Wednesday, February 29, 2012

Engel Curves for Toilets

For those seeking a distinctive economics research question, consider the following topic.   China's rising demand for new toilets.  The NY Times has written an emotional piece about the paucity of toilets in China and the discomfort this causes for women who take more time than their male counterparts.  In the middle of the article, the reporter does acknowledge that China's rising income will increase its toilet access and so economic growth will solve this problem.   But, the reporter doesn't view this as a "sexy solution" so the reporter spends more of the article talking about "Occupy Toilets" as women have stormed into men's bathrooms to relieve themselves.   There are many other strategies that can be considered.  Don't forget the famous piece that Sports Illustrated published a few years ago about the "Stadium Pal".  Necessity is the mother of invention. For dudes that like to drink beer at baseball games but don't like to miss any of the game action , this device delivers!  To be serious for a second,  China's rising income growth will allow it to address many sanitation and public health challenges.  This will be a new theme as this blog evolves.

Parenting and Time Allocation: A Natural Experiment

My wife and I have one kid.  For the last 2 days, our 10 year old has gone off on a class trip with his classmates to some place in the LA mountains.  We have missed him but it has been an interesting experiment to learn about how we allocate our time towards him.  In his absence, with our time windfall, we have "reoptimized"!    We took a long walk to a good outdoor lunch place just South of Wilshire on Westwood Blvd.  I was in no rush to leave lunch because I knew that I would work late into the night.  Last night, I watched more of the LA Clippers game with the volume on because I knew it couldn't keep him up.  At dinner, my wife and I spoke about slightly more mature subject matter than when he is around but we did return again and again to him and what lessons he would learn from this trip concerning personal growth and independence and relying on one's own good judgement.  He went to a place where there is 14 inches of snow sitting there so we hope he was sharp enough to put on his thermals!  

Monday, February 27, 2012

China's Future Green Cities

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.  

Sunday, February 26, 2012

Los Angeles and the 3%

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.

Thursday, February 23, 2012

The Cost of Urban Density

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.

Tuesday, February 21, 2012

Boring Updates

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.

USC Price Peers Into China’s Environmental Future

Monday, February 20, 2012

Some UCLA Campus Investment Algebra

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.


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 .


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!

Moral Hazard and FEMA and Adapting to Sea Level Rise

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.

Ultimately the taxpayers will pick up the bills, bailing out places like Bluff Point as flooding escalates. Taxpayer-supported federal flood insurance programs, beach replenishment programs, and the Federal Emergency Management Agency are all seeing costs soar as coastal flooding escalates. Private insurers have already pulled back from many coastal areas."
As you know, I discuss this exact point at length in my Climatopolis.  We need to harness market forces to help us to adapt to climate change.  Well meaning government actions often have nasty unintended consequences and this is a classic example.    

Sunday, February 19, 2012

Downton Abbey and the Enlightened 1%

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?

Saturday, February 18, 2012

Improvements in Information Technology and Environmental Progress

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!

Face to Face Contact and the Internet are Complements: The Case of Brazil's Carnival

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? 

Friday, February 17, 2012

Big Think on the Future of Energy Economics

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.

Tuesday, February 14, 2012

A Comment on the Posner and Weyl Proposal for "FDA Screening" for New Financial Products

Two University of Chicago scholars have posted an intriguing paper for establishing future "rules of the game" to reduce the likelihood of future financial market meltdowns.

To quote Posner and Weyl; "We propose that when investors invent new financial products, they be forbidden to market them until they receive approval from a government agency designed along the lines of
the FDA, which screens pharmaceutical innovations. The agency would approve financial
products if and only if they satisfy a test for social utility. The test centers around a simple
market analysis: is the product likely to be used more often for hedging or speculation?"

What strikes me here is to not forget the difference between partial equilibrium and general equilibrium.  When the FDA examines a new drug to see if it will allow it to be sold to the public, it conducts clinical trials to study the direct effect of this drug on those who are suffering from a medical condition.  This "treatment effect" is a reduced form parameter that can be estimated using conventional methods.  The FDA can get away with conducting partial equilibrium analysis.  

