Saturday, December 31, 2011

Moving to Higher Ground

Leah Boustan, Paul Rhode and I have completed a draft of our paper that we will present at the Chicago AEA meetings next week.  Here it is.   After writing my Climatopolis book, I have sought to continue to do research on the microeconomics of climate change adaptation.  The problem for an empirical nerd is that this adaptation will take place in the future and this makes empirical work hard.  Climatopolis  offers many predictions about how capitalism will help us to adapt to climate change but as of 2012 it is too early to "fail to reject" these predictions.

Similar to Michael J. Fox in Back to the Future,  I have teamed up with two leading economic historians to take a look at how young men in the 1920s and 1930s in the United States coped with natural disaster risk.   Young people are highly likely to migrate to areas that offer good earnings and quality of life.  If an area has recently experienced natural disasters such as floods, tornadoes and hurricanes then such individuals can protect themselves by not moving to such areas or moving away. This is private self protection in the sense that Gary Becker and Ehrlich used this term.

Now, government can invest (think of New Orleans and Sea Wall construction) to make an area safer.  This is public investment in protection. Our paper argues that it is likely that Public investment displaces private investment. In a Peltzman sense, an unintended consequence of government place based investment in climate proofing an area is to attract more "victims" to live there.   The rise of the New Deal in the 1930s (relative to the no New Deal 1920s) allows us to test this hypothesis.

Here is the paper's intro;

"Natural disasters cause significant loss of life and property damage in the United States. In 2005, Hurricane Katrina destroyed large sections of New Orleans, resulting in the death of thousands. This salient disaster highlights that millions of people have chosen to locate in geographical areas that are at risk of natural disasters. In fact, the attraction of coastal living has encouraged more and more people to move to areas at risk from hurricanes and flooding (Rappaport and Sachs, 2003). Despite the fact that developed nations suffer less than poor countries from a disaster of a given size, natural disasters are imposing larger economic costs over time (Kahn, 2005; Pielke, Jr., et al., 2008). Many forecasters predict that climate change will only exacerbate these risks.
            An individual’s exposure to natural disaster risk is a function both of private choices and of governmental decisions over land use zoning and infrastructure investment. Government actions intended to protect the public can reduce the incentive to engage in private self-protection. An intuitive example of such “crowding out,” analyzed by Kousky, Luttmer and Zeckhauser (2006), is building new sea walls in New Orleans. More people will stay in or move to a risky area if they believe that sea walls will be built. In this case, government investment can displace self-protection against risk (Peltzman, 1975). Such efforts could be disastrous if the public is overly optimistic about engineers’ ability to protect the public.
In this paper, we examine one form of private self-protection, net migration away from disaster-struck areas, during the 1920s and 1930s, a period of high disaster activity taking place before the advent of coordinated federal disaster management. In this era, disaster relief was directed by the American Red Cross (ARC). We use ARC documents to compile all major natural disasters from 1920 to 1940. Floods and tornados are the two most common types of disaster events; our dataset also contains a small number of earthquakes and hurricanes. Migration activity is measured in two new panel datasets, the first following individuals from 1920 to 1930 and the second tracking location from 1935 to 1940, both using Census sources. We find that, on net, young men move away from areas hit by tornados but are attracted to areas experiencing floods. Early efforts to protect against future flooding, especially during the New Deal era of the late 1930s, may have counteracted an individual migration response.
Migration away from tornado-struck areas in this era before significant government protection is consistent with Hornbeck (forthcoming), which documents out-migration from the Dust Bowl in the mid-1930s. This historical pattern is in sharp contrast with Deryugina (2011), which finds no net population change in counties struck by hurricanes in the 1980s and 1990s. Instead, affected counties receive $356 (2008 dollars) per capita in immediate disaster aid and $670 per capita in additional federal transfers, principally through unemployment insurance and income maintenance programs, over the next ten years. She speculates that these federal transfers may create moral hazard problems, “leading individuals to live in riskier places” (p. 3). The declining private response to natural disasters over the twentieth century provides support for the “crowding out” hypothesis. An unintended consequence of the growth in disaster relief and government investment in protective infrastructure may be to expose more people to risk as they choose not to leave disaster-prone areas or to move to such areas." 

Friday, December 30, 2011

Do First Year Classes at Yale Law School Influence Student Ideology?

Yale University's Law School produces stars.  Due to the diversity of the Yale Law School faculty, and the fact that students are randomly assigned to first year classes,  researchers have the opportunity to tease out whether taking Law classes with friends of Adam Smith shapes law students.   While Yale is known to be a liberal law school, there are some faculty sketching the benefits of pursuing "efficiency".  According to this paper,  students who were randomly assigned to the "neo-classical economics" sections for courses such as torts and contracts reveal themselves to be more likely (on average) to act like economic man.  If you look at the tables in back, you will see that the "Tiger Mom" is one of the instructors.  She is coded up as "neutral".  Future research should study whether attending her class has a causal effect in shaping students.

This research interests for 2 reasons.  First, it is funny.   Second, as a free market environmentalist --- I'm quite interested in how we set up institutions and incentives to encourage "green growth".   Why are people in Berkeley such liberal/greens?  Is it selection (i.e hippies choosing to live with each other) or is it treatment (i.e if Rick Perry were forced to move to Berkeley he would assimilate and start eating tofu and would eventually like it).   During this ideological age, where does our ideology come from? (our parents?) and how does it evolve over time?  

Somehow, liberal Democrats have triggered a perverse reaction by Republicans.  There is no reason that Republicans must now have a litmus test that all "green action" is communism and over-reach by the state but many in this group have adopted this view because liberal/greens have been so sanctimonious about environmental issues.  The enemy of my enemy is my friend?  

If we understood more about ideological dynamics (at the individual level), then social science would make progress in predicting and explaining voting behavior and in anticipating the political economy of what public policies could actually be supported by a majority.

