Wednesday, October 31, 2012

A 7 Minute Video on the Economics of Hurricane Sandy

In this video,  I discuss the economics of tree trimming, coastal real estate, moral hazard and FEMA and whether the people of South Dakota should be subsidizing coastal living.  I also ask whether Wall Street should remain in flood prone Southern Manhattan.

The complete set of 8 economics videos are now posted here.   I'm recording 3 a week so this set will grow large.  In the description box, I try to sketch the big topics presented in each short talk.  I'm hoping that these videos are a useful teaching tool for environmental economics and urban economics classes.

Dr. Mulligan vs. Dr. Krugman Round #8

Casey Mulligan makes a powerful case for his new book in this blog post.   His book argues that President Obama's well meaning policies for protecting those who have been hurt by the deep recession may have serious unintended consequences reducing the incentive to work and to save.   Casey is an excellent micro economist and he closely tracks how federal policies change budget constraints as they introduce funky kinks and non-linearities.  Such incentive effects can sharply affect the choices of rational households.

UPDATE:  In today's WSJ,  David Gamage provides strong evidence based on Obamacare's unintended consequences that supports Mulligan's main thesis.

During this deep recession, the University of Chicago's excellent economists have been surprisingly quiet in their public pronouncements on the role of government in the free market.   John Cochrane is blogging and so is Gary Becker and so is Casey.    But, there are probably 100 economists on that campus so 3% ain't a big number.  When you hold unpopular views during a tough time, what do you do?  Do you grow quiet or do speak louder to encourage an intellectual debate?  I respect Casey Mulligan's effort to grab the microphone.

Tuesday, October 30, 2012

Rebuilding New Jersey and Coastal Moral Hazard

Read Maureen Dowd's piece and see if you recognize that the Governor of New Jersey seeks a very large FEMA bailout for his stricken state.  When you spend "other people's money", do you have the right incentives to rebuild in a smart way?  A "what if".  What if New Jersey's residents knew that there would never be another FEMA $ for rebuilding their state's residential and commercial structures and any new structures that would be built post-Hurricane Sandy would  have to withstand future natural disasters or the people of New Jersey would be on the hook for such damage?

I predict that in the "no FEMA" equilibrium, that the state's residents and leaders would invest in taking many more precautions to reduce their exposure to flood and hurricane risk.  Zoning laws would change to discourage construction in the riskiest areas and to reduce population density in those areas.  Coastal home owners would be incentivized by the state to take much greater precautions to reduce ex-post damage.  

Given the reliance on FEMA $,  how will coastal areas such as Atlantic City be rebuilt?  Will a higher quality capital stock that is more flood resilient be built?  Will FEMA $ be used to rebuild in the same places using the same materials as before?  

During a time of tragedy, we seek to make the victims whole but is an unintended consequence of such well meaning aid to create a "moral hazard" effect such that the next natural disaster causes equal pain?  Could "tough love" (i.e no FEMA bailout) actually aid climate change adaptation efforts?

Away from the coasts, we are learning that falling tree limbs killed many people.  An obvious externality exists here.  When neighbors under-invest in trimming tree limbs, this imposes risks on the neighborhood.  Will liability laws need to be strengthened to hold home owners liable for their trees? How do we incentivize such owners to invest in costly precautions such as tree trimming?  Such legal changes would create more "green jobs" (i.e more guys trimming dangerous limbs).   How do we use the legal code to encourage more ex-ante self precautions to reduce the damage caused by natural disasters?

How do natural disasters affect population migration patterns?  In this short piece, Boustan, Rhode and I explore this issue.  Well meaning government investment in rebuilding shocked areas can crowd out private self protection and actually increase the number of people who live in harm's way.   Sea Walls can increase the victim count if they act as a magnet attracting people to live in risky places that they would have avoided in the absence of the Sea Walls.  

Mild Praise from Mother Jones

Maybe my mother will appreciate what Mother Jones has to say about her older boy?

