A Few Thoughts About "Why Nations Fail"

Tom Friedman and I have at least one thing in common. We both really like the new Acemoglu and Robinson book Why Nations Fail.   Here, I would like to offer a few random thoughts as I work away in a Manila hotel room.  The Philippines may offer another data point supporting the author's contention that institutions and political outcomes are the key determinant of economic success of nations.  The modern macro economists have known that the "rules of the game" matter greatly but at least when I studied macro they didn't have a good explanation for why different nations chose different rules.

Before I start up and offer my bland thoughts, for those of you who are good readers, I suggest that you read Fukuyama's review of this book.  His review is the most subtle of the numerous ones that are being rolled out.

A few thoughts:

1.  How will representative agent macro economists such as Prescott respond to this book?  It seems intuitive that the representative agent framework simply assumes away politics.  If there is 1 person who represents an economy then he is likely to agree with himself about "optimal" policies at any point in time.

2.  The book poses a challenge to classical growth theory.  In retrospect, growth theory appears to be a giant accounting exercise.  If all nations have access to the same one sector production function then differences in output per-capita must be tied to differences in accumulated inputs and hard to measure technological change.  But, why do different nations have different levels of human capital and physical capital? How did the early "rules of the game" affect the dynamic accumulation of such capital?

3.  When I was taught growth theory, there was a unique steady state that nations were converging to. If I'm reading this book correctly, the authors view growth as a multiple equilibria game where the U.S and England lucked out due to a variety of early conditions (that extraction of resources in the Jamestown colonies was not profitable) and thus inclusive institutions and high powered incentives were needed to lure men to devote effort to developing these areas.   This book highlights that macro models are unlikely to be "markovian" and simply to depend on last period's key state variables. In contrast, small differences initial conditions hundreds of years ago snowball to give us the Mining Mita today.

4.  Regression discontinuities and borders such as the North Korea/South Korea and the Mexico/U.S border yield sharp tests of the role of institutions.

5.  Why not a "political Coase Theorem"?     This has always been my question about Daron's work on the broad subject of institutions.  As a Chicago Ph.D., we took the Coase theorem very seriously.  Societies figure out how to use resources efficiently.   The authors reject this claim and argue that the incumbent elites may choose to lower growth that could be achieved under inclusive institutions because they are growing so rich under the "extractive institutions regime" of simply enslaving people or treating them like serfs.

If the elite believe they have secure property rights to the "pie" over time then they should have strong incentives to create rules to allow the pie to grow. I recognize that if the elites believe that their property rights are tenuous and will be weakened by allowing the pie to grow (i.e the people will grow confident as their wealth grows and create their own army using their own $), then the elites may not open the door a crack and will choose to avoid "inclusive institutions".  So this is a time consistency issue and Prescott and Daron can work on this.


The Acemoglu and Robinson book's key themes are relevant for my work on environmental quality dynamics in growing cities in the developing world.  Do the elites desire "green cities"? If the elites want these for themselves, must they provide them for everyone in the city because pollution is a local public bad? This argument is similar to Werner Troesken's 2004 book on lead and water pollution that argued that in the U.S past that wealthy whites provided clean water for nearby black neighborhoods not due to altruism but to minimize the likelihood of a pollution spillover effect.

UPDATE:  As I think back to my education at the University of Chicago from 1988 to 1993, we rarely discussed "politics".  I would like to ask Daron a "history of economic thought" question.  What was going on in macro in the late 1980s such that politics was ignored?  Was this due to the embrace of the representative agent and working out the human capital augmented models?  What convinced Daron that we can't study macro without focusing on politics?

California Sustainability Challenges: An Economist's Perspective

I'm teaching an elective class during Spring quarter called "California Sustainability Challenges".  I expect that there will be roughly 35 students enrolled.  What will this course cover?

Here is the boring course intro;

"This course seeks to introduce students to the economic approach of thinking about the broad topic of “sustainability”.  Emphasis is placed on designing incentives to protect the environment and to boost the California economy.   The course will highlight the important role of “crunching” empirical data to test hypotheses about pollution’s causes and consequences."

This will be a 10 week course. Here are the broad topics we will cover.