In contrast, in the case of new financial instruments , if we are serious about evaluating the net benefits of allowing such new products then we need to write down a dynamic general equilibrium model of how the economy would evolve with and without the new set of contracts.  This must be an example of the theory of the second best because I have always thought that opening up new markets can only increase our well being because we can always choose not to participate in the market.   The "theory of the 2nd best" always strikes me to be a big mess where economists haven't made much progress.

Market Signals

My publisher has notified me that I can purchase hard copies of my Climatopolis book for $2.26 each.   This isn't good news in terms of my expected future royalties but demand curves do slope down. I am purchasing 200 copies and giving them away for free to my UCLA students.  So, this should provide you with a lower bound on how much I care about my students!  The only good news here is that Climatopolis continues to be talked about in unusual places such as the National Review and random Chinese blogs.

On the broad topic of climate change adaptation, I plan to do two things;

1.  I will be writing a historical migration paper with Leah Boustan and Paul Rhode on how U.S migrants responded to past disasters.

2.  I plan to write a short overview paper listing the open micro economic research agenda (both in terms of reduced form slop and fancier structural work) on how to pin down the costs of climate adaptation.  

Monday, February 13, 2012

The Keystone Pipeline and the Futility of "Green" Boycotts

An interesting debate is playing out between the NY Times Joe Nocera and Joe Romm and friends.  You can read the details here.  I would like to add one simple point.  When has a boycott succeeded?   If Canada doesn't sell us their fossil fuel, will it really sit in the ground and not be consumed?   Global GHG emissions would be lower if such natural resources weren't tapped.  This is really an issue of transportation costs and economic incidence.  If the pipeline had been built connecting Alberta, Canada to U.S consumer destinations, what would have been the gains to trade?  In the absence of this pipeline, will this natural resource now be shipped to Asia?  At what transportation cost and what are the gains to trade?  So, does not building the pipeline have a causal effect on the dirty resource staying in the ground?  China smells an arbitrage opportunity here and is stepping in.  Have well meaning greens defended their "line in the sand" or have they merely diverted oil that will be consumed anyway?  World trade poses a challenge to the boycotters.    This is a classic example of leakage and represents a reason why I wrote my climate change adaptation book Climatopolis.  

As a fan of sharp GHG mitigation, and as a technological optimist, I believe that Dr. Romm and his friends should point their efforts to developing electric vehicles and the spread of cheaper renewable power generation.    Yelling and screaming at fossil fuel exporters to quit exporting isn't going to achieve much in a globalized world trade economy.

Will the "Rebound Effect" Cause Global Warming?

I haven't read David Owen's new book but he appears to be taking Jevons too seriously.   He needs to read Gary Becker's work on the value of time in a society where our value of time is rising.   Here is the blurb for his book;

"Hybrid cars, fast trains, compact florescent light bulbs, solar panels, carbon offsets: Everything you've been told about living green is wrong. The quest for a breakthrough battery or a 100 mpg car are dangerous fantasies. We are consumers, and we like to consume green and efficiently. But David Owen argues that our best intentions are still at cross purposes to our true goal - living sustainably and caring for our environment and the future of the planet. Efficiency, once considered the holy grail of our environmental problems, turns out to be part of the problem. Efforts to improve efficiency and increase sustainable development only exacerbate the problems they are meant to solve, more than negating the environmental gains. We have little trouble turning increases in efficiency into increases in consumption."

So, in plain English -- if you used to drive a Hummer and it achieves 10 MPG and you trade it in and buy a Prius and it achieves 100 MPG  --- your gasoline consumption and hence your GHG emissions will plummet if you continue to drive the same amount of miles each day.