Sunday, October 28, 2012

Riders on the Storm

To my friends and family in New York City, I suggest you listen to the Doors' Riders on the Storm.  As the Big Storm approaches the Northeast, how much damage will it cause?   The NY Times discusses the ex-ante precautions that have been taken.   Government has provided 3 day ahead forecasts of the extent of the possible flooding and has encouraged households to migrate to higher ground and prepare for worse case scenarios.  Government is shutting down at risk public transportation. So note that both private and public self protection investments are taking place.  This is adaptation!   While Monday will be a nasty day for the region, will long run damage take place?  

As a social scientist, I view this unfortunate Monday as an important field experiment as we learn how to take a punch from Mother Nature.  Are the doom and gloomers right that we can't take a punch?  As we learn from Monday's experience, will future shocks cause even less damage?   We are always rebuilding our cities and infrastructure, how should we build the next round of such sunk capital to reduce future climate change risk? This is adaptation!  Forward looking individuals have an incentive to incorporate their best guesses of the future (i.e expectations) when choosing their investments in where to live and how to live.

Birds and Glass Buildings in Toronto

The NY Times reports a story about birds and glass buildings in Toronto.  This city has built a large number of glass buildings and birds such as the songbird are flying into them. Millions of such songbirds died due to the impact with the glass.  "Perhaps because of familiarity, the urbanites of the bird world, like house sparrows, pigeons and gulls  are much less prone to crashing into glass, Professor Klem said."  That's adaptation!

The bird deaths are an unintended consequence of the rise of Glass buildings in cities.

"Toronto’s modern skyline began to rise in the 1960s, giving it a high proportion of modern, glass-clad structures, forming a long wall along the northwestern shore of Lake Ontario. That barrier crosses several major migratory flight paths, the first large structures birds would encounter coming south from the northern wilderness.
Though those factors make Toronto’s buildings particularly lethal, Professor Klem was quick to say that the city also leads North America when it comes to addressing the problem.
After years of conducting rescue and recovery missions and prodding the city to include bird safety in its design code for new buildings, FLAP has recently begun using the courts to help keep birds alive. It is participating in two legal cases using laws normally meant to protect migratory birds from hunting and industrial hazards to prosecute the owners of two particularly problematic buildings."
Bird advocates are angry that developers and architects have been slow to adopt two apparently low cost solutions to the problem.
"One especially effective, if unpopular, method of reducing the threat to birds, Mr. Mesure said, is simply to cover the outside of windows up to the height of adjacent trees with the finely perforated plastic film often used to turn transit buses into rolling billboards. The film can be printed with advertising or decorative patterns, although the group has found that a repetitive pattern of small circles made from the same adhesive plastic is both effective and less likely to prompt aesthetic objections.
For new buildings, the solution can be as simple as etching patterns into its glass. A German glass company is also developing windows that it hopes can take advantage of the ability of birds to see ultraviolet light, by including warning patterns that are invisible to humans."
The economics question here is one of the aesthetics.  How much "uglier" would the buildings be if the developers listened to the ecologists? Is there a "win-win" solution here?

Saturday, October 27, 2012

Youtube Environmental and Urban Economics Lectures

Rather than attempting to write a bad environmental and urban economics textbook, I have chosen to record a series of five minute youtube videos.  Now that I understand how to do this home production, they are all posted here.

Did the U.S Drought of 2012 Reduce Economic Growth by .4 Percentage Points?

This article claims that if the recent nasty U.S drought hadn't taken place that the U.S economy would have grown by 2.4% rather than by the reported 2%.  Is this "what if" correct?

I see that the U.S GDP in 2011 was roughly $15.2 Trillion.   If I multiply .004*15,200 this yields an estimated drought impact of  $60.8 billion on our GDP.  There are roughly 300 million people in the U.S.  If I take 60,800/300 =     $202 dollars worth of damage to every American citizen.   Is that possible?

