USC's Price School was kind enough to invite me to give a speech in late January 2012 about China's Future Green Cities.   Here is the YouTube Video.  At first, I tried to be dignified but after a while I start to crack a number of pretty good jokes.  

Forget the 1% and OWS.  The new key number in life for the people of Los Angeles is 3%.   In Los Angeles, it is easy to evade paying for riding the subway.  Turnstiles are unlocked, security is lax and commuters often hop over or pass through undetected (source).    Why has the LA Metro chosen not to invest in the basic public transit infrastructure (such as monitoring turnstiles) that New Yorkers take for granted?  The answer is, as reported by the LA Times, that the Metro Authority assumes that only 3% of riders are evading fares!   Talk about the honor code!  Gary Becker wouldn't be surprised to find that there is more crime where there is less punishment.   The honor code is honorable but unreasonable.

During this time of public sector budget deficits, this "free pass" adds up to a fair bit of redistribution to those who evade. Who chooses to jump the turnstile?   This would be a good study that an economist and sociologist could write together.  I'm guessing that those who evade are more likely to be poor and young but I apologize for my profiling.   In LA, the base fare is $1.5 so if you evade twice a day and work 200 days a year, that's $600 that you have chosen not to give the city of LA as you enjoy its services for free.

For those economists who measure the CPI, I think that this price of transportation should be factored in.  If the poor are more likely to evade, then they face lower transportation prices than people who drive.  There is an old literature in economics studying whether there is less consumption inequality than there is income inequality.  This could happen if the poor face lower prices for goods.   Here is a paper by Cutler and Katz that rejects the claim that consumption inequality is lower than income inequality.

I'm sitting at a midtown Manhattan Starbucks waiting for a friend of mine who actually works.  Below, I supply a photo of some urban garbage that I found close to the Hilton Hotel on 53rd and 6th.


This image nudged me back to my work on "green cities" and density.  As you know, in several past papers I have extolled the green benefits of density.   But, this photo highlights that if NYC wasn't rich -- this densely populated place could be a real mess. I ran into this today as I walked through midtown.  Too many smoking people packed into too little space.  Maybe the makers of that 1960s sitcom Greenacres were correct?

But, $ can solve several problems.  This garbage must have been placed there with the intent of some well paid public sector worker picking it up and taking it somewhere.  NYC uses $ to create a moat between its waste and its consumption.  In many LDC cities, residents can't afford to do this.

As I lecture on "green cities", I interact with ecologists who argue that rich cities "artificially" green themselves by being able to export their trash.  If you had to sit in a dirty diaper all day, you might poop less!  I believe that this is their logic.  

As an economist who believes in free trade, I would point out that NYC has to pay for trash removal but I certainly agree that less trash would be produced if producers paid per bag versus facing a zero marginal cost incentive.

This topic popped up in  a lecture I gave to my UCLA freshmen last week.  I was facetiously arguing that they use too much toliet paper in the dorms because they face a zero marginal cost per sheet. I argued that a little person should sit there in the stall and sell the sheets for a positive price.  My brilliant freshmen looked puzzled and slightly disturbed. I told them that this logic would appear on their final and they should go think about it.

For those who care about my views on China's environmental future, you can read a funny USC article here.  I won't be blogging for several days because I'll be in NYC.  You may see me in midtown on Thursday or perhaps at the Federal Reserve on Friday.  I look forward to seeing you.


Here is a photo from my USC speech.  I promise that next time I will wear a necktie.

In 2011, Meyer and Renee Luskin made an extremely generous gift to UCLA.  Roughly 1/2 of this gift was allocated to the UCLA Luskin School of Public Policy.  This was a very wise investment.   The other 1/2 has been allocated to a new conference and guest center.

In this blog post, I would like to review some algebra focused on university investment of finite capital.

According to this website,  the project will have a total cost of 152 million in upfront construction.

Assuming it is finished on time, and UCLA construction usually has a 1 year lag, in 2016 there will be a new hotel with the following dimensions;  250 rooms that will be rented out at $185 each.  I will ignore the parking to keep the algebra simple.