But, demand curves slope down!   To keep the math simple, assume the price of a gallon of gasoline is $2.  In this case, the total gasoline expenditure to drive one mile in a Hummer =  2/10 or 20 cents.  While, the total gasoline expenditure to drive one mile in a Prius = 2/100 = 2 cents.   Suppose you respond to this 90% reduction in price by driving 11 times as many miles.   I recognize that this would be a huge price elasticity but bear with me.

Suppose you used to drive the Hummer 10,000 miles per year so your gasoline consumption was 1000 gallons.

Given the assumptions above, when you substitute to the Prius, your gasoline consumption is now (1/100)*110,000  = 1,100 and that's the "proof" that Prius driving will cause climate change.

There is one obvious mistakes in Owen's logic:

Behavioral responses to price declines are not that large.  The reason for this is that we often need to use our own time when we use a product that consumes electricity.   As Lucas Davis notes in this strong paper,  when we use an appliance such as a car or washing machine we use energy and our time.  Since our time is our scarcest asset, the "Becker Price" of using the device doesn't fall that much as technology becomes more efficient.  So, by ignoring our value of Time --- Owen is overstating the importance of the Rebound Effect.

Sunday, February 12, 2012

The Age of Big Data and the Rising Demand for Applied Micro Economists

Steve Lohr has written a strong piece for the NY Times on the "age of big data".  I sent it to my UCLA Freshmen to read.  We will see if they bother.  I want to make a distinction here between 1.  crunching data from an existing data set  ,  2.  engaging in an explicit field experiment in mid-stream.   I also want to talk about heterogeneity.

Permit me to talk about a hypothetical example of data from an electric utility.

Your electric utility provides electricity to everyone (residential, commercial and industrial customers) in its service zone.  If you receive a monthly bill, it has this data (kWh and the total $ bill you will be charged). It knows your street address.

In this age of "big data", this leads to a big data set.  What can be done with these data?  Since the utility knows your street address, it can purchase and merge in other data so that it has some basic demographic data about you and about the home you live in.   For example, from the Los Angeles County office  --- you can purchase data on each home in LA with regards to its physical attributes.  Such data could be merged by street address to the electric utility's electricity consumption data.

Once, you have created this "big data merge", you can use standard statistical methods to test a variety of hypotheses concerning who consumes a lot of electricity.  To give you sense of this type of research, you can read my paper with Dora Costa posted here.

Now, let's pivot and talk about #2 above.  Once the "big data" research effort has baseline data about different individuals, it can then engage in a randomization of a new incentive. For example, a supermarket may offer a targeted price discount of coffee to all people who live in zip code 90024.  Such an offer may last for 1 month and offer a random subset of households who live in zip code 90024 a 30% discount.  For the economists out there, note that this provides two points on such households' demand curve. If the supermarket can use such field experiments to sketch out different coffee consumers' demand curves for coffee then it can use this information in figuring out the best pricing strategy for maximizing its profit.  This is an example of how "big data" combined with randomized field experiments leads to better corporate decision making.

At UCLA's Institute of the Environment, Magali Delmas and I are looking for more corporate partners who are willing and eager to explore the demand for "green products" and to use the combination of "big data" and field experiments to learn.   You know where to find  us!

Saturday, February 11, 2012

Preparing to Teach

On Monday, I will deliver my first UCLA lecture of the 2012 calendar year.  The audience will be a group of about 120 first year undergrads.  They look young to me.  Is there anything I can teach them?   This is a general education cluster course at UCLA.  Monday's lecture has the following sexy title:
Environmental Economics – An Overview of Behavioral Incentives and Hypothesis Testing:

During my 50 minute presentation, I will cover the following wisdom;

1.  For 15 weeks, the students have heard from leading environmental scientists but not from social scientists.  What do social scientists do all day and why are we useful people for thinking about environmental problems?

2.  Why is social science a harder subject than "real" science?

3.   What is an interesting environmental economics hypothesis?  What evidence would lead us to reject a hypothesis?

Friday, February 10, 2012

Lee Ohanian Answers Ten Economic Policy Questions

Here are Lee's answers.