Thursday, December 29, 2011

Some Drought Economics

The NY Times recently reviewed two books that go on at length that the U.S Southwest is an unsustainable hellhole that will soon suffer greatly because of climate change and drought.  What is striking about the article is that it never mentions the price of water in Phoenix, Las Vegas or other Southwest cities.  The Econ 101 solution to this real challenge is ignored.  

Here is a quote from the review about one of the books;

"In his hands, it is a sweeping story, encompassing global weather patterns, the mysterious histories and farming practices of the native people whose settlements rose and vanished in the desert, and the firefighters, biologists, anthropologists, water administrators and others who deal with increasing dryness today and seek to plan for an even drier tomorrow.
In interviews in their offices and in the field, they tell him they fear the story will play out — in forest fires, invasions of insects that prey on trees weakened by drought and heat, die-offs of native grasses, and prolonged dryness and thirst. Rains, when they come, will fall less often in the gentle, soaking precipitation Native Americans call “female rain” and instead will be its “male” counterpart — short, sharp downpours that flood the arroyos, erode the canyons and run off before they can do much to recharge underground water supplies already burdened by overuse."
So what is the price of a gallon of water in Phoenix today?  According to this official website, the average Phoenix household consumes 136,000 gallons of water each year and pays $58.5*12 for it. So, this works out to a 1/2 cent per gallon.   May I propose a solution to drought in Phoenix?  Let the price rise to 2 cents a gallon and there won't be any more drought.  Demand will decline as the green grass will go and households will substitute along a variety of margins so that supply and demand are in balance again.
Why did the author of this book review ignore the obvious economics? Perhaps the Climatopolis style optimism that relies on pricing signals and individual choice is a turn off?  Such a "simple solution" doesn't offer enough gloom and doom?  We control our destiny.  There is an interesting political economy question of why water prices aren't rising.  The Phoenix authorities did raise them by 7% on February 2011.  
Scientists should do their core job of investigating the likely consequences of climate change for cities such as Phoenix.  Spread this information and then allow the market to do its thing. Politicians will inhibit climate change adaptation if they don't allow prices to signal scarcity.   Note the teamwork here, the science only matters if we have free markets where prices reflect all available information about new risks and opportunities.    
Too many scientists appear to believe in a magical West Wing government in which a benevolent leader saves the day.  Martin Sheen isn't up to the job and neither is his son Charlie.  Instead, look to the market.

My Disagreement with Stanford QB Andrew Luck

In this morning's SF Chronicle, Scott Ostler writes about Stanford QB Andrew Luck's choice to take easy classes this semester as he focused on his Saturday games and his chance to win the Heisman Trophy.  Here is the quote that caught my eye.

"Luck needs two more classes to graduate. He will skip the upcoming winter quarter to prep for an NFL career, then come back in the spring to pick up the classes.
Luck did dial it back a tad academically this past quarter, as he dealt with Heisman Trophy hoopla and Stanford football. But it's relative.
A month ago he told me, "At this point you realize, 'I'm not going to take classes in school that are going to tax my time completely.' Which is not to say that I don't put the effort into the classes. But I'm not going to take the maximum amount of units, or a hard studio class for architecture."
Luck said he took two art history classes and a course in urban sustainability, whatever that is. Easy courses?
"I wouldn't call 'em easy," Luck said, uneasily, "but on the lighter workload side. I wouldn't want to disrespect the professors."
You know how big-time football stars hate to disrespect their professors.
Luck, due to some oversight, never received the College Superstar Athlete Manual. He attends classes, gets good grades (around a 3.5 GPA), rides his bicycle around campus and lived in the dorm his first three years."

So, Dr. Ostler --- you dare to mock "urban sustainability"?   Allow me to offer you a short course on this subject.

You have a job at the SF Chronicle because there is a city called San Francisco.  If there were no cities, you would be a farmer and would spend your days doing hard work just to make sure that your family has something to eat.  You wouldn't have a tractor because such farming equipment is made in cities.  Good luck using your hands and other primitive tools.

All over the world, billions of people are moving to cities and becoming richer because they are moving to cities.  If everyone in India and China achieves the American Dream of earning a good wage and then buying a home and a car and consuming electricity, will we run out of oil and other natural resources?  Will we unintentionally exacerbate the challenge of climate change because of the fossil fuels we use in powering our economy?   Could we unintentionally kill off the golden goose because our cities are growing?  These are some of the major themes of urban sustainability?  You and Mr. Luck should pay more attention in class. This is an exciting field.   If you would like to learn more, go to this webpage and start reading!

Now, maybe Stanford is to blame for not offering rigorous urban sustainability classes?  I taught for one year at Stanford in 2003-2004 and was very happy with the students but I doubt that "urban sustainability" is taught by an economist.   So, Mr. Luck's experience may be an example of why serious universities should be hiring more economists so that we can teach these classes.  The rigorous tools of economics can be applied to many subjects that appear to be far removed from "supply and demand".

Dr. Ostler and Dr. Luck have both chosen to live in the San Francisco metropolitan area.  It is well known to be a "Green City".  Do they believe that this status was simply caused by god giving it good temperate climate and some topographical beauty?  This is surely part of the equation but don't forget the human aspect. The area self selects liberal, educated, sophisticated people (think of Berkeley) and these folks vote for policies that further "green" the area.  This in  a nutshell is "urban sustainability".   When Andrew Luck is playing for the Colts in Indy, he may want to go back to his notes to think about how to make that city nicer.  Don't simply blame the cold weather.  Chicago is "green" these days.  Why?  Take a course in urban sustainability and stay awake this time!

Wednesday, December 28, 2011

Can Safe Public Parks Cause More Crime?

Macro economists do not have a monopoly on term "crowding out".  The NY Times uses it today in an article about the night use of Central Park.  As crime has fallen in the Big Apple and people are feeling safer, they are dropping their guard and taking more risks by walking in the park at night.  So, the cops, abortion, and anti-lead reduce the crime and this "public investment" in safe streets displaces "private self protection" as people unlock their front door and go for a walk at night.

