter drop"  the equivalent of "debit cards" that would have a fixed amount of $ on them and could be used for food purchases at any time. In both cases, improvements in technology allow the donor to connect with the poor without having to trust some government or middle man to distribute the food.

There could also be more randomized  field audits to test for corruption in India and those who are caught could be punished in a high profile setting. Such "shock and awe" examples might deter some corruption and thus help the poor.

It would interest me if the greatest "leakage" occurs with poor people who are farmers versus those who live in cities.  By the definition of cities, they are densely populated and there is more likely to be more information and more "perfect competition" between sellers. In contrast, in the rural countryside  --- the rural people may constantly face monopoly conditions where there is only one buyer of their product, it is costly for them to go to the city, and they lack information on several fronts.

In such a setting,  India could delegate the redistribution task to a set of non-profit international agencies who are not profit maximizing but can pre-commit to be "do gooders".  Such institutions, if they could develop trust, could become the new middle men distributing poverty $ to the poor.   My logic here is to acknowledge that there is an asymmetric information problem here and to delegate the distribution of aid to groups who we know from the start (because they are idealistic do gooders) are more eager to redistribute than to pocket the aid.  If the Gates Foundation played this role , it could even be asked to kick in an extra 20% of money for every $1 that India provides in poverty relief. This would provide the Gates Foundation with an incentive to monitor its own people.

Thursday, May 19, 2011

California Job Growth and our Next "Golden Goose"

In the year 2040, what will people in California do all day long?  We are likely to be an older population so we may be content to sit around and enjoy the sun and eat our good local fruit to raise our fiber intake.   But, some people will actually have to work for a living.  Who will they work for?   People say that Facebook hasn't created many jobs.  I know that relatively few people actually work at Facebook but I have wondered how many "spillover" jobs they can claim to have caused.  For example,  I did not know that there is a group of Los Angeles people who are big fans of the Kansas University "Jayhawks" .  People who want to be in this group can opt in and join and then if there is some firm out there who caters to such a niche then it can easily reach this group through targeted advertising or placing a message on this board.  How valuable is this "micro targeting"?  I don't know.

Now, the NY Times highlights that movie making won't be a growth industry for California.  In this long article about Arnold Schwarzenegger's return to making movies, one paragraph stands out;

"The new film will be shot mostly in New Mexico, to take advantage of state tax incentives, despite Mr. Schwarzenegger’s campaign as governor to keep the movies in California."  It would interest me if Arnold made any effort to demand that the movie be made in California?  Perhaps he believes that there are perfect substitutes for him and thus he didn't have a credible threat that he could make.

I am realizing that I don't have much imagination.  As I watch the UCLA Class of 2011 get ready to graduate, I don't know what they will be doing for a living when they are 40 or 50 years old.  I am a big believer in the U.S economy's ability to reinvent itself but I have some trouble anticipating what our comparative advantage will be.   We have "green cities" and "good fruit" and great universities --- perhaps tourism and health care and coffee places and a rising number of academic nerds can employ all of us?

Tuesday, May 17, 2011

Full Disclosure

Columbia Business School has announced a new policy that requires its faculty to reveal all details (perhaps not compensation) about their outside activities.  Such "sunshine laws" should be adopted everywhere.   Markets are more efficient when there is less asymmetric information.

Search Costs for "Good Data"

I hadn't heard of the company Zanran until I read Donald Marron's blog post in the CS Monitor.  Until now, when I have been searching for some piece of data -- I have gone to Advanced Google and set the option on ".xls" to search for some file.  I knew that this was an inefficient way to search.  I am hoping that Zanran makes it easier to search.  

Proprietary data issues will arise.  I had hoped to write a paper about Beijing's new vehicle stock and in particular I was interested in what types of vehicles were being registered within the city by calendar year.  In California, it is relatively easy to acquire such data because you can purchase data on Smog Check outcomes or you can pay more to a company such as R.L Polk to know the exact count of vehicle registrations for a given geographical area such as the 90024 zip code or Los Angeles county. In Beijing, the price would have been huge to have accessed such data.   My vision for Zanran is that it will be an "open source" means to cobble data sets together.

In an open source, "hippie" sense -- the nascent effort of major social science journals to engage in replication could play out in Zanran as the website would figure out which data sets are where on the web.  So, can Zanran identify the contents of a stata file?  Or based on the text file documentation know that a relevant stata data set is posted at the American Economic Review's website? Ideally, young economists are standing on the shoulders of giants and aren't merely downloading other people's data but are figuring out how to combine such "old data" with their own original data collection efforts.  This is progress. I remember back in 1990 going to the Chicago EPA library and writing down in a notebook individual monitoring station pollution data. From the perspective of today, that was a big waste of time but I was trying to build a pollution data base.

Monday, May 16, 2011

The Future of Environmental Education

Persuasion is a major research topic in economics right now.   What do you find to be a convincing argument?  One that confirms your prior or one that is based on new credible evidence or a mixture of the two?  For environmentalists who are not content with the status quo,  can adults be educated  to take costly actions that promote sustainability  and to support politicians who are willing to take costly stands?   The answer is probably "no".  The putty hardens into clay and we aren't that malleable after a while.  But, young people may be more open minded and more willing to engage.   This new book, whose press blurb I present below, is co-written by a UCLA colleague of mine.


