Thursday, May 31, 2012

Some Comments on Markets, Morality, Sandel and Kristof

I tend not to read Nicholas Kristof's pieces for the NY Times because he repeats himself over and over again.  His piece today caught my attention.   He makes a quick case that we have too many markets and this is undermining our democracy.  Given that I was taught that more markets offer us more choice and thus improve our standard of living, his claim is an interesting one.

He writes;

" Is it right that prisoners in Santa Ana, Calif., can pay $90 per night for an upgrade to a cleaner, nicer jail cell?

• Should the United States really sell immigration visas? A $500,000 investment will buy foreigners the right to immigrate.
• Should Massachusetts have gone ahead with a proposal to sell naming rights to its state parks? The Boston Globe wondered in 2003 whether Walden Pond might become Wal-Mart Pond.
• Should strapped towns accept virtually free police cars that come laden with advertising on the sides? Such a deal was negotiated and then ultimately collapsed, but at least one town does sell advertising on its police cars.
“The marketization of everything means that people of affluence and people of modest means lead increasingly separate lives,” Sandel writes. “We live and work and shop and play in different places. Our children go to different schools. You might call it the skyboxification of American life. It’s not good for democracy, nor is it a satisfying way to live.” 

Now, Kristof is passionate about the subject of human trafficking.  Suppose that the U.S government promised to use a chunk of the extra revenue it collects from such price discrimination (as the examples above illustrate) to fight human trafficking.  Would Kristof still oppose such "tacky" products as the ads on police cars?

Sandel, of Harvard, appears to be making a logical leap without much evidence.   He certainly is right that the 1% live in their own bubble away from Homer Simpson but did Prince Charles ever have much to do with Joe the Plummer?    He appears to be celebrating an earlier time when the U.S featured more equality and less diversity.   If the population wants to self-segregate into like minded (Tiebout) sub-communities, what is lost?  Perhaps, he is embracing the Alesina-Glaeser view that there would be more support for redistribution if the wealthy connected and embraced the less fortunate?  

Does Sandel support mandatory military service to force rich kids to integrate with other kids?   If the population wants to self-segregate, what binding nudge is he proposing be implemented? Will he quit his position at Harvard and teach at Univ. Mass to interact with more people from different backgrounds?

If the rich pay their taxes and commit no crimes, what else do they owe society?  As a citizen, what do you owe your fellow man?  

Kristof and Sandel appear to believe that more markets means more segregation and less interactions across groups (Putnam's bridging social capital).  They prefer a "pooling equilibrium" where every restaurant, church, neighborhood, school contains a representative sample of the U.S population.  But, over and over again the population has revealed a taste for "sorting".   To claim that individual's privately favorite choices cause social problems is to argue that there is a negative externality from allowing the rich to self segregate.  

When Kristof and Sandel send their children to an income integrated public school (I don't know if they do),  who benefits from this action?  It would be wonderful if the answer is "everyone" but what is the evidence supporting that claim?  

Again, if the rich have access to markets that allow them to view life in a "Sky Box" then should they be denied this ability to express their taste for this elite status?  

In the case of pollution, we want to have a pollution tax on activities such as driving a Hummer that offer private benefits but impose social costs. When Don Trump wants to be in a Sky Box and is willing to pay extra for it, how does that hurt Joe the Plummer?   Would Joe the Plummer be a more productive guy if he got to sit next to Don Trump at the boxing match?

Wednesday, May 30, 2012

The Highly Educated Concentrate in "Green Cities"

The NY Times has a nice piece  that quotes Glaeser and Moretti about the recent divergence in average human capital levels across U.S cities.   To quote the article;

"The winners are metro areas like Raleigh, N.C., San Francisco and Stamford, Conn., where more than 40 percent of the population has a college degree. The Raleigh area has a booming technology sector in the Research Triangle Park and several major research universities; San Francisco has been a magnet for college graduates for decades; and metropolitan Stamford draws highly educated workers from white-collar professions in New York like finance.
Metro areas like Bakersfield, Calif., Lakeland, Fla., and Youngstown, Ohio, where less than a fifth of the population has a college degree, are being left behind. The divide shows signs of widening as college graduates gravitate to places with a lot of other college graduates and the atmosphere that creates."
So, the authors are telling a path dependence story that college graduates want to live and work near others like them perhaps due to marriage markets and shopping and restaurant opportunities (see the work of Joel Waldfogel).
I would add that where the educated concentrate become "green" high amenity cities.  Some of these places are exogenously great such as San Francisco but in other cases when the skilled concentrate in an area they vote for regulations and policies that endogenously boost the area's local public goods.  Public schools in highly educated areas are likely to be of higher quality and the non-market local quality of life such as crime, pollution, green space are all likely to be nicer.  
London used to be nasty before 1960 and made a transition to being a highly educated green city.  Boston, NYC and Chicago have made a similar transition.   Rents are higher in these cities and this pricing differential self selects people with money and or people with a taste for these amenities who are willing to sacrifice other consumption to live there.
The NY Times article does not explain why it matters if the U.S cities segregate by educational level. I would guess that the editors would claim that the social fabric of the nation would be stronger if people from different groups interacted more but is this true?  Did it ever happen?
The article hints that college educated workers offer a positive spillover to those communities that attract them. Enrico Moretti's work has measured these effects in terms of how much higher are high school graduates' wages in cities with a larger % of college graduates living there.  If the Mayors of Bakersfield and Lakeland know this, why don't they offer amenities and services to attract such individuals to move there?
SWITCHING SUBJECTS:  I would like to thank Paul Oyer for recently giving me a tour of Stanford University's new Business School complex.  You have not lived until you have seen their campus.  I was amazed.   I walked away thinking that my campus needs a makeover.  

Monday, May 28, 2012

Are Cities and the Internet Complements or Substitutes?

Glaeser has argued that they are complements while this NY Times Piece suggests they are substitutes.