Leah Boustan, Paul Rhode and I will present a new paper at the AEA meetings next week that will make a similar point.  We study U.S migration patterns in the 1920s and 1930s as a function of several variables including local natural disaster shocks.  Our current results suggest a similar "crowding out" hypothesis. Back int the 1920s before the New Deal and large place based federal transfers, young men were less likely to move to areas that had experienced natural disasters.  While in the 1930s and more recently, it appears that migrants are actually attracted to disaster areas as these areas are rebuilding and attracting Keynesian rebuilding funds.  Robert Barro would appreciate this result, do you?

If you like some math in your life, I suggest that you read this paper by Kousky, Luttmer and the Zech.  For lazy people, here is the abstract to their paper

"Hurricane Katrina did massive damage because New Orleans and the Gulf Coast were not appropriately protected. Wherever natural disasters threaten, the government—in its traditional role as public goods provider—must decide what level of protection to provide to an area. It does so by purchasing protective capital, such as levees for a low-lying city. (“Protection” also consists of prohibiting projects that raise risk levels, such as draining swamps.) We show that if private capital is more likely to locate in better-protected areas, as would be expected, then the marginal social value of protection will increase with the level of protection provided. That is, the benefit function is convex, contrary to the normal assumption of concavity. When the government protects and the private sector invests, there may be multiple Nash equilibria due to the ill-behaved nature of the benefit function. Policy makers must compare them, rather than merely follow local optimality conditions, to find the equilibrium offering the highest social welfare. There is usually considerable uncertainty about the amount of private investment that will accompany any level of protection, further complicating the government’s choice problem. We show that when deciding on the level of protection to provide now, the government must take account of the option value of increasing the level of protection in the future. We briefly examine but dismiss the value of rules of thumb, such as building for 1000-year floods or other rules that ignore benefits and costs." 

Two Green Links

Washington DC will soon make a major investment in cleaning up its rivers.  The details are provided here.  Such infrastructure investment takes serious $.   As more cities, ranging from Chicago to NYC to Boston to London to Seoul, have discovered that beauty is one of their main "golden geese" for attracting tourists and keeping the skilled amenity seekers happy, they have strong incentives to invest in "greenness".  This isn't hippie stuff but merely good business.  

UC Berkeley's Dan Kammen has a strong editorial in the SF Chronicle focused on solar investments.  He points out that solar installation creates five times more jobs than the investment of a similar capacity natural gas plant. I didn't know that.  He also returns to one of my favorite themes.

"Solar simply doesn't provide a lot of manufacturing jobs in any country, and the number is dwindling further with automation. That's why blocking imports is beside the point. The jobs of tens of thousands of Americans employed in the solar industry, however, rely on the supply of quality solar panels from many nations, including China.
China certainly should do a better job of reporting on its subsidy programs, in accordance with World Trade Organization requirements, and the U.S. government should demand such compliance. However, subsidy policies may have their place, as they do in the United States, to help build a strong, job-producing solar energy industry.
Even Sen. Jeff Merkley, D-Ore., who supports a petition to punish China for unfair trading practices, has acknowledged that punitive tariffs against Chinese solar panels would immediately result in job losses to American installers. Longer-term benefits are even less clear.
This raises the question of why the U.S. government would attempt to effectively pick technology winners by applying punitive tariffs against Chinese companies when what is needed is to encourage competition among all promising companies."

Dr. Kammen is a University of Chicago free trader!  We need more globalization and international trade in order to bring about the "green economy".  When I wrote about this subject for the NY Times blog, I received a lot of crazy comments.    Everyone should read my paper with Aparna Sawhney. on international trade in renewables equipment!

Tuesday, December 27, 2011

Electricity Demand in China

As China grows richer, electricity demand will rise.  Given that China's urbanites are buying cars and that China is a net importer of oil, it appears to be a reasonable home market strategy for China's powerful state to nudge forward the production of electric cars.  As this article discusses,  the grid operators in China anticipate that the rise of the electric car will further increase the demand for their services.

From an environmentalist's standpoint, they must "pick their poison".   From a carbon mitigation perspective, do they prefer Chinese cars to run on oil (and hence bid up the price of world oil and this may trigger innovation for more fuel efficient vehicles) or for Chinese cars to run on electricity generated by dirty coal fired power plants? Of course, the greens will prefer that the cars run on electricity created by renewables but we haven't reached that point on the cost curves yet.

With several co-authors, I recently published a paper on Chinese urbanite resource consumption using their 2006 National Survey.  For a copy of the paper, click here.  This paper was published in the Journal of Economic Geography in 2011.

Monday, December 26, 2011

The Wisdom of Crowds

You know that you are growing older when the obituary section is your favorite part of the newspaper.   Say what you want about the NY Times but it has a very solid obituary section.  When I was a 5th grader, we took a class trip to the NY Times and I was shocked that they already had written 80% of many leading living people's obituaries. I recall that they showed us the lead in for some baseball player who I admired.

Why do I tell you this?  Well, this obituary impressed me.     Mr. Farrell must have been a modest man. He knew that "he didn't know" what people wanted by the way of endings to Hollywood movies.  So, rather than taking a gamble and allowing the artists who made the movie to choose their ending; he polled actual movie viewers to see whether they liked an ending and if the focus groups said "no" -- he nudged the movie makers to adjust the movie. In the case of Fatal Attraction, this worked perfectly (in terms of making $).  While I had never heard of Mr. Farrell, he embodied a key element that we all need --- humbleness.  I am only pessimistic about those people who think they know but truly don't.   Those who don't know that they "don't know" will have much more trouble adapting in the face of change.