To quote the article:

"The drought hit hardest in July, a critical time for corn and other crops. Corn production is expected to drop more than 13 percent in the 2012-2013 growing season. Soybean production will likely fall 8 percent. "

According to this website, total U.S corn production in 2011 was 313,918,000 metric tons and this fell 13% to 272,488,000 in 2012.

According to this website, the value of a ton of corn is roughly $280.  So, let's multiply price times quantity.

(272488000-313918000)*$280 =    -$11.6 billion.  

So, if the biggest impact (assuming no behavioral change) is the corn sector at $11.6 billion, I'm confused how these numbers will add up to $60.8 billion.    Perhaps, the story is that corn fields have been severely damaged and this means that future production will also be lower.  In this case, we need to think about the opportunity cost of this land.  What else could it be used for?

In the medium term, this shock could accelerate GDP growth as the farming sector has learned that it must invest in adaptation efforts.

So, the price of corn increased from $274 per metric ton in October 2011 to 321 in September 2012.

Assuming the price and quantity dynamics are generated by the drought creating a supply shock that shifts the supply curve while the demand curve is constant; and assuming U.S exports of corn = imports of corn = 0, then we can calculate the elasticity of demand for corn =   13%/17% = -.76.  That's a huge short run elasticity of demand.  This suggests that consumers had many substitutes for corn.  In such a case, can shocks to corn have large GDP impacts?

The consumers spent their $ on something else so the drought stimulated the demand for substitutes for corn.  A serious GNP accountant should add this as a positive effect of the drought.

UPDATE:  As I think about it, this headline of loss of ".4% growth" is a great data point for optimists about climate change adaptation.  Our urban economy suffers a horrible drought and GDP only falls by .4%.  This is a macro piece of evidence of how the diversification of our economy across sectors protects us from climate shocks.   Keep in mind that future droughts will cause even less GDP "damage" as make investments to be more resilient to shocks.  That's the rational expectations vision for how we will adapt to climate change.

Friday, October 26, 2012

My Field Trip to the Water Treatment Plant

For reasons that I can't explain, for the second year in a row I led 16 Freshman on a local field trip.   The students didn't know who I am and didn't want to speak to me.  I introduced myself to two students from China and forced them to listen to my "elevator talk" about my new book on China's urban environmental quality dynamics.  They feigned interest for a little while.

UCLA asked me to go on this trip to make sure that the number of students who got on the bus to go to the Water Treatment Plant equaled the number of students who got off the bus when we returned!  I am a camp counselor.

Here are two photos from the trip,  What you see below isn't "chocolate milk".

Here are some UCLA first year students in hard hats.

I am a caring Professor.

I learned two pieces of economics.  First, the ratio of capital to labor ratio at the treatment plant is huge.  Millions of dollars of expenditure on pipes and treatment per worker.  Only 75 people work there.  We also learned that very few women work there.

Wednesday, October 24, 2012

The Launch of My Field Experiment

I have posted my first youtube video related to environmental economics.  It is short and you don't see my face!  (That's the good news).  The bad news is that I have an outline for 70 more of these videos that I will soon post.  Together, these short 6 minute videos will provide an overview to my thinking on modern environmental and urban economics. I hope that some high school kids, grandmas and folks who are not at UCLA can learn a few ideas and debate some new concepts.   Will this exceed the "Khan Academy"?  I don't think so.  This "Kahn Academy" will be more modest but perhaps more thought provoking?

UPDATE:  I have created a "playlist" so that all of the lecture videos are posted in one place.

"Democracy Just Doesn't Always Reward Anticipation"

Jennifer Gathright is a talented Harvard undergraduate.  I recommend her recent Crimson piece.  I like this paragraph;

"This contradiction isn’t our fault—democracy just doesn’t always reward anticipation. Politicians are accountable to voters whose main concerns generally include how to feed their families and keep their jobs and houses. And it is this combination of preoccupied voters and cowardly lawmakers that has kept the U.S. from tackling climate change in any sort of comprehensive way."

