Saturday, July 30, 2011

Meet My New Neighbor

This 22 year old  has purchased a nearby home in Little Homby for $85 million.   I assume she won't be using the local public schools in the short run.  At a 1% property tax, she will be paying roughly $16,000 a week for garbage pickup.   That's civic engagement!  

Note that she is from England.   As I have argued before, one way for us to address our budget deficit and stimulate our housing markets is to auction off United States passports. Everyone's always saying that we need to export more. Our passports are something that foreigners want!

So, if we sell two million passports a year at $250,000 each, our treasury department will collect $500 billion a year.  That would help reduce the deficit and I do think that this infusion of successful people would encourage innovation and boost local home prices and this would stem any ongoing concerns about foreclosure.

Friday, July 29, 2011

Urban Economics in Hawaii in December 2011

Which sub-field of economics throws the best conferences?  My new vote is for "urban economics".

ADB Workshop on Urbanization in Asia

Honolulu Hawaii, December 14-15, 2011

Call for Papers

The Asian Development Bank (ADB), in collaboration with the East-West Center and the University of Hawaii at Manoa, invites submissions of substantial abstracts, or preferably completed but unpublished papers that focus on urbanization in developing Asia. Both research  and policy oriented papers are welcome provided that findings, conclusions and policy recommendations are based on solid evidence. Manuscripts can focus on Asia as a whole, group of countries or individual economies, preferably from the developing Asia-Pacific region.

ADB will meet the travel and accommodation costs of one author per paper. Accepted papers will be considered for a special issue of a leading academic journal and/or a book volume.

Papers can deal with but are not limited to the following topics:

- Determinants and impacts (on growth, environment, inequality/poverty…) of urbanization;
- Assessment of urbanization strategies and policies (successes and failures)
- The role of government in urbanization including financing for infrastructure and public services
- Urban-rural disparity, migration and remittances
- Major challenges (pollution, congestion, slums…) and possible solutions
- Employment, housing and land market issues
- Comparative study on urbanization issues in Asia and other regions

Jan Brueckner, Edward Glaeser, Matthew Kahn, John Quigley and Anthony Venables are among the prominent economists who have joined the project team.

Important dates

Deadline for submission of substantial Abstracts September 16, 2011
Deadline for submission of complete paper(s) October 21, 2011
Decisions on submissions November 1, 2011

Completed papers or substantial abstracts should be emailed to Cet e-mail est protégé contre les robots collecteurs de mails, votre navigateur doit accepter le Javascript pour le voir

For further information, contact Dr. Guanghua Wan at

Thursday, July 28, 2011

A Culture of Energy Conservation and Sacrifice

In Japan today, there an increasingly urgent effort to conserve on electricity consumption.  While most economists would suggest that the price mechanism could be used to discourage use (see Frank Wolak's study), an alternative strategy is peer pressure, "shame and ostracism" and relying on guilt.    UCLA scholars have been studying how UCLA students respond to information about their relative electricity consumption to see if our impressive students can be nudged to change their behavior.

But, back to Japan.  Here is an impressive quote from the NY Times article;

"In the Tokyo area, the government is pushing to cut electricity use by 15 percent between 9 a.m. and 8 p.m. on weekdays to prevent blackouts — and on Thursday, for example, that target was met compared with last year.

Japanese are bringing to the conservation drive a characteristic combination of national fervor, endurance, sloganeering, technology and social coercion.

A “Super Cool Biz” campaign, which builds on the option of no-tie summer business attire begun in 2005, now encourages salarymen to dress down even further by wearing polo shirts or the traditional aloha-style shirts worn on the Japanese tropical islands of Okinawa.

To back up the call to conserve, electricity reports that forecast the day’s power supply and track demand in real time have become as much a part of this summer as the scorching sun and humid air. They are delivered along with the weather on the morning news and announced along with the next stop aboard some trains.
Government alerts are also sent to subscribers’ cellphones if overall demand nears capacity, prodding households to turn down the air-conditioner or, better yet, turn it off altogether. "

This adherence to "good behavior" impresses my inner-Chicago economist.  Why aren't these individuals free riding?  The economics of identity literature would say that sacrifice for a worthy cause provides direct pleasure and that during a time of crisis that individuals are willing to sacrifice such as volunteering for the army rather than draft dodging.

It has been pointed out that in the United States that few people pay more to the government than what they owe on their taxes. Do Americans do fewer "good deeds" than other people?  What is it about Japanese culture that they may reach conservation goals without explicit pricing incentives?  