Dear Diary:
While sitting on a bench in Central Park on a recent Sunday afternoon, I started to experiment with my new iPhone. I was interested in Siri, the feature that allows you to ask a verbal question and get a response from the phone. To see if its answer would be correct, I would ask it something I knew.
I placed the phone to my ear and said, “Where is Zabar’s?”
Before the phone could respond, a woman on the other end of the bench told me Zabar’s is on Broadway and 80th Street.
Edward G. Miller

Saturday, May 26, 2012

Climate Change and Global Politics

Mark Thoma's post offers me the opportunity to mention the publication of my 2012 Economic Inquiry paper on this topic.   I wrote my 2010 climate change adaptation book titled Climatopolis, because it was clear to me that there is a voting bloc in Congress (namely Conservatives from poor, high carbon areas) who will oppose any carbon legislation.   I've been quite pessimistic that a global deal on carbon can or will happen in the short term.   I predict that individual initiatives such as California's AB32 will teach useful lessons and that the host of low carbon technologies will become more price competitive over time due to globalized free trade.

Take a look at this slide below and explain how in a world where population and world per-capita emissions are rising how we will start a chain reaction so that all of the world's key players join the carbon coalition.  Who will provide the "carrot" to nudge the BRIC nations to play ball?   Who will pay for this nudge?  The units are tons per-capita per year in the following graph.


Wednesday, May 23, 2012

Don't Feed the Monkeys

Too many monkeys in New Delhi offers a great example of the Tragedy of the Commons.  The NY Times reports:    Aren't the monkeys cute?

Given the abundance of monkeys, some residents of New Delhi are "fighting fire with fire".  To quote the article;

"With the city’s trapping program a failure, some residents are getting a bigger monkey, a langur, to urinate around their homes. The acrid smell of the urine scares the smaller rhesus monkeys away for weeks. But the odor is no bouquet for humans, either, and as soon as it disappears, the rhesus monkeys return."

Capitalism is at work here.  One person's agony about monkeys is another person's opportunity; "
Mr. Singh said that he had 65 langurs urinating on prominent homes and buildings throughout Delhi. He and his partners feed and walk each monkey during the day, but they remain tied to their posts overnight. He charges about $200 a month."

But, one family's adaptation strategy actually imposes a deflection cost on other neighbors; "Dr. Tyagi said langurs simply pushed rhesus monkeys to ransack adjoining homes. The city started out seven years ago paying monkey catchers $5 for every rhesus monkey they caught. It raised the price to $9 four years ago, and now pays $12."
As the monkeys have been pursued, these smart creatures have adapted!  Maybe they have read my book?
"Years of trapping, using cages baited with fruit and nuts, have taught the monkeys to avoid the traps. For a time, the city hired highly professional trapping teams from the south of India, but even they have stopped coming to Delhi, Dr. Tyagi said. Himachal Pradesh, a northern Indian state, issued permits to kill monkeys that destroyed crops, but the practice spurred protests and is not being considered in Delhi."
How would Ronald Coase solve this externality?  Perhaps the monkeys should be paid to move away?

Monday, May 21, 2012

New UCLA Research Suggests that Men Should Not Bike

This new piece of research confirms a long standing conjecture of mine.  Guys should drive rather than bike.   It appears that the serious bike riders are using some cream that has unintended consequences.    Here is the press release and I hope you know that my headline is meant to be funny.

Cycling may negatively affect male reproductive health, UCLA study finds

Laura Perry,
A study by researchers at the UCLA School of Nursing has found that serious male cyclists may experience hormonal imbalances that could affect their reproductive health. 

The study, "Reproductive Hormones and Interleukin-6 in Serious Leisure Male Athletes," was recently published in the European Journal of Applied Physiology. 

To date, an extensive amount of research has been done documenting the positive effects of long-term exercise on health. Yet while moderate exercise can lead to enhanced cardiovascular and metabolic function and reduced body fat, studies have shown that ultra-endurance levels of exercise can also adversely affect the neuroendocrine system and reproductive health. 

Most research studying the effects of exercise on reproductive health has focused on female athletes; there have been few studies that have looked at male endurance-trained athletes. 

The UCLA study explored associations between exercise intensity and circulating levels of reproductive hormones in both serious leisure athletes and recreational athletes. The researchers divided 107 healthy male study subjects (ages 18 to 60) into three groups: 16 triathletes, 46 cyclists and 45 recreational athletes. 

Participants completed the International Physical Assessment Questionnaire to provide an objective estimate of time they spent participating in different levels of physical activity and inactivity during the previous week. Blood samples were then collected from each participant to measure total testosterone, estradiol, cortisol, interleukin-6 and other hormones. 

"Plasma estradiol and testosterone levels were significantly elevated in serious leisure male cyclists, a finding not previously reported in any type of male athlete," said Leah FitzGerald, an assistant professor at the UCLA School of Nursing and principal investigator and senior author of the study. 

Plasma estradiol concentrations were more than two times higher in the cyclists than in the triathletes and recreational athletes, and total testosterone levels were about 50 percent higher in cyclists than in the recreational athletes. 

Estradiol is a form of estrogen and, in males, is produced as an active metabolic product of testosterone. Possible conditions associated with elevated estrogen in males include gynecomastia, a condition that may result in the loss of pubic hair and enlarged breast tissue. 

"Although preliminary, these findings warrant further investigation to determine if specific types of exercise may be associated with altered sex-hormone levels in men that could affect general health and reproductive well-being," FitzGerald said. 

One of the interesting findings of the study related to the use of chamois cream. Some cyclists apply chamois cream to their perineum area to help prevent chaffing and bacterial infections related to bicycle saddle sores. However, many commercial creams contain a variety of ingredients, including lubricants, polymers and oils, and some also contain parabens, which are anti-microbial preservatives and weak estrogen agonists. 

In the study, 48.5 percent of cyclists — compared with 10 percent of triathletes — reported using a paraben-containing chamois cream. The study found an association between an increase in estrogen levels and increasing years of chamois cream use, particularly for male cyclists using the cream for more than four years. At this time, however, no direct cause and effect has been found, the researchers said. 

The study was funded by the UCLA School of Nursing, the UCLA General Clinical Research Center and the Kaiser Foundation. Other authors of the study included Wendie A. Robbins, also of the UCLA School of Nursing, and James S. Kesner, of the division of applied research and technology at the Centers for Disease Control and Prevention's National Institute for Occupational Safety and Health. 

