Monday, October 31, 2011

Thursday Night at MIT

This Thursday, I have the opportunity to participate in an event at MIT's Department of Urban Planning along with my friends Nate Baum-Snow and David Albouy.  All details are here.  Bring your copies of Climatopolis and I will sign them!  (As an aside, I teach MBAs at the Anderson School at UCLA and the other day I gave a signed copy of my book to one of my students who had done a good job in class the week before.  He told me that he was likely to sell it on Ebay and expected to earn 50 cents. I respected his honesty).

What will the Dream Team of Albouy, Baum-Snow and Kahn be speaking about?

Economics and the Sustainable City
Thursday, November 3, 2011, 5:00-7:00pm
MIT 3-133

Three urban economists discuss how economic principles will help cities to create a smaller environmental footprint.
  • David Albouy, Assistant Professor of Economics, University of Michigan; Faculty Research Fellow, National Bureau of Economic Research; and Research Associate at the Office of Tax Policy Research
  • Nathaniel Baum-Snow, Assistant Professor of Economics, Brown University
  • Matthew E. Kahn, Professor, Institute of the Environment, Department of Public Policy, UCLA
Moderator: Frank Levy, Daniel Rose Professor of Economics, Department of Urban Studies and Planning, MIT

  • Eran Ben-Joseph, , Professor of Landscape Architecture and Urban Design; Head of the Joint Program in City Design and Development, Department of Urban Studies and Planning, MIT
  • Judith Layzer, Associate Professor of Environmental Policy and Head of Environmental Policy and Planning Group, Department of Urban Studies and Planning, MIT

Now, I must note for the record that Nate has been promoted to tenured Associate Professor at Brown and as you know .--- this listing above omits 3 of my UCLA affiliations.  In addition to the Institute of the Environment and the Department of Public Policy, I am also a Professor in the Economics Department, the Anderson School of Business and the Law School.  So that's 5 and I want 5 more. Which ones?  I respect the folks in the Anthropology Dept, Sociology, Political Science,  Urban Planning and I like the Physicists.

So, that would equal 10 appointments and I'm already 1/2 way towards this goal.

I have very fond memories of MIT.  That great school treated my wife very well during her 14 years on their faculty.

Some Comments on the WSJ's Editorial on California's "Green Tax"

The Editorial writers at the WSJ have some tough things to say about California's AB32 carbon mitigation effort.  The regulators at the Air Resources Board are called "elitists" who do not understand the unintended consequences of their well meaning regulations.  The WSJ predicts that this regulation will further damage the California economy.  This editorial merit some analysis.

First, allow me to quote the editorial in a couple of places to give you a flavor of its tone and main points.

"It may be time for California to formally apply for membership in the European Union. Its taxing, borrowing and regulatory policies are already more in line with the southern tier of Euroland than with other U.S. states, and the Golden State has taken another lurch in the Euro-direction by becoming the first jurisdiction in the nation to adopt a full-scale cap-and-trade tax to combat global warming. The new taxes and regulations will require a nearly 30% reduction in carbon emissions from power plants, manufacturers, cars and trucks by 2020."

I agree that this is funny and well written.

"So California will go it alone on cap and trade, and the economic fallout won't be pretty. Nearly every independent analysis agrees that water, electricity, construction and gas prices inside the state will rise. The only debate is about how much."

This is the key paragraph in the piece.  The WSJ forgets that the Air Resources Board is aware of the general equilibrium impacts of its policies.   The ARB is trying to change "the rules of the game" to get California polluters to expect that they will be charged a gradually higher price for carbon emissions.  As these polluters update their capital stock and make investment decisions (and given this policy path expectation), they will make choices that allow them to adapt smoothly to the new incentives.

The WSJ implies that the policy regime shift is "cold turkey" but this is false.  California polluters will only gradually face a higher price for carbon emissions.  It is true that meeting the aggressive Renewable Portfolio Standard for electric utilities must be pushing them to raise their electricity prices (and the exact amount should be a leading economic consulting project) but the new cap and trade program will be gradual. Here are some facts.

To placate critics who view this as a "silly tax",  "In California, 90 percent of the allowances will be given out free, but 10 percent will be sold on the open market, which some say could raise $500 million a year for the state's climate-change programs."

So, at the start of the cap and trade program  --- the polluters will only be paying for 10% of their pollution and the price per ton will start low and only gradually rise.  This is like walking into the ocean one toe at a time.  This isn't the rise of Stalinism!

As I have said many times, California is running a major field experiment here and since ideas are public goods, the good ideas that California discovers will be applicable all over the world to reducing GHG emissions elsewhere.  Of Course, California can't "solve" climate change by itself but by volunteering to be the "green guinea pig", we will generate new knowledge and good mitigation strategies that can be applied all around the world.   Are we are hero or a sucker?  The WSJ incorrectly calls us a sucker.  As a subscriber to the WSJ, I must admit that I'm disappointed with their dogmatic editorial staff.  This smart group has ignored that the leaders of the ARB are well aware of the political realities they face.  There is no free lunch but it is possible to identify "win-wins" that internalize externalities.

UPDATE:  The WSJ makes a mistake in citing a "cost of regulation" piece that claims that California households will be paying an extra $3,800 a year in new regulatory costs.  To quote the sober Joe Romm, I have "DEBUNKED" that regulatory study in my own analysis  . Unlike those authors, I was not paid for my report!  You can also read my LA Times editorial (joint with Jim Sweeney) on this subject here.

Sunday, October 30, 2011

What Can UCLA Learn from Ohio State University?

Today's Business Section of the NY Times had some wild stuff.  There was a large advertisement from the Stanford University Medical School announcing its new search for a Dean of the Medical School. Now, the interesting part was to announce this in the Business Section!  Maybe medicine and capitalism are connected?  There was also an article about Tom Sargent as he explained that he is both liberal and conservative but he doesn't like simple labels and slogans.

Finally, on the back cover of the Business Section was another Ad. The Ohio State University was announcing that it has borrowed a 1/2 $ billion dollars by issuing 100 year bonds to help it remain a great university.  As I read this, I asked myself; "Why isn't UCLA doing this?".  There are many great projects that we could invest in now (no, the New Hotel is not one of them) if we had the $.  If we could borrow and pay interest for 100 years and then pay back the balance, we could do great things with such $. Ohio State will pay 4.8% on its bonds. I believe that serious investments in UCLA will generate a greater than 4.8% percent annual return.

Now, I'm not a lawyer but I believe that the University of California can already issue bonds.  I propose that UCLA should be allowed to set its own tuition and that it be allowed to issue debt if it wants to.

Who would buy this debt?  UCLA has over 300,000 graduates. Many of them have never given a penny to the University and many paid very low tuition to attend.  Many of these graduates are successful and are looking for risk adjusted investments that pay a high rate of return.  The UCLA bonds would offer a safe investment that would offer a loyalty payout.  By buying our bonds, our graduates would be showing their support for UCLA moving forward.  Casey Mulligan has documented a similar loyalty effect during World War II when people were willing to hold U.S bonds at a low interest rate. Such UCLA patriotism would mean that we could borrow at an even lower interest rate.

