The New York Post reports that Little Italy in Manhattan is shrinking as Chinatown expands.  The New York Times reports that Spike Lee is upset that African-American communities in Brooklyn are shrinking as "Girls" (white yuppies) move in.   What do urban economists think?  Scarce land is allocated to the highest bidder. Unless there is an externality, why doesn't this private valuation reflect the highest and best use of this land?   If you say that there is an externality that the historical character of the area should be preserved, this may be a fair point but a critic might ask "why?'".    Why can't neighborhoods change?  If you say that the renters who live there planted roots there and now can't afford to live there then you are making a valid point but you are saying that they have the property rights to an asset they didn't own.   That's  a dangerous precedent that borders on socialism.

So, to be fair and to be clear, I do see that there is a co-ordination problem that people who lived as renters for years in a community have revealed that they want to live there and they have developed roots there. If gentrification takes place and these individuals are displaced, they face a co-ordination issue of where they can regroup in a newly affordable community.  This transition takes time and resources and this is the cost that this group bears due to gentrification. Such transition dynamics have not been studied enough by urban economists because we haven't spent enough time thinking about endogenous social networks. Instead, we assume perfect competition, zero migration costs and a complete attribute space such that if Brooklyn becomes unaffordable that a household can costlessly move to a close Brooklyn substitute and continue to live his life.

An even more interesting issue here relates to urban politics. The political leaders in the gentrifying area were elected by the original group. Such self interested leaders will be aware that the new entrants may not support the leader and may eventually elect their own leader. This means that the incumbent political leader in a gentrifying area has strong incentives to rally around Spike Lee and "fight the power".  If the incumbent residents who are being priced out anticipate that political leaders will back their protests then this helps to solve their free rider problems and this group will gather and march and hope that the New York Times shows up to cover the rally, this in turn leads to Progressive Bill De Blasio to show up.  So, note the social dynamic here that is triggered and is self re-enforcing.   Randy Walsh and I discuss some of these issues in our new Handbook of Urban Economics chapter that I will blog about soon.

Nate Silver's new blog is generating some readers and some excitement. University of Chicago graduates are supposed to engage in active debate about important ideas and Silver represents the UC well.  Recently, there has been quite a lot of talk about Roger Pielke Jr's post for the 538 blog.  I would like to make a few points.

I was very happy to see in the piece that he cited my work on the death toll from natural disasters.  This downward trend is caused by economic growth as shown by evidence both across countries and within countries.   It is true that in very poor nations starting to urbanize that such migration causes a diversification problem that such nations have put millions of their eggs (the migrants) in one basket (a city) and can suffer a large loss of life because of this concentration of people in a poor city.

I am not qualified to judge whether climate change is increasing the count or the severity of natural disasters. I have assumed that this is the case.  As an economist what interests me is if we anticipate this trend, what actions will we take to reduce the anticipated trend's economic impact on us?

The simplest approach is to migrate to higher ground.  With good elevators, we can build high rise buildings in relatively small spaces (look at Hong Kong).  For each nation around the world, where is the higher ground?  Why aren't developers building there? What role is the nation's government playing in encouraging coastal living through implicit subsidies?

A mistake that climate change adaptation pessimists make is their view that the real estate capital stock (homes, apartments and buildings) to be infinitely lived capital.  Such buildings live a long but not permanent life.  If a coastal building has a lifespan of 75 years then when the new news that this building is at flood risk occurs, the owner of the building faces an expected present discounted value of lower lifetime rents over the life of this building.  This is his loss.  The rational owner will choose to invest less in maintenance of the building because of the expectation of a premature "death" of this building.  While this investor loses, there are other investors who will build on higher ground who will gain new demand for residential and commercial space from those who vacate the coast.  

Do you remember in the first Superman movie when Lex Luthor invested in Colorado real estate because he planned to nuke California and anticipated that Colorado would be the new coast?  So, this is almost a zero sum game.  A flooded Miami will reform on higher ground called "inland Miami".  Yes, there will be losers bu there will also be winners and the new capital stock will be built to higher quality.

As we grow richer, natural disasters will cause greater capital damage but I bet that the ratio of (capital damaged/total value of the capital stock)  will decline over time.

As I argue in Climatopolis, the insurance industry must be allowed to price gouge to provide strong incentives for owners of coastal real estate to take proper precautions to minimize the damage that such anticipated storms will cause.

Here are my slides for my talk at UCLA this Monday. You will see my usual blend of humor and wisdom.  My topic is the economics of the nascent California partnership with Quebec on carbon permit trading.   Here are the details about our conference.