This article highlights that conservation has real costs!  "Offices here, already balmy by American standards, have been directed to set the room temperature to 82.4 degrees Fahrenheit, though the real temperature, especially on hot days, has climbed above 86 degrees in many offices."  Would Al Gore and Joe Romm put up with that?

Economists have not done a great job investigating the willingness to sacrifice to achieve social goals.  Right now in the midst of our budget debate, it appears that everyone wants a free lunch and nobody wants to sacrifice for the common good.   Are the Japanese better people than we are?

I recall that Casey Mulligan has published a JPE paper arguing that during World War II that Americans were willing to accept lower wages to work and lower interest rates to hold U.S Treasury Bills as these costly actions helped the War effort. This is an example of sacrifice during a time of crisis.

Writing Book Blurbs

For the first 45 years of my life, I have tried to figure out what am I actually good at.  It turns out that the answer is simple; writing book blurbs.  Want proof?  Compare these.

Reviews of Gernot Wagner's forthcoming book

“If you want to understand how an economist thinks about the biggest challenge our planet has ever stumbled up against, this book is an awfully good place to start!” —Bill McKibben, author of Eaarth: Making a Life on a Tough New Planet
“Idealism will not shift the choices of billions of people as effectively as self-interest. Gernot Wagner has written a lucid and enjoyable exposition of the underlying economics. We must remove the incentives to treat scarce resources as if they were free. He respects the moral principles of the idealists who want to change behavior by precept alone. But, as an economist, he knows that if we want less of anything, including pollution, we must raise its price.” —Martin Wolf, Financial Times
“This splendid book showcases why environmental economics is such an exciting field today. Who knew that an economist not named Krugman could write so well? I will buy my mom a copy.” —Matthew E. Kahn, author of Climatopolis: How Our Cities Will Thrive in Our Hotter Future
“As the earth approaches runaway global warming, Gernot Wagner lays out clearly the moral and economic reasoning we will need to make the tough choices ahead. His intellect is powerful, his style is engaging and humorous. But he is also rigorous and persistent, and he will stay with you until you “get it.” And that’s what we need. He takes the most relevant insights of classical economics, behavioral economics, moral philosophy and even libertarian doctrine and fuses them into a consistent and brilliant analytic construct for thinking about the global environmental threats that face us.” —Peter J. Goldmark, Jr., former chairman and CEO, International Herald Tribune
“Gernot Wagner underscores the ‘eco’ in economics, showing how ...
--This text refers to the Kindle Edition edition.

Global Climate Change Policy Momentum

In April, I attended the Fortune Brainstorm Green Conference in Newport Beach.  At the dinner, I met Mark Fulton and his wife.  We had a very nice talk about many issues.  So, I was very happy to see that his team at Deutsche Bank has just issued this stimulating new report that benchmarks nations with respect to their willingness to engage in serious carbon mitigation measures.

Here are some key points from their report;

  • Countries such as Germany, China and increasingly the UK continue to develop strong domestic policies that contribute to global climate change mitigation,
  • Whilst others, such as the US, Russia, Spain and Canada (Ontario) either fail to initiate, or in some cases, even reverse or threaten to reverse, crucial climate policy initiatives.
  • Thus, some policy regimes have succeeded while others have failed, and the key for investors is to identify the winning policy structures which reduce uncertainty.  Within this context, we continue to develop our 'best-in-class' climate policy framework, with emphasis on policies directed at clean energy technologies and efficiency.
I like that California is classified as a "nation" on page 10.

This report card raises an interesting issue.  Do nations look to other nations to learn about "best practices"?  As Australia launches its carbon tax, will other nations learn from the lessons this "field experiment" will generate?   When nations make policy choices are these choices "independent"? or is there a "domino effect" such that if the United States leads, then other nations will follow?   While sociologists and economists work on peer effects at the "micro" level, I don't know of much "macro policy" work on nations imitating other nations that they admire.

Tuesday, July 26, 2011

A New Real Estate Blog

For those of you looking for new UCLA insights on the broad topic of real estate and urban policy, please take a look at our new blog.

Amazon in the City

The Wall Street Journal reports on some interesting urban economics related to Amazon having to pay state sales tax and the consequences of this tax regime shift on where it locates its warehouses.   Back in 1999, an economist named Austan Goolsbee (have you heard of him?) wrote this paper whose abstract tells the story;

"The rapid rise in sales over the Internet and the fact that most Internet buyers pay no sales tax
has ignited a considerable debate over taxes and the Internet. This paper uses new data on the
purchase decisions of approximately 25,000 online users to examine the effect of local sales taxes on
Internet commerce. The results suggest that, controlling for observable characteristics, people living in
high sales taxes locations are significantly more likely to buy online. The results are quite robust and
cannot be explained by unobserved technological sophistication, shopping costs, or other alternative
explanations. The magnitudes in the paper suggest that applying existing sales taxes to Internet
commerce might reduce the number of online buyers by up to 24 percent."

