Monday, July 30, 2012

Do Environmentalists Own Swimming Pools?

I skim Joe Romm's blog because it offers some substance and it provides a sense of how "climate hawks" are attempting to attract attention for their cause.   His team blogged about a recent paper of mine without mentioning me or Nils Kok.

This recent blog post caught my eye. It claims that people who live in homes where there is a swimming pool consume 49% more electricity than those who don't.  It makes the nice point that this is likely to be a selection effect rather than a treatment effect and it establishes this point by looking at the differential in average consumption between "pool homes" and homes without pools by looking off-season at spring and fall and showing that this differential persists.

So, who self-selects to live in a home with a private swimming pool?  It could be a standard demographic story of households with more kids and more income gaining pleasure from having a pool and they consume more electricity.

What about environmental ideology?   Are Republicans more likely to live in homes with pools?  To study this, I took the data that Nils Kok and I used for our "green homes" paper  and merged it by street address to Aristotle data.  The Aristotle data provides information for home owners on their age and in California on their political party of registration.  Using this merged data set for recent home sales in Placer County, California, I ran the following regression.

areg Pool  Rep age, absorb(zip)

Linear regression, absorbing indicators                Number of obs =   13145
                                                       F(  2, 13118) =   12.74
                                                       Prob > F      =  0.0000
                                                       R-squared     =  0.0918
                                                       Adj R-squared =  0.0900
                                                       Root MSE      =  .35199

        Pool |      Coef.   Std. Err.      t    P>|t|     [95% Conf. Interval]
         Rep |   .0196991   .0061828     3.19   0.001     .0075799    .0318182
         age |  -.0008377   .0002082    -4.02   0.000    -.0012459   -.0004296
       _cons |   .1930868   .0108083    17.86   0.000      .171901    .2142727
         zip |      F(24, 13118) =     53.221   0.000          (25 categories)

So, for 13,145 homes in Placer County --- I ask the following question ---- within a given zip code (note the zip code fixed effects);   who owns a home with a Pool?  According to this linear probability model, older people are less likely to own a pool.   Note the dummy variable "Rep" . This is a dummy that equals one if the head of household is a registered Republican and equals zero otherwise.  All else equal, Republicans are 2 percentage points more likely to own a pool.  The Pool ownership rate in this sample is 16% so this is moderate effect but it highlights that a type of ideological sorting is taking place.

What about "square footage" of the house?  Again, note that I"m comparing people who live in the same zip code so this is comparing people with roughly similar incomes.  The Republicans on average, live in homes that are 146 feet larger (see below) in Placer County.

 areg SA_SQFT  Rep age, absorb(zip)

Linear regression, absorbing indicators                Number of obs =   13143
                                                       F(  2, 13116) =   54.85
                                                       Prob > F      =  0.0000
                                                       R-squared     =  0.1452
                                                       Adj R-squared =  0.1435
                                                       Root MSE      =  909.08

     SA_SQFT |      Coef.   Std. Err.      t    P>|t|     [95% Conf. Interval]
         Rep |   146.5746    15.9695     9.18   0.000     115.2721    177.8772
         age |  -2.882094   .5377636    -5.36   0.000    -3.936189   -1.827999
       _cons |   2372.058   27.91508    84.97   0.000      2317.34    2426.775
         zip |      F(24, 13116) =     86.957   0.000          (25 categories)

The Big House with the Pool is part of the American Dream.  Does that attract you?  The liberals of Berkeley are likely to say "no thanks" while some in Texas would say; "hell yeah!".  When consumption offers private benefits but imposes social costs, who gorges versus who engages in voluntary restraint?

So, my point is that while standard demographics matter in explaining consumer choices that have implications for electricity consumption and co2 production.  Political party identification and environmental ideology also matter.  This point will be at the heart of the revised paper I present at the John Quigley Lincoln Institute Conference in October 2012.

Understanding differences in lifestyle choices between people as a function of ideology will become a more important subject at the intersection of economics, sociology and political science.  Such consumption differences (do you live in a Houston McMansion?) then affect voting behavior as self interested individuals are aware of the price they will pay for a real carbon tax.

How Should Environmental Economics Be Taught?

For reasons I can't explain, I will teaching Summer School starting next week.  This 6 week course will meet 4 hours a week and will cover most of the basics of environmental economics.  So, what does that mean?  This blog post will sketch out my vision.

Course Objectives and Prerequisites:

This course seeks to introduce students to the major ideas in natural resources and environmental economics. Emphasis is placed on designing incentives to protect the environment. The course will highlight the important role of “crunching” empirical data to test hypotheses about pollution’s causes and consequences. The course is open to all students who have completed a statistics course and have taken intermediate microeconomics or have received permission from the instructor.

There is no textbook for the course.  Instead, here is what we will do.  Under each topic, I offer a few random thoughts.

Topic One: What is Environmental Economics?

Kahn, Matthew.  Air Pollution in Cities

I start the course by distinguishing environmental economics from intermediate micro.  The key difference is incomplete markets, pervasive public goods, property rights issues and many different types of uncertainty. 

Topic Two: Does Economic Growth Damage the Environment?

  • Air pollution
  • Indoor air pollution
  • Water pollution
  • Greenhouse gas emissions
  • Why does the answer differ across indicators?

Dasgupta, Susmita, Benoit Laplante, Hua Wang, and David Wheeler. 2002. “Confronting the Environmental Kuznets Curve.” Journal of Economic Perspectives, 16(1): 147-168.
Key Indicators Chapter for Asian Development Bank Report 2012

This second topic immediately jumps into externalities and the micro-economics behind "green accounting".  How does capitalism "injure" the environment through scale, composition and technique effects.