I can also report that Berkeley in late December is a delightful place to be. No rain this winter, and daily high temperature of around 65.  My basketball game is pretty good these days and my son is hitting jump shots from between the free throw line and the top of the key.  For a 10 year old kid, that isn't bad!  He is now wearing a shark tooth necklace and appears to be pretty cool.  He also now has a pair of sunglasses that allow him to make movies as he looks at you (there is a video camera in the sun glasses).  We are stimulating the economy.

I am trying to write something for the Journal of Economic Literature but I'm tired of talking about other people's work.  I am being nice and only saying nice things about everyone.  I'm trying to set an example for the rest of the profession.

Sunday, December 25, 2011

Lost in Translation?

I am making plans to visit Fudan University in Shanghai this summer.  To prepare for this trip, I enlisted Google to teach me a bit about its economics department.  Since I can't read Chinese, I have to rely on English translations and I found one here.  Permit me to quote the first 2 paragraphs and please read the 2nd paragraph which Dora and I both think is very funny.

"The School of Economics Fudan University consists of Department of Economics, Department of World Economics, Department of International Finance, Department of Public Economics, Department of Insurance, Research Institution of World Economics, Research Center for China Socialist Market Economy, Research Center for China Venture Capital, Fudan Research Center for Environmental Economy, Research Center for Geriatric Economics, Research Center for Economics of the real estate, etc.
The school has totally 138 faculties, among whom there are 34 professors and 42 associate professors. Not only does the school owns geriatric economists well-known by the world, but it owns young and middle-aged economists rising in the economics theory circles for the past few years, which made the school in leading position in the field of domestic economics."

We liked the words "geriatric" and "owns".  That is funny!   

As I have said many times, U.S universities should require mandatory retirement at age 65 and recall those faculty who are still hard at work.  If there is a life cycle productivity effect such that people do their best work before age 50 and then reduce the quantity and quality of their research output then nations who are hiring younger faculty and nudging out older faculty will have higher average research productivity.  If there are spillover effects that depend on your average colleague's quality, then these research universities with a younger active faculty will be more productive.  This implies that the U.S advantage over other nations in research productivity at our leading universities will shrink over time.  

Saturday, December 24, 2011

Long Run Trends in Government Employment

This book chapter taught me several facts.  Based on its Table 2.1, 3.9% of workers worked for government in 1900 and this percent grew to 6.7% in 1935, 15.1% in 1970 and shrunk to 14.1% by 1984.  The military is not included in these percentages.  Here is the break out of employment in 2010 by sector for state employees.  If I'm reading this BLS table correctly, roughly 17% of national employees work for government in the year 2010.   As government seeks to reduce its deficit, how many government jobs will be shed?

As federal, state and local government reduces its employment, who will bear the incidence of these declines?  Are center city residents more likely to work for government and local hospitals than suburban residents.  Are minorities more likely to hold these jobs?   This issue matters for public policy because cities such as Detroit face tough choices over how to reduce their deficits.  Mayor Bing is likely to turn to President Obama and HUD for some financing.  Will Republicans push back and say that local deficit reduction must be financed with reduced expenditure rather than increased Federal transfers?   Economists have examined public employment as a form of local redistribution. Here is a well known paper.  During this time of "Occupy Wall Street", I believe that this issue will arise again.

If center cities respond by raising their taxes, will we observe a new "Laffer Curve" as this will create tax flight as mobile skilled people and firms will suburbanize even faster?

Friday, December 23, 2011

2012 and Climate Change Adaptation

2012 will be an election year and in the Summer of 2012 there will be an intense focus on London and its Olympics and whether the Miami Heat will win a NBA title. Putting these issues to the side, I predict that in 2012 that there will start to be a serious discussion about climate change adaptation.  Articles such as this one by CNN will mushroom.  Where economists can inform this debate will be discussing whether free market capitalism will lead the charge in protecting us (both urbanites and farmers) from the expected and unexpected shocks caused by climate change.  To return to a key theme in economics, is the private sector and government intervention complements or substitutes in reducing our risk exposure?

In my Climatopolis book,  I argue that because information is a public good that government should specialize in funding new climate science work and then sharing this information using GIS maps and reports so that nobody can claim that they are unaware of the new risks they will face.  But, the free market plays a key role here. One person's misery is another person's opportunity.  As people become aware of the new risks they will face, some firms will step up and supply products and solutions to help people cope.  This is the evolutionary feature of capitalism.  After all, we only needed one Mark Zuckerberg to have Facebook.  We need a few entrepreneurs to step up a long a number of fronts such as;  air conditioning efficiency, renewable power generation, water desalination,  building design that minimizes risk of extreme heat and flooding.  We need new agricultural crops that are more resistant to drought and extreme climate conditions.  Are you betting against human ingenuity?  I don't.  We have enough lead time here and there is enough profit to be earned by stepping up and addressing these issues that I'm quite optimistic that we will adapt to our hotter future.

I would love to see us reduce our GHG emissions now but when I travel in China --- I see a lot of gas.  It is time to start thinking hard about adaptation.

Thursday, December 22, 2011

Localized Externalities and the Coase Theorem

For those micro teachers seeking to spice up their classes, consider teaching this case.   Apparently, there are some obese people who fly in the coach section of airplanes.  If such an individual sits in a middle seat next to you, what happens next?  This article explores the "spillover" effects.   It raises a broader issue of how we share common space.  What are your rights?  When has someone intruded on "your" space?

Wednesday, December 21, 2011

Preparing for a Busy 2012

2011 has been a good year but I hope to get more work done in 2012.  In calendar year 2011, I taught 5 courses.  Doesn't that sound like a heavy teaching load for an old guy?  I taught a MBA course twice (Real Estate Finance), undergraduate environmental economics (twice), and a seminar on California Sustainability Challenges.