In a democracy,  perhaps she is right that the median voter isn't in the mood and this voter's "anticipation" is what is critical to attract election hungry politicians to embrace the issue.    But, she is repeating part of my Climatopolis logic.    The beauty of free markets is that we do not need the 50th percentile of entrepreneurs to anticipate the challenges we will face.  We just need a handful.  Once one entrepreneur creates a "Facebook", the idea can be scaled up using the production capability of China and India.   Democracy relies on the median while innovation has a very different production process that combines the ideas of dreamers, with capital from Wall Street and mass production from low wage nations.  That's a potent system that doesn't rely on the vagaries of democracy.

In this sense, climate adaptation is more likely than carbon mitigation.  The relevant institutions and players have the right incentives to step up in the case of adaptation.    So, while democracy doesn't always reward anticipation,  there are many modern success stories in the market place who highlight the free market power of anticipation.    In the long run, we all prosper.  

Tuesday, October 23, 2012

Returning to LA

I am sitting in Boston's Logan Airport.  My 3 days in Cambridge, MA were great.  On Friday, I went to dinner with my co-author Denise DiPasquale.   While we published our last paper more than 10 years ago,  we have agreed to write a new paper on the energy efficiency of multi-family housing.  The paper will be good!  Saturday I went out to dinner with my co-author Mike Cragg's family.  Mike now lives in Belmont, MA and this allowed me to return to a place (Payson Park) where I lived in a nice home adjacent to the park for six happy years.  My son's first days of his life were spent there.   On Saturday afternoon at 4pm, I sat in Payson Park on a sunny day and wondered if I made the right choice to nudge our family West. It was awfully pleasant in that park.    On Sunday, I had breakfast with Dan McMillen (not a co-author) and then had lunch with a new co-author of mine  Danglun Luo from Sun Yat-Sen University in China.  We will be working on corporate finance and environmental performance in China.   On Sunday, I went to dinner with my co-author Erin Mansur.   At the Lincoln Conference on Monday and Tuesday, I spoke for a long time to my co-author Siqi Zheng and Nils Kok.      I then met my co-author Ed Glaeser for coffee in Harvard Square.  So, that's a lot of talk with 7 different co-authors.  I now fly home to see my favorite co-author and her young son.

There is no point to this blog post.  This is a brief diary of the power of face to face interactions.  I haven't bothered to list what I ate during my 5 trips to Legal Seafood while I was here. You need to pay the premium price to access that juicy info.  

Sunday, October 21, 2012

Field Experiments as "UnNatural Experiments" the Case of Geo-Engineering

The NY Times reports that Russ George of California launched his own geoengineering field experiment.  His "treatment" was to dump 100 tons of iron dust in the Pacific waters off western Canada.  His goal was to regenerate plankton that would give salmon something to eat (and hence help them to prosper in our hotter future) and to sequester carbon dioxide.