Environmental education has failed and must be revamped, new book argues

Stuart Wolpert, swolpert@support.ucla.edu
310-206-0511
           
Schools must revamp how they teach about the environment to prevent ecological collapse, conservationist Charles Saylan and UCLA life scientist Daniel T. Blumstein argue in "The Failure of Environmental Education (And How We Can Fix It)," published this week by the University of California Press. 

"Americans like to think we are doing a great job educating our kids about the environment, but there has been a major disconnect between raising awareness about the environment and taking action to reduce environmental degradation," said Blumstein, a UCLA professor and chair of the department of ecology and evolutionary biology. "We believe environmental destruction — pollution, global warming, biodiversity loss, ocean acidification, over-harvesting resources, to name a few — is ruining the Earth and that students should be taught to preserve the Earth." 

"Environmental education has failed to keep pace with environmental degradation," said Saylan, co-founder and executive director of the Ocean Conservation Society. "We are advocating a sea change in education." 

"The world will be a very different place by the end of this century," Blumstein said. "Is that a world we want for our kids and our grandkids?" 

"Sooner than that," remarked Saylan. He and Blumstein strongly emphasize "tipping points" that can rapidly degrade the environment. 

"Many systems may be stable for a long time and suddenly change," Blumstein said. "Tipping points are unpredictable. You don't know when you're near one."

He cited the rapid collapse of Hosni Mubarak's government in Egypt as one example and the depletion of many fish species as another. 

"You don't know where tipping points are until they tip," Saylan agreed. "They can happen faster than most people think. Many people all over the globe, for example, are running out of fresh water. Where will all these people go?" 

Blumstein and Saylan recommend integrating environmental education into the overall curriculum in schools, rather than teaching it separately. 

"When you're learning math, why not learn about a carbon audit or an environmental issue?" Blumstein asked. "Students can learn about projected climate-change scenarios, what acidification is and the effects of pollution. Teachers and schools can develop all kinds of creative, integrative educational experiences." 

Specifics should be left to local communities, Saylan said. He and Blumstein do not seek to micromanage what schools should teach at various grade levels. 

Blumstein and Saylan have both participated in Earth Day events since these events began back in 1970, and they have been disappointed to see that over the ensuing decades, the Earth's environmental problems have actually become worse. 

"This generation of young people and the next generation to follow will have to solve a lot of environmental problems," Blumstein said. "That is why K–12 education is so important. We are facing one of the largest collective action problems humanity has ever faced, and we need to give students the skills to solve them. Education has to be an important part of the solution to environmental destruction; we have given the generation in school and those that follow big marching orders." 

"Neighborhood recycling programs and plastic bag bans are great but unlikely to save us from serious impacts of global climate change," Saylan said. "Actions must be commensurate in magnitude to the problems they are intended to mitigate. Environmental education must nurture the social awareness and engagement necessary to convert words and ideas into measurable action." 

Blumstein and Saylan recommend teaching critical thinking. Environmental education must be accountable — "we will need to know which teachers and programs work and which do not," Saylan said — it must be integrative and it must quickly permeate our schools, they argue. 

Students also need to learn how science works.

"Science is self-correcting," Blumstein said. "Nothing is known with certainty except easy things." 

Environmental education should not be a political issue, they say. 

"Environmentalism is no longer a choice," Saylan said. "All of us who breathe need to be environmentalists now; our future and our children's future depend on it." 

"We need to maintain a habitable Earth," Blumstein said. "There is only one." 

"


WHAT do I think of this new book?  I haven't read it yet. I like the idea of nudging children into thinking about real world scarcity challenges.  But, I would like to see children be introduced to free market environmentalism and how the capitalist price system sends signals concerning scarcity challenges.   Several of the challenges that the authors allude to are classic "tragedies of the commons".  Most economists would say that we need to introduce private property rights to get the incentives right here and it is important to introduce young people to these ideas. 





Celebrities Making Sense Without a Teleprompter

I used a teleprompter for the first time for a video and I now have a better sense of how it makes public speakers look sharp.   I wrote the script and as I read it to the camera -- I tried to look earnest.   Here is Rob Lowe talking without a teleprompter in an interview with the NY Times. He makes a lot of sense.   He is promoting his new book. I read part of it at Ralph's the other day and found it to be more interesting than most economics books.  Perhaps, UCLA should hire him.

Sunday, May 15, 2011

Chicago as a "Consumer City" or No More "Beirut by the Lake"

I was born in Chicago and spent some time in graduate school there.  I spent a fair bit of time in the early 1990s watching Michael Jordan dunk and Frank Thomas hit homers.   The people of Chicago are in deep thought about their mayorial transition from a Daley to a Dancer.   We are supposed to swoon at the success of the Emanuel brothers but lets not forget the Daleys.    The Mayor's understated brother is playing a key role in the Obama Administration.