(The findings and conclusions in the report are those of the authors and do not necessarily represent the views of the National Institute for Occupational Safety and Health.) 

Sunday, May 20, 2012

A Profile of NYC's Major Urban Planner

My mother still wants me to quit being an economist and get a graduate degree in urban planning.  She had high hopes that I could be part of the solution in Newark, New Jersey as my ideas about the spatial distribution of roads, housing,industry and infrastructure would remake that city and improve its quality of life and raise the area's overall productivity.   As a friend of Hayek, I didn't think  that I had a bright future as a central planner.  But, now I've read this piece in the NY Times about Amanda Burden.  She has has an interesting social life and now she has a very important job as the director of the New York City Planning Department.    At the age of 46, it may be time for me to go "Back to School".  

Adapting to Increased Midwest Flood Risk

A new report from the Rocky Mountain Climate Organization offers some specific historical trends over the last  50 years for states such as Illinois  and Ohio.    Now that we have received this trend information about the increased flood risk that such states face, what do we do as Bayesian updaters?  How do we adapt to this new reality?    As a Climatopolis optimist, I bet that we will see individuals, firms and local governments taking pro-active steps to reduce their risk from these floods.  Engineers will offer certain solutions to improve drainage and to build shielding infrastructure.  Individuals will make investments (such as not keeping key stuff in their basement) to reduce their losses from flooding.  Insurance companies will change their premium policies to incentivize the insured to take pro-active steps to reduce the probability that they will seek insurance after a flood event.  For example, the insurance company could offer lower premiums for people who live in elevated homes or homes located outside of the new flood plains.

On page 29 and 30 of the RMCO report,  the authors talk about strategies that the federal, state and local government can take to protect the midwest from flooding.   But, they don't discuss individual choice by households and firms.  Implicitly, these guys are embracing benevolent paternalism --- that only the government can save you from climate risk.  I don't believe this.  As I argue in Climatopolis, the combination of actions by individuals, firms and governments together will work towards achieving adaptation.    Place based politicians such as the Mayor of Cleveland will have an incentive to make his city more resilient to flooding because he will lose his skilled people if the town's quality of life suffers.

The RMCO report also doesn't devote enough time to adaptation to flooding. It returns again and again to mitigation. Of course, we would face less flooding if global GHG emissions decline but they are not going to decline.  The RMCO should send a copy of their report to everyone in China and India and see if this treatment reduces the greenhouse gas emissions from the BRIC nations. Of course, it won't. That's the core free rider problem! Facing this unfortunate reality, we must prepare to adapt and we have the right incentives to do so as we learn about the "new normal" and the challenges we will face under climate change.

Saturday, May 19, 2012

1 Out of 200

Over the last two months, I gave away roughly 200 copies of my Climatopolis book to my UCLA students.  One of my students was kind enough to post it as a "Facebook Like".  If all "Facebook likes" are created equal, then my opus matches up well with her other likes that include; "Rihanna", "Confessions of a Shopaholic", "Harry Potter",  "Scrabble" , and "How I Met Your Mother".     Not bad!

Astrobiologists Discover Propensity Score Matching Methods

The Wall Street Journal reports on a funny statistical exercise involving the search for life on a billion other planets.  Whether a planet has "life on it" is a random variable.  There are certain characteristics of the planet that are observable such as its distance from the closest star, its diameter and other attributes.   Based on these observable planetary attributes, what is your best guess of whether that planet has life on it?  After all, during this time of budget constraints -- NASA should only send space probes to places that have a high index score.

A "propensity score" scholar would implement the following strategy.  Take a random sample of planets (say 100 of them) for which we know whether there is life on the planet or not and for which we know a vector of planetary attributes.  Call this vector Z.  So this will include the stuff such as distance to the closest star, diameter, density etc.

Define Life = a dummy variable that equals one if there is life on a specific planet and 0 otherwise.  Using linear regression methods to estimate a linear probability model of the form:

Life =  constant + b*Z  + U                     (equation #1)

This yields an estimate of "b" which we call "b_hat".   Think of "b_hat" as an estimate of the slope as a specific Z attribute such as distance to the closest star increases, how much does the probability of Life change by? If the probability goes down sharply then "b_hat" will be negative and large. The estimates of "b_hat" represent index weights that allow the researcher to collapse the Z vector into a single index for predicting which of the billion planets are most likely to be home to life.

Now that we have estimated this equation, the researcher can form the following prediction index:

Probability of Life on planet J =  b_hat*Z_j    where Z_j is planet j's observable attributes

Sort this index from highest to lowest and the astrobiologists are ready to explore the universe!  I acknowledge that it takes time and effort to collect the Z_j vector for each of a billion planets.

Now, there is only one problem here.   There is only one known planet that we know has Life and this is Earth.  This makes it difficult to estimate the "Life statistical model" presented in equation (1) above.  Without such estimates, the astrobiologists must be simply making up their "b_hat" estimates and that isn't very scientific.

Friday, May 18, 2012

Should Economists Care About What Philosophers Have to Say About Us?

Raj Chetty, John Friedman and Jonah Rockoff merit the widespread interest in their work on the payoff of a good 3rd grade teacher.  I attribute my failures in life to the bad 3rd grade teachers I had at Scarsdale's Greenacres back in the early 1970s.   But, in today's NY Times a Notre Dame Philosopher takes aim at these scholars.   Gary Gutting asks; "How Reliable are the Social Sciences?"  Permit me to quote the philosopher:

"Consider, for example, the report President Obama referred to.  By all accounts it is a significant contribution to its field.  As reported in The Times, the study, by two economists from Harvard and one from Columbia, “examined a larger number of students over a longer period of time with more in-depth data than many earlier studies, allowing for a deeper look at how much the quality of individual teachers matters over the long term.”  As such, “It is likely to influence the roiling national debates about the importance of quality teachers and how best to measure that quality.”
But how reliable is even the best work on the effects of teaching?  How, for example, does it compare with the best work by biochemists on the effects of light on plant growth? Since humans are much more complex than plants and biochemists have far more refined techniques for studying plants, we may well expect the biochemical work to be far more reliable.  For making informed decisions about public policy, though, we need to have a more precise sense of how large the difference in reliability is. Is there any work on the effectiveness of teaching that is solidly enough established to support major policy decisions?"