So, does Amazon have a big problem in its showdown with Downtown Gov. Jerry Brown in California and other high sales tax states such as Illinois?  Jerry Brown wants Amazon to pay its share of sales taxes to reduce the state's deficit.  A big fight on this issue is brewing.

Here is a quote from the WSJ;

"But collecting sales taxes nationwide could have benefits. Amazon places many of its warehouses outside high-population states and away from major urban areas. Analysts believe it does this to avoid establishing a business presence that would force it to collect taxes in a state. One warehouse in Nevada, for example, by the California border, serves the Golden State.

If it starts collecting sales taxes, Amazon could build warehouses in or just outside major cities. The result: potentially lower shipping time and costs. That is important for a company that had operating margins of just 3.3% in the year's first quarter. It may also allow the company to pursue other opportunities, like a textbook-rental-by-mail service."

Amazon will stop tax arbitraging and will start to tradeoff classic urban forces between land prices and transportation costs to final consumers.  How much will Amazon's carbon footprint shrink by if it locates warehouses near the "home markets"?  How much has the tax code been influencing where Amazon sites its warehouses and how inefficient have these "rational" choices been in terms of logistics for consumers and resulting carbon emissions?

Monday, July 25, 2011

Santa Monica's Trash Exports and Marginal Cost Pricing

Santa Monica is a pretty, progressive city adjacent to the Pacific Ocean and 5 miles from UCLA.  In 2008, I had hoped to buy a house on Harvard St. in Santa Monica but the owner turned down my low ball bid.  This article  sketches the challenge that this liberal city faces.  In my own work, I have documented its high count of hybrid vehicles but it also produces a fair bit of trash. It faces the challenge that the landfills it ships to are demanding higher prices for sending it to them.  What will Santa Monica do next?  So, this is a pretty city that stays pretty through several strategies --- one of them being to pay other communities to take its trash.  In a free market, they have every right to do this.

An economist might suggest that this City should introduce a garbage price per bag.  Today, people pay their property taxes and (UPDATE) pay a 68 gallon fee for garbage pick up --- this works out to about $1 per day for garbage pickup with a zero marginal cost for disposing of any trash in your bin).

If the City of Santa Monica replaced this non-linear pricing system with a flat rate of $1 per bag of garbage, would people produce less garbage? Would they seek out products that contained less materials that would need to be thrown away? If this liberal city did introduce a "garbage bag tax", would there be unintended consequences?

On this last point, consider this paper ;  Here is its abstract:


This paper employs individual household data to estimate the effect of per-unit pricing on the weight of garbage, the number of containers, the weight per can, and the amount of recycling. We also provide two indirect measures of illegal dumping. The data are based on a natural experiment that provides a unique opportunity to study human behavior in response to a change in price. On July 1, 1992, the City of Charlottesville, Virginia, implemented a program to charge $0.80 per 32-gallon bag or can of residential garbage collected at the curb. Before and after the implementation of this program, we counted and weighed the bags or cans of garbage and recyclable materials of 75 households. In response to this new price, the average person living in these households reduced the weight of garbage by 14 percent, reduced the volume of garbage (number of containers) by 37 percent, and increased the weight of recycling by 16 percent. Our indirect measures suggest that additional illegal dumping may account for 28 percent to 43 percent of the reduction in garbage.

In the case of Santa Monica, would these "good greens" engage in illegal dumping or would they comply with the law? It would be an interesting economics study to test whether liberal communities are more likely to comply with environmental regulations even if they do not face a credible formal penalty structure. My own work on "Internal consistency" of liberals (i.e that they practice what they preach) would suggest that there will be less illegal dumping in a liberal Santa Monica if it did introduce garbage pricing.

So, if Santa Monica is serious about becoming even "greener" it should introduce the garbage pricing law.