Research by David Cutler and Grant Miller found that when U.S cities were able to issue debt to finance new infrastructure investments in the early 20th century that death from waterborne diseases fell sharply. I predict that UCLA will achieve similar greatness if it can invest now using your savings!

Saturday, October 29, 2011

Informative Blog Content from Environmental and Urban Economics?

Google just directed someone to my blog who searched for "who is more likely to have a sex change a liberal or conservative" .    How is that for value added?

Mirror, Mirror on the Wall: Who is the Greenest Electric Utility of them All?

This article  sketches an interesting election decision this Tuesday.  Will the greens from Boulder, Colorado continue to buy their power from the "big bad" Xcel private electric utility or will they switch to a municipal provider?

The article provides some additional support for my old finding that greens do "walk the walk".

"Because of the intense environmental ethos here, for example, Xcel customers in Boulder have been disproportionate enrollees in the company’s existing solar energy and conservation programs. The city’s 48,000 Xcel customers account for only 3.4 percent of the statewide ratepayer base, but 15 percent of the solar participants."  That sounds like my Prius findings in Berkeley.

The funny thing is that Colorado has a differential RPS standard for private utilities versus municipal utilities. The privates face a more stringent RPS than the municipal utilities (this must be due to soaking the private firm's share holders rather than the municipal within state rate payers) so the greens may actually increase their state's carbon factor if they vote out the "capitalist pigs" on Tuesday.

Wind Cycles and the Rise of Batteries

If the wind blows at night but nobody is consuming electricity then, what is the value of wind farms?  Batteries are the answer.  Such batteries create a storage technology that breaks the link between when power is produced and when it is consumed.  this article highlights the point that the price of electricity varies sharply during a day.  A wise arbitrage move is to "produce low" and "sell high".  While batteries are expensive, their price is likely to fall with experience and scale of production.    Increased wind farm installation will increase the demand for batteries, this will help the electric vehicle industry as improvements in battery technology take place to serve wind farms. In this sense, these different "green technology industries are all interconnected.

Thursday, October 27, 2011

Will Kevin Murphy's Economic Logic Help to End the NBA Strike?

This article claims that Prof. Kevin Murphy is a key "player" as he works with the NBA union in forming their bargaining strategy with the owners.  Will his economic analysis lead to a new JPE paper? Or to a full 82 game season? or both?

Prospective Economic Analysis of New California Regulations

The Economics of new goods literature has tried to estimate how much our well being is improved by when for profit companies design and sell new cereals or new mini-vans or new drugs.  An analogous question can be asked about "new regulations".  Whether it is Bernanke's QE2 or California's anti-carbon AB32, how much will  these new regulations improve our quality of life?  As you can imagine, this is a tough question.

A new study by the California Little Hoover commission tries to tackle this broad issue of how economic analysis should be incorporated into such prospective decision making.   A group of CGE modelers have earned good consulting gigs supplying such estimates but I have questioned their work's plausibility.  When you know that you do not know what will be the consequences of a new policy but your hunch is that it will work, how do you design it so that as you learn you can incorporate the new lessons into refining the regulation to make sure that it is cost effective and avoids unintended consequences.  Regulator learning and experimentation is an under-researched topic.

 Here I report the parts of the study's EXECUTIVE SUMMARY.  Take a look at page 25 of the study to see the discussion of my work with J.R DeShazo.

"California’s regulatory agencies are known nationwide as  trailblazers that set benchmarks that the nation as a whole often  follows.  Over the years, such regulations have produced huge  benefits for Californians in consumer safety, food security, worker protection, energy efficiency and air and water quality.
The state’s large population and its dynamic and complex economy  require a sophisticated, coordinated and thoughtful approach to  developing the regulations our society needs to ensure fairness and
protect California’s quality of life.

It is unfortunate on several levels then, that California’s approach to  developing regulations is uneven, lacks coordination and, despite an  independent agency to enforce the Administrative Procedure Act, lacks
the kind of thorough oversight that ensures efficiency and accountability.   The way California state departments develop regulations varies widely,  particularly in their use of economic analysis to determine what burden a  proposed regulation will have on a person or business affected by it.  California has been reluctant to adopt and use analytical tools employed  in other states and at the federal level.  This has produced a regulatory  approach that can focus intensely on solving problems in a single arena
without taking into consideration the broader context or consequences of  the solution it imposes or developing regulations that maximize benefits  in a systematic way.  In the course of the Commission’s study, it saw examples of where these  shortcomings either resulted in failed rulemaking efforts, the potential
imposition of costly conditions that could force painful tradeoffs, or  regulations undermined by an economic analysis that did not account for  real-time changes in the economy.  

An oversight system put in place to ensure that agencies weighed
alternatives to solving a problem and used an economic impact
assessment to choose the least burdensome solution simply does not
work.  The department checks a box on a form.  The box is examined to
see that it is checked.  But no one checks to see if the department did its
homework in assessing the impact or choosing the least burdensome

These shortcomings have costs to the state, in time and money, as well
as in the state’s reputation for fairness and the legitimacy of the
regulatory process.  These shortcomings also have costs to the state’s

One area critical to this goal is greater use of economic analysis in the
development of regulations – already required by the state’s
Administrative Procedure Act – and greater oversight of the process to
ensure adequate assessments and consistency across agencies.  Though
economic analysis should not be the determining factor in developing
regulations, the work of building the analysis should force state agencies
to engage with all interested parties early in the rulemaking process,
develop and assess alternatives, and create a richer body of information
to put before the board members and department directors who
ultimately make the decision.  Such analysis also can articulate and
measure the benefits of a proposed regulation, providing greater context
for the public as well as decision makers.

In recommending greater use of economic analysis, the Commission
encourages a focus on prioritizing alternatives by their cost-effectiveness.
This would tend to result in the selection of the alternative that best
provides the benefit intended in the legislation but is least burdensome
to regulated stakeholders and to the people of California.  The emphasis
on cost-effectiveness assessments is not to short shrift discussion, or
assessment, of benefits.  In most cases, however, the benefit, often with
specific targets, is laid out in the legislation that the proposed
regulations are to implement.  All regulations should be required to show
how a preferred approach would produce the desired benefits.  

Non-regulated stakeholders, particularly environmental groups and labor
advocates, have expressed concern about the potential abuse of
economic analysis to undermine the goals of regulation, and its ability to
create “analysis paralysis.”  In interviews and during a Commission
advisory committee meeting, they reserved a specific wariness for costbenefit analysis, which they said  can understate the value of such
benefits as clean water and air and human health, while allowing
industry to overstate its costs.
The Commission recognizes that some parties within an industry have an
incentive to game the process by withholding information or inflating
estimates of the cost of compliance.  It recognizes, too, the view that not
all benefits, or costs, can be assigned an accurate dollar value and neatly
fit into a cost-benefit model.  It recommends the state focus more on
cost-effectiveness assessments of alternatives that meet the goals of the
legislation the regulation is trying to implement.  A formal cost-benefit
analysis is time-consuming and expensive and should be reserved for
special cases or where required by legislation.  For regulatory packages
that have a significant impact on the economy, the state should have its
economic impact assessments peer-reviewed by a panel of anonymous
outside experts.  