Professor Gutting needs to take a statistics course.   Chetty et. al. are well aware that we do not know what is the value of having a great 3rd grade teacher.  This is a random variable whose mean and variance may vary across the population.  A monkey will still be a monkey even it is taught by a great teacher while my son may gain greatly from having a great teacher.   Chetty et. al. have used unique longitudinal data (following students from age 8 until they are young adults and merging in data from IRS tax records) to have an outcome variable to link later life outcomes to the treatment effect of certain teachers.  Their statistical model yields an estimate of the average effect on earnings for a certain demographic group (such as white kids) from being exposed to a high quality teacher.   In a diverse world, Gutting is correct that this statistical exercise does not recover the full distribution of treatment effects of being exposed to an excellent teacher (the monkey would learn less and earn less later than the average kid exposed to the excellent teacher).

But, the average effect is still an interesting parameter to recover.  If parents are risk neutral and don't know their child's type (i.e monkey or median kid or Einstein) then they will value having the information about how the average child responds when exposed to an excellent teacher because their best guess of their child's ability is that the kid is average.  This is the Heckman "essential heterogeneity" agenda.  Under the "veil of ignorance" (if I can borrow a philosopher's term from Rawls) voters will cast their votes for high taxes to pay for teachers if they believe Chetty's results and are risk neutral and know that they don't know their child's ability.  In this sense,  Chetty's paper is important in terms of informing public policy. Of course Gutting is right that not all children (think of the monkey) need an excellent 3rd grade teacher (especially if the cost of hiring her is very high), but knowing the average treatment effect is a good start for learning about the entire distribution of returns.

Jim Heckman has written an entire AER paper on this topic.  So,  Professor Gutting should nudge Dr. Heckman to team up with the Chetty team.

Carneiro, Pedro, James J. Heckman, and Edward J. Vytlacil. 2011. "Estimating Marginal Returns to Education." American Economic Review, 101(6): 2754–81.
This paper estimates marginal returns to college for individuals induced to enroll in college by different marginal policy changes. The recent instrumental variables literature seeks to estimate this parameter, but in general it does so only under strong assumptions that are tested and found wanting. We show how to utilize economic theory and local instrumental variables estimators to estimate the effect of marginal policy changes. Our empirical analysis shows that returns are higher for individuals with values of unobservables that make them more likely to attend college. We contrast our estimates with IV estimates of the return to schooling. (JEL I23, J24, J31)

In this case the marginal policy change would be to increase the supply of excellent teachers and have more schools hire these people.  As these people join different schools, at the margin, would a future Chetty research team recover the same average treatment effect?  Or would the marginal school who hires such a teacher have a lower treatment effect ?  Where treatment effect is the increase in lifetime earnings from having a better 3rd grade teacher teaching at a specific school

Thursday, May 17, 2012

The Environmental Costs of Anti-Dumping Policy

Maybe Adam Smith and Alfred Marshall didn't figure out all of micro theory.  Consider the case of solar panel imports from China.  The NY Times reports that the U.S is imposing a large tariff punishment on these imports. This will hurt Chinese exporters and U.S importers and help U.S producers of panels but it will also impose a global pollution externality.  A side benefit of the U.S being able to import cheap solar panels is that this increases their adoption and this reduces global GHG emissions.  In the presence of such a consumption positive externality, does this affect how we think about the economics of dumping?   The irony here is that environmentalists should support Chinese dumping (i.e. China selling their green products in the U.S for a really low price).

As I understand the economics of dumping,  regulators are concerned that exporter prices low now to kill off domestic competition and once the U.S firms are dead will sharply raise prices to monopoly levels and gouge the silly Americans.    Most Chicago economists do not believe this logic.  If China did achieve market power and tried to take advantage of it, this would trigger entry by some other developing nation who could cheaply mass produce that solar panel technology.  The "pro-dumpers" implicitly assume that there is some future barrier to entry that prohibits entry into the industry.  That sounds silly to me.

To repeat this blog post's key point.  With most goods such as cars, when we import a car there is actually a negative pollution externality so "anti-dumping" laws protect the environment. In the case of products that offer positive externality benefits,  environmentalists should be bigger fans of free trade and oppose tariffs on such products!  Free trade and the environment baby!  Think about it.

Wednesday, May 16, 2012

A Witty Book Review

My mom will be proud that I managed to publish a book review in Stanford's Social Innovation Review.  If you bother to read it, you will see some good jokes and some University of Chicago price theory at work.  I review John Elkington's "Zeronaughts".

The End of Government Collected Data and the Rise of More Bad Finance Papers

Information is a public good so there is some justification for government supplying it but the recent budget deficit is being used to cut back on data collection.  Here is Exhibit #1.  You will see that I signed this letter requesting that funds for EIA data collection continue.  Here is Exhibit #2.  This bill would end the American Community Survey that in recent years took the place of the Census Long Form.  The Census Long form (filled out by 1 in 6 households each decade) has been crucial for social science research.  If you don't believe me, take a look at the IPUMS data base.  Exhibit #3 comes from the proposal that the NSF be banned from financing political science research.

The net effect of this effort will be to undermine basic social science.  Researchers who work with private companies such as Google or Facebook or Amazon willl be able to access such confidential data but a series of privacy issues will arise.  Such research can be great but there are a limited set of questions would can answer with such data.

Another dangerous effect of the government pulling out of data collection is that the "democracy of scholars" will be threatened.  Today in development economics,  rich schools with famous scholars such as MIT and Yale have ongoing data collection efforts in which randomized control trials are implemented in various nations.  This is a great research agenda but you have to be part of their "network" to be able to access such data.  If you are not part of the network, then there will be very high barriers to enter the field.   In a world without public data collection, personal connections to firms and non-profits will play an increasingly important role for determining who has access to great data.

In fairness to these groups, I know that MIT and Yale's researchers have open competitions where they invite outside researchers to propose experiments and offer seed money for financing them.

In the absence of government data, how will we know what are the aggregate trends taking place with respect to income inequality, unemployment, poverty?   How will people sample a subset of the population? Using Facebook?   A cynic might say that some Republicans seeks to increase general ignorance among the population so that the status quo can continue. I hope this claim is wrong.