Topic Three: Are We Running Out of Natural Resources?

  • Will the world run out of oil?
  • Will the world deplete all of the fish and farmland?
  • The economics of property rights and resource extraction

Wackernagel, Mathis, Niels B. Schulz, Diana Deumling, Alejandro Callejas Linares, Martin Jenkins, Valerie Kapos, Chad Monfreda, Jonathan Loh, Norman Myers, Richard Norgaard, and Jørgen Randers. 2002. “Tracking the Ecological Overshoot of the Human Economy.” Proceedings of the National Academy of Sciences, U.S.A., 99(14): 9266-9271.
Nordhaus, William D., Robert N. Stavins, and Martin L. Weitzman. 1992. “Lethal Model 2: The Limits to Growth Revisited.” Brookings Papers on Economic Activity, 23(2): 1-60.
Diamond, Jared and his critics;  “What is Your Consumption Factor?”

The class then detours to the limits to growth and natural resource consumption both for oil and fish.

Topic Four: Government and Environmental Protection

  • Why is government intervention required?
  • What is a pollution tax?
  • What is regulation?
  • The Economics of California’s AB32
  • National Policy:  The Clean Air Act

Hilton, F. G. Hank, and Arik Levinson. 1998. “Factoring the Environmental Kuznets Curve: Evidence from Automotive Lead Emissions.” Journal of Environmental Economics and Management, 35(2): 126-141.
Benefits and Costs of the Clean Air Act:

Kotchen, Matthew,  Energy Efficiency Codes;

This part of the course has a Chicago School of regulation feel as I discuss the benefits and costs of government regulation and focus on the unintended consequences of regulation and who bears the incidence of regulation.

Topic Five: Will “Green Markets” Green the Environment?

  • The demand for “green cities”
  • The demand for green products such as the Prius and solar panels
  • The supply of green products
  • What is the role for government?
  • What is the “rebound effect”?

Ambec, Stefan and Paul Lanoie, Does it Pay to Be Green? A Systematic Overview
Kahn, Matthew E., 2007. "Do greens drive Hummers or hybrids? Environmental ideology as a determinant of consumer choice," Journal of Environmental Economics and Management, Elsevier, vol. 54(2), pages 129-145, September.

Portney, Paul,  The (Not So) New Corporate Social Responsibility: An Empirical Perspective,

Zheng, Siqi & Kahn, Matthew E., 2008. "Land and residential property markets in a booming economy: New evidence from Beijing," Journal of Urban Economics, Elsevier, vol. 63(2), pages 743-757, March.

So, this is a "sexy topic" focused on whether the rise of the Prius and Solar panels and "green minded" consumers can truly "green" capitalism. 

Topic Six: Population

  • Quantity vs. quality of children and household fertility choice

Mammen, Kristin, and Christina Paxson. 2000. "Women's Work and Economic Development." Journal of Economic Perspectives, 14(4): 141–164.

This is my homage to Gary Becker and the economics of the family.  All environmental economists should know their labor economics because population growth plays a key role as a driver of many of the effects that interest us.  This topic allows me to talk about the developing world.

Topic Seven: The Economics of Climate Change Adaptation

Kahn, Climatopolis,

We will have already spoken about carbon taxes and climate change mitigation under government in Topic 5 so this last topic allows me to focus on my favorite issue of adaptation and to highlight the implicit optimism in modern economics about the positive role that capitalism plays in our life.

If your research paper isn't listed above, do not worry.  In class, I speak about dozens of studies and why I like them without requiring the students to read them.  If you audit my class, you can see for yourself that the students are learning and are actively engaged.  While I will never be "teacher of the year", I am trying.

Saturday, July 28, 2012

Facebook's Troubles and Potential Solutions

In an early May 2012 post, I instructed the readers of this newsletter to short Facebook.  I hope you followed my advice.  I did and now John Paulson and I are both gurus.   How can Facebook monetize its assets?  

What does it own?   On some level it is like Central Park in NYC.  I'm in Manhattan now so allow me to expand upon this lousy analogy.  In Central Park, you walk around with your friends talking and sharing and enjoying life.  But, imagine if everything you do in the Park is recorded and photographed.  There is a privatization of the commons.   The net result is that FB owns data about you and your social networks. 

If you have stable preferences and if your preferences are positively correlated with your friends' preferences as revealed by what they share in "the park" then FB should have a valuable asset to sell to micro advertisers.   But,  where does the ACLU figure in here?  Will people be allowed to opt out of having their data shared with for profit firms?  If the legal courts rule that there there can be an "opt out", what types of data self selection issues will this create?  Rather than having data for  a representative sample of Facebook users, in the "opt out" world --- advertisers would have a "funky" sample or non-representative sample of exhibitionists who are willing and eager to share their "likes" with spammers.

The second challenge for FB is the rise of the mobile device.  FB must figure out how to create ads that people actually like.  For example, suppose I like the Rolling Stones -- they must figure out how to embed a Toyota commercial into "Get off my Cloud" so that I listen to the song and hear the ad.   As TIVO showed, another company will figure out how to allow mobile device users to scrub out the ads if they simply take up time and space between content provision.

Perhaps the best chance for FB is to team up with the internal revenue service of different nations to identify tax evasion by identifying individuals whose consumption patterns appear to be much greater than their reported income profile.  

Another promising outlet for FB would be for it to foster "conspicuous consumption" and trade stocks based on the sociological waves it creates.  FB needs to set off fads and waves for the next hula hoop and then collect a % of the revenue for creating the initial conditions and amplification such that the social multiplier effect plays out.  FB then could start to short the stock of companies who product's cycle has "jumped the shark". FB would know this by plotting its own data.  FB could also do this in political markets. Think of the excitement about Obama in 2008.  FB could use its machinery to help elect future presidents and anticipate who will be the next President and trade on this endogenous information.