Sunday, July 24, 2011

Climate Change Adaptation: The Case of Growing Rice

Important recent statistical research has documented how weather shocks have affected recent U.S agricultural production.  For those hoping for good news for how innovation and new ideas can offset Mother Nature's blows;   Here is some optimism.  "Rice – which provides nearly half the daily calories for the world's population – could become adapted to climate change and some catastrophic events by colonizing its seeds or plants with the spores of tiny naturally occurring fungi, just-published U.S. Geological Survey-led research shows." source

Understanding Why Only Some Hybrid Vehicles Sell for a Price Premium

The Toyota Camry Hybrid is priced at nearly $7,000 more than the conventional Toyota Camry.   In contrast, the "Lincoln MKZ hybrid stands out, offering a value proposition that is unique in the auto industry: a hybrid with the same price as its conventional gasoline counterpart."   Is this pricing differential between the hybrid version and the conventional version between these two types of cars a puzzle?  This article provides some facts.  "The hybrid Lincoln starts at $35,520. With popular options including a sunroof, navigation system, blind spot monitors, a THX surround-sound stereo and a backup camera (with a useful feature that alerts you to traffic approaching from either side), my test car’s window sticker came to $41,370."

Economists are interested in how much households are willing to pay for "status".  Given that we drive our cars in public, you signal to others in your residential community and your work community messages about you based on what you drive.  A hybrid driver saves $ on gas, can sometimes drive in the HOV lane, and can feel good about one's smaller environmental impact.

Given the Toyota Prius' unique niche in "status", it would interest me to see a hedonic analysis price what such a car should be priced at (given its characteristics such as size, and MPG) and then see if Toyota charges much more than this.

There must be some product attribute bundling taking place here. Car buyers have different preferences over vehicle attributes. Greens want the "hybrid" symbol to make a statement and to do the "right thing".  Upscale people want the hybrid for other attributes bundled into it such as a fancy sound system and perhaps they want peace of mind that if gas prices go up that they will need to purchase less gas to drive the same number of miles.  In this case, an "upscale hybrid" will attract both types of buyers and the company can sell it for a fair bit of $.

New York City's Push to Become a "Greener" City

In a big city, small actions such as converting a building's heating source from oil to natural gas can have big consequences.  Basic economics tells us that the decision makers will compare their own private benefits and private costs from taking such an action but in a city such a "greening" of fuel sources offers social benefits that any individual polluter has no incentive to recognize.   A nice case study of this is presented in this NY Times article.  Older buildings in NYC have used dirty heating oil (#6).  New regulation requires them to upgrade to cleaner heating oil by the year 2015 and to even cleaner natural gas by the year 2030.  To avoid having to make two systems changes, many residential buildings are considering jumping to convert to natural gas now.

Such an action has environmental benefits and may lower the price of winter heating (if natural gas prices stay low) but this conversion requires upfront investments.  In many "green economy" cases, such as installing solar panels, the decision maker faces an asymmetry.  The costs are certain and are borne at the start of the project while the cost savings from going green are uncertain and will take place as a flow each year in the future.  Both risk averse decision makers and those who do not have the ability to borrow $ now to finance upfront conversion costs will cautious about making such investments.

The conversion to natural gas will also require new investments by the local electric utility.

"Most buildings are already hooked up for cooking gas. But long stretches of pavement may need to be ripped up to connect a building to the pipelines for heating gas, which are larger in diameter. “When you can get it and how much it will cost depends on where your building is relative to the gas line,” Ms. Silverman said. "

Interesting issues of cost sharing for connecting to this grid will arise.  Will all utility payers or will the building being connected pay the larger share of the connection cost? The article implies that this is negotiated on a building by building basis.

"Con Ed waived the $23,000 cost of connecting Mr. Cohen’s building to a pipeline that runs along Park Avenue because the building committed to using Con Ed’s gas exclusively. Mr. Cohen’s building was lucky. He said that a friend at a building on Madison Avenue had recently learned that connecting to a pipeline would cost $1 million."

This case study highlights that the Bloomberg Administration would be wise to go building by building in NYC and conduct a "perceptions survey" concerning what do the decision makers in the buildings believe will be the costs and benefits of converting from #6 oil to natural gas now.  If these perceptions do not match reality, then these buildings are more likely to make the wrong social choices.  The Bloomberg Team could then send out its own consultants to educated condo boards about "the truth" and work with the electric utility and local financing to make sure that these "green gains to trade" actually take place.

The net result will be a "greener NYC" with more use of natural gas and a smaller carbon footprint and less local soot and particulate matter.  I support this!

Friday, July 22, 2011

Passing the Stress Test Posed by the Current Heat Wave

The summer heat continues in the Northeast.  Reading about this heat wave, I'm happy to learn that "There were no reports of serious heat-related injuries or deaths in New York, but city officials advised people to take extra precautions and to go to cooling centers if they had no air-conditioning."  