Now, there is one piece of data that will continue to be in the public domain.  That is asset pricing data!  Each day, you can look up the price of every public company around the world. An unintended consequence of the demise of government data collection will be a sharp increase in the supply of bad finance papers!  Think about that.


Tuesday, May 15, 2012

How Will Hawaii's Beaches Cope with Climate Change?

The NY Times is worried about the future of Hawaii's beaches. Its article is based on a new academic report available here. At the end of the article, the reporter finally starts talking about the economics of adapting to this anticipated challenge of disappearing beaches.   She writes;

"But the most common alternative approach, replenishing beaches with pumped-in sand, is difficult in Hawaii, where good-quality sand can cost 10 times as much as it does on the East Coast, Mr. Williams said.
Dr. Fletcher said he believes the answer lies in encouraging people to move buildings and other infrastructure away from the shoreline, a strategy coastal scientists call retreat. “If we want beaches we have to retreat from the ocean,” he said. But, he added. “It’s easy to say retreat; it’s much harder to implement it.”
OPTION #1:   So, note that there is a "solution" to this problem;  importing sand but it is costly.  Do you doubt that some capitalist firm won't figure out some "sand substitute" to swap in that would cheaper?
OPTION #2: raises issues of property rights.  Folks who own coastal real estate in Hawaii want to fight rather than surrender to the sea.  Of course, they want to use tax payer $ to build a sea wall. Spending other people's $ is easy.  An interesting real estate issue will arise.  As we retreat from the coasts, owners of coastal real estate will suffer an asset loss.  Do they have the right to be insured by the public for the loss? Are they suckers who bought property believing it would keep its value? Or were they shrewd investors who knew they were flipping a one sided coin?  By this I mean the following;  if climate change doesn't raise sea levels then the owners of the coastal property make $ as they own a valuable asset. If climate change does raise sea levels, and the public feels sorry for the coastal property owners, then tax payers will bail them out. In this case, the coastal property owners bear no risk from their RISKY investment. That's a bad incentive.  If you buy coastal real estate, of course you are taking a gamble.  
Note that the logic of Climatopolis  is evident here.   Even the NY Times knows that Hawaii's beaches face a challenge. This creates opportunities for entrepreneurs and the search for adaptive strategies begins .  This is how we cope with climate change.

A Preview of Moretti's The New Geography of Jobs

Professor Enrico Moretti of UC Berkeley has written a very important book that will be published in one week.  Google Books offers you an exciting preview of the New Geography of Jobs here.

Monday, May 14, 2012

John Quigley: A Giant in Urban Economics

UC Berkeley's John Quigley passed away this weekend.  This news deeply saddens me.  He was a great scholar, a great leader, and a good friend of mine.    At the age of 70, he continued to write new papers and brimmed with ideas and enthusiasm about applied economics.    Just  three weeks ago, we finished a new paper.  This is joint research with Nils Kok.  Here is the title and abstract of the paper.

Commercial Building Electricity Consumption: Understanding the Role of Shocks, Structure Quality and Contract Incentives

Matthew E. Kahn
University of California,
Los Angeles and NBER
Nils Kok
Maastricht University
John M. Quigley
University of California
Berkeley, CA

April 22, 2012


The residential sector has been the primary focus of public policies related to energy efficiency, but commercial buildings are now responsible for most of the durable building stock’s total electricity consumption. This paper exploits a unique panel of data to investigate variations in the electricity consumption of individual buildings as they experience both climatic and macro-economic shocks. We also seek to understand the impact of building vintage, contract incentives, and human capital on the cross-sectional variation in electricity consumption across commercial buildings. We document that electricity consumption and building quality are complements, not substitutes. Technological progress may reduce the energy demand from heating, cooling and ventilating, but the behavioral response of building tenants and the large-scale adoption of appliances more than offset these savings, leading to increases in energy consumption in more recently constructed, more efficient structures. In the absence of carbon pricing, these results have important implications for policy makers in assessing and influencing future energy demand.

John's research focused on issues at the intersection of urban and local public finance economics.   Quigley, his mentor John Kain and Kain's mentor John Meyer , Brown University's Vern Henderson , and Harvard's Ed Glaeser have been the key urban economists whose research has deeply influenced my work.

He was an amazingly versatile researcher.   Take a look at his recent papers.  In recent years, he and Dwight Jaffee offered proposals for reforming the GSEs.  He and Nils Kok and Piet  Eichholtz published several influential papers on the economics of "green buildings".  He also published some great work on using a natural experiment from Sweden for testing for the role that universities play in knowledge creation.   He and Chip Case and Robert Shiller wrote a famous paper on measuring the marginal propensity to consume out of stock market wealth versus housing equity wealth.   On top of this, he wrote an exceptional paper on the political economy of voting for congestion pricing.   I could go on and on but I am depressed because I have lost the opportunity to continue to learn from him and to laugh as we would crack jokes in his Goldman School office.  

John and his wife Mary Curran, Dora and I would often have dinner together in Berkeley. He was a fascinating man who I was always eager to talk to.   

The Chronicle of Higher Education has devoted a lot of attention to the graying of the research university faculty. If senior scholars would act like John Quigley, then U.S academia will continue to thrive.  He always was an ambitious and optimistic scholar. I found that to be infectious!

Sunday, May 13, 2012

Is $16 Billion a Large Number?

California has a $16 billion dollar deficit.  In a state with 39 million people, Jerry Brown could introduce the following status quo plan; there will be a head tax of $410 per person for every person who is in California.  Don't pay this each year and you must leave.  That's $1.12 per day.   Call it a "sun tax" and treat everyone equally.  Now, I know that a head tax is "unfair" but once we start with this charge, the legislature would then be incentivized to debate alternative revenue plans.

Switching subjects, I want to mention China and the accountants. China has made a mistake with its new edict that locals must be in charge of Accounting projects in China. "China's Ministry of Finance announced the audit industry's so-called Big Four -PricewaterhouseCoopers, Ernst & Young, KPMG and Deloitte - must begin to hand over the reins of their Chinese practices to its citizens and accountants."

