This report claims that Californians who live in new homes use 57% of their water outside.  If we now face a drought, wouldn't basic supply and demand suggest that we consider adaptation strategies to reduce our demand?   In this picture below, I present a Westwood home with no "real grass".  This home has ripped out the grass and installed what appears to be a miniature golf astro turf substance.  They must be saving water by doing so.  Yes, this is tacky but this is climate change adaptation and I like it.



Many non-economists implicitly assume that all demand curves are perfectly inelastic. In English this means, that consumers do not change their behavior as the price goes up.   It is time that we tested "the law of demand".   Give the price system a chance, and we will enjoy a smooth adaptation path to handling climate change in the Southwest.  

I have learned about the power of inertia the hard way.  I often travel abroad so when I travel to exotic places I call up my cell phone carrier (T-Mobile) to place me on the international rate category.  I always tell them the dates when I'm leaving the USA and returning home.  I had assumed that my cell phone company would start my international rate when I leave and end it when I return.  This assumption turns out to be false. T-Mobile earns more $ from me (roughly $20 a month) when I'm on the international rate and once I was on it, this company was happy to keep me on that rate.  I had falsely assumed that this company switches me off the plan when I return to the U.S (and they know the date I return and I'm 99% sure I told them to stop the plan when I returned).  I pay my bill using direct pay but in the monthly statement, I saw that my monthly bill was roughly $20 more than what I expect but until I called T-Mobile I didn't connect the dots concerning my being billed for the International deal when I was in the USA.

So, the interesting point here isn't that I'm a sucker.  The more interesting point is that there is a synergy between "direct pay" and the "opt out".   Since I wasn't writing a check each month, I didn't give much thought to really itemizing my cell phone bill and my International Plan was an explicit  "opt out".  How much windfall profit does T-Mobile earn from such hustles?   What other examples exist of this being billed for services we don't need in a user friendly way that doesn't draw explicit attention to it?

I am a victim.  Will Elizabeth Warren protect me?

UCLA is now filled with young, physically fit enthusiastic students walking (and jogging) around the campus.   As a not-young, not fit, cynical professor, I'm wondering who has the right attitude?   I'm now wondering whether the students are right and I am wrong.  With that thought in mind,  I am trying to change my game.   I plan to be kinder to people, to show up to some meetings and to try to do my job.  I have hired some talented undergrads to work for me as research assistants and I'm hopeful that they will nudge my work forward.  In the classroom, I will teach 4 classes this year and my goal is to make each of my lectures real good and memorable.

I'm now optimistic about UCLA's trajectory.  The School has made some very strong faculty hires in economics, public policy, urban planning, the Law School, and the Business School.  I would like to see more hiring at the senior faculty level but we need our endowment to grow to achieve this goal and I can't control that.   We are told that our leaders are effectively raising private $ and I will give them the benefit of the doubt.

UPDATE:  Read this obituary for BU's President John Silber .   He's my kind of University Leader.

We know that the pursuit of "green social status" has helped the sales of the Prius and solar panels but now the New York Times reports about vegan dining in Los Angeles and the role that celebrities play in making it hip and thus creating a bandwagon effect.

A Quote:

Have you read this new 594 page report by the IPCC?  This volunteer crew writes updated reports about what we know and don't know about climate change's causes and consequences.   The media such as the New York Times pay careful attention to what these reports say.  This crew has even won a Nobel Peace Prize! For those of you who are too lazy to read a 594 single spaced report, here is the executive summary.

The 594 page report cites roughly 4,000 papers but by my crude calculation only 5 of them were published by economists in economics journals.   Yes, my 2005 RESTAT paper is cited on page 282 but that doesn't make me feel any better.   Are you telling me that 20 years of economics research has created less than (5/4000) = .12% of the literature on this subject?

There appears to be a strange bias going on here.  Is it politically motivated?  Take a look at this roster of environmental economists at NBER.  Roughly 25% of this group have worked on topics that are relevant to the issues of risk exposure and self protection and political economy discussed throughout the IPCC report.

Take a look at the U.S authors associated with this IPCC report. They are listed on page 552.  Howard Kunreuther of Wharton is the only economist that I have heard of on this list.  For the rest of the hundreds of authors listed, does this group think highly of economists?  The answer appears to be "no" based on their citation trail.   Why?  Is it our belief that people respond to incentives and form expectations of the future to pursue their own goals?  Is it our fondness for free markets and our focus on measuring the unintended consequences of government policy?

UPDATE:  I suggest that there are at least 40 papers published in the Journal of Risk and Uncertainty alone that would merit citation in the IPCC Report.