So, FB's best chance is to morph into being a hedge fund that uses its micro data to anticipate trends.  Perhaps it should merge with Goldman Sachs?

Wednesday, July 25, 2012

The Coase Conjecture and the iPhone

Ronald Coase must have enjoyed this article in today's NY Times business section.  My 10 year old son restated the Coase Conjecture to me after reading the article.  Here is its the lead sentence; "It looks as if many people are so sure the next iPhone is going to be good that they are not buying the ones Apple is selling now."  So, the expectation of product quality improvement leads to delayed expenditure today!    For those of you who have forgotten their intermediate micro;  here is the Coase Conjecture.

Tuesday, July 24, 2012

Convergence in Beliefs About Climate Change?

I am in Cambridge MA in a hotel filled with economists.  There are hundreds of economists who are all talking, talking, talking.  In earlier years, I was one of the young guys but that is no longer true.  Now, I'm one of the older guys.  At lunch today,  I talked to one of the younger guys about his work on persuasion and the contentious issue of climate change.   Jesse Shapiro told me about his new paper.

Here is his abstract:

"A neutral expert sends an informative message to an uninformed voter. An interested party
can pay a cost to replace the expert’s message with its own. The more informed is the expert,
the greater is the interested party’s incentive to replace the expert’s message. In equilibrium,
making the expert more informed has no effect on the voter’s beliefs and strictly reduces social
welfare. The model thus implies an endogenous limit on how credible a purported expert can
be. I apply the model to public skepticism about climate change."

So, here is the nasty intuition.  Before I spoke to Jesse, I had naively believed that climate scientists such as my colleagues at the UCLA Institute of the Environment  would make progress understanding "the truth" about climate changes and through blogs and other forums such as PBS would educate the public about what they know and how they know it and this iterative learning process would lead to convergence over time such that by the year 2025 or so that we collectively would agree on what is "the new normal".  This learning would mean that we all agree that the probability of unlikely events has increased such as what is the probability that there will be an extreme flood in a given month or extreme heat waves.  The climate scientists would educate us about the causal links between global CO2 levels and the probability of nasty random events such as heat waves and droughts.

Shapiro's starting point is that interest groups who oppose carbon mitigation can invest their $ to pay their own experts to muddy up the water by encouraging this counter-group to launch their own efforts to disagree with the climate scientists.  If the public doesn't know "who is an expert" and views all Ph.Ds as perfect substitutes then the public is less likely to be nudged by objective progress made by the "real" climate scientists.   This interest group competition in the market for ideas is interesting and important.

On another note, a good friend of mine gently nudged me here to think about posting fewer blog entries about my book.  I believe he believes that such posts have reached diminishing returns.   Maybe there has been a convergence of beliefs about this point?

Finally, I have reopened the comments section of my blog now that I have the sense that students no longer read this blog.  It turns out that a number of my friends read this blog and I will try to raise my game to deliver some good ideas and some funny ones!

UPDATE:   I forgot to mention in my discussion of the Shapiro paper that his paper has implications for "free markets".  His results suggest pessimism about there being a Congressional effort to mitigate carbon emissions (because the ideological divide on carbon mitigation will continue).   But, don't forget about "free markets".   Building on my usual Climatopolis optimism,  I believe that there are private entrepreneurs who are sophisticated enough to know a "real climate scientist" when they see one.  If these entrepreneurs become convinced of the new challenges we will face, they will devote their time and effort to start coming up with solutions.  These solutions could earn them a fortune in our hotter future!  

Saturday, July 21, 2012

Durable Capital, Depreciation and Dr. Krugman's Pessimistic Views of Climate Change Adaptation

Krugman's blog piece on climate change adaptation is worth reading.   Here is a key quote:

"My first-pass answer is that we have a global economy that is adapted to historically normal climate — not just in terms of what is grown where, but in terms of where we locate our cities. In the long run, after a couple of centuries’ worth of urban development and infrastructure has been drowned by rising sea levels and/or made useless because previously habitable regions need to be abandoned, we might be able to reconstruct an equally productive economy; but in the long run …"

As the case of Las Vegas shows, we (even ignoring China) are completely capable of building new cities in 30 years or less.    Krugman is right that cities are long lived durable capital but this capital depreciates over time and the forward looking investor must decide whether to invest in maintenance or not.  I believe that homes built in the 1950s in Detroit in the year 2012 are in worse shape than those near Dr. Krugman's home in Princeton. Why?  This isn't a law of physics -- instead it is a question of depreciation and optimal maintenance investment.  The home owners in Detroit are aware that if they invest $25,000 today to improve their roof that this won't offer a payback in the future in terms of the resale value of the home.  The home owners thus don't make an investment that the Princeton home owners routinely make and the net effect of these "small ball" decisions is that the housing capital stock of Princeton looks a lot better than the Detroit homes even though they were built at the same point in time.  

Krugman ignores that our economy is an urbanized economy and cities insulate us from many of climate change's blows.  As an expert on international trade, he knows that the key issue related to the food supply is international correlations in yields.  If there are places on the planet where food can be grown in our hotter future with wackier more variable rainfalls then agriculture will move there and export back to the rest of the world. He also has forgotten about storage and inventories and futures markets.  If we know that the variance of climate shocks has increased then food and commodity storage technologies become more valuable.     