You don't have to be a great game theorist to anticipate that Chinese citizens are likely to be more responsive to central government lobbying and nudges than foreign nationals.  This perception that the books "will be cooked" should give foreign investors a stomach ache when thinking about whether to invest in China.   

If China believes in the strength of its economy, then it should support transparency because it has "nothing to hide".  

Saturday, May 12, 2012

California High Speed Rail and a Game of Matching Pennies

California's High Speed Rail will likely cost $100 billion dollars to build and operate.  Who should pay for this? Given that the bulk of the benefits of this project will accrue to the people of California, it's not crazy to ask the people of California to pay for it.  But, the people of California are eager to spend "other people's money" and the Obama Administration has offered a fairly large upfront investment.  As reported in this blog,  the Obama Team is asking some tough questions focused on whether large deficit California will ante up and put roughly $3 billion of its own $ to pay for the train.  An interesting game of "Chicken" is emerging.  Will the Obama Team pull their Federal $ for the train if California doesn't pay its "fair share"?    During this time of national and state deficits, is this project a "good project"?

You might think that a $200,000 economic consulting study would be a valuable input in the decision process but I don't know of any consulting team with blue chip credentials who has been brought in to conduct this analysis.  In my "rational" world of public policy, the benefits and costs of each option are explored and quantified and the "known unknowns" are identified BEFORE an irreversible multi-billion dollar investment is made.  This is especially true in the case of rail that has a long history of not delivering the benefits its advocates promised before the project was implemented.   For folks looking for objective evidence that substantiate these points; please read this Don Pickrell paper  and my 2005 Brookings Institution paper with Nate Baum-Snow.

A High Returns Investment Strategy: Short Facebook

On Monday,  Jerry Brown will announce new budget cuts that will hurt UCLA.  Anticipating this, I have been brainstorming about new ways to raise UCLA's return on its tiny endowment.  Shorting Facebook offers one winning strategy.  While there is great fanfare about Facebook's IPO,  I am pessimistic about this company's future --- relative to the hype surrounding this juggernaut .  Permit me to explain.

Compare Starbucks and Facebook.  Starbucks can collect more revenue from people if it opens up more stores in more nations or if with a given number of stores it manages to get more customers into each store or nudges incumbent customers to spend more at the current set of Starbucks.   With our daily need for coffee, diminishing returns doesn't kick in.  Starbucks is a high quality product that I view as a "reward" (a relative cheap reward) for a day of effort and suffering.

In contrast, let's turn to Facebook. It is rightly proud that 1 billion users have accounts but at least in my case I find that I'm logging in less and less frequently.  Diminishing returns have kicked in. I'm proud of having reconnected with the Scarsdale Class of 1984 and my Hamilton College class of 1988 but I have nothing to say to these old friends.  I have now seen photos of them and I know how many kids they have and what they done with their lives. What else is there to say?   Facebook is losing me because the social connections it offers me are stale.  I'm glad to have reconnected with my old friends but I don't have enough time in the day to invent a future with people from my past.  I have a feeling that my experience holds true for many other people.  I have roughly 200 facebook friends and only a subset (roughly 15) post something on a weekly basis.  This isn't good news for FB.

Now let's turn to FB's revenue model.  As more computer activity moves to the smartphone and tablet, will such smaller devices be conducive to advertisements?  I don't think so.  I believe that advertisers won't feel they are getting their $ worth and will pull the plug on paying FB for advertising.  What will FB do then?

Does Google face that equal challenge?  I believe that there will continue to be a set of people who "compute at a desktop or notebook" and Google will continue to make $ from this group.

A final concern that I have with Facebook is its implicit assumption that we only learn from our social network and friends.  In truth, people combine information from multiple sources.  The wise person will check in with their peer group (using FB) and use Google to see what are the leading links for a topic such as "best restaurants in LA".  Facebook appears to believe that we only learn from local knowledge. This seems exaggerated to me and is likely to backfire in the near future.

So, UCLA -- find a financial instrument that allows you to sell Facebook in June 2012 and buy it back in June 2013.  You will earn big $ on this trade!

UPDATE:  Another challenge that FB faces is that it is a leisure activity.  People use Google at Work and we are at work for half of the time we are awake. You are not supposed to use FB at work. It is a leisure activity.   For FB to continue to occupy our time, the Zuck must convince people to remain glued to his site rather than to actually live their lives in the real world.  There isn't enough time in the day to do both.

So, the Zuck should hire a time diary expert to make a histogram of how much time people spend on Facebook and study dynamic patterns.  A person like me used to spend 40 minutes a day and now I'm at 0 minutes.  I apologize Zuck but I have a life to live.  Am I typical? Or only typical of 46 year old bald dudes?

UPDATE #2:  General Motors agrees with my logic.  They have stopped sending FB $10 million dollar advertising checks.

Wednesday, May 09, 2012

The End of Austerity for Europe and a Time Consistent Keynesian Big Push

It isn't shocking that non-German European voters are eager to end Austerity and issue some Euro bonds to finance a new round of "New Deal" stimulus.  The New York Times keeps printing photos of passionate young European voters crying and celebrating "regime change".  Before we enact Paul Krugman's plan, I would hope that we can discuss two points;

1.  Given what we have learned from the U.S stimulus efforts, what is the optimal way to "jump start" the European economies?  Tax cuts?  government infrastructure projects?   Free copies of Krugman's new book?  Extra stimulus sounds like the "easy fix".  

2.  If the answer is more Keynesian "G",  how will it sunset?  What is the political economy mechanism such that it will sunset?  What confidence should the bond holders of this next round of debt have that they will be paid back?   Budgets must eventually balance -- what is the fiscal mechanism for paying back these new debts?  Could there be sufficient economic growth stimulated by this new push to cover these new payments?

If Germany doesn't back this next round of bonds, what would there interest rate be due to the perception of future default risk?  Would the French be issuing "junk bonds"?  If the German promise as the "lender of last resort" lowers that interest rate, should the French officially thank the Germans for their kindness?  As we continue to try to figure out how to escape from the macro challenges what do nations owe each other?

The Choice

I sometimes mail out "snail mail".  Anticipating this, I own a large number of 44 cent stamps.  It crossed my mind that the first class rate is no longer $.44 and Google informed that it is now 45 cents.  What is an economist to do?