The Commission recommends that the state start the process of
strengthening its rulemaking process by establishing a small Office of
Economic and Regulatory Analysis, that would reestablish the regulatory
analysis function which once existed in the now-defunct Trade and
Commerce Agency.   The primary duty of this small group would be the
review of economic impact assessments for proposed regulations.  This
function could be assigned to the Department of Finance, which already
has the task of assessing the fiscal impact of new regulations, or to the
Office of the Governor or the Bureau of State Audits, which would
provide independence from the executive branch entities overseen.  In reestablishing this function, the state can learn from the example of the
U.S. Office of Information and Regulatory Affairs, which is located in the
White House’s Office of Management and Budget.  The small cost
associated with re-establishing this function would be more than offset
by reducing the costs of failed regulatory processes, by reducing lengthy
challenges on methodology and the potential to improve confidence in the
rulemaking process.

One of the first tasks of California’s Office of Economic and Regulatory
Analysis would be to set guidelines for economic impact assessments
that would be used across departments to ensure consistency and
fairness.  The guidelines should be designed to accommodate a range of
scales for regulatory involvement, with the most rigorous reserved for the
most significant proposed regulations.  The state should recruit an
advisory body of economists and experts from other disciplines with
regulatory experience to help draft the guidelines.  The guidelines should
build on, but not be restricted by, work already done in California by the
California Energy Commission and the California Air Resources Board,
as well as the U.S. Office of Management and Budget’s Circular A-4.
Separate from the Form 399 filing
process, staff performing the
regulatory review function should
have the authority to check in with
departments as they are drafting
regulations to ensure that the
agencies are following the
appropriate guidelines for the level of
economic impact analysis required,
and that they are making every effort
to engage with all interested parties
inside and out of government before
the rules are put out for public
comment. As part of the review
function, this staff should determine
what level of economic impact
assessment is needed on the front
end.  When the economic impact
assessment is complete, as part of
the Form 399 process, the regulatory
review staff should make a
determination whether the
assessment is adequate.
The Office of Administrative Law,
which ensures that agencies follow
the Administrative Procedure Act
through the rulemaking process,
should be required to send back final
versions of proposed
recommendations that have not done
the necessary economic impact
assessment as determined by the
Office of Economic and Regulatory

A cost-effectiveness test approach to evaluating alternatives should be
emphasized especially where the desired social benefit and targeted goal
is spelled out in statute.  The guidelines also should include proper
methodologies for a more formal cost-benefit analysis in the event such
an analysis is required by legislation.

To the extent regulatory reform can build confidence and enhance
communication, transparency and  accountability, such reform can
improve the foundation for economic growth and bolster the legitimacy of
the state’s regulatory structure, protecting public health, consumers,
workers and the environment.  Done well, regulatory review should result
in fewer failed rulemaking processes, saving state agencies and
stakeholders alike time and money as departments implement the goals
of the Legislature.

The Commission’s goal is not to create less or more regulation, but
rather better regulation – rules developed through a transparent and
interactive process that meet the statutory purpose and that place the
least burden necessary on Californians and the California economy.

Recommendation 1: The state should require  departments promulgating regulations or
rules that impose costs on individuals, businesses or government entities to perform an
economic assessment that takes into account costs that will be incurred and benefits that
will result.
‰ The economic assessment must be completed well before the
proposed regulation is released for public comment.  
‰ Departments must demonstrate  how the proposed regulatory
action will meet the statutory purpose of the regulation.
‰ Departments promulgating the regulation should be required to
reach out to regulated and interested parties in the development
of the economic assessment prior to the regulation’s release for
public comment.

Recommendation 2: The state should require departments proposing a major regulation
to perform a high-quality, rigorous economic analysis.

‰ A major regulation is a regulation that would impose an annual
cost of $25 million or more.  
‰ At the minimum, the economic analysis should be a costeffectiveness assessment of alternatives that meet the statutory
purpose of the regulation to determine the lowest cost alternative
to meeting this goal, prior to the release of the regulation for
public comment (possibly the alternative that maximizes net
social benefits).
‰ Proposed regulations that impose a substantially higher burden
on  an  affected  industry  or  industries, or have the potential to
materially reshape the state’s economy, should be subject to a
cost-benefit analysis that includes an assessment of costs as well
as social benefits.

‰ The department promulgating a  major regulation should be
required to make a substantial effort to engage all regulated and
interested parties in the development of alternatives that would
satisfy the statutory purpose of the proposed major regulation
prior to its release for public comment.  This should not prevent
the department from developing additional alternatives, or
refining its economic analysis, on the basis of information
provided through the public comment process.

‰ The state should require a department that is promulgating a
major regulation to demonstrate that its preferred alternative is
the most cost-effective approach to meeting the major regulation’s
statutory purpose or explain why another alternative was chosen,
or, in the case of a more substantial regulation that calls for a
cost-benefit analysis, demonstrate that the chosen regulatory
approach maximizes net social benefits.
‰ The department must respond to comments about its analysis of
the alternatives, including the selected alternative, made during
the public comment period.

Global Supply Chain Disruption Risk and Climate Change Adaptation

People are well aware of the Thailand floods.  The WSJ is reporting  that a consequence of such floods is that global supply chains are being disrupted.  For profit firms have strong incentives to sign contracts with intermediate input suppliers who are not risky in terms of delivering promised products.   Why does this matter?  Suppose that you are a political leader of Thailand and you gain if your nation's firms sign more international agreements to participate in global supply chains. If you know that damage from natural disasters endangers these contracts (as Multinational Western corporations seek out safer locations to purchase inputs from), then you have strong incentives to adapt to natural disasters.   This is the logic of Climatopolis!  Self interest, not green ideology, guides the urge to adapt.  I predict that Thailand's firms and governments will make a series of self protective investments to reduce flood risk exposure.  What will be the net effect of these investments? How much flood risk can be offset?  We will see.

Wednesday, October 26, 2011

How Much Will Science Research Suffer Due to Federal Funding Budget Cuts?

Both the National  Science Foundation and the National Institute of Health must be deeply concerned about cuts to their future budgets.  If the NSF and NIH experience a 15% annual cut, what research won't be funded? Universities such as UCLA count on the overhead $ (roughly 50% of the size of the grant) as revenue for the school.  The researchers applying for this $ use it to pay for equipment and to hire research assistants and Post-Docs. If this $ is cut sharply, then unemployment for nerds will rise.  Will the private sector fill this gap?  Yes and no.  While there is certainly private capital out there, these firms are not altruists seeking increases in basic knowledge.  These for profit firms will require the nerds they invest in to give them the intellectual output they generate.  There will be less "open source" knowledge under this model.

In today's Harvard Crimson, there is an article  that discusses the fact  that the Department of Defense gives Harvard's Physics dept a lot of research $.  If DARPA is pruned back then, this Harvard Dept's revenue will decline.

Many universities appear to be betting that Federal grant dollars will keep growing but what if this assumption is wrong?  What if the only folks with cash to hand over to Universities are upper-middle class parents who want a good education for their kids and companies who want to maximize profits?   How will research universities reconfigure themselves if this is the "new reality"?

Monday, October 24, 2011

Encouraging Better Teaching at Research Universities

The editorial writers at the Harvard Crimson offer some thoughts about how to improve the educational experience there.  Their piece raises some mildly interesting issues.  What would motivate the lazy faculty at leading schools to try harder in the classroom?   As UCLA raises its tuition, we need to raise the quality of our undergraduate educational experience.