"The iron spawned the growth of enormous amounts of plankton, which Mr. George, a former fisheries and forestry worker, said might allow the project to meet one of its goals: aiding the recovery of the local salmon fishery for the native Haida.
Plankton absorbs carbon dioxide, the predominant greenhouse gas, and settles deep in the ocean when it dies, sequestering carbon. The Haida had hoped that by burying carbon, they could also sell so-called carbon offset credits to companies and make money."
So this is the new free market environmentalism in the age of climate change.  This entrepreneur thought he could kill two birds with 1 stone as he generated more salmon and less global pollution.
His efforts have outraged the nerds and the NY Times.
I have more mixed feelings.  I know that we don't know much about geo-engineering.  In any case where learning needs to take place, we need to experiment.  In the 1990s, economists passively waited for "natural experiments" to take place such as a change in a law such or a volcano erupting.  In the 2000s, economists now actively run field experiments.  The climate scientists appear to be resisting the urge to run field experiments or are not in agreement about the protocols for how to have an orderly set of such experiments run.   
Academics such as UCLA's Ted Parsons and Columbia's Scott Barrett are writing about geo-engineering.  If we agree that "experimentation is good" and that we are doing "too little" geo-engineering experimentation then what do we do next? Do you trust the United Nations to figure out the optimal protocols?   When could individual efforts really backfire?  
Now, I'm not a scientist and  I can't judge whether Russ George's methodology will allow real scientists to use his evidence to test hypotheses.   
Consider the challenges that we face in our macro economy right now.  The fundamental problem that macroeconomists face is that we can't run enough controlled experiments to establish cause and effect.  The macro guys have very few data points to study.  There aren't enough post-War years and in a globalized world it is difficult to believe that your can study nation/years in isolation of one another.    How do we do science when we can't experiment?   One's "prior" world view tends to dominate discussions when little new data is arriving.  Are you a dogmatic Bayesian?

Friday, October 19, 2012

The Lincoln Institute Celebrates John Quigley's Research with a Two Day Conference

I am on a slow moving Acela that is creeping from NYC to Boston.  This is the last leg of my journey and I will return to LA on Tuesday night.   On Monday and Tuesday I will be participating in the Lincoln Institute's Conference that will honor UC Berkeley's John Quigley.    My co-author Siqi Zheng is presenting one new paper we have written and Nils Kok will present another paper that we have co-written. I will sit there and do nothing.  At age 46, that's what I do best;  sit and look deep in thought.  

Many of my friends will be there for the conference.  The first day focuses on energy issues as this was what John Quigley had been working on for the last few years.  The second day will mainly consist of presentations from his excellent set of students who he trained at UC Berkeley.  I was not his student but I always thought of him as a mentor and good friend.  As I have mentioned before, he had a tremendous enthusiasm for living and for economics.  That meant a  lot to me.

The Lincoln Institute deserves a lot of credit for hosting this conference and I'm really looking forward to it.

Wednesday, October 17, 2012

Free Market Environmentalism in 10 Minute Bites

I have returned to the USA and now am sitting at a Starbucks at 85th and Lexington in NYC.  Don't look for me here because I'm leaving in 5 minutes.  On Monday, I was at Columbia and yesterday I was meeting folks at NYU.   New York is a productive place but this is a consumer city.   At lunch yesterday,  Brandon Fuller gave me a good ideas.  He taught me about the Marginal Revolution University's "bite size" videos.  Out of respect to Tyler and Alex, I am going to follow their approach.

My 11 year old son has graciously agreed to work with me to make 60 10 minute videos all focused on free market environmental and urban economics.  In each of these 10 minute videos, I will take a single key idea and speak about the topic while presenting some Powerpoint slides.  All of this material will be posted for free on YouTube.   For folks who know me,  I have a distinctive style of speaking that blends humor, crazed ideas and random asides all while trying to present a Chicago price theory focus on the topic at hand.  I know that I'm a acquired taste. My teaching ratings at Chicago, Columbia, Tufts, Stanford, Harvard and UCLA have always been bimodal but I'm hoping that there is a fat tail of folks who appreciate what I'm trying to do.  The videos will start next week when I return to Los Angeles.

The first segment will be titled;  "Why did I become an environmental economist?"

UPDATE:  The first six lectures are now posted here.   Each video is short and on point.

Friday, October 12, 2012

Portraits of Great Economists

Do you recognize Friedman and Samuelson in the pictures below?  Barcelona's CREI has made a wise investment.   This has me thinking that UCLA could invest a little to make Bunche Hall a little classier.  Does a nice work environment raise productivity?

Today is my 3rd and last day at CREI and I fly back to the USA tomorrow.   I have had a great time in Barcelona but my lifestyle of waking up early and eating dinner early doesn't really fit the Barcelona groove.  We finished dinner at 1130pm yesterday.