Downtown Chicago's success since the mid-1980s is an important trend.   The people of Detroit can wonder why they haven't enjoyed similar success.  These two cities have roughly similar weather conditions.  Chicago made a bet on a more diversified employment base and a larger bet on financial industries.  Still,  I believe that Chicago's perception of being a high quality of life city fed on itself.  

As crime has fallen in major cities, richer people have been more comfortable living downtown.  Chicago's embrace of being a "Green City" has helped it.    As rich people live downtown, the "local amenities" improve and a snowball process feeds on itself.   New York City has enjoyed a dynamic like this since the early 1980s and so has Boston and Chicago.  These cold weather cities were run down and looking nasty and like Rocky they have gotten off the canvas and reinvented themselves.

What causal credit do their mayors deserve?  Great man theories of city dynamics are hard to test but Chicago appears to have enjoyed a long period of good karma.

The Chicago power couple of  President Obama and the First Lady represent a leading example of the rise of the Black elite educated upper class.  Chicago has many more examples of the Obamas.  Such success highlights that traditional racial divisions in big cities do not have to persist. The perception that the American Dream lives on and is available to all creates good will, civic engagement and more early life investments by young people and their parents as they become confident that free market success is achievable.    

Nimble Farmers Redux

At a given point in time, farmers must choose what crops to grow.  The wise farmer will compare his expected profits from each choice.  Profits will depend on input choices, his production technology, climate conditions and world prices of output.  The same farmer might make different choices if he lived under different climate conditions.  Variation in climate conditions across nations provides a type "lab" to see how a given farmer might respond if climate change affects the temperature and rainfall conditions where he currently lives.

In this paper, PRADEEP KURUKULASURIYA and ROBERT MENDELSOHN use some nice micro data to study this issue. Here is their abstract:


"This paper examines the impact of climate change on primary crops grown in Africa. An
innovative approach is presented that bridges the gap between agro-economic and traditional
Ricardian models. We label it a ‘structural Ricardian model’. It first captures the type of crop a
farmer will select and then examines the conditional net revenue of that crop. The model is
estimated using a sample of over 5000 farmers across 11 countries in Africa. The analysis finds
that farmers shift the crops they plant to match the climate they face. Studies that fail to account
for crop switching will overestimate the damages from climate change and underestimate the
benefits."

This makes intuitive sense and matches the predictions of "optimistic" climate change adaptation economists.

I read the paper quickly and it does not appear that they collected any data on the farmers themselves such as their cognitive skills or their ability to borrow money to finance new capital investments.  Why does this matter?  Suppose that Matt is a farmer in Africa and I have plenty of experience growing crop X but due to climate change that my yields of X have declined by 70%.   I can either move to the city or change my game and grow crop Z that is more suited to the new climate conditions on my land.  But, there are transition costs to changing my ways and moving my production from X to Z.   If I have general human capital, then this transition will be easier, it will also be easier if I have access to financing to buy the equipment needed to produce Z.    Implicit in this paper's logic is that transition costs for farmers (to change their game from growing X to Z) are low.   Organizations such as the Gates Foundation can play a leadership role here educating farmers in at risk areas and helping them to make this transition.  This is an example of the "small ball" for adapting to climate change.

What I like about this paper is that it presents new empirical work on the "big point" of investigating whether poor African farmers are passive victims or whether they step up and make choices to maximize their probability of success when faced with different climate conditions.

Saturday, May 14, 2011

Celebrity Homes for Sale in Los Angeles

If you are looking for a home in the $5 million+ range then skim the listings here.  All of these homes are somewhere in LA. You can buy Jodie Foster's home or Eddie Murray's ex-wife's home.   My personal favorite is the home of the actor who played "Al Bundy" in Married With Children.  He reminded me of many economists.

Switching subjects, I am happy to say that it is almost summer time.  It is the 8th week in the Spring Quarter at UCLA. I've been teaching my undergraduate energy economics class and my MBA class in Real Estate Finance and Investments. I'm a versatile guy. In the fall, I taught a week of PHD economic history and in two weeks I'll give a lecture in an ecology class. In the Winter, I gave a seminar in the atmospheric sciences department.  How's that for diversity?

This summer I will head to Montana to hang out with my friends at PERC.   I'm hoping we will ride some bison and do the kind of stuff that Harrison Ford and Ted Turner do out there.  I don't know what I'm talking about but I look forward to trying it.   If I can't ride bison in Montana, then I will try to do this in Beijing and Tianjin.   I will make my 2nd trip to China and hope to double my Chinese vocabulary.  Right now, I know one word and I've been told that this one word is not a real word so my language progress is slow.





 

Thursday, May 12, 2011

Launching California's Carbon Cap & Trade Program

In a pinch of irony, the Sierra Club is upset about California's nascent Carbon Cap & Trade program. Has the Sierra Club joined the Tea Party?  That would be Time-AOL merger!   At the tender age of 45, I speak in cliches.  "Every journey starts with a first step".   California is the green guinea pig as we try to launch a credible carbon cap & trade program.   The goal is to credibly commit to a slow ramp up in the price of carbon emissions.  Right now the price = 0 and this is too low.  The hope here is that by having a slow ramp up (i.e allowing the price of a ton of carbon to rise over time) that this incentivizes polluters such as fossil fuel power plants to green their game.  They will have plenty of lead time to plan for such changes and can move on whatever margin they believe is most cost-effective for them.  If polluters must change their ways (thanks to this regulation) then this will thicken markets for low carbon products and encourage specialization and human capital investment that will in total lower the cost of abatement.  The lessons learned will be passed on around the world. In this sense, California is providing public goods.  