Here I offer my magic recipe for cooking some fresh high quality teaching.

First, there is selection.  University faculty have to become younger.  Mandatory retirement at age 70 would improve teaching on average.  Excellent teachers over the age of 70 could be recalled.   I am 45 and I plan to retire at age 62.  At that point, I plan to visit a different university each year and let the market decide where I will go next.

Second, Universities need better graduate students who are motivated to do a good job as Teaching Assistants. This takes $.   I would love to see UCLA engage in major fund raising targeted to providing better deals for Ph.D. students.    This is a case where I believe in efficiency wages.     Teachers have lots of discretion.  A well paid teacher is a happy teacher who will not cut corners and go the extra mile for the students.   As my father says; "Cheap is expensive".  More $ for Ph.Ds would increase the # of Americans entering such programs and language skills matter in undergraduate teaching.

Third,  Deans should figure out how to have professors co-teach a course where they actually show up for the other's lectures.   When my colleagues are in the room for my undergrad talks, I raise my game. I want to show my colleagues how I play the game (and they are impressed).

Fourth;   Undergraduates could be given a research pot of $ which they will paid if they sign a research contract with a professor.   Professors who need research assistants would then have an incentive to compete for these students and would respond by giving more interesting lectures to attract students to want to work with them.  So, such research grants could be given to students with a GPA greater than 3.7 and faculty would compete for this subsidized smart labor.  More generally, encouraging undergraduate researchers with Profs would improve the undergrad experience.

Fifth;  Professors who stink in the classroom should be identified and punished.  There are lots of crappy jobs that have to be done in Departments.  Give these assignments to the profs who stink in the classrooms .   I recall that when I was a student at Chicago, there was one prof who had only 1 student registered for his class. He was rewarded for doing a bad job by having no work to do.  Bad incentives!  To pull this off requires a Chairman of the Department who is tough enough to deal out punishment.   Most profs play nice but this holds back the university.   Departments need enforcers.  Charles Oakley should make a comeback.

Six:  The University's Deans, Provost and President should all have to teach a course every 2 years so they don't forget the reason they entered academia in the first place.

Seven;  Teaching evaluations?  I don't think that these are the answer.  I'm not convinced that profs read them.  At UCLA Econ, each faculty member receives his own ranking and how he compares to every other Prof in the department.  The sheet is reported sorted by "overall score".  Does any department engage in "shame and ostracism" in which the faculty member with the lowest scores is mocked?  I don't think so.  Each individual faculty member must judge him/herself .    At UCLA, we have a step promotion system and teaching is one of the categories that is part of the evaluation for step promotion.   I'm not convinced that this incentive system yields more faculty effort.

Eight:  The Deans could figure out how to have faculty "teach" outside of standard classes.  At UCLA, other faculty are always asking me to give guest lectures.  The great Deans of UCLA should have a pot of $ and offer a payment to faculty who give a big lecture for the whole community.  If 500 people show up to hear Math Genius Terrence Tao talk about math then he has contributed to the teaching experience at UCLA and he should be rewarded.

Nine:  The Deans need to promote Loyalty to the University.  Faculty have discretion and private information about their classroom effort.  How do universities minimize shirking?  When I was a Visiting Prof at Harvard btwn 1996 and 1998, I noticed how many faculty were graduates of Harvard and had children who were attending Harvard.  These folks expected to spend their whole careers at Harvard and they were loyal to Harvard and sacrificed for the common good.   When a person does a "good deed" without explicit cash compensation, are they a hero or a sucker?

Ten:  Smaller classes for upper-division electives.  Faculty have to get to know students.  In smaller classes, students will talk more.  Students are not eloquent public speakers. They don't receive enough practice but speaking is more important than writing essays in the real world.

Teaching and research go hand in hand.  For U.S universities to stay several steps ahead of China's and India's universities, we will need to continue to innovate.  A tenured, comfortable faculty need to be confronted with carrots and sticks!

Now, why do my opinions matter? I've been a prof for 20 years and I like to teach.  67,000 have watched me give this talk about climate change adaptation.  I am also the son of a famous teacher at NYU's Medical School.   For most of my adult life, my father has stressed to me the importance of being a teacher and what it means to be a teacher.

Sunday, October 23, 2011

The Rise of the Eco-Concierge

As Tom Friedman and other wise people ponder what jobs will remain in the U.S, the New York Times offers a new industrial category for the NAICS to incorporate.  They introduce the "eco-concierge".    Could there be tens of millions of these consultants buzzing around in the near future?  In past blog posts, I have discussed the Good Guide and other information websites that talk to your smart phone and provide information focused on what products are "naughty and nice" from a green's point of view. This article appears to take this concept to the next level.

To quote the article;

"They will run your errands by bicycle, recommend a spa that gives vegan manicures or buy organic clothes for you and your dog. They will even book you a dream vacation and buy the appropriate carbon offsets.
Green living is just so much easier when you have your own personal environmental concierge.
“The problem with going green is that people think it takes so much work, so much effort, so much conscious decision-making,” said Letitia Burrell, president of Eco-Concierge NYC, a year-old business in Manhattan that tries to make it easy for people to rid their homes of toxins, hire sustainable-cuisine chefs and find organic dry cleaners.
Memberships range from $175 a month to $3,500 a year, depending on the level of service. Or you can opt for à la carte service at $25 to $50 an hour.
It is a niche business, but a clever one. At least a half-dozen services of this type have sprung up around the country in recent years, both to help time-starved consumers manage their lives and to assuage the guilt of those who worry that they are letting the planet down."

Will this business emerge in any poor parts of town?

There is at least one demander out there;

"Tracy Stamper, a fitness instructor in St. Louis, hired Herb’n Maid a few years ago for green cleaning after products used by a conventional service aggravated her husband’s asthma. That set her on a slippery green slope. Ms. White referred her to a hairstylist, within walking distance, who would color her hair with natural dyes. Instead of using Drano to unclog bathtubs, Herb’n Maid gave her a less harsh product.
Then Ms. Stamper’s husband bought a solar-powered fan for the attic; the neighbors wanted one, too. Next up for the Stampers may be switching to organic clothing made with no chemical dyes or pesticides.
“My husband and I both look for ways to up the ante,” Ms. Stamper said."

Will the planet notice such "small deeds"? Will Gernot Wagner notice?

Here is another quote;

"Do such small steps add up to a larger difference? Some climate experts say not really, explaining that only nations and industries have the collective might to dial back global warming.
“The changes necessary are so large and profound that they are beyond the reach of individual action,” Gernot Wagner, an economist at the Environmental Defense Fund, wrote in a recent New York Times Op-Ed article. Eco-concierges see it their way — that every contribution counts. "

To be serious for a moment.  We live in a diverse world. A gross exaggeration is that there are liberal/greens who want to "walk the walk" because they internalize the social costs that conventional living causes (think of power generated from coal).  There are other Rick Perrys of the world who do not concern themselves with such issues. This doesn't mean that Perry is bad. He simply needs an incentive to be good and the right incentive is a pollution tax.