This is a prime example of how capitalism protects us from Mother Nature.  I apologize to long time readers for returning to this core theme again and again but I've been surprised by how the core theme of my Climatopolis work is so "shocking" and upsetting to environmentalists.   Yes, we should reduce our greenhouse gas emissions but I don't believe that we will.

As a realist, I continue to work on climate change adaptation because this is the reality we have created for ourselves.  Doom?  Not if we learn and plan and invest.  Out of narrow self interest, we have individual incentives to do so.  In the case of adaptation to climate change, there is no "free rider" problem to the degree that there is for reducing global GHG emissions. Our individual pursuit of the good life, while facing new climate risks and realities, drives us to find solutions to protect ourselves and our families.  The heat wave of Summer 2011 shows the people in Moscow and other places that are unfamiliar with the heat how to battle their "opponent" and continue to thrive in our hotter future.

Thursday, July 21, 2011

Adapting to Summer Heat

As I sit and work outside in 75 degree Los Angeles, permit me to offer a few thoughts about the current heat wave.  This article offers some wisdom.   It claims that heat waves cause fewer deaths in areas where people have more experience dealing with heat waves.  That is interesting.  A silver lining of experience!

It also contains the following optimistic graph.   When I wrote Climatopolis, I didn't know about the graph that I present below.  It is a salient example of my book's core point.   This graph documents that across U.S regions that summer excess heat wave death has fallen more in areas where there has been growth in air conditioning.

Now, I recognize that this fun correlation may not imply causation.  Rising air conditioning rates are correlated with income growth and income growth may cause reduced death through omitted other factors such as better health care but this correlation is compelling.

It is not a "fatalistic graph". It shows how capitalist market products protect us from Mother Nature's blows. I have been amazed at the fatalism and "defeatism" that people have voiced against my optimism that we have strong incentives to adapt to climate change and that capitalism will greatly help our cities to adapt to climate change.  As usual, I want you to sit down and take a look at my book's core logic summarized here.  For those of you who live in Los Angeles, I will speaking about the book at the UCLA Faculty Club on Tuesday October 18th at 1pm. 

Slow Public Transit in Los Angeles: A Case Study

Last night, I took a 5pm #1 Big Blue Bus from the UCLA Hilgard Ave stop to Santa Monica intending to get off at Ocean Ave (just at the beach).    Google Maps told me this would be a 7 mile drive. My trip took 62 minutes.  How did we average a speed less than 7 MPH?    The cost of the trip was 75 cents but an hour of my time (even during this ongoing recession) is worth a little bit more than that.  The traffic actually wasn't that bad but we stopped at every stop and the stops appeared to be one block apart. It was Murphy's Law that every time we stopped to drop off people or pick up people that a green light went red.

My best guess is that the travel time would have been 30 minutes had we stopped at every 2nd bus stop.  Why are there so many bus stops on the route?  My guess is that this is a convenience benefit conveyed to senior citizens and some of unusual people who like to ride this bus.  

Public health officials worry that we are getting fat and not exercising enough.  If the bus made fewer stops, then it would travel at higher speeds and we would be forced to exercise more. Isn't that a win-win?

I wanted to take a bus back from the Beach to Westwood but I got tired of waiting around at the bus stop and I jumped in a $20 cab and was back at UCLA in 15 minutes at the end of the night.  So, I traded off $19 tax deductible dollars (I had attended  a business dinner)  for roughly 30 minutes of reduced time.  A good tradeoff?

Wednesday, July 20, 2011

Green Chemistry and Healthy Products Revisted

The New York Times has an interesting article on the continued use of potentially cancer causing chemicals by embalmers.   Last year, I had an opportunity to work on the California Green Chemistry Initiative. I am always been an optimist that incentivized firms can figure out how to swap out dangerous chemicals from products.  This embalming case offers a salient counter-example.

Anticipating Future Hot Summers and Getting Ready to Adapt

Heidi Cullen's OP-ED in today's NY Times serves a useful purpose in reminding us that this summer's heat is likely to be a typical outcome in the near future.   She does cross the line when she states; "In the United States, in any given year, routine weather events like a hot day or a heavy downpour can cost the economy as much as $485 billion in crop losses, construction delays and travel disruptions, a recent study by the National Center for Atmospheric Research found. In other words, that extra 1.5 degrees might be more than we can afford."