Yet, the Sierra Club has deep concerns.    Bill Magavern's letter to Gov. Jerry Brown lists several items related to the details of how California will launch its cap & trade program.

Mr. Magavern is concerned about;

1. reliance on offsets purchased by sellers from outside of California
2. local environmental justice
3. forest offsets
4. enforcement problems with offsets
5.  handing out allowances to polluters

I will try to tackle these issues in this order;

1.  As I understand it, California's AB32 allows firms who must comply with the cap to purchase carbon offsets from other entities who reside outside of California.  So, if I must reduce my emissions by 10 tons --- I could pay some economists in Boston to walk more and drive their car less or pay a land owner in Brazil to not cut down his trees.   These are offsets and I will search for the cheapest way to meet the regulatory requirement.

A couple of serious issues arise.  Do such international credits actually take place or does the Brazilian land owner say that he has kept the forest a forest or did he cut it down anyway and cash my offset check?  We need serious environmental accountants here to verify claims.   There is also a counter-factual question; did my paying the Brazilian change his actions? If he would not have cut down his forest had I not sent him the check, then the California Cap & Trade has had no impact on global carbon emissions. It affects income transfers but not real activity.

Mr. Magavern wants carbon emissions reductions to be "home grown". He tries to be an economist with a Big Push argument claiming that the green economy will be stimulated if we do all of the reductions here in state. There is some truth to this but the costs of compliance will be higher and he intentionally avoids discussing this point.

2. Local environmental justice --- if local polluters can buy offsets, could they actually increase their carbon emissions and raise local air pollution problems in the poor neighborhoods where they are located?   Again, there is valid concern here but in this age of the Internet and Twitter --- a public relations disaster would ensue for a firm that followed this strategy.  As the cap is tightened over time, firms will have an incentive to take a close look at their production process and swap out old dirty capital and purchase cleaner capital. The net effect in the medium term will be lower ambient pollution near the polluting sources.  New capital is cleaner than old capital (a 1960s power plant say) and this regulation will eventually nudge these firms to update their capital stock.  Now, some scholars have documented that the Clean Air Act actually encouraged firms to slow down the replacement of old capital because of "grandfathering". New capital was regulated while existing production facilities (old capital) faced no regulation.  But, the beauty of "cap and trade" is that such pricing regulation is not quantity regulation and it treats a ton of emissions the same regardless if it was produced by old or new capital.  

3.  forest offsets --- Mr. Magavern makes a nice point here and I am not qualified to discuss it.  He is doing some good economics here by pointing out a potential unintended consequence of relying on forest offsets.  There is also the broad accounting issue of how many trees equals  a ton of carbon abated.

4. Enforcement problems -- there will be no enforcement problem if each polluter's total emissions can be verified.  Once it is know how many tons I emit, then I owe the market price of a permit * the tons I emitted.   Again, if I can buy offsets there is a key accounting here to determine whether my claimed offsets actually do offset the pollution I created.    If there are nations who we do not trust to honestly comply with the contract then we could have the equivalent of "default risk". For example, if we don't believe Russian claims about their offsets then we don't have to have 1 to 1 exchange rate. Instead, 10 tons of Russian offset credits could equal 1 ton of California offsets. Facing this 10 to 1 exchange rate, California polluters would have an incentive to substitute to more trusted offset suppliers. Russia would have an incentive to bring in an arm's length certifier to confirm that they are achieving the offsets they are claiming. Why? If Russia took this action, its "exchange rate" would improve to 5 to 1 or at best 1 to 1.

5. Allocations --- The Sierra Club wants the "polluter to pay" --- I agree with this in terms of property rights. This is a classic initial Coasian issue of who has the right to pollute?   But don't forget lobbying. The polluters must receive a side payment in order for them to not call in their lawyers. While I would prefer for the state to collect all of the revenue from the permit auctions, I am not surprised by the choice to hand out some allowances. The same thing happened in the case of Acid Rain SO2 markets.  The coal fired power plants across the nation received huge initial allotments.

Tuesday, May 10, 2011

Pay for Performance? The Case of the University of Texas

After carefully studying the spreadsheet posted here, I can now confidently say that I'm one of the world's leading experts on Economists' pay at the University of Texas at Austin.  University of California academics have grown used to our salaries being public information so I welcome my UT friends to our club of "exhibitionists".

Other economists should join us by posting their 9 month salary next to their name on their webpage.  Perhaps, the NBER could ask each of its family members to post their true 9 month salary next to their name.  Such honesty would be refreshing and it would help Deans to decide who might be a tempting hire.  Compensating differentials scholars would be able to write a high quality paper on measuring the "combat pay" that is required to lure someone from a Los Angeles to a Houston.