2012 will be a year of travel.  I need to write my plans down somewhere so it might as well be here;

January 2012;   Chicago  and later  Duke and World Bank
February 2012;   UC Davis and later New York City
March 2012;    Manila
April 2012;    Santa Barbara  and maybe go to Merced
May 2012;    Illinois and Kansas City  and Stanford
June 2012:    Budapest
July 2012;    Singapore and Shanghai,  Boston and New York City
August 2012;   Berkeley

If you know of somewhere else that I'm supposed to be, please email me!

In 2012,  Siqi Zheng and I will complete our China manuscript and I also have big plans on a number of other research fronts.   You won't see me teaching 5 classes in 2012!

If you insist on wanting to see me teach, then you can curb that urge by watching this.

Monday, December 19, 2011

How Will California Achieve its 33% RPS Goal?

Today, California's electricity is mainly generated using natural gas.  By the year 2020, AB32 legislation requires that 33% of the state's power come from renewables such as wind and solar.  This is the renewable portfolio standard (RPS).  For years, I have wondered what will be the cost of achieving this ambitious goal.  In recent days, the CEC has released documents from a recent conference on the RPS.  As usual, I see lots of talented engineers presenting stuff but unless I'm mistaken I don't see any economic analysis.  Is that puzzling?  Why should economists be involved?   I would think that economists could model the likely impact on electricity pricing from substituting to renewables.  I would think that residential, industrial and commercial consumers will care about such a prediction.  In terms of formal economics, what does the state's supply curve for power look like?  How binding a constraint is the 33% RPS?  In english, what would be the price per kWh if we continue to use natural gas as the energy source versus what would the price be under the 33% RPS?  For an optimistic opinion on this issue read this.

From an economic science point of view, this big green push offers an excellent test of the "learning by doing" hypothesis.  Does the average cost per kWh of renewable power decline with more cumulative production?  As the industry matures, is there more investment in renewables?  Is Adam Smith's pin factory of specialization taking place here?  

Also don't forget about international trade and globalization.  As the United States imports renewables equipment from India and China, our costs of installing such completed systems decline.  MIT's Technology Review has published a nice piece on this. For some facts about recent international trade patterns, read my paper joint with Aparna Sawhney.

Here is our sexy abstract:

We track US imports of advanced technology wind and solar power-generation equipment from a panel of countries during 1989-2010, and examine the determining factors including sector-specific US FDI outflow, country size, and domestic wind and solar power generation. Differentiating between the core high-tech and the balance of system equipment, we find US imports of the both categories have grown at significantly higher rate from the relatively poorer countries, particularly China and India. US FDI is found to play a significant positive role in the exports of high-tech equipment from both rich and poor countries, especially for the balance of system equipment. For the core wind and solar equipment, we find domestic renewable power generation played a significant positive role, and the effect is more pronounced for the rich countries as well as China compared to other poor countries.

and here is a well written paragraph from the paper's introduction:

There is a certain irony that trade with developing countries is accelerating the development of the “green economy”.  The trade and environment literature has studied the conditions such that poor nations would be pollution havens for rich countries as dirty factories could escape tight regulation in rich countries by re-locating to poorer nations (Copeland and Taylor 2003, 2004).   This literature emphasizes that the location of dirty economic activity will be determined by both factor endowments and regulatory intensity.  
In the case of “green energy” trade, the poorer South is emerging as a key provider of cheap equipment for renewable-power generation to the rich North for its production and consumption of clean energy.  If clean energy prices decline then they are more likely to induce a composition shift as nations choose to substitute them for fossil fuel generated electricity (i.e coal and natural gas).   Such a composition shift could significantly reduce national greenhouse gas emissions associated with power generation.   

I hope you agree that I should teach less so that I can devote more time to writing such witty prose?

On an unrelated note, I will soon be in Berkeley, CA to restore my liberal/green street credibility.  If you want to see me, look for me at Strada.

Sunday, December 18, 2011

Are Economists Good People?

A funny economist has written a funny OP-ED for the NY Times.  You can read Yoram B's piece here.  He returns to the old question of whether jerks self select and choose to be economists or does studying economics transform angels into pedantic Darth Vaders?

Permit me to defend my wife and myself.    Economics makes you a better strategic thinker.  You begin to anticipate how others will respond to a particular stimulus.  Such an appreciation for unintended consequences distinguishes us from other thinkers.  We also have a growing understanding of disentangling causation from correlation.  We are quite sophisticated with respect to how we crunch data to tease out "freakonomic" facts. Both of these are useful skills.  The world faces so many problems that some people want to believe in the magic bullets that policy entrepreneurs are peddling.  Yes, economists are a cynical crew and idealism is refreshing but I'm confident that naive idealism will only cause trouble and abuse.  Be prepared!

Our intense focus on the role of incentives and establishing an agenda for identifying "causal effects" should score us a lot of points with the general public.

Yes, economists free ride and many of us prefer to be rewarded with monetary compensation rather than "social recognition" for our good deeds but  Economists are a diverse group spanning both the political left and right.  If you want to see some economists who care, then visit this webpage.

Saturday, December 17, 2011

A Link on Climate Change Adaptation

I am not surprised that more and more reasonable people are starting to think about climate change adaptation.  Such thoughts begin to offer an escape route helping us to sidestep many of the challenges that climate change will pose.  After all, if you can anticipate a threat (even if the threat's impacts are vague and uncertain), you can begin to set up a series of options that will offer you flexibility in responding as you learn about the emerging threat.  So, link #1  is from a California article highlighting what my state is doing to begin to cope with the new challenges (thanks to Neil Lessem for this link).

Where I differ from many other commentators is in my belief that the free market (both individuals and firms) rather than governments will be the leaders in helping us to adapt.  Local governments will only take such actions if their leaders fear that there could be a brain drain and a tax base loss due to climate change under business as usual strategies.  But, note that it is the threat of exit by both firms and skilled individuals that will nudge politicians to act.     For my two pager sketching my optimistic free market view on adaptation read this.