For a brilliant guy, he has given a lazy answer about the economics of adaptation to climate change. I worry that he is trying to use his clout (which he has plenty of) to downplay adaptation prospects because he wants mitigation now.  I want mitigation now but we need to be honest about what happens to the global economy when we don't mitigate.  As I discuss in Climatopolis,    we are going to have a smooth adjustment path to climate change over the 21th century as we simultaneously adapt and eventually mitigate our carbon emissions.  This latter effect will take place because we won't like the "new normal" and this will nudge voters to enact costly carbon pricing.    The "price" of decarbonizing will decline due to technological change (thanks to efforts such as California's AB32) and international trade with nations such as China and India who will export cheaper low carbon products.   The net effect is that even Republicans will eventually vote for a carbon tax bundled with a reduction in income taxes.  So global CO2 will rise but not to 800 ppm. Capitalism will allow us to adapt to the new normal thanks to international trade and futures markets and new entrepreneur's efforts to provide products that help people to cope with the new risks.   This was a key theme of my 2010 Climatopolis book.  For a 7 minute video about my optimism that free markets will help us to adapt to many of the challenges of climate change; watch this.

As a proud Keynesian,  shouldn't Dr. Krugman celebrate the "silver lining" of the stimulus benefits of building new cities in geographic areas that are less at risk from climate change?   Rather than burying bottles filled with cash and having the unemployed look for them, we could have this crew get to work to build the more resilient cities we will need in the future.  Real estate developers will have the right incentives to locate the geographic areas whose quality of life will suffer least and to start to build the capital stock to create the future Las Vegas and Phoenix in such areas. 

Friday, July 20, 2012

Should I Interview Flavor Flav?

Some background.  Back in 1993, Chris Acito and I attended a Public Enemy concert.  Fast forward to July 19th 2012 and on my Amazon Kindle,  I watched Flavor Flav's Roast on Comedy Central.  I enjoyed it very much.  I was unaware that I'm an important blogger. My 5 readers won't be surprised but I just received an email inviting me to interview Flavor Flav.   What could Dr. Kahn and Dr. Flav talk about?  Econometrics?  Nasty university politics?  Book writing?  Brigitte Nielsen?

Here is the email I received:

Dear Matthew Kahn :

When it comes to rapper and reality-TV star Flavor Flav, always expect the unexpected! This is exactly what passengers discovered recently when Flavor Flav took over the PA system on three inbound flights to Las Vegas to remind everyone to visit his House of Flavor restaurant while in Vegas for some of the best specialty recipe soul food (and fixins’) ever!

Please read the following press release and let me know if I may schedule an interview with this always-entertaining celebrity who knows how to fire up an audience. Thank you.

Rassa Eddie
Flavor Flav's House Of Flavor Restaurant

3333 S. Maryland Parkway

Las Vegas, NV 89169



Flavor Flav ‘Hijacks’ Two More Airplane Intercoms This Week To Plug His Las Vegas Restaurant

Las Vegas, NV, July 20, 2012 - Passengers on a total of three recent inbound flights to Las Vegas from Burbank, Phoenix and New York, received a pleasant surprise when the voice of Flavor Flav came over the PA system to tell them he knew just where they could grab some great tasting food while in Vegas. And he should know! Flavor Flav was plugging the great food served at his Las Vegas restaurant House of Flavor.

After informing the passengers on just how hot it was in Vegas, he asked them to thank the flight attendants and pilots for their service. And, just in case they didn’t know where to eat during their stay, he reminded them to visit Flavor Flav’s House of Flavor restaurant at 3333 South Maryland Parkway – making everyone’s mouth water by reciting all the delicious menu features.

Flav signed off by leading the whole plane in a chorus of "Flavor Flaaaaaaaaav," which was a huge hit with passengers who have been writing in to his restaurant thanking him for the entertainment.

Flavor Flav’s House of Flavor is a celebrity-centric Las Vegas take out restaurant with a quick-service menu specializing in smoked barbecue and fried chicken. The menu also includes barbecue spare and baby back ribs, hot links, barbecue chicken, fried chicken and Flavor Flav's signature red velvet waffle - indulgent and delicious. The restaurant is decorated with memorabilia from Flavor Flav's multi-faceted career as a rapper hype man, reality-TV star and entertainer for audiences around the world. Patrons of the House of Flavor might also expect celebrity sightings.

Flavor Flav is an iconic figure domestically and internationally, having made appearances in over 77 countries to sold-out audiences. Most recently, fans will have spotted him starring with Elton John in the Pepsi Super Bowl commercial premiere; the Super Bowl XLVI broadcast set a record with 111.3 million viewers on February 5, 2012.

According to VH1, 7.5 million viewers tuned in for Flavor Flav’s season finale of Flavor of Love 2 that went down in VH1 history books as the network’s highest rated telecast ever, propelling the episode to the #1 telecast on cable for the night and the #1 non-sports telecast in all of basic cable for the entire year.

The Flavor Flav Comedy Central Roast was the most-watched, #1 highest rated show ever among men ages 18-34. The star recently donated a signature Clock which is displayed in the Enduring Traditions Exhibit Hall of the Grammy® Museum. Flavor Flav’s Clock is also on display at both the Rock ‘n Roll Hall of Fame Museum and the Hard Rock Café.



Time Magazine calls Flavor Flav “rap’s greatest hype man of all time turned Reality-TV Star.”

How Will Wine Makers Adapt to Climate Change?

This article claims that Canada's wine makers are innovating and experimenting and planning to adapt to changing climate conditions.  Some will succeed and some will fail.  Wine drinkers won't buy the products of those who fail to adapt.  That's capitalist competition at work and a cute example of how capitalism allows to cope with the evolving challenge of climate change.  

Should We Celebrate the 7.7% Decline in U.S Carbon Dioxide Emissions?