SCENARIO #1

So, under best case assumptions -- let's assume that this hotel is fully booked 365 days a year;
total revenue = 365*250*185 =  $16.88 million a year
Let's assume a zero percent interest rate (again best case).
Let's assume that the hotel's worker all work for free so there are no labor costs
Let's assume that water and electricity are provided for free by LADWP
.
Under these assumptions the payback period for this investment =   152 million/16.88 =  9 years .


SCENARIO #2:

Let's assume that that the occupancy rate is 75% over the course of the entire year and that the interest rate is 3%. Let's assume that the hotels's workers are paid $2 million a year in total (I am making up this number).  I am also ignoring utility bills for electricity and water and security and insurance and maintenance.

Annual profits =  .75*16.88 - 2 =  10.66 and the payback period is now 18 years.

Assuming the hotel will live for 40 years , this works out to a 7% IRR  .  Interest rates are likely to go up sharply in the medium term as the U.S will pay a risk premium for borrowing for the deficit.

I look at this and say that UCLA should invest the generous Luskin gift in hiring new faculty.

Human capital rather than physical capital!

Who knew that Grist has a free markets libertarian streak?  This piece  by Tom Horton makes  a lot of sense.  He argues that sea level rise along the Virginia coastline should nudge an organized retreat and the growth of wetlands.  But, he notes that government disaster relief efforts offer insurance and will have perverse effects as we adapt to climate change. Here is a quote from the end of his piece.

"The only way many wetlands could adapt would be if adjacent uplands are left undeveloped to give the marshes a chance to migrate inland as the Bay rises, Stiles says. That’s a good reason to leave places like Bluff Point in conservation zones.

If you were the Earl of Grantham would you be a benevolent daddy to your large staff of serfs and house maids?  The NY Times has a very funny piece focused on altruism  and class at Downton Abbey.   Is Robert Crawley a special case?  We don't see him interacting with other members of his class and these other fat cats making fun of him for his progressive views.  He certainly didn't inherit his worldview from his mother (Maggie Smith).   In the first season, there is some discussion that he fought in a war with Mr. Bates.  Did this experience of being in combat with other men humble him? Did he learn that he was "no better" than other men who are not part of his 1%?

It doesn't appear that Robert Cawley believes in buying loyalty through paying efficiency wages.  

Is one of the goals of this show to nudge successful people into being more altruistic towards others?    In 2012, who is a gentleman for "altruistic reasons" versus to lower your taxes through deductions or to shine in the volunteer scene?   How many successful people give away $ anonymously and what types of people do this?

The Earl inherited his title and his American wife's daddy provided the cash.  In the U.S, more of the 1% have earned their $ themselves.  If we had known that Bill Gates would give away roughly 90% of his  fortune for his Gates Foundation, would we have rooted for the Federal government to break up Microsoft?  Put differently, if we can identify the "good billionaires" should we help them to thrive so that they maximize their income (through using their skills and muscle) and then wait for the later payout to society as they give their fortune away.  If billionaires could pre-commit to give away their fortune should this affect anti-trust policy?

The rise of micro blogs in China helps to educate the public about product issues such as the bullet train accident or the milk safety scandal and this reduces the likelihood that the State can suppress  information.  Such "sunshine" increases political accountability and thus improves the quality of governance.  The rise of twitter and other websites provide real time information so that the canonical case of the Simpsons and Blinkie the 3 eyed fish will be quickly discovered and the guilty party will be discovered.

In addition to these examples, we now have the case of the drones.   Such drones not only attack our enemies but when used on domestic missions can provide crucial information.  Here is  a quote from the article;

"For Patrick Egan, who represents small businesses and others in his work for the Remote Control Aerial Photography Association in Sacramento, the new law also can’t come fast enough. Until 2007, when the federal agency began warning against nonrecreational use of drones, he made up to $2,000 an hour using a drone to photograph crops for farmers, helping them spot irrigation leaks. “I’ve got organic farmers screaming for me to come out,” he said."