As China and India seek to keep their recent economic growth rolling will their political leaders embrace pro-growth policies such as allowing foreign direct investment in India and in the case of China shrinking subsidies for State Owned Enterprises?    Hsieh and Klenow document  large total factor productivity differentials across manufacturing plants in China.  Here is a direct quote from their paper:


"For example, imagine an economy with two firms that have identical
technologies but in which the firm with political connections benefits from subsidized
credit (say from a state-owned bank) and the other firm (without political connections)
can only borrow at high interest rates from informal financial markets.  Assuming that
both firms equate the marginal product of capital with the interest rate, the marginal
product of capital of the firm with access to subsidized credit will be lower than the
marginal product of capital of the firm that only has access to informal financial markets.
This is a clear case of capital misallocation: aggregate output would be higher if capital
was reallocated from the firm with a low marginal product of capital to the firm with a
high marginal product of capital.  The misallocation of capital results in low aggregate
output per worker and TFP."

Note that this is a static example where the two firms have identical technologies.  In the "real world", when firms face competition they make costly investments to increase their efficiency.  Consider an extension of the Hsieh and Klenow discussion above in which "connected firms" do not bother to make such efficiency investments because they know that their connections to government provides easy access to special treatment.  In this case, the non-connected firms may give up and not make sunk investments to achieve efficiency because they know that they can't compete with the connected firms.  In such a setting, industries will under-invest in innovation a dynamic effect and in then in each round of this game; capital will be misallocated for the reasons that are discussed above.  The net effect is bad macro performance.

To return to the title of this blog, during boom times the State can claim that all is fine and the favoritism isn't costly (and they may deny that it is even taking place).  During bad times, such inefficiency becomes costly and may prolong the recession itself. In this sense, the fear of recession can act to purge inefficient policies that simply redistribute to connected firms.

Have you seen this list that names names of which companies will have to participate in California's nascent carbon cap and trade market?  I don't see my name mentioned but I still plan to buy some permits.  I hold a diversified portfolio.

A young structural microeconomist might want to ask the following question; for each of the companies listed above how will they respond to the new regulation?  Will they simply pay the market price of the permits?  Will they innovate?  Will they run to Texas?  In a diverse world where firms differ with respect to their ability to reduce their emissions,how costly is regulation?  Will new green consultant jobs appear because these firms will now seek to increase their energy efficiency and will team hire engineers and economists to work together to get rid of the waste?  Could the Porter Hypothesis turn out to be true?   Or do you believe that California has gone nuts as it embraces "Free market environmentalism"?

I'm excited about this experiment and this one of the reasons I continue to live in California.  When the excitement ends, we will move to China.   That's a nation where the students study hard and I like that.

UCLA is about to learn an economics lesson in revenue generation at research hospitals .  The LA Times reports that UCLA's and Cedar-Sinai are being cut out of public health insurance plans in the City of LA

Can a bullet train through farm country help to reinvent California?  Will the owners of the land near the bullet train stations become rich?  Will Southwest's stock price plummet as guys like me substitute from plane to train to go from LA to Northern California?  I realize that every journey starts with a first step but these first 65 miles are expensive.  All those who support this train should be required to ride it enough trips so that the average cost per mile of use per passenger is less than that of a new Mercedes.

So, suppose this train costs $100 billion dollars.

Suppose that 5 million people ride it a year and the train lives for 20 years.    Suppose that the average ride is 150 miles.   Assuming the interest rate is 0% and there is no maintenance investment for these trains then the average cost per passenger mile over the life of this train  =  100 billion/(100 million*150) =  1000/150 = 6.66.

Suppose that you buy a $100,000 Mercedes and you alone drive it 100,000 miles.  You must buy gas at $4 a gallon and if the vehicle achieves 25 MPG then you will need $16,000 in gas.   The average cost per passenger mile = 1.16 = 116000/100000.    

So the Bullet train's cost is 6.66 times higher than the Mercedes.  Think about it!

This is the challenge that the train faces.  For my loyal readers, what do you predict will be the ridership per year?   There are 365 days in a year.   Do you believe that more than 13,900 people will ride it a day?  

The WSJ reports that  General Electric just ran an experiment in which it sharply increased the medical deductible that its workers have to pay for health care.  Here is the key quote; "In the first two years after the plan went into effect, use of advanced imaging including MRIs and CT scans has dropped by as much as a quarter, as covered employees' overall use of health services fell, according to the company."

The CEO of General Electric could publish this in the QJE?   

The article goes on to say that GE as a company has a problem because as other private companies raise their medical deductibles demand for MRI and CT Scans will decline.  GE sells these devices and thus will suffer a profit loss from the aggregate change in demand for its high tech services.  

So, this article has two pieces of interesting economics.  1. Demand curves do slope down!  2.  Health expenditure is a cost for some firms and represents revenue for other firms so changes in health care demand due to shifting incentives will have wide reaching effects on major companies.  This is general equilibrium at work!