Thursday, December 15, 2011

The View from Honolulu

Have you ever wondered what is the view from Room #1421 at the Ala Moana Hotel in downtown Honolulu?   From my balcony, I could see "Soviet Style" architecture and the Pacific Ocean.  While Honolulu is quite attractive, I am a pinch surprised that this coastal community hasn't invested that much in new "nice" buildings.  I had assumed that it would be like Santa Monica in LA but this wasn't the case.  You can judge for yourself.

Why have I been in Honolulu for the last 3 days?  Well, that's what faculty do.  I helped my friends to organize an Asian Development Bank conference to discuss environmental and urban economics and we chose to hold it here.  I had never visited Hawaii before.

When I return to LA, I will actually do some paper grading and then will root for my son's robot team as they compete this Saturday in the Championships.

Monday, December 12, 2011

Adaptation Discussion at Durban

This 3 page memo is a promising step for having an honest discussion about climate change adaptation.  To repeat my long held view.  Climate change is a real challenge that is exacerbated by economic growth in population and per-capita income.  The world free rider problem precludes a serious anti-carbon incentive from being adopted and so GHG emissions will continue to rise.  Adaptation  is crucial and the magic of capitalism, freedom of choice, competition and innovation will help us to adapt to many of the challenges that climate change will pose.  We are not passive victims and we are not morons.  Instead, necessity is the mother of invention.

Now that I've put my cards on the table, let's look at the Durban 3 pager's first 7 points.

1. Mainstreaming adaptation as a key informant of all local government development planning

We commit to climate change adaptation as a key consideration in all key local government development strategies and spatial development frameworks. Institutionally climate change should be located in a high level integrating office such as the Executive Mayor or City Manager’s office of the local authority.

2. Understand climate risks through conducting impact and vulnerability assessments

We will undertake local level impact and vulnerability assessments to determine the exposure, sensitivity and adaptive capacity of human and natural systems as guided by best available science and traditional knowledge.

3. Prepare and implement integrated, inclusive and long-term local adaptation strategies designed to reduce vulnerability

We will prepare evidence-based, locally relevant adaptation strategies and will develop and adopt measures to ensure that the objectives of these strategies are implemented, monitored evaluated and mainstreamed into statutory government planning processes. This planning will guide the development of infrastructure and investments that are climate-smart and environmentally sustainable, and that ensure that urban and rural development provide opportunities for adaptive, sustainable development.

4. Ensure that adaptation strategies are aligned with mitigation strategies

We will ensure that adaptation actions taken are in synergy with mitigation actions in order to promote cost-effective and sustainable solutions, and limit increases in the production and release of greenhouse gases. Similarly, we will ensure that mitigation activities do not increase vulnerability or result in mal-adaptation.

5. Promote the use of adaptation that recognises the needs of vulnerable communities and ensures sustainable local economic development

We will ensure that the use of Community Based Adaptation (CBA) is prioritised in order to improve the quality of life in our communities, including the urban and rural poor, who are vulnerable to the harmful impacts of climate change, especially vulnerable groups such as women, children, youth, the elderly, physically and mentally challenged, disadvantaged minority and indigenous populations. We will engage our citizens in our actions to address climate change, and will support proposals from civil society that efficiently and cost-effectively encourage changes in lifestyles that contribute to our local climate actions. We will assess climate adaptation strategies for compatibility with local economic development strategies.

6. Prioritise the role of functioning ecosystems as core municipal green infrastructure

We will ensure that sustainable management, conservation and restoration of ecosystems and the related ecosystem services are used to enable citizens to adapt to the impacts of climate change, which is known as Ecosystem-based Adaptation (EBA). We will strive to maintain and, enhance resilience and reduce the vulnerability of ecosystems and people to the adverse impacts of climate change.

7. Seek the creation of direct access to funding opportunities

We will build our climate financing through generating funds internally and through seeking the development of innovative financing mechanisms that enable direct access to national and international funding for our registered adaptation actions. We support the creation of a local adaptation thematic window in the Green Climate Fund, and in so doing we will seek the support of national governments and multilateral funding institutions.

This all looks good to me but it is vague.  I see no discussion of the synergies between the private sector and government activities listed above. I fully support the role of government as trusted information provider.  As I talk about in Climatopolis, updated GIS maps of hazards and pollution levels will play a key role in helping individuals and firms and governments to make "better" choices over a host of margins.  As I argue in my book, cities that do not prepare to adapt will suffer from inevitable climate change blows and these shocks to their quality of life will cause a reduction in home prices and the flight of the skilled who seek out quality of life. As these cities lose their skilled, they will suffer the same fate as Detroit and Cleveland.  Anticipating this "brain drain", wise city officials will have strong incentives to adapt.

The Ultimate Field Experiment: New Rules in Honduras and the Rise of the Charter City

Who volunteers to be a guinea pig?   Common sense suggests that you must be desperate for a cure (to sign up for a risky new drug) or committed to the cause (such as California unilaterally pursuing reducing its GHG emissions sharply under AB32).  This week this Economist article about Charter Cities in Honduras highlights another guinea pig path.  

When I first started graduate school way back in 1988, I loved Tom Sargent's intuitive discussions of rational expectations focused on the "rules of the game".  If the rules of the game change, then optimal behavior changes.  For example, if the NFL switched over to Canadian Football rules that you only have 3 downs to achieve a first down, then more teams would punt on 3rd down.  I understood this point and would think about it back in 1988. See page 9 of this paper.

But, back then, there wasn't a subtle discussion of where the "rules of the game" came from and if the current rules are bad,  why the rules don't change to something better?  The field of political economy hadn't really made much progress up until that point.  Perhaps the old rules had been "optimal" at an earlier time but the economy has evolved so that the old rules need to be updated? 