Can liberal/greens save the world on their own?  They could if there is a strong enough contagion effect such that the Rick Perrys of the future will embrace the liberal Berkeley lifestyle once they have given it a try or seen their friends on Facebook vouch for it.  Alternatively, if green products become cheaper to produce and become higher quality, then some Rick P's will substitute to them merely out of self interest.  This general topic of "Greens as guinea pigs" fascinates me.

But note, that this article is all about Rich Greens trying to optimize their lives.  Tomorrow, I will teach my undergraduates from UCLA's Institute of the Environment and I will start my class by asking my students whether they want to work in the Eco-Concierge industry.

Shaq Explains the NBA's Principal-Agent Problem

In addition to reading Greg Mankiw's column today on hyperinflation, I suggest that you read this Shaq O'Neal interview on the NBA's principal-agent problem in the ongoing strike negotiations.

"Q: What do you think about agents’ planning strategy for players?
A.  It’s a touchy situation. Agents have always wanted to be in control. When the checks don’t come in, the players’ agents don’t get paid. So you have to look at what they’re doing it for. Are they doing it for their own pockets or are they doing it for the betterment of the players?

Q: What do you think about the reported 50-50 revenue split offered by the owners and rejected by the players?
A.  It’s difficult to really know what the numbers are."

Maybe he is the great Aristotle.  Note that in his first quote, he clearly explains the deviation in the objectives of agents and the players.   In the 2nd quote, he questions the entire field of accounting.   Returning to his first quote, suppose that agents are solely paid a fixed percentage of a player's compensation from the league and advertisements. In this case, is there any conflict of interest between the players and agents?  I don't know how the typical NBA player's agent is compensated but Shaq sounds like a cynical economist (I mean this to be a compliment!).

Here are some more details about the principal agent problem.

Green Links for Today

1. The New York Times covers the hearing where the California Air Resources Board "green lights" the state's carbon cap and trade program.   Mary Nichols hired me at UCLA before she left to become the Chair of the Air Resources Board.  You can see a photo of her in that article.   This Thursday, we will appear on a televised panel on the "California Green Economy" (see this).

2. Lunch and Landfills in NYC:  The Times reports  that Californians who have moved to NYC are grossed out by the fact that the Big Apple is to busy to have different garbage cans for different types of garbage.  Such self sorting of stuff would aid recycling and reduce landfill pressure.  But, the NYC government is politically incorrect and states;

"Last year, the City Council passed legislation to require the recycling of rigid plastics — all those containers for yogurt or Chinese takeout, as well as others like medicine bottles and flower pots — and divert 8,000 more tons of plastic from landfills and incinerators each year. But that expansion hinges not just on the opening of the new recycling plant, but also on an assessment of costs.
Still, city officials say that it is more expensive to recycle than to send trash to landfills and incinerators for disposal, and that they have to weigh those costs against environmental goals.
The city also has to give people somewhere to put their recyclables, especially out on the streets. With the heaviest pedestrian traffic in the country, New York has only 500 recycling bins on streets and in parks, compared with about 25,000 wastebaskets. Sanitation Department officials say that to keep costs down, they place the bins mostly in areas along existing collection routes, where volunteers from the community help by replacing and storing bags when they fill up. "

This is an interesting example of not pricing the externality of the pollution created by incineration.  Recycling would be more "cost-effective" if such costs were internalized.  Here  is a recent Yale Study showing how to do this in the case of pricing the pollution from coal power plants.

3.  Turkey's quake;     ongoing economic development will reduce the death count from future quakes.

Saturday, October 22, 2011

A Saturday Class Field Trip to the Los Angeles River

How many "serious" economists would join 22 UCLA freshmen on a Saturday five hour field trip to tour various parts of the Los Angeles River?  Zero?  Our tour guide was "Joe" and he is an interesting dude.  I chatted with several of the students but most of them didn't want to talk to me so I studied the river and asked myself how I got myself into this situation.    As a tenured full professor, I'm not sure where it says in my contract that I have to ride the Frosh bus on a Saturday.  But, my father would say that one must be dedicated and make sacrifices for the greater good (he is not an economist).   I am co-teaching a Freshmen Cluster course at UCLA and attending this event is one of my responsibilities.

The LA river is not beautiful. It trickles along and has health doses of garbage along its banks.  I didn't feel that I was observing a "green" part of the city but it was a mildly interesting experience.  I'm too old to being spending 1/2 of a Saturday with Freshmen.   They didn't know who I was.  I guess I'm another old dude who tells them when to get on and off the bus.  This is my comparative advantage.  I did do one good deed.  One of the students needed to go to the bathroom so I told the bus driver and she pulled over and this guy was able to find a toilet. 

I know that I have a good job but I wonder whether any of my friends at the University of Chicago have recently gotten on a 8:30 am Saturday bus filled with Freshmen to go look at garbage?  You might counter that they have earned the right to turn down this opportunity.

UPDATE:  I must admit that I was a pinch surprised that none of these gifted 18 year olds came up to me to ask me who I was and what I did at UCLA.  When I got on the bus, I introduced myself and told them I would be their prof in Winter 2012.    They showed no intellectual interest in getting to know a UCLA faculty member. I guess I was just an adult who was there to "supervise".  That's nuts!   They knew I was a UCLA prof and that I would be their teacher next winter but they had nothing they wanted to say to me or ask me. Strange days!

Municipal Finance in LDC Cities

It takes serious money to build urban infrastructure such as new highways, water treatment plants and sewer systems.  In China, until recently, if a city had wanted to invest in such local infrastructure it had to sell land to developers to raise revenue.  Now, it has been announced that four Chinese cities will be allowed to issue municipal bonds.   The U.S experience shows why this is a big deal.

Consider this abstract of this paper by David Cutler and Grant Miller;

"The construction of municipal water systems was a major event in the history of American cities -- bringing relief from disease, providing resources to combat fires, attracting business investment, and promoting development generally. Although the first large-scale municipal water system in the United States was completed in 1801, many American cities lacked waterworks until the turn of the twentieth century. This paper investigates the reason for the century-long delay and the subsequent frenzy of waterworks construction from 1890 through the 1920s. We propose an explanation that emphasizes the development of local public finance. Specifically, we highlight the importance of municipal bond market growth as a facilitator of debt finance. We argue that this explanation is superior to others put forward in the literature, including disease knowledge, the presence of externalities, municipal population density, natural monopoly, contracting difficulties, corruption costs, and growth in the supply of civil engineers."

For another paper on the role of financing urban infrastructure in LDC cities, I suggest you read this paper by Noll and Shirley and Cowan. 

Thursday, October 20, 2011

"Wayne's World" for California Greens

This October 27th event will be shown on Cable TV in Los Angeles.  We will be talking about California's economy, "green issues" and jobs.  To prepare for my 15 minutes, I will go get a haircut and put on a clean jacket.   I keep hoping that Quentin Tarantino will figure out that I'm his long lost twin and cast me in one of his movies.  Do people still watch cable TV?


Some Links for Today

Paul Krugman discusses the University of Minnesota's econometrics sequence.

Mark Zuckerberg's sister tries to figure out what to do with her life.

What NYC moms wear when they drop their children off to school.

What Occupy Wall Street teaches us about public private spaces.