Topic One:   Measuring Progress

Topic Two:  California’s Environmental Report Card for Cities

·         

      Green Cities?

Ø  Lifestyle and urban form

Ø  Transportation

Ø  Industrial Production

Ø  Electric Utility

Ø  Household lifestyles

Ø  Buildings

Topic Three:  California’s Environmental Report Card for Agriculture

·         Agriculture

Ø  Water

Ø  Chemicals

Topic Four:   California’s Comparative Advantage in the 21^st Century

Ø  Total Scale

Ø  Geography of jobs and people

Ø  Universities

Topic Five:  State Policy

Ø  Air Resources Board and Clean Air Regulation

Ø  AB32

Ø  Water Pricing

Ø  Electric Utility Policy and the Smart Grid and dynamic pricing

Topic Six:   Government and Information Provision

Topic Seven:  Public Finance

Topic Eight:  Climatopolis, City Competition and the Future of California

This course will border on being science fiction in the sense that we will think about reinventing California's economy through basic pricing incentives.  We won't be naive. In class, we will debate the political economy of who would be the winners and losers from introducing policies that economists know would enhance efficiency.  

To quote Robert F. Kennedy: “Some men see things as they are and say why. I dream things that never were and say why not.”   This is what we will do in this course.

In this class, I won't lecture. I'm too old to lecture. Instead, we will discuss and debate.  I like to encourage students to lead the discussion and stand at the front of the class and engage with their classmates.   This is a type of social learning.  I guess I am a facilitator of economic learning rather than being a Professor of Economics. 

If my students say some smart things, I will post them here.  I look forward to attending this class.

The Marginal Product of Economists: Evidence from Mortgage Bank Foreclosure Policy

Are economists contributing to the well being of society?  In the midst of our ongoing macro challenges, a huge food fight had broken out among macro bloggers but let's not forget micro.  Today, the NY Times provides a good example of why economic models are useful.  In this article about the foreclosure abuse settlement, the reporters are concerned that this legislation will reward banks for activity they would have engaged in even in the absence of the settlement.  To quote one source in the article; ""The credits over all, Mr. Black said, “are a pretty sweet deal for banks since it gives them a pat on the back for what they are already doing.”"


So, we are back to basics and asking "who is at the margin?"  Intuitively, how much would the price of a meat pizza have to fall by to induce a vegetarian to eat one? How much would the price of gas go up by to induce Dick Cheney to buy a Prius?  


Returning to the foreclosure settlement, an economic model is needed to predict which banks and how such banks will change their behavior when they face the new rules of the game embodied in the Foreclosure Abuse Settlement.   Note that this requires a "counter-factual" analysis.  We need to estimate how for profit banks would have acted in the absence of the regulation and how they will act when faced with this regulation.  By comparing these two outcomes, we can measure the benefits of this regulation.  A simple before/after comparison that compares the actions of banks before and after the regulation isn't good enough because the pre-regulation period may not be an "apples to apples" valid comparison with the economic conditions that the banks face today.  


In a world where you do not have a twin and cloning is not allowed, how can we know what would have happened to you had you made other choices.  For example, I have been a Professor at UCLA for 6 years now.  Who would I be now  (in terms of research productivity, hair loss etc) had I remained at Tufts for the last six years?  To answer this, we need a model of individual choice!  Such a model will be a constrained optimization problem featuring the decision maker's goal subject to  the constraints he/she faces where regulation is an additional set of constraints and incentives.  


In my West Wing (Aaron Sorkin) fantasy world of policy making, policy makers would engage with academic economists and have a credible estimate of the benefits and costs of a given policy before it is enacted. The NY Times appears to be mocking this policy saying that its marginal effect on banks will be small because everyone is "infra-marginal".  

Can Michigan Asparagus Farmers Adapt to Climate Change?

In the 1960s, John Kain studied the "spatial mismatch" hypothesis that posits that African-American unemployment rates were high mainly because this group disproportionately lived in center cities (due to racial discrimination in housing markets) while jobs were suburbanizing.  This physical distance between people and jobs raised the costs of working (due to high commute times).  His policy solution was to increase job access for this group. In recent years, Michael Stoll and others have worked on this hypothesis.