1. I could walk to the post office and stand in line and wait to purchase a large number of 1 cent stamps.

2.  I could double down and put two 44 cent stamps on my envelopes and over pay and run out of stamps.

3.  I could purchase electronic postage at 1 cent a piece here.

4. I could take the gamble of dropping my 44 cent letter in the mail and see if the Obama Administration is willing to subsidize my "green job" (I am an environmental economist)  at 1 cent per letter.  

Tuesday, May 08, 2012

Bubble Thickness

Peter Gordon nudged me to take Charles Murray's 20 question quiz to reveal my type.   I answered "yes" to two of the 20 questions.  Please email me which ones you think I checked "yes".  I'm not sure that I achieved any greater self awareness but I did enjoy taking the quiz.

As I tell my students on exam days, "Exam Days" were always my favorite days of the year and now I don't get to take them anymore.  The funny thing is that I have the feeling my students believe me.

Financing Green Projects Using Obama $

We know that Solyndra failed but it would be wrong to extrapolate and conclude that public funds shouldn't be used for financing "green infrastructure".   Today, the NY Times has published a green puzzle.  City governments and private firms aren't using the Qualified Energy Conservation Bonds (only 20% of the $ has been used).

Some Facts:

Qualified Energy Conservation Bonds (QECBs) may be issued by state, local and tribal governments to
finance qualified energy conservation projects. A minimum of 70% of a state’s allocation must be used
for governmental purposes, and the remainder  may be used to finance private activity projects.
• Qualified projects are defined broadly (detailed discussion to follow).   Examples of qualified projects
include energy efficiency capital expenditures in public buildings, green communities, renewable energy
production, various research and development, efficiency/energy reduction measures for mass transit,
and energy efficiency education campaigns.
• The United States Treasury (U.S. Treasury) allocated $3.2 billion to states according to population.
There is no statutory deadline for eligible public entities to issue QECBs.
• QECBs were originally structured  as tax credit bonds. However, the March 2010 HIRE Act (H.R. 2847
(Sec. 301)) changed QECBs from tax credit bonds to direct subsidy bonds similar to Build  America
Bonds (BABs).  The QECB issuer pays the investor a taxable coupon and receives a rebate from the
U.S. Treasury.

So, this approach allows the green project to finance itself at a 1% interest rate.   The NY Times has an interesting quote for how this $ could be used.

"Municipalities have found the program difficult to navigate, as it wasn’t always clear how clean energy projects could qualify. For example, localities could sell bonds for projects that reduced energy consumption in public buildings by 20 percent. But some officials were unsure how to calculate the savings, either for individual buildings or the overall group."

This quote surprises me.   Suppose that a building's monthly electricity consumption is X kWh.  Then, the proposed building retrofit would reduce annual consumption by .2*X*12 .  Suppose that electricity is priced at p $ per kWh (so let's ignore an increasing block tariff structure).  Then the annual savings due to this project is .2*X*12*p  .

Suppose that the retrofit costs $F and the interest rate for borrowing this money is 1% and the market rate of interest is 4%.   To keep this algebra simple, let's assume that the building  lives for 2 years and then falls apart.

The city should engage in the green Retrofit if:

.2*X*12*p*1.04 + .2*X*12*p  - (1.01)*F  >  0

Note that I'm solving this at time period 2 so that by doing the retrofit project, you save on electricity bills and you can put that $ in the bank and earn 4% and in time period 2 you save again but you have to pay back the loan amount and the 1% interest.

What is so difficult about calculating this term?   The Government could introduce a calculator to help potential investors decide whether they have an economic incentive to pull the trigger on doing such retrofits using government subsidized $. In the presence of a GHG externality, such subsidies may make sense.  But, there is a puzzle of why City governments can't do this arithmetic.



Monday, May 07, 2012

The Rise of the French Socialists and the New Book "Uncontrolled"

I celebrate the celebration of randomized field experiments and I'm happy that a MIT nerd has written a whole business book about them.   Today's headlines suggest that France is now running a regime shift experiment to see whether a radical change in public finance and borrowing more money from Germany can improve economic outcomes.  The challenge that "macro scholars" face is that they do not have a control group while the micro RCT scholars have a good one.

I have not read "uncontrolled" but a key issue here is selection bias.  A firm is only willing to run a field experiment when three conditions hold;

1. It knows that it does not know a key parameter of interest such as the elasticity of demand for a product.
2. It has the self confidence to give up control of its operations to a research nerd to implement and evaluate the experiment in question.
3.  It believes that running the experiment will yield sufficient ex-post benefits to justify the annoyance cost of implementing the disruptive experiment in the first place.

I would suggest to you dear reader that the companies that would most benefit from running field experiments are the least likely to meet these 3 criteria.   U.S productivity would be higher if we had more firm experimentation but risk taking within bureaucracies is not always rewarded. We need a new generation of leveraged buy out artists to come in and take over companies that do not experiment enough.

Returning to France,  the macro economists face a challenge.   We do not know the correct model economic growth and different decision makers have different models in their head.  There is also a game theoretic issue lurking of "too big to fail" and basic time consistency issues that past promises will be broken.  Germany tried to commit Europe's nations to rules over discretion but the Socialist election promises another regime break.  We will soon see new papers on political business cycles and their impact on investment under uncertainty.  I believe that Becker, Davis and Murphy's WSJ piece applies in the case of Europe.   The uncertainty created by the political regime shift will freeze up investment in Europe and this will further slow growth.  While Dr. Krugman demands a sharp increase in public demand, what will this $ be spent on? Who will be held accountable for spending it efficiently?  Once government ramps up, what institutions will reduce the size of the government once the bad times end?   What RCT can be used to answer these questions?

Sunday, May 06, 2012

The High Cost of Zero Marginal Cost Pricing: Evidence from American Airlines

The LA Times reports a very funny story. In the late 1980s, American Airlines sold lifetime first class unlimited tickets for $350,000 each and often sold a "companion pass" for an extra $150,000. Once you own one of these "golden tickets", you can book two first class tickets for free anywhere you want to go.   You don't have to be Jim Heckman to anticipate that this incentive regime will induce a selection effect (a non-random subset of people signing up) and then induce some extreme treatment effects (as these high demanders now face a zero marginal cost of flying).