The more interesting piece of the UT experiment is its intent to design some performance metrics for each faculty member to judge their "cost-effectiveness".    This is only fair. Education economists are helping elementary schools design "test score value added" criteria to identify which teachers are key inputs in the child quality production process. Such "good teachers"   (those with a positive fixed effect) are likely to receive a bonus.  In a similar spirit, the Deans want to know who is the Deadwood and who is the highly paid Deadwood.  They want Wood that is thinking of slowing down and becoming "Deadwood" to be aware that the Deans will know that they have made this choice.   Performance criteria do create accountability.

From glancing at the UT spreadsheet, the criteria they want to use are;  number of courses taught, the count of undergraduates enrolled in your classes, the count of graduate students enrolled in your classes, and your total federal grant dollars that you receive.  Will UT's economists score high on these criteria?

A self-serving argument is that these attributes represent a small part of the job.  A professor can point to his peer reviewed articles, books, editorial positions,  government consulting,  participation in alumni events, mentoring of student theses, mentoring of junior faculty, serving on university committees, talking to reporters and being quoted as from University X as examples of the multiple dimensions of activities we participate in.  A Dean knows this.  The Deans were once professors but now they are "Management".  

Now, a smart economist will respond to incentives.  Well paid professors will volunteer to teach econ 101 in order to have a big enrollment. Joe Stiglitz taught this class at Columbia and Greg Mankiw teaches this at Harvard, and John Taylor taught it at Stanford.  I believe that Superstars should be teaching the early classes with the huge enrollments but UCLA has not fully embraced this model.

As inflation starts to heat up in the United States,  the Deans will have a new opportunity to lower our pay and perhaps our cost-effectiveness will rise.

 

Monday, May 09, 2011

Cities, Weather and Death in India

In Climatopolis, I argue that urban growth will help us to adapt to climate change.  Cities make us richer (due to trade, learning and specialization) and income will help people to adapt to the challenge of climate change.  Productivity in cities takes place indoors and is more immune to climate conditions than agriculture.  This new paper provides some evidence in favor of my broad hypothesis.  The "Dream Team" of Burgess, Deschenes, Donaldson and Greenstone report that; "We also show that hot and dry weather depresses agricultural output and wages, and raises agricultural prices, in rural areas|but that similar e ffects are absent in urban areas. Using the coeffi cients from our analysis of Indian districts combined with two leading models of climate change we demonstrate that the mortality increasing impacts of global warming are likely to be far more strongly felt by rural Indians relative to their counterparts in urban India or the US."

So, this suggests that India's best strategy for reducing climate change impacts is to have its population urbanize.  Which cities should they move to? That's up to them. Abstracting from local congestion and pollution, the invisible hand will guide this rural to urban migration and the household's optimal choice will mirror where a benevolent planner would have sent.


To quote the authors;

"Put simply, hot weather is a major source of excess mortality in India but not in the US.
The results we uncover suggest weather in India kills by denting agricultural incomes
via the interruptions it imposes on agricultural production and employment. We observe no
e ffect of weather on death in urban areas of India. This is true even for infants".

The authors Conclude


"The eff ects of weather on death, in short, are highly unequal even within a single country. This in turn suggests that the eff ects of climate change will be highly unequal. Using the coe fficients from our analysis
of Indian districts combined with two leading models of climate change we con rm this by
demonstrating that the mortality increasing impacts of global warming will be far more
keenly felt by rural Indians relative to their counterparts in urban India or the US."


Now, as India grows richer must agriculture be harmed by heat waves?  I don't think this is a law of physics. Forward looking farmers who have increased access to capital markets have the right incentives to think through what investments they can make to reduce the impacts of heat waves and other climate change induced shocks on their yields.

Using "Endogenous Growth" as a Justification for a Government Funded Place Based Subsidy

Suppose that you want to attract billions of New York State tax dollars to the city of Buffalo.  Can you say to rich folks such as Derek Jeter and Don Trump; "Dear Manhattan Friends, please send large amounts of your tax dollars to your old friends in Western New York"?  Such an appeal is unlikely to move the Donald.  Smart place based politicians try an alternative approach.  They make the case that strategic investments in a specific city will be "synergistic" and will fuel growth that otherwise would not have happened.  

The Endogenous Growth Theory built by Paul Romer can be used as a justification for government funds to be used for specific place based programs.  Optimists can claim that if capital can be raised that a terrific project could be undertaken and they can claim that the economic returns will be so large that tax dollars (rather than private funding) should be used to finance it.

Consider the case of SUNY Buffalo.

Here is a quote from the NY Times Article;


"Where a drab low-income housing project now sits, leaders of the University at Buffalo, part of the State University of New York system, envision glass-and-steel biomedical buildings. They propose hiring hundreds of new professors and thousands of staff members. They imagine young researchers living in restored lofts, dining at street-side bistros and walking to work.

The $5 billion expansion plan, given the name UB 2020, has captivated business leaders and local politicians, who dream of a new economic base.

But cash-short state officials in Albany have not been keen on what would amount to the SUNY system’s biggest expansion since its creation six decades ago. Skeptics see the plan as a fantasy that, at best, would enrich wealthy developers while making the university too expensive for poor students. A version of UB 2020 failed to win approval in the Legislature last year, and two state senators from the Buffalo area lost re-election bids last year partly as a consequence.