Today's NY Times writes about a new spatial mismatch hypothesis.  Due to unusually warm early Spring weather in Michigan, the Asparagus are popping up.  Since the farmers didn't expect this, they have not contracted with migrant workers to be around to harvest them. The migrant workers are elsewhere.  This is "spatial mismatch".  The logic of my Climatopolis applies!   Now that the farmers have seen the "new normal", they will come up with contingency plans to have workers ready to pick early crops.

The farmers also say that they are worried about frost that could damage their crop.   There are strategies for fighting frost. A few are listed here.  Are these cost effective?   If not, then there is an opening for an entrepreneur who can figure out a good idea for helping the Asparagus Farmers fight frost.

Electric Vehicle Demand and Public Recharging Stations: Solving a "Catch-22"

When your car's fuel tank is near empty, you stop by a gas station and refuel.  This mutually beneficial trade requires no government intervention.  In the case of electric vehicles, a "Catch-22" emerges.   Drivers are less likely to buy an electric vehicle because they anticipate that they can't find the equivalent of a gas station to recharge their battery.  For profit gas stations do not invest in recharging stations for electric cars because nobody owns one.  In such a case, there is an externality justification for government to step in and provide public electric vehicle recharging stations.  The LA Times discusses a large capital investment project that will implement this.

If electric vehicles are powered by renewable power (or by natural gas fired power plants), then the carbon emissions from this mode of driving will be less than the carbon emissions from the same amount of driving using gasoline.  Given that carbon dioxide emissions represents an unpriced externality, I do see the logic behind subsidies of such public infrastructure. This investment will solve the "Catch-22" that I sketched above.

In my own past research, I have studied the complementarities between private and public investment.  I predict that if more households buy EV vehicles and if the state's PUC introduces more dynamic electricity pricing that more households will install solar panels for their homes and then charge their own EV vehicles using "excess" power.  I would support allowing these households to also be able to fuel neighboring home's EVs.

The interesting "free markets" question here is;  when we want to promote the "green economy" but we haven't passed a carbon tax ---  how do we achieve this goal at low cost while anticipating the necessary infrastructure that is required to launch this regime shift?

UPDATE:  Here is a NY Times Article on the EV.

Amazon's Anticipated Sales Tax Collection Offers a Test of the Rational Expectations Hypothesis

The Wall Street Journal reports that Amazon will start collecting sales tax on California orders starting in September 2012.   The California sales tax rate is 7.25%.  If Amazon shoppers in California know about the Amazon tax regime shift and know the sales tax rate, rational expectations theory would predict that shoppers will "Pre-Order" all of the books and other things they plan to buy from Amazon.   A statistician who studies the August 2012 data should observe a huge spike in Amazon sales then (pre-sales tax) and then see an equal drop in Amazon sales in October 2012 (post-sales tax).

A Funny Email

Dear Matthew Kahn,
 
The Office of the University Registrar at the University of Chicago has been holding on to your diploma since you 
graduated in Summer 1993.   We would very much like to send you this unclaimed diploma. 
 
Please let us know by March 12, 2012, if this is the address you would like us to use. Once we hear back from you, we 
will mail your diploma within 3 business days.  Diplomas will be sent in a large flat cardboard mailing envelope. 
Please keep this in mind when providing or confirming your address, since these envelopes do not fit in standard 
apartment mailboxes and will be left as a package to be collected.
 
Please let us know if you have any questions about these matters.
 
Andrew S. Hannah
Interim University Registrar
5801 S. Ellis Avenue
Chicago, IL  60637
http://registrar.uchicago.edu

My Monday Class

On Monday after my 11am class, I will be happy to speak to UCLA students about my views on undergraduate transfer students.    Here, I would like to preview my main points.  I will also be happy to answer any student questions.

In my six years at UCLA,  I have taught thousands of students and many of them have been transfer students.  Many of these students have excelled in my classes and I hope to attract excellent transfer students in the future.

A few days ago, I posted a quickly written blog post.  After re-reading my blog post, I realized that it was inappropriate and I wasn't proud of this entry.  In the past, I have re-written major parts of blog posts as my thinking has changed over time and as I have learned about a subject.   I revised my post and included an apology and posted it here.