Augmenting The Water Supply Via Recycling

Do you trust the engineers to develop new solutions for addressing society's challenges?  UCLA has an excellent engineering school and thousands of young, sober students attend the engineering classes taking notes and hopefully thinking.  Can these young people figure out how to take "dirty water" (think of your toliet after you use it) and transform it into drinkable water?  If the answer is yes, and if the public believes that the answer is yes then we have another strategy for adapting to climate change.  Such recycled water offers us another way to increase our supply of scarce resources.  In Climatopolis, I talk at length about how human ingenuity will substitute for those resources that Mother Nature will be less generous with supplying in our hotter future.  I believe in directed technological change.  We foresee a challenge, we see the benefits of coming up with a solution for the challenge and we hold a competition. If 100 entrants submit a new idea, the best idea in the set will emerge and it will be quite good and it will broadly diffuse and the idea's creator will become rich.  Good dynamic incentives!  In the case of "toliet to the tap", there has been resistance to this approach before but now the NY Times reports that this gross out is easing.  Why?  Sociologists should work on this.  If water prices rise, this would encourage water consumers to give the engineers the benefit of the doubt.  Perhaps the experience of nations such as Singapore has taught the rest of us that such solutions can be effective. In this case, Singapore is a useful "green guinea pig".

Switching subjects; the next time that a critic claims that social science is worthless --- you should point them to this new volume on divergence and the development of child potential.  Interesting stuff!

Wednesday, February 08, 2012

Evaluating Urban Infrastructure

I am at the enormous new Sacramento airport waiting to fly back to LA.  I have learned my value of time.  I could have paid $120 to take a 3 hour earlier flight to LA but I said no and I have gotten a lot of work done in this quiet airport that offers free wifi.    I can even vouch for the men's bathroom quality and space.  Roomy!  Maybe sprawl and new infrastructure has its advantages as there are almost no people at this airport but infinite amounts of space and cushy seats and electric sockets for plugging stuff into.  The folks at JFK airport in NYC should visit Sacramento to compare their craggy airport to this one.

I have more mixed feelings about Amtrak. To start on  a positive note, this morning I took a $9 dollar ride from Davis to Sacramento on Amtrak.  But, Amtrak kept me up last night. My hotel was in the middle of downtown Davis and the railroad stops downtown and the train tracks are right there.  As trains travel through Davis , they blow their horn and I kept waking up.  The same thing happens to me in Berkeley and when I was in Raleigh recently, I was told that the same thing happens there.  I don't know if Amtrak blows that horn for safety reasons but does have some noise pollution effects.

Monday, February 06, 2012

My Climatopolis Lecture at UC Davis Tomorrow

Tomorrow night I will be speaking at the Levine Family Fund Lecture Series at UC Davis.  Here are  my Climatopolis slides.  Given that my book was published in September 2010,  I am making a conscious effort to transition from talking about the book to talking about what is the research agenda moving forward on the topic of urban adaptation to climate change.  

I do enjoy talking about this work and will be discussing my work at Occidental College this Friday and in Kansas City on May 2nd 2012.  People know where to find me if they want to hear a frank talk about the challenges and opportunities posed by climate change.  Free market environmentalism is a growth field!

Sunday, February 05, 2012

The Future of Football in the South Under Climate Change

Joe Romm notes that Southern August football practice could be quite uncomfortable in the year 2035.  I like his piece but where in the Constitution is it written that we must play football in the fall after practicing in the summer?  In our hotter future, the NCAA could move basketball to the fall and play football games in the winter.  That's a taste of adaptation.  I'm not even resorting to mentioning more indoor domes.   He adaptation two step is that we identify a new challenge posed by climate change and we individually think about how to solve that problem.  Whoever discovers a low cost, high quality solution will be rich and the rest of us will be grateful.  That's the "small ball" of adaptation.  I hope to see all of you at my UC Davis talk this Tuesday!