The California-Quebec Adventure: Linking Cap and Trade as a Path to Global Climate Action


As usual, economists will be in the minority at this interdisciplinary event.  As I get older, I actually want to return to my roots and only interact with other academic economists.   

I read in People Magazine today that NFL great Tom Brady is selling this home in Brentwood, California (located 4 miles from me) to move to Boston.  For details about this $50 million dollar home, click here. I am aware that he works in Boston but he only works there for a few months a year and the team plays many away games and he is also approaching his retirement.   A move from Los Angeles to Boston that does not appear to be work related poses a challenge to the "consumer city" theory.   This theory posits that in this footloose age that the skilled and the rich seek out the most desirable areas and thus further enhance those areas both through the property taxes that they pay and through their aggregate purchasing power attracting upscale commercial and retail activity that further enhances the glamour of a specific community and its city (go visit Brentwood to see what I mean).   While I lived in Boston for eight years, I'm not sure that I would rate that livable city in LA's league.

The NY Times is starting to write about climate adaptation and today it has a nice set of images and words about the fate of Bangladesh.   As a climate change adaptation optimist, how much of a challenge does Bangladesh pose as a salient case?  Let's look at some data I downloaded from the World Bank's WDI data base on this nation's real per-capita GDP over the last 50 years.



Point #1 is that since 1980 there has been sharp economic growth.  While this is still a very poor nation, if this growth were to continue for another decade then more and more people in this nation will have the resources to protect themselves against the serious threat of flooding.  This of Japan, South Korea or China.  These nations were very poor in the not so recent past and yet few worry about their ability to adapt to climatic shocks.

Point #2:  Adaptation is more likely to be achieved when people anticipate the challenge.  So, how is Bangladesh adapting?  For those who want to read some serious stuff; take a look at this  and this  and this.

Point #3;  Don't forget about fertility trends and the quality vs. quantity tradeoff.

Take a look at this graph of this nation's births per woman.






Do you see the demographic transition taking place?  This nation is following a classic pattern such that the new generation of kids will have more human capital and financial capital and this will allow many of them to move to nations such as China that will need an influx of young immigrants in the near future. There are gains to trade in international labor markets.  The system of cities provides a diversified strategy for collectively protecting us from known unknowns.

Note the distinction here between damage to physical places versus people.  We will be better able to adapt to climate change if we allow for more mobility and options to locate and live your life in our hotter future.

I made all of these points in my Climatopolis.  For those who want even more optimism in your life, take a look at Matt Ridley's piece in the WSJ today. 

Google has been good for me.  It has allowed me to efficiently search for stuff that interests me and it has allowed me to write several economics research papers.  People have been interested in my past work on Google Searches as a tool to learn about interest in climate change.   Now you can read a draft of my new Internet paper focused on China's housing markets and what is revealed by Chinese households' Internet searches related to their markets.  Here is our paper's title and abstract.

Internet Search Activity as Social Learning: Evidence from China's Housing Market Dynamics

I haven't swam in an Ocean for 35 years. Today, I made my comeback in the surprisingly warm Pacific.  If you had been at this beach at 5pm, you would have seen quite a sight.

This Stanford Anthropologist argues that Facebook makes us miserable.  She advances an interesting hypothesis that until people are connected to the Web that they are blissfully unaware of how little fun and status they are achieving relative to everyone else.  It is easy to "Keep up with The Joneses" when you don't know they exist.  Facebook confronts you with those smooth, attractive Joneses and the low ranked monkeys get depressed.  One study focused on this topic is discussed here.

A few thoughts;

1.  Facebook is an "opt in" technology. You can choose not to spend time on Facebook so establishing the causal effects of spending time on Facebook is tricky because the researcher must disentangle selection effects from treatment effects.

2.  Implicit in Dr. Luhrmann's analysis is a view of the world that people believe in a vertical model of quality.  For hundreds of years, economists have talked about comparative advantage rather than focusing on absolute advantage.  In an absolute advantage model, Mike Tyson is a better boxer than me, he is a better economist than me, he is funnier than me, he is more handsome than me, he cooks better than me, he is a better father than me.  Are you getting the picture here?  In the absolute advantage model, there is a single index of a person's quality (such as IQ) and we can sort people from the highest monkey to the lowest ranked monkey.

Economists reject this vision.  The comparative advantage model views people and nations as multidimensional. We make choices over what we study in college and what we focus our scarce time on.  Such investments increase your skill at one task (such as blogging) and you sell these services to the market while buying stuff that others have a relative advantage in producing.  

