At the 21 minute mark of this video of his Becker-Friedman Institute talk, Bill Nordhaus begins to discuss the impacts of climate change.  He stresses three impacts while emphasizing how difficult it is to predict future adaptation.  Overall, he appears to be an optimist but acknowledges the significant uncertainty!

1. The impact on agriculture ---- he points to the IPCC report and presents a nuanced view of the ability of farmers to adapt.  He presents a graph that farmers can take the heat with losing much output. He is highly optimistic about the ability of the farmers to adapt and slightly mocks the IPCC's doom and gloom.

2.   Species extinction --- here he is more pessimistic.  He notes that ecologists predict a major increase in extinction over the next 100 years relative to the previous 500 years.   For example, many snails are going to have trouble adapting to the heat.   Should we care?  Would Darwin care?

3.  Tipping points and catastrophic effects --- global effects such as melting of the Greenland ice caps and ocean acidification.   Nordhaus points out that his house would flood.   He argues that science finds that the melting of Greenland will take hundreds of years even at a 6 degree Celsius to melt.

At the 48th minute, Nordhaus says some very smart stuff regarding adaptation that Julian Simon and I both applaud.  He claims that adaptation is difficult to predict and then some guy at the 49th minute asks whether it is possible that "no adaptation" will occur and Nordhaus shoots him down.

Alan Dershowitz has retired after serving for 50 years as a faculty member at Harvard Law School.  He talks about his legacy in this piece.   He is quite proud of his teaching accomplishments and his legacy for Jewish students at Harvard.

Every professor must confront the big question of what he/she has done for his institution.    Many of us are free riders who view ourselves as free agents who help the institution by narrowly pursuing our own private research goals.

While I will not serve for 50 years on the UCLA faculty (I've been here 8 years and I'm pondering retiring soon to the Midwest),  I have done a few things for the school.  First, I brought Dora with me and she has certainly had a positive treatment effect on this very unusual institution.   Second,  whenever possible I have tried to teach (both my students and my colleagues) about the power of free markets.  There is amazing hostility towards free markets and I could spend 12 hours a day debating everyone who wants to fight.  I focus my finite energy on those young students who I believe are open minded intellectuals.  UCLA has some terrific undergraduates and I try to identify them early and work with them through their time here.   Third, I have been active in Los Angeles in participating in numerous public events where I represent UCLA and try to convey what we do --- that the scientific approach informs public policy.   Fourth, wherever I travel --- I do say that I'm an "environmental economist at UCLA".  UCLA is more than sports, sun and jogging.  Fifth, I have learned the hard way not to get involved with UCLA politics.  Our Academic Senate isn't looking for new ideas for how to improve the institution.  Similar to other Universities, every department wants more money and space.  Priorities and budget constraints and departmental incentives are the forte of basic economics but economists have not been asked to play a role in designing "good rules".   UCLA has many interest groups defending their turf and the easy play is to declare that we are excellent at everything and make no hard choices.    So, this is a long winded way of my admitting that Dershowitz has done more for Harvard than I have for UCLA.    I do hope to make amends but I'm running out of time.

Human capital is a funky capital stock.  In our diverse world, kids have a vector of cognitive and non-cognitive endowments.  As time passes, investments in own time, parental time and market inputs are made to increment the elements of these vectors.  These investments are actively made by investors (the parents and the person him/herself) who are aware of the market rate of return to these various attributes.  Human capital theory sought to recast investment in people as similar to any theory of investment with the exception that human capital is embodied in a living person and thus can't be transferred at death or sold except it can be rented in labor markets.  Risk neutral investors will undertake all projects with an expected present discounted value that they can finance.

Early on, Gary Becker and others recognized the key role of capital constraints in limiting access to "good projects".   If you can't pay Harvard's tuition and it doesn't offer you financial aid, then you won't go even though Harvard might be a great treatment for you.

To see some strange discussion about human capital in Slate read this.

In Piketty's race between "r" and "g", I don't see how he incorporates the non-linear returns to human capital.  One way for "g" to rise faster than "r" is to identify binding capital constraints that limit productive human capital investments.    Incomplete capital markets limit the ability of those who would greatly benefit from human capital investment from contracting with the "capitalists" to borrow from them.  If such trades could occur (and depending on the terms of the trade and on how aggregate growth increases as a function of our human capital stock), then it is possible that the economy would grow at a rate (g) greater than the market rate of interest (r).

For good theorists, is Piketty writing down a complete markets model or one in which there are incomplete markets for skill formation?  Without engaging in his global wealth tax are there other markets that if they were introduced would lead to g > r?   My intuition is that market structure matters and over time transaction costs are falling so the world's economy in the limit approaches the Arrow-Debreu ideal.

Siqi Zheng and I are finishing a book on pollution progress in urban China.   Capitalism and Society just published a short paper of mine on this subject.

The Chronicle has a lot to say about Thomas Piketty and modern economics.   Piketty has done a great job assembling new data sources to document long run trends in inequality.  As I understand it, his explanation hinges on how the returns to capital and the rate of economic growth evolve over time.   If the return to capital is greater than the rate of economic growth then economic inequality increases as the "rentier" capitalists become relatively richer.