Wednesday, October 19, 2011

Adapting to the New Dust Bowl

Due to drought in the Southwest, a new "Dust Bowl" is now playing. For some dramatic video, watch this.   What are the strategies such that this area can adapt to these conditions?  One newspaper article reported that part of the solution will be to plant native plants that are more likely to withstand drought conditions.  If the plants stay alive then the soil is less likely to blow away.  For some facts about keeping vegetative cover read this.

A leading young economist named Rick Hornbeck has written about the past impacts of the Dust Bowl.  Here is the abstract from his study;

"The 1930's American Dust Bowl was an environmental catastrophe that greatly eroded sections of
the Plains. Analyzing new data collected to identify low-, medium-, and high-erosion counties, the
Dust Bowl is estimated to have immediately, substantially, and persistently reduced agricultural land
values and revenues. During the Depression and through at least the 1950's, there was limited reallocation
of farmland from activities that became relatively less productive. Agricultural adjustments, such
as reallocating land from crops to livestock, recovered only 14% to 28% of the initial agricultural cost.
The economy adjusted predominately through migration, rather than through capital inflows and increased

So, note the adaptation. The geographical area suffered but economic activity moved.  It wasn't costless but it did happen. I predict that our past experience with dust bowl  conditions and technological advance will help this region to cope and adjust with the new dust bowl.

Consider this quote that highlights the role of increased out migration (and reduced in -migration) in adapting to these Dust Bowl shocks;

"From 1930 to 1940, the unemployment rate increased by 0.71 percentage points in high-erosion counties (Table 5, column 5). The increase was gone by 1950, however, and medium-erosion counties had no increase in unemployment after 1940. Declining populations may have prevented further unemployment, because there is little evidence of an increase in manufacturing."

Note that the land (and the land owners) suffered but the people can protect themselves by clearing out.

As Rick says in his conclusion;

"The experience of the American Dust Bowl highlights that agricultural costs from environmental destruction need not be mostly mitigated by agricultural adjustments, and that mass migration may result."

Did civil unrest and dislocation occur as this population moved? No.  Free markets mediated this transition.  This is another example of Climatopolis at work.  Capitalism aids the adaptation to the new shock.

Now in 2011, how do we handle "Dust Bowl"?    To read more click here.

Tuesday, October 18, 2011

Eminent Domain and Energy Supply Infrastructure

 This NY Times piece shocked me.  Canada's Trans-Canada is threatening U.S property owners with lawsuits if these owners do not sell their access rights to allow the Keystone XL pipeline to run through their property.   The pipeline is 36 inches in diameter and it is true that in South Dakota and Nebraska and Kansas there is a lot of land but private property is private property.

The big issue here is how to transport the energy, whether it is renewable power or oil or natural gas, to final consumers.   It takes up land to site transmission capacity or pipelines.  Which land owners have the lowest willingness to accept to have such transport capacity go on their property?  What is "fair" compensation in this case?

Monday, October 17, 2011

To Be Green in Seattle

Seattle's Bullitt Center will be quite a green building.   What interests me in this case is a self-selection question; what tenants will choose to locate in this building?   How does locating in this building raise their productivity and improve their social networks?

To quote the article;
"The Bullitt Center has early lease commitments for four of its six floors. The building’s general contractor, the Schuchart Corporation, will be a principal tenant, joining Mr. McLennan’s Cascadia Green Building Council in staking their reputations on the structure’s success. The foundation says rents will be comparable to those for other newly constructed, LEED-certified buildings in the area, and it eventually expects a positive return on investment.
Mr. Hayes said the project team was talking with behavioral economists on incentives to encourage tenants to practice environmentally responsible habits. Immediate feedback on energy use may be one. Competition among floors may be another, as well as making each tenant’s consumption public."
My work with Dora Costa supports this claim that because a green building will self select environmentalist tenants that they will be willing and eager to be benchmarked on peer comparisons in engaging in voluntary restraint.  But, if this building is as "green" as its promoters claim; how much lower can energy consumption go?
Electric utilities must get involved in the unsexy work of nudging 1960s built homes and multi-family housing to become more energy efficient.  Dora Costa and I have documented that when buildings were build during a time of low energy prices that their current energy consumption is high.

Saturday, October 15, 2011

Do Democrats and Republicans Agree About What It Costs Government To Install a Toliet?

Imagine an economy where everybody has identical tastes.  We like consuming pizza and we like riding public transit.  Pizza is produced by private firms who sell it at the market price.  People use all of their income minus what they pay in taxes to buy pizza.  Tax dollars are collected across everybody and are used to build public transit that people ride for free once it is built.

In this economy, let's introduce one twist. There are two types of people.  There are "Republicans" who believe that the government is inefficient at taking tax revenue and using this to build public transit while there is another group called "Democrats" who do not share this concern.

In terms of the language of economics, the Republicans perceive that there is a high price (measured in pizza) for building more public transit. 

How will this affect voting?  Republicans will want low taxes and high pizza while Democrats will accept the high taxes because they believe that a lot of public transit will be built.

Note that everyone has the same tastes in this economy but people differ with respect to what they perceive to be the price of providing public goods (the transit).

Who is right?  I don't believe economists have done a good job measuring the price per quality adjusted services when government provides it versus when the private sector provides it.

If there is a large public sector wage premium (i.e that a high school graduate earns much more ,the Post Office than at Starbucks), then the Republican will be right about the conjecture
 presented above.  If government is an inefficient manager of big projects (i.e Boston Big Dig), then this conjecture is more likely to be correct.

So, here is my point --- if government could become more cost-effective (i.e a lower tax price per unit of services provided) would more moderate Republicans be "pro-government"?

Friday, October 14, 2011

Individuals Identify Radiation Hot Spots in Tokyo

After the March 2011 nuclear meltdown, did the Japanese government have the right incentives to identify and announce the location of radiation hot spots?  This article presents evidence of individuals conducting their own radiation tests in Tokyo and discovering elevated radiation levels far from the original nuclear plant source.

The lesson here is that government should not have a monopoly on collecting environmental data.  If monitoring costs fall, then individuals can do their own investigations and through blogs and IT distribute the new information they have collected.  Government can sometimes have bad incentives concerning whether it wants to investigate "bad news".  If the government believes that "ignorance is bliss" then it will not invest resources to discover truths that can contribute to panic and bad public relations.  But, we know that informed households make better choices.

If Government knows that people will eventually learn the truth and then will blame government for initially covering up the truth, then this will lead self interested governments to act in the public's interest.

A Prediction About China's Future Growth

The newspapers are filled with stories about Chinese entrepreneurs facing capital constraints.  Since these people are not politically connected, they can only borrow money at very high interest rates.  In contrast, State Owned Enterprises (SOEs) have an easy time borrowing at very low interest rates.  The key macro question here is whether any of these SOEs have used the money they received from the State wisely?  There is a nasty moral hazard issue here.  Do the SOEs have strong incentives to produce quality products that people want to buy?

I anticipate that there are two possible outcomes here.  Under scenario #1, the SOEs go broke and the State learns from its past mistakes and stops bailing them out and China's industries evolve into a "free market" system rather than a mixed system featuring SOEs and for profit firms.  Under the scenario #2, the SOEs are bailed out again and again and in aggregate this subsidization drags down the whole system.