Some Simple Game Theory Applied to Pollution Problems in China

China's water quality is suffering from a recent industrial spill.  The simple economics of self protection offers a productive approach for studying this issue.  Let's return to the classic Ehrlich and Becker 1972 model.   In the past, when Chinese officials anticipated that environmental disasters caused by industrial negligence would be suppressed so that the world wouldn't find out about it, such officials had little incentive to regulate industry to engage in costly precautions.

Now that China is growing richer and this means that the value of life and the willingness to pay to avoid risk is rising and with the rise of micro blogging and accountability, officials now know that when disasters take place that government officials will be held accountable.   When government environmental officials anticipate ex-post punishment when disasters do take place, they now have strong incentives to do their job ex-ante and to take regulatory actions that reduce the probability that industrial disasters occur in the first place.

This rise of "good" green dynamic incentives is an example of why I am optimistic about China's short term environmental future. Note the two driving mechanisms here.  Increased access to information about the consequences of industrial activity and the desire for health and quality of life among China's rising urban class.

Green Cities in China will be a new repeated theme of this blog!  Stay tuned.

Fresh Tuna

Yesterday, I participated in a naval battle between two sailing vessels.  We left from the port of Ventura, California and fought it out in the Pacific Ocean.  My son was thrilled as we fired fake cannon balls at the other ship and yelled and screamed at our adversaries.   Unlike in Master and Commander, we choose to not board the other vessel for a sword fight.  We were on the same boat that was used in some "Pirates" movie with Jonny Depp.    My only worry with this wonderful 3 hour boat ride was that there was no toliet on board.

Before we got on the boat, we went to a fresh Tuna market.  A major fishing boat had recently landed in Ventura Harbor with a hull filled with hundreds or thousands of frozen Tuna.  Each of these fish looked like it weighed 30 or 40 pounds.  The Men would take one of these fish out; chop off its frozen head and tail and turn it into Ahi Tuna steaks that the local suburbanites of Ventura were buying for $6 a pound. Knowing what I pay for sushi in LA makes me think that there are some profits being earned by the middle man and by the restaurants as the product moves through the supply chain and to my plate.

My son and I gained a sense of what "real men" do for a living so we have decided to return to UCLA for the 2012-2013 year.

Saturday, February 04, 2012

Hong Kong's Views of Mainland China

Hong Kong appears to take pride at being a "green city".  This LA Times article highlights a little bit of class warfare taking place with visitors from mainland China.  Here are a couple of quotes;

"Last year, an Internet music video called "Locust World" enumerated Hong Kong natives' complaints in the form of a saccharine Cantonese pop song. Against a black-and-white video of swarms of locusts devouring a field, the singer painted a portrait of mainland tourists spitting in public, yelling into cellphones and allowing their children to defecate on the streets. "The locusts will stop at nothing," he croons. "Inch by inch, Hong Kong is being taken over by these pests."

As urban China grows richer, I predict that "low class" behavior will decline.  Smoking rates will fall. Public spitting and public pooping will decline.  This is the "small ball" of how a green city forms.

It appears that Hong Kong is out in front within China's system of cities but perhaps the experience of visiting Hong Kong will offer the mainlanders some experience with the possibility of living in a green city.  

Green Big Brother?

"Down the road, this data will be used against you."  Or so says one opponent of mandated installation of smart meters into homes.   This quote comes from this article  spelling out Tea Party opposition to "green initiatives" seeking to reduce our carbon footprint.  If you view climate change as a hoax and government intervention as intrusive on individual liberty then I can certainly see that such individuals could be bothered by such new "green mandates".

But, I think there is a deeper issue here related to property rights and theory of the second best.  Do individuals have the property rights to continue to produce their current level of greenhouse gas emissions?  Put simply, if you live in the suburbs and drive to work and air condition your large house and if you like to barbecue big steak dinners, you are unintentionally producing a lot of greenhouse gas emissions.  This is even more likely to be the case if your electricity is generated by coal fired power plants.  