Taking this fact to be "true" today does not mean that it will be true in the future.  She appears to take the NCAR's study as a law of physics.  Using Google, I found  the technical paper that she is citing.  To quote these nerds; "To estimate the sensitivity of the U.S. economy to weather variability, we used non-linear regression analysis to model the relationships between sectoral GSP and economic inputs of
capital, labor, and energy and a set of weather indicators."   As reported in their Table 1, they find that agriculture's value of output is lower when cooling degree days are higher (i.e it is hot outside) and when rainfall is more volatile. Climate change will increase the likelihood of both of these scenarios.

Cullen actually misquotes the authors. Here is their quote;

"Holding technology and economic inputs constant (i.e., setting them at
their 1996–2000 averages), we then used parameter estimates from these 11 empirical models
with 70 years of historical weather data to identify states more sensitive to weather impacts and
rank the sectors by their degree of sensitivity to weather variability. We calculated the aggregate
dollar amount of variation in U.S. economic activity associated with weather variability could
vary by 3.4% or $485 billion a year of 2008 gross domestic product."

Now, if you bother to read their paper and look at their Table 1, you will see some strange results. They claim that manufacturing output is negatively related to the volatility of rainfall. I don't believe this.  They also find a big negative effect for finance and utilities! This looks weird and merits an explanation.  I agree with one writer that hydro electric utilities will be affected by rainfall variation but hydro is a relatively small share (less than 10%) of U.S power generation.  Also note that in their Table 1, that the construction industry's output increases with summer heat (CDD) and rainfall volatility. Does that make sense?

The authors report their facts; "A primary finding of this study is that every sector is statistically significantly sensitive to at least one measure of weather variability, and two sectors—FIRE and wholesale trade—show
sensitivity to all four measures of weather variability." but they are a little bit lazy as they don't provide any explanation for whether this finding is credible or not.

Their claims that weather variability affect the U.S economy over the 70 years from 1930 to 2000 differ from the NBER results of Dell, Jones and Olken available here.

But, let's assume that the $485 billion loss that Cullen reports in the past is correct.  The whole point of my Climatopolis project is that past loss estimates vastly overstate the impact of future costs because of adaptation.  Thanks to people such as Heidi Cullen, we know that we face the challenge of climate change and that this summer is no fluke. Forward looking people will make a host of investment choices across many margins including where they live, how they live and products they buy.  Farmers will make a host of new choices that collectively shield us from the extent of damage that Cullen cites.

For more details about my thinking read this.

UPDATE:  I'm receiving some angry email about this post. I am a fan of Ms. Cullen but her quote is incorrect. If you read the direct quote I reproduce above she appears to say that the economy is rolling along and then weather shocks occur and this causes a drop of $485 billion in output.  Keep in mind that our economy's total value is about 14 trillion (corrected!).  But, the authors of the study actually say that when you compare GNP at the "best" weather (for maximizing output for each sector) versus the "worst" weather that this yields an estimate of $485 billion.   She is thus running a strange experiment of taking us from great weather to the worst weather rather than evaluating what happens when we have average weather and then overnight the worst weather (for maximizing GNP) emerges.

To all the critics out there, please read the research team's Table 1. You will be amazed by some of the strange coefficient estimates they report.  The impact of climate on agricultural output is smaller than the impact of climate on electric utility output!  Construction's output rises when weather is hot and rain volatile.  Could this be correct?   Please explain to me what the causal mechanism could be.

Tuesday, July 19, 2011

New York City Prepares to Make a Big Bet on "Applied Science"

Is New York City the right place to build the "next Silicon Valley"?  The Mayor appears to believe so and he is prepared to use a fair bit of $ to try to achieve this goal.

"The RFP is the next step in the initiative – unveiled in December 2010 – that seeks a university, institution or consortium to develop and operate a new or expanded campus in the City in exchange for access to City-owned land – at the Navy Hospital Campus at the Brooklyn Navy Yard, the Goldwater Hospital Campus on Roosevelt Island, or on Governors Island – and the full support and partnership of the Bloomberg Administration. The City is also prepared to make a significant investment in site infrastructure, offering up to $100 million in a competitive process designed to select the proposal that yields the most benefit to the City for the lowest commitment of City resources. The City expects that any public contribution will be matched several times over by resources raised by the winner or winners themselves."

Will excellent students and professors and new firms want to locate in these areas?  I realize they need to be gentrified but will these "desirable engineers" want to live and work in these locations?  If they do want to live and work in these locations, is it obvious that there will be a significant "spillover" effect that benefits incumbent New Yorkers such as my parents?    Will the imported engineering nerds really make a discovery that they would not have discovered had they not been in NYC?   It is true that access to Wall Street may offer some synergies as engineers seeking venture capital for their own version of Facebook will have an easy time getting to Wall Street to make a presentation but should city money be used to subsidize such activities?  