If I could turn back time,  here is what I would say;

1.  I want UCLA to become an even stronger university which excels at teaching and research.

2.  Transfer students deserve to be at UCLA and are important members of the UCLA Community.

3.  If UCLA could raise more endowment money for financial aid, then I would want the transfer students to transfer in after 1 year at another institution so that they could have at least 3 years at UCLA.

The main point of my post was the importance of having our students be at UCLA longer (as close as possible to 4 years).

Here are two points that I believe but I recognize that these points could be false for some students at some colleges and in some fields of study.

p      Claim #1     The more time you spend at UCLA, the more connected you are to other students and faculty at  UCLA.




     Claim #2;        UCLA offers a better first two year education than Community Colleges.  I teach first year students.  We have excellent TAs in this class.  I take my teaching in the College very seriously.  I had assumed that UCLA offers an excellent education in the first two years that is better than nearby  Community Colleges.   If this point is false, then UCLA must work harder on improving its first two years of education.  If I am right, then we owe it to our transfer students to help them to transfer in as soon as possible to improve their undergraduate educational experience.  

I must add that I met with Dean Judi Smith today.  She taught me several things.  I now understand that there are several very strong community colleges in the LA area that specialize in teaching small classes and staff the classes with Professors who hold Ph.Ds from UCLA and that several of these have special tracks that students take to prepare to transfer to the UC.  This is great and I didn't know this.    That said, for the tuition we charge undergraduates, UCLA better offer an even better undergraduate experience.  So, note that this is a relative statement not an absolute statement about the quality of nearby community colleges.

Based on these two claims, I believe that UCLA's long run financial future would be strengthened by encouraging more of our transfer students to transfer in earlier and ideally to be 4 year students or at least 3 year full time students at UCLA.    

Regular readers of this blog know that I have blogged about my views on how to make UCLA a stronger university that has the financial resources to remain excellent.   To recap, my thinking;

1.  The Undergraduate population would be 60% California and 40% out of state students.  The out of state students would pay a tuition that is 20% below the Ivy League rate.   Under this formula, roughly tens of millions of extra revenue dollars would be collected and undergraduate financial aid could be greatly expanded.

2.  The UCLA in-state tuition would be set by the campus and wouldn't have to be the same rate as charged by other campuses such as UC Davis.  Similar to Harvard's financial aid formula, the tuition could be based on household income.

3. Major gifts such as the Luskin donation should be used for hiring faculty and improving Ph.D. financial packages so that we can improve undergraduate education.

4.  UCLA should have the same transfer student percentage as UC Berkeley.

What Happens When You Hand Out 150 Free Copies of Your Book to Your Students?

I am a nice guy.  The proof?  Yesterday,  I handed out over 130 copies of Climatopolis away for free today to my UCLA Freshmen.   Some of the students appreciated my contribution to their education but most of them didn't seem to care.  I also handed free copies to several of my friends on the faculty.  They appeared to be much more thankful than the students.  What does that say?

It suggests that I no longer connect with the undergraduates and that worries me.  My father, at the age of 73, is connecting with his students at NYU Medical School but I'm not.

Switching subjects, long time readers of this blog will know that this isn't an "academic blog".  I write these entries quickly, in a breezy fashion.  I throw out many ideas --- some of them may be correct and some may be false.  I want to be thought provoking.

This strategy can backfire.  My recent piece  has lead to some really nasty emails being sent to me. I did make a mistake in posting an original half-baked entry that wasn't well written and that left a lot of room open for being misinterpreted.    I have deleted that post and I regret writing it.  I have apologized to anyone who was offended by it.   As I have stated, it was never my intent to be offensive?  Why would I seek to be?  I have taught hundreds of excellent transfer students at UCLA and I hope they continue to enroll in my classes.  I deeply care about my teaching and I'm now embarrassed for having caused some pain for members of the Bruin community.  

In the future, I will try to be more mature and anticipate how my words might be interpreted.  In the case of my UCLA post, I wanted to make two points;

1.  The more time you spend at UCLA, the more likely you are to be loyal to UCLA.
2.  The more time you spend at UCLA as a student, the more you learn.