I think I understood that there would always be incumbents who benefit from the status quo rules but I optimistically assumed that if a Hicksian Pareto Improvement were possible through new rules (i.e if the total economy would grow under the new rules then the losers could be compensated for giving up their veto to change the rules), then the economy would move to the efficient equilibrium.  How much of poverty in the developing world is due to "bad rules"?  To answer this question, we need some nation to take the "treatment" of switching rules at least for some piece of its geographical territory and that is what a "charter city" will be.

I am excited that Honduras may launch this experiment.  There is an information externality here.  The rest of the world's poor nations should give Honduras a payment for launching this experiment.  Why? The lessons learned (especially about what works) can be replicated elsewhere.  Honduras appears to be volunteering for this "guinea pig" role. I salute them but they should ask for a side payment.

Saturday, December 10, 2011


I may have forgotten what Ricardo taught us about comparative advantage.   Why doesn't Michael Jordan mow his own lawn?  Why is Matthew Kahn doing his own grading?  Maybe the answer is comparative advantage.  As the University of California has less cash these days, there are fewer teaching assistants for courses.  My 75 student environmental economics class didn't merit a graduate teaching assistant or reader.   Fortunately, I was able to hire two outstanding undergraduates to hold office hours with students (I also hold my own office hours) but I must handle all of the grading.  Since I ask "Becker style" questions on exams, students write out long answers that must be read by somebody to see if they merit any points. 

In my humble opinion, the class was a success. I gave 19 environmental economics lectures and you can look them over here.  For the first time in my 20 year career as a teacher, I didn't give one bad lecture!

Now that I've finished my grading, I am exhausted and will go to Hawaii next week to recover.  I've learned a good lesson this quarter, if I teach this class again at UCLA --- I will cap the enrollment or make sure that some lucky Ph.D. student has the chance to work with me in co-teaching this class.

Thursday, December 08, 2011

Pollution Havens and International Trade in Lead

When we dispose of products such as computers and car batteries, what becomes of them?  The NY Times reports on another version of the pollution havens hypothesis.  Our car batteries go to Mexico and the lead is plucked from them.  This work increases exposure to some nasty stuff.   I have mentioned Jessica Reyes' work on lead exposure many times.   To my surprise, the long NY Times piece doesn't mention the 1990s Larry Summers memo on a similar topic.   Should exports of used batteries be illegal?  Or, do you support encouraging people in developing countries to take on risky, relatively high paid work?  Can we figure out whether these workers are aware of the short term and long term health implications of working with batteries? If these workers are not informed about the true risks, does your answer change?   The Obama team embraces benevolent paternalism so how should it handle this issue?

The real issue that I believe the NY Times wants discussed is endogenous innovation.  Imagine if the U.S didn't have the option of sending toxic trash to LDCs. In this case, where we would know that we are "stuck with the trash", we would simultaneously nudge our engineers to engineer a substitute that is less toxic and we would also develop end of life cycle ways to recycle valuable resources.   When we know that we can "outsource the problem", we have less of an incentive to innovate and come up with a green solution.   The NY Times appears to believe that necessity is the mother of invention and that globalization eases the necessity of finding a novel solution.

Wednesday, December 07, 2011

Adapting to Wacky Weather

Optimists of the world unite.  This article talks about cities making capital investments in  "winter weather equipment, which will help better prepare the roads for travel when the weather hits. Dallas, Atlanta and Chicago have all readied themselves for the upcoming season by purchasing new snow plows and other equipment. "  Doesn't this sound like learning from experience and investment under uncertainty?  This is the "small ball" of adaptation.   Now, will London's airports buy some snow plows?  I believe that the answer is "yes".  Capitalism offers many products for adapting to new weather patterns.  Where there is demand, supply will follow.

Economic theory predicts that we do not make the same mistake twice.  We learn from past mistakes and change our behavior to protect ourselves from scenarios such as wacky weather that become more likely because of climate change.  When we know "that we do not know" what extreme weather will be, we purchase certain types of "insurance" such as having extra plowing equipment in case an extreme snow storm takes place.  Be prepared!  While adaptation is not costless, this forward looking approach (armed with the financial resources to finance the equipment purchases) helps to protect us.  

Doom and gloomers are implicitly adherents of behavioral economics.  If we are myopic and we do not update our prior probability assessments then we can certainly be blindsided by climate change but as this Wacky Weather example highlights, investment patterns are changing in anticipation of the "new normal".  Again, this is the logic of Climatopolis!

Induced Innovation

The NY Times reports that for profit drug companies smell new opportunities to sell pills in Asia and are responding by increasing their R&D to make new pills targeted to diseases that people in Asia are more likely to suffer from.  "Merck and its rivals have a better chance of success fighting diseases like hepatitis B and esophageal cancer — both far more common in China than elsewhere — if they conduct research and trials on the ground."  My guess is that China will allow clinical trials that the USA might block.  

Note that this example supports the core claims of Acemoglu and Linn's important 2004 QJE paper.  I point to this line of work because I hope that sick people in Asia enjoy increased access to drugs that help them but in addition this example highlights how capitalism evolves to provide us with new products that we need.  This is a key idea in my climate change adaptation Climatopolis work.   Many environmentalists are afraid to engage with the idea that capitalism is a force that can protect us from environmental harm and reduce the core source of the harm.   At UCLA on Monday, I gave a talk about my new work on China.  I continue to be surprised by my non-economist faculty's ambivalence about capitalism.  Who signs our checks at UCLA?  The answer is Adam Smith!  The market place has generated the $ to support excellent research universities.  