So, the wise leaders of China will face a choice.  To continue to grow at 9% a year, they will have to let the SOEs die and this will cost them money and their friends at the SOEs will be sad.

Macroeconomists are in deep thought about capital misallocation across sectors.  Here is a recent example that includes relevant references.

If politics distorts who gets the money, then less productive people may be handed more capital.  This is not the key to growth.

So, the leaders of China face a choice.  Do they prioritize growth or nepotism?

Thursday, October 13, 2011

The Geography of DOE Green Economy Loan Guarantees

Solyndra isn't the only company the DOE placed a bet on.  Here is the full list.  You will see that California is over-represented on the list and it appears that Republican areas appear to be under-represented.  Coincidence? Or do the Red States have few RPS standards and little renewable power potential and thus few renewables companies operate there?

A good research project would be to do an event study.   For the subset of this list who are publicly traded firms, has their stock price fallen with the "new news" about Solyndra?  Does the DOE now have a reputation for "picking losers"?

How Do Ecologists Study Climate Change Adaptation?

In this article, researchers go to Arizona and count the types and quantities of creatures in different geographical areas before and after there is "complete water loss".   Now, unlike social scientists they do not collect longitudinal data to track a specific creature (such as Matt Kahn) over time to see where I migrate to or if I just die from drought conditions.  Instead, they create indices of "species richness".

At the end of their article, they posit some optimism due to selection effects.

"Eventually, sensitive species such as the top predator A. herberti could be regionally extirpated, resulting in a
simplified and depauperate regional species pool. Ironically, these new local communities may then be more resilient to climatic and anthropogenic disturbances than the original communities, as all sensitive species will have been extirpated leaving only the most tolerant and resilient species (Côté & Darling, 2010)."

To my readers who are economists, doesn't that sound like comparative advantage?  Doesn't that sound like Climatopolis?   I must admit that I don't fully understand what are the "big implications" if the predators are knocked off by this climate change.  Do they only suffer or does this trigger additional problems as the creatures they used to eat thrive in our hotter future?

It is interesting to compare their actual research paper with the "hot press release" about it.  It appears to me that OSU's public relations team is playing up the "panic" piece of this study.   Climate scientists would be less likely to be accused of being "Chicken Littles"  if they present their results but are careful to not overplay them.

Mazed and Confused

This story  highlights the power of "Google Maps".  This family wandered into a maze field and got lost and panicked when they were just 25 feet from the street.    They called "911" and were rescued for free.

In a Libertarian world, they would pay low taxes but when lost they would either have continued to have searched around for freedom or they would have contracted with a private rescue firm that would have swooped in and given them a $2,000 bill for the rescue.  I suggest that the 2012 Presidential Election will be a referendum on which of these scenarios  do we prefer.

Wednesday, October 12, 2011

Paul Gilding Argues that Climate Change Will Cause a New Culture to Emerge

This will be a petty (but insightful) blog post about another author thinking about how will adapt to climate change.  Paul Gilding (ex-Greenpeace thinker) anticipates that climate change and resource depletion will force us to cast away our old consumption based "American Dream" conception of the "good life" and embrace a more Berkeley lifestyle.  Apparently, he believes that a silver lining of mass destruction caused by climate change is that a new culture will emerge that will drop "shopping" cold turkey.

Here is a quote from his press people.

"It’s time to stop just worrying about climate change, says Paul Gilding. We need instead to brace for impact because global crisis is no longer avoidable. This Great Disruption started in 2008, with spiking food and oil prices and dramatic ecological changes, such as the melting ice caps. It is not simply about fossil fuels and carbon footprints. We have come to the end of Economic Growth, Version 1.0, a world economy based on consumption and waste, where we lived beyond the means of our planet’s ecosystems and resources.
The Great Disruption offers a stark and unflinching look at the challenge humanity faces-yet also a deeply optimistic message. The coming decades will see loss, suffering, and conflict as our planetary overdraft is paid; however, they will also bring out the best humanity can offer: compassion, innovation, resilience, and adaptability. Gilding tells us how to fight-and win-what he calls The One Degree War to prevent catastrophic warming of the earth, and how to start today.
The crisis represents a rare chance to replace our addiction to growth with an ethic of sustainability, and it’s already happening. It’s also an unmatched business opportunity: Old industries will collapse while new companies will literally reshape our economy. In the aftermath of the Great Disruption, we will measure “growth” in a new way. It will mean not quantity of stuff but quality and happiness of life. Yes, there is life after shopping."
 Who is this wise gent?

"An activist and social entrepreneur for 35 years, Paul’s purpose is to lead, inspire and motivate action globally on the transition of society and the economy to sustainability. He pursues this purpose across all sectors, working around the world with individuals, businesses, NGOs, entrepreneurs, academia and government." 

Both Gilding and I are optimistic about our future but he predicts that we must suffer a day of reckoning in order to be "born again" and embrace a new culture.   I do not believe that such "shock and awe" is necessary.   He ignores the fact that many people are able to form expectations of the future and to learn about current trends. If the world is growing warmer, and riskier in terms of climate conditions, then we will seek out coping strategies.  This will create challenges and opportunities but capitalism is great at evolving to meet new challenges.  His vision is dramatic but borders on evangelical as he appears to believe that we need to have  a "near death" experience to be born again.    The transition will be smoother than his "razor's edge" model for our globe.

Our ability to anticipate danger and form expectations of the future distinguishes us from other creatures.   Yes, some people will embrace the "Berkeley lifestyle" and I for one try to live my life in this way but I do not believe that we will be required by worldwide scarcity to do so.

For the nerds out there, learn about the 2011 Nobel Prize in Economics and the role of expectations in influencing investment today by reading this.

Wisdom from the Harvard

Harvard has at least one smart undergrad there right now.  A young guy named Dylan R. Matthews offers this wise quote about Steve "Odd" Jobs, "That’s why Jobs was important. He was a model of wealth acquired not due to highly leveraged, socially prestigious gambling, but due to actual inventiveness. For those of us who still think that regulated capitalism is still something worth saving, that’s something to celebrate." Now, I do wonder what regulated capitalism is? I've been thinking about this concept since I stumbled upon reading Harvard's Dani Rodrik's tough piece about Milton Friedman posted here.

I never knew Milton Friedman but he was my age in roughly 1957 and this was a time when many smart economists were admiring the Soviet collective effort.  Friedman used his considerable debating skills to make a strong case for free market competition and reliance on the price system rather than on top down control.  Supporters of "big activist" government, need to be honest about the long run economic growth consequences of pursuing a short run redistribution agenda.   A refusal by government to commit to clear rules over policy discretion creates a dangerous precedent and encourages rent seeking and lobbying rather than an investment in attempting to be the next Steve Jobs.

Sunday, October 09, 2011

Cow Migration as Evidence of Climate Change Adaptation

Everyone knows that Texas has been hot and dry.  Cattlemen are responding to this new news.  Given that they expect that this drought will continue, they are seeking out new "verdant" areas to raise their cattle.  Investment under uncertainty and rational expectations lives on!

The LA Times reports the key facts in this article.   This quote in the article is revealing; "A few months ago, managers of Swenson and the larger spreads called a crisis meeting at Tongue River Ranch, about 95 miles north of here. They agreed to send Braden and the manager of the Four Sixes Ranch to scout northern pastures that had received above-average rainfall, and ended up leasing land in Colorado, Wyoming, Kansas, Nebraska, South Dakota and Montana."