Based on these 2 points, I argued that UCLA should consider enrolling more 4 year undergraduates.  Transfer students have every right to attend UCLA but I want them to be here for 4 years!

UCLA is a great university and we are a stronger university because we attract excellent transfer students.  I want UCLA to have the resources so that these same admitted student can attend UCLA for 4 years rather than for 3 or 2 years.

Bad Shocks to Los Angeles Quality of Life

It was 85 degrees and sunny in LA on Sunday and I took my son swimming at the UCLA pool.  Despite this good life, there are dark clouds surrounding LA's quality of life.  Kobe is getting older and the Clippers are now a .500 team since Chauncey was injured.   My son and I could defeat UCLA's men's basketball team in two on two.   UCLA now requires that its esteemed faculty contribute to our defined benefit pension plans and this contribution will quickly rise perhaps as high as 108% of our annual salary!

On top of all of this, one of our favorite restaurants called Orris has gone nuts and made a dumb transition to being an Asian Spaghetti House.  While my wife is half Italian, neither of us can figure out what in the heck this new fusion combo means.  This isn't good.  We had hoped to take Enrico Moretti there for dinner tomorrow night but with the new news that Orris is now a pasta joint we have re-optimized.  You can find us closer to the ocean tomorrow night.

So, let me declare for the record that if LA continues this nose dive --- we will have to leave and move to a city that offers a great quality of life and a serious set of economists.    Does such a city exist?

Is IBM's Quest to Make Cities "Smarter" Through a Centralized Command Post Better than Decentralized Twitter?

The NY Times has a long piece about IBM's new business as it supplies "Command Centers" for mayors of cities around the world.   The article suggests that each Mayor seeks to be a benevolent leader (think of Ike during WW II) but that due to transaction costs was unable to know in real time how a particular crisis was playing out across the city's geography.  By providing real time information to the "leader", IBM is helping cities to cope with new news and shocks.

I agree with all of this but the reporter downplays the main benefit of providing high quality information in cities. Individuals (not mayors) now make better choices and in aggregate the city is healthier and more robust in the face of shocks.   You don't have to be Hayek to believe that the real payoff of the IBM technology is to allow the government to play the role of impartial data provider and then allow individuals to make their own best choices of how they want to adapt and cope with new news. If crime is rising in a certain slum in Rio, rental prices will adjust --- people will no longer move there and will choose to locate in a different part of the city.

As economists have shown in many cases such as Smog Alerts and restaurant public health ratings,  individuals change their behavior as they are provided with new information and they change their behavior so that to reduce their exposure to risk and disamenities.

It is of course the case that a Mayor who has real time information about a crisis may allocate resources more effectively but I do not believe in a Superman theory of history.  The reporter  appears to believe that Mayors are benevolent paternalists who seek to protect their citizens but lack information about the real time challenges they face.   I wish we lived in that world.

In truth, decentralized twitter updates are likely to provide pretty close to the same services (for free!) that IBM is supplying at a price of billion of dollars.  People such as Guru Banavar at IBM should explain under what conditions would his "smart grid" for the Mayor outperform twitter?

For decentralized twitter to be equally effective as IBM, all Twitter would need is an aggregator that allows you search tweets based on subject and date such as "storm, Rio, March 22nd 2012" .

Raising Revenue at Elite Public Universities

As a professor at a leading public university, I have a strong stake in helping UCLA identify new sources of revenue.  While we can chant "China, China, China", I believe in a diversified revenue stream.   Due to political pressure, public universities will not be able to continue to sharply increase tuition.  Federal grant dollars from NSF and NIH will soon start to decline.  How will $ continue to flow to Universities?

THIS POST has been updated and edited on March 7th 2012

Schools such as Harvard and Stanford have figured out that if you offer young people an excellent education that some of them will be successful and in later life will give back large amounts of $ because they remember the role that the university played in shaping their life.  Other Alumni will give big bucks because they want their kids to have a shot at "legacy admissions".  Regardless of the motivation for giving,  a school's stock of past graduates represents an excellent source of donations.