So, the drones  are flying around and they can cheaply spot wasted water . Once farmers are alerted of this, they go to the broken hose and repair it and this helps to reduce overall water consumption and this increases environmental sustainability.   Human ingenuity substitutes for natural capital.  This is a key theme!

In Rio De Janeiro, the following sequence has often taken place.  "It's the typical tale of doomed Carnival romance: Boy spots girl in the sweaty crush of a street party. Moments later, they're locked in a passionate embrace. Then the crowd surges, and the human tide wrenches them apart, forever." 
source      But, this story has a happy ending!  The NY Times reports that a new Internet blog has started that allows these "short term couples" to reunite.


This strikes me to be an excellent example of Gasper and Glaeser's point about Internet technology increasing the demand for cities.  Funny? 

Now that I've turned 46, young economists ask me "big think" questions about where I think the field of energy economics should go.  Since nobody reads this blog, I can confidently sketch an answer without causing any trouble.

Everybody knows that we are now accessing better micro data.  Read Ito's paper or my paper with Dora to get a sense of the great dependent variables that researchers are accessing.    The electric utilities have great data by account and by year/month and soon by account/year/month/day/hour on electricity expenditure and consumption.

The key question is what can researchers do to explain and predict the cross-sectional and time series patterns we see in household and firm level electricity consumption.

Here is my "favorites lists";

1. randomized experiments in which the researcher manipulates information and or prices to change the household's behavior.  We will see dozens of these papers soon.  These papers will be classic "treatment effect" papers as they will recover a short run average treatment effect.  If researchers have access to any household attributes and if they have large enough sample sizes, they will stratify the data to test for heterogeneous treatment effects with respect to attributes of either the structure or the decision maker.

2.  As time goes by, researchers will test for the persistence of these effects.

For those lucky researchers who find an impact of their "treatment", they will face the challenge of explaining why it took place.   In the short run, we know that households and firms face fewer behavioral margins they can move on.  For example, on hot days you can set your thermostat at 70 degrees rather than 64 degrees.  In the short run, you can't go out and buy a new HVAC system that is more energy efficient.

I'm especially interested in these lumpy durables decisions and whether the timing and choices that households make over these costly investments can be influenced by the treatment in question.

I think we need to do a much better job on understanding the "why" rather than merely having a long list of "causal effects".

3.  I'm interested in social learning --- in what types of communities can a "cascade" be set off such that by training a few influential people that they tell their friends and "so on and so on and so on" such that a beneficial contagion is set off.  In such settings, the benefits of a specific intervention are much larger than the private gains for those in the treatment group.  In fact, a researcher might find no "treatment effect" because the neighbors who weren't treated (the classic control group) are also "treated".

4.  For those households and firms that are "energy hogs" (i.e have a high residual electricity consumption holding observables constant),  do these decision makers continue to be "energy hogs" after they have
been treated with energy and price incentives intended to change their behavior?  If yes, then being a "energy hog" is a time invariant "fixed effect" rather than a "mistake".   Can we run experiments to sketch out the supply curve of energy conservation;  how high a price of electricity would it take for Rush Limbaugh to "go green"?   In Jim Heckman's language, this is identification at infinity. If we could randomly assign the price of electricity to households, how high would we need to make it to nudge even Rush to engage in energy conservation?


5.  If people are such inefficient managers of their home's electricity --- -what transaction costs preclude having professional firms step in to manage it for you?  Under what electricity prices and information technology would this vacuum be filled?  Same issue for commercial real estate and its energy efficiency level. Where are the professionals?  Under what economic incentives would young people specialize their human capital in "energy efficiency management"?   Do any MBA programs offer such classes?  Why is there no market for such people? Under what circumstances would there be a market?   Nick Bloom's paper is relevant here.

6.  We need better data supplied by the national government.  The EIA only has a few data sets on its main webpage.  The CBECS is way out of date.   In development economics, researchers at Yale are creating a platform in which baseline characteristics of households are collected and these data are widely available. Graduate students can then visit these areas and run a new experiment and merge their new information back to the baseline data. Energy economics needs a similar platform.