Yet there is no denying that the hope — that Buffalo could someday be a New York version of Berkeley, Calif. — is a tantalizing one."

If an economic consultant were called in to do an honest evaluation of the likely effects of this investment, how would they conduct such an analysis?  One would need a structural model of entry and spillover effects.  An optimist would point to studies such as "Million Dollar Plant" work by Greestone, Moretti and Hornbeck (see
 this  or John Quigley's work on what happens to Swedish cities in terms of productivity growth and innovation when a new campus is opened within its borders (see this).

These are great studies but the question remains;  if Buffalo enjoys this irreversible investment in new infrastructure -- will this jump start this specific city?  

I am a big believer in the key aspect of quality of life. If skilled innovative people want to live in Buffalo, then I am more optimistic that such a "Big Push" can work.  But, we get into the field of dreams effect. If Buffalo builds it, will the nerds show up?

There is a certain irony that "endogenous growth theory" (a niche developed by Chicago economists) can be used to justify big government.  Hinting at beneficial spillover effects helps a cost/benefit analysis by pumping up the benefits margin in ways that are hard to verify before the project receives the green light.

Saturday, May 07, 2011

Electric Vehicles Fill a Void in Japan's Disaster Area

Economists have bored generations of students talking about "backstop technologies" but maybe our students were wrong to tune out.  This article sketches the cool case of electric vehicles playing a key role replacing gasoline vehicles in the wrecked cities of Northeast Japan.

To quote the article:


"With oil refineries out of commission and clogged roadways slowing deliveries, finding gasoline had become a challenge. Shortages were so acute that Japan’s Self-Defense Forces had to truck in gasoline; donations of diesel fuel were accepted from China.

Yet in Sendai, about 250 miles northeast of Tokyo, and other cities ravaged by the earthquake, electricity returned within days. Taking stock of the situation, the president of Mitsubishi Motors, Osamu Masuko, offered dozens of his company’s egg-shaped i-MiEV (pronounced “eye-meeve”) electric cars to affected cities.


Despite their image as light-duty runabouts best suited for trips to a nearby shopping mall, the electric vehicles were immediately put to use. They were pressed into service ferrying supplies to refugee centers, schools and hospitals, and taking doctors, city workers and volunteers on their rounds."

Understanding Rising Political Polarization on Climate Change

Samuel Clemens published under the pen name of Mark Twain.  If Al Gore had followed this strategy for "Inconvenient Truth" would we now have passed more aggressive Federal legislation for slowing the growth of greenhouse gas emissions?   I do not want to put a heavy trip on the Vice President but the fact remains that there has been a recent divergence between Republicans and Democrats on the issue of climate change and reasonable people can ask "why"?

Consider this quote from a recent Republican Presidential Debate from Gov. Tim Pawlenty;


"Chris: in January you told me that you signed a bill to promote renewable energy sources, but, and here’s the quote, we never did sign a bill relating to cap and trade in 2007 the bill you signed required a task force to recommend how the state could adopt cap and trade in 2008, you said I support a reasonable cap and trade system at the federal level. You made this ad for the Environmental Defense Action Fund. Let's watch.

“If we act now, we can create thousands of new jobs in clean energy industries, before our overseas competitors beat us to it. Cap greenhouse gas pollution, now.”

Chris: Governor, I told you it was going to be a problem for you down the line. You now say it was a dumb mistake. Weren't you far more committed to cap and trade over those years than you now let on?

Gov Pawlenty: What i said that day and many other times is this we did consider in signing the law in Minnesota that would study cap and trade. We didn't impose it. We signed up to review it, study, join with other states to look at it and we did. What i concluded subsequently is it is really a bad idea. Not in the last six months. I sent a letter congress I think about two years ago. And other times have said, I was wrong, I was a mistake and I’m sorry. It is ham fisted, it is going to be harmful to the economy. Everybody here and anybody else running for president, if you have -- or considering running for president, if you've got an executive position and you have been in the battle, you are going to have battle scars or clunkers in your record, we all do. And that’s one of mine.  I just admit. I don't try to duck it, bob it, weave it, try to explain it away, I’m just telling you, I made a mistake. I look the American people in the eye and say i made a mistake. Nobody is perfect. If anybody is perfect come on up here and stand by this podium because we would like that person to be running for president."

This looks like a "litmus test" to me.  Republicans define themselves by opposing what their opponents support.

Supporters of cap & trade (and that includes myself and 98% of economists) need to think through what would be a valid "natural experiment" for testing whether those who claim that carbon cap & trade will be a jobs killer are correct.  Economists have written technical articles on this subject and I believe that the public needs to think about these studies.  As this recession ends, it is time to reopen this subject again.

For some reading;  I suggest my paper  with Erin Mansur; and Olivier Deschenes's  paper.

