I have never understood why Occidental Petroleum had their headquarters in Westwood Village (located .75 miles from UCLA).   Now it has been announced that it is moving to Houston.    The news is saying that LA is only home to 3 of the Fortune 500 companies while New York City has many more.  Why was OP in LA? I have the feeling that the answer was that Armand Hammer enjoyed living here.  Should the new Mayor of LA worry that this signals that our great city is not sufficiently business friendly?  I don't believe that Fortune 500 companies are the wave of our future.  LA needs to position itself so that startup Internet companies view this as an exciting place to locate.  What are the synergies between such startups and the celebrity culture and Hollywood?

Was China's One Child Policy a binding constraint?  The NY Times reports that for some households the answer is "no".  Consider a simple urban economics model where apartments are very expensive in Superstar Cities such as Beijing and Shanghai and where both university educated spouses work full time with ambitious career goals.  Such power couples may choose "quality" over "quantity" of children.  A household who has one child has more disposable income and spend more quality time with this child.  Given China's competitive school admissions process, the forward looking family might choose to have 1 rather than more.  Future demography research should study this topic.

On Wednesday, the UCLA Institute of the Environment and the Anderson School of Management will co-sponsor an event on Green Buildings.  We expect that 400 people will show up.  I will speak for ten minutes and I will present these slides.   The program also features a Keynote by KB Home's CEO Jeffrey T. Mezger   and an all star panel.   

If you look at my slides, you will see that I focus on long run trends in "green building" and a few ideas about the supply and demand for green buildings.  An important point that I will stress is the importance of allowing water and electricity prices to float (i.e dynamic pricing) and to reflect true scarcity.  The expectation of potential price spikes creates strong incentives to invest in green real estate for both new and existing capital.  To my many environmentalist friends,  trust the market!   Incentives matter.  

Today, I published a short popular piece on this topic and its relevance for Californian home owners.  Here is a more academic piece I wrote on this subject back in 2009 called "Urban Growth and Climate Change" and here is a recent Albouy et. al. paper that further examines some of the key issues.    One of my favorite papers on this subject studied the winners and losers among competing ski resorts.

When you walk in Italy's cities, you see and smell a lot of dog poop.  For years, I have been asking my wife whether authorities could trace the DNA sample (i.e the poop) back to the supplier and hold its owner accountable.   Today, the NY Times reports that Naples is implementing this idea.  This is an example of how "big data" and credible punishment work together to reduce a nasty urban externality.

Suppose that dog owners in Naples now anticipate that there is a 25% chance that if they leave their dog's poop on the ground that the DNA random testers will trace it back to them. If a 200 Euro fine is imposed on such polluters then the risk neutral person will anticipate that the new cost of not cleaning up the poop is .25*200 = 50 Euros while in the past the expected cost of such litter was 0.   This increase in credible punishment will nudge those (even those who are not civic minded) to clean up their mess and a greener Naples will emerge.  

A good field experiment design would have the city randomly choose the size of the fine measured in Euros each month.  A researcher could go around and see how much more poop is out on the streets when the fine is low.  Such a Freakonomics author could write a paper on how steeply upward sloping is the supply curve of Italian dog poop.

So, the point of this blog post is that Italian cities used to suffer from a Tragedy of the Commons as each self interested dog owner took the lazy action of not scooping the poop.  Similar to Jake Vigdor's work on free riding and not filling out your census form, only a subset of society was being a good citizen. In such a setting, financial incentives are needed to encourage good behavior.  The new dog DNA tracking system achieves accountability and urban quality of life in these cities will improve.  

It appears that Gov. Brown didn't study economics when he attended UC Berkeley.  My state is suffering from a drought.  Anyone who has slept through Econ 101 knows that drought is the equivalent of shifting in the supply curve so water prices should rise to signal scarcity and the "magic of the market" will take care of the "crisis".  Read through this press release .  I see no reference to raising water prices.  Perhaps the Governor would call me politically naive but the people of LA County are now charged .5 cents per gallon for water.  Do we have a strong incentive to economize?  

For the many climate change adaptation pessimists out there, read this and think.     Investment under uncertainty will remain an active economics research topic.  While we may retreat from assuming that investors have rational expectations, the new work on robustness suggests that forward looking investors who know that they don't know the exact risks they will face will build in "slack" to protect themselves from emerging fat tail risk.

In this graph below, I take the WDI for Japan, the USA and China and graph life expectancy from 1960 to 2011.  Do you see the convergence during a time when U.S environmental quality improved greatly and China's environmental quality has remained bad?   Since 1990, China's life expectancy has increased by 5.5 years while Japan's life expectancy has increased by 3.2 years.  Does money matter?

Nils Kok and I have released a new NBER Working Paper studying the electricity consumption of Wal-Mart stores.   We received no funding from Walmart.   Walmart has made a concerted effort to be "sustainable".   The corporate social responsibility literature tends to have "mushy" benchmarks.  Our focus on electricity consumption per square foot has obvious implications for greenhouse gas production.

Nils and I think we have identified an interesting piece of fixed cost and scale economics.  Consider the following thought experiment.  Imagine a suburban mall where 20 small retail businesses each own 2,000 square feet.  Do each of these small businesses have strong incentives to pay fixed costs for energy engineers to optimize their store's energy performance?  No.  The energy engineer will expect an hourly consulting payment and the present discounted value of the energy cost savings is likely to be low.