Joe Romm says "yes we can".  Is the U.S 7.7% decline over 6 years impressive?   Recall that greenhouse gas emissions are a world public bad.  The key statistic to track is the globe's production of greenhouse gas emissions.  Using data from the World Development Indicators, here is the per-capita CO2 graph over time.  Note that all three lines have a positive slope.  The world's per-capita emissions are rising.  China's emissions are sharply increasing after 2001 and India's per-capita emissions are rising linearly.   Keep in mind that "population" is also growing.

This graph is the main reason that I wrote Climatopolis.   I would be more likely to agree with Dave Roberts and Joe Romm about their carbon mitigation optimism if they could tell a convincing story about how carbon mitigation efforts in the U.S (such as the power generation transition from coal to natural gas) will affect choices by India and China and other developing nations who are now building their power plants.

How Will Participating Universities Make $ From Offering Free Web Courses on Coursera?

The Chronicle of Higher Education asks the right question.  The CEO of the company admits that he hasn't figured this out and he is a Stanford Engineering Professor!  Perhaps, he should walk over to Stanford GSB's new building and find an economist.  What would David Krebs say?  Pop-up ads?

To quote the Chronicle:

"The contract reveals that even Coursera isn't yet sure how it will bring in revenue. A section at the end of the agreement, titled "Possible Company Monetization Strategies," lists eight potential business models, including having companies sponsor courses. That means students taking a free course from Stanford University may eventually be barraged by banner ads or promotional messages. But the universities have the opportunity to veto any revenue-generating idea on a course-by-course basis, so very little is set in stone.
Andrew Ng, a co-founder of the company and a professor of computer science at Stanford, describes the list as an act of "brainstorming" rather than a set plan. "We have a lot of white boards up around the office where these ideas are being written down and erased and written down and erased," he says. Still, that brainstorm list has some surprises, including the idea of selling course content from universities to companies to use for internal training.
Coursera is following an approach popular among Silicon Valley start-ups: Build fast and worry about money later. Venture capitalists—and even two universities—have invested more than $22-million in the effort already."
So, this is similar to the Facebook Problem.   Students do expect to pay tuition for a quality education.  I bet that these guys will soon charge for each course --- especially if you demand a "diploma" showing that you mastered it.  
From the participating Universities' perspective, will giving away free material increase demand to attend there?  Is this a repeat of Glaeser's old thesis that information technology is a complement (not a substitute) for cities (i.e being at a University).   As a University employee, I hope so!

Thursday, July 19, 2012

Measuring the Price Premium for Energy Star Homes

Nils Kok and I have finished a new paper measuring the price premium for "green homes. You can download a copy here.   On one level, this is a standard hedonic real estate paper but on another level it is a pinch "funky" because we focus on the capitalization effect of being Energy Star or LEED certified.  We find a large effect of 9% based on a large sample of recent home sales in California. We hope that this paper creates a discussion among real estate developers concerning the costs and benefits of "going green".  Ideally, we can partner with an electric utility to measure the actual electricity consumption of these "green buildings".  Such monthly kWh data on electricity consumption would allow for a test of the "rebound effect" and to see whether the engineers are right about their promised energy savings for real world households who actually live in these homes.

Wednesday, July 18, 2012

Drought Puts Food at Risk?

The NY Times is worried.  It reports that the Secretary of Agriculture (a Hamilton graduate) is praying for rain.  “I get on my knees every day, and I’m saying an extra prayer now,” Mr. Vilsack told reporters at the White House after his discussions with Mr. Obama. “If I had a rain prayer or rain dance I could do, I would do it.”

As an economist,  I don't do "rain dances".    The NY Times article hints that our food supply is at risk.  Could we starve because of climate change?   A couple of points:

1.  Storage --- if the likelihood of drought has increased over time,  can holding inventories help to protect us against climate shocks?

2. International trade --- is it raining more in any part of the world right now?  Can these areas that enjoy a bumper crop export a % of their bounty back to us?   In this case, our domestic producers will suffer from the climate shock but consumers won't. 

The NY Times implicitly assumes that our producers and consumers are in the "same boat" but international trade breaks the link between what we produce and what we consume.

3.  If drought reduces supply, how much do consumer prices increase by?  What is the elasticity of demand for specific crops and commodities impacted by drought?   If wheat prices go up by 10%, who loses from this?  Who can easily substitute to another food staple?    

4. I thought that Americans are eating too much and are too obese. Could there be benefits of higher food prices as a commitment device to eat less?

For those looking to read more, I suggest this post at Climate Progress.   If the authors are right about the "international threat", then we should see new financial instruments emerge such as futures markets in different commodities for the intermediate term (say 10 years from now). If such markets exist (and they may exist already), this allows nations who import such food commodities to "lock in" and guarantee that they won't face a price spike due to future climate.   International law will need to be strengthened to guarantee that if such a contract is signed that the party who is on the hook to supply the scarce commodity in the future actually does so or is severely punished.    If purchasers of futures contracts today worry that the seller may not honor the contract's terms in the future, then they will be less willing to pay today for the contract. A type of adverse selection could arise and this key adaptation market (futures contracts in climate affected commodities) could unravel.

This topic merits future research.  The same issue arises with financial annuities.  Old people are often unwilling to give up a large amount of $ now in return for a promised flow of annual payments because they worry that the seller may renege by going bankrupt or running away.  Such fears limit the gains to trade and risk sharing.