Friday, October 05, 2012

Can You Judge a Book by its Cover?

New UCLA psychology research says "yes we can".

"Female politicians with stereotypically feminine facial features are more likely to be Republican than Democrat, and the correlation increases the more conservative the lawmaker's voting record," said lead author Colleen M. Carpinella, a UCLA graduate student in psychology.

Is this a selection effect or a treatment effect?  I would say that it is "selection".   

This is my last blog post for a while.  

Wednesday, October 03, 2012

Cities vs. Rural Areas and Adapting to Drought

Urbanites are more insulated against climate shocks than farmers.  Read this for some evidence.  Yes, urbanites import food to eat but in a globalized economy, they can import it from thousands of possible places around the world.  International trade is a climate change adaptation strategy because it diversifies risk.  As I've argued many times, urbanization is a climate change adaptation strategy.

Does President Obama mention climate change on the campaign trail?  It is time to start to think hard about the economics of climate change adaptation.

The Coase Theorem, the Lighthouse and the Future of a Frank Lloyd Wright House in Arizona

A funky Frank Lloyd Wright house may be demolished in Arizona.  The owner of the property is free to choose to do what he/she wants with her property.  Historic Preservation laws do not apply in Arizona but the Coase theorem would predict that a Wright Home is a public good and those who would lose from its destruction should band together if they face low transaction costs and can overcome free riding to make a bid to purchase and preserve the private property.  The NY Times alludes to this point when it writes;

"So the other prong of attack is to find some preservation-minded angel with deep pockets who will buy it from the developer. Preferably today."

Let's not forget the Coase Lighthouse example. In a nation with 300 million citizens, will someone step up and use private funds to provide public goods and take this action solely due to self interest of enjoying owning a Wright House?

So, this Arizona case study provides a good test of how powerful are the 101 year old Coase's ideas in the year 2012. 

Tuesday, October 02, 2012

Historic Preservation: The Case of Larry King's Childhood House

When you travel to China's cities, most of the city has been recently constructed. If you request it, Western tourists are taken to the "old parts" of the city to see what life used to be like.  There you see one and two story buildings and lots of street vendors selling stuff for tourists.   It appears that China views "historical preservation" as a way to create another tourist site but that there are diminishing returns to preserving too much of the past because the land could be used to build something tall such as an apartment tower.  

In the United States, mainly in older liberal cities there is a desire to preserve the past.  Today, the NY Times explores whether NYC has gone too far as a debate plays out concerning whether TV legend Larry King's childhood house merits "historic preservation" status.   Who is the King Solomon among us who can figure out the right balance between keeping pieces of the past vs. embracing progress?  Could we use the market to determine this?  If history is valuable and can be labeled, won't Larry King's house be highly priced because it is Larry King's house and thus the owner would have no incentive to tear it down and build a 7-11?   To appreciate the unintended consequences of overuse of the "historic landmarking",  read Ed Glaeser's piece posted here.

Monday, October 01, 2012

UCLA's Football Team's Record is 4-1. Are Beer and Studying Complements or Substitutes?

UCLA makes a big deal about sports.  I don't support this. Now that I've put my cards on the table, I'm happy to show you this new economics paper.  When a university's football team is winning, the dudes stop studying and increase their beer consumption.  Big Time Sports crowds out human capital acquisition!  That's ugly and predictable.

Are Big-Time Sports a Threat to Student Achievement?  (free copy here)
Jason M. Lindo, Isaac D. Swensen and Glen R. Waddell
We consider the relationship between collegiate football success and non-athlete student performance. We find that the team's success significantly reduces male grades relative to female grades, and only in fall quarters, which coincides with the football season. Using survey data, we find that males are more likely than females to increase alcohol consumption, decrease studying, and increase partying in response to the success of the team. Yet, females also report that their behavior is affected by athletic success, suggesting that their performance is likely impaired but that this effect is masked by the practice of grade curving. (JEL I21, L83)