Thursday, May 05, 2011

Community Redevelopment: The Case of Beijing's Neighborhoods

Many urban economists are interested in gentrification and how declining urban areas make a comeback.  Think of Manhattan in the 1970s.  Those were gritty days in the Big Apple featuring murder, pollution, litter, smoke, and dog poop.  It was not the "green city" that it is today.   Within a big city, neighborhoods change over time as new migrants move in and change the character of a neighborhood.  If the newcomers are richer than the incumbents, then average income in the neighborhood increases and this will attract nicer stores and restaurants. In this sense, there is a feedback loop.  If crime declines in a neighborhood or if local blight is cleaned up (such as East Los Angeles smog),  then richer people will want to live there and the vitality of the neighborhood will rise as the housing stock will be cleaned up and refurbished.

Now, you might think that attracting major employers must play a key role in this gentrification but I don't know if this is right. In this age of "consumer city" many people reverse commute as they live in a big city and work at a suburban location.

What role does government investment play in gentrifying neighborhoods?   If government investment improves local public goods such as street safety, public schools, and clean air then it can play a major role.  The U.S literature highlights this point.  In recent work with Siqi Zheng we have been re-examining this claim in Beijing.   In this new paper, we present several facts about how Beijing's neighborhoods near the recently constructed Olympic Village and near new subways have evolved over time.


Does Government Investment in Local Public Goods Spur Gentrification? Evidence from Beijing

NBER Working Paper No. 17002

Issued in April 2011


In Beijing, the metropolitan government has made enormous place based investments to increase green space and to improve public transit. We examine the gentrification consequences of such public investments. Using unique geocoded real estate and restaurant data, we document that the construction of the Olympic Village and two recent major subway systems have led to increased new housing supply in the vicinity of these areas, higher local prices and an increased quantity of nearby private chain restaurants. 



Urban economists tend to be big fans of "person based" programs rather than place based programs but politicians tend to emphasize the importance of investing in places.   At the end of our paper, we discuss the quality of life of the urban poor who were displaced by these new investments.  While economists talk about "Hicksian pareto improvements", the losers from any policy rarely are compensated and this appears to be another case.

Wednesday, May 04, 2011

The Economic Incidence of Cutting University Employee Non-Pay Compensation

A professor's compensation has several pieces to it.  Everyone knows about the 9 month salary and the teaching load but there are other important pieces such as the retirement package, the health care package and tuition waivers for kids and spouses.  These latter pieces are not taxed and thus are highly valued by self interested faculty.   At the UC, these benefits are likely to take a haircut.  Schools such as UCLA are getting ready to demand that the faculty contribute more for their own defined benefit retirement plans and to pay more for health insurance. The net effect of these "takings" is to lower faculty pay.

Before you celebrate this point, remember that all workers can "vote with their feet" and go to another university job.  If private Universities are still offering sweet deals then a public school such as UCLA will suffer a brain drain if in unilaterally cuts pay.  But, good news for the UCLA Deans!  Columbia University has announced its own painful cuts (read this. )  If this rich Ivy League School's plight is any indicator, then perhaps UC faculty can not credibly threaten to leave to greener pastures. Perhaps, Sacramento knows what it is doing?

Will Climate Change Cause War?

Both novelists and academics have argued that climate change will increase violence around the world.  Homer-Dixon and David Victor have had a productive debate on this topic.  Do I have anything to add? Unlikely, but the truth can't slow you down.

Before, I talk about war --- I was excited to learn that China plans to collect some high quality micro data about its people.  Is the government's intention to improve my research with Siqi Zheng?  Apparently not.


"China’s top internal security official called for building a database containing information on each of China’s 1.34 billion residents to improve “social management,” a term that encompasses the state’s efforts to manage public dissent and head off protests in the name of maintaining stability. The official, Zhou Yongkang, said the system should be based on the resident identity cards issued to every Chinese citizen, and should include such details as each person’s tax record and history of education and employment, as well as what property and vehicles he or she owns. Writing in Qiushi, a Communist Party magazine, Mr. Zhou said that a comprehensive database would help neighborhood watchmen enforce stability."

These vehicle data will be useful for estimating some Engel Curves.

Back to the novel about the world in 2084;  here is a quote from the review I cite above;


"Powell is a scientist, and he puts his considerable knowledge of global warming and feedbacks to good use.  Floods, fires, storms, rising seas, disease, famine, refuges and warfare – including a war between the US and Canada – are the leitmotif for nearly every interview.   He weaves repeating major events into several of the interviews which helps establish a certain verisimilitude to the chronicle, rendering it all the more chilling.
He also does a good job of forecasting the kind of political horrors the challenges embedded in global warming are likely to ignite.  A chapter entitled America First looks chillingly like the logical conclusion of the fascistic right wing  leanings we see in today’s politics.  He is equally convincing in describing how global warming-induced water shortages combine with ethnic and religious hatred to ignite a nuclear war between India and Pakistan, or how water shortages inevitably lead to yet another tragic war between Israel and its Arab neighbors."



So, to be fair to the author --- he raises a fundamental issue --- during crisis do we turn to violence or do we continue to rely on free markets to determine who produces what and who consumes what?

The author is claiming that our "stable capitalist system" featuring peace and free markets will collapse due to shocks of natural disasters and resource scarcity.