In a world that recognizes that there are many different skills (dancing, kissing, debating, writing, cooking, thinking, boxing); we can all be the star at something!  When I taught at Harvard I saw this first hand, Harvard had the best student in each of these subtasks and they were all delighted with themselves because they knew they were great at what they cared about.  The key here to keep your self respect and your sanity is to promote comparative advantage.   An economist is who is a good researcher and a great teacher can take pride that she is mentoring the next generation rather than thinking depressed thoughts that she won't win a Nobel Prize.  While REPEC ranks us on a vertical quality index, economics researchers ranked #2000 and higher can think of a variety of ways that makes them "better" than the #1 Dude on the list.

 

The NY Times has published an interesting piece making the case that more cities should raise their minimum wage.  The authors argue that firms can benefit from complying with such wage hikes as their workers will be more loyal and will quit less.  The more interesting question to me here concerns the economic incidence of such local wage growth.

As liberal cities such as Seattle raise their minimum wage, how do local businesses respond?  How many shut down? How many remain in business and raise the price to final consumers?  In liberal cities, the typical consumer is also likely to be liberal.  Are such consumers willing to pay their "fair share" for higher coffee prices and locally produced services?  In this case, the "buy local" movement shifts the redistribution from the firms who employ the minimum wage workers to their consumers.

A future urban economics project should construct a CPI index in liberal versus conservative areas to see whether residents of cities such as Seattle and San Francisco pay significantly more for a basket of common goods than the people of Houston.  Some of this is due to differential rents for land, and some is due to differential housing regulation (further driving up the price of real estate) but if this localized minimum wage movement is phased in across liberal cities then "over paying" low skill labor in liberal places will be another reason why a $ of nominal earnings for a middle class household doesn't go far in liberal places.

Another project for an urban/local public finance scholar would be to build on David Albouy's work on ranking city quality of life.  He ranks metropolitan areas with respect to their quality of life and their productivity.  Are liberal areas more highly ranked in terms of quality of life? If the answer is "yes", then in a simple differentiated products model, liberal cities can engage in more redistributionary policies (i.e raise the tax on the middle class) without driving them away because they have market power.   How much market power do they really have?   A second question that interests me very much here relates to selection versus treatment.  Do liberals make a city great through the public goods policies they enact and their cool lifestyle?  This would be a treatment effect.  Or, have liberals moved to the areas with exogenous great life and simply settled there and then introduced their funky redistributionary policies?

This intersection between politics and urban economics is a ripe subject.   I have published a few papers on this including;  this one on housing supply and this local redistribution paper with Ed Glaeser.

As a 1993 graduate who is married to a 1993 graduate and who hopes that his son may be a 2022 graduate in its college, the future of the University of Chicago is of mild interest to me.  In recent days, there have been interesting blog posts about the debt the university has taken on to finance new construction and anonymous posters have shared their constructive thoughts about the future of the school's renowned Economics Department.

I was back at the University of Chicago in late October 2013 and early December 2013 and I saw a thriving economics research community.    In early December, the University was celebrating the Fama/Hansen Nobel Prize in Financial Economics.

The Economics Department is small in size but the Becker Friedman Institute allows the Department to import ample visiting talent both for short term visits and for conferences and as Post-Docs.   My friend Rob Metcalfe is an example of the type of talent that UChicago attracts.    Dora and I both believe that UCLA would be a much more interesting research community if it could finance luring more Post-Docs to Westwood.   The BFI didn't exist when I was a student at Chicago.  I never attended a single economics conference until I graduated from Chicago.  Now, there appears to be an interesting conference at Chicago almost twice a month. At the Department, an ambitious new faculty hiring plan is already yielding strong results.

The construction of the new Economics Department Building will place leading economists only 200 feet from the Booth Business School.   Location matters and this close physical proximity will facilitate learning and more interaction.   Harvard's various sets of economists at Littauer, HBS and the KSG sit far apart and I never saw much interaction between the MIT Econ faculty and the Sloan School faculty.    The Booth School faculty is loaded with young talent from the top Ph.D. training programs such as Harvard and MIT.  By co-locating the Booth School very close to the new Economics Department, the gains to trade will flourish.  

Across the Midway, the Law School and the Harris School both have many excellent economists.  While the Law School will not be able to replace scholars such as Cass Sunstein and Richard Epstein (guys who were there when I was a student), the faculty remains quite strong and the Harris School faculty has significantly improved since I was a student.

The University of Chicago has never had much "social capital".  The place celebrates competition, raw competition.  At both Harvard and MIT,  I have seen more camaraderie among the faculty and students.  I believe that my UChicago needs to invest in some social capital and find some new faculty members who are loyal to the institution and willing to provide public goods.   Back in the day,  Sherwin Rosen played this key role.  Such "Jedi" still do exist.