Smoggy Beijing

Every two months, the NY Times publishes an article about China's environmental pollution challenges.  Today, there is a piece  about recent high levels of air pollution in Beijing.   Permit me to say a few things.  The article hints that the powerful Chinese State intentionally measures the "wrong thing" that it measures PM10 while the real threat to public health is PM2.5.   While this statement may be true,  it is important to note that the US EPA started monitoring PM10 in 1988 and switched to monitoring PM2.5 in 1999 (see this).   Research studies have documented that the correlation between ambient PM10 and PM2.5 is between .5 and .9 (see this study  from Greece and this study from Thailand).   My friends in Beijing have told me that the U.S Embassy (where the "independent" PM2.5 readings are being taken) is in the center of the city near a highway.  Both of these factors will lead to elevated readings.  The Center City features a higher population density and proximity to roads will lead to hot spots of local particulate levels.    So, the NY Times needs to be subtle about how "Beijing Pollution" is measured. Do you take a spatial average?  A population weighted average?  Or do, you measure at the most polluted geographical point in the city?

I read the NY Times article through an optimistic lens. The growing middle class are concerned about environmental issues and are demanding government attention.  This is how "democracy" works.  I predict that we will see environmental progress in Beijing and other Chinese cities in the near future.

Tuesday, December 06, 2011

Carbon Intensity Reduction in China?

Why is China setting out credible energy intensity reduction targets?   Have they been motivated by pep talks by Tom Friedman and Al Gore?  I don't believe that this will cut global GHG emissions but it will slow the growth of global GHG emissions and it will accelerate the introduction and diffusion of new technologies that will break the link between GHG emissions and economic growth.  Perhaps we aren't doomed.  We still don't fully understand why China is offering the world such a "gift".  Does Beijing value losing the tag of being a global green villain?  Are their leaders concerned that Peak Oil is a real threat and they want to have an implicit insurance policy in case the ecological economists are correct?

Monday, December 05, 2011

Does China Offer a Better Quality of Life than the United States?

Professional athletes market their skills on an international market. Such a market offers a revealed preference test of which nation is the best.   Stephon Marbury has voted with his feet and claims that China is the place to be.  Now, a cynic might ask what basketball wage he would earn in the United States but as Mr. Marbury compares the bundle of China's wages and quality of life vs. what he would in the USA, he claims that he prefers the East.   Economists are increasingly studying the migration patterns of superstar athletes.  This study offers some international "Laffer Curve" evidence of how stars respond to marginal tax rates and seek out the tax havens.

Sunday, December 04, 2011

Who Occupies Malibu?

The LA Times provides clues here.  I don't know of any UCLA faculty who live there.  Road speeds are too slow in LA.  You can only move around at roughly 15 MPH so it is quite frustrating to be in "close" proximity to some destination but that it takes too much time to actually get there.

This is finals week at UCLA and I have been hard pressed to dream up new questions. I am too old to be writing exams.   I write challenging exams that Gary Becker would approve of.  Students are astonished that they can't find answers to these questions in their lecture notes or on Google.  They actually have to sit and think!  My, my.

Now that UCLA has no $, I don't have graduate TAs for my classes so I am writing and grading my own exams. This may not be the best use of my time?  Next year, I think I will use my own research accounts to hire graduate students to work for me but I will need to cover Ph.D. student tuition (which is usually waived for those who TA for an assigned class). The total cost of hiring a graduate student for a single quarter could be $12,000. That's a pretty serious 10 week expenditure for faculty to pay.

If I successfully grade all of these finals, I then will go to Hawaii, then Berkeley and then to Chicago.  Do those 3 locations have anything in common?  As I think back on 2011, I have been to some fun places this year.  In no particular order;   London, Beijing, Tianjin, Maastricht, Rome, Florence, Sienna, Pisa, New York City, Boston, Bozeman MT,  Washington DC, Denver, San Francisco, and LA.

The only good news for me is that fall 2011 was my tough teaching quarter.  I have plenty of research to do in 2012 and I know that my co-authors are waiting for me to deliver.

Saturday, December 03, 2011

Does Google Books Offer Too Much Intellectual Property?

Click here to read huge chunks of Dr. Glaeser's Triumph of the City for free.  Click here to read huge chunks of my Climatopolis for free (chapters 1,3,6 and 7).  I'm hoping that my friends at Google can explain how this is legal?  Could the publishers of these books really agree to this deal?  I like the idea that everyone on the web can read 40% of my book for free but can that be a $ maker for the publishers?

Friday, December 02, 2011

China's Future Green Cities

On Monday, I will be speaking at lunch time at my UCLA Institute of the Environment about my China research.  Over the last five years,  Professor Siqi Zheng of Tsinghua University and I have written seven papers about environmental quality in China's cities.   We are now starting to write a book about this topic.

If you want to prepare for my lunch time talk, please read the following.

1.  This
2.  This
3.  This
4.  This
5.  This
6.  This

Mapping the UCLA Anderson School's Global Impact

Maps can be powerful tools for conveying information.  This map  highlights that the UCLA Anderson School of Management has had an international impact.  I like how it nudges people to participate in this social network by nominating themselves or a friend to provide information about this new person's accomplishments.  I'm sure that this creates a domino effect as more people sign up.

I am a professor at the Anderson School.  If I could survey, all of our graduates over the last 30 years and learn their current salary and work location, it would interest me to test for nation and city size effects.  Intuitively, in which nations does the same degree (an Anderson MBA) offer the highest payoff and how does this payoff vary as a function of economic sector (i.e finance vs. consulting vs. industry) and city size.   For those nations and industries with high "economic returns", is it the case that new Anderson graduates are moving to those cities?  So, I am imagining an economic study that examines both the geographic migration decision of MBAs and their earnings in the city and industry they choose to work in.

Labor economists always face the challenge that in the typical data set, we may observe that a person has a "college degree" or a "graduate degree" but we do not know from what type of school.  If you focus on a specific population (those with an Anderson MBA), this would help to measure the returns to human capital.

For an example of the type of study I envision, here is a very nice paper that uses survey data from the University of Chicago's Booth School of Business.    They have a 31% response rate to their survey.  Relative to the typical survey, that is an outstanding response rate but the usual concerns about bias arise.  I would need the Dean of the Business School to use her influence to help me have a 100% response rate from the Universe of Anderson graduates!