Tuesday, July 17, 2012

Gayer and Viscusi on Lost Consumer Surplus from Energy Efficiency Regulation

California seeks to sharply increase the fuel economy of the next generation of vehicles.  There are social benefits of this policy (ignoring the rebound effect), GHG emissions will decline from driving.  There would be private benefits from this policy such as lower household expenditure on gasoline as a Hummer driving household now buys a Prius but rational households should have already take this money savings into account when choosing between a Hummer and Prius.  Implicit in some energy efficiency regulation is a strong belief in behavioral economics.  Gayer and Viscusi explore this point here.

Back in 2008, I made a similar point.  See the bottom of page 20 of my report posted here.

"Today, there are vehicles such as the Toyota Avalon whose fuel economy is
way below this standard.  While, I cannot know for sure how Toyota would respond to this
regulation, I predict that they would produce fewer Avalons if they faced this regulation.
Families who own the Toyota Avalon today are revealing themselves to be a type of consumer

who values this type of vehicle. If the Pavley Bill means that they can no longer buy such new
vehicles in 2020, then they have been made worse off.  

To suggest that the Pavley Bill offers
“negative costs”,  the ARB must be implicitly assuming that today’s buyers of big fuel inefficient
vehicles (including Governor Arnold Schwarzenegger and his Hummer collection) will suffer no
happiness loss from having their consumption choices shrunk by this regulation.  To repeat my
point, there is an implicit assumption here that the set of vehicles produced in 2020 will be
identical along all dimensions except that they will be more fuel efficient.   I hope that this is the
case but I’m not sure that I believe this.  I predict that those households who have a taste for
large vehicles will suffer because of this Pavley rule.  Their costs from having their choice
opportunities shrunk do not appear to be included in row T-1.   The vehicle manufacturers will
also have to change their production processes and re-direct their research and development
efforts to meet this regulation’s mandate.  How do we estimate their expected costs of this new
regulatory mandate?"  

A 1962 Field Experiment at the University of Chicago Tested for Housing Discrimination

Several University of Chicago economists are running high quality field experiments.  In skimming the College Magazine, I read this piece about a 1962 field experiment run by the undergrads without faculty involvement!  Here is the key quote (for lazy readers jump to the 2nd paragraph):

"During the 1961–62 school year, they did. The previous year, a Maroon staffer doing clerical work in an administrative office saw a copy of the University budget, and "we discovered that the University owned a lot of segregated apartment buildings," recalls Ruder, who served as production editor and managing editor. "It was really bizarre because our student population at that point was largely white, but there was no segregation," she says. "There weren’t separate dorms for African American students—if someone had suggested that, people would have been appalled."
Concerned that administrators would connect their staffer with the leaked information, the editors decided against immediately reporting the story. Instead, they gave the apartment addresses to Student Government, which teamed with representatives of the UChicago chapter of the Congress of Racial Equality (CORE) to conduct six test cases in which African American students attempted unsuccessfully to secure apartments in the identified buildings. Student Government and CORE confronted President George Beadle with their findings and demanded that the buildings promptly be desegregated. The Maroon broke the story on the January 17, 1962, front page with the headline, "UC Admits Housing Segregation."
In an article the following week, Beadle agreed with the students’ concerns, stressing the University’s nondiscrimination policy and the difference between on-campus housing, which was open to all, and commercial residential properties acquired by the University, many of which had existing segregation policies. "The only issue on which there is arguable difference of opinion," he said, "is the rate at which it is possible to move toward the agreed objective without losing more than is gained."
Unsatisfied with Beadle’s call for "planned, stable integration," protesters conducted pickets and a series of sit-ins drawing about 30 people outside the president’s office in the Admin Building; theMaroon printed front-page updates until February 6, when protesters agreed to halt the sit-ins and work with the president to find a solution. The next fall, the paper reported that Beadle had accepted a faculty committee recommendation to immediately desegregate all University-owned apartments. The Maroon’s role in discovering and sharing the information, says Ruder, was never discovered."

Note the tight link between the experiments' findings (that there was discrimination against blacks) and when the University President learned this information (or at least learned that it was now common knowledge) he changed the policy and desegregated the university owned apartments.  Have recent field experiments been as successful in influencing policy or corporate decisions?  I hope some have.

Sunday, July 15, 2012

Can Improvements in Atlanta's Public Transit Infrastructure Reduce Road Congestion?

This article claims that the Atlanta Braves baseball team supports a new sales tax of an extra penny per transaction for 10 years in Atlanta.  The Braves believe that with the revenue earmarked for public transit projects that road traffic will become better and more people will attend their games.   "Even professional sports teams like the Atlanta Braves have come out in support, hoping that bad traffic — often cited as a reason for low attendance at games — would be eased."    While I'm sure that some of the proposed transit projects are good,  reducing road congestion without introducing road pricing is not going to happen.  

The people of Atlanta need a lesson in Econ 101 and need to read Duranton and Turner's paper called the Fundamental Law of Traffic Congestion.    To my friends who teach Economics at Emory and Georgia State, I would ask you to write some local editorials on this topic.  Micro economists must educate voters about what we know and what the voters should know before they make an irreversible policy choice.   

I know of no economic evidence supporting the claim that improvements in public transit without simultaneously introducing road congestion charges will reduce traffic congestion.  The demand for trips when you face a zero marginal cost for road use is quite high.   

It is important to note that Duranton and Turner were not paid to write their paper on transit. I bet that the boosters of the public transit projects have hired consultants to write paid "research" to document that improvements in public transit reduce highway congestion.  Are any of these papers good? Could they withstand peer review and actually be published? Do the funders care?   I care.   There is an element of adverse selection here so that the people who read Atlanta's newspapers view all Ph.D. economists as perfect substitutes.  But, are we?  Who is the intellectual 1% and have they earned the right to be taken "more seriously"?