How will the people of NYC gain from being an engineering mecca?  I lived for years near MIT while my wife worked there. I deeply respected the people at MIT and met many very successful people but I can't claim to have seen any "multiplier effects" for the local economy. Perhaps a booming business at Legal Seafoods was a side benefit of a booming MIT.

I can't tell if the Mayor's team seeks to gentrify a couple of neighborhoods or if they are serious about diversifying NYC's economy.   Given Columbia's major investment in engineering, why hasn't this been sufficient to trigger a NYC version of Silicon Valley?  How will this new school nudge NYC to the top?

Rather than simply betting all of this land on an abstract idea that "applied science" is the best bet, why not run a field experiment in which some of the land will be given to different types of activities and see which ones prosper and which ones are attractive to incumbents who already live and vote in the City?    As learning takes place, the rest of the land can be allocated to the pursuit that offers the highest expected value.   The leaders in NYC should be honest that they do not know what will be NYC's next golden goose.  A flexible approach would allow them to re-optimize as they learn.

Monday, July 18, 2011

The Declining Death Toll from Natural Disasters

I have published only one "macro" paper in my career.  My 2005 Death Toll from Natural Disasters has generated a lot of cites and some media attention.  In that paper, I argued that economic development protects nations from death risk from natural disaster.  A richer government can provide better public goods and richer citizens are better able to self protect against disaster risk by living in better housing, and having access to better medical care.  In Beijing this week, I met with a Professor from Renmin University named Xinye Zheng.  He told me that he has written several papers using data from within China to document the declining death toll from natural disasters within China and that this reduction in damage is most pronounced in richer geographical areas. It is true that the economic damage caused by disasters in these areas is an "inverted U" because middle income areas have valuable assets that are at risk to be hurt by natural disasters but are not rich enough to defend them well.   Another economic geographer in China (Canfei He) told me that China's cities are investing to adapt to climate change and are investing more in areas that are at risk from sea level rise such as in the Delta river regions.   Such investment patterns are consistent with my core thesis in Climatopolis that the expectation of challenges posed by the very real threat of climate change triggers early investment that helps to protect us from climate change.

In his review of Climatopolis,  Ed Glaeser expressed concern about how the developing world will cope with climate change. I share this concern but I believe that the developing world will develop and that the same forces and investment patterns observed in recent years in China will play out in other developing countries. If a nation can grow at 4% per year, then its per-capita income will double in 18 years.  Such growth will go a  long way towards helping such countries to protect themselves.   If you want to minimize the damage caused by climate change, then you should support the development of the "renewable green economy" (to decouple GHG production from energy production and consumption) and you should favor policies that promote national growth.

Sunday, July 17, 2011

My Beijing Trip

I have just returned from spending ten days in Beijing and Tianjin.   Do U.S academics enjoy too much leisure?  To my slight surprise, I was asked to give a Sunday seminar at Tsinghua University and roughly 20 people attended my talk.  I had the opportunity to meet my co-author Siqi Zheng's research team.  Several of these students have worked on my projects as research assistants and it was nice to meet them face to face.   The students in the room listened and appeared to be interested in what I was saying.  I also gave a seminar at Nankai University's economics department in Tianjin where my friend Jingkui Zhou teaches.   In addition to these talks, I also gave 10 hours of lectures for the Lincoln Institute's "Teaching the Teachers".  This was a one week short course consisting of lectures by me, Chip Case and Dan McMillen.  We had a good time hanging out together.  On top of all of this, this last weekend there was an International Conference sponsored by the Lincoln Institute in which 30 academic papers were presented.  Pretty intense stuff.

When I wasn't talking to new friends about economics, I was walking around in the humid, hot air and sightseeing.  There is new construction taking place everywhere in China and it is fascinating to just watch it.

One  perk of this trip was that I flew business class from LAX to Bejing.  Business Class is classy stuff and the 12 hour flight flew by.  On the most recent leg home, I watched 2 comedies, read 300 pages of a book and slept for a few hours and talked to the young guy sitting next to me.  Time flew by.

My only problem is that I'm well aware that I told a number of people that I would get back in touch with them after I returned home from China.  This week I need to catch up.

While I missed my family and LA's blue skies and perfect weather, I really like China's big cities.

On an unrelated note, the average quality of economics bloggers is rising!  Gernot Wagner has started up a very high quality blog.   When his new book is published this September, I will review it here.