In a first best world, we would collectively introduce a carbon tax and you would face higher prices for gasoline, and electricity and you would adjust your behavior responding to these incentives.   We have chosen not to introduce such a tax so we have introduced a large number of piecemeal strategies for trying to nudge households to have a smaller carbon footprint.  These include residential electricity report cards (such as the product that Opower produces), land use controls that encourage people to live a new urbanist life closer to public transit and living in multi-family housing.

The introduction of Smart Meters is a first step in providing households with the information about how much electricity they are consuming each hour of the day.  Households are more likely to make "good choices"  if they have information about the consequences of their actions such as leaving on the lights or not turning off computers at the end of the night.

The NY Times article explains that Tea Party activists are "connecting the dots" and seeing an international entity (the UN) as the mastermind behind trying to sabotage how Americans act to try to make us "more French".   There is some truth to this claim that to reduce GHG emissions we need there to be global convergence to a lower level of emissions and this will require lifestyle change or tremendous innovation in energy efficiency.

I think it would be a very promising field for sociologists to study the backlash against the environmental movement.   Would Tea Party folks really be miserable living a new urbanist lifestyle?  Do they reject the required low carbon lifestyle's components or do they simply feel anger at being lectured to by liberals?

Friday, February 03, 2012

Disagreement About the Probability of Future Events: Insurance, Moral Hazard and Climate Change

Young people who are good at math are told that being an actuary might be a good job for them.  As I understand it, actuaries take historical data and calculate conditional probabilities such as; what is the probability that a 45 year old white man will die in the next year and that such probabilities are useful for pricing products such as life insurance.  Suppose that the probability that the average 45 year old white man has a .1% chance of death (1/1000) then if the insurance industry is a perfectly competitive industry the price of $1 million dollars of insurance would be $1,000.  Why?  The expected cost to the industry =  probability of death*payout =  (1/1000)*1,000,000 = $1,000.  Note that in this case, all actuaries at different firms would have access to the same historical data and would converge on the same "best guess" of the probability that a 45 year old while man will die within the next year.

Now let's turn to climate change and suppose that climate change introduces a non-stationarity to the probability that events take place.  For example, what is the probability that there are more than 3 100 degree days in Sacramento over the next year?  Climate change raises this probability but there will be disagreement about by how much.

Let's return to disaster insurance.  Suppose that the actuaries disagree about the probability that there will be massive floods over the next year.  The optimistic actuaries who work at "Nice Firm" say that the probability is 1% while the pessimistic actuaries who work at "Nasty Firm" say that the probability is 10%.

In competition, the price of a $1 million dollar housing insurance policy will be $10,000 charged by the "Nice Firm" and $100,000 charged by the "Nasty Firm".  Suppose that the truth is that the Nasty Firm's assessment is correct.  As consumers shop for a lower price, the "Nasty Firm" will attract no customers and it will go broke. The over-optimistic firm "Nice Firm" will gain the whole market for insurance but when the true state of the world is observed it will go bankrupt because it collects $10,000 per premium but its expected losses is $100,000 so it loses $90,000 on each policy it sells!

What happens next? In our moral hazard government,  the Federal Government will bail out the home owners who will not be punished for their bad choice.  If the disaster had not taken place, the "Nice Company" would remain in business so it holds an option on when it declares bankruptcy.

This discussion is motivated by this NY Times article  about regulation of the insurance industry given the anticipation of climate change.

How would Milton Friedman address this issue?  Note that as the "Nasty Firm" offers its policy at a higher price it will be accused of price gouging just as the health insurance industry is being accused as it raises premiums. But, the interesting wrinkle in my example is the cross-sectional variation in premium prices based on differences in subjective probability assessments.

How do market equilibrium forces lead to a convergence to the true probability assessment as this target (i.e the probability of horrible flood) moves over time due to climate change?   The government would need to pre-commit to no bailouts of premiums when insurers declare bankruptcy and that the insurers would have to post a bond to commit that they can cover extreme losses. In this case, they would have the right incentives to each do their homework about predicting future dynamics of events rather than in focusing on historical data and linearly extrapolating.