Now consider, "big capitalism" such that Walmart owns all of the same 40,000 square feet. In this case, Walmart has much stronger incentives to hire that same energy engineer because his wage is the same but the PDV of the expected energy cost savings will be much higher.    In this sense, this simple fixed cost algebra highlights that "big capitalism" will be more energy efficient as it hires the best engineers and has access to the internal financing to pay the upfront costs of these investments.

Commercial real estate is a very interesting subject and we are exploring in papers such as the Walmart one and our original NBER paper that "big data" guys can make progress on this subject.

Yale Press sent me a copy of Bill Nordhaus' The Climate Casino.   Here is Paul Krugman's highly favorable review.  Here are glowing quotes from Larry Summers and Jeff Sachs.

"Nordhaus is the world’s clearest, best informed and most serious thinker on climate change policy. There is more insight and good sense advice in this volume than in many libraries. This book should be as central to climate policy debates as climate change is to humanity’s future."—Lawrence H. Summers, Charles W. Eliot University Professor and President Emeritus at Harvard University

(Lawrence H. Summers 2013-06-04)

"Bill Nordhaus is one of the world’s pioneers in applying economic reasoning to the harrowing problem of climate change.  Before there was the UN climate treaty, the recent rounds of IPCC reports, and the Stern Review, there was Nordhaus’ path-breaking thinking, modeling, and research on the subject.  His new book, The Climate Casino, marks a long-awaited update and synthesis of this work for the public and students everywhere.  His core conclusion – that we must act and act now – is carefully explained with Nordhaus’ trademark vigor, clarity, and thoughtfulness."—Jeffrey D. Sachs, Director of The Earth Institute, Quetelet Professor of Sustainable Development, and Professor of Health Policy and Management at Columbia University

(Jeffrey D. Sachs 2013-06-26)"

The book jacket states; "The World's leading economic thinker on climate change analyzes the economics and politics of the central environmental issue of today and points the way to realistic solutions."

The book is ambitious and covers a lot of ground but I'm puzzled by why climate change adaptation and the role that cities will play in helping the majority of the world's population to adapt to climate change receives so little attention.  Chapter 13 covers both adaptation and geo-engineering but within that chapter adaptation receives less than 1.5 pages of coverage (see page 150).  On page 96, there is a brief discussion of the role of air conditioning in India and the positive role it will play in helping new urbanites to adapt to increased climate change induced summer heat.  On pages 120 and 121, Prof. Nordhaus acknowledges that the spatial distribution of economic activity plays a key role in determining the economic costs of hurricanes and natural disasters.  He points out that we can move to higher ground.  Migration as an adaptation strategy is briefly discussed on page 72.

Here is a direct quote from the last paragraph from chapter 10 of his book.

"The need for far-sighted strategies to deal with coastal settlements for both hurricanes and sea-level rise is one of the major challenges in dealing with climate change.  Orderly planning can reduce the most dangerous impacts significantly, but the process of adaptation is likely to be politically contentious and messy."

Why?

In my 2010 book Climatopolis, I argued that capitalism will facilitate the process of adaptation.  If there is significant sea level rise, we will move away from our coasts unless place based politicians and FEMA subsidize coastal living.  Yes, we like coastal living and yes there are current property owners who want their coastal properties to be fortified using other tax payer's money.  But, the simple rational expectations logic doesn't go away. As climate change manifests itself, this new risk will lead to falling coastal home prices and real estate developers will build new housing on higher ground. Cities such as Manhattan (in an extreme case) will reform on higher ground.  There will be losers (the incumbent home owners) and there will be winners (the developers and land owners who own on higher ground).

Note that Professor Nordhaus places "good planning" as the key here while I would suggest that the free market sends the right signals to facilitate this transition.   I would hope that he celebrate the power of the invisible hand yet I do not see any discussion of how capitalism helps us to adapt to climate change in skimming his book.

Take a look at Prof Nordhaus' index for the book and urbanization doesn't even merit an entry.   Yet, in the year  2030, 60% of the world's population will live in cities.   Spatial considerations receive too little attention in his book.  He tends to focus on the impact of climate change on agriculture.  Agriculture will be impacted but with world markets in agriculture and the ability to keep inventories much of the idiosyncratic climate risk can be averaged over.  Again, the key issue here is how capitalism evolves to protect us from an emerging threat.  

It appears to me that Professor Nordhaus approaches the climate change challenge from the perspective of top down central planning.  What do nations have to do to address this global externality?   I 100% support a carbon tax today but I do not see a roadmap through which the world adopts this policy.  Take a look at my 2013 paper on USA carbon politics. 

As greenhouse gas emissions continue to rise, the role of the micro economist is to think through how self interested households and firms will respond to this emerging challenge.  How does capitalism evolve in the face of a new anticipated but vague challenge?  

Climate Casino is an impressive book and I hope that Nordhaus and Weitzman win the Nobel Prize in Economics for their contributions to environmental economics.  That said,  our best scholars must be held to a higher standard.  I would ask Dr. Nordhaus to consider the following thought experiment.  Consider your grandfather and the tools and markets he had access to in order to cope with the challenges of climate change.   Now think of your grandchildren's grandchildren.    Directed technological change (a topic Nordhaus has worked on) will play a key role in helping us to adapt to the new challenges.   In 2014, critics are questioning capitalism as a way to order our society.  Climate change offers a terrific test of the power of capitalism to be a powerful source of good in everyone's life.   Nordhaus appears to view climate change as an engineering problem rather than as an adaptive challenge that we anticipate and respond to.  

I do not believe that the words "rational expectations" appear in this book. Is Professor Nordhaus in the Behavioral Economics camp or does he embrace the Chicago worldview of the power of unfettered free markets?