Some Nitty Gritty Detail About Land Use Regulation in West L.A

We are thinking about investing in a nearby piece of real estate.   Ownership does not convey unlimited property rights.  The local Home owner's association has some real power.  All of the details are described here.   Here are some good quotes form the piece:  (HPOZ = HISTORICAL  PRESERVATION OVERLAY ZONE )

"Why do communities want to become a HPOZ? Here are the reasons and the upsides:

Bad architectural design happens everywhere – an HPOZ means neighbors won’t be able to do something to their property which would devalue surrounding properties or something that would be detrimental to other residents’ quality of life.

When bad architectural change occurs, it negatively impacts the entire community and disrupts the flow of neighborhood character (Beverly Hills is a perfect example of how bad design change has affected the entire residential community).

Demolition of homes with character which are replaced with mediocre “boxes” – an HPOZ means the community determines what is appropriate, and what is not appropriate and everyone plays by the same rules. Guidelines make it easy to understand what is expected within the district to gain plan approval.

Mansionization, which reduces the value of adjacent homes – an HPOZ means scale and massing are important considerations for neighborhoods to maintain a positive image and remain desirable as a place to live."

Beverly Hills is mocked several times in this piece for being "tacky" with "Big Boxes" housing 7,000 sf structures.  Here is an example:

"We are now seeing the oversized characterless “boxes” in Holmby-Westwood that appear in Beverly Hills and surrounding communities. "

I fully support having local rules that minimize cross-parcel negative spillover effects but the introduction of a zoning board puts uncertainty into our minds.  It is difficult to bid for a parcel of land if you don't fully know what you are entitled to do with this parcel.  I'm a risk averse guy and this makes me lower my bid sharply.  

Saturday, July 14, 2012

How Will Mountain Climbers Adapt to Climate Change?

The NY Times reports that climbing major mountains has become even more challenging in recent years due to increasingly volatile weather patterns.   How can free markets help mountain climbers to cope with this "new normal"?   It would be a horrible shame if more mountain climbers die because they are not bayesian updaters who recognize that the objective probability of death on a climb has increased.    Life insurance companies would have the right incentive to not issue policies for people who climb or to charge them a much higher premium.  This would signal to the climbers that there are higher risks associated with their old hobby.

UPDATE:   Justin Ross has alerted me that scholars have documented that local government intervention can impede this adjustment process. If local governments, due to eco-tourism reasons, invest in search and rescue teams then the tourists who seek to climb the local hill will continue to show up.  In fact, as Justin discusses it could increase the number of mountain climbers (the lulling effect) to the point where deaths on the mountain increase because of government intervention in "climate proofing" the climb.

Here is his quote:

"You might be interested in the reverse case, for which there was at least some empirical work done on this by JR Clark and Dwight Lee, published in the EEJ:
In their paper, they show that when the community around Mount McKinley started a public rescue operation, it lowered the probability that someone would die from a climbing attempt. Subsequently, the number of climbers increased enough that the number of deaths on the mountain also increased, despite a lowering probability of death.  They frame this in terms of a Laffer curve.
If climbers were sensitive to the probability of being rescued by local government, I would reason that they will respond to gradually declining weather conditions."

In this age of cheap air travel, there are many international eco-tourism possibilities.  For those mountain climbers seeking "risk" and "danger" , they could choose to go ocean diving as their new challenge.   This raises the broad issue of "substitutability".  Intuitively, if a Mercedes lover can't buy such a car anymore, would she be roughly equally happy to buy a BMW or Lexus? If the answer for mountain climbers is that "yes" there are substitute thrills for them to mountain climbing, then capitalism offers the climbers alternatives that are less affected by climate change.

If the Mountain Climbers insist on continuing to go up into the "thin air", then the Mountain's "safe climate days" could be identified and similar to a congestion charge a fee can be charged for climbing the mountain on those safe days.   This charge would reduce congestion on the mountain and could be used to generate enough revenue to invest in rescue helicopters and other protection strategies.   I agree that poor people who love to climb mountains would "suffer" under my pricing plan but do you know any of these folks? I would guess that they are Ph.D. students and they should be in the library anyway.   UPDATE:   Justin's point above should be mentioned again that this could create a moral hazard effect of having more climbers but this could be offset by raising the fee charged to climb the mountain. In the example that Justin gives above, note that the local tax payers (not the mountain climbers) are paying for their own search and rescue.

So, the NY Times has written a whole article about Mountain Climber quality of life but didn't bother to talk about any of these issues.  This blog post offers some insights into why the climate scientists need the social scientists more than they think!

The big point I want my loyal readers to think about is the following.   Yes, climate change is going to rock the boat but for any story the NY Times writes --- capitalism will respond to the challenge. When there are numerous adjustment margins, the total cost of the shock will be small as diverse individuals will choose that path that is best for them (i.e the 3 examples I gave above).  This is the "small ball" of climate change adaptation.   All of this is written down in Climatopolis!

Friday, July 13, 2012

Does Free Trade Reduce the Female/Male Wage Gap?

International trade and industrial organization are two fields that are merging.   This new NBER paper now brings some labor economics into this new "big tent".   As I understand it, the basic point is that trade liberalization between nations (think of NAFTA) entices new firms to enter the industry.  New firms operate in new factories with cutting edge technology.  The authors find evidence that these new firms need less "muscle" on the job (perhaps because new robots are moving stuff around) and that women have relatively more opportunities at such firms relative to the old "Archie Bunker" firms.  If women have greater opportunities at new firms (because of the robot effect) and if new firms are gaining market share, then the average male/female wage gap declines and this is due to international trade.