Tuesday, July 05, 2011

The Good Old Days

This WSJ Article about rising river shipping costs due to silt buildup in muddy rivers (caused by recent flooding) made me think back to the good old 1990s when "natural experiments" offered economists exogenous variation for testing various hypotheses. Now that we are in the golden age of the field experiment, will any young researcher use this exogenous variation in costs of shipments along the river to write a new paper on monopoly power and pricing in the short run?   What other novel tests can be done using this "God Given" gift?

God has given us a new Instrumental variable and somebody out there should be ambitious enough to use it!

Say what you want about the 1990s "natural experiments" era but at least it didn't cause any concern about Hawthorne effects. I have wondered whether the U.S is losing jobs because of the rampant field experiments being run.  Firms don't want to be faxed fake resumes from research nerds posing as job seekers.  One way to avoid these costs is to move to a less "field experiment" friendly location. So forget tax havens and pollution havens, I claim the U.S is losing some jobs because some firms are seeking "field experiment free" zones.

Monday, July 04, 2011

Will a Vehicle Fleet Average Fuel Economy of 56 MPG Offer a "Free Lunch"?

In the year 2025, there will be plenty of vehicles driving around the United States.  If their average fuel economy is 56.2 MPG and if the "rebound effect" isn't a serious factor, then total greenhouse gas emissions from U.S transportation will decline and this would be very good.  Rather than relying on rising gasoline taxes and fear of Peak Oil to bring about this increase in fuel economy, the Obama Administration seeks to achieve this fleet composition shift through much tighter CAFE Standards. 

The NY Times reports that car makers admit that they know how to make these cars but even with gas priced at $4 per gallon they do not believe that drivers want to drive these cars.  

An interesting issue arises.  Do you respect consumer sovereignty or not?  For  profit firms will cater to the demands of their potential customers.  It is true that if the price of gas were $10 per gallon, these households would be more likely to want smaller, more fuel efficient vehicles.

A sharp increase in CAFE standards will deny many purchasers of large fuel inefficient vehicles from being able to buy vehicles they want.  This will lead to GHG reductions but it will cost these households well being and it will lead to higher prices of used large vehicles as buyers seek out older vehicles that have the size that they can no longer buy on the new car market.

Consider this quote below;  some politicians view private vehicles as perfect substitutes (a mile of driving a Mercedes = a mile of driving a Toyota Tercel) --- under this view --- smaller more fuel efficient vehicles offer a "free lunch" because they have lower GHG and higher MPG and thus save households $ in terms of long run operating expenses.

"Green Technology: Do these economic issues supersede our environmental goals?

Sen. Fran Pavely: No. The record shows that strong environmental laws like AB 32 and AB 1493, two of my favorites, actually provide a stimulus to the economy. I remember Governor Schwarzenegger’s statement back on World Environment Day in June 2005. He said it isn’t a choice between the environment and the economy. You can have a strong economy and a healthy environment. That’s still true.

There’s a perfect example of this with AB 1493, the Clean Car Law. The regulations may result in a slight increase in the cost of vehicles, but consumers will recoup the money within two to three years because of reduced operating costs. This will also reduce our dependence on foreign oil and we’ll have cleaner, lower-emissions vehicles as well. Anyone who keeps a car longer than a few years will make money on the deal. We’re finding the same thing with energy efficiency. The public gets it."source

Sunday, July 03, 2011

Taxing Imported Carbon Emissions

I have returned to Westwood after spending 4 very pleasant days in Berkeley.   Berkeley is great, the UC Berkeley faculty is outstanding but Westwood is my town.  For better or worse, I've morphed into a West LA guy.  What does that mean?  This Los Angeles primer written for Prince William and his young wife will explain all.

Switching subjects, a NY Times piece on carbon taxes for U.S flights to Europe caught my eye.  This is a classic economic incidence question.  If U.S flights must now pay a carbon charge, will U.S airlines' profits fall or will flight ticket prices rise?   Who bears the incidence of this regulation?  Is China a large enough economy to threaten Europe with a boycott if Air China doesn't want to pay these fees?

Turning to behavioral change; if these fees are charged --- how will U.S airlines respond?  Will they invest in a more fuel efficient fleet to reduce their carbon bill? Will such substitution have unintended consequences such as raising safety risks for people on the planes?  (I have no idea if this is true or not).   If more airlines demand more fuel efficient planes, then will this demand side push accelerate Green R&D such that high fuel economy planes are invented more quickly?