At the University of Chicago, we were taught that human capital is the ultimate capital stock.  How does human capital fit into the Piketty framework?   When you die, your brain can't be handed to your children. You build up your brain during the investment period and then you earn a flow of income during your productive years.   Human capital investment offers both a high return and is risky.  If you get hit by tree branch, you lose your productive capacity.

Imagine an economy in which the market risk free interest rate is 3% and the economy is growing by 2%.  Piketty would say that because r > g  that inequality will rise.

If owners of physical capital invest in other people's human capital, then this would tend to flip the inequality (I believe that increases in the stock of human capital would feed through a Lucas or Romer growth model into a higher rate of g).   Why would owners of physical capital invest in people? They would do so depending on the risk/return frontier for the set of all assets they are considering investing in. Imagine if  a mutual fund that consists of a 10% stake in 1000 people's future earnings. Some of these people will succeed while others will fail but this portfolio would give the capitalist an incentive to "buy in".

My point is that Piketty's argument hinges on market structure for investing in human capital and the general equilibrium incidence of such investment.   The rich can be a catalyst to a rising "g" if there are complete markets for investing in human capital of young people.   Jim Heckman should discuss how the Heckman Equation links to Piketty's argument.

"Years of Living Dangerously" was aired at Harvard Business School recently.  Of course, the creators of this Showtime Show hope to motivate voters to support a carbon tax.  I wish that they succeed.   But the HBS students offer a different pathway for coping with climate change. HBS is full of future corporate leaders in finance, entrepreneurship and management.  Many of these young men and women will work in developing nations where the growth is now taking place.  The crisis of climate change creates opportunities for creating products that help us to adapt.  The future economic growth directed towards building and distributing such products achieves a "double bottom line" of creating economic growth and shielding consumers (who purchase these products ranging from better housing to air conditioners) from the blows of climate change.

Showtime's impact is more likely to occur through encouraging adaptation investments rather than by accelerating the mitigation movement's political clout.   Intellectuals need to start thinking about men and women as voters (where they free ride) versus as self interested consumers and investors.

I'm on a bus heading to Cornell University.  Tomorrow, I will give a talk titled; "Adapting to Climate Change: An Urban Economist's Perspective".  Click on the link to see my slides.   My optimistic talk poses some questions for macro modelers such Prof. Nordhaus and Prof. Weitzman.  For young scholars seeking exciting research questions, I pose dozens of riddles that I expect will set an agenda.  There is a lot of work that needs to be done on a range of environmental and urban economics issues focused on the system of cities and the role that urbanization will play in protecting us from climate change's blows.

The China Daily  reports that foreign firms in China are seeking out 2nd and 3rd tier Chinese cities that feature blue skies because Beijing is just too polluted.  The introduction of a competitive system of cities would make urban China an even stronger nation.  The centralization of the powerful government in Beijing means that rent seeking firms have had strong incentives to locate in Beijing as they seek to curry favor with the central government.   Ades and Glaeser analyze the same issue in the case of South America.

An unintended consequence of decentralizing economic activity to 2nd and 3rd tier cities would be to create a system of cities in which firms sort across space based on the comparative advantage of different areas (i.e cheap land, cheap labor, cheap electricity, access to export markets) and workers sort across space based on their skills and their human capital.  In the U.S such sorting is common, if China can retreat from central planning then its economic growth will accelerate.

The NY Times  reports that there are many liberal cities where the median rent divided by the median household income is greater than 30%.  The Times interprets this fact that the middle class can't afford to live in a series of cities ranging from Los Angeles, to Miami to San Francisco to NYC.   Interestingly, College Station Texas also has a high ratio.

Why might liberal cities be increasingly unaffordable?    Recall that the ratio has median rent in the numerator.  Liberal cities tend to be desirable places in terms of quality of life (in part because of all of those wise urban planning policies) and this raises demand but they are also very hard places to build in (because of all of those wise urban planning policies).  You do not need to be an A+ student in intro econ to know if demand is high and supply is low that market rents will be high.   What about the denominator?  Liberal cities have high a series of regulations that make it difficult for businesses to thrive and this may inhibit middle class income growth.

So, if the NY Times is serious that it is urgent for major cities to reduce their rent to income ratio then it should endorse a relaxation of restrictions on real estate developers and on local businesses.  This is how the free market would address this social challenge.  What is the NY Times' preferred solution?

An old literature in economics states that only "new news" moves markets.  Do the recent IPCC reports say anything new?  Those who know that climate change is a major challenge "learn" that they were right.  Those who deny that climate change is happening or believe that we will adapt to these new challenges learn little from these reports.  Who is at the margin who might learn something from these consensus documents?  

 The IPCC would be wise to engage in much more geographic specificity where they should have country experts speak about specific regions within each nation to discuss challenges that the region faces, is climate change causing these challenges?  What adaptation strategies can be used to protect the place and the people?  Is the free market up to the challenge? Are government officials taking action?  The answer that will appear again and again is poverty and corruption is inhibiting adaptation.  So, this suggests that economic development, educational attainment, and political competition are needed to help the poorest nations to adapt.