In my work on international trade, I have focused on the environmental consequences of such trade and in particular how it affects the lifespan of used vehicles.   and how international trade between poor nations and rich nations can cause the rise of the "green economy" by lowering the price of wind turbines and solar panels.   

I must admit that I'm looking forward to learning some more economics next week.   To get a taste of what papers I may try to listen to at NBER, take a look at the environmental meetings, the urban meeting and the housing crisis meeting.

Thursday, July 12, 2012

Electricity Access in Iraq and Favortism

Has some economist who works on corruption studied spatial patterns in electricity access in developing country cities?  This NY Times piece about Iraq was funny and interesting.  The world agrees that Katie Couric is cute!  But, here is the key quote:

"The ministry says that electricity is improving, and some residents agree, especially those who live near ministry offices. Murtada Khassim, who sells cologne and bars of soap from a wooden cart near another billboard of Ms. Couric’s smiling face, and who lives in an apartment nearby, said he had had 10 straight hours of power the previous night, a substantial improvement from last summer, when most residents had just a few hours each day."

This merits some GIS research!

Suburban Sprawl Has a Causal Effect on Basketball Skills

This long NY Times sports piece takes you on a tour of outdoor b-ball in NYC.   The author observes that suburban kids are better pure shooters than urban kids and argues that this is a causal treatment effect!   Here is the quote:

"The city’s busy, congested courts have influenced the style of play that takes place on them. For instance, I haven’t run across many pure shooters, but I have encountered a lot of athletes with wicked ball-handling skills. My theory is that because the courts here are so packed with players, there is not enough time or space to practice jump shots.
That is why so many shooters, I suspect, are cornfed boys from the Midwest and prep schoolers from the suburbs: the country and sprawl quarantine them, and they have nothing to do but practice fundamentals by their lonesome.
In the city, amid swarms of young men and women, you practice ball handling, playing keep-away 21 — the one-on-everybody-else game."
This is a funny example of the causal effects of suburbanization.  I have worked on this topic in the case of greenhouse gas emissions but not in the case of basketball skills!  

Tuesday, July 10, 2012

An Excellent Review Paper Focused on The Economics of Climate Change Adaptation

RFF's Carolyn Kousky has written an excellent paper on what we know about the economics of climate change adaptation.  I would have liked to have seen more discussion of endogenous innovation in anticipation of the opportunities and challenges that climate change will pose but perhaps Carolyn will work on that question in the future.   For teachers of environmental economics who wrestle with how to teach the "economics of climate change" and don't want to present Integrated Assessment Models, this piece offers a valuable teaching tool.  It highlights the many adjustment margins.  Putting on my urban economics hat, I would have also liked to have seen her have more a of a discussion about the spatial aspects to climate change and how our thinking about adaptation changes when we acknowledge that locations differ with respect to how they will be affected by climate change.   This introduces migration of firms and households into the discussion and forms the basis for my Climatopolis book.

Green City Tradeoffs: Nice Trees or Consistent Power Supply

During the recent heat wave in Washington D.C. there was a powerful set of thunderstorms that knocked down trees and they knocked down power lines leaving more than a million people without power.  The Economist reports  that the culprit are suburbanites who oppose tree pruning.  The claim is that if the trees had a good haircut then there would be less risk of these trimmed down trees knocking down power lines.  So, the greens face an interesting tradeoff. If the suburbs remain "green" and leafy then there is higher risk of low probability nasty power loss.  How costly to the local aesthetics is the "tree pruning and trimming"?

Tree pruning is a simple example of climate change adaptation.  Several of those who comment on the The Economist's piece are surprised that the local power company hasn't learned its lesson from previous storms.     As we learn from the recent heat wave, electricity is valuable stuff for coping with extreme heat.  We seek air conditioning and refrigeration and entertainment and electricity serves up all three.  The role that electricity consumption plays in insulating us from extreme temperature risk is an under-studied subject.  Environmentalists immediately jump to voicing concern that the power will be generated with fossil fuels and thus exacerbate climate change risk.  Given our current mix of how we generate power (and our reliance on coal and natural gas), they are correct but as renewable's share of total generation increases this concern recedes.

LIBOR Economics: UCLA's Connan Snider and Thomas Youle Were Ahead of Their Time

Have you ever written a paper and a few years later the world figures out that you were making a very important point?   While my own answer to this is "no", my colleague Connan Snider can say "yes".  Here is an old draft of his LIBOR paper titled; "Does the LIBOR Reflect Banks' Borrowing Costs?"

Here is their Abstract:

The London Interbank Off ered Rate (Libor) is a vital benchmark interest rate to which
hundreds of trillions of dollars of fi nancial contracts are tied. Recently observers have raised
concerns that the Libor may not accurately reflect average bank borrowing costs, it's ostensible
target. In this paper we provide two types of evidence that this is the case. We first show
that bank quotes in the Libor survey are di cult to rationalize by observable cost measures,
including a given bank's quotes in other currency panels. Our second type of evidence is based
on a simple model of bank quote choices in the Libor survey. The model predicts that if banks
have incentives to a ffect the rate (as opposed to simply reporting costs), we should see bunching
of quotes around particular points and no such bunching in the absence of these incentives. We
show that there is strong evidence of the predicted bunching behavior in the data. Finally, we
present suggestive evidence that several banks have large portfolio exposures to the Libor and
have recently pro fitted from the rapid descent of the Libor. We conjecture that these exposures
may be the source of misreporting incentives.

Did Barclay's read this paper and act upon these ideas or did Snider anticipate and uncover a whole financial intrigue?  The economist as detective.  This is financial "Freakonomics" taking place at UCLA.  Two cheers for Snider and Youle!  Past reviewers of their paper should re-read their reports!