In a diverse world, what types of people would give American Airlines $500,000 in upfront cash in return for unlimited future plane rides?   From a selection point of view, these will be wealthy people who believe that they have a very high demand for fancy flying.

Once you purchase one of these gold tickets, and now face a zero marginal cost per ride,  econ 101 would predict that you will demand lots of rides.   This is the "treatment effect".  The article offers one example of a Mr. Rothstein who made 3,009 reservations in less than 4 years and canceled 2,523 of them.  These guys would book several first class tickets and hold them in case of weather delays or other unexpected shocks to their schedule.  They would also sell of their "companion ticket" and pocket the money while some of the gold ticket owners would make new friends and allow them to fly for free in first class.  American Airlines was surprised by the amount of fraud and "over use" that their incentive system introduced.

American Airlines should have called a micro economist and asked for a prediction about the unintended consequences of zero marginal cost pricing before it implemented this policy!

Saturday, May 05, 2012

The Environmental Benefits of China's One Child Policy

I've read in the news that the blind Chinese activist is eager for China to get rid of its one child policy.  Will environmentalists oppose his agenda?  After all, Paul Ehrlich's ideas remain influential.  It has been claimed that China would have an extra 300 million people right now had it not introduced this policy.  Such population growth would scale up greenhouse gas emissions and resource consumption.

Siqi Zheng and I have worked on a different environmental benefit of "4-2-1" (4 grandparents, 2 parents, 1 kid).  As Chinese urbanites have only 1 kid, they have very strong incentives to seek out "green cities" to guarantee this precious child's health and happiness.  Pollution injures both.   Dora Costa and I have argued that the willingness to pay to avoid risk rises faster than national per-capita income.  As China grows richer, this logic implies that China's willingness to pay for safety and environmental regulation will increase and this will help to supply "green cities".  Zheng and I have a Journal of Economic Literature submission that fleshes out these ideas.

Demographers have long noted that a consequence of China's one child policy is that the nation's population will age.  Given that nations need young people, China will face a choice between large scale immigration or retracting the 1 child policy.  In my work on climate change adaptation, I have argued that there are hundreds of millions of people in Southern Asia who will be seeking a better life (think of Bangladesh) and migration to a "middle class" China in the year 2030 will offer gains to trade.  While environmentalists have worried about international migration of millions of environmental refugees, a more optimistic interpretation of this trend is that there will be gains to trade in the international labor market.  The U.S has welcomed millions of migrants here over the years.  China's population "crisis" can be defused relatively easily here.

Thursday, May 03, 2012

New Foreclosure Research

My friends at the Fed of Boston have released an important general interest paper on the causes of the foreclosure crisis.  In this post, I would like to highlight what I like about the paper written by
Christopher L. Foote, Kristopher S. Gerardi, and Paul S. Willen.

Here is their sexy intro:

"More than four years after defaults and foreclosures began to rise, economists are still debating the ultimate origins of the U.S. mortgage crisis. Losses on residential real estate touched
off the largest financial crisis in decades. Why did so many people—including homebuyers
and the purchasers of mortgage-backed securities—make so many decisions that turned out
to be disastrous ex post?"

The paper contains many interesting claims.

1.  Fancy, complicated adjustable rate mortgages are not to blame for the rising loan default rate

2.  Investment bankers were not snake oil salesmen doing their best P.T Barnum imitation as they looked to sell sophisticated products to naive suckers.

3.   The authors' favorite story for recent events focuses on a contagion of optimism about ever rising home prices and this "infection" impacted both buyers of real estate and the financial industry.  "The bubble theory therefore explains the foreclosure crisis as a consequence of distorted beliefs rather than distorted incentives."

Japan's Growing Carbon Footprint

As Japan shuts down nuclear power plants, what energy source will be used to produce its electricity?   This webpage claims that 14% of Japan's power is currently generated by nuclear plants.  If this 14% is now produced using natural gas power plants, we can do some arithmetic to calculate the marginal increment to
climate change caused by extra greenhouse gas emissions.

In 2008, Japan produced ,  1,025,000,000,000     kWh of power.

14% of this = 143,500,000 MW of power 

Based on data from the U.S EGRID,  the median natural gas power plant in the United
States has a carbon emissions factor of 837 pounds of carbon dioxide per MW of power generated.

So, this means that the transition of Japanese electricity production from nuclear to natural gas will increase annual carbon
dioxide emissions by   143500000*837/2000 =     60 million tons of CO2 per year.

If the social damage from CO2 is $50 per ton, then the global externality associated with this fuel transition equals $3 billion
a year in terms of exacerbating climate change.

When folks wonder why I wrote Climatopolis and focus on climate change adaptation,  this blog post gives you
the answer!   

Wednesday, May 02, 2012

Summer School 2012

If you are looking for some excitement in your life, I will be teaching Environmental Economics at UCLA this summer starting in early August.  Look up my teaching ratings.

Took his Econ M134 
All I can say about this professor is that obviously he devotes his life to the research of environment economics. He's not only a genius but also a crazy, enthusiastic environmentalist. I am not a fan of protecting environment or doing research, but I found his class very interesting even from the first meeting, not only because of his great sense of humor(includes the way he talks) but also because he uses his real world experience to help you realize the concepts. The tests are not hard. Lots of past exams will be provided. Even if the test is difficult, there will be a reasonable curve. Definitely recommend to take this class.

While I'm not loved at UCLA, when I step into the classroom students learn and think and I try my best.  Why teach summer school?  It ain't for the salary. I take a deep pay cut to help my unit.  I won't be teaching this fall and this course will allow me to not get rusty.  I like to teach this class and the revenue generated by the course mainly goes to my Institute of the Environment rather than vanishing into the ether of the University of California.    While I can't talk about my master plan for bringing about solvency for the University of California, the plan revolves around decentralizing responsibility and opportunities back to the individual campuses.  Everyone on each campus should face the right incentives to raise revenue (both from grants, teaching and private fund raising) and to reduce costs.  I am a fan of having everyone at UCLA pay for toliet paper per sheet.  Marginal prices = 0 leads to waste and the days of waste of $ have ended.