I would argue the opposite.  Free markets will become an even more important force in our lives because of expected resource scarcity and increased risk of natural disasters.  The ability to buy and sell through free markets will help us to adapt to climate change.

The author posits that the U.S and Canada will fight a war.  That is almost funny but let's think this through.  Suppose that people in the U.S want Canadian oil.  In a world featuring private property, we must compensate the Canadian owners for their resources.  They will sell to us if this benefits them.  They will compare the $ they will collect from selling to what value they could create by holding the resource or selling to someone else.  Nations that trade more with each other are less likely to fight a war against each other.

If I want your stuff, I can use violence or compensate you through a trade.  If we anticipate that we are running out of certain natural resources then we will innovate so that consumers can purchase more efficient products that use less of this resource.  There will be no need to invade another nation for their stuff.

Markets access and expectations of future scarcity provide sufficient incentive to preempt concerns about "resource wars".

I predict that in Africa that ongoing economic development and urbanization will diffuse the concerns that Miguel and his co-authors raise.    Only in cases where there is a nasty Tragedy of the Commons problem and various interest groups have free entry to land can violence break out but this is an issue of establishing property rights. Once property rights are established then trade will emerge.

Will climate change lead desperate people to challenge other's property rights to land? It could but if an economy has enough upward mobility then this won't happen. I will return to this point soon.

Tuesday, May 03, 2011

Ranking Cities

Ed Glaeser has recently written about his  views on urban rankings.  Permit me to offer my views.

The U.S has roughly 300 major cities.  Could all 300 million Americans agree on their rankings from A to Z or would different people have different rankings?  Put bluntly,  how much would I have to pay the people who choose to live in San Francisco to move to Houston and how much would I have to pay the people who choose to live in Houston to move to San Francisco?

As economists, Glaeser and I would agreed that a market test of the desire to live in a particular city such as San Francisco is to calculate your annual income if you live there and to subtract off your annual rent for a standardized home.  If this consumption is large, then an economist would conclude that this isn't a desirable city to live in.  After all, suppose there is a great city to live in that offers a great quality of life, high wages and low rents.   If such a paradise existed, everyone would try to move there and this would lower market wages at the location and raise the rents at the location until people were just indifferent between living there or not.

So, in an open system of cities where you can migrate across cities --- the differences in a local city quality of life will be reflected in local wages and rents.

Now, I realize that "quality of life" may mean different things to different people.  Economists have documented that young, middle aged, and old people have different priorities over what city attributes they care about.  For example, older people reveal a taste for warm winters as they migrate to Florida for the winter while young people may care more about bars and nightlife that a specific city offers.

Another demographic determinant of ranking cities is income.  New York City is  a very different town if you are upper middle class versus poor versus rich.   A poor New Yorker is more likely to live in the Bronx or Brooklyn rather than in Manhattan.  Yes, these different groups are exposed to roughly the same climate conditions but they will have different access to Opera Tickets, fancy restaurants and stores and good seats at Pro-Sports games.  So, the same city can be a very different experience depending where you sit in the income distribution.

Ethnicity is another determinant of city rankings.  People tend to self segregate and live with people who look like them.  If I am the only person of Chinese heritage in a city, then I am unlikely to find a Chinese newspaper or my hometown's cuisine in an American city.  But, if there are 250,000 Chinese immigrants in my city then my U.S city will have the scale to cater to my tastes and I will be able to recreate my "old life" in my U.S city.

Economists use migration as a "market test" of which cities are on the rise.  I ask my UCLA students; "how many of you plan to move to Detroit after graduation?" I have never seen a student raise his hand and say "yes" to this question.  For Detroit to make a comeback, it must retain its home grown skilled and attract "outsiders" looking for cheap housing and new opportunities.

Ed Glaeser and I have been interested in ranking cities with respect to their carbon footprint.  We have written two papers that are available here and here. Such metrics allow for "apples to apples" comparisons that can be made across international borders.

But, let's focus on the real issue here.   How will we know when Shanghai is a "better" city than New York City or Los Angeles?    Economists have ranked universities by studying where students choose to enroll when they have a choice and when the researcher can see the financial aid packages offered by both competing schools.  For example, suppose you know that I have been accepted by Harvard and Yale and that Yale has offered me a $10,000 discount in tuition. If I choose Harvard, then this is strong market evidence that I really prefer Harvard.  This paper pursues this strategy.

In the case of Shanghai and NYC, the analogue would be some sort of free agent either in sports or high tech services who can do his job anywhere.  If you could observe the salary offers in the two cities and see which choice is accepted (and if you know the rents for housing in the two markets) then you would have the start of a credible ranking index of "International Superstar Cities".

Economists have used such an approach to measure international tax haven effects.  See this soccer paper.

There are other "objective criteria" such as murders per-capita, polluted air days,  humid day counts,  count of highly rated Zagat's restaurants but while each of these could be collected by city it assumes that there is no variation in quality of life within cities and you continue to face the challenge of how you collapse this broad set of data into a single rating for the city as a whole?  Why is NYC a better city than Boston? Is it?  How do you define your metric for measuring how "far apart" they are?  Would Trump ever live in Boston?  Why Not?