Public universities such as UCLA have been slow to tap into their graduates to make "the ask".   Many of these graduates took for granted that the Great California would provide them with a "free, high quality education" and they are aware that their children will not receive extra consideration for admissions even if they make a big gift.

The main point of this blog post is to ask a "what if".  Could UCLA's endowment grow more quickly if we enroll more 4 year students? If I'm reading this table correctly,  UCLA admits roughly 3,000 transfer students a year.  Many of these students will stay at UCLA for 2 years and earn a degree and leave.

Suppose that these same students spend all 4 undergraduate years in Westwood enrolled at UCLA.  I think that future donations to UCLA would be much higher. Loyalty takes time to build. If you spend 4 years in wonderful Westwood, learning and being part of the social network -- you will have stronger roots to the community.  Given the strength of UCLA's education, the same students would also learn more at UCLA than if they spend 2 years at one college and then transfer here. I realize that there are always exceptions to the rule.

I also recognize that UCLA has had terrific transfer students and will continue to have excellent transfer students.   The economic decision here is what is the "optimal number" of transfer students?

I have received some angry emails from students concerning my original posting. I would like to apologize to them.   It was not my intent to be offensive or rude.  My goal was to stimulate a debate.

But, returning to fund raising consider the following facts;   In 2011, UCLA's endowment stands at 1.3 billion dollars or at 2.6 billion depending on how you count.  USC charges a higher tuition and has an endowment of roughly 3.5 billion but is in the middle of an ambitious capital campaign that will increase its endowment to roughly 7 to 8 billion dollars.  For those who are members of the UCLA Bruin community, what is your solution for how to maintain and produce excellence?

UPDATE:   I was not aware that the California Master Plan requires that the UCs reserve a significant number of places for Community College students.    This Master Plan has costs and benefits and it should be debated.

Climate Change Adaptation and Rural Out-Migration

A new NBER Working Paper documents that when crop yields decline due to weather shocks that young people move away from rural areas.   This finding is a 1st cousin of the recent trend that cattlemen are moving their herds away from Texas towards Northern areas (i.e Montana) receiving more rainfall (here was my blog post on this).  In both cases, migration plays a key role in helping us to adapt to climate change.  This was a big theme of my book Climatopolis.  No government here is involved.  Self interested individuals re-optimize.   A reasonable question to ask is; "what are the transition costs?"

In the case of young people moving away from the rural Corn Belt, such individuals are moving away from their friends and family.  This could be costly in terms of lost social networks but in this Facebook age, I am optimistic that such individuals can stay connected with their old way of life while seeking new opportunities at the location they choose to move to.

In the case of cattle migration, the question is how costly is it to put cattle in trucks and trains to move to Montana?   This is a transition cost. If the cattle live for years, then there is a present value stream of benefits that will be earned by those who pay these transition costs.  So, I acknowledge that adaptation isn't costless but these fun examples highlight our various strategies.

Let's return to the rural outflow of young people in areas experiencing climate shocks.  As young people leave, this will increase the wages and economic opportunities for those who remain.   Yes,  the climate shock lowers local labor demand but the out-migration reduces local labor supply so that wages return to their pre-shock levels.  This is the logic of Blanchard and Katz and their work on Regional Evolutions.

Some Sexy Public Finance Economics

Public finance is an important branch of economics but it sometimes strikes me as a pinch dry.  For those PF profs seeking to spice up their lectures consider California Assemblyman Das Williams, D-Santa Barbara.   proposal of placing a $10 per person tax on attendees of strip clubs and taking this new tax revenue and allocating it towards  generating money for sexual assault-related counseling, crisis intervention, rape prevention, community education, victim advocacy. and evidence testing in rape cases (see the Sac Bee as the Source).  This is quite an example of revenue recycling.    


In the past, economists had focused on other revenue recycling ideas such as introducing a carbon tax and using its revenue to cut labor taxes.    Das Williams must believe that the demand for strip clubs is inelastic!  Is he right?  

Read more here: http://blogs.sacbee.com/capitolalertlatest/2012/03/price-would-rise-as-clothes-come-off-under-california-strip-bar-legislation.html#storylink=cpy