Thursday, February 02, 2012

Pension Investing and Seeking Out High Rates of Return in LDCs

In the developed West, individuals seek to have a comfortable retirement and have saved trillions of dollars in private savings and mutual fund holdings and retirement plans.   The institutional investors are aware that U.S Treasuries pay 0% right now.  Will the U.S Stock Market yield a 7% annual return over the next decade?  It is possible but this would mean that the Dow Jones will be rise to 25,000 in the year 2022.  If the Dow Jones experiences such a rise, then Glassman and Hassett will be selling more copies of their 2nd edition of Dow 36,000.

So, I predict that institutional investors will turn to the developing world seeking higher returns but what are the risks of seeking those returns?  Will Moodys and S&P invest in highly trained institutional analysts so that Western investors actually know the true risks that they face in investing in the developing world?

I predict that the asymmetric information issues that we faced with the mortgage backed securities in the U.S will be even more severe here.

There is also the issue of political risk.  How will the ratings agencies use econometric models to predict whether there will be a coup in Egypt and whether the new government will renege on foreign debt?  I recognize that if investors know that they don't know these risks that they will demand  a larger risk premium in terms of higher interest rates.

As the U.S has trillions invested in certain LDC nations, will we ask our military to get involved to protect our interests in these nations?  In the past, there were multinational companies such as Exxon who had invested in irreversible capital in such nations but I'm anticipating that moving forward that hundreds of millions of Americans will have a financial stake in the health of these LDCs because the productive growth is taking place there and our capital has been invested there.  Will this "skin in the game" make our people more interested in foreign affairs?  Will more Congressmen get a passport?

Wednesday, February 01, 2012

Tropics of Chaos: Cherry Picking Some Wacky Quotes

In 2011, a book titled Tropic of Chaos: Climate Change and the New Geography of Violence was published.  The author is Christian Parenti.  Here is the amazon page for this strange book.  

From Google Books, I quote from his page 8;  "Societies, like people, deal with new challenges in ways that are conditioned by traumas of the past.  Thus, damaged societies, like damaged people, often respond to new crises in ways that are irrational, short-sighted and self-destructive.  In the case of climate change, the prior traumas that set the stage for bad adaptation, the destructive social response, are Cold War era militarism and the economic pathologies of neoliberal capitalism.  Over the last forty years, both of these forces have distorted the state's relationship to society --- removing and undermining the state's collectivist, regulatory and redistributionary functions while overdeveloping its repressive and military capacities.   This, I argue, inhibits society's ability to avoid violent dislocations as climate change kicks in."

While I have some trouble understanding what in the heck he is saying, it appears to be the mirror opposite of my Climatopolis' logic.  That's funny.    

Mr. Parenti will eventually learn that he will owe the invisible hand an apology.  Big, bad "neoliberal capitalism" will offer him a series of solutions to the challenges we will face.  

Income and Coping with Extreme Weather Shocks: The Case of Heavy Snowfalls and Plows

I was surprised to read that Japan's Western region has suffered many deaths due to recent heavy snow storms.  The details are posted here. The article states the following;  "Western Japan has been battered by one snowstorm after another since the beginning of the year, overwhelming cash-strapped cities struggling to keep up with cleanup efforts.  In the Niigata Prefecture, officials said nearly half of their 30 cities had run out of funds set aside snow removal. Further north in the Aomori Prefecture, the government had already applied for additional funds from Tokyo, after draining its budget."

The article goes on to say that "Residents, frustrated by the slow response, have taken it upon themselves to clean up the winter mess, resulting in deadly consequences. Nearly all the storm-related deaths have been a direct result of snow removal."

So, the deaths are taking place because guys are having heart attacks moving heavy snow with a shovel.  This is horrible but it highlights how urban income protects us from shocks.  Don't forget John Henry and the Machine.  We substitute capital (snow removal trucks) for labor (guys with shovels) and this is progress but it takes money to do this.   Richer nations are better able to adapt to these shocks and this creates an imperative to encourage economic growth.