Note that this is the logic of Climatopolis playing out in the non-urban sector.   The cattlemen are betting that locations within these other six states will be more "cow friendly" in terms of rain and food supplies.   So, a lot like portfolio theory from Wall Street, the key idea here is that geographical locations differ with respect to their temperature and rainfall conditions.  As long as climate change doesn't have the same impact on every location, then some areas will be "cow friendly" and rational investors have a strong incentive to identify those areas and relocate there.  This is the "small ball" optimism of my climate change adaptation work.

Now, I recognize that this transition process isn't costless. The extent of these costs hinges on what is the next best use of the land that the cattlemen are now seeking to lease and how costly it is to ship cattle out of Texas.  

For those who like data, consider the graph below (source is the LA Times).

Note, the jump in cow "exports" out of Texas towards more "verdant" northern locations. Rational cattle investors are being pro-active rather than being passive victims in the face of climate change.

Lots of folks threw some tough punches at my Climatopolis but take a look at current events.  There is no "global carbon policy" deal on the horizon (and that makes me unhappy).  We are each on our own to struggle with the new challenge we have collectively created.  What happens next?  Doom?  No, cow migration is the tip of the iceberg of how we will control our own destiny and continue to thrive despite the very real challenges we will face.  Necessity is the mother of cow migration (and invention)!

Some Quirky Links for Today

My son turns 10 on Tuesday.  I am in deep thought about what this means. He is happy kid.  I have stimulated the economy by purchasing more Lego for him.

1. For those of you eager to relive some of your teenage years, I offer you this.

2. How do Texas cattle owners adapt to drought?  They send their cattle to Minnesota!   Does that sound familiar?  People can migrate and so can creatures.  The cattle owners search for potential destinations for their asset now that climate conditions have made Texas a less desirable place to rear the cattle.   A good economist will calculate their change in profit and this represents their cost of adaptation.

3. This LA Times Editorial worries about the future of California's middle class and their political support for the University of California and their ability to finance paying the potentially $22,000 tuition in the near future.  The "answer" to this issue is to allow the various campuses to charge different prices.   I apologize for my elitism but UCLA could raise its price to $30,000 and the place would still be packed with students.   Now, I have argued that the faculty will have to offer a better product if we go ahead and charge such prices but the demand for studying in paradise is fairly inelastic!

4.  A new celebrity spotting.  In Beverly Hills today,  I spotted Seth Rogren.  As I was walking, I saw a woman having her photo taken with some dude and then she said to him;  "sorry for inconveniencing you" and it immediately occurred to me that the dude had to be  a celebrity.  He had a hat and sunglasses on but when I turned to take a real look at him, I recognized him.

5.  For those of you who tend to support government strategic investments in stimulating the economy,  please take a look at this Steve Lopez piece in the LA Times today.  Maybe Austin Beutner should go back to Wall Street.

Friday, October 07, 2011

Would You Buy Sharon Stone's LA House for $9 Million?

Is your basic instinct to purchase a $9 million dollar Beverly Hills house that Sharon Stone bought for $11 million in 2006? If yes, then click here.  So, if you put 10% down for her crib, and find a fixed rate 5% 30 year loan --- your monthly mortgage payments will be $43,500.  Most economists can afford that?

To my fellow economists, I would like to pose a question.  Do you find that the month of October is the month of writing letters?  These days, I find myself to be a "man of letters" as I use my pen to write letters to potential employers of my undergraduate students, I write letters to journal editors offering advice about papers I've been asked to review and I write letters to journal editors trying to explain how my new draft of the paper actually addresses the comments that they were kind enough to send me.   I also write letters for colleagues who are being considered for promotion at other universities or to be hired by those universities.  There are a lot of letters that need to be written.  But, does anyone actually read any of these letters?

I must admit that at the start of September I found myself to be in a funk as my main research computer was broken and I was sick with a bad head cold.  The cold didn't affect my teaching (I guess you don't need to think to teach) but I didn't have an intelligent thought for days and that greatly depressed me.

Wednesday, October 05, 2011

Mulligan vs. Krugman Round Two

This article about U.S farmers being unable to recruit Americans to work as farmers appears to support Casey Mulligan's labor supply explanation for recent labor market facts.

Would a Young Nobel Laureate in Economics Be "Well Behaved"?

The new Nobel Laureates in Physics include a 41 year old and a 44 year old. You can read about them here.  Dr. Riess looks about 20 years old in the photo.   Given that the Econ Nobel will be announced next week, the "new news" that 66% of the new physics Nobel laureates are younger than me got me thinking.  Suppose that the Econ Nobel was awarded to a "kid".  Would this young star be transformed into a real diva now that he/she had received the ultimate prize at such an early age?   Who in our profession is humble enough to be able to handle this ultimate honor with grace?    This is my explanation for why I won't win it this year!

In the year 2005, I offered this set of predictions for the Nobel.  Note that I correctly predicted #3, #5, and #8!    So, I'm 50% over the last 6 cycles.  Not bad!!

1. Nobel prize in environmental economics to Weitzman, Nordhaus

2. Nobel prize in trade theory to Bhagwatti and Dixit

3. Nobel prize in President Bush praising to Krugman and David Brooks

4. Nobel prize in behavioral stuff to Richard Thaler

5. Nobel prize in contracts to Hart, Holmstrom, and Oliver Williamson

6. Nobel prize in development economics to Dasgupta and Deaton

7. Nobel prize in finance to Fama

8. Nobel Price in mechanism design to Milgrom, Myerson and Maskin

9. Nobel prize in family economics to Mincer and Pollak

10. Prize in Political Economy to Alesina, Persson and Tabellini

11. Prize in Modern Macro to Barro and Sargent

Monday, October 03, 2011

Pharaohs, Farmers and Climate Change

How did farmers adapt to climate change in the past?   Here is the abstract from a new research proposal produced by a  "Dream Team" including my UCLA colleagues; Willeke Wendrich  (Near Eastern Languages & Cultures), Glen MacDonald, (Environment/Geography, UCLA) , Edward Rhodes , (Earth & Space Sciences, UCLA)

"This project studies how agriculture, which is the basis of the ancient Egyptian culture under the Pharaohs, was first introduced in Egypt. Our theory is that a period of climate change with winter rain enabled the earliest farmers in Egypt to adopt the knowledge to grow domesticated wheat and barley in the same way as this had been done for centuries in other regions around the Mediterranean. After the climate became more arid, agriculture depended on using the Nile flood. This research will combine textual and iconographic references to Egyptian agricultural symbolism; fossil pollen analysis to reconstruct the vegetation and period of agricultural use during the early agricultural stage; and stable isotope analysis to determine water sources and season of rainfall."

Do you see the synergy between human capital and shocks to the environment?  The environment changes and self interested individuals (the farmers) must change their game in order to survive.  That's the right incentives.  Did they succeed? Who succeeded?  What constraints limited their ability to adapt?  I predict that the researchers will find that richer people and more nimble people were better able to adapt to the new environmental challenges.

Just like these dudes from yesteryear, rising human capital will help us to